Index
 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, 2007
 OR
 
 o
              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 April 15, 2007 was 16,671,127.
  
 **FORM10-Q** **INDEX**
  **Page****PART I****FINANCIAL
                  INFORMATION****Item
                    1.**
                
                **Financial
                    Statements.**
                3Condensed
                    Consolidated Balance Sheets as of March 31,
                    2007 and December 31, 2006
                3Condensed
                    Consolidated Statements of Operations for the
                    three months ended March 31, 2007 and 2006
                5Condensed
                    Consolidated Statements of Changes in
                    Shareholders’ Equity and Comprehensive Loss for the three months
                    ended March 31, 2007 and the year ended December 31,
                    2006
                7Condensed
                    Consolidated Statements of Cash Flows for the
                    three months ended March 31, 2007 and 2006
                8Notes
                    to Condensed Consolidated Financial
                    Statements
                9**Item
                    2.**
                
                **Management’s
                    Discussion and Analysis of Financial Condition and Results ofOperations.**
                21**Item
                    3.**
                
                **Quantitative
                    and Qualitative Disclosure about Market
                    Risk.**
                35**Item
                    4.**
                
                **Controls
                    and Procedures.**
                35**PART II****OTHER
                  INFORMATION****Item
                    1.**
                
                **Legal
                    Proceedings.**
                36**Item
                    1A.**
                
                **Risk
                    Factors.**
                36**Item 2.**
                
                **Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds.**
                48**Item
                    3.**
                
                **Defaults
                    Upon Senior
                    Securities.**
                48**Item 4.**
                
                **Submission
                    of Matters to a Vote of Security
                    Holders.**
                48**Item
                    5.**
                
                **Other
                    Information.**
                48**Item
                    6.**
                
                **Exhibits.**
                49**SIGNATURES**
                50
  Certifications
        pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
        2002










-2-





**PART
      I**  **FINANCIAL
      INFORMATION**





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





**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





CondensedConsolidated
      Balance Sheets


(in
      thousands)





**March
                  31, 2007**
              
              **December
                  31, 2006****Assets**
              
              (Unaudited)Current
                  assets:Cash
              
              $
              15,718
              
              
              1,807Receivables:Trade
              
              
              43,396
              
              
              47,383Other
              
              
              797
              
              
              853Total
                  receivables
              
              
              44,193
              
              
              48,236Inventories:Coal
              
              
              12,418
              
              
              5,512Materials
                  and supplies
              
              
              7,985
              
              
              7,448Total
                  inventories
              
              
              20,403
              
              
              12,960Prepaid
                  royalties
              
              
              4,195
              
              
              3,851Other
                  current assets
              
              
              3,175
              
              
              4,288Total
                  current assets
              
              
              87,684
              
              
              71,142Property,
                  plant, and equipment, at cost:Land
              
              
              5,680
              
              
              5,719Mineral
                  rights
              
              
              190,346
              
              
              190,346Buildings,
                  machinery and equipment
              
              
              275,011
              
              
              264,551Mine
                  development costs
              
              
              23,556
              
              
              21,727Construction-in-progress
              
              
              189
              
              
              189Total
                  property, plant, and equipment
              
              
              494,782
              
              
              482,532Less
                  accumulated depreciation, depletion, and amortization
              
              
              163,259
              
              
              144,752Property,
                  plant and equipment, net
              
              
              331,523
              
              
              337,780Goodwill
              
              
              26,492
              
              
              26,492Other
                  assets
              
              
              19,328
              
              
              15,840Total
                  assets
              
              $
              465,027
              
              
              451,254


See
      accompanying notes to condensed consolidated financial statements





-3-


**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





Condensed
      Consolidated Balance Sheets


(in
      thousands, except share amounts)


**March
                  31, 2007**
              
              **December
                  31, 2006****Liabilities
                  and Shareholders' Equity**
              
              (Unaudited)Current
                  liabilities:Current
                  portion of long-term debt
              
              $
              1,576
              
              
              -Accounts
                  payable
              
              
              40,531
              
              
              42,065Accrued
                  salaries, wages, and employee benefits
              
              
              6,006
              
              
              4,733Workers'
                  compensation benefits
              
              
              9,300
              
              
              9,300Black
                  lung benefits
              
              
              2,630
              
              
              2,630Accrued
                  taxes
              
              
              5,365
              
              
              6,028Other
                  current liabilities
              
              
              12,545
              
              
              8,975Total
                  current liabilities
              
              
              77,953
              
              
              73,731Long-term
                  debt, less current maturities (note 2)
              
              
              188,424
              
              
              167,493Other
                  liabilities:Noncurrent
                  portion of workers' compensation benefits
              
              
              45,295
              
              
              44,134Noncurrent
                  portion of black lung benefits
              
              
              24,557
              
              
              24,136Pension
                  obligations
              
              
              12,733
              
              
              13,011Asset
                  retirement obligations
              
              
              28,560
              
              
              27,394Deferred
                  income taxes
              
              
              5,555
              
              
              13,160Other
              
              
              1,880
              
              
              1,798Total
                  liabilities
              
              
              384,957
              
              
              364,857Commitments
                  and contingencies (note 4)Shareholders'
                  equityPreferred
                  Stock, $1.00 par value. Authorized 10,000,000 shares
              
              
              -
              
              
              -Common
                  stock, $.01 par value. Authorized 100,000,000 shares;issued
                  and outstanding 16,673,067 and 16,669,376, respectively
              
              
              167
              
              
              167Paid-in-capital
              
              
              125,148
              
              
              124,191Accumulated
                  deficit
              
              
              (44,959
              )
              
              (37,704
              )Accumulated
                  other comprehensive loss
              
              
              (286
              )
              
              (257
              )Total
                  shareholders' equity
              
              
              80,070
              
              
              86,397Total
                  liabilities and shareholders' equity
              
              $
              465,027
              
              
              451,254




See
      accompanying notes to condensed consolidated financial
      statements


-4-


**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**





CondensedConsolidated
      Statements of Operations


(in
      thousands, except per share data)


(unaudited)








**Three
                  Months**
              
              **Three
                  Months****Ended**
              
              **Ended****March
                  31, 2007**
              
              **March
                  31, 2006**Revenues
              
              $
              132,435
              
              
              146,676Cost
                  of sales:Cost
                  of coal sold
              
              
              113,588
              
              
              119,246Depreciation,
                  depletion and amortization
              
              
              19,333
              
              
              17,420Total
                  cost of sales
              
              
              132,921
              
              
              136,666Gross
                  profit (loss)
              
              
              (486
              )
              
              10,010Selling,
                  general and administrative expenses
              
              
              7,475
              
              
              6,244Total
                  operating income (loss)
              
              
              (7,961
              )
              
              3,766Interest
                  expense (note 2)
              
              
              4,496
              
              
              3,889Interest
                  income
              
              
              (120
              )
              
              (5
              )Charges
                  associated with repayment of debt (note 2)
              
              
              2,421
              
              
              -Miscellaneous
                  income, net
              
              
              (214
              )
              
              (220
              )Total
                  other expense, net
              
              
              6,583
              
              
              3,664Income
                  (loss) before income taxes
              
              
              (14,544
              )
              
              102Income
                  tax benefit
              
              
              (7,289
              )
              
              (1,299
              )Net
                  income (loss)
              
              $
              (7,255
              )
              
              1,401Earning
                  (loss) per common share (note 5)Basic
                  earnings (loss) per common share
              
              $
              (0.46
              )
              
              0.09Shares
                  used to calculate basic earnings (loss) per share
              
              
              15,929
              
              
              15,768Diluted
                  earnings (loss) per common share
              
              $
              (0.46
              )
              
              0.08Shares
                  used to calculate diluted earnings (loss) per share
              
              
              15,929
              
              
              16,745





See
        accompanying notes to condensed consolidated financial
        statements





-5-





**JAMES
      RIVER COAL COMPANY**


**AND
      SUBSIDIARIES**


CondensedConsolidated
      Statements of Changes in
      Shareholders’


Equity
      and Comprehensive Loss


(in
      thousands)


(unaudited)





**Common**
                **stock**
                **shares**
              
              **Common**
                **stock
                  par**
                **value**
              
              **Paid-**
                **in-**
                **capital**
              
              **Deferred**
                **stock**
                **based**
                **compensation**
              
              **Accumulated**
                **deficit**
              
              **Accumulated**
                **other**
                **comprehensive**
                **income
                  (loss)**
              
              **Total****Balances,
                  December 31, 2005**
              
              
              16,653
              
              $
              167
              
              
              135,923
              
              
              (13,226
              )
              
              (11,187
              )
              
              (410
              )
              
              111,267Adoption
                  of SFAS 123R
              
              
              -
              
              
              -
              
              
              (13,226
              )
              
              13,226
              
              
              -
              
              
              -
              
              
              -Adoption
                  of SFAS 158Pension
                  plan
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (348
              )
              
              (2,650
              )
              
              (2,998
              )Black
                  lung obligation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,324
              
              
              1,324Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (26,169
              )
              
              -
              
              
              (26,169
              )Minimum
                  pension liability adjustment, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,479
              
              
              1,479Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (24,690
              )Issuance
                  of restricted stock awards, netof
                  forfeitures
              
              
              99
              
              
              1
              
              
              (1
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Repurchase
                  of shares for tax withholding
              
              
              (83
              )
              
              (1
              )
              
              (2,350
              )
              
              -
              
              
              -
              
              
              -
              
              
              (2,351
              )Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              3,845
              
              
              -
              
              
              -
              
              
              -
              
              
              3,845**Balances,
                  December 31, 2006**
              
              
              16,669
              
              
              167
              
              
              124,191
              
              
              -
              
              
              (37,704
              )
              
              (257
              )
              
              86,397Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,255
              )
              
              -
              
              
              (7,255
              )Amortization
                  of excess black lung liability
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (29
              )
              
              (29
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,284
              )Issuance
                  of restricted stock awards, netof
                  forfeitures
              
              
              4
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Repurchase
                  of shares for tax withholding
              
              
              -
              
              
              -
              
              
              (3
              )
              
              -
              
              
              -
              
              
              -
              
              
              (3
              )Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              960
              
              
              -
              
              
              -
              
              
              -
              
              
              960**Balances,
                  March 31, 2007**
              
              
              16,673
              
              $
              167
              
              
              125,148
              
              
              -
              
              
              (44,959
              )
              
              (286
              )
              
              80,070





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, 2007**
              
              **March
                  31, 2006**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              (7,255
              )
              
              1,401Adjustments
                  to reconcile net income (loss) to net cash provided byoperating
                  activitiesDepreciation,
                  depletion, and amortization
              
              
              19,333
              
              
              17,420Accretion
                  of asset retirement obligations
              
              
              531
              
              
              486Amortization
                  of deferred financing costs
              
              
              368
              
              
              319Amortization
                  of deferred stock-based compensation
              
              
              960
              
              
              839Deferred
                  income tax benefit
              
              
              (7,589
              )
              
              (1,321
              )Gain
                  on sale or disposal of property, plant, and equipment
              
              
              (3
              )
              
              (214
              )Write-off
                  of deferred financing costs
              
              
              2,421
              
              
              -Changes
                  in operating assets and liabilities:Receivables
              
              
              4,043
              
              
              (17,531
              )Inventories
              
              
              (7,443
              )
              
              (3,416
              )Prepaid
                  royalties and other current assets
              
              
              769
              
              
              1,341Other
                  assets
              
              
              (1,709
              )
              
              (1,118
              )Accounts
                  payable
              
              
              (1,534
              )
              
              7,892Accrued
                  salaries, wages, and employee benefits
              
              
              1,273
              
              
              687Accrued
                  taxes
              
              
              (666
              )
              
              1,151Other
                  current liabilities
              
              
              3,599
              
              
              4,528Workers'
                  compensation benefits
              
              
              1,161
              
              
              284Black
                  lung benefits
              
              
              376
              
              
              438Pension
                  obligations
              
              
              (278
              )
              
              (579
              )Asset
                  retirement obligation
              
              
              (151
              )
              
              (103
              )Other
                  liabilities
              
              
              82
              
              
              (9
              )Net
                  cash provided by operating activities
              
              
              8,288
              
              
              12,495Cash
                  flows from investing activities:Additions
                  to property, plant, and equipment
              
              
              (12,298
              )
              
              (18,626
              )Proceeds
                  from sale of property, plant, and equipment
              
              
              121
              
              
              367Net
                  cash used in investing activities
              
              
              (12,177
              )
              
              (18,259
              )Cash
                  flows from financing activities:Proceeds
                  from borrowings under long-debt
              
              
              40,000
              
              
              -Repayments
                  under revolver, net
              
              
              (17,493
              )
              
              -Principal
                  payments under capital lease obligations
              
              
              (139
              )
              
              (68
              )Capitalized
                  deferred financing costs
              
              
              (4,568
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              17,800
              
              
              (68
              )Increase
                  (decrease) in cash
              
              
              13,911
              
              
              (5,832
              )Cash
                  at beginning of period
              
              
              1,807
              
              
              8,936Cash
                  at end of period
              
              $
              15,718
              
              
              3,104





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




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




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









***Recent
      Accounting Pronouncements***




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which
      clarifies the accounting and disclosure for uncertainty in tax positions, as
      defined. FIN 48 seeks to reduce the diversity in practice associated with
      certain aspects of the recognition and measurement related to accounting for
      income taxes. The Company is subject to the provisions of FIN 48 as
      of January 1, 2007, and has analyzed filing positions in all of the federal
      and state jurisdictions where it is required to file income tax returns, as
      well
      as all open tax years in these jurisdictions.  The Company has
      identified its federal tax return and its state tax returns in Virginia,
      Kentucky and Indiana as “major” tax jurisdictions, as defined. The only periods
      subject to examination for the Company’s federal return are the 2000 through
      2006 tax years. The audits of the tax years 2003 and 2004 have been completed,
      but are still pending review by the Joint Committee on Taxation. The periods
      subject to examination for the Company’s state returns in Virginia are years
      2003 through 2006; Kentucky are years 2002 through 2006 and Indiana are years
      2003 through 2006. The Company believes that its income tax filing positions
      and
      deductions will be sustained on audit and does not anticipate any adjustments
      that will result in a material change to its financial
      position.  Therefore, no reserves for uncertain income tax
      positions have been recorded pursuant to FIN 48. In addition, the
      Company did not record a cumulative effect adjustment related to the adoption
      of
      FIN 48.




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












-8-


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





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





**March
                31,**
              **2007**
            
            **December
                31,**
              **2006**Senior
                Notes
            
            $
            150,000
            
            
            150,000Term
                Facility
            
            
            40,000
            
            
            -Prior
                Senior Secured Credit Facility -Revolver
            
            
            -
            
            
            17,493Total
                long-term debt
            
            
            190,000
            
            
            167,493Less
                amounts classified as current
            
            
            1,576
            
            
            -Total
                long-term debt, less current maturities
            
            $
            188,424
            
            
            167,493




***Senior
      Notes***




In
      May
      2005, the Company issued $150 million of Senior Notes due on June 1, 2012 (the
      Senior Notes).  The Senior Notes are unsecured and accrue interest at
      9.375% per annum.  Interest payments on the Senior Notes are required
      semi-annually.  The Company may redeem the Senior Notes, in whole or in
      part, at any time on or after June 1, 2009 at redemption prices ranging from
      104.86% in 2009 to 100% in 2011.  In addition, at any time prior to June 1,
      2008, the Company may redeem up to 35% of the principal amount of the Senior
      Notes with the net cash proceeds of a public equity offering at a redemption
      price of 109.375%, plus accrued and unpaid interest to the redemption
      date.




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





***Senior
      Secured Credit Facilities***




On
      February 26, 2007, the Company entered into a $35.0 million Revolving Credit
      Agreement (the Revolver) and a $100.0 million Term Credit Agreement
      (collectively the Facilities). The Term Credit Agreement consists of a $40.0
      million term facility (the Term Facility) and a $60.0 million letter of credit
      facility (the Letter of Credit Facility). A portion of the proceeds from the
      Facilities were used to repay the Prior Revolver and the Prior Letter of Credit
      Facilities (defined below) and to pay fees and expenses associated with the
      Facilities. The remaining proceeds are available for working capital and other
      general corporate purposes. The Letter of Credit Facility does not constitute
      a
      loan to the Company and accordingly is not available for borrowing by the
      Company.  The Letter of Credit Facility supports the issuance of up to $60
      million of letters of credit by the Company. The following is a summary of
      significant terms of the Facilities.





**Revolver**
            
            **Term
                Facility**
            
            **Letter
                of Credit**
              **Facility**Maturity
            
            February
                2012
            
            February
                2013
            
            February
                2013Interest/Usage
                Rate
            
            Company’s
                option of Base Rate(a)plus 1.0% or LIBOR plus 2.0% per annum
            
            Company’s
                option of Base Rate(a)plus 3.0% or LIBOR plus 4.0% per annum
            
            4.0%
                per annumMaximum
                Availability
            
            Lesser
                of $35.0 million and the borrowing base(b)
            
            $40.0
                million reduced by any repayments
            
            $60.0
                millionPeriodic
                Principal Payments
            
            None
            
            1%
                of face amount is due quarterly.
            
            Not
                applicable




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





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


-9-





The
      Revolver provides that the Company can use up to $10.0 million of the Revolver
      availability to issue letters of credit. The Revolver provides for a 2.0% fee
      on
      any outstanding letter of credits issued under the Revolver and a 0.5% fee
      on
      the unused portion of the Revolver. The Facilities require certain mandatory
      prepayments from certain asset sales, incurrence of indebtedness and excess
      cash
      flow. The Facilities include financial covenants that require the Company to
      maintain a minimum EBITDA and a maximum leverage ratio and limit capital
      expenditures, each as defined by the agreement. The Facilities are secured
      by
      substantially all of the Company’s assets.




As
      of
      March 31, 2007, $34.9 million of the Revolver is available to the Company. 
As a result of the completion of the Facilities, the Company expects to have
      adequate liquidity and be in compliance with the above covenants throughout
      2007.




***Prior
      Senior Secured Credit***




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









***Interest
      Expense and Other***





During
      the three months ended March 31, 2007 and 2006, the Company paid $0.6 million
      and $4,000 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 20%
      or
      more of the Company’s outstanding common stock.




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




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




***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.


-10-




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, 2007, there were 504,221 shares available under the Plan for future
      awards.







*Restricted
      Stock Awards*




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






*Performance
      Stock Awards*




Performance
      stock awards have been made to certain employees pursuant to the Plan. The
      expected cost of these shares were reflected in income over the performance
      period. All performance stock awards vested or expired prior to January 1,
      2006.







*Stock
      Options Awards*




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




The
      Company accounts for share-based compensation in accordance with SFAS No. 123R,
      “Share-Based Payment,” which was adopted January 1, 2006, utilizing the modified
      retrospective transition method. The following table highlights the expense
      related to share-based payment for the periods ended March 31 (in 000’s):


**Three
                  months ended****2007**
              
              **2006**Restricted
                  stock
              
              $
              886
              
              
              789Stock
                  options
              
              
              74
              
              
              50Stock
                  based compensation
              
              $
              960
              
              
              839Stock
                  based compensation, net of taxes
              
              $
              624
              
              
              545




The
      fair
      value of the restricted stock outstanding and issued is equal to the value
      of
      shares at the grant date. At this time, the Company does not expect any of
      its
      restricted shares or options to be forfeited before vesting. The fair value
      of
      stock options was estimated using the Black-Scholes option pricing
      model.





The
      following is a summary of restricted stock and stock option awards for the
      three
      months ended March 31, 2007:




Restricted
                  Stock
              
              Stock
                  OptionsWeighted
              
              
              
              WeightedAverage
              
              
              
              AverageNumber
                  of
              
              Fair
                  Value
              
              Number
                  of
              
              ExerciseShares
              
              at
                  Issue
              
              Shares
              
              PriceDecember
                  31, 2006
              
              
              739,720
              
              $
              18.25
              
              
              261,001
              
              $
              16.07Granted
              
              
              5,000
              
              
              6.63
              
              
              -
              
              
              -Exercised/Vested
              
              
              -
              
              
              -
              
              
              -
              
              
              -Canceled
              
              
              (1,000
              )
              
              15.65
              
              
              -
              
              
              -March
                  31, 2007
              
              
              743,720
              
              
              18.18
              
              
              261,001
              
              
              16.07




-11-




The
      following table summarizes additional information about the stock options
      outstanding at March 31, 2007.


**Range
                  of**
                **Exercise**
                **Price**
              
              **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted**
                **Average**
                **Remaining
                  Contractual**
                **Life**
                **(Years)**
              
              **Aggregate**
                **Intrinsic**
                **Value
                  (1)**
                **(in
                  000's)**Oustanding
                  at March 31, 2007
              
              $10.80-$33.75
              
              261,001
              
              $16.07
              
              7.6
              
              $   
                  -Exercisable
                  at March 31, 2007
              
              $10.80-$33.75
              
              109,337
              
              $15.33
              
              7.2
              
              $-Vested
                  and expected to vest at March 31, 2007
              
              
              
              
              261,001
              
              $16.07
              
              7.6
              
              $   
                  -
  (1)
              The
                  difference between a stock award's exercise price and the underlying
                  stock's market price at March 31, 2007. No
                  value is assigned to stock awards whose option price exceeds the
                  the
                  stock's market price at March 31,
                  2007.




The
      following table summarizes the Company’s total unrecognized compensation cost
      related to stock based compensation as of March 31, 2007.


Weighted
                  AverageRemaining
                  PeriodUnearned
              
              Of
                  ExpenseCompensation
              
              Recognition(in
                  000's)
              
              (in
                  years)Stock
                  Options
              
              $
              481
              
              
              1.8Restricted
                  Stock
              
              
              10,673
              
              
              2.8Total
              
              $
              11,154










-12-




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




The
      Company has established irrevocable letters of credit totaling $59.6 million
      as
      of March 31, 2007 to guarantee performance under certain contractual
      arrangements. The letters of credit were issued under the Company’s Letter of
      Credit Facility (see note 2).




The
      Company is involved in various claims and legal actions arising in the ordinary
      course of business. In the opinion of management, the ultimate disposition
      of
      these matters will not have a material adverse effect on the Company’s
      consolidated financial position, results of operations or
      liquidity.









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




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




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


**Three
                  Months Ended****March
                  31,**
              
              **March
                  31,****2007**
              
              **2006**Weighted
                  average number of common sharesoutstanding:Basic
              
              
              15,929
              
              
              15,768Effect
                  of dilutive instruments
              
              
              -
              
              
              977Diluted
              
              
              15,929
              
              
              16,745









For
      periods in which there was a loss, the Company has excluded from its diluted
      earning per share calculation options to purchase shares with underlying
      exercise prices less than the average market prices and the unvested portion
      of
      time vested restricted shares, as inclusion of these securities would have
      reduced the net loss per share.  The excluded instruments would have
      increased the diluted weighted average number of common shares by approximately
      742,509 for the three months ended March 31, 2007.





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




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


**Three
                    Months**
                  **Ended**March
                  31, 2007
              
              **Three
                    Months**
                  **Ended**March
                  31, 2006Service
                  cost
              
              $
              724
              
              
              624Interest
                  cost
              
              
              900
              
              
              805Expected
                  return on plan assets
              
              
              (1,027
              )
              
              (848
              )Net
                  periodic benefit cost
              
              $
              597
              
              
              581








-13-







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




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


**Three
                    Months**
                  **Ended**March
                  31, 2007
              
              **Three
                    Months**
                  **Ended**March
                  31, 2006Service
                  cost
              
              $
              142
              
              
              131Interest
                  cost
              
              
              397
              
              
              348Amortization
                  of actuarial loss
              
              
              (45
              )
              
              73Total
                  expense
              
              $
              494
              
              
              552














-14-








(8)
            **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 are shown below (amounts in thousands).












Three
                  Months EndedMarch
                  31,2007
              
              2006RevenuesCAAP
              
              $
              110,843
              
              
              121,481Midwest
              
              
              21,592
              
              
              25,195Corporate
              
              
              -
              
              
              -Total
              
              $
              132,435
              
              
              146,676Depreciation,
                  depletion and amortizationCAAP
              
              $
              15,459
              
              
              13,842Midwest
              
              
              3,845
              
              
              3,550Corporate
              
              
              29
              
              
              28Total
              
              $
              19,333
              
              
              17,420Total
                  operating income (loss)CAAP
              
              $
              (3,919
              )
              
              4,919Midwest
              
              
              (44
              )
              
              1,813Corporate
              
              
              (3,998
              )
              
              (2,966
              )Total
              
              $
              (7,961
              )
              
              3,766Net
                  earnings (loss) (1)CAAP
              
              $
              (3,919
              )
              
              4,919Midwest
              
              
              (44
              )
              
              1,813Corporate
              
              
              (3,292
              )
              
              (5,331
              )Total
              
              $
              (7,255
              )
              
              1,401




(1)
            Income
                and expense items that are not included in income (loss) from operations
                are not allocated to the
                segments.


-15-










March
                  31,
              
              December
                  31,2007
              
              2006Total
                  AssetsCAAP
              
              $
              346,669
              
              
              351,846Midwest
              
              
              93,142
              
              
              93,384Corporate
              
              
              25,216
              
              
              6,024Total
              
              $
              465,027
              
              
              451,254GoodwillCAAP
              
              $
              -
              
              
              -Midwest
              
              
              26,492
              
              
              26,492Corporate
              
              
              -
              
              
              -Total
              
              $
              26,492
              
              
              26,492














-16-












**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, 2006.





**Overview**




We
      mine,
      process and sell bituminous, steam- and industrial-grade coal through six
      operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
      and in southern Indiana. We have two reportable business segments based on
      the
      coal basins in which we operate (Central Appalachia (CAPP) and the Midwest
      (Midwest)). We derived 88% of our total revenues (contract and spot) in the
      three months ended March 31, 2007 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, 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, 2007, CAPP produced 2.4 million tons of coal
      (including contract coal and purchased coal). Of the CAPP tons produced, 77%
      came from Company operated underground mines. For the three months ended March
      31, 2007, we shipped 2.3 million tons of coal and generated coal sale revenues
      of $108.5 million from our CAPP segment. For the three months ended March 31,
      2007, Georgia Power and South Carolina Public Service Authority were our largest
      customers, representing approximately 30% and 19% of our total revenues,
      respectively. No other CAPP customer accounted for more than 10% of our total
      revenues.





***Midwest
      Segment***





In
      the
      Midwest, the majority of our coal is sold in the East North Central Region,
      which includes the states of Illinois, Indiana, Ohio, Michigan and Wisconsin.
      For the three months ended March 31, 2007, our Midwest mines produced 0.8
      million tons of coal. Of the Midwest tons produced, 83% came from Company
      operated surface mines. For the three months ended March 31, 2007, we shipped
      0.7 million tons of coal and generated coal sale revenues of $21.6 million
      from
      our Midwest segment. For the three months ended March 31, 2007, our Midwest
      segment’s largest customer was Hoosier Energy which represented approximately 7%
      of our total revenues.




**Results
      of Operations**





***Three
      Months Ended March 31, 2007 Compared with the Three Months Ended March 31,
      2006***





The
        following tables show selected operating results for the three months ended
        March 31, 2007 compared to the three months ended March 31, 2006 (in 000’s
        except per ton amounts).


-17-





**Three
                  Months Ended March 31****2007**
              
              **2006**
              
              **Change****Total**
              
              **Per
                  Ton**
              
              **Total**
              
              **Per
                  Ton**
              
              **Total**Volume
                  shipped (tons)
              
              
              3,030
              
              
              
              
              
              3,401
              
              
              
              
              
              -11
              %RevenuesCoal
                  sales
              
              $
              130,074
              
              
              42.93
              
              
              144,767
              
              
              42.57
              
              
              -10
              %Synfuel
                  handling
              
              
              2,361
              
              
              
              
              
              1,909
              
              
              
              
              
              24
              %Cost
                  of coal sold
              
              
              113,588
              
              
              37.49
              
              
              119,246
              
              
              35.06
              
              
              -5
              %Depreciation,
                  depletion and amortization
              
              
              19,333
              
              
              6.38
              
              
              17,420
              
              
              5.12
              
              
              11
              %Gross
                  profit (loss)
              
              
              (486
              )
              
              (0.16
              )
              
              10,010
              
              
              2.94
              
              
              -105
              %Selling,
                  general and administrative
              
              
              7,475
              
              
              2.47
              
              
              6,244
              
              
              1.84
              
              
              20
              %









**Volume
      and Revenues by Segment**


**Three
                  Months Ended March 31,**2007
              
              2006CAPP
              
              Midwest
              
              CAPP
              
              MidwestVolume
                  (tons)
              
              
              2,281
              
              
              749
              
              
              2,484
              
              
              917Coal
                  sales revenue
              
              $
              108,482
              
              
              21,592
              
              
              119,572
              
              
              25,195Average
                  sales price per ton
              
              $
              47.56
              
              
              28.83
              
              
              48.14
              
              
              27.48





Coal
      sales revenue for the three months ended March 31, decreased from $144.8 million
      in 2006 to $130.1 million in 2007. This decrease was primarily due to a decrease
      in tons sold in the CAPP region.





For
      the
      three months ended March 31, 2007, the CAPP region sold approximately 2.1
      million tons of coal under long-term contracts (91% of total CAPP sales volume)
      at an average selling price of $46.18 per ton. For the three months ended March
      31, 2006, the CAPP region sold 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, 2007, the CAPP region sold 204,000
      tons of coal (9% of total CAPP sales volume) to the spot market at an average
      selling price of $61.61 per ton. For the three months ended March 31, 2006,
      the
      CAPP region sold approximately 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.





The
      Midwest’s region sales of coal were under long term contracts for both the 2007
      and 2006 periods. For the three months ended March 31, 2007, the Midwest region
      sold 749,000 tons at an average sales price of $28.83. For the three months
      ended March 31, 2006, the Midwest region sold 917,000 tons at an average sales
      price of $27.48.




Synfuel
      handling revenue for the three months end March 31, 2007 increased $0.5 million
      to $2.4 million as compared to the prior period. The increase was primarily
      related to $1.1 million of additional synfuel fees received in 2007, related
      to
      the finalization of the amount due for 2006 synfuel shipments.





**Operating
      Costs by Segment**


**Three
                  Months Ended March 31,**2007
              
              2006CAPP
              
              Midwest
              
              Corporate
              
              CAPP
              
              Midwest
              
              Corporate**Cost
                  of coal sold**
              
              $
              96,357
              
              
              17,231
              
              
              -
              
              
              99,895
              
              
              19,351
              
              
              -**Per
                  ton**
              
              
              42.24
              
              
              23.01
              
              
              -
              
              
              40.22
              
              
              21.10
              
              
              -**Depreciation,
                  depletion and amortization**
              
              
              15,459
              
              
              3,845
              
              
              29
              
              
              13,842
              
              
              3,550
              
              
              28**Per
                  ton**
              
              
              6.78
              
              
              5.13
              
              
              -
              
              
              5.57
              
              
              3.88
              
              
              -


-18-




C *ost
      of Coal Sold*




For
      the
      three months ended March 31, the cost of coal sold, excluding depreciation,
      depletion and amortization, decreased from $119.2 million in 2006 to $113.6
      million in 2007. Our cost per ton of coal sold in the CAPP region increased
      from
      $40.22 per ton in the 2006 period to $42.24 per ton in the 2007 period. This
      $2.02 increase in cost per ton of coal sold was primarily due to an increase
      in
      variable mine costs. Variable costs increased by $1.72 per ton, primarily due
      an
      increase in raw materials and maintenance and repair parts and the impact of
      continuing regulatory scrutiny that began in 2006, which has impacted both
      our
      productivity and our overall mining costs.





Our
      cost
      per ton of coal sold in the Midwest increased $1.91 per ton to $23.01 per ton
      in
      the 2007 period. The increase in cost per ton of coal sold was primarily due
      to
      a $1.18 per ton increase in labor costs due to an increase in wages and an
      increase in headcount.





*Depreciation,
      depletion and amortization*




For
      the
      three months ended March 31, depreciation, depletion and amortization increased
      from $17.4 million in 2006 to $19.3 million in 2007. In the CAPP region,
      depreciation, depletion and amortization increased $1.6 million to $15.5 million
      or $6.78 per ton. This increase was due to capital expenditures which increased
      the depreciable asset base. In the Midwest, depreciation, depletion and
      amortization increased $0.3 million to $3.8 million or $5.13 per ton. The per
      ton increase the amount of depreciation, depletion and amortization in the
      Midwest is primarily due to the decrease in tonnage.




*Selling,
      general and administrative*




Selling,
      general and administrative expenses increased from $6.2 million for the three
      months ended March 31, 2006 to $7.5 million for the three months ended March
      31,
      2007. The increase was primarily due to $0.5 million decrease in taxes in the
      three months ended March 31, 2006, due to a reduction in the accrual for
      franchise taxes. The remaining increase was due to increases
      in professional fees and certain benefit amounts.




**Income
      Taxes**





Our
      effective tax rate for the three months ended March 31, 2007 was 50.1%. Our
      effective tax rate 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 enacted in 2005. Adjusted for the benefit
      for the reduction in 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.








**Liquidity
      and Capital Resources**





As
      of
      March 31, 2007, we have outstanding $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.




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




On
      February 26, 2007, we entered into a $35.0 million Revolving Credit Agreement
      (the Revolver) and a $100.0 million Term Credit Agreement (collectively the
      Facilities). The Term Credit Agreement consists of a $40.0 million term facility
      (the Term Facility) and a $60.0 million letter of credit facility (the Letter
      of
      Credit Facility). A portion of the proceeds from the Facilities were used to
      repay the Prior Revolver and Prior Letter of Credit Facilities and to pay fees
      and expenses associated with the Facilities. The remaining proceeds are
      available for working capital and other general corporate purposes. The Letter
      of Credit Facility does not constitute a loan to us and accordingly is not
      available for borrowing by us.  The Letter of Credit Facility supports the
      issuance of up to $60 million of letters of credit. The following is a summary
      of significant terms of the Facilities.


-19-






**Revolver**
            
            **Term
                Facility**
            
            **Letter
                of Credit Facility**Maturity
            
            February
                2012
            
            February
                2013
            
            February
                2013Interest/Usage
                Rate
            
            Our
                option of Base Rate(a)plus 1.0% or LIBOR plus 2.0% per annum
            
            Our
                option of Base Rate(a)plus 3.0% or LIBOR plus 4.0% per annum
            
            4.0%
                per annumMaximum
                Availability
            
            Lesser
                of $35.0 million and the borrowing base(b)
            
            $40.0
                million reduced by any repayments
            
            $60.0
                millionPeriodic
                Principal Payments
            
            None
            
            1%
                of face amount is due quarterly.
            
            Not
                applicable




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




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





The
      Revolver provides that we can use up to $10.0 million of the Revolver
      availability to issue letters of credit. The Revolver provides for a 2.0% fee
      on
      any outstanding letter of credits issued under the Revolver and a 0.5% fee
      on
      the unused portion of the Revolver. The Facilities require certain mandatory
      prepayments from certain asset sales, incurrence of indebtedness and excess
      cash
      flow. The Facilities include financial covenants that require us to maintain
      a
      minimum EBITDA and a maximum leverage ratio and limit capital expenditures,
      each
      as defined by the agreement. We project that we will be in compliance with
      these
      covenants through 2007. The Facilities are secured by substantially all of
      our
      assets.




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





**March
                31,**
              **2007**
            
            **December
                31,**
              **2006**Senior
                Notes
            
            $
            150,000
            
            
            150,000Term
                Facility
            
            
            40,000
            
            
            -Prior
                Senior Secured Credit Facility -Revolver
            
            
            -
            
            
            17,493Total
                long-term debt
            
            
            190,000
            
            
            167,493Less
                amounts classified as current
            
            
            1,576
            
            
            -Total
                long-term debt, less current maturities
            
            $
            188,424
            
            
            167,493





As
      a
      result of the completion of the Facilities we expect to have adequate liquidity
      throughout the remainder of 2007. The Term Loan provided us with $40 million
      which we used in part to repay the amounts outstanding on the Prior Revolver
      and
      costs associated with the Facilities. At March 31, 2007, we had available
      liquidity of $50.6 million. This available liquidity consisted of cash and
      cash
      equivalents of $15.7 million and availability of $34.9 million under the
      Revolver.





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





Our
      secondary source of cash is the Revolver. We believe that cash on hand,
      cash generated from our operating activities, and availability under
      the Revolver will be sufficient to meet our working capital needs, to
      fund our capital expenditures for existing operations and to meet our debt
      service obligations through the remainder of 2007. 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.


-20-







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 the Facilities restrict our ability to incur
      additional indebtedness. We cannot provide assurance that any reductions in
      our
      planned expenditures or in our expansion would be sufficient to cover shortfalls
      in available cash or that additional debt or equity financing would be available
      on terms acceptable to us, if at all.





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





Net
      cash
      provided by operating activities reflects net income or loss adjusted for
      non-cash charges and changes in net working capital (including non-current
      operating assets and liabilities). Net cash provided by operating activities
      was
      $8.3 million for the three months ended March 31, 2007, and net cash provided
      by
      operating activities was $12.5 million for the three months ended March 31,
      2006. During the three months ended March 31, 2007, our net loss, as adjusted
      for non cash charges, was offset by a $0.5 million decrease in cash from our
      operating assets and liabilities.





Net
      cash
      used by investing activities decreased by $6.1 million to $12.2 million for
      the
      three months ended March 31, 2007 as compared to the same period in 2006. The
      decrease was primarily due to a reduction in capital expenditures. Capital
      expenditures primarily consisted of new and replacement mine equipment and
      various projects to improve the production and efficiency of our mining
      operations.





Net
      cash
      provided by financing activities was $17.8 million for the three months ended
      March 31, 2007. The cash provided by financing in the three months ended March
      31, 2007 was primarily the result of the receipt of $40 million from the Term
      Loan net of a $17.5 million repayment of our Prior Revolver and the payment
      of
      $4.6 million of costs associated with the Senior Secured Credit
      Facilities. ****







**Reserves**




Marshall
      Miller & Associates, Inc. (MM&A) prepared a detailed study of our CAPP
      reserves as of March 31, 2004 based on all of our geologic information,
      including our updated drilling and mining data. MM&A completed their report
      on our CAPP reserves in June 2004. For the Midwest properties, MM&A also
      prepared a detailed study of the Midwest reserves as of February 1, 2005 for
      the
      reserves obtained in the acquisition of the Midwest properties and as of April
      11, 2006 for certain additional reserves acquired in the second quarter of
      2006.  The MM&A studies were planned and performed to obtain reasonable
      assurance of the subject demonstrated reserves.  In connection with the
      studies, MM&A prepared reserve maps and had certified professional
      geologists develop estimates based on data supplied by us and Triad using
      standards accepted by government and industry. We have used MM&A’s March 31,
      2004 study as the basis for our current internal estimate of our Central
      Appalachia reserves and MM&A’s February 1, 2005 and April 11, 2006 studies
      as the basis for our current internal estimate of our Midwest reserves.




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


-21-







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, 2007, we estimate that, as of March 31, 2007, we
      controlled approximately 230.3 million tons of proven and probable coal reserves
      in the CAPP region and 39.7 millions tons in the Midwest region.  The
      following table provides additional information regarding changes to our
      reserves since December 31, 2006 (in millions of tons):


**CAPP**
              
              **Midwest**
              
              **Total**Proven
                  and Probable Reserves, as of December 31, 2006 (1)
              
              
              233.0
              
              
              40.2
              
              
              273.2Coal
                  Extracted
              
              
              (2.2
              )
              
              (0.8
              )
              
              (3.0
              )Acquisitions
                  (2)
              
              
              -
              
              
              0.2
              
              
              0.2Divesture
                  (3)
              
              
              (0.6
              )
              
              -
              
              
              (0.6
              )Adjustments
                  (4)
              
              
              0.1
              
              
              0.1
              
              
              0.2Proven
                  and Probable Reserves, as of March 31, 2007 (1)
              
              
              230.3
              
              
              39.7
              
              
              270.0





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 leased entered into or properties acquired
      during the relevant period.  We calculated the reserves in the same manner,
      and based on the same assumptions and qualifications, as used in the MM&A
      studies described above, but these estimates have not been reviewed by
      MM&A.





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





(4)
      Represents changes in reserves due to additional information obtained from
      exploration activities, production activities or discovery of new geologic
      information. We calculated the adjustments to the reserves in the same manner,
      and based on the same assumptions and qualifications, as used in the
      MM&A studies described above, but these estimates have not been reviewed by
      MM&A.








**Recent
      Accounting Pronouncements**




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which
      clarifies the accounting and disclosure for uncertainty in tax positions, as
      defined. FIN 48 seeks to reduce the diversity in practice associated with
      certain aspects of the recognition and measurement related to accounting for
      income taxes. We are subject to the provisions of FIN 48 as
      of January 1, 2007, and have analyzed filing positions in all of the
      federal and state jurisdictions where it is required to file income tax returns,
      as well as all open tax years in these jurisdictions.  We have
      identified our federal tax return and our state tax returns in Virginia,
      Kentucky and Indiana as “major” tax jurisdictions, as defined. The only periods
      subject to examination for the Company’s federal return are the 2000 through
      2006 tax years. The audits of the tax years 2003 and 2004 have been completed,
      but are still pending review by the Joint Committee on Taxation. The periods
      subject to examination for the state returns in Virginia are years 2003 through
      2006; Kentucky are years 2002 through 2006 and Indiana are years 2003 through
      2006. We believe that its income tax filing positions and deductions will be
      sustained on audit and do not anticipate any adjustments that will result in
      a
      material change to our financial position.  Therefore, no
      reserves for uncertain income tax positions have been
      recorded pursuant to FIN 48. In addition, we did not record a cumulative
      effect adjustment related to the adoption of FIN 48.





**Key
      Performance Indicators**





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


-22-





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





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





EBITDA
      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, 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**





Recently,
      demand has slowed for coal which has led to a softening in coal prices. This
      reduction in demand and prices has been driven by a number of factors including
      a mild winter followed by a cool summer and increased production of coal. We
      believe that the lower coal prices will result in decreased production as it
      will no longer be economical to operate higher cost coal mines. We believe
      that,
      in the long term, the market for coal in the United States remains strong as
      coal continues to be one of the most economical energy sources. However, while
      we are not able to predict when the coal market will begin to strengthen, we
      believe that a projected decrease in production and projected long term increase
      in demand for coal will lead to higher coal prices in the future. A number
      of
      factors beyond our control impact coal prices, including:





·
            the
                supply of domestic and foreign
                coal;


·
            the
                demand for electricity;


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


·
            the
                cost of transporting coal to the
                customer;


·
            domestic
                and foreign governmental regulations and
                taxes;


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


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




Our
      costs
      of production have increased in recent years, particularly in the CAPP region.
      We expect the higher costs to continue for the next several years, due to a
      number of factors, including increased governmental regulations, high prices
      in
      worldwide commodity markets and a highly competitive market for a limited supply
      of skilled mining personnel. See the risk factors titled “Shortages or increased
      costs of skilled labor in the Central Appalachian coal region may hamper our
      ability to achieve high labor productivity and competitive costs”, “Underground
      mining is subject to increased regulation, and may require us to incur
      additional cost” and “Unexpected increases in raw material costs could
      significantly impair our operating results” in Part II, Item 1A of this Form
      10-Q.







Our
      business is very sensitive to changes in supply and demand for coal and we
      intend to carefully manage our mines in 2007 to achieve sustainable profit
      margins.  Events beyond our control could impact our profit
      margins.





**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.


-23-





We
      use
      surety bonds to secure reclamation, workers’ compensation and other
      miscellaneous obligations. At March 31, 2007, we had $99.1 million of
      outstanding surety bonds with third parties. These bonds were in place to secure
      obligations as follows: post-mining reclamation bonds of $53.5 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
      miscellaneous obligation bonds of $5.3 million. Recently, surety bond costs
      have
      increased and the market terms of surety bonds have generally become less
      favorable. To the extent that surety bonds become unavailable, we would seek
      to
      secure obligations with letters of credit, cash deposits, or other suitable
      forms of collateral.





We
      also
      use bank letters of credit to secure our obligations for workers’ compensation
      programs, various insurance contracts and other obligations. At March 31, 2007,
      we had $59.6 million of letters of credit outstanding. The letters of credits
      were issued under our Letter of Credit Facility.





**Critical
      Accounting Estimates**




***Overview***


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





***Workers'
      Compensation***




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




We
      accrue
      for the present value of certain workers’ compensation obligations as calculated
      annually by an independent actuary based upon assumptions for work-related
      injury and illness rates, discount rates and future trends for medical care
      costs. The discount rate is based on interest rates on bonds with maturities
      similar to the estimated future cash flows. The discount rate used to calculate
      the present value of these future obligations was 5.4% at December 31, 2006.
      Significant changes to interest rates result in substantial volatility to our
      consolidated financial statements. If we were to decrease our estimate of the
      discount rate from 5.4% to 4.9%, all other things being equal, the present
      value
      of our workers’ compensation obligation would increase by approximately $1.5
      million. A change in the law, through either legislation or judicial action,
      could cause these assumptions to change. If the estimates do not materialize
      as
      anticipated, our actual costs and cash expenditures could differ materially
      from
      that currently estimated. Our estimated workers’ compensation liability as of
      March 31, 2007 was $54.6 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 high quality corporate bonds with maturities similar to the
      estimated future cash flows. The discount rate used to calculate the present
      value of these future obligations was 5.5% at December 31, 2006. Significant
      changes to interest rates result in substantial volatility to our consolidated
      financial statements. If we were to decrease our estimate of the discount rate
      from 5.5% to 5.0%, all other things being equal, the present value of our black
      lung obligation would increase by approximately $1.7 million. A change in
      the law, through either legislation or judicial action, could cause these
      assumptions to change. If these estimates prove inaccurate, the actual costs
      and
      cash expenditures could vary materially from the amount currently estimated.
      Our
      estimated pneumoconiosis liability as of March 31, 2007 was $27.2
      million.


-24-







***Defined
      Benefit Pension***




The
      estimated cost and benefits of our non-contributory defined benefit pension
      plans are determined annually by independent actuaries, who, with our review
      and
      approval, use various actuarial assumptions, including discount rate, future
      rate of increase in compensation levels and expected long-term rate of return
      on
      pension plan assets. In estimating the discount rate, we look to rates of return
      on high-quality, fixed-income investments. At December 31, 2006, the discount
      rate used to determine the obligation was 5.55%. Significant changes to interest
      rates result in substantial volatility to our consolidated financial statements.
      If we were to decrease our estimate of the discount rate from 5.55% to 5.05%,
      all other things being equal, the present value of our projected benefit
      obligation would increase by approximately $5.3 million. ** The
      rate
      of increase in compensation levels is determined based upon our long-term plans
      for such increases. The rate of increase in compensation levels used was 4.0%
      for the period ended March 31, 2007. The expected long-term rate of return
      on
      pension plan assets is based on long-term historical return information and
      future estimates of long-term investment returns for the target asset allocation
      of investments that comprise plan assets. The expected long-term rate of return
      on plan assets used to determine expense was 7.5% for the period ended
      March 31, 2007. Significant changes to these rates would introduce substantial
      volatility to our pension expense. Our accrued pension obligation as of March
      31, 2007 was $12.7 million.








***Reclamation
      and Mine Closure Obligation***




The
      Surface Mining Control Reclamation Act of 1977 establishes operational,
      reclamation and closure standards for all aspects of surface mining as well
      as
      many aspects of underground mining. Our total reclamation and mine-closing
      liabilities are based upon permit requirements and our engineering estimates
      related to these requirements. U.S generally accepted accounting principles
      require that asset retirement obligations be initially recorded as a liability
      based on fair value, which is calculated as the present value of the estimated
      future cash flows. Our management and engineers periodically review the estimate
      of ultimate reclamation liability and the expected period in which reclamation
      work will be performed. In estimating future cash flows, we considered the
      estimated current cost of reclamation and applied inflation rates and a third
      party profit. The third party profit is an estimate of the approximate markup
      that would be charged by contractors for work performed on our behalf. The
      discount rate is based on interest rates of bonds with maturities similar to
      the
      estimated future cash flow. The estimated liability can change significantly
      if
      actual costs vary from assumptions or if governmental regulations change
      significantly. The actual costs could be different due to several reasons,
      including the possibility that our estimates could be incorrect, in which case
      our liabilities would differ. If we perform the reclamation work using our
      personnel rather than hiring a third party, as assumed under U.S. generally
      accepted accounting principles, then the costs should be lower. If governmental
      regulations change, then the costs of reclamation will be impacted. U.S.
      generally accepted accounting principles recognize that the recorded liability
      could be different than the final cost of the reclamation and addresses the
      settlement of the liability. When the obligation is settled, and there is a
      difference between the recorded liability and the amount paid to settle the
      obligation, a gain or loss upon settlement is included in earnings. Our asset
      retirement obligation as of March 31, 2007 was $31.0 million.





***Contingencies***





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





***Income
      Taxes***





We
      account for income taxes in accordance with FASB Statement No. 109, Accounting
      for Income Taxes (“Statement No. 109”), which requires that deferred tax assets
      and liabilities be recognized using enacted tax rates for the effect of
      temporary differences between the book and tax bases of recorded assets and
      liabilities. Statement No. 109 also requires that deferred tax assets be reduced
      by a valuation allowance if it is more likely than not that some portion of
      the
      deferred tax asset will not be realized. In evaluating the need for a valuation
      allowance, we take into account various factors, including the expected level
      of
      future taxable income. We have also considered 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, 2007, we had no valuation allowance recorded for deferred tax
      assets.





-25-


***Coal
      Reserves***




There
      are
      numerous uncertainties inherent in estimating quantities and values of
      economically recoverable coal reserves. Many of these uncertainties are beyond
      our control. As a result, estimates of economically recoverable coal reserves
      are by their nature uncertain. Information about our reserves consists of
      estimates based on engineering, economic and geological data initially assembled
      by our staff and analyzed by Marshall Miller & Associates, Inc. The reserve
      information has subsequently been updated by our staff. The updates to the
      reserves have been calculated in the same manner, and based on the same
      assumptions and qualifications, as used in the MM&A studies described above,
      but these updates to the reserve estimates have not been reviewed by
      MM&A.  A number of sources of information were used to determine
      accurate recoverable reserves estimates, including:


·
              all
                  currently available data;





·
              our
                  own operational experience and that of our
                  consultants;





·
              historical
                  production from similar areas with similar
                  conditions;





·
              previously
                  completed geological and reserve
                  studies;





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





·
              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.”








-26-


**Other
      Supplemental Information**




*Sales
      Commitments*




As
      of
      March 31, 2007, we had the following contractual commitments to ship coal at
      a
      fixed and known price (tons in 000’s):





Remaining2007
              
              2008
              
              2009
              
              2010Average
                Price
                  Per
                Ton
              
              Tons
              
              Average
                Price
                  Per
                Ton
              
              Tons
              
              Average
                Price
                  Per
                Ton
              
              Tons
              
              Average
                Price
                  Per
                Ton
              
              TonsCAPP
              
              $
              46.93
              
              
              5,832
              
              $
              49.09
              
              
              2,000
              
              $
              50.56
              
              
              1,000
              
              $
              -
              
              
              -Midwest
                  (a)
              
              $
              27.23
              
              
              2,191
              
              $
              27.45
              
              
              2,500
              
              $
              27.56
              
              
              1,995
              
              $
              29.00
              
              
              200
  (a)
                Certain
                    contracts in the Midwest include a customer option to increase
                    or decrease
                    the stated tons in thecontract.
                    We have included option tons that we believe will be exercised
                    based on
                    current market prices.The
                    prices for the Midwest in years 2007 to 2009 are minimum base
                    price
                    amounts that will be adjusted for fuel
                    escalators.







**FORWARD-LOOKING
      INFORMATION**




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




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





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





·
              governmental
                  policies and regulatory
                  actions;





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





·
              weather
                  conditions or catastrophic weather-related
                  damage;





·
              our
                  production capabilities;





·
              availability
                  of transportation;





·
              market
                  demand for coal, electricity and
                  steel;





·
              competition;





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





·
              employee
                  workforce factors;





·
              our
                  assumptions concerning economically recoverable coal reserve
                  estimates;





·
              future
                  economic or capital market conditions;
                  and





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


-27-





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




We
      wish
      to caution readers that forward-looking statements, including disclosures which
      use words such as “believe,” “intend,” “expect,” “may,” “should,” “anticipate,”
“could,” “estimate,” “plan,” “predict,” “project,” or their negatives, and
      similar statements, are subject to certain risks and uncertainties which could
      cause actual results to differ materially from expectations. These risks and
      uncertainties include, but are not limited to, the following: a change in the
      demand for coal by electric utility customers; the loss of one or more of our
      largest customers; our dependency on one railroad for transportation of a large
      percentage of our products; failure to exploit additional coal reserves; failure
      to diversify our operations; increased capital expenditures; increased
      compliance costs; lack of availability of financing sources; the effects of
      regulation and competition; the failure to successfully integrate the Triad
      mining complex into our overall operations; and the risk factors set forth
      in
      this Form 10-Q under Part II - Item 1A “Risk Factors.” Those are representative
      of factors that could affect the outcome of the forward-looking statements.
      These and the other factors discussed elsewhere in this document are not
      necessarily all of the important factors that could cause our results to differ
      materially from those expressed in our forward-looking statements.
      Forward-looking statements speak only as of the date they are made and we
      undertake no obligation to update them.







**ITEM
      3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK**





Our
      $150
      million Senior Notes have a fixed interest rate and are not sensitive to changes
      in the general level of interest rates.  Our Revolver and Term Facility
      entered into in February of 2007 have floating interest rates based on our
      option of either the base rate or LIBOR rate. As of March 31, 2007, we had
      no
      borrowing outstanding under the Revolver and $40.0 million outstanding under
      the
      Term Facility. We are considering whether to use interest rate swaps to manage
      this risk. A 100 basis point (1.0%) increase in the average interest rate for
      our floating rate borrowings would increase our annual interest expense by
      approximately $0.1 million for each $10 million of borrowings under the Revolver
      and Term Facilities.





We
      manage
      our commodity price risk through the use of long-term coal supply agreements,
      which we define as contracts with a term of one year or more, rather than
      through the use of derivative instruments. We believe that the percentage of
      our
      sales pursuant to long-term contracts was approximately 89% for the three months
      ended March 31, 2007.




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





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








**ITEM
      4. CONTROLSAND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**





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




During
      the first quarter of 2007, our Midwest segment began using the same purchasing
      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 2007 that materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.


-28-





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.














**PARTII**


**OTHER
      INFORMATION**











**ITEM
      1. LEGALPROCEEDINGS**





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








**ITEM
      1A. RISKFACTORS**





**Certain
      Risks**





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








**Risks
      Related to the Coal Industry**





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




We
      derived 88% of our total revenues (contract and spot) for the three months
      ended
      March 31, 2007 and 88% of our total revenues in 2006, from our electric utility
      customers. Fuel cost is a significant component of the cost associated with
      coal-fired power generation, with respect to not only the price of the coal,
      but
      also the costs associated with emissions control and credits ( *i.e.* ,
      sulfur
      dioxide, nitrogen oxides, etc.), combustion by-product disposal ( *i.e.* ,
      ash)
      and equipment operations and maintenance ( *i.e.* ,
      materials handling facilities). All of these costs must be considered when
      choosing between coal generation and alternative methods, including natural
      gas,
      nuclear, hydroelectric and others.





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




Overall
      economic activity and the associated demands for power by industrial users
      can
      have significant effects on overall electricity demand. Robust economic activity
      can cause much heavier demands for power, particularly if such activity results
      in increased utilization of industrial assets during evening and nighttime
      periods.





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




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


-29-







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






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




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




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




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




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




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




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




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





Our
      Central Appalachia mines generally ship coal via rail systems. During 2006,
      we
      shipped in excess of 95% of our coal from our Central Appalachia mines via
      CSX.
      In the Midwest, we shipped approximately 63% of our produced coal by truck
      and
      the remainder via rail systems. We believe that our 2007 transportation modes
      will be comparable to those used in 2006. Our dependence upon railroads and
      third party trucking companies impacts our ability to deliver coal to our
      customers. Disruption of service due to weather-related problems, strikes,
      lockouts, bottlenecks and other events could temporarily impair our ability
      to
      supply coal to our customers, resulting in decreased shipments. Decreased
      performance levels over longer periods of time could cause our customers to
      look
      elsewhere for their fuel needs, negatively affecting our revenues and
      profitability.





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





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




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


-30-




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




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




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





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




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





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.


-31-






***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.


-32-




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




In
      January 2005, a virtually identical claim to that filed in West Virginia was
      filed in Kentucky. The plaintiffs in this case, *Kentucky
      Riverkeepers, Inc., et al. v. Colonel Robert A. Rowlette, Jr., et
      al.* ,
      Civil
      Action No 05-CV-36-JBC, seek the same relief as that sought in West Virginia.
      The court heard oral arguments on a summary judgment motion in late 2005 and
      there has been no action by the court since that time. A ruling for the
      plaintiffs in this matter could have an adverse impact on our planned surface
      mining operations.




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


-33-




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, 2007, we had accrued $31.0 million related to estimated mine
      reclamation costs. These amounts recorded are dependent upon a number of
      variables, including the estimated future retirement costs, estimated proven
      reserves, assumptions involving profit margins, inflation rates, and the assumed
      credit-adjusted risk-free interest rates. Furthermore, these obligations are
      unfunded. If these accruals are insufficient or our liability in a particular
      year is greater than currently anticipated, our future operating results could
      be adversely affected.




***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
      three
      months ended March 31, 2007, we generated approximately 85% of our total
      revenues from several long-term contracts with electrical utilities, including
      30% from our largest customer, Georgia Power Company, and 19% from South
      Carolina Public Service Authority. At March 31, 2007, we had coal supply
      agreements with these customers that expire in 2007 to 2009. The execution
      of a
      substantial coal supply agreement is frequently the basis on which we undertake
      the development of coal reserves required to be supplied under the
      contract.




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





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





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




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


-34-





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




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





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




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




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





The
      mine
      disasters that occurred during 2006 in West Virginia and other states led to
      the
      enactment of significant new federal and state laws and regulations relating
      to
      safety in underground coal mines.   These laws and regulations include
      requirements for constructing and maintaining caches for the storage of
      additional self-contained self rescuers throughout underground mines; installing
      rescue chambers in underground mines; constant tracking of and communication
      with personnel in the mines; installing cable lifelines from the mine portal
      to
      all sections of the mine to assist in emergency escape; submission and approval
      of emergency response plans; and new and additional safety training. 
Additionally, new requirements for the prompt reporting of accidents and
      increased fines and penalties for violation of these and existing regulations
      have been implemented.  These new laws and regulations will cause us to
      incur substantial additional costs, which will adversely impact our operating
      performance.





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




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





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




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







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





-35-





***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.




***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 2007, we anticipate approximately 2%
      of
      our total production will come from mines operated by independent contract
      mine
      operators and approximately 2% of our total coal produced 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.





-36-





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, 2007, we had outstanding surety
      bonds
      with third parties for post-mining reclamation totaling $53.5 million.
      Furthermore, we have surety bonds for an additional $40.3 million in place
      for
      our federal and state workers’ compensation obligations and other miscellaneous
      obligations. Insurance companies have informed us, along with other participants
      in the coal industry, that they no longer will provide surety bonds for workers’
compensation and other post-employment benefits without collateral. We have
      satisfied our obligations under these statutes and regulations by providing
      letters of credit or other assurances of payment. However, letters of credit
      can
      be significantly more costly to us than surety bonds. The issuance of letters
      of
      credit under our senior secured credit facility also reduces amounts that we
      can
      borrow under our senior secured credit facility for other purposes. If we are
      unable to secure surety bonds for these obligations in the future, and are
      forced to secure letters of credit indefinitely, our profitability may be
      negatively affected.




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




We
      are
      required by law to provide various long-term employee benefits. We accrue
      amounts for these obligations based on the present value of expected future
      costs. We employed an independent actuary to complete estimates for our workers’
compensation and black lung (both state and federal) obligations. At March
      31,
      2007, the current and non-current portions of these obligations included $27.2
      million for coal workers’ black lung benefits and $54.6 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 March 31, 2007, we
      estimated that our pension plan was underfunded by approximately $12.7 million.
      If future payments are insufficient to fund the pension plan adequately to
      cover
      our future pension obligations, we could incur cash expenditures and costs
      materially higher than anticipated. The pension obligation is calculated
      annually and is based on several assumptions, including then prevailing
      conditions, which may change from year to year. In any year, if our assumptions
      are inaccurate, we could be required to expend greater amounts than
      anticipated.




***Substantially
      all of our assets are subject to security interests.***




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


-37-







***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
                EBITDA;•
            maximum
                total 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 amendments to our debt agreements
      which could make the terms of these agreements more onerous for us and require
      the payment of amendment or waiver fees. Failure to comply with these
      restrictions, even if waived by our lenders, also could adversely affect our
      credit ratings, which could increase our costs of debt financings and impair
      our
      ability to obtain additional debt financing.





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




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




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




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




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




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




***The
      disallowance 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 2006, 1% of our total revenues
      came
      from synfuel handling, shipping and marketing revenues. Sales of the fuel
      processed through these types of facilities are eligible for non-conventional
      fuels tax credits under Section 29 of the Internal Revenue Code. The owner
      of
      the facility that we supply with coal has obtained a Private Letter Ruling
      (“PLR”) from the Internal Revenue Service confirming that the facility produces
      a qualified fuel eligible for Section 29 tax credits. The Section 29 tax credit
      program is scheduled to expire on December 31, 2007. There is a risk that the
      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. Additionally,
      recent market prices of oil caused the synfuel plants to cease operations during
      a portion of 2006. Additional synfuel plant closures will result in the loss
      of
      the handling, shipping and marketing fees for our services, which may negatively
      affect our profitability.


-38-





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




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





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




We
      believe that our cash on hand, the cash provided by our new Term Facility,
      the
      availability under our new Revolver and cash generated from our operations
      will
      provide us with adequate liquidity for at least the next twelve months. However,
      such funds likely will not provide sufficient cash to fund any future
      acquisitions. Accordingly, we may need to conduct additional debt or equity
      financings in order to fund any such additional acquisitions, unless we issue
      shares of our common stock as consideration for those acquisitions. If we are
      unable to obtain any such financings, we may be required to forego future
      acquisition opportunities.





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




Our
      southern Indiana mining complex currently has rights to proven and probable
      reserves that we believe will be exhausted in approximately 12.1 years at 2006
      levels of production, compared to our current Central Appalachia mining
      complexes, which have reserves that we believe will last an average of
      approximately 26.0 years at 2006 levels of production. We intend to increase
      our
      reserves in southern Indiana by acquiring rights to additional exploitable
      reserves that are either adjacent to or nearby our current reserves. If we
      are
      unable to successfully acquire such rights on acceptable terms, or if our
      exploration or acquisition activities indicate that such coal reserves or rights
      do not exist or are not available on acceptable terms, our production and
      revenues will decline as our reserves in that region are depleted. Exhaustion
      of
      reserves at particular mines also may have an adverse effect on our operating
      results that is disproportionate to the percentage of overall production
      represented by such mines.




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




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


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**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 Global Select Market, make it difficult to predict the market price
      for our common stock in the future and cause the value of your investment to
      decline.




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




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





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




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




We
      have a
      shareholder rights agreement which, in certain circumstances, including a person
      or group acquiring, or the commencement of a tender or exchange offer that
      would
      result in a person or group acquiring, beneficial ownership of more than 20%
      of
      the outstanding shares of our common stock, would entitle each right holder,
      other than the person or group triggering the plan, to receive, upon exercise
      of
      the right, shares of our common stock having a then-current fair value equal
      to
      twice the exercise price of a right. This shareholder rights agreement provides
      us with a defensive mechanism that decreases the risk that a hostile acquirer
      will attempt to take control of us without negotiating directly with our board
      of directors. The shareholder rights agreement may discourage acquirers from
      attempting to purchase us, which may adversely affect the price of our common
      stock.




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





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




**ITEM 3.
      DEFAULTSUNDER SENIOR SECURITIES**





None.




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





None


-40-





**ITEM 5.
      OTHERINFORMATION**





None





**ITEM** **6.** **EXHIBITS**





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













-41-


**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
      9,
      2007








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