JAMES
      RIVER COAL COMPANY





**ANNUAL
      INCENTIVE COMPENSATION PLAN**











1. **PURPOSE.**





The
      Board
      of Directors (the “Board”) of James River Coal Company (the “Company”) has
      determined that certain executives and corporate managers of the Company
      contribute substantially to the growth, success and financial performance of
      the
      Company. The purpose of this Plan is to reward such individuals with a cash
      bonus (“Financial Award”) when the Company achieves certain annual financial
      goals established by the Board. Financial Awards may vary based upon the
      achievement of certain pre-established safety goals and the individual
      performance of participants during the Plan Year.





2. **PLAN
      YEAR.**





This
      Plan
      will operate on a calendar year basis. The first Plan Year will be from January
      1, 2007 through December 31, 2007. Thereafter, each Plan Year will be for a
      subsequent calendar year period until the Plan is terminated by the
      Board.





3. **PARTICIPANTS.**





The
      Compensation Committee of the Board (the “Committee”) shall designate and
      approve participants in the Plan. Those individuals listed on Exhibit A will
      participate during the 2007 Plan Year (each a “Participant”). The Committee
      shall have the right to add or remove Participants from time to time as it
      deems
      appropriate in its sole discretion. When a Participant is added during the
      course of a Plan Year, his/her Financial Award shall be prorated based upon
      length of service during the Plan Year, unless otherwise determined by the
      Committee.





4. **CORPORATE
      FINANCIAL GOALS AND PERFORMANCE MEASURE.**





The
      Committee shall establish a Target Financial Goal for each Plan Year. The Target
      Financial Goal shall be a designated level of Earnings Before Interest, Taxes,
      Depreciation and Amortization (EBITDA) for such year. EBITDA shall be defined
      as
      net income before federal income taxes, excluding net gains or losses on
      investments, and before deduction for any expenses attributable to Interest,
      Depreciation or Amortization, as derived from the annual audited financial
      statements of the Company for such Plan Year.





5. **SAFETY
      GOALS AND INDIVIDUAL PERFORMANCE GOALS.**





The
      Committee shall also establish annually one or more safety and/or individual
      performance goals applicable to individual Participants. The weighting of such
      goals in determining a Participant’s Financial Award may vary from individual to
      individual, but will not exceed the percentages shown on Exhibit
      A.








6. **PARTICIPANT
      FINANCIAL AWARDS.**





No
      later
      than March 15 following the end of each Plan Year, the Committee shall determine
      a Participant’s Financial Award for such Plan Year based upon (i) the financial
      performance of the Company in relation to the Target Financial Goal; (ii) the
      safety performance of the subsidiary or subsidiaries in relation to the safety
      goals applicable to that Participant; and (iii) the Participant’s individual
      performance during such Plan Year, all such criteria being weighted for each
      respective Participant as set forth on Exhibit A. Each Participant shall have
      a
      predetermined bonus level, dependent upon his/her level of responsibility within
      the Company, that is a percentage of such Participant’s annual base salary (the
“Award Opportunity”). The Award Opportunity for each Participant in the 2007
      Plan Year is set forth on Exhibit A. The Committee shall have the authority
      to
      set and amend the Award Opportunity and the weighting of the criteria applicable
      to individual Participants in the Plan. Financial Awards shall be calculated
      by
      applying the Award Multiplier set forth on Exhibit A when the Company’s actual
      EBITDA exceeds the Target Financial Goal for the Plan Year. All Financial Awards
      shall be paid in a cash, lump sum payment no later than March 15 following
      the
      end of the Plan Year, or, if later, when the annual audited financial statements
      are finalized.





7. **TERMINATION
      OF EMPLOYMENT.**





Except
      as
      otherwise provided in Section 8 below, if a Participant’s employment terminates,
      voluntarily or involuntarily, at any time during the Plan Year or prior to
      payment of a Financial Award for the Plan Year for any reason other than Normal
      Retirement, Early Retirement, Death or Disability (all as defined in the James
      River Retirement Plan), no Financial Award or payment under this Plan shall
      be
      earned, due or payable.





If
      a
      Participant’s employment terminates during the Plan Year due to Normal
      Retirement, Early Retirement, Death or Disability (all as defined in the James
      River Retirement Plan), the Financial Award earned pursuant to this Plan will
      be
      prorated based upon the date of such occurrence and the base salary earned
      through such date, and shall be paid to the Participant in a lump sum no later
      than March 15 following the end of the Plan Year in which the termination
      occurs, or, if later, when the annual audited financial statements are
      finalized.





8. **CHANGE
      OF CONTROL** ***.***





In
      the
      event that a “Change of Control” as defined in the Company’s Severance and
      Retention Plan (but excluding the proviso at the end of such definition) occurs
      after conclusion of a Plan Year for which Financial Awards have been earned
      but
      not yet paid, such awards shall be paid to Participants as soon as practicable.
      In addition, upon the occurrence of a Change of Control all Participants shall
      become immediately vested and entitled to receive within thirty (30) days after
      such event, provided they are still employed by the Company immediately prior
      to
      such Change in Control, their Financial Awards at the Target Financial Goal
      for
      the Plan  Year
      during which the Change of Control occurs.








9. **ADMINISTRATION
      OF THIS PLAN.**





A. **GENERAL.** The
      Board has delegated authority for the overall administration of the Plan to
      the
      Compensation Committee of the Board. Actions of the Committee may be taken
      by
      the vote of a majority of its members at a meeting or through written or
      electronic ballot in lieu of a meeting. The Committee may allocate among its
      members and delegate to any person who is not a member of the Committee any
      of
      its administration responsibilities. The Committee will have power to interpret
      this Plan, to make regulations for carrying out its purpose and to make all
      other determinations in connection with its administration, all of which will,
      unless otherwise determined by the Committee, be final, binding and conclusive.
      The Committee shall administer and interpret the Plan in a manner that it
      reasonably determines is consistent with the requirements of Internal Code
      section 409A.





B. **DISCRETION** .
      As soon
      as practicable after the end of the Plan Year and no later than the March 15,
      or, if later, when the annual audited financial statements are finalized, the
      Committee shall certify the level at which the Target Financial, individual,
      and
      safety goals have been met and shall approve payments for Participants, if
      deemed reasonable by the Committee. The Committee may use discretion to reduce
      or to increase Awards to be paid in accordance with this Plan.





C. **DETERMINATION
      OF EMPLOYMENT** .
      The
      Committee will have the right to determine, with respect to any Participant,
      the
      commencement date or termination date of the Participant’s employment with the
      Company solely for purposes of this Plan, separate and apart from any
      determination as may be made by the Company with respect to the individual’s
      employment.





D. **AMENDMENTS** .
      The
      Committee will have the power to amend or terminate this Plan in any manner
      and
      at any time, including in a manner adverse to the rights of the
      Participants.





E. **NO
      LIABILITY** .
      No
      member of the Board of Directors of the Company or the Committee or any employee
      of the Company (each, a “Covered Person”) will have any liability to any person
      (including any Participant) for any action taken or omitted to be taken or
      any
      determination made in good faith with respect to this Plan or any Participant’s
      participation in it. Each Covered Person will be indemnified and held harmless
      by the Company against and from any loss, cost, liability, or expense (including
      attorneys’ fees) that may be imposed upon or incurred by such Covered Person in
      connection with or resulting from any action, suit or proceeding to which such
      Covered Person may be a party or in which such Covered Person may be involved
      by
      reason of any action taken or omitted to be taken under this Plan and against
      and from any and all amounts paid by such Covered Persons, with the Company’s
      approval, in settlement thereof, or paid by such Covered Person in satisfaction
      of any judgment in any such action, suit or proceeding against such Covered
      Person, provided that the Company will have the right, at its own expense,
      to
      assume and defend any such action, suit or proceeding and, once the Company
      gives notice of its intent to assume the defense, the Company will have sole
      control over such defense with counsel of the Company’s choice. The foregoing
      right of indemnification will not be available to a Covered Person to the extent
      that a court of competent jurisdiction in a final judgment or other final
      adjudication, in either case, not subject to further appeal, determines that
      the
      acts or omissions of such Covered Person giving rise to the indemnification
      claim resulted from such Covered Person’s bad faith, fraud or willful
      misconduct. The foregoing right of indemnification will not be exclusive of
      any
      other rights of indemnification to which Covered Persons may be entitled under
      the Company’s Articles of Incorporation or Bylaws, as a matter of law, or
      otherwise, or any other power that the Company may have to indemnify such
      persons or hold them harmless.











10. **GENERAL
      RULES.**





A. **TAX
      WITHOLDINGS** .
      As a
      condition to the payment of any amount under this Plan or in connection with
      any
      other event that gives rise to a federal or other governmental tax withholding
      obligation (1) the Company may deduct or withhold (or cause to be deducted
      or
      withheld) from any payment to a Participant whether or not pursuant to this
      Plan
      or (2) the Committee will be entitled to require that the Participant remit
      cash
      to the Company (through payroll deduction or otherwise), in each case, in an
      amount sufficient in the opinion of the Company to satisfy such withholding
      obligation.





B. **NO
      RIGHTS TO OTHER PAYMENTS** .
      The
      provisions of this Plan provide no right or eligibility to a Participant to
      any
      other payouts from the Company under any other alternative plans, arrangements
      or contracts the Company may have with any employees or group of employees
      of
      the Company.





C. **BENEFICIARY** .
      For the
      purpose of the Plan, a beneficiary shall be either (1) the named beneficiary
      designated by the Participant under this Plan, (2) the named beneficiary or
      beneficiaries designated by the Participant under the Company’s group life
      insurance plan, or (3) in the absence of any such designation, a legal
      representative of the Participant, duly appointed in the case of incompetence
      or
      death of the Participant. A Participant may revoke or change any designation.
      To
      be effective, the designation of a named beneficiary or beneficiaries, or any
      change in or revocation of any designation, must be on a form provided by the
      Company, signed by the Participant, and filed with the Company’s Manager of
      Benefits, prior to the death or disability of such Participant. Any such
      designation, change or revocation shall be ineffective to invalidate any cash
      payment made or other action taken by the Company pursuant to the Plan prior
      to
      the receipt of same by the Company. The determination by the Company of a
      beneficiary or beneficiaries, or the identity thereof, or the rights of same,
      based on proof by affidavit or other written evidence satisfactory to the
      Company shall be conclusive as to the liability of the Company, and any payment
      made in accordance therewith shall discharge the Company of its obligation
      under
      the plan for such payment.





D. **SEVERABILITY** .
      If any
      of the provisions of this Plan is finally held to be invalid, illegal or
      unenforceable (whether in whole or in part), or inconsistent with the
      requirements of Internal Revenue Code section 409A, such provision will be
      deemed modified to the extent, but only to the extent, of such invalidity,
      illegality or unenforceability and the remaining provisions will not be affected
      thereby; provided, that if any such provisions is finally held to be invalid,
      illegal, or unenforceable because it exceeds the maximum scope determined to
      be
      acceptable to permit such provision to be enforceable, such provision will
      be
      deemed to be modified to the minimum extent necessary to modify such scope
      in
      order to make such provision enforceable hereunder.








E. **ENTIRE
      AGREEMENT.** This
      Plan contains the entire agreement of the parties with respect to the subject
      matter thereof and supersedes all prior agreements, promises, covenants,
      arrangements, communications, representations and warranties between them,
      whether written or oral with respect to the subject matter thereof.





F. **NO
      THIRD PARTY BENEFICIARIES** .
      Except
      as expressly provided therein, this Plan will not confer on any person other
      than the Company and the Participant or the Participant’s beneficiary any rights
      or remedies thereunder. The exculpation and indemnification provisions of
      Section 9 E will inure to the benefit of a Covered Person’s estate and
      beneficiaries and legatees.





G. **COMPANY’S
      SUCCESSORS AND ASSIGNS** .
      The
      term of this Plan will be binding upon and inure to the benefit of the Company
      and its successors and assigns.





H. **RIGHT
      TO DISCHARGE** .
      Nothing
      contained in this Plan will confer on any Participant any right to be continued
      in the employ of the Company or to be included in any future plans of similar
      nature.





11. **DISPUTES** .





A. **GOVERNING
      LAWS** .
      This
      Plan will be governed by and construed in accordance with the laws of the
      Commonwealth of Virginia, without regard to principles of conflict of
      laws.





B. **JURISDICTION** .
      The
      Company and each Participant hereby irrevocably submit to the exclusive
      jurisdiction of a state or federal court of appropriate jurisdiction located
      in
      the City of Richmond, the Commonwealth of Virginia over any suit, action or
      proceeding arising out of or relating to or concerning this Plan. The Company
      and each Participant acknowledge that the forum designated by this section
      has a
      reasonable relation to this Plan and to such Participant’s relationship with the
      Company.





C. **WAIVER** .  The
      Company and each Participant waive, to the fullest extent permitted by
      applicable law, any objection that the Company and such Participant now or
      hereafter may have to personal jurisdiction or to the laying of venue of any
      such suit, action or proceeding in any court referred to in Section 11B. The
      Company and each Participant undertake not to commence any action, suit or
      proceeding arising out of or relating to or concerning this Plan in any forum
      other than a forum described in Section 11B.





D. **SERVICE
      OF PROCESS** .
      Each
      Participant irrevocably appoints the Secretary of the Company at 901 E. Byrd
      Street, Suite 1600, Richmond, Virginia 23219, as his or her agent for service
      of
      process in connection with any action, suit or proceeding arising out of or
      relating to or concerning this Plan. The Secretary will promptly advise the
      Participant of any such service of process.





E. **CONFIDENTIALITY** .
      Each
      Participant must keep confidential any information concerning any Award made
      under this Plan and any dispute, controversy or claim relating to this Plan,
      except that a Participant may disclose information concerning a dispute or
      claim
      to the court that is considering such dispute or to such Participant’s legal
      counsel (provided that such counsel agrees not to disclose any such information
      other than as a necessary to the prosecution or defense of the
      dispute).











12. **TERM
      OF PLAN.**





This
      Plan
      will continue until suspended or terminated by the Board in its sole
      discretion.