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, 2008




OR





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





For the
transition period from __________________ to __________________





Commission
File Number  000-51129





JAMES
      RIVER COAL COMPANY


Exact
name of registrant as specified in its charter)





Virginia
            
            54-1602012(State
      or other jurisdiction
            
            (I.R.S.
      Employerof
      incorporation or organization)
            
            Identification
      No.)901
      E. Byrd Street, Suite 1600Richmond,
      Virginia
            
            23219(Address
      of principal executive offices)
            
            (Zip
      Code)





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





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


Yes    ý             No    o




Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.






Large
      accelerated filer  o
            Accelerated
      filer  ý
            Non-accelerated
      filer  o







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


YesoNoý





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


Yes    ý             No    o




The
number of shares of the registrant’s Common Stock, par value $.01 per share,
outstanding as of April 15, 2008 was 25,324,897.











FORM
10-Q INDEX





PagePART I     FINANCIAL INFORMATION
              3Item 1.
              Financial Statements.Condensed Consolidated Balance Sheets as of March 31, 2008
      and December 31, 2007
              3Condensed Consolidated Statements of Operations  for
      the three months endedMarch
      31, 2008 and 2007
              5Condensed Consolidated Statements of Changes in
      Shareholders’ Equity andComprehensive Income (Loss) for the three months ended
      March 31, 2008 and the yearended
      December 31, 2007
              6Condensed Consolidated Statements of Cash Flows for the
      three months endedMarch
      31, 2008 and 2007
              7Notes to Condensed Consolidated Financial
      Statements
              8Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
              15Item 3.
              Quantitative and Qualitative Disclosure about Market
      Risk.
              27Item 4.
              Controls and Procedures.
              27PART II      OTHER INFORMATION
              28Item 1.
              Legal Proceedings.
              28Item 1A.
              Risk Factors.
              28Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds.
              40Item 3.
              Defaults Upon Senior Securities.40Item 4.
              Submission of Matters to a Vote of Security
      Holders.40Item 5.
              Other Information.40Item 6.
              Exhibits.SIGNATURES
              41
 
 
 Certifications
pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002










PART
I                               FINANCIALINFORMATION





ITEM 1.  FINANCIALSTATEMENTS





JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





Condensed
ConsolidatedBalance Sheets


(in
thousands)





March
      31,
                  2008
                
                
                December
      31,
                  2007Assets
                
                (unaudited)Current
      assets:Cash
      and cash equivalents
                
                $
                45,772
                
                
                
                5,413Receivables:Trade
                
                
                43,189
                
                
                
                40,544Other
                
                
                475
                
                
                
                762Total
      receivables
                
                
                43,664
                
                
                
                41,306Inventories:Coal
                
                
                7,146
                
                
                
                5,915Materials
      and supplies
                
                
                8,853
                
                
                
                8,277Total
      inventories
                
                
                15,999
                
                
                
                14,192Prepaid
      royalties
                
                
                4,227
                
                
                
                3,817Other
      current assets
                
                
                2,925
                
                
                
                4,180Total
      current assets
                
                
                112,587
                
                
                
                68,908Property,
      plant, and equipment, at cost:Land
                
                
                6,361
                
                
                
                6,220Mineral
      rights
                
                
                193,324
                
                
                
                191,586Buildings,
      machinery and equipment
                
                
                291,890
                
                
                
                285,009Mine
      development costs
                
                
                34,647
                
                
                
                31,923Total
      property, plant, and equipment
                
                
                526,222
                
                
                
                514,738Less
      accumulated depreciation, depletion, and amortization
                
                
                212,524
                
                
                
                195,534Property,
      plant and equipment, net
                
                
                313,698
                
                
                
                319,204Goodwill
                
                
                26,492
                
                
                
                26,492Other
      assets
                
                
                24,024
                
                
                
                24,683Total
      assets
                
                $
                476,801
                
                
                
                439,287




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,
                2008
              
              
              December
      31,
                2007Liabilities
      and Shareholders' Equity
              
              (unaudited)Current
      liabilities:Current
      maturities of long-term debt (note 2)
              
              $
              21,981
              
              
              
              1,600Accounts
      payable
              
              
              40,216
              
              
              
              46,641Accrued
      salaries, wages, and employee benefits
              
              
              7,536
              
              
              
              6,010Workers'
      compensation benefits
              
              
              9,450
              
              
              
              9,450Black
      lung benefits
              
              
              2,050
              
              
              
              2,050Accrued
      taxes
              
              
              5,426
              
              
              
              4,234Other
      current liabilities
              
              
              12,210
              
              
              
              7,394Total
      current liabilities
              
              
              98,869
              
              
              
              77,379Long-term
      debt, less current maturities
              
              
              166,419
              
              
              
              187,200Other
      liabilities:Noncurrent
      portion of workers' compensation benefits
              
              
              44,276
              
              
              
              44,142Noncurrent
      portion of black lung benefits
              
              
              22,578
              
              
              
              22,084Pension
      obligations
              
              
              5,245
              
              
              
              5,423Asset
      retirement obligations
              
              
              34,360
              
              
              
              32,288Other
              
              
              1,042
              
              
              
              997Total
      other liabilities
              
              
              107,501
              
              
              
              104,934Total
      liabilities
              
              
              372,789
              
              
              
              369,513Commitments
      and contingencies (note 4)Shareholders'
      equity:Preferred
      stock, $1.00 par value.  Authorized 10,000,000
      shares
              
              
              -
              
              
              
              -Common
      stock, $.01 par value.  Authorized 100,000,000
      shares;issued
      and outstanding 25,324,897 and 21,906,265 sharesas
      of March 31, 2008 and December 31, 2007, respectively
              
              
              253
              
              
              
              219Paid-in-capital
              
              
              210,436
              
              
              
              159,403Accumulated
      deficit
              
              
              (108,407
              )
              
              
              (91,719
              )Accumulated
      other comprehensive income
              
              
              1,730
              
              
              
              1,871Total
      shareholders' equity
              
              
              104,012
              
              
              
              69,774Total
      liabilities and shareholders' equity
              
              $
              476,801
              
              
              
              439,287
  See
accompanying notes to condensed consolidated financial
statements.




-4-


JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





Condensed
ConsolidatedStatements of Operations


(in
thousands, except per share data)


(unaudited)








Three
      Months
              
              
              Three
      MonthsEnded
              
              
              EndedMarch
      31, 2008
              
              
              March
      31, 2007Revenues
              
              $
              138,188
              
              
              
              132,435Cost
      of sales:Cost
      of coal sold
              
              
              125,730
              
              
              
              113,588Depreciation,
      depletion and amortization
              
              
              17,290
              
              
              
              19,333Total
      cost of sales
              
              
              143,020
              
              
              
              132,921Gross
      profit (loss)
              
              
              (4,832
              )
              
              
              (486
              )Selling,
      general and administrative expenses
              
              
              7,334
              
              
              
              7,475Total
      operating income (loss)
              
              
              (12,166
              )
              
              
              (7,961
              )Interest
      expense (note 2)
              
              
              4,889
              
              
              
              4,496Interest
      income
              
              
              (88
              )
              
              
              (120
              )Charges
      associated with repayment of debt (note 2)
              
              
              -
              
              
              
              2,421Miscellaneous
      income, net
              
              
              (279
              )
              
              
              (214
              )Total
      other expense, net
              
              
              4,522
              
              
              
              6,583Loss
      before income taxes
              
              
              (16,688
              )
              
              
              (14,544
              )Income
      tax benefit
              
              
              -
              
              
              
              (7,289
              )Net
      loss
              
              $
              (16,688
              )
              
              
              (7,255
              )Loss
      per common share (note 5)Basic
      loss per common share
              
              $
              (0.78
              )
              
              
              (0.46
              )Shares
      used to calculate basic loss per share
              
              
              21,492
              
              
              
              15,929Diluted
      loss per common share
              
              $
              (0.78
              )
              
              
              (0.46
              )Shares
      used to calculate diluted loss per share
              
              
              21,492
              
              
              
              15,929
  See
accompanying notes to condensed consolidated financial
statements


-5-














JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES


Condensed
ConsolidatedStatements of Changes in
Shareholders’


Equity
and Comprehensive Income (Loss)


(in
thousands)


(unaudited)











Common
      stock shares
              
              
              Common
      stock par value
              
              
              Paid-in-capital
              
              
              Accumulated
      Deficit
              
              
              Accumulated
      other comprehensive income (loss)
              
              
              TotalBalances,
      December 31, 2006
              
              
              16,669
              
              
              $
              167
              
              
              
              124,191
              
              
              
              (37,704
              )
              
              
              (257
              )
              
              
              86,397Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (54,015
              )
              
              
              -
              
              
              
              (54,015
              )Amortization
      of black lung liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              (180
              )
              
              
              (180
              )Black
      lung obligation adjustment, net of $(812) of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,909
              
              
              
              4,909Pension
      liability adjustment, net of $969 of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,601
              )
              
              
              (2,601
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (51,887
              )Issuance
      on common stock net of offering costs of $213
              
              
              5,175
              
              
              
              52
              
              
              
              32,337
              
              
              
              -
              
              
              
              -
              
              
              
              32,389Issuance
      of restricted stock awards, net of forfeitures
              
              
              135
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
      of shares for tax withholding
              
              
              (73
              )
              
              
              (1
              )
              
              
              (977
              )
              
              
              -
              
              
              
              -
              
              
              
              (978
              )Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              3,853
              
              
              
              -
              
              
              
              -
              
              
              
              3,853Balances,
      December 31, 2007
              
              
              21,906
              
              
              
              219
              
              
              
              159,403
              
              
              
              (91,719
              )
              
              
              1,871
              
              
              
              69,774Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (16,688
              )
              
              
              -
              
              
              
              (16,688
              )Amortization
      of black lung liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (141
              )
              
              
              (141
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (16,829
              )Issuance
      on common stock net of offering costs of $163
              
              
              3,413
              
              
              
              34
              
              
              
              50,049
              
              
              
              -
              
              
              
              -
              
              
              
              50,083Issuance
      of restricted stock awards, net of forfeitures
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              984
              
              
              
              -
              
              
              
              -
              
              
              
              98425,325
              
              
              $
              253
              
              
              
              210,436
              
              
              
              (108,407
              )
              
              
              1,730
              
              
              
              104,012












-6-











JAMES
RIVER COAL COMPANY


AND
SUBSIDIARIES





CondensedConsolidated Statements of Cash Flows


(in
thousands)


(unaudited)





Three
      Months
              
              
              Three
      MonthsEnded
              
              
              EndedMarch
      31,
                2008
              
              
              March
      31,
                2007Cash
      flows from operating activities:Net
      loss
              
              $
              (16,688
              )
              
              
              (7,255
              )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activitiesDepreciation,
      depletion, and amortization
              
              
              17,290
              
              
              
              19,333Accretion
      of asset retirement obligations
              
              
              664
              
              
              
              531Amortization
      of deferred financing costs
              
              
              396
              
              
              
              368Amortization
      of deferred stock-based compensation
              
              
              984
              
              
              
              960Deferred
      income tax benefit
              
              
              -
              
              
              
              (7,589
              )Gain
      on sale or disposal of property, plant, and equipment
              
              
              (174
              )
              
              
              (3
              )Write-off
      of deferred financing costs
              
              
              -
              
              
              
              2,421Changes
      in operating assets and liabilities:Receivables
              
              
              (2,358
              )
              
              
              4,043Inventories
              
              
              (1,807
              )
              
              
              (7,443
              )Prepaid
      royalties and other current assets
              
              
              845
              
              
              
              769Other
      assets
              
              
              263
              
              
              
              (1,709
              )Accounts
      payable
              
              
              (8,152
              )
              
              
              (1,534
              )Accrued
      salaries, wages, and employee benefits
              
              
              1,526
              
              
              
              1,273Accrued
      taxes
              
              
              1,192
              
              
              
              (666
              )Other
      current liabilities
              
              
              4,699
              
              
              
              3,599Workers'
      compensation benefits
              
              
              134
              
              
              
              1,161Black
      lung benefits
              
              
              353
              
              
              
              376Pension
      obligations
              
              
              (178
              )
              
              
              (278
              )Asset
      retirement obligation
              
              
              (62
              )
              
              
              (151
              )Other
      liabilities
              
              
              45
              
              
              
              82Net
      cash provided by operating activities
              
              
              (1,028
              )
              
              
              8,288Cash
      flows from investing activities:Additions
      to property, plant, and equipment
              
              
              (9,310
              )
              
              
              (12,298
              )Proceeds
      from sale of property, plant, and equipment
              
              
              1,014
              
              
              
              121Net
      cash used in investing activities
              
              
              (8,296
              )
              
              
              (12,177
              )Cash
      flows from financing activities:Proceeds
      from borrowings under long-debt
              
              
              -
              
              
              
              40,000Repayments
      of long-term debt
              
              
              (400
              )
              
              
              -Repayments
      under revolver, net
              
              
              -
              
              
              
              (17,493
              )Net
      proceeds from issuance of common stock
              
              
              50,083
              
              
              
              -Principal
      payments under capital lease obligations
              
              
              -
              
              
              
              (139
              )Capitalized
      deferred financing costs
              
              
              -
              
              
              
              (4,568
              )Net
      cash provided by financing activities
              
              
              49,683
              
              
              
              17,800Increase
      in cash
              
              
              40,359
              
              
              
              13,911Cash
      at beginning of period
              
              
              5,413
              
              
              
              1,807Cash
      at end of period
              
              $
              45,772
              
              
              
              15,718





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
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto for the year ended
December 31, 2007. The balances presented as of or for the year ended December
31, 2007 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 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In February 2008, the FASB deferred
the effective date of SFAS 157 by one year for certain non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
On January 1, 2008, the Company adopted the provisions of SFAS 157,
except as it applies to those non-financial assets and non-financial liabilities
for which the effective date has been delayed by one year. The adoption of
SFAS 157 did not have a material effect on the Company’s financial position
or results of operations.





(2)       Long
Term Debt and Interest Expense





Long-term
debt is as follows (amounts in thousands):





March
      31,
              2008
            
            
            December
      31,
              2007Senior
      Notes
            
            $
            150,000
            
            
            $
            150,000Term
      Facility
            
            
            38,400
            
            
            
            38,800Total
      long-term debt
            
            
            188,400
            
            
            
            188,800Less
      amounts classified as current
            
            
            21,981
            
            
            
            1,600Total
      long-term debt, less current maturities
            
            $
            166,419
            
            
            $
            187,200




-8-




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




In 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).  The Letter of Credit Facility does not constitute a
loan to the Company and accordingly is not available for borrowing by the
Company.  The Letter of Credit Facility supports the issuance of up to $60
million of letters of credit by the Company. The Company entered into the Third
Amendment to the Term Credit Agreement and the Second Amendment to the Revolving
Credit Agreement in May 2008 (collectively the Credit Amendment).  The
Credit Amendment waived defaults under the Facilities as of March 31, 2008,
modified certain existing financial covenants under the Facilities and increased
the interest rates of the Term Facilities and Letter of Credit
Facility.  The Credit Amendment also extends the time frame for
penalties on early repayment of the Term Loan and Letter of Credit
Facilities.  The following is a summary of significant terms of the
Facilities, as amended, as of March 31, 2008.


Revolver
              Term
      Facility
              Letter
      of Credit FacilityMaturity
              February
      2012
              February
      2013
              February
      2013Interest/Usage
      Rate (d)
              Company’s
      option of
                Base
      Rate(a)
      plus 1.75%
                or
      LIBOR plus 2.75%
                per
      annum
              Company’s
      option of
                Base
      Rate(a)
      plus 3.75%
                or
      LIBOR plus 4.75%
                per
      annum
              4.75%
      per annumMaximum
      Availability
              Lesser
      of $35.0 million
                and
      the borrowing
                base
      (b)
              $38.4
      million (c)
                outstanding
      as of
                March
      31, 2008.
              $60.0
      millionPeriodic
      Principal Payments
              None
              $400,000
      (c)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.  Amount available is also subject to a minimum liquidity
      covenant.
 (c)
              In
      connection with the mandatory prepayment of the term loan in April 2008
      (see below), the amount outstanding under the term loan was reduced to
      $17.1 million and the quarterly payments were reduced to
      $178,000.
 (d)
              The
      interest rates on the Term Facility and the Letter of Credit Facility were
      raised by 0.75% in connection with the Credit Amendment that was completed
      in May 2008 (see above).




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




-9-




As of
March 31, 2008, $35.0 million of the Revolver is available to the Company after
giving consideration to the $20 million minimum liquidity requirement on March
31, 2008.  Effective, April 1, 2008, the minimum liquidity requirement
will be $10 million.  The Company was not in compliance with all of
the financial covenants under the Facilities and the Senior Notes as of March
31, 2008.  The Credit Amendment waived these defaults as of March 31,
2008.  As a result of the Credit Amendment, the Company was in compliance
with all of the financial covenants under the Facilities as of March 31,
2008.  The Company expects the costs associated with the Credit Amendment
to be approximately $2.4 million.





During
the fourth quarter of 2007 and the first quarter of 2008, the Company raised a
total of approximately $82.5 million through the issuance of common
shares.  As required by the Term Facility, the Company offered a
portion of the proceeds from the issuance of the common shares in excess of $40
million to the holders of the Term Facility.  In April 2008, the
mandatory tender offer was accepted by the holders of the Term Facility and the
Company repaid $21.3 million on the Term Facility.   The $21.3
million repaid is classified in current maturities on long-term debt on the
accompanying condensed consolidated balance sheet as of March 31,
2008.  In addition, in connection with this repayment, the Company
expects to write-off approximately $1.1 million of unamortized financing charges
on the Term Facility in the second quarter of 2008.




Prior
Senior Secured Credit




The
Company wrote off $2.4 million of financing charges in connection with the
repayment of the Company’s Prior Senior Secured Credit Facility on February 26,
2007. The write off of the financing charges is classified as charges associated
with repayment of debt in the accompanying condensed consolidated statement of
operations.





Interest
Expense and Other





During
the three months ended March 31, 2008 and 2007, the Company paid $1.0 million
and $0.6 million in interest, respectively.





(3)       Equity




Preferred
Stock and Shareholder Rights Agreement




The
Company has authorized 10,000,000 shares of preferred stock, $1.00 par value per
share, the rights and preferences of which are established by the Board of the
Directors. The Company has reserved 500,000 of these shares as Series A
Participating Cumulative Preferred Stock for issuance under a shareholder rights
agreement (the Rights Agreement).




On May
25, 2004, the Company’s shareholders approved the Rights Agreement and declared
a dividend of one preferred share purchase right (Right) for each two shares of
common stock outstanding.  Each Right entitles the registered holder to
purchase from the Company one one-hundredth (1/100) of a share of our Series A
Participating Cumulative Preferred Stock, par value $1.00 per share, at a price
of $200 per one one-hundredth of a Series A preferred share.  The Rights
are not exercisable until a person or group of affiliated or associated persons
(an Acquiring Person) has acquired or announced the intention to acquire 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.  The Company currently has the following
types of equity awards outstanding under the Plan.




-10-






Restricted
Stock Awards




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




Stock
Options Awards




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




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, 2008, there were 437,490 shares available under the Plan for future
awards.





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




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





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





Three
      months ended2008
              
              
              2007Restricted
      stock
              
              $
              905
              
              
              $
              886Stock
      options
              
              
              79
              
              
              
              74Stock
      based compensation
              
              $
              984
              
              
              $
              960




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.




-11-





The
following is a summary of restricted stock and stock option awards for the three
months ended March 31, 2008:




Restricted
      Stock
                
                
                Stock
      OptionsWeighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                AverageNumber
      of
                
                
                Fair
      Value
                
                
                Number
      of
                
                
                ExerciseShares
                
                
                at
      Issue
                
                
                Shares
                
                
                PriceDecember
      31, 2007
                
                
                676,307
                
                
                $
                15.84
                
                
                
                264,334
                
                
                $
                15.79Granted
                
                
                5,200
                
                
                
                14.39
                
                
                
                -
                
                
                
                -Exercised/Vested
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Canceled
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -March
      31, 2008
                
                
                681,507
                
                
                
                15.83
                
                
                
                264,334
                
                
                
                15.79




The
following table summarizes additional information about the stock options
outstanding at March 31, 2008.




Range
      of
                  Exercise
      Price
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
      Price
                
                
                Weighted
      Average Remaining Contractual Life (Years)
                
                
                Aggregate
                  Intrinsic
                  Value
      (1)
                  (in
      000's)Outstanding
      at March 31, 2008
                
                $
                10.80-$33.75
                
                
                
                264,334
                
                
                $
                15.79
                
                
                
                6.7
                
                
                $
                1,153Exercisable
      at March 31, 2008
                
                $
                10.80-$33.75
                
                
                
                157,670
                
                
                $
                15.74
                
                
                
                6.4
                
                
                $
                673Vested
      and expected to vest at March 31, 2008
                
                
                
                
                
                
                264,334
                
                
                $
                15.79
                
                
                
                6.7
                
                
                $
                1,153




(1)  
The difference between a stock award's exercise price and the underlying stock's
market price at March 31, 2008.
 No value
is assigned to stock awards whose option price exceeds the the stock's market
price at March 31, 2008.




The
following table summarizes the Company’s total unrecognized compensation cost
related to stock based compensation as of March 31, 2008.




Weighted
      AverageRemaining PeriodUnearned
              
              
              Of
      ExpenseCompensation
              
              
              Recognition(in
      000's)
              
              
              (in
      years)Stock
      Options
              
              $
              263
              
              
              
              1.3Restricted
      Stock
              
              
              7,637
              
              
              
              2.3Total
              
              $
              7,900







(4)
            Commitments
      and Contingencies




The
Company has established irrevocable letters of credit totaling $60.0 million as
of March 31, 2008 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.




-12-


(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 (loss) per share (in
thousands):




Three
      Months EndedMarch
      31,
              
              
              March
      31,2008
              
              
              2007Weighted
      average number of common shares outstanding:Basic
              
              
              21,492
              
              
              
              15,929Effect
      of dilutive instruments
              
              
              -
              
              
              
              -Diluted
              
              
              21,492
              
              
              
              15,929




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
702,000 and 743,000 for the three months ended March 31, 2008, and 2007,
respectively.




(6)       Pension
Expense




Effective
September 30, 2007, the Company froze pension plan benefit accruals for all
employees covered under its qualified non-contributory defined benefit pension
plan.  The
components of net periodic benefit cost are as follows (amounts in
thousands):




Three
      Months
                Ended
              
              
              Three
      Months
                EndedMarch
      31,
                2008
              
              
              March
      31,
                2007Service
      cost
              
              $
              —
              
              
              
              724Interest
      cost
              
              
              911
              
              
              
              900Expected
      return on plan assets
              
              
              (1,089
              )
              
              
              (1,027
              )Net
      periodic (benefit) cost
              
              $
              (178
              )
              
              
              597





(7) Pneumoconiosis
(Black Lung) Benefits




The
expense for black lung benefits consists of the following (amounts in
thousands):




Three
      Months
                Ended
              
              
              Three
      Months
                EndedMarch
      31,
                2008
              
              
              March
      31,
                2007Service
      cost
              
              $
              120
              
              
              
              142Interest
      cost
              
              
              491
              
              
              
              397Amortization
      of actuarial loss
              
              
              (141
              )
              
              
              (45
              )Total
      expense
              
              $
              470
              
              
              
              494




-13-





(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 Appalachia (CAPP) and in the Midwest (Midwest). The Company’s CAPP
operations are located in eastern Kentucky and the Company’s Midwest operations
are located in southern Indiana. Coal quality, coal seam height, transportation
methods and regulatory issues are generally consistent within a basin.
Accordingly, market and contract pricing have been developed by coal basin. The
Company manages its coal sales by coal basin, not by individual mine complex.
Mine operations are evaluated based on their per-ton operating costs. Operating
segment results are shown below (in thousands).





Three
      Months EndedMarch
      31,2008
              
              
              2007RevenuesCAPP
              
              $
              115,479
              
              
              $
              110,843Midwest
              
              
              22,709
              
              
              
              21,592Corporate
              
              
              -
              
              
              
              -Total
              
              $
              138,188
              
              
              $
              132,435Depreciation,
      depletion and amortizationCAPP
              
              $
              13,539
              
              
              $
              15,459Midwest
              
              
              3,717
              
              
              
              3,845Corporate
              
              
              34
              
              
              
              29Total
              
              $
              17,290
              
              
              $
              19,333Total
      operating income (loss)CAPP
              
              $
              (5,134
              )
              
              $
              (3,919
              )Midwest
              
              
              (3,110
              )
              
              
              (44
              )Corporate
              
              
              (3,922
              )
              
              
              (3,998
              )Total
              
              $
              (12,166
              )
              
              $
              (7,961
              )Net
      earnings (loss) (1)CAPP
              
              $
              (5,134
              )
              
              $
              (3,919
              )Midwest
              
              
              (3,110
              )
              
              
              (44
              )Corporate
              
              
              (8,444
              )
              
              
              (3,292
              )Total
              
              $
              (16,688
              )
              
              $
              (7,255
              )




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







March
      31,
              
              
              December
      31,2008
              
              
              2007Total
      AssetsCAPP
              
              $
              322,955
              
              
              
              326,571Midwest
              
              
              91,503
              
              
              
              93,982Corporate
              
              
              62,343
              
              
              
              18,734Total
              
              $
              476,801
              
              
              
              439,287GoodwillCAPP
              
              $
              -
              
              
              
              -Midwest
              
              
              26,492
              
              
              
              26,492Corporate
              
              
              -
              
              
              
              -Total
              
              $
              26,492
              
              
              
              26,492





-14-




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, 2007.





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 68% of our total revenues (contract and spot) in the
three months ended March 31, 2008 from coals sales to electric utility customers
and the remaining 32% from coal sales to industrial and other
companies.





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, 2008, CAPP produced 2.2 million tons of coal
(including contract coal and purchased coal). Of the CAPP tons produced, 78%
came from Company operated underground mines. For the three months ended March
31, 2008, we shipped 2.2 million tons of coal and generated coal sale revenues
of $115.5 million from our CAPP segment. For the three months ended March 31,
2008, Georgia Power Company was our largest customer, representing approximately
26% of our total revenues.  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, 2008, our Midwest mines produced 0.7
million tons of coal. Of the Midwest tons produced, 75% came from Company
operated surface mines. For the three months ended March 31, 2008, we shipped
0.7 million tons of coal and generated coal sale revenues of $22.7 million from
our Midwest segment. For the three months ended March 31, 2008, our Midwest
segment’s largest customer was Hoosier Energy which represented approximately 5%
of our total revenues.




Results
of Operations





Three
Months Ended March 31, 2008 Compared with the Three Months Ended March 31,
2007





The
following tables show selected operating results for the three months ended
March 31, 2008 compared to the three months ended March 31, 2007 (in thousands
except per ton amounts).




-15-




Three
      Months Ended March 312008
              
              
              2007
              
              
              ChangeTotal
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      Ton
              
              
              TotalVolume
      shipped (tons)
              
              
              2,922
              
              
              
              
              
              
              3,030
              
              
              
              
              
              
              -4%RevenuesCoal
      sales
              
              $
              138,188
              
              
              
              47.29
              
              
              $
              130,074
              
              
              
              42.93
              
              
              
              6%Synfuel
      handling
              
              
              -
              
              
              
              
              
              
              
              2,361
              
              
              
              
              
              
              
              -100%Cost
      of coal sold
              
              
              125,730
              
              
              
              43.03
              
              
              
              113,588
              
              
              
              37.49
              
              
              
              11%Depreciation,
      depletion and amortization
              
              
              17,290
              
              
              
              5.92
              
              
              
              19,333
              
              
              
              6.38
              
              
              
              -11%Gross
      profit (loss)
              
              
              (4,832
              )
              
              
              (1.65
              )
              
              
              (486
              )
              
              
              (0.16
              )
              
              
              894%Selling,
      general and administrative
              
              
              7,334
              
              
              
              2.51
              
              
              
              7,475
              
              
              
              2.47
              
              
              
              -2%




Volume
and Revenues by Segment





Three
      Months Ended March 31,2008
                        
                        
                        2007CAPP
                        
                        
                        Midwest
                        
                        
                        CAPP
                        
                        
                        MidwestVolume
      (tons)
                        
                        
                        2,197
                        
                        
                        
                        725
                        
                        
                        
                        2,281
                        
                        
                        
                        749Coal
      sales revenue
                        
                        $
                        115,479
                        
                        
                        
                        22,709
                        
                        
                        
                        108,482
                        
                        
                        
                        21,592Average
      sales price per ton
                        
                        $
                        52.56
                        
                        
                        
                        31.32
                        
                        
                        
                        47.56
                        
                        
                        
                        28.83





Coal
sales revenue for the three months ended March 31, increased from $130.1 million
in 2007 to $138.2 million in 2008. This increase was due to an increase in the
average sales price per ton in both the CAPP and Midwest regions.





For the
three months ended March 31, 2008, the CAPP region sold approximately 1.0
million tons of coal under long-term contracts (44% of total CAPP sales volume)
at an average selling price of $48.64 per ton. 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, 2008, the CAPP region
sold 1.2 million tons of coal (56% of total CAPP sales volume) under short term
contracts (includes spot sales) at an average selling price of $55.60 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) under short term contracts at an average
selling price of $61.61 per ton.  The decrease in the average selling
price for short-term contract in the three months ended March 31, 2008 as
compared to 2007, was primarily due to a change in the mix between steam and
stoker coal short term contract tons sold.





The
Midwest’s region sales of coal were under long term contracts for both the 2008
and 2007 periods.  For the three months ended March 31, 2008, the
Midwest region sold 725,000 tons at an average sales price of
$31.32.  For the three months ended March 31, 2007, the Midwest region
sold 749,000 tons at an average sales price of $28.83.




Operating
Costs by Segment
  Three
      Months Ended March 31,2008
                
                
                2007CAPP
                
                
                Midwest
                
                
                Corporate
                
                
                CAPP
                
                
                Midwest
                
                
                CorporateCost
      of coal sold
                
                $
                104,110
                
                
                
                21,620
                
                
                
                -
                
                
                
                96,357
                
                
                
                17,231
                
                
                
                -Per
      ton
                
                
                47.39
                
                
                
                29.82
                
                
                
                -
                
                
                
                42.24
                
                
                
                23.01
                
                
                
                -Depreciation,
      depletion and amortization
                
                
                13,539
                
                
                
                3,717
                
                
                
                34
                
                
                
                15,459
                
                
                
                3,845
                
                
                
                29Per
      ton
                
                
                6.16
                
                
                
                5.13
                
                
                
                -
                
                
                
                6.78
                
                
                
                5.13
                
                
                
                -





-16-






Cost of Coal Sold




For the
three months ended March 31, the cost of coal sold, excluding depreciation,
depletion and amortization, increased from $113.6 million in 2007 to $125.7
million in 2008.  Our cost per ton of coal sold in the CAPP region
increased from $42.24 per ton in the 2007 period to $47.39 per ton in the 2008
period.  This $5.15 increase in cost per ton of coal sold was due to
several factors.  Labor and benefit costs increased by $1.71 per
ton. This increase was primarily due to the impact of increased regulatory
scrutiny, which negatively impacted our productivity.  Variable costs
increased $1.63 per ton, primarily due to the impact of rising commodity prices
including diesel fuel and steel, as well as an increase in equipment rental
costs at our surface mines.   Sales related costs and trucking also
resulted in an additional $1.40 per ton increase.





Our cost
per ton of coal sold in the Midwest increased $6.81 per ton to $29.82 per ton in
the 2008 period.  The increase in cost per ton of coal sold was
primarily due to a $5.83 increase in variable costs and a $1.24 per ton increase
in labor costs.  The increase in the variable costs was due to
increase in diesel and explosives as well as weather related inefficiencies at
the surface mines.  The increase in labor costs was due to an increase
in wages as compared to prior year and weather related inefficiencies at the
surface mines.





Depreciation,
depletion and amortization




For the
three months ended March 31, depreciation, depletion and amortization decreased
from $19.3 million in 2007 to $17.3 million in 2008.  In the CAPP
region, depreciation, depletion and amortization decreased $1.9 million to $13.5
million or $6.16 per ton.  This decrease was primarily
due to a drop in the depreciable assets base due to certain assets that became
fully depreciated in May 2007.  In the Midwest, depreciation,
depletion and amortization decreased $0.1 million to $3.7 million or $5.13 per
ton.




Selling,
general and administrative




Selling,
general and administrative expenses decreased from $7.5 million for the three
months ended March 31, 2007 to $7.3 million for the three months ended March 31,
2008.




Income
Taxes





Our
effective income tax rate is impacted primarily by the amount of the valuation
allowance recorded and percentage depletion.  For the three months
ended March 31, 2008, we recorded no tax benefit based on the
conclusion that the benefit of the expected 2008 net operating loss is not
more likely than not to be realized.  The criteria for recording a
valuation allowance are described in “Critical Accounting Estimates – Income
Taxes.”  As of March 31, 2008, we had an $18.3 million valuation
allowance against gross deferred tax assets.  Our effective tax rate for
the three months ended March 31, 2007 was 50.1%.  We had no valuation
allowance recorded as of March 31, 2007.  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 basis in the properties, 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 March
31, 2008, our outstanding long term debt consists of $150 million of Senior
Notes due on June 1, 2012 (the Senior Notes) and amounts outstanding under our
Senior Secured Credit Facilities (discussed below).  The Senior Notes
are unsecured and accrue interest at 9.375% per annum. Interest payments on the
Senior Notes are required semi-annually. We may redeem the Senior Notes, in
whole or in part, at any time on or after June 1, 2009 at redemption prices from
104.86% in 2009 to 100% in 2011. In addition, at any time prior to June 1, 2008,
we may redeem up to 35% of the principal amount of the Senior Notes with the net
cash proceeds of a public equity offering at a redemption price of 109.375%,
plus accrued and unpaid interest to the redemption date.





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





-17-




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




We
entered into the Third Amendment to the Term Credit Agreement and the Second
Amendment to the Revolving Credit Agreement in May 2008 (collectively the Credit
Amendment).  The Credit Amendment waived defaults under the Facilities
as of March 31, 2008, modified certain existing financial covenants under the
Facilities and increased the interest rates of the Term Facilities and Letter of
Credit Facility. The Credit Amendment also extends the time frame for penalties
on early repayment of the Term Loan and Letter of Credit Facilities.




The
following is a summary of significant terms of the Facilities, as amended, as of
March 31, 2008.




Revolver
              Term
      Facility
              Letter
      of Credit FacilityMaturity
              February
      2012
              February
      2013
              February
      2013Interest/Usage
      Rate (d)
              Our
      option of Base Rate(a)
      plus 1.75% or LIBOR plus 2.75% per annum
              Our
      option of Base Rate(a)
      plus 3.75% or LIBOR plus 4.75% per annum
              4.75%
      per annumMaximum
      Availability
              Lesser
      of $35.0 million and the borrowing base (b)
              $38.4
      million(c)
      outstanding as of March 31, 2008.
              $60.0
      millionPeriodic
      Principal Payments
              None
              $400,000(c)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.  Amount available is also subject to a minimum liquidity
      covenant.
 (c)
              In
      connection with the mandatory prepayment of the term loan in April 2008
      (see below), the amount outstanding under the term loan was reduced to
      $17.1 million and the quarterly payments were reduced to
      $178,000.
 (d)
              The
      interest rates on the Term Facilities and the Letter of Credit Facility
      were raised by 0.75% in connection with the Credit Amendment that was
      completed in May 2008.




The
Revolver provides that we can use up to $10.0 million of the Revolver
availability to issue letters of credit. The Revolver provides for a 2.75% fee
on any outstanding letters of credit 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 Adjusted EBITDA, a maximum leverage ratio and a minimum liquidity
threshold and limit capital expenditures, each as defined by the
agreement.  We were not in compliance with the minimum EBITDA and Leverage
Ratio covenants required by our Facilities as of March 31, 2008. The Credit
Amendment waived these defaults as of March 31, 2008 and modified the existing
financial covenants. As a
result of the Credit Amendment, we were in compliance with all of the financial
covenants under the Facilities as of March 31, 2008.  Although we project
that we will be in compliance with these covenants through 2008, we cannot
assure you that we will remain in compliance with these covenants in 2008 or in
subsequent periods.  If necessary, we will consider seeking an additional
waiver or other alternatives to remain in compliance with the covenants. We expect
the costs associated with the Credit Amendment to be approximately $2.4
million.  For more detail regarding the covenants under the
Facilities, see Part II - Item 1A - Risk Factors - “We may be unable to comply
with restrictions imposed by the terms of our indebtedness, which could result
in a default under these instruments.”  The Facilities are secured by
substantially all of our assets.




-18-





The
following chart reflects the components of our debt as of March 31, 2008 and
December 31, 2007:





March
      31,
              2008
            
            
            December
      31,
              2007Senior
      Notes
            
            $
            150,000
            
            
            $
            150,000Term
      Facility
            
            
            38,400
            
            
            
            38,800Total
      long-term debt
            
            
            188,400
            
            
            
            188,800Less
      amounts classified as current
            
            
            21,981
            
            
            
            1,600Total
      long-term debt, less current maturities
            
            $
            166,419
            
            
            $
            187,200





During
the first quarter of 2008 and the fourth quarter of 2007, we raised
approximately $82.5 million through the issuance of common
shares.   As required by our Term Facility, we offered a portion
of the proceeds from the common shares in excess of $40 million to the holders
of the Term Facility.  In April 2008, the mandatory tender offer was
accepted by the holders of the Term Facility and we repaid $21.3 million on the
Term Facility.   The $21.3 million repaid is classified as
current maturities of long-term debt on the accompanying balance sheets as of
March 31, 2008.  As a result of the availability under our Facilities
and the sale of common stock in 2007 and 2008, we expect to have adequate
liquidity to operate our business throughout 2008.    At March
31, 2008, we had available liquidity of approximately $59.5 million. This
available liquidity consisted of cash and cash equivalents of $45.8 million and
availability of $35.0 million under the Revolver after giving consideration to
the $20 million minimum liquidity requirement on March 31, 2008 offset by the
$21.3 million that we are required to use for repayment of the Term Loans in
April 2008.   The minimum liquidity threshold will be $10 million for
the remainder of 2008.





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
generated from operations, borrowings under our credit facilities and future
debt and equity offerings will be sufficient to meet working capital
requirements, anticipated capital expenditures and scheduled debt payments for
the next several years.  Nevertheless, our ability to satisfy our working
capital requirements and debt service obligations, or fund planned capital
expenditures, will substantially depend upon our future operating performance
(which will be affected by prevailing economic conditions in the coal industry),
debt covenants, and financial, business and other factors, some of which are
beyond our control.





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





Net cash
from 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 used by operating activities was $1.0 million
for the three months ended March 31, 2008, and net cash provided by operating
activities was $8.3 million for the three months ended March 31,
2007.  During the three months ended March 31, 2008, our net loss, as
adjusted for non cash charges, was offset by a $3.5 million decrease in cash
from our operating assets and liabilities.





Net cash
used in investing activities decreased by $3.9 million to $8.3 million for the
three months ended March 31, 2008 as compared to the same period in
2007.   The decrease was primarily due to a reduction in capital
expenditures and an increase in proceeds from asset sales. 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 $49.7 million for the three months ended March 31,
2008. The cash provided by financing in the three months ended March 31, 2008
was primarily the result of the receipt of $50.1 million of net proceeds from
the issuance of common stock.  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.


-19-







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 Triad properties, MM&A
also prepared a detailed study of Triad’s reserves as of February 1, 2005 for
the reserves obtained in the acquisition of Triad 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), MM&A’s engagement did not
include performing an economic feasibility study for our reserves.  In
accordance with standard industry practice, we have performed our own economic
feasibility analysis for our reserves.  It is not generally considered to
be practical, however, nor is it standard industry practice, to perform a
feasibility study for a company’s entire reserve portfolio.  In addition,
MM&A did not independently verify our control of our properties, and has
relied solely on property information supplied by us.  Reserve
acreage, average seam thickness, average seam density and average mine and wash
recovery percentages were verified by MM&A to prepare a reserve tonnage
estimate for each reserve.  There are numerous uncertainties inherent in
estimating quantities and values of economically recoverable coal reserves as
discussed in “Critical Accounting Estimates – Coal Reserves”.




Based on
the MM&A reserve studies and the foregoing assumptions and qualifications,
and after giving effect to our operations from the respective dates of the
studies through March 31, 2008, we estimate that, as of March 31, 2008, we
controlled approximately 223.6 million tons of proven and probable coal reserves
in the CAPP region and 42.2 millions tons in the Midwest region.  The
following table provides additional information regarding changes to our
reserves since December 31, 2007 (in millions of tons):




CAPP
                  
                  
                  Midwest
                  
                  
                  TotalProven
      and Probable Reserves, as of December 31, 2007 (1)
                  
                  
                  225.3
                  
                  
                  
                  42.6
                  
                  
                  
                  267.9Coal
      Extracted
                  
                  
                  (2.1
                  )
                  
                  
                  (0.7
                  )
                  
                  
                  (2.8
                  )Acquisitions
      (2)
                  
                  
                  0.2
                  
                  
                  
                  0.3
                  
                  
                  
                  0.5Divesture
      (3)
                  
                  
                  (0.3
                  )
                  
                  
                  -
                  
                  
                  
                  (0.3
                  )Adjustments
      (4)
                  
                  
                  0.5
                  
                  
                  
                  -
                  
                  
                  
                  0.5Proven
      and Probable Reserves, as of March 31, 2008 (1)
                  
                  
                  223.6
                  
                  
                  
                  42.2
                  
                  
                  
                  265.8





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.





-20-


(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 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”
(FAS 157), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In February 2008, the FASB deferred
the effective date of SFAS 157 by one year for certain non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
On January 1, 2008, we adopted the provisions of SFAS 157, except as
it applies to those nonfinancial assets and nonfinancial liabilities for which
the effective date has been delayed by one year. The adoption of SFAS 157
did not have a material effect on our financial position or results of
operations.





Key
Performance Indicators





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





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





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





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





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




Trends
In Our Business
 
 Recently,
demand has increased for coal which has led to a rise in coal
prices.  This increase in demand and prices has been driven primarily
by an increase in coal exports driven by low worldwide coal
inventory.  We believe that the increase in coal prices will result in
increased production as it will become economical to operate higher cost coal
mines.  We believe that the demand for coal worldwide will continue to
be strong and help to offset future increases in production.  In the
long term, we believe that the market for coal in the United States remains
strong as coal continues to be one of the most economical energy
sources.  A number of factors beyond our control impact coal prices,
including:
 
 ·
                the supply of domestic and
      foreign coal;
 ·
                the demand for
      electricity;




-21-









·
              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.





As
discussed previously, our costs of production have increased in recent
years.  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.




Our
business is very sensitive to changes in supply and demand for coal and we
intend to carefully manage our mines in 2008 to maximize operating
results.  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.





We use
surety bonds to secure reclamation, workers’ compensation and other
miscellaneous obligations. At March 31, 2008, we had $101.6 million of
outstanding surety bonds with third parties. These bonds were in place to secure
obligations as follows: post-mining reclamation bonds of $56.9 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
miscellaneous obligation bonds of $4.4 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, 2008, we had $60.0 million of letters of credit outstanding.  The
letters of credits were issued under our Letter of Credit
Facility.  In addition, we may use up to $10 million of our $35
million Revolver for the issuance of additional letters of credit, if
necessary.





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.




-22-





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 6.0% at
December 31, 2007.  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 6.0% to 5.5%, all other things
being equal, the present value of our workers’ compensation obligation would
increase by approximately $1.6 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, 2008 was $53.7
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 6.5% at December 31, 2007. 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 6.5% to 6.0%, all other things being equal, the present value of our black
lung obligation would increase by approximately $1.4 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, 2008 was $24.6
million.





Defined
Benefit Pension





Effective
September 30, 2007, the Company froze it pension plan benefit accruals for all
employees covered under its non-contributory defined benefit pension plan,
resulting in a curtailment gain of $6.1 million.  The Company has
valued the pension obligation to reflect the impact of the
curtailment.  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, 2007, the discount rate used to determine the obligation was 5.80%.
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 5.80% to 5.30%, all other things being equal, the present
value of our projected benefit obligation would increase by approximately $4.9
million. 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, 2008. Significant changes
to these rates would introduce volatility to our pension expense.  Our
accrued pension obligation as of March 31, 2008 was $5.2 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 asset retirement obligation liabilities
consist of spending estimates related to reclaiming surface land and support
facilities at both surface and underground mines in accordance with federal and
state reclamation laws. Our total reclamation and mine-closing liabilities are
based upon permit requirements and our engineering estimates related to these
requirements. US GAAP 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 US GAAP, then the costs should be lower. If governmental
regulations change, then the costs of reclamation will be impacted. US GAAP
recognizes 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, 2008 was
$36.5 million.




-23-


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.





We
recorded no tax benefit for the three months ended March 31, 2008, based on the
conclusion that the benefit of the expected 2008 net operating loss is not
more likely than not to be realized.  As of March 31 2008, the Company
had recorded an $18.3 million valuation allowance against its gross deferred tax
assets.





Coal
Reserves





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





·
              all
      currently available data;





·
              our
      own operational experience and that of our
  consultants;





·
              historical
      production from similar areas with similar
  conditions;





·
              previously
      completed geological and reserve
studies;





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





·
              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.”







-24-





Other
Supplemental Information





Reconciliation
of Non-GAAP Measures





EBITDA is
a measure used by management to measure operating performance.  We define
EBITDA as net income or loss plus interest expense (net), income tax expense
(benefit) and depreciation, depletion and amortization (EBITDA), to better
measure our operating performance.  We regularly use EBITDA to evaluate our
performance as compared to other companies in our industry that have different
financing and capital structures and/or tax rates.  In addition, we use
EBITDA in evaluating acquisition targets.





Adjusted
EBITDA and the leverage ratio are the amounts used in our current debt
covenants.  Adjusted EBITDA is defined as EBITDA further adjusted for
certain cash and non-cash charges.  Adjusted EBITDA and the leverage ratio
are used to determine compliance with financial covenants and our ability to
engage in certain activities such as incurring additional debt and making
certain payments.





EBITDA,
Adjusted EBITDA, and the leverage ratio are not recognized terms under US GAAP
and are not an alternative to net income, operating income or any other
performance measures derived in accordance with US GAAP or an alternative to
cash flow from operating activities as a measure of operating liquidity. 
Because not all companies use identical calculations, this presentation of
EBITDA, Adjusted EBITDA and the leverage ratio may not be comparable to other
similarly titled measures of other companies.  Additionally, EBITDA or
Adjusted EBITDA are not intended to be a measure of free cash flow for
management’s discretionary use, as they do not reflect certain cash requirements
such as tax payments, interest payments and other contractual
obligations.





The
leverage ratio is calculated as the Company’s Senior Funded Indebtedness divided
by annualized adjusted EBITDA as calculated below.  The Senior Funded
Indebtedness as of March 31, 2008 is $98.4 million and includes the amounts
outstanding under our revolver, amounts of the letters of credit available to be
issued under our letter of credit facility and the amounts outstanding on the
term loan as of March 31, 2008.




Three
      months endedMarch
      31
              
              
              March
      312008
              
              
              2007Net
      loss
              
              $
              (16,688
              )
              
              
              (7,255
              )Income
      tax benefit
              
              
              -
              
              
              
              (7,289
              )Interest
      expense
              
              
              4,889
              
              
              
              4,496Interest
      income
              
              
              (88
              )
              
              
              (120
              )Depreciation,
      depletion, and amortization
              
              
              17,290
              
              
              
              19,333EBITDA
      (before adjustments)
              
              $
              5,403
              
              
              
              9,165Other
      adjustments specifiedin
      our current debt agreement:Charges
      associated with repayment of debt
              
              
              -
              
              
              
              2,421Other
      adjustments
              
              
              2,252
              
              
              
              2,182Adjusted
      EBITDA
              
              $
              7,655
              
              
              
              13,768








-25-





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.





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.






-26-




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; inability to secure new coal supply agreements or to extend
existing coal supply agreements at market prices; 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; encountering
difficult mining conditions; increased costs of complying with mine health and
safety regulations; bottlenecks or other difficulties in transporting coal to
our customers; delays in the development of new mining projects; increased costs
of raw materials; the effects of litigation, regulation and competition; lack of
availability of financing sources; our compliance with debt covenants; 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 have floating interest rates based on our option of either the base
rate or LIBOR rate.  As of March 31, 2008, we had no borrowing
outstanding under the Revolver and $38.4 million outstanding under the Term
Facility.  We currently do not 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.  The percentage of our
sales pursuant to long-term contracts was approximately 47% for the three months
ended March 31, 2008.




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





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





ITEM
4.  CONTROLSAND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





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




There
were no changes in our internal control over financial reporting during the
three months ended March 31, 2008 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




The
Company’s management, including the Company’s CEO and CAO, does not expect that
the Company’s disclosure controls and procedures or the Company’s internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of the
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.







-27-







PART
II


OTHERINFORMATION











ITEM
1.  LEGALPROCEEDINGS





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








ITEM
1A. RISKFACTORS





Certain
Risks





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








Risks
Related to the Coal Industry





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




We
derived 68% of our total revenues (contract and spot) for the three months ended
March 31, 2008 and 86% of our total revenues in 2007, 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.




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.








-28-





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;•
            price
      of alternative sources of electricity;•
            world
      wide demand; 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 2007, we
shipped in excess of 95% of our coal from our Central Appalachia mines via CSX.
In the Midwest, we shipped approximately 64% of our produced coal by truck and
the remainder via rail systems.  We believe that our 2008
transportation modes will be comparable to those used in 2007.  Our
dependence upon railroads and third party trucking companies impacts our ability
to deliver coal to our customers. Disruption of service due to weather-related
problems, strikes, lockouts, bottlenecks and other events could temporarily
impair our ability to supply coal to our customers, resulting in decreased
shipments. Decreased performance levels over longer periods of time could cause
our customers to look elsewhere for their fuel needs, negatively affecting our
revenues and profitability.




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





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




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





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






-29-




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.




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.






-30-




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.





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.






-31-




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. 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 headwater streams. This ruling applied only to the permits at issue
in the case before Judge Chambers and has precedence only with respect to
certain counties in southern West Virginia (where we do not now operate).
However, the matters at issue in that case are likely to be litigated in the
future in jurisdictions in which we do operate and a ruling for the plaintiffs
in that litigation or the NWP 21 litigation could have an adverse impact on our
planned surface mining operations.





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




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




The SMCRA
establishes operational, reclamation and closure standards for all aspects of
surface mining as well as many aspects of underground mining. We accrue for the
costs of current mine disturbance and of final mine closure, including the cost
of treating mine water discharge where necessary. Under U.S. generally accepted
accounting principles we are required to account for the costs related to the
closure of mines and the reclamation of the land upon exhaustion of coal
reserves. Specifically, the fair value of an asset retirement obligation is
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The present value of the estimated asset retirement
costs is capitalized as part of the carrying amount of the long-lived asset. At
March 31, 2008, we had accrued $36.5 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.






-32-




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





We
have experienced operating losses and net losses in each of the last three years
and may experience losses in the future.




We have
experienced operating losses and net losses in the years ended December 31,
2007, 2006 and 2005.  Our operating loss and net loss increased in each of
these three years.  In order to return to profitability, we must carefully
manage our business, including the balance of our long-term and short-term sales
contracts and our production costs.  Although we seek to balance our
contract mix to achieve optimal revenues over the long term, the market price of
coal is affected by many factors that are outside of our control.  Our
production costs have increased in recent years, and we expect higher costs to
continue for the next several years.  Accordingly, we cannot assure you
that we will be able to achieve profitability in the future.





The
loss of, or significant reduction in, purchases by our largest customers could
adversely affect our revenues.




For the
three months ended March 31, 2008, we generated approximately 68% of our total
revenues from several long-term contracts and spot sales with electrical
utilities, including 26% from our largest customer, Georgia Power Company. The
Company also projects that it will have greater than 10% of sales for the year
ended December 31, 2008 from South Carolina Public Service
Authority.  At March 31, 2008, we had coal supply agreements with
these customers that expire in 2008 to 2010. 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.






-33-





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




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





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




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




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





The mine
disasters that occurred during 2006 in West Virginia and other states led to the
enactment of significant new federal and state laws and regulations relating to
safety in underground coal mines and increased enforcement activities by federal
and state regulators.  These laws and regulations, the most significant of
which was the MINER Act,  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.  In 2007, implementation of the MINER
Act continued with new penalty regulations that significantly increased regular
penalty amounts and special assessments.   In addition, a new
emergency temporary standard was issued relating to mine seal
requirements.  The outlook for 2008 includes a possibility that
additional new federal legislation know as the S-MINER Act could be passed that
would further increase the cost structure and materially adversely impact of
mining operations.  Various states also have enacted their own new
laws and regulations addressing many of these same subjects.  
 These new laws and regulations will cause us to incur substantial
additional costs, which will adversely impact our operating
performance.





During
2007, we were notified by the U.S. Department of Labor, Mine Safety and Health
Administration (MSHA) that a potential pattern of violations may exist at three
of our mines based upon initial screening and pattern criteria review by
MSHA.  Upon receipt of such notifications, we conducted a comprehensive
review of the operations at each mine and prepared and submitted plans to MSHA
designed to enhance employee safety at the mines through better education,
training, mining practices, and safety management.   Following
implementation of the plans, MSHA conducts a complete inspection of each mine
and further evaluates the situation.  MSHA has advised us with respect to
each of the mines that a potential pattern of violations no longer continues to
exists and that MSHA therefore will take no further action with respect to these
matters.   The issuance of a Notice of a Pattern of Violations in
the future could have a significant impact on our operations.





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.






-34-





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




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







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





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




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




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




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




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





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 2008, we anticipate less than 1% of our
total production will come from mines operated by independent contract mine
operators and approximately 4% 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. 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.






-35-





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




Forecasts
of our future performance are based on estimates of our recoverable coal
reserves. Estimates of those reserves are based on studies conducted by Marshall
Miller & Associates, Inc. in accordance with industry-accepted standards
which we have updated for current activity using similar methodologies. A number
of sources of information were used to determine recoverable reserves estimates,
including:




•
            currently
      available geological, mining and property control data and
      maps;•
            our
      own operational experience and that of our consultants;•
            historical
      production from similar areas with similar conditions;•
            previously
      completed geological and reserve studies;•
            the
      assumed effects of regulations and taxes by governmental agencies;
      and•
            assumptions
      governing future prices and future operating
  costs.





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





•
            mining
      activities;•
            new
      engineering and geological data;•
            acquisition
      or divestiture of reserve holdings; and•
            modification
      of mining plans or mining methods.





Therefore,
actual coal tonnage recovered from identified reserve areas or properties, and
costs associated with our mining operations, may vary from estimates. These
variations could be material, and therefore could result in decreased
profitability.





Our
operations could be adversely affected if we are unable to obtain required
surety bonds.




Federal
and state laws require bonds to secure our obligations to reclaim lands used for
mining, to pay federal and state workers’ compensation and to satisfy other
miscellaneous obligations. As of March 31, 2008, we had outstanding surety bonds
with third parties for post-mining reclamation totaling $56.9 million.
Furthermore, we have surety bonds for an additional $44.7 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,
2008, the current and non-current portions of these obligations included $24.6
million for coal workers’ black lung benefits and $53.7 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
provided pension benefits to eligible employees through September 30, 2007, at
which time we froze the plan. As of March 31, 2008, we estimated that our
obligation under the pension plan was underfunded by approximately $5.2 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.






-36-




Substantially
all of our assets are subject to security interests.




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





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




We were
not in compliance with the minimum Adjusted EBITDA and Leverage Ratio covenants
required by our facilities as of March 31, 2008. We entered into an amendment to
the facilities in May 2008 that waived the non-compliance as of March 31,
2008, and also modified our minimum Adjusted EBITDA and total Leverage Ratio and
maximum limits on capital expenditures covenants for future periods. As a result of the Credit
Amendment, we were in compliance with all of the financial covenants under the
Facilities as of March 31, 2008.  Although we project that we will be in
compliance with these covenants through 2008, we cannot assure you that we will
remain in compliance with these covenants in 2008 or in subsequent
periods.  If necessary, we will consider seeking an additional waiver or
other alternatives to remain in compliance with the
covenants.


Additional
detail regarding the terms of the facilities, including these covenants and the
related definitions, can be found in our current report on Form 8-K filed on May
6, 2008.





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




•
            The
      facilities require that we achieve minimum Adjusted EBITDA (as defined in
      the facilities as "Consolidated EBITDA").  Adjusted EBITDA
      is measured at the end of each quarter.  We are required to
      have adjusted EBITDA of $8.6 million, $27.5 million and $41.0 million for
      the six months ended June 30, 2008, the nine months ended September 30,
      2008 and the year ended December 31, 2008,
      respectively.  Beginning March 31, 2009 Adjusted EBITDA is
      calculated on a trailing 12-month basis with Adjusted EBITDA increasing
      each quarter thereafter.  For the three months ended March 31, 2008,
      we had Adjusted EBITDA of $7.7 million.  Adjusted EBITDA is not a
      recognized term under GAAP and is not an alternative to net income,
      operating income or any other performance measures derived in accordance
      with GAAP or an alternative to cash flow from operating activities as a
      measure of operating liquidity.  The most directly comparable GAAP
      financial measure is net loss.  For the three months ended March 31,
      2008, we had net loss of $16.7 million.  Adjusted EBITDA is defined
      and reconciled to EBITDA and Net Loss under “Reconciliation of Non-GAAP
      Measures” in Part I – Item 2 – Management’s Discussion and Analysis of
      Financial Condition and Results of
Operations.





•
            The
      facilities require that our Leverage Ratio (as defined in the facilities)
      not exceed a specified multiple at the end of each quarter.  The
      Leverage Ratio is permitted to be 5.0x as of June 30, 2008, but decreases
      to 3.0x as of September 30, 2008 and decreases further thereafter. 
      Leverage Ratio is defined and reconciled to EBITDA and Net Loss under
      “Reconciliation of Non-GAAP Measures” in Part I – Item 2 – Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





•
            The
      facilities limit the Capital Expenditures (other than Mandated Capital
      Expenditures) (as both are defined in the facilities) that we may make or
      agree to make in any fiscal year.  For the fiscal years ended
      December 31, 2008, we may not make Capital Expenditures in excess of $56.1
      million.  For the fiscal year ended December 31, 2009 and each fiscal
      year thereafter, we may not make Capital Expenditures in excess of $66
      million.  For the three months ended March 31, 2008, we made Capital
      Expenditures of $9.3 million.





•
            The
      facilities require that our Minimum Liquidity (as defined in the
      facilities) be no less than a specified amount at the end of each
      quarter.  As of March 31, 2008, we were required to have Minimum
      Liquidity of $20.0 million.  The required Minimum Liquidity
      declines thereafter.  As of March 31, 2008, our Minimum Liquidity was
      in excess of $50 million.





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.  While the lenders have,
to date, waived any covenant violations and amended the covenants, there is no
guarantee they will continue to do so if future violations occur.






-37-





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.





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.







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




We
believe that our cash on hand, the availability under our Revolver and
cash generated from our operations will provide us with adequate
liquidity through 2008.  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 13.6 years at 2007
levels of production, compared to our current Central Appalachia mining
complexes, which have reserves that we believe will last an average of
approximately 27.9 years at 2007 levels of production. We intend to increase our
reserves in southern Indiana by acquiring rights to additional exploitable
reserves that are either adjacent to or nearby our current reserves. If we are
unable to successfully acquire such rights on acceptable terms, or if our
exploration or acquisition activities indicate that such coal reserves or rights
do not exist or are not available on acceptable terms, our production and
revenues will decline as our reserves in that region are depleted. Exhaustion of
reserves at particular mines also may have an adverse effect on our operating
results that is disproportionate to the percentage of overall production
represented by such mines.




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




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








Risks
Relating to our Common Stock





The
market price of our common stock has been volatile and difficult to predict, and
may continue to be volatile and difficult to predict in the future, and the
value of your investment may decline.




The
market price of our common stock has been volatile in the past and may continue
to be volatile in the future. The market price of our common stock will be
affected by, among other things:




•
            variations
      in our quarterly operating results;•
            changes
      in financial estimates by securities analysts;•
            sales
      of shares of our common stock by our officers and directors or by our
      shareholders;•
            changes
      in general conditions in the economy or the financial
    markets;•
            changes
      in accounting standards, policies or interpretations;•
            other
      developments affecting us, our industry, clients or competitors;
      and•
            the
      operating and stock price performance of companies that investors deem
      comparable to us.





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





Dividends
are limited by our senior secured credit facility.




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






-39-





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.
UNREGISTERED SALES 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





ITEM 5.
OTHERINFORMATION





None





ITEM 6.
EXHIBITS




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









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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 CompanyBy:
      /s/  Peter
      T. SochaPeter
      T. SochaChairman,
      President andChief
      Executive OfficerBy:
      /s/ Samuel M.
      Hopkins IISamuel
      M. Hopkins, IIVice
      President andChief
      Accounting Officer
 May 8,
2008












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