---

---

SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C.

FORM 10-Q

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

|                                 |  |                  
|-------------------------------- |  | -----------------
|For
  the quarterly period ended |  | Commission
  File
|March 31, 2005                   |  | Number 000-51129 



|                                                        
|--------------------------------------------------------
|JAMES RIVER COAL COMPANY                                
|(Exact name of registrant as specified in
  its charter)



|                                                                 |  |                                       
|---------------------------------------------------------------- |  | --------------------------------------
|Virginia                                                         |  | 54-1602012                            
|(State or other jurisdiction
  of incorporation or organization) |  | (I.R.S. Employer
  Identification No.)
|                                                                 |  |                                       
|901 E. Byrd Street, Suite 1600                                   |  |                                       
|Richmond, 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  R          NO  
o

Indicate by check mark
whether the registrant is an accelerated filer (as defined by Exchange Act Rule
12b-2).

YES  
o          NO  R

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  R          NO  
o

The number of
shares of the registrants Common Stock, par value $0.01 per share, outstanding
as of May 6, 2004 was 14,740,694.

-1-


---

---

FORM
  10-Q INDEX

|                  |                                                                                                                                                                                                                                                                                                           |     
|----------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                  |                                                                                                                                                                                                                                                                                                           | Page
|                  |                                                                                                                                                                                                                                                                                                           |     
|PART
        I    | FINANCIAL
        INFORMATION                                                                                                                                                                                                                                                                             |     
|                  |                                                                                                                                                                                                                                                                                                           |     
|Item
        1.   | Financial
        Statements                                                                                                                                                                                                                                                                              |     
|                  |                                                                                                                                                                                                                                                                                                           |     
|                  | Condensed
        Consolidated Balance Sheets as of March 31, 2005 (Successor) and December
        31, 2004 (Successor)                                                                                                                                                                                  | 3   
|                  |                                                                                                                                                                                                                                                                                                           |     
|                  | Condensed
        Consolidated Statements of Operations for the three months ended March
        31, 2005 (Successor) and March 31, 2004 (Predecessor)                                                                                                                                                    | 5   
|                  |                                                                                                                                                                                                                                                                                                           |     
|                  | Condensed
        Consolidated Statements of Changes in Shareholders Equity (Deficit)
        and Comprehensive Income (Loss) for the three Months ended March 31, 2005
        (Successor), eight months ended December 31, 2004 (Successor) and four
        months ended April 30, 2004 (Predecessor) | 6   
|                  |                                                                                                                                                                                                                                                                                                           |     
|                  | Condensed
        Consolidated Statements of Cash Flows for the three months ended March
        31, 2005 (Successor), and March 31, 2004 (Predecessor)                                                                                                                                                   | 7   
|                  |                                                                                                                                                                                                                                                                                                           |     
|                  | Notes
        to Condensed Consolidated Financial Statements                                                                                                                                                                                                                                              | 8   
|                  |                                                                                                                                                                                                                                                                                                           |     
|Item
        2.   | Managements
        Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                             | 19  
|                  |                                                                                                                                                                                                                                                                                                           |     
|Item
        3.   | Quantitative
        and Qualitative Disclosure about Market Risk                                                                                                                                                                                                                                         | 30  
|                  |                                                                                                                                                                                                                                                                                                           |     
|Item
        4.   | Controls
        and Procedures                                                                                                                                                                                                                                                                           | 30  
|                  |                                                                                                                                                                                                                                                                                                           |     
|PART
        II   | OTHER
        INFORMATION                                                                                                                                                                                                                                                                                 | 32  
|                  |                                                                                                                                                                                                                                                                                                           |     
|**Item
      2.** | **Unregistered
      Sales of Equity Securities and Use of Proceeds**                                                                                                                                                                                                                                     | 32  
|                  |                                                                                                                                                                                                                                                                                                           |     
|Item
        6.   | Exhibits                                                                                                                                                                                                                                                                                                  | 33  
|                  |                                                                                                                                                                                                                                                                                                           |     
|SIGNATURES        |                                                                                                                                                                                                                                                                                                           |     
|                  |                                                                                                                                                                                                                                                                                                           |     
|CERTIFICATIONS    |                                                                                                                                                                                                                                                                                                           |     

-2-

---



PART I
  FINANCIAL INFORMATION

ITEM 1.          FINANCIAL
  STATEMENTS

JAMES RIVER
  COAL COMPANY 
  AND SUBSIDIARIES

Condensed Consolidated
  Balance Sheets

|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|------------------------------------------------------------------ |  | ---------------------- | - | ------------------------- |  |  |  |  | ------- |  | 
|                                                                   |  | March
        31, 2005 |   | December
        31, 2004 | 
|                                                                   |  |                        |   |                           | 
|                                                                   |  | (Unaudited)            |   |                           |  | 
|Assets                                                             |  |                        |   |                           |  |  |  |  |         |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Current
        assets:                                            |  |                        |   |                           |  |  |  |  |         |  | 
|Cash                                                               |  |                        | $ | 1,724                     |  |  |  |  | 3,879   |  | 
|Receivables:                                                       |  |                        |   |                           |  |  |  |  |         |  | 
|Trade                                                              |  |                        |   | 37,496                    |  |  |  |  | 23,871  |  | 
|Other                                                              |  |                        |   | 2,928                     |  |  |  |  | 7,362   |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Total
        receivables                                          |  |                        |   | 40,424                    |  |  |  |  | 31,233  |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Inventories:                                                       |  |                        |   |                           |  |  |  |  |         |  | 
|Coal                                                               |  |                        |   | 5,500                     |  |  |  |  | 2,305   |  | 
|Materials
        and supplies                                     |  |                        |   | 4,446                     |  |  |  |  | 4,084   |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Total
        inventories                                          |  |                        |   | 9,946                     |  |  |  |  | 6,389   |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Prepaid
        royalties                                          |  |                        |   | 3,731                     |  |  |  |  | 4,358   |  | 
|Other
        current assets                                       |  |                        |   | 4,310                     |  |  |  |  | 6,337   |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Total
        current assets                                       |  |                        |   | 60,135                    |  |  |  |  | 52,196  |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Property,
        plant, and equipment, at cost:                   |  |                        |   |                           |  |  |  |  |         |  | 
|Land                                                               |  |                        |   | 2,745                     |  |  |  |  | 2,698   |  | 
|Mineral
        rights                                             |  |                        |   | 162,577                   |  |  |  |  | 162,577 |  | 
|Buildings,
        machinery and equipment                         |  |                        |   | 114,597                   |  |  |  |  | 106,105 |  | 
|Mine
        development costs                                     |  |                        |   | 11,428                    |  |  |  |  | 5,729   |  | 
|Construction-in-progress                                           |  |                        |   | 706                       |  |  |  |  | 231     |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Total
        property, plant, and equipment                       |  |                        |   | 292,053                   |  |  |  |  | 277,340 |  | 
|Less
        accumulated depreciation, depletion, and amortization |  |                        |   | 31,272                    |  |  |  |  | 21,765  |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Property,
        plant and equipment, net                         |  |                        |   | 260,781                   |  |  |  |  | 255,575 |  | 
|Restricted
        cash (note 1(c))                                |  |                        |   | 8,425                     |  |  |  |  | 8,404   |  | 
|Other
        assets                                               |  |                        |   | 11,792                    |  |  |  |  | 11,651  |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 
|Total
        assets                                               |  |                        | $ | 341,133                   |  |  |  |  | 327,826 |  | 
|                                                                   |  |                        |   |                           |  |  |  |  |         |  | 

See accompanying notes to
  condensed consolidated financial statements.

-3-

---



JAMES RIVER
  COAL COMPANY
  AND SUBSIDIARIES

Condensed Consolidated
  Balance Sheets

|                                                                                                                                             |  |                        |   |                           |   |  |  |  |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ------------------------- | - |  |  |  | ------- | -
|                                                                                                                                             |  | March
        31, 2005 |   | December
        31, 2004
|                                                                                                                                             |  |                        |   |                          
|                                                                                                                                             |  | (Unaudited)            |   |                          
|Liabilities
        and Shareholders Equity                                                                                                 |  |                        |   |                           |   |  |  |  |         |  
|                                                                                                                                             |  |                        |   |                           |   |  |  |  |         |  
|Current
        liabilities:                                                                                                                 |  |                        |   |                           |   |  |  |  |         |  
|Current
        maturities of long-term debt (note 3)                                                                                        |  |                        | $ | 3,600                     |   |  |  |  | 2,700   |  
|Current
        installments of obligations under capital leases                                                                             |  |                        |   | 374                       |   |  |  |  | 388     |  
|Accounts
        payable                                                                                                                     |  |                        |   | 25,043                    |   |  |  |  | 15,116  |  
|Accrued
        salaries, wages, and employee benefits                                                                                       |  |                        |   | 3,235                     |   |  |  |  | 2,093   |  
|Workers
        compensation benefits                                                                                                       |  |                        |   | 12,090                    |   |  |  |  | 12,090  |  
|Black
        lung benenfits                                                                                                                 |  |                        |   | 2,600                     |   |  |  |  | 2,600   |  
|Accrued
        taxes                                                                                                                        |  |                        |   | 4,326                     |   |  |  |  | 3,530   |  
|Other
        current liabilities                                                                                                            |  |                        |   | 4,654                     |   |  |  |  | 3,633   |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 
|Total
        current liabilities                                                                                                            |  |                        |   | 55,922                    |   |  |  |  | 42,150  |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 
|Long-term
        debt, less current maturities (note 3)                                                                                     |  |                        |   | 91,400                    |   |  |  |  | 92,300  |  
|Other
        liabilities:                                                                                                                   |  |                        |   |                           |   |  |  |  |         |  
|Noncurrent
        portion of workers compensation benefits                                                                                 |  |                        |   | 38,381                    |   |  |  |  | 38,223  |  
|Noncurrent
        portion of black lung benefits                                                                                            |  |                        |   | 23,421                    |   |  |  |  | 23,341  |  
|Pension
        obligations                                                                                                                  |  |                        |   | 15,206                    |   |  |  |  | 15,744  |  
|Asset
        retirement obligations                                                                                                         |  |                        |   | 15,129                    |   |  |  |  | 14,939  |  
|Obligations
        under capital leases, excluding current installments                                                                     |  |                        |   | 518                       |   |  |  |  | 637     |  
|Deferred
        income taxes                                                                                                                |  |                        |   | 34,569                    |   |  |  |  | 34,615  |  
|Other                                                                                                                                        |  |                        |   | 245                       |   |  |  |  | 292     |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 
|Total
        liabilities                                                                                                                    |  |                        |   | 274,791                   |   |  |  |  | 262,241 |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 
|Shareholders
        equity                                                                                                                 |  |                        |   |                           |   |  |  |  |         |  
|Preferred
        Stock, $1.00 par value.  Authorized 10,000,000 shares; none issued                                                         |  |                        |   | -                         |   |  |  |  | -       |  
|Common
        stock, $.01 par value.  Authorized 100,000,000 shares; issued and
        outstanding 14,740,694 and 14,715,694, respectively |  |                        |   | 147                       |   |  |  |  | 147     |  
|Paid-in-capital                                                                                                                              |  |                        |   | 73,592                    |   |  |  |  | 71,784  |  
|Deferred
        stock-based compensation                                                                                                    |  |                        |   | (8,900                    | ) |  |  |  | (7,540  | )
|Retained
        earnings                                                                                                                    |  |                        |   | 1,460                     |   |  |  |  | 1,151   |  
|Accumulated
        other comprehensive income                                                                                               |  |                        |   | 43                        |   |  |  |  | 43      |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 
|Total
        shareholders equity                                                                                                           |  |                        |   | 66,342                    |   |  |  |  | 65,585  |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 
|Commitments
        and contingencies (note 5)                                                                                               |  |                        |   |                           |   |  |  |  |         |  
|Total
        liabilities and shareholders equity                                                                                           |  |                        | $ | 341,133                   |   |  |  |  | 327,826 |  
|                                                                                                                                             |  |                        |   |                           |   |  |  | 

See accompanying notes to
  condensed consolidated financial statements.

-4-

---



JAMES RIVER
  COAL COMPANY
  AND SUBSIDIARIES

Condensed Consolidated
  Statements of Operations
  (in thousands, except per share data)
  (unaudited)

|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|----------------------------------------------------------------- |  | ---------------------- | - | ------ | ---------------------- |  |  |  |  | ------ | - | 
|                                                                  |  | Successor              |   |        | Predecessor            | 
|                                                                  |  |                        |   |        |                        | 
|                                                                  |  | Three
        Months   |   |        | Three
        Months   | 
|                                                                  |  | Ended
        03/31/05 |   |        | Ended
        03/31/04 | 
|                                                                  |  |                        |   |        |                        | 
|Revenues                                                          |  |                        | $ | 97,875 |                        |  |  |  |  | 80,858 |   | 
|Cost
        of sales:                                            |  |                        |   |        |                        |  |  |  |  |        |   | 
|Cost
        of coal sold                                         |  |                        |   | 80,942 |                        |  |  |  |  | 65,707 |   | 
|Depreciation,
        depletion, and amortization                 |  |                        |   | 9,478  |                        |  |  |  |  | 9,272  |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Total
        cost of sales                                       |  |                        |   | 90,420 |                        |  |  |  |  | 74,979 |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Gross
        profit                                              |  |                        |   | 7,455  |                        |  |  |  |  | 5,879  |   | 
|Selling,
        general, and administrative expenses             |  |                        |   | 5,035  |                        |  |  |  |  | 3,561  |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Total
        operating income                                    |  |                        |   | 2,420  |                        |  |  |  |  | 2,318  |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Interest
        expense (note 3)                                 |  |                        |   | 2,186  |                        |  |  |  |  | 403    |   | 
|Interest
        income                                           |  |                        |   | (21    | )                      |  |  |  |  | -      |   | 
|Miscellaneous
        income, net                                 |  |                        |   | (123   | )                      |  |  |  |  | (53    | ) | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Total
        other expense, net                                  |  |                        |   | 2,042  |                        |  |  |  |  | 350    |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Income
        before reorganization items and income tax expense |  |                        |   | 378    |                        |  |  |  |  | 1,968  |   | 
|Reorganization
        items, net (note 6)                        |  |                        |   | -      |                        |  |  |  |  | 1,557  |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Income
        before income taxes                                |  |                        |   | 378    |                        |  |  |  |  | 411    |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Income
        tax expense                                        |  |                        |   | 69     |                        |  |  |  |  | -      |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Net
        income attributable to common shareholders            |  |                        | $ | 309    |                        |  |  |  |  | 411    |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Earnings
        per common share (note 7)                        |  |                        |   |        |                        |  |  |  |  |        |   | 
|Basic
        earnings per common share                           |  |                        | $ | 0.02   |                        |  |  |  |  | 24.33  |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Shares
        used to calculate basic earnings per share         |  |                        |   | 13,800 |                        |  |  |  |  | 17     |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Diluted
        earnings per common share                         |  |                        | $ | 0.02   |                        |  |  |  |  | 24.33  |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 
|Shares
        used to calculate diluted earnings per share       |  |                        |   | 14,752 |                        |  |  |  |  | 17     |   | 
|                                                                  |  |                        |   |        |                        |  |  |  |  |        |   | 

See accompanying notes to
  condensed consolidated financial statements.

-5-

---



JAMES RIVER
  COAL COMPANY
  AND SUBSIDIARIESCondensed Consolidated Statements of Changes in Shareholders
  Equity (Deficit) and Comprehensive Income (Loss)
  Three Months ended March 31, 2005 (Successor), eight months ended December 31,
  2004 (Successor) and
  four months ended April 30, 2004 (Predecessor)
  (in thousands)
  (unaudited)

|                                                                                              |  | Common
        
        stock |     | Paid-in-
        capital |  | Deferred
        stock-
        based 
        Compensation |   | Retained
        
        earnings 
        (accumulated 
        deficit) |  | Subscribed
        
        shares |   | Accumulated
        
        other 
        comprehensive 
        income (loss) |  | Total |         
|--------------------------------------------------------------------------------------------- |  | ----------------------------- | --- | ------------------------ |  | ----------------------------------------------------------- | - | -------------------------------------------------------------------------- |  | ---------------------------------- | - | -------------------------------------------------------------------------------- |  | ----- | --------
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Predecessor
        Company                                                                   |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Balances,
        December 31, 2003                                                           |  |                               | -   |                          |  | 226                                                         |   |                                                                            |  | -                                  |   |                                                                                  |  |       | (107,989
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Net
        income                                                                            |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | 107,989 
|Minimum
        pension liability adjustment                                                  |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Comprehensive
        income                                                                  |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Application
        of fresh start accounting (note 2)                                        |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Cancellation
        of Predecessor common stock                                              |  |                               | -   |                          |  | (226                                                        | ) |                                                                            |  | -                                  |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Elimination
        of Predecessor accumulated other comprehensive loss and subscribed shares |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Balances,
        April 30, 2004                                                              |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |    
|                                                                                              |  |                               |    
|Successor
        Company                                                                     |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Issuance
        of Successor common stock                                                    |  |                               | 138 |                          |  | 63,153                                                      |   |                                                                            |  | -                                  |   |                                                                                  |  |       | -       
|Net
        income                                                                            |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | 1,976   
|Unrealized
        gain on marketable securities, net                                         |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Comprehensive
        Income                                                                  |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Deferred
        compensation related to restricted stock awards                              |  |                               | 9   |                          |  | 8,631                                                       |   |                                                                            |  | (8,640                             | ) |                                                                                  |  |       | -       
|Cost
        to register common stock                                                         |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | (825    
|Amortization
        of deferred stock-based compensation                                     |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | 1,100                              |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Balances,
        December 31, 2004                                                           |  |                               | 147 |                          |  | 71,784                                                      |   |                                                                            |  | (7,540                             | ) |                                                                                  |  |       | 1,151   
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Net
        income                                                                            |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | -                                  |   |                                                                                  |  |       | 309     
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Deferred
        compensation related to restricted stock awards                              |  |                               | -   |                          |  | 1,808                                                       |   |                                                                            |  | (1,808                             | ) |                                                                                  |  |       | -       
|Amortization
        of deferred stock-based compensation                                     |  |                               | -   |                          |  | -                                                           |   |                                                                            |  | 448                                |   |                                                                                  |  |       | -       
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         
|Balances,
        March 31, 2005                                                              |  | $                             | 147 |                          |  | 73,592                                                      |   |                                                                            |  | (8,900                             | ) |                                                                                  |  |       | 1,460   
|                                                                                              |  |                               |     |                          |  |                                                             |   |                                                                            |  |                                    |   |                                                                                  |  |       |         

See accompanying notes
  to consolidated financial statements.

-6-

---



JAMES RIVER
  COAL COMPANY
  AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows
  (in thousands)
  (unaudited)

|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|---------------------------------------------------------------------------------------- |  | ---------------------- | - | ------- | ---------------------- |  |  |  |  | ------- | - | 
|                                                                                         |  | Successor              |   |         | Predecessor            | 
|                                                                                         |  |                        |   |         |                        | 
|                                                                                         |  | Three
        Months   |   |         | Three
        Months   | 
|                                                                                         |  | Ended
        03/31/05 |   |         | Ended
        03/31/04 | 
|                                                                                         |  |                        |   |         |                        | 
|Cash
        flows from operating activities:                                            |  |                        |   |         |                        |  |  | 
|Net
        income                                                                       |  |                        | $ | 309     |                        |  |  |  |  | 411     |   | 
|Adjustments
        to reconcile net income to net cash provided by operating activities |  |                        |   |         |                        |  |  |  |  |         |   | 
|Depreciation,
        depletion, and amortization                                        |  |                        |   | 9,478   |                        |  |  |  |  | 9,271   |   | 
|Accretion
        of asset retirement obligations                                        |  |                        |   | 325     |                        |  |  |  |  | 299     |   | 
|Amortization
        of debt issue costs                                                 |  |                        |   | 103     |                        |  |  |  |  | -       |   | 
|Amortization
        of deferred stock-based compensation                                |  |                        |   | 448     |                        |  |  |  |  | -       |   | 
|Deferred
        income tax expense                                                      |  |                        |   | (46     | )                      |  |  |  |  | -       |   | 
|Gain
        on sale or disposal of property, plant, and equipment                       |  |                        |   | 6       |                        |  |  |  |  | 14      |   | 
|Changes
        in operating assets and liabilities:                                     |  |                        |   |         |                        |  |  |  |  |         |   | 
|Receivables                                                                              |  |                        |   | (9,191  | )                      |  |  |  |  | (10,776 | ) | 
|Inventories                                                                              |  |                        |   | (3,557  | )                      |  |  |  |  | (3,068  | ) | 
|Prepaid
        royalties and other current assets                                       |  |                        |   | 627     |                        |  |  |  |  | (1,193  | ) | 
|Other
        assets                                                                     |  |                        |   | 1,783   |                        |  |  |  |  | 27      |   | 
|Accounts
        payable                                                                 |  |                        |   | 9,927   |                        |  |  |  |  | (3,241  | ) | 
|Accrued
        salaries, wages, and employee benefits                                   |  |                        |   | 1,142   |                        |  |  |  |  | 1,211   |   | 
|Accrued
        taxes                                                                    |  |                        |   | 796     |                        |  |  |  |  | 2,127   |   | 
|Other
        current liabilities                                                        |  |                        |   | 1,021   |                        |  |  |  |  | 1,172   |   | 
|Workers
        compensation benefits                                                   |  |                        |   | 158     |                        |  |  |  |  | 1,165   |   | 
|Black
        lung benefits                                                              |  |                        |   | 80      |                        |  |  |  |  | (391    | ) | 
|Pension
        obligations                                                              |  |                        |   | (538    | )                      |  |  |  |  | 28      |   | 
|Asset
        retirement obligation                                                      |  |                        |   | (135    | )                      |  |  |  |  | (131    | ) | 
|Other
        liabilities                                                                |  |                        |   | (47     | )                      |  |  |  |  | 4       |   | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Net
        cash provided by (used in) operating activities                              |  |                        |   | 12,689  |                        |  |  |  |  | (3,071  | ) | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Cash
        flows from investing activities:                                            |  |                        |   |         |                        |  |  |  |  |         |   | 
|Additions
        to property, plant, and equipment                                      |  |                        |   | (14,690 | )                      |  |  |  |  | (6,815  | ) | 
|Proceeds
        from sale of equipment and property                                     |  |                        |   | -       |                        |  |  |  |  | 40      |   | 
|Increase
        in restricted cash                                                      |  |                        |   | (21     | )                      |  |  |  |  | (21     | ) | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Net
        cash used in investing activities                                            |  |                        |   | (14,711 | )                      |  |  |  |  | (6,796  | ) | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Cash
        flows from financing activities:                                            |  |                        |   |         |                        |  |  |  |  |         |   | 
|Proceeds
        from borrowings                                                         |  |                        |   | -       |                        |  |  |  |  | 6,400   |   | 
|Principal
        payments under capital lease obligations                               |  |                        |   | (133    | )                      |  |  |  |  | (101    | ) | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Net
        cash provided by (used in) financing activities                              |  |                        |   | (133    | )                      |  |  |  |  | 6,299   |   | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Decrease
        in cash                                                                 |  |                        |   | (2,155  | )                      |  |  |  |  | (3,568  | ) | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Cash
        at beginning of period                                                      |  |                        |   | 3,879   |                        |  |  |  |  | 4,890   |   | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 
|Cash
        at end of period                                                            |  |                        | $ | 1,724   |                        |  |  |  |  | 1,322   |   | 
|                                                                                         |  |                        |   |         |                        |  |  |  |  |         |   | 

See accompanying notes to
  condensed consolidated financial statements.

-7-

---



JAMES RIVER
  COAL COMPANYAND SUBSIDIARIES

Notes
  to Condensed Consolidated Financial Statements

(Unaudited)

|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Summary
        of Significant Accounting Policies and Other Information
|    |                                                                         
|    | (a)                                                                      | Description
        of Business and Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          | The
        Company mines, processes and sells bituminous, low sulfur, steam- and
        industrial-grade coal through five operating subsidiaries located throughout
        Eastern Kentucky. Substantially all coal sales and accounts receivable
        relate to the electric utility and industrial markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          | The
        interim condensed consolidated financial statements include the accounts
        of James River Coal Company and its wholly owned subsidiaries. The interim
        condensed consolidated financial statements of James River Coal Company
        and subsidiaries (Company) as of and for the three months ended March
        31, 2005, and the three months ended March 31, 2004 presented in this
        report are unaudited.  All significant intercompany balances and
        transactions have been eliminated in consolidation.  The results
        of operations for any interim period are not necessarily indicative of
        the results to be expected for the full year.  These financial statements
        should be read in conjunction with the consolidated financial statements
        and the notes thereto for the year ended December 31, 2004.  The
        balances presented as of December 31, 2004 are derived from the Companys
        audited consolidated financial statements.                                                                                                                            
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          | Management
        of the Company has made a number of estimates and assumptions relating
        to the reporting of assets, liabilities, revenues and expenses and the
        disclosure of contingent assets and liabilities in order to prepare these
        condensed consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America.  Significant
        estimates made by management include the valuation allowance for deferred
        tax assets, accrued reclamation costs and amounts accrued related to the
        Companys workers compensation, black lung, health claim, and
        pension obligations.  Actual results could differ from these estimates. 
        In the opinion of management, the accompanying unaudited condensed consolidated
        financial statements contain all adjustments, consisting of only 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.
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | (b)                                                                      | Bankruptcy
        and Restructuring                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          | On March
        25, 2003, James River Coal Company and subsidiaries (the Company) filed
        a voluntary petition for relief under Chapter 11 with the United States
        Bankruptcy Court for the Middle District of Tennessee. On April 21, 2004
        the United States Bankruptcy Court for the Middle District of Tennessee
        confirmed the Companys Plan of Reorganization (the Plan). The Plan
        of Reorganization became effective May 6, 2004 (the Effective Date) which
        is the date on which the Company formally emerged from Chapter 11. Pursuant
        to the Plan, the Companys unsecured creditors claims were discharged
        and terminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          | The
        Companys accompanying consolidated financial statements for the
        three months ended March 31, 2004, have been prepared in accordance with
        the American Institute of Certified Public Accountants Statement
        of Position 90-7, Financial Reporting by Entities in Reorganization
        under the Bankruptcy Code (SOP 90-7), which provides guidance for
        financial reporting by entities that have filed petitions under Bankruptcy. 
        The consolidated financial statements after emergence are those of a new
        reporting entity (the Successor) and are not comparable to the consolidated
        financial statements of the pre-emergence Company (the Predecessor). A
        black line has been drawn in the financial statements to distinguish Predecessor
        and Successor financial information.  See note 2 for additional information.                                                                                                                                                                                                                                             
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | (c)                                                                      | Restricted
        Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                          | As of
        March 31, 2005 and December 31, 2004, $8,425 and $8,404 respectively,
        of the Companys cash was restricted as to its use. Restrictions
        were imposed by the Companys bank relating to a letter of credit
        issued to one of the Companys insurers (see note 5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | (d)                                                                      | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

-8-

---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | Inventories
        of coal and materials and supplies are stated at the lower of cost or
        market. Cost is determined using the average cost for coal inventories
        and the first-in, first-out method for materials and supplies.  Coal
        inventory costs include labor, supplies, equipment cost, depletion, royalties,
        black lung tax, reclamation tax and preparation plant cost.  Coal
        is classified as inventory at the point in time that the coal is extracted
        and removed from the mine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (e) | Reclamation
        Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Effective
        January 1, 2003, the Company adopted Financial Accounting Standards
        Board (FASB) Statement No. 143, Accounting for Asset Retirement
        Obligations. Statement No. 143 requires that asset retirement
        obligations be recorded as a liability based on fair value, which is calculated
        as the present value of the estimated future cash flows, in the period
        in which it is incurred. The estimate of ultimate reclamation liability
        and the expected period in which reclamation work will be performed is
        reviewed periodically by the Companys management and engineers.
        In estimating future cash flows, the Company considers the estimated current
        cost of reclamation and applies inflation rates and a third party profit,
        as necessary. The third party profit is an estimate of the approximate
        markup that would be charged by contractors for work performed on behalf
        of the Company. When the liability is initially recorded, the offset is
        capitalized by increasing the carrying amount of the related long-lived
        asset. Over time, the liability is accreted to its present value each
        period, and the capitalized cost is depreciated over the useful life of
        the related asset. Accretion expense is included in cost of produced coal.
        To settle the liability, the obligation is paid, and to the extent there
        is a difference between the liability and the amount of cash paid, a gain
        or loss upon settlement is incurred. At March 31, 2005 and December 31,
        2004, the Company had accrued $16,179 and $15,989, respectively, related
        to estimated mine reclamation costs.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (f) | Workers
        Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The
        Company is liable for workers compensation benefits for traumatic
        injuries under state workers compensation laws in which it has operations.
        Subsequent to 2001, a portion of its workers compensation benefits
        are payable under a high-deductible, fully-insured workers compensation
        insurance policy. For claims incurred prior to 2002, the Company is self-insured,
        except for those claims incurred between 1979 and 1982, which are covered
        by a third party insurance company. Specific excess insurance with independent
        insurance carriers is in force to cover traumatic claims in excess of
        the self-insured limits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The
        Company accrues for workers compensation benefits by recognizing
        a liability when it is probable that the liability has been incurred and
        the cost can be reasonably estimated. To assist in the determination of
        this estimated liability, the Company utilizes the services of third party
        administrators who develop claim reserves from historical experience.
        These third parties provide information to independent actuaries, who
        after review and consultation with the Company with regards to actuarial
        assumptions, including discount rate, prepare an evaluation of the liabilities
        for workers compensation benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (g) | Black
        Lung Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The
        Company is responsible under the Federal Coal Mine Health and Safety Act
        of 1969, as amended, and various states statutes for the payment
        of medical and disability benefits to employees and their dependents resulting
        from occurrences of coal workers pneumoconiosis disease (black lung).
        The Company provides for federal and state black lung claims through a
        self-insurance program. The Company uses the service cost method to account
        for its self-insured black lung obligation. The liability measured under
        the service cost method represents the discounted future estimated cost
        for former employees either receiving or projected to receive benefits,
        and the portion of the projected liability relative to prior service for
        active employees projected to receive benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The
        periodic expense for black lung claims under the service cost method represents
        the service cost, which is the portion of the present value of benefits
        allocated to the current year, interest on the accumulated benefit obligation,
        and amortization of unrecognized actuarial gains and losses. The Company
        amortizes unrecognized actuarial gains and losses over the average remaining
        work life of the workforce.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Annual
        actuarial studies are prepared by independent actuaries using certain
        assumptions to determine the liability. The calculation is based on assumptions
        regarding disability incidence, medical costs, mortality, death benefits,
        dependents, and interest rates. These assumptions are derived from actual
        Company experience and industry sources.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (h) | Revenue
        Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Revenues
        include sales to customers of Company-produced coal and coal purchased
        from third parties. The Company recognizes revenue from the sale of Company-produced
        coal and coal purchased from third parties at the time delivery                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

-9-

---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | occurs
        and title passes to the customer, which is either upon shipment or upon
        customer receipt of coal based on contractual terms. Also, the sales price
        must be determinable and collection reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (i) | Income
        Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | Income
        taxes are accounted for under the asset and liability method. Deferred
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of existing assets and liabilities and their respective tax bases and
        operating loss and tax credit carryforwards. Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply to taxable income
        in the years in which those temporary differences are expected to be recovered
        or settled. The effect on deferred tax assets and liabilities of a change
        in tax rates is recognized in income in the period that includes the enactment
        date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (j) | Equity-Based
        Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The
        Company accounts for stock-based compensation using the intrinsic value
        method prescribed by Accounting Principles Board (APB) Opinion
        No. 25, Accounting for Stock Issued to Employees, and related
        Interpretations. Accordingly, compensation cost for stock options granted
        to employees is measured as the excess, if any, of the quoted market price
        of the stock at the date of grant over the amount an employee must pay
        to acquire the stock. Compensation cost for stock appreciation rights
        and performance equity units is recorded based on the quoted market price
        of the Companys stock at the end of the period. Stock-based compensation
        other than stock options is recorded to expense on a straight-line basis.
        The Company has implemented the disclosure-only provisions of FASB Statement
        No. 123 Accounting for Stock-Based Compensation. The
        Company has not recognized stock-based compensation expense related to
        stock options in any period as all options granted had an exercise price
        at least equal to the fair value of the underlying common stock on the
        date of the grant. If the Company had followed the fair value method under
        FASB Statement No. 123 for options outstanding the impact on the three
        months ended March 31, 2005 would have been less than $.01 per share.
        In performing the Statement No. 123 analysis for stock options, a risk
        free rate of 5% was assumed, expected volatility was zero, and no dividends
        were anticipated.  The Company had no stock options outstanding as
        of March 31, 2004.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | If the
        Company had followed the fair value method under FASB Statement No. 123
        to account for stock based compensation cost for restricted stock grants
        the amount of stock based compensation, net of related tax, which would
        have been recognized for each period and pro-forma net income for each
        period would have been as follows (in 000s except per share amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|                                                                                                                                                                              |  |                        |   |      |   | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ---- | - | 
|                                                                                                                                                                              |  | Three
        Months   |  
|                                                                                                                                                                              |  | March
        31, 2005 |  
|                                                                                                                                                                              |  |                        |  
|Net
        Income, as reported                                                                                                                                               |  |                        | $ | 309  |   | 
|Add: 
        Net stock-based employee compensation expense recorded for restricted
        and performance based stock grants                                                |  |                        |   | 358  |   | 
|Deduct: 
        Net stock-based employee compensation expense for restricted and performance 
        based stock grants determined under Black-Scholes option pricing model |  |                        |   | (289 | ) | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|Pro
        forma net income                                                                                                                                                  |  |                        | $ | 378  |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|Income
        per share:                                                                                                                                                     |  |                        |   |      |   | 
|Basic
        - as reported                                                                                                                                                   |  |                        | $ | 0.02 |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|Basic
        - pro forma                                                                                                                                                     |  |                        | $ | 0.03 |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|Diluted
        - as reported                                                                                                                                                 |  |                        | $ | 0.02 |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 
|Diluted
        - pro forma                                                                                                                                                   |  |                        | $ | 0.03 |   | 
|                                                                                                                                                                              |  |                        |   |      |   | 



| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
        Financial Accounting Standards Board (FASB) has issued Statement
        of Financial Accounting Standards No. 123 (revised 2004), Share-Based
        Payment (FAS 123R), which requires all public companies to measure
        compensation cost in the income statement for all share-based payments
        (including employee stock options) at fair value. The

-10-

---



|    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                | Company
        intends to adopt FAS 123R on January 1, 2006 using the modified-prospective
        method. The Company has not completed its assessment of the impact of
        the adoption of this statement on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | Fresh
        Start Accounting
|    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                | The
        Company implemented fresh start accounting and reporting in accordance
        with SOP 90-7 on April 30, 2004, the end of the Companys most recent
        fiscal month prior to the Effective Date. Fresh start accounting requires
        that the reorganization value of the reorganized debtors be allocated
        to their assets in conformity with FASB Statement No. 141, Business
        Combinations, for transactions reported under the purchase method. 
        The enterprise value (value of the net assets and liabilities excluding
        cash, debt, and capital leases) of the reorganized company was estimated
        to range from $145 million to $165 million based on a third-party valuation
        prepared in connection with the bankruptcy proceedings.  For purposes
        of applying fresh start accounting, an enterprise value for the reorganized
        company of $155 million was utilized.
|    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                | The
        effects of the Plan and the application of fresh-start accounting on the
        Companys pre-confirmation consolidated balance sheet include adjustments
        to record the gain on the debt extinguished under the plan and adjustments
        to record the assets of the Company at their estimated fair value and
        the liabilities of the Company at their estimated present values. The
        reorganization value was derived from the enterprise value for the reorganized
        company as follows: (amounts in 000s)                                                                                                                                                                                                                                                                                                                                                                                                  



|                                                                          |  |   |         |  
|------------------------------------------------------------------------- |  | - | ------- | -
|Estimated
        enterprise value of the reorganized company             |  | $ | 155,000 |  
|Borrowings
        under credit facility                                  |  |   | (6,400  | )
|Capital
        leases assumed                                            |  |   | (1,396  | )
|Cash
        balance excluded from enterprise value                       |  |   | 1,301   |  
|Administrative
        claims payable excluded from enterprise value      |  |   | (10,214 | )
|                                                                          |  |   |         |  
|                                                                          |  |   | 138,291 |  
|Less:
        new secured debt issued to extinguish prepetition debt      |  |   | 75,000  |  
|                                                                          |  |   |         |  
|Fair
        value of common shares issued to extinguish prepetition debt |  | $ | 63,291  |  
|                                                                          |  |   |         |  

-11-

---



James River
  Coal Company
  Reorganized Condensed Consolidated Balance Sheet
  As of April 30, 2004
  (amounts in 000s)
  (Unaudited)

|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|------------------------------------------------------------------ |  | ------------------------------------------- | - | ------------------------------------ |  | ------------------------------------------- |  | ----------------------------------------- | ------------- |  |  | -------- | ----- |  |  | ------- |  | 
|                                                                   |  |                                             |   | Fresh
        Start Adjustments      |  |                                             | 
|                                                                   |  |                                             |   |                                      |  |                                             | 
|Assets                                                             |  | Predecessor
        Company
        4/30/04 |   | Debt
        
        Extinguishment |  | Reorganization
        
        Adjustments |  | Successor
        Company
        4/30/04 |              
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |              
|Cash                                                               |  |                                             | $ | 1,301                                |  |                                             |  | -                                         |               |  |  | -        |       |  |  | 1,301   |  | 
|Receivables                                                        |  |                                             |   | 35,838                               |  |                                             |  | -                                         |               |  |  | -        |       |  |  | 35,838  |  | 
|Inventories                                                        |  |                                             |   | 11,930                               |  |                                             |  | -                                         |               |  |  | 1,079    | (2)   |  |  | 13,009  |  | 
|Prepaid
        royalties                                          |  |                                             |   | 9,932                                |  |                                             |  | -                                         |               |  |  | (362     | ) (2) |  |  | 9,570   |  | 
|Other
        current assets                                       |  |                                             |   | 4,463                                |  |                                             |  | -                                         |               |  |  | (347     | ) (2) |  |  | 4,116   |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|Total
        current assets                                       |  |                                             |   | 63,464                               |  |                                             |  | -                                         |               |  |  | 370      |       |  |  | 63,834  |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|Land
        and mineral rights                                    |  |                                             |   | 223,004                              |  |                                             |  | -                                         |               |  |  | (57,567  | ) (2) |  |  | 165,437 |  | 
|Buildings,
        machinery, and equipment                        |  |                                             |   | 236,901                              |  |                                             |  | -                                         |               |  |  | (155,050 | ) (2) |  |  | 81,851  |  | 
|Mine
        development costs                                     |  |                                             |   | 12,984                               |  |                                             |  | -                                         |               |  |  | (12,984  | ) (2) |  |  | -       |  | 
|Construction-in-progress                                           |  |                                             |   | 974                                  |  |                                             |  | -                                         |               |  |  | -        |       |  |  | 974     |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|                                                                   |  |                                             |   | 473,863                              |  |                                             |  | -                                         |               |  |  | (225,601 | )     |  |  | 248,262 |  | 
|Less
        accumulated depreciation, depletion, and amortization |  |                                             |   | 219,604                              |  |                                             |  | -                                         |               |  |  | (219,604 | ) (2) |  |  | -       |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|Net
        property, plant, and equipment                         |  |                                             |   | 254,259                              |  |                                             |  | -                                         |               |  |  | (5,997   | )     |  |  | 248,262 |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|Restricted
        cash                                            |  |                                             |   | 8,348                                |  |                                             |  | -                                         |               |  |  | -        |       |  |  | 8,348   |  | 
|Other
        long-term assets                                     |  |                                             |   | 6,518                                |  |                                             |  | (3,110                                    | )
        (1) |  |  | (734     | ) (2) |  |  | 2,674   |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 
|Total
        assets                                               |  |                                             | $ | 332,589                              |  |                                             |  | (3,110                                    | )             |  |  | (6,361   | )     |  |  | 323,118 |  | 
|                                                                   |  |                                             |   |                                      |  |                                             |  |                                           |               |  |  |          |       |  |  |         |  | 

-12-

---



James River
  Coal Company
  Reorganized Condensed Consolidated Balance Sheet
  As of April 30, 2004
  (amounts in 000s)
  (Unaudited)

|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|------------------------------------------------------------------------ |  | ----------------------------------------------------- | - | ------------------------------------ | - | ---------------------------------- |  | --------------------------------------------------- | ----- |  |  | ------- | ----- |  |  | ------- |  | 
|                                                                         |  |                                                       |   | Fresh
        Start Adjustments      |   |                                    |  |                                                    
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                    
|Liabilities
        and Shareholders Equity 
        (Deficit)          |  | Predecessor
        
        Company 
        4/30/04 |   | Debt
        
        Extinguishment |   | Reorganization
        Adjustments |  | Successor
        
        Company 
        4/30/04 |      
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |      
|Borrowings
        under DIP credit agreement                            |  |                                                       | $ | 6,400                                |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 6,400   |  | 
|Current
        installments of obligations under capital leases         |  |                                                       |   | 749                                  |   |                                    |  | -                                                   |       |  |  | (272    | ) (3) |  |  | 477     |  | 
|Accounts
        payable                                                 |  |                                                       |   | 26,293                               |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 26,293  |  | 
|Accrued
        salaries, wages and employee benefits                    |  |                                                       |   | 4,501                                |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 4,501   |  | 
|Workers
        compensation benefits                                   |  |                                                       |   | 9,500                                |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 9,500   |  | 
|Black
        lung benefits                                              |  |                                                       |   | 2,500                                |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 2,500   |  | 
|Accrued
        taxes                                                    |  |                                                       |   | 3,588                                |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 3,588   |  | 
|Other
        current liabilities                                        |  |                                                       |   | 4,037                                |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 4,037   |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Total
        current liabilities                                        |  |                                                       |   | 57,568                               |   |                                    |  | -                                                   |       |  |  | (272    | )     |  |  | 57,296  |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Long
        term debt                                                   |  |                                                       |   | -                                    |   |                                    |  | 75,000                                              | (1)   |  |  | -       |       |  |  | 75,000  |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Noncurrent
        portion of workers compensation benefits             |  |                                                       |   | 42,699                               |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 42,699  |  | 
|Noncurrent
        portion of black lung benefits                        |  |                                                       |   | 10,661                               |   |                                    |  | -                                                   |       |  |  | 13,610  | (4)   |  |  | 24,271  |  | 
|Pension
        obligations                                              |  |                                                       |   | 14,267                               |   |                                    |  | -                                                   |       |  |  | 3,363   | (5)   |  |  | 17,630  |  | 
|Asset
        retirement obligations                                     |  |                                                       |   | 13,963                               |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 13,963  |  | 
|Obligations
        under capital leases, excluding current installments |  |                                                       |   | 1,159                                |   |                                    |  | -                                                   |       |  |  | (240    | ) (3) |  |  | 919     |  | 
|Deferred
        income taxes                                            |  |                                                       |   | -                                    |   |                                    |  | -                                                   |       |  |  | 27,391  | (6)   |  |  | 27,391  |  | 
|Other
        long term liabilities                                      |  |                                                       |   | 658                                  |   |                                    |  | -                                                   |       |  |  | -       |       |  |  | 658     |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Total
        other liabilities                                          |  |                                                       |   | 83,407                               |   |                                    |  | -                                                   |       |  |  | 44,124  |       |  |  | 127,531 |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Liabilities
        subject to compromise                                |  |                                                       |   | 319,451                              |   |                                    |  | (319,451                                            | ) (1) |  |  | -       |       |  |  | -       |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Total
        liabilities                                                |  |                                                       |   | 460,426                              |   |                                    |  | (244,451                                            | )     |  |  | 43,852  |       |  |  | 259,827 |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Common
        stock                                                     |  |                                                       |   | -                                    |   |                                    |  | 138                                                 | (1)   |  |  | -       |       |  |  | 138     |  | 
|Paid-in-capital                                                          |  |                                                       |   | 226                                  |   |                                    |  | 63,153                                              | (1)   |  |  | (226    | ) (7) |  |  | 63,153  |  | 
|Retained
        earnings (accumulated deficit)                          |  |                                                       |   | (111,533                             | ) |                                    |  | 178,050                                             | (1)   |  |  | (66,517 | ) (7) |  |  | -       |  | 
|Subscribed
        shares                                                |  |                                                       |   | (821                                 | ) |                                    |  | -                                                   |       |  |  | 821     | (7)   |  |  | -       |  | 
|Accumulated
        other comprehensive income (loss)                    |  |                                                       |   | (15,709                              | ) |                                    |  | -                                                   |       |  |  | 15,709  | (7)   |  |  | -       |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Total
        shareholders equity (deficit)                             |  |                                                       |   | (127,837                             | ) |                                    |  | 241,341                                             |       |  |  | (50,213 | )     |  |  | 63,291  |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 
|Total
        liabilities and shareholders equity                       |  |                                                       | $ | 332,589                              |   |                                    |  | (3,110                                              | )     |  |  | (6,361  | )     |  |  | 323,118 |  | 
|                                                                         |  |                                                       |   |                                      |   |                                    |  |                                                     |       |  |  |         |       |  |  |         |  | 

-13-

---



The following is a description
  of the fresh start adjustments for debt extinguishment and reorganization adjustments:

Extinguishment of Debt

|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Liabilities
        subject to compromise that were extinguished in bankruptcy consist of
        the following (amounts in 000s):



|                                                |  |   |         | 
|----------------------------------------------- |  | - | ------- | 
|Pre-petition
        bank loan agreement        |  | $ | 207,807 | 
|Pre-petition
        senior note                |  |   | 37,953  | 
|Accrued
        and unpaid interest             |  |   | 12,234  | 
|Terminated
        interest rate swap           |  |   | 8,434   | 
|                                                |  |   |         | 
|Total
        secured                           |  |   | 266,428 | 
|                                                |  |   |         | 
|Promissory
        notes                        |  |   | 5,176   | 
|Redeemable
        preferred stock              |  |   | 8,500   | 
|Accounts
        payable and other              |  |   | 39,347  | 
|                                                |  |   |         | 
|Total
        unsecured                         |  |   | 53,023  | 
|                                                |  |   |         | 
|                                                |  |   |         | 
|Total
        liabilities subject to compromise |  | $ | 319,451 | 
|                                                |  |   |         | 



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
        Company issued new common shares, new secured debt, and transferred its
        interest in specified life insurance policies held in a rabbi trust to
        the creditors in full satisfaction of pre-petition claims.  The gain
        on extinguishment of pre-petition claims is calculated as follows (amounts
        in 000s):



|                                                                        |  |   |         |  
|----------------------------------------------------------------------- |  | - | ------- | -
|Liabilities
        subject to compromise                               |  | $ | 319,451 |  
|Less:
        Assets of rabbi trust transferred to creditors            |  |   | (3,110  | )
|Less:
        New secured debt issued in exchange for pre-petition debt |  |   | (75,000 | )
|Less:
        Fair value of common shares issued                        |  |   | (63,291 | )
|                                                                        |  |   |         |  
|Gain
        on extinguishment of pre-petition claims                   |  | $ | 178,050 |  
|                                                                        |  |   |         |  

Reorganization Adjustments

|    |                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In connection
        with the application of fresh start accounting, the Company made adjustments
        aggregating approximately $6.3 million to record its identifiable assets
        at fair value as follows: (amounts in 000s):



|                                                                   |  |                     |   |          |   | 
|------------------------------------------------------------------ |  | ------------------- | - | -------- | - | 
|                                                                   |  | Increase/(Decrease) |  
|                                                                   |  |                     |  
|Coal
        inventories                                           |  |                     | $ | 1,079    |   | 
|Prepaid
        royalties                                          |  |                     |   | (362     | ) | 
|Other
        current assets                                       |  |                     |   | (347     | ) | 
|Land
        and mineral rights                                    |  |                     |   | (57,567  | ) | 
|Buildings,
        machinery and equipment                         |  |                     |   | (155,050 | ) | 
|Mine
        development costs                                     |  |                     |   | (12,984  | ) | 
|Less
        accumulated depreciation, depletion, and amortization |  |                     |   | 219,604  |   | 
|Other
        long-term assets                                     |  |                     |   | (734     | ) | 
|                                                                   |  |                     |   |          |   | 
|Total
        fair value adjustments to identifiable assets        |  |                     | $ | (6,361   | ) | 
|                                                                   |  |                     |   |          |   | 



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Contractual
        terms of certain capital lease agreements were renegotiated during bankruptcy. 
        Obligations under capital leases have been adjusted to reflect the revised
        terms.               
|    |                                                                                                                                                                                                                     
|(4) | The
        liability for black lung benefits has been adjusted to reflect the total
        discounted benefit obligation.                                                                                         
|    |                                                                                                                                                                                                                     
|(5) | The
        pension liability has been adjusted to reflect the total discounted projected
        benefit obligation of the plan.                                                                                   
|    |                                                                                                                                                                                                                     
|(6) | Deferred
        income taxes have been adjusted to reflect differences in the book and
        tax basis of the revalued assets and liabilities of the Company after
        application of fresh start accounting.
|    |                                                                                                                                                                                                                     
|(7) | The
        equity of the predecessor company, including subscribed shares and accumulated
        other comprehensive loss, has been eliminated in fresh start accounting.                                         

-14-

---



|    |                                             |                                                                           
|--- | ------------------------------------------- | --------------------------------------------------------------------------
|(3) | Long
        Term Debt and Interest Expense
|    |                                            
|    |                                             | Long-term
        debt at March 31, 2005 is as follows (amounts in 000s):



|                                                      |  |                        |        | 
|----------------------------------------------------- |  | ---------------------- | ------ | 
|                                                      |  | March
        31, 2005 |       
|                                                      |  |                        |       
|Senior
        secured credit facility:               |  |                        |        | 
|Term
        loan component                           |  | $                      | 20,000 | 
|Revolver
        component                            |  |                        | -      | 
|                                                      |  |                        |        | 
|Term
        credit facility                          |  |                        | 75,000 | 
|                                                      |  |                        |        | 
|                                                      |  |                        |        | 
|Total
        long-term debt                          |  |                        | 95,000 | 
|                                                      |  |                        |        | 
|Less
        amounts classified as current            |  |                        | 3,600  | 
|                                                      |  |                        |        | 
|                                                      |  |                        |        | 
|Total
        long-term debt, less current maturities |  | $                      | 91,400 | 
|                                                      |  |                        |        | 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Senior
        Secured Credit Facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Effective
        May 6, 2004, the Company closed a $50 million senior secured credit facility
        with Wells Fargo Foothill, Inc. (the Senior Secured Credit Facility). 
        This facility was used to repay outstanding amounts and replace letters
        of credit previously issued under the $20 million debtor-in-possession
        facility to pay expenses associated with the exit from bankruptcy and
        to provide liquidity for general corporate purposes.  The Senior
        Secured Credit Facility is comprised of a $30 million revolver component
        and a $20 million term component.  The term loan was fully funded
        at closing.  Borrowings under the revolver component bear interest
        at LIBOR + 2.5% or the Base Rate (as defined in the credit agreement)
        + 1.0%.  Borrowings under the term component bear interest at LIBOR
        + 5.25% or the Base Rate + 3.85%.  The term of the Senior Secured
        Credit Facility is five years.  Principal payments on the term component
        of $900,000 per quarter commence on April 1, 2005 and continue through
        April 1, 2009, with the remaining principal balance due on May 6, 2009. 
        Interest is payable in arrears, on the first day of each month on 
        Base Rate borrowings while interest on LIBOR Rate borrowings is due on
        the last day of the LIBOR interest period.  Advances under the Senior
        Secured Credit Facility are secured by a first priority lien on substantially
        all of the Companys assets, and, except for the Term Credit Facility,
        the Company may not incur additional debt on the assets securing the Revolving
        Credit Facility.  Advances under the revolver component may not exceed
        a borrowing base calculation derived as a percentage of eligible assets. 
        The Senior Secured Credit Facility can be terminated with 90 days written
        notice by paying all outstanding principal, interest and making any prepayment
        premium payments due.  The $30 million revolver component has a prepayment
        premium of 2.5% of the total revolver commitment for the first year, declining
        to 2.0% for the second year, 1.5% for the third year and 0.5% for the
        fourth year.  There is not a prepayment premium for the fifth year
        of the revolver component of the Senior Secured Credit Facility. 
        The $20 million term loan component has a prepayment premium of $200,000
        (1.0%) if paid prior to April 30, 2007.  There is no prepayment premium
        after April 30, 2007 for the term loan component.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (b) | Term
        Credit Facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The
        Company also entered into a $75 million term credit facility with the
        Companys pre-petition secured lenders (the Term Credit Facility)
        in partial satisfaction of its prepetition obligations, pursuant to the
        Plan of Reorganization.  The term of the Term Credit Facility is
        seven years, and the repayment of the Term Credit Facility is secured
        by a second priority lien on substantially all of the Companys assets. 
        Except for the Senior Secured Credit Facility, the Company may not incur
        additional debt on the assets securing the Term Credit Facility. 
        In addition, the Company may not incur any unsecured debt (other than
        normal trade payables) and may not incur more than $5 million of
        recourse debt (including the Senior Secured Credit Facility and the Term
        Credit Facility).  There is no scheduled amortization of this facility
        for the first two years.  The notes are payable over seven years
        with principal repayments of $1.5 million per quarter beginning June 30,
        2006 and increasing to $2.5 million per quarter beginning June 30, 2008. 
        All remaining principal and interest is due May 6, 2011.  Borrowings
        under the Term Credit Facility may be prepaid without penalty.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (c) | Interest
        Expense and Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

-15-

---



|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |        | Until
        the date of filing of bankruptcy, the Company accrued interest. The Company
        determined that there was insufficient collateral to cover the interest
        portion of the scheduled payments on its prepetition debt obligations.
        As of the bankruptcy date the Company ceased accruing interest on all
        the prepetition secured debt obligations. If such interest had continued
        to be accrued, interest expense would have been approximately $5.7 million
        for the three months ended March 31, 2004. During the three months ended
        March 31, 2005 and 2004, the Company paid $2,087,000 and $147,000 in interest,
        respectively.                                                                                                                                                                                                                                                                                      
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | The
        Senior Secured Credit Facility and the Term Credit Facility contain financial
        covenants including a fixed charge coverage, a minimum leverage, minimum
        consolidated tangible net worth, minimum Consolidated Total EBITDA (as
        defined in each of the credit facilities), and maximum annual limits on
        capital expenditures.  The Company was in compliance with all of
        the financial covenants for the Senior Secured Credit Facility and the
        Term Credit Facility as of March 31, 2005.  The Companys debt
        covenants also prohibit payment of cash dividends.                                                                                                                                                                                                                                                                                                                                                           
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4) | Equity
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | (a)    | Preferred
        Stock and Shareholder Rights Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | The
        Company has authorized 10,000,000 shares of preferred stock, $1.00 par
        value, 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 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)
        have acquired or announced the intention to acquire 15% or more of the
        Companys outstanding common stock.                                                                                                                                                                                                   
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | In the
        event that the Company is acquired in a merger or other business combination
        transaction or 50% or more of the Companys consolidated assets or
        earning power is sold after a person or group has become an Acquiring
        Person, each holder of a Right, other than the Rights beneficially owned
        by the Acquiring Person (which will thereafter be void), will receive,
        upon the exercise of the Right, that number of shares of common stock
        of the acquiring company which at the time of such transaction will have
        a market value of two times the exercise price of the Right.  In
        the event that any person becomes an Acquiring Person, each Right holder,
        other than the Acquiring Person (whose Rights will become void), will
        have the right to receive upon exercise that number of shares of common
        stock having a market value of two times the exercise price of the Right.
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | (b)    | Redeemable
        Preferred Stock (Predecessor Company)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | The
        Company had 8,500 shares of Class C, nonvoting, mandatorily redeemable
        preferred stock outstanding. The preferred shares had a par value of $1,000
        per share and a dividend rate of 8%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | On July
        1, 2003, the Company adopted Statement No. 150, Accounting for Certain
        Financial Instruments with Characteristics of both Liabilities and Equity,
        which required that dividends on redeemable preferred stock be reported
        as a financing cost in our statement of operations. Accordingly, preferred
        dividends of $170,000 for the three months ended March 31, 2004, are included
        in interest expense in the condensed consolidated statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |        | The
        preferred stock was cancelled on May 6, 2004 in accordance with the terms
        of the Plan of Reorganization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

-16-

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Commitments
        and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The
        Company has established irrevocable letters of credit totaling $32.7 million
        as of March 31, 2005 to guarantee performance under certain contractual
        arrangements.  The Company has letters of credit totaling $7.8 million
        that are collateralized by restricted cash (see note 1(c)).  The
        remaining letters of credit totaling $24.9 million were issued under the
        Senior Secured Credit Facility and reduce the Companys availability
        under the $30 million revolver component.  The Company is charged
        a fee of 2.5% annually on letters of credit outstanding.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | 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.                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(6) | Reorganization
        Items, Net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Reorganization
        items, net, consists of the following (amounts in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



|                                                      |  |                                                                                    |   |       |   | 
|----------------------------------------------------- |  | ---------------------------------------------------------------------------------- | - | ----- | - | 
|                                                      |  | Predecessor
        
        Company 
        Three Months 
        Ended 03/31/04 |  
|                                                      |  |                                                                                    |  
|                                                      |  |                                                                                    |  
|Professional
        fees and administrative expenses |  |                                                                                    | $ | 1,607 |   | 
|Interest
        income                               |  |                                                                                    |   | (50   | ) | 
|                                                      |  |                                                                                    |   |       |   | 
|                                                      |  |                                                                                    |   |       |   | 
|                                                      |  |                                                                                    | $ | 1,557 |   | 
|                                                      |  |                                                                                    |   |       |   | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | Earnings
        Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Basic
        earnings per share is computed by dividing net income available to common
        shareholders by the weighted average number of common shares outstanding
        during the period, excluding restricted common stock subject to continuing
        vesting requirements.  Diluted earnings per share is calculated based
        on the weighted average number of common shares outstanding during the
        period and, when dilutive, potential common shares from the exercise of
        stock options and restricted common stock subject to continuing vesting
        requirements, pursuant to the treasury stock method.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The
        following table provides a reconciliation of the number of shares used
        to calculate basic and diluted earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



|                                                              |  |                                                                                 |            |                                                                                   |  |  |        |  | 
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---------- | --------------------------------------------------------------------------------- |  |  | ------ |  | 
|                                                              |  | Successor
        
        Company 
        Three Months 
        Ended 3/31/05 |            | Predecessor
        
        Company 
        Three Months 
        Ended 3/31/04 | 
|                                                              |  |                                                                                 |            |                                                                                   | 
|                                                              |  |                                                                                 |            |                                                                                   |  |  |        |  | 
|Weighted
        average number of common shares outstanding: |  |                                                                                 |            |                                                                                   |  |  |        |  | 
|Basic                                                         |  |                                                                                 | 13,799,994 |                                                                                   |  |  | 16,890 |  | 
|Effect
        of dilutive instruments                        |  |                                                                                 | 951,678    |                                                                                   |  |  | -      |  | 
|                                                              |  |                                                                                 |            |                                                                                   |  |  |        |  | 
|Diluted                                                       |  |                                                                                 | 14,751,672 |                                                                                   |  |  | 16,890 |  | 
|                                                              |  |                                                                                 |            |                                                                                   |  |  |        |  | 



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May
        6, 2004 the Company emerged from bankruptcy under a joint plan of reorganization. 
        On that date the Company cancelled all existing equity securities and
        issued 13,799,994 shares of new common stock, which were distributed pro-rata
        to the pre-petition secured creditors.

-17-

---



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(8) | Pension
        Expense                                                               
|    |                                                                                       
|    | The
        components of net periodic benefit cost are as follows (amounts in 000s):



|                                           |  |                                                                      |   |                                                                          |   |  |  |      |   | 
|------------------------------------------ |  | -------------------------------------------------------------------- | - | ------------------------------------------------------------------------ | - |  |  | ---- | - | 
|                                           |  | Successor
        Company
        Three Months
        Ended 3/31/05 |   | Predecessor
        Company 
        Three Months 
        Ended 3/31/04 |  
|                                           |  |                                                                      |   |                                                                          |  
|                                           |  |                                                                      |   |                                                                          |   |  |  |      |   | 
|Service
        cost                       |  |                                                                      | $ | 527                                                                      |   |  |  | 459  |   | 
|Interest
        cost                      |  |                                                                      |   | 793                                                                      |   |  |  | 723  |   | 
|Expected
        return on plan assets     |  |                                                                      |   | (761                                                                     | ) |  |  | (608 | ) | 
|Amortization
        of prior service cost |  |                                                                      |   |                                                                         |   |  |  | 97   |   | 
|Recognized
        actuarial loss          |  |                                                                      |   |                                                                         |   |  |  | 255  |   | 
|                                           |  |                                                                      |   |                                                                          |   |  |  |      |   | 
|Net
        periodic benefit cost          |  |                                                                      | $ | 559                                                                      |   |  |  | 926  |   | 
|                                           |  |                                                                      |   |                                                                          |   |  |  |      |   | 



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(9) | Pneumoconiosis
        (Black Lung) Benefits                                                     
|    |                                                                                                  
|    | The
        expense for black lung benefits consists of the following (amounts in
        000s):



|                                       |  |                                                                        |   |                                                                                   |  |  |  |     |  | 
|-------------------------------------- |  | ---------------------------------------------------------------------- | - | --------------------------------------------------------------------------------- |  |  |  | --- |  | 
|                                       |  | Successor
        Company 
        Three Months 
        Ended 3/31/05 |   | Predecessor
        
        Company 
        Three Months 
        Ended 3/31/04 | 
|                                       |  |                                                                        |   |                                                                                   | 
|                                       |  |                                                                        |   |                                                                                   |  |  |  |     |  | 
|Service
        cost                   |  |                                                                        | $ | 74                                                                                |  |  |  | 74  |  | 
|Interest
        cost                  |  |                                                                        |   | 340                                                                               |  |  |  | 188 |  | 
|Amortization
        of actuarial loss |  |                                                                        |   | 54                                                                                |  |  |  | 262 |  | 
|                                       |  |                                                                        |   |                                                                                   |  |  |  |     |  | 
|Total
        expense                  |  |                                                                        | $ | 468                                                                               |  |  |  | 524 |  | 
|                                       |  |                                                                        |   |                                                                                   |  |  |  |     |  | 



|     |                                                                                                                                                                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Definitive
        Agreement to Acquire Triad Mining, Inc.                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                         
|     | In March
        2005, the Company signed a definitive agreement to acquire Triad Mining
        Inc. (Triad) for approximately $75 million, consisting of
        $64 million in cash and $11 million of Company common stock. Triad operates
        six surface mines and one underground mine in Southern Indiana.

-18-

---



ITEM 2.  MANAGEMENTS
  DISCUSSION 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.

Overview

We mine, process and sell
  bituminous, low sulfur, steam- and industrial-grade coal through five operating
  subsidiaries (mining complexes)
  located throughout Eastern Kentucky.  Our
  five mining complexes include 18 mines and seven
  preparation plants, five of which have integrated rail loadout facilities and
  two of which use a common loadout facility at a separate location.  For
  the three months ended March 31, 2005, we generated approximately 76% of our
  revenues from several long-term contracts with electrical utilities, including
  32% derived from our largest customer, Georgia Power Company.  Of the remaining
  revenues, 22% were generated by industrial accounts and 2% were generated from
  fees from the handling and marketing of coal-based synfuel product.

As compared to the prior
  year, we experienced a significant increase in mining costs during the first
  three months of 2005.  The increased costs were primarily due to higher
  sales related costs and an increase in roof support and mining bit costs due
  to an increase in steel costs.  We continue to focus on reducing our operating
  costs at each mine and improving miner productivity.

Reserves

Marshall Miller & Associates,
  Inc. (MM&A) prepared a detailed study of our reserves as of
  March 31, 2004 based on all of our geologic information, including our updated
  drilling and mining data.  The coal reserve study conducted by MM&A
  was planned and performed to obtain reasonable assurance of our subject demonstrated
  reserves.  In connection with the study, MM&A prepared reserve maps
  and had certified professional geologists develop estimates based on data supplied
  by us and using standards accepted by government and industry.  MM&A
  completed their report in June 2004.

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

Based on the MM&A reserve
  study and the foregoing assumptions and qualifications, and after giving effect
  to our operations from March 31, 2004 through March 31, 2005, we estimate that,
  as of March 31, 2005, we controlled approximately 221.6 million tons of proven
  and probable coal reserves.  The following table provides additional information
  regarding changes to our reserves since March 31, 2004 (in millions of tons):



|                                                             |  |                                                             |       |                                                               |  |  |       |   | 
|------------------------------------------------------------ |  | ----------------------------------------------------------- | ----- | ------------------------------------------------------------- |  |  | ----- | - | 
|                                                             |  | Three
        Months 
        Ended 
        March 31, 2005 |       | Nine
        Months 
        Ended 
        December 31, 2004 | 
|                                                             |  |                                                             |       |                                                               | 
|Proven
        and Probable Reserves beginning of period (1) |  |                                                             | 207.4 |                                                               |  |  | 207.2 |   | 
|Coal
        Extracted                                       |  |                                                             | (2.2  | )                                                             |  |  | (6.3  | ) | 
|Acquisitions
        (2)                                     |  |                                                             | 15.4  |                                                               |  |  | 3.7   |   | 
|Adjustments
        (3)                                      |  |                                                             | 1.0   |                                                               |  |  | 2.8   |   | 
|                                                             |  |                                                             |       |                                                               |  |  |       |   | 
|Proven
        and Probable Reserves end of period           |  |                                                             | 221.6 |                                                               |  |  | 207.4 |   | 
|                                                             |  |                                                             |       |                                                               |  |  |       |   | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) Calculated
        in the same manner, and based on the same assumptions and qualifications,
        as described above.  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

-19-

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | degree
        of geologic assurance and are reserves for which quantity and grade and/or
        quality are computed from information similar to that used for proven
        reserves, but the sites for inspection, sampling and measurement are farther
        apart or are otherwise less adequately spaced.  The degree of assurance,
        although lower than that for proven reserves, is high enough to assume
        continuity between points of observation.  This reserve information
        reflects recoverable tonnage on an as-received basis with 5.5% moisture.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (2)
        Represents estimated reserves on properties acquired during the relevant
        period.  The Company calculated the reserves in the same manner,
        and based on the same assumptions and qualifications, as described
        above, but such estimates were not covered by the MM&A report.                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (3)
        Represents changes in reserves due to additional information obtained
        from exploration activities, production activities or discovery of new
        geologic information.  The Company calculated the reserves in the
        same manner, and based on the same assumptions and qualifications, as described
        above, but such estimates were not covered by the MM&A report.                                                                                                                                                                                

Recent Accounting Pronouncements

On December 16, 2004,
  the Financial Accounting Standards Board (FASB) issued Statement
  of Financial Accounting Standards No. 123 (revised 2004), Share-Based
  Payment(FAS 123R), which requires all public companies to measure
  compensation cost in the income statement for all share-based payments (including
  employee stock options) at fair value for fiscal years beginning after June 15,
  2005.  We intend to adopt FAS 123R on January 1, 2006 using the
  modified-prospective method.  We have not completed our assessment of the
  impact of the adoption of this statement on our financial statements. 
  SFAS 123R also requires the benefits of tax deductions in excess of recognized
  compensation cost be reported as a financing cash flow, rather than as an operating
  cash flow as required under current literature. This requirement will reduce
  net operating cash flows and increase net financing cash flows in periods after
  adoption to the extent non qualified stock options are exercised.

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/administrative costs.

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

In the operations area, we
  monitor the volume of coal that is produced by each of our principal sources,
  including company mines, contract mines, and purchased coal sources.  For
  our company mines, we focus on both operating costs and operating productivity. 
  Our operating costs are measured by our operating costs per ton produced. 
  We measure our operating productivity by Linear Feet (of mine advance) Per Man
  Hour (LFPMH).  LFPMH gives us a good indication of labor productivity across
  a number of different mines.

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

Trends In Our Business

We expect the current strong
  pricing environment for coal to weaken somewhat during the next one to two years. 
  This is due to increased incremental production that has historically come into
  the markets during periods of strong pricing.  We believe that the impact
  of this potentially increased production will be offset by the need of utilities
  to rebuild diminished coal inventories resulting from service difficulties that
  the major railroads experienced in 2004.  According to the Energy Information
  Administration (EIA), coal stockpiles at utilities are currently below normal
  levels.  Any effort by the utilities to rebuild their inventory positions
  should absorb a portion of any increased coal production.  Any recurrence
  of the difficulties with rail transportation experienced during 2004 may also
  have an impact on increased production and market pricing.  If marginal
  increases in the production of coal cannot be delivered to the utility customers
  by rail in a timely manner, the depressing effect of the increased production
  on market prices will be reduced.  In addition, any new coal production
  would likely require additional permits, labor and equipment, which are currently
  difficult and time consuming to obtain.

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

| |   |                                                 
| | - | ------------------------------------------------
| |  | the
        supply of domestic and foreign coal;

-20-

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| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | the
        demand for electricity;                                                                                     
| |  | the
        demand for steel and the continued financial viability of the domestic
        and foreign steel industries;
| |  | the
        cost of transporting coal to the customer;                                                                  
| |  | domestic
        and foreign governmental regulations and taxes;                                                        
| |  | air
        emission standards and other environmental requirements for coal-fired
        power plants; and            
| |  | the
        price and availability of alternative fuels for electricity generation.                                     

As discussed above, our costs
  of production have recently increased.  We expect the higher costs to continue
  for the next several years, due to a highly competitive market for a limited
  supply of skilled mining personnel and higher costs in worldwide commodity markets. 
  We are actively recruiting and training new personnel to staff our mines. 
  However, we expect the strong market pricing for coal to increase turnover of
  existing personnel and potentially lead to higher costs for employees that we
  retain.  Our costs have also increased for steel and other commodities
  used in our mining operations.  We believe these increases are the result
  of economic development in the Pacific Rim (notably China) and an expanding
  economy in the United States.  We do not anticipate a change in these circumstances
  during the next one to two years.

Plan of Reorganization

In March 2003, we and all
  of our subsidiaries filed voluntary petitions with the United States Bankruptcy
  Court for the Middle District of Tennessee for reorganization under Chapter
  11.  In January 2004, we filed a Plan of Reorganization for the Chapter
  11 cases.  The plan was subsequently accepted by the required percentage
  of creditors entitled to vote on the plan and was confirmed by the bankruptcy
  court in April 2004.

On May 6, 2004, after securing
  a new senior secured line of credit and term loan facility, our Plan of Reorganization
  became effective, and we emerged from Chapter 11 bankruptcy proceedings. 
  Our implementation of fresh start accounting pursuant to SOP 90-7 resulted in
  material changes to our consolidated financial statements, including the valuation
  of our assets and liabilities at fair value in accordance with principles of
  purchase accounting, and the valuation of our equity based on a valuation of
  our business prepared by our independent financial advisors.

As a result of the reorganization
  transactions and the implementation of fresh start accounting, our results of
  operations after our emergence from bankruptcy are those of a new reporting
  entity (the Successor Company), and are not comparable to the results
  of operations of the pre-emergence Company (the Predecessor Company)
  for prior periods described in this managements discussion and analysis
  and reported in our condensed consolidated financial statements.

Our interim condensed consolidated
  financial statements for the three months ended March 31, 2005 and 2004 presented
  in this report are unaudited.  The financial statements for the three months
  ended March 31, 2004 include the effects of our bankruptcy proceedings. 
  These include the classification of certain expenses, and gains and losses as
  reorganization items, and other matters described in the notes to our condensed
  consolidated financial statements.

Recent Developments

Definitive Agreement
  to Acquire Triad Mining, Inc.

In March 2005, we signed
  a definitive agreement to acquire Triad Mining, Inc. (Triad), for
  $75.0 million, consisting of $64.0 million in cash and $11.0 million of our
  common stock.  The final closing of the Triad acquisition is subject to
  various conditions.  The cash portion of the purchase price will be increased
  or decreased based on changes in Triads net working capital, less agreed
  upon distributions, between December 31, 2004 and the closing date.

Triad operates six surface
  mines and one underground mine in Southern Indiana, and in 2004 produced approximately
  3.4 million tons of coal.  Of the 3.4 million tons produced, approximately
  87% came from surface mines, while the remaining 13% came from underground mines. 
  In 2004, Triad generated revenues of approximately $81.6 million.  As of
  February 1, 2005, based upon an independent reserve report, we believe that
  Triad controlled approximately 17.6 million tons of proven and probable coal
  reserves.

Financing Developments

We recently filed a Registration
  Statement with the Securities and Exchange Commission for a proposed offering
  of 1,500,000 shares of our common stock and a concurrent offering of $150 million
  of senior notes due 2012.  The underwriters also have an option to purchase
  an additional 525,000 shares of our common stock to cover any over-allotments. 
  We also intend to enter into a proposed new $100 million senior secured credit
  facility.  If completed as planned, we would expect to have $25 million
  of availability under the new senior secured credit facility.  The proposed
  new senior secured credit facility is contingent upon completion of the Triad

-21-

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acquisition.  The concurrent
  offerings of common stock and notes are not conditioned upon each other. 
  We cannot assure you that we will be able to complete either or both of the
  concurrent offerings or enter into our proposed new senior secured credit facility.

Results of Operations

Three Months Ended
  March 31, 2005 Compared with the Three Months Ended March 31, 2004

The following compares the
  three months ended operating results for the Predecessor Company with that of
  the Successor Company.  However, as a result of the reorganization transaction
  and the implementation of fresh start accounting, the results of operations
  of the Successor Company and the Predecessor Company are not comparable.

The following table shows
  selected operating results for the three months ended March 31, 2005 compared
  to the three months ended March 31, 2004 (amounts in 000s):

|                                                     |  |                              |   |        |  |        |  |  |        |  |  |  |    |   
|---------------------------------------------------- |  | ---------------------------- | - | ------ |  | ------ |  |  | ------ |  |  |  | -- | --
|                                                     |  | Three Months Ended March 31, |   |        |  |       
|                                                     |  |                              |   |        |  |       
|                                                     |  | 2005                         |   | 2004   |  | Change
|                                                     |  |                              |   |        |  |       
|Volume
        (tons)                                |  |                              |   | 2,228  |  |        |  |  | 2,287  |  |  |  | (3 | %)
|Revenues                                             |  |                              |   |        |  |        |  |  |        |  |  |  |    |   
|Coal
        sales                                   |  |                              | $ | 96,401 |  |        |  |  | 79,239 |  |  |  | 22 | % 
|Synfuel
        handling                             |  |                              |   | 1,474  |  |        |  |  | 1,619  |  |  |  | (9 | %)
|Cost
        of coal sold                            |  |                              |   | 80,942 |  |        |  |  | 65,707 |  |  |  | 23 | % 
|Depreciation,
        depletion and amortization     |  |                              |   | 9,478  |  |        |  |  | 9,272  |  |  |  | 2  | % 
|Gross
        profit                                 |  |                              |   | 7,455  |  |        |  |  | 5,879  |  |  |  | 27 | % 
|Selling,
        general and administrative expenses |  |                              |   | 5,035  |  |        |  |  | 3,561  |  |  |  | 41 | % 

Volume
  and revenues

For the three months ended
  March 31, we shipped 2.2 million tons of coal in 2005 and 2.3 million tons in
  2004.  We experienced a reduction during the three months ended March 31,
  2005 of 102,000 tons from contract mining operations as compared to the three
  months ended March 31, 2004.  This reduction was primarily due to delays
  in the commencement of operations at one of our contract surface mines and delays
  in obtaining production equipment.  That contract surface mine began producing
  coal in April 2005 and is expected to reach normalized production levels during
  the second quarter of 2005.

Coal sales revenue for the
  three months ended March 31, increased from $79.2 million in 2004 to $96.4 million
  in 2005.  This increase was due to an increase in the average sales price
  per ton for sales under long-term contracts and spot sales.  For the three
  months ended March 31, 2005, we sold 1.9 million tons of coal under long-term
  contracts (87% of total sales volume) at an average selling price of $40.46
  per ton.  For the three months ended March 31, 2004, we sold 1.9 million
  tons of coal (82% of total sales volume) under long-term contracts at an average
  selling price of $33.51 per ton.  The increase in average selling price
  from contract sales from 2004 to 2005 was due to the renegotiation of below-market
  contract prices as part of our bankruptcy proceedings.  For the three months
  ended March 31, 2005, we sold 296,000 tons of coal (13% of total sales volume)
  to the spot market at an average selling price of $61.63 per ton.  For
  the three months ended March 31, 2004, we sold approximately 405,000 tons (18%
  of total sales volume) to the spot market at an average selling price of $39.92
  per ton.

Operating
  costs

For the three months ended
  March 31, the cost of coal sold, excluding depreciation, depletion and amortization,
  increased from $65.7 million in 2004 to $80.9 million in 2005.  Our cost
  per ton of coal sold increased from $28.70 per ton in the 2004 period to $36.33
  per ton in the 2005 period.  This $7.63 increase in cost per ton of coal
  sold was due to several factors.  Sales related costs (primarily royalties
  and severance taxes) increased by $1.30 per ton as a result of increased sales
  prices.  Labor and benefit costs increased by $1.24 per ton in the 2005
  period due to a wage increase to all production employees, effective January
  1, 2005.  The competitive job market in the coal industry necessitated
  this increase.  Variable costs increased by $3.41 per ton, primarily due
  to a per ton increase in roof support materials and mining bits costs due to
  the increase in worldwide steel prices.  Trucking costs increased by $1.16
  per ton in the 2005 period due to tonnage restrictions and higher fuel costs.

For the three months ended
  March 31, depreciation, depletion and amortization, increased from $9.3 million
  in 2004 to $9.5 million in 2005.  On a per ton basis, depreciation, depletion
  and amortization was $4.05 for the three months ended March 31, 2004 and $4.25
  for the three months ended March 31, 2005.  These results are not comparable
  due to the impact of fresh start accounting on our asset base.

-22-

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Selling, general and administrative
  expenses increased from $3.6 million for the three months ended March 31, 2004
  to $5.0 million for the months ended March 31, 2005.  This increase was
  primarily due to $447,000 charges in 2005 for stock related compensation, a
  $256,000 increase in salaries, a $261,000 increase in other administrative costs
  associated with being a public company and a $213,000 increase in bank fees
  for our asset backed credit facilities.

Income
  taxes

Our effective tax rate for
  the three months ended March 31, 2005 was 18.3%.  Our effective income
  tax rate is impacted by percentage depletion.  Percentage depletion is
  an income tax deduction that is limited to a percentage of taxable income from
  each of our mining properties.  Because percentage depletion can be deducted
  in excess of cost depletion, it creates a permanent difference and directly
  impacts the effective tax rate.  Fluctuations in the effective tax rate
  may occur due to the varying levels of profitability (and thus, taxable income
  and percentage depletion) at each of our mine locations.

Liquidity and Capital
  Resources

Although our cash from operations
  has changed significantly in the periods discussed below, we do not believe
  that those periods are comparable due to our emergence from bankruptcy. 
  We experienced unusual swings in working capital leading up to and entering
  bankruptcy.  We also were able to renegotiate our coal contracts due to
  the bankruptcy, which increased our revenues.  We believe that our liquidity
  going forward will be generated primarily by our gross profit on coal sales. 
  The gross profit will be driven primarily by the price of coal and our operating
  costs.  Our capital expenditure payments for existing operations are expected
  to be paid out of the cash generated by the gross profit.

As of March 31, 2005, we
  had available liquidity of approximately $6.8 million.  This consisted
  of unrestricted cash on hand of approximately $1.7 million and availability
  under the revolver component of our Senior Secured Credit Facility of approximately
  $5.1 million.

After the refinancing of
  our existing debt as described above under  Recent Developments
   Financing Developments, we expect to have availability under our
  proposed new senior secured credit facility of approximately $25 million.

Excluding the proposed financings
  discussed above, our primary source of cash will 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.  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 secured letters of credit as further security for these obligations. 
  Recently, surety bond costs have increased, while the market
  terms of surety bonds have generally become less favorable.  To the extent
  that surety bonds become unavailable, we would seek to secure obligations with
  letters of credit, cash deposits, or other suitable forms of collateral. 
  The benefit payments for workers compensation and black lung benefits
  will be paid as the claims are submitted over the lives of our employees.

Excluding the other proposed
  financings discussed above, we expect that our secondary source of cash will
  be the revolver component of our proposed new senior secured credit facility. 
  We believe that cash on hand, cash generated from our operating activities,
  and availability under the revolver component of our proposed new senior secured
  credit facility will be sufficient to meet our working capital needs, to fund
  our capital expenditures for existing operations and to meet our debt service
  obligations for the next twelve months, excluding the Triad acquisition. 
  Nevertheless, there are many factors beyond our control, including general economic
  and coal market conditions, that could have a material adverse impact on our
  ability to meet our liquidity needs.

In the event
  that the sources of cash described above are not sufficient to meet our future
  cash requirements, we will need to reduce certain planned expenditures or seek
  additional financing, or both.  If debt financing is not available on favorable
  terms, we may seek to raise funds through the issuance of our equity securities. 
  If such actions are not sufficient, we may need to limit our growth 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 and/or economic and financial conditions.  In particular,
  our Senior Secured Credit Facility restricts, and our proposed senior notes
  and new senior secured credit facility, if completed, will restrict our ability
  to incur additional indebtedness.  We cannot provide assurance that any
  reductions in our planned expenditures or in our expansion and personnel 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.

-23-

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Other than ordinary course
  of business expenses and capital expenditures for existing mines during the
  next several years and the proposed Triad acquisition, our only large expected
  use of cash will be the development of a new mine at our McCoy Elkhorn complex
  discussed below.  We expect to invest approximately $23 million in additional
  expenditures during 2005 in the development of the new McCoy Elkhorn mine and
  the related preparation plant upgrade.  We expect that such expenditures
  will be funded through cash on hand, cash generated by operations and from the
  revolver component of our Senior Secured Credit Facility or our proposed new
  senior secured credit facility.

The following chart reflects
  the components of our debt as March 31, 2005 (amounts in 000s):

|                                                      |  |   |        | 
|----------------------------------------------------- |  | - | ------ | 
|Senior
        Secured Credit Facility                |  |   |        | 
|Term
        loan component                           |  | $ | 20,000 | 
|Revolver
        component                            |  |   | -      | 
|Term
        Credit Facility                          |  |   | 75,000 | 
|                                                      |  |   |        | 
|Total
        long term debt                          |  |   | 95,000 | 
|Less
        amounts classified as current            |  |   | 3,600  | 
|                                                      |  |   |        | 
|Total
        long term debt, less current maturities |  | $ | 91,400 | 

Effective May 6, 2004, we
  closed a $50 million senior secured credit facility with Wells Fargo Foothill,
  Inc. (the Senior Secured Credit Facility).  This facility was
  used to repay outstanding amounts and replace letters of credit under our $20.0
  million debtor-in-possession facility, to fund expenses associated with our
  exit from bankruptcy and to provide liquidity for general corporate purposes. 
  The Senior Secured Credit Facility is comprised of a $30 million revolver component
  and a $20 million term component.  The term loan was fully funded at closing. 
  Borrowings under the revolver component bear interest at LIBOR + 2.5% or the
  Base Rate (as defined in the credit agreement) + 1.0%.  Borrowings under
  the term component bear interest at LIBOR + 5.25% or the Base Rate + 3.85%. 
  The term of the Senior Secured Credit Facility is five years.  Principal
  payments on the term component of $900,000 per quarter commence on April 1,
  2005 and continue through April 1, 2009, with the remaining principal balance
  due on May 6, 2009.  Interest is payable in arrears, on the first day of
  each month on Base Rate borrowings while interest on  LIBOR Rate borrowings
  is due on the last day of the LIBOR interest period.  Advances under the
  Senior Secured Credit Facility are secured by a first priority lien on substantially
  all of our assets, and, except for the Term Credit Facility, we may not incur
  additional debt on the assets securing the Senior Secured
  Credit Facility.  Advances under the revolver component may not exceed
  a borrowing base calculation derived as a percentage of eligible assets. 
  The Senior Secured Credit Facility can be terminated with 90 days written notice
  by paying all outstanding principal, interest and making any prepayment premium
  payments due.  The $30 million revolver component has a prepayment premium
  of 2.5% of the total revolver commitment for the first year, declining to 2.0%
  for the second year, 1.5% for the third year and 0.5% for the fourth year. 
  There is not a prepayment premium for the fifth year of the facility. 
  The $20 million term loan component has a prepayment premium of $200,000 (1.0%)
  if paid prior to April 30, 2007.  There is no prepayment premium after
  April 30, 2007.

We also entered into a $75
  million restructured term credit facility with our pre-petition secured lenders
  (the Term Credit Facility) in partial satisfaction of our prepetition
  obligations, pursuant to the Plan of Reorganization.  The term of the Term
  Credit Facility is seven years, and our repayment of the Term Credit Facility
  is secured by a second priority lien on substantially all of our assets. 
  Except for the Senior Secured Credit Facility, we may not incur additional debt
  on the assets securing the Term Credit Facility.  In addition, we may not
  incur any unsecured debt (other than normal trade payables) and may not incur
  more than $5 million of recourse debt (including the Senior Secured Credit
  Facility and the Term Credit Facility).  The Term Credit Facility provides
  for an annual interest rate of 9%.  There is no scheduled amortization
  of this facility for the first two years.  The notes are payable over seven
  years with principal repayments of $1.5 million per quarter beginning June 30,
  2006 and increasing to $2.5 million per quarter beginning June 30, 2008. 
  All remaining principal and interest is due May 6, 2011.  Borrowings under
  the Term Credit Facility may be prepaid without penalty.

The Senior Secured Credit
  Facility and the Term Credit Facility contain financial covenants for fixed
  charge coverage, total leverage, minimum consolidated tangible net worth, minimum
  Consolidated Total EBITDA (as defined in each of the credit facilities), and
  maximum capital expenditures.  We were in compliance with all of the financial
  covenants for the Senior Secured Credit Facility and the Term Credit Facility
  as of March 31, 2005.

As described above, we have
  recently filed a registration statement with the Securities and Exchange Commission
  for a planned offering of 1,500,000 shares of our common stock and a concurrent
  offering of $150 million senior notes due 2012.  The underwriters also
  have an option to purchase an additional 525,000 of our common stock to cover
  any over-allotments.  If we complete these

-24-

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transactions, we would expect
  to use the net proceeds to complete the Triad acquisition and to refinance all
  amounts outstanding under the Senior Secured Credit Facility and Term Credit
  Facility.  We also expect to enter into a proposed new senior secured credit
  facility.  After giving effect to these transactions, our total debt and
  interest expense will increase significantly.  The concurrent offerings
  of common stock and notes are not conditioned upon each other.  We cannot
  assure you that we will be able to complete either or both of the concurrent
  offerings or enter into our proposed new senior secured credit facility.

Net cash provided by or used
  in operating activities reflects net income or loss adjusted for non-cash charges
  and changes in net working capital (including non-current operating assets and
  liabilities).  Net cash provided by operating activities was $12.7 million
  for the three months ended March 31, 2005, and net cash used by operating activities
  was $3.1 million for the three months ended March 31, 2005.  For the three
  months ended March 31, 2004, the Companys net income, as adjusted for
  non cash charges, was offset by a $2.1 million increase in cash from operations
  due to changes in our working capital.  This change in net working capital
  was primarily caused by changes in accounts receivable due to increased sales
  and an increase in accounts payable due to timing and increased capital expenditures.

Net cash used by investing
  activities increased $6.8 to $14.7 million for the three months ended March
  31, 2005 as compared to the three months ended March 31, 2004.  The increase
  was primarily due to additional capital expenditures for the three months ended
  March 31, 2005 on Mine 15 of $5.5 million.  The remaining capital expenditures
  primarily consisted of new and replacement mine equipment and various projects
  to improve the efficiency of our mining operations.

Net cash provided by or used
  in financing activities primarily reflects changes in short- and long-term financing. 
  Net cash provided by financing activities was $0.1 million for the three months
  ended March 31, 2005 and net cash used in financing activities was $6.3 million
  for the three months ended March 31, 2004.  During the three months ended
  March 31, 2004, we borrowed $6.4 million under its Debtor in Possession Loan.

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 and to the Risk
  Factors discussed in our registration statement on Form S-1 as initially
  filed with the Securities and Exchange Commission on April 19, 2005, as amended.

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, 2005, we had $69.4 million of outstanding surety bonds with third
  parties.  These bonds were in place to secure obligations as follows: post-mining
  reclamation bonds of $26.6 million, workers compensation bonds of $40.3
  million, wage payment, collection bonds, and other miscellaneous obligation
  bonds of $2.5 million.  Recently, surety bond costs have increased, while
  the market terms of surety bonds have generally become less favorable. 
  To the extent that surety bonds become unavailable, we would seek to secure
  obligations with letters of credit, cash deposits, or other suitable forms of
  collateral.

We also use bank letters
  of credit to secure our obligations for workers compensation programs,
  various insurance contracts and other obligations.  At March 31, 2005,
  we had $32.7 million of letters of credit outstanding, including $7.8 million
  of letters of credit outstanding collateralized by $8.4 million of cash deposited
  in restricted, interest-bearing accounts pledged to issuing banks.

Critical Accounting Estimates

Overview

Our discussion and analysis
  of our financial condition, results of operations, liquidity and capital resources
  are based upon our consolidated financial statements, which have been prepared
  in accordance with accounting principles generally accepted in the United States
  of America.  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

-25-

---



the notes to the condensed
  consolidated financial statements lists and describes our significant accounting
  policies.  The following critical accounting policies have a material effect
  on amounts reported in our consolidated financial statements.

Workers Compensation

Our most significant long-term
  obligation is the obligation to provide workers compensation benefits. 
  We are liable under various state statutes for providing workers compensation
  benefits.  To fulfill these obligations, we have used self-insurance programs
  with varying excess insurance levels, and, since June 7, 2002, a high-deductible,
  fully insured program.  The high-deductible, fully insured program is comparable
  to a self-insured program where the excess insurance threshold equals the deductible
  level.

We accrue for the present
  value of certain workers compensation obligations as calculated by an
  independent actuary based upon assumptions for work-related injury and illness
  rates, discount rates and future trends for medical care costs.  The discount
  rate is based on interest rates on bonds with maturities similar to the estimated
  future cash flows.  The discount rate used to calculate the present value
  of these future obligations was 5.25% at December 31, 2004.  Significant
  changes to interest rates result in substantial volatility to our consolidated
  financial statements.  If we were to decrease our estimate of the discount
  rate from 5.25% to 4.25%, all other things being equal, the present value of
  our workers compensation obligation would increase by approximately $3.5
  million.  A change in the law, through either legislation or judicial action,
  could cause these assumptions to change.  If the estimates do not materialize
  as anticipated, our actual costs and cash expenditures could differ materially
  from that currently estimated.  Our estimated workers compensation
  liability as of March 31, 2005 was $50.5 million.

Coal Miners Pneumoconiosis

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

An independent actuary has
  calculated the estimated pneumoconiosis liability based on assumptions regarding
  disability incidence, medical costs, mortality, death benefits, dependents and
  interest rates.  The discount rate is based on interest rates on bonds
  with maturities similar to the estimated future cash flows.  The discount
  rate used to calculate the present value of these future obligations was 5.25%
  at December 31, 2004.  Significant changes to interest rates result in
  substantial volatility to our consolidated financial statements.  If we
  were to decrease our estimate of the discount rate from 5.25% to 4.25%, all
  other things being equal, the present value of our black lung obligation would
  increase by approximately $3.3 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, 2005 was $26.0 million.

Defined Benefit Pension

The estimated cost and benefits
  of our non-contributory defined benefit pension plans are determined 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, 2004, the discount rate used to determine
  the obligation was 5.5%.  Significant changes to interest rates result
  in substantial volatility to our consolidated financial statements.  If
  we were to decrease our estimate of the discount rate from 5.5% to 4.5%, all
  other things being equal, the present value of our pension liability would increase
  by approximately $11.0 million.The rate of increase in compensation
  levels is determined based upon our long-term plans for such increases. 
  The rate of increase in compensation levels used was 4.0% for the year ended
  December 31, 2004.  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 in each period was 8.0% for of the year ended
  December 31, 2004.  Significant changes to these rates would introduce
  substantial volatility to our pension expense.  Our pension obligation
  as of March 31, 2005 was $15.2 million.

Reclamation and Mine
  Closure Obligation

The SMCRA establishes operational,
  reclamation and closure standards for all aspects of surface mining as well
  as many aspects of underground mining.  Our total reclamation and mine-closing
  liabilities are based upon permit requirements and our engineering estimates
  related to these requirements.  Statement No. 143 requires that asset retirement
  obligations be 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

-26-

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profit, as necessary. 
  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 Statement No. 143, then the costs should be lower. 
  If governmental regulations change, then the costs of reclamation will be impacted. 
  Statement No. 143 recognizes that the recorded liability will be different than
  the final cost of the reclamation and addresses the settlement of the liability. 
  When the obligation is settled, and there is a difference between the recorded
  liability and the amount of cash paid to settle the obligation, a gain or loss
  upon settlement is included in earnings.  Our asset retirement obligation
  as of March 31, 2005 was $16.2 million.

Contingencies

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

Income Taxes

We account for income taxes
  in accordance with FASB Statement No. 109, Accounting for Income Taxes (Statement
  No. 109), which requires that deferred tax assets and liabilities be recognized
  using enacted tax rates for the effect of temporary differences between the
  book and tax bases of recorded assets and liabilities.  Statement No. 109
  also requires that deferred tax assets be reduced by a valuation allowance if
  it is more likely than not that some portion of the deferred tax asset will
  not be realized.  In evaluating the need for a valuation allowance, we
  take into account various factors, including the expected level of future taxable
  income.  We have also considered, but not relied upon, tax planning strategies
  in determining the deferred tax asset that will ultimately be realized. 
  If actual results differ from the assumptions made in the evaluation of the
  amount of our valuation allowance, we record a change in valuation allowance
  through income tax expense in the period such determination is made.

At December 31, 2004, we
  had a net deferred tax liability of $34.6 million, which consisted of a total
  gross deferred tax asset of $107.4 million, a valuation allowance of approximately
  $61.1 million and a gross deferred tax liability of $80.9 million.  The
  valuation allowance, which includes approximately $14.6 million that was recorded
  as part of our fresh start entries, provides a reserve for our net operating
  loss and alternate minimum tax credit carryforwards.

Coal Reserves

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

|                                                                                         |   |                                                                                   
|---------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------
|                                                                                         |  | 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;                                                        

-27-

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| |   |                                                            
| | - | -----------------------------------------------------------
| |  | 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
  our annual calculation for potential impairment.  For a further discussion
  of our coal reserves, see  Reserves.

Other Supplemental Information

Labor and Turnover

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

Based on average employment
  of production personnel, our gross turnover has been approximately 18.3% during
  the twelve months ended March 31, 2005.  Our net turnover during this period,
  after considering employees that have left and been rehired, is approximately
  7.9%.  We believe that our retention of employees is equal to, or better,
  than other coal mining companies in our operating area.

We are actively working to
  improve our results in this area including the development of safety and incentive
  plans that we believe will further reduce our employee turnover and improve
  employee relations.

Sales Commitments

As of March 31, 2005, we
  had the following contractual commitments (including long term and short term
  contracts) to ship coal at a fixed and known price during the period indicated:

| |                                 |  |                                                      |       |      |  |                                       |  |      |       |                                       |  |           |  |   |       |  |  |           | 
| | ------------------------------- |  | ---------------------------------------------------- | ----- | ---- |  | ------------------------------------- |  | ---- | ----- | ------------------------------------- |  | --------- |  | - | ----- |  |  | --------- | 
| |                                 |  | Nine
        Months Ending
        December 31, 2005 |       | 2006 |  | 2007                                  | 
| |                                 |  |                                                      |       |      |  |                                       | 
| |                                 |  | Average
        Price
        Per Ton                |       | Tons |  | Average
        Price
        Per Ton |  | Tons |       | Average
        Price
        Per Ton |  | Tons      | 
| |                                 |  |                                                      |       |      |  |                                       |  |      |       |                                       |  |           | 
| |                                 |  |                                                      |       |      |  |                                       |  |      |       |                                       |  |           |  |   |       |  |  |           | 
| | Total
        Sales Commitments |  | $                                                    | 41.87 |      |  | 6,665,600                             |  | $    | 40.21 |                                       |  | 4,694,000 |  | $ | 38.37 |  |  | 1,630,000 | 

Project Development

We undertake projects to
  add and replace production, improve productivity and efficiency, and add reserves.
  Currently, we have several projects underway, including the development of Mine
  15 at our McCoy Elkhorn complex, and several projects under consideration, including
  certain projects described below.

Mine
  15 Project

The Mine 15 project involves
  construction of a mine at our McCoy Elkhorn complex to access what we estimate
  to be approximately 14 million tons of controlled reserves in the Glamorgan,
  or Millard, seam. Included in the Mine 15 project are construction of a slope
  and shaft along with related surface facilities and an upgrade to the adjacent
  Bevins Branch preparation plant. During 2004, capital expenditures for the Mine
  15 project were $3.7 million. We expect the total budget cost for this project
  to increase modestly from the original budget of $22 million due to higher costs
  of steel and cement. The excavation has progressed to the point that both the
  slope and the shaft have now reached the coal seam. The fabrication and installation
  of the remaining mine infrastructure is expected to be completed before December
  31, 2005, and the mine is expected to have very limited production beginning
  in the fourth quarter of 2005, before ramping up to full annualized production
  levels of approximately 1.4 to 1.5 million tons by the end of 2006. Due to the

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flexibility of shipping locations
  in all of the Companys non-synfuel coal supply agreements, all coal from
  Mine 15 is considered uncommitted and unpriced.

Test results for coal samples
  taken from Mine 15 indicate that the coal can be sold as a high quality utility
  steam coal with average heat content of 13,000 Btu and average sulfur content
  of less than 1%, during the initial years of mining. We may also use the coal
  to blend with higher sulfur coal at the McCoy Elkhorn complex. Depending on
  market conditions, and in certain limited circumstances, we may also sell the
  coal as a low quality metallurgical coal for blending purposes by other suppliers.
  We have not determined the percentage of coal that will be allocated to each
  end-market. We continue to negotiate with mineral owners to add additional contiguous
  reserves to the project.

Potential
  Surface Mining Projects

Our operations and engineering
  teams have identified 41 surface mining projects that merit further review.
  We currently control more than 75% of these reserves. Sixteen of these projects
  have current state mine permits, and the Army Corps of Engineers permitting
  process has already begun on these properties. Our management team expects six
  projects from this list to be presented for board consideration and potential
  near-term development.

Potential
  Preparation Plant Projects

Our operations and engineering
  teams have developed a list of projects intended to improve the yield of existing
  preparation plants. These projects are concentrated in the screening and separation
  areas of the plants. Our management team expects to present the project analysis
  for board consideration during the second quarter of 2005. If approved, and
  we proceed, these projects will likely be completed during the first quarter
  of 2006.

FORWARD-LOOKING INFORMATION

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

| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | our
        cash flows, results of operation or financial condition;                                                          
| |   |                                                                                                                               
| |  | the
        consummation of acquisition, disposition or financing transactions and
        the effect thereof on our business;
| |   |                                                                                                                               
| |  | governmental
        policies and regulatory actions;                                                                         
| |   |                                                                                                                               
| |  | legal
        and administrative proceedings, settlements, investigations and claims;                                         
| |   |                                                                                                                               
| |  | weather
        conditions or catastrophic weather-related damage;                                                            
| |   |                                                                                                                               
| |  | our
        production capabilities;                                                                                          
| |   |                                                                                                                               
| |  | availability
        of transportation;                                                                                       
| |   |                                                                                                                               
| |  | market
        demand for coal, electricity and steel;                                                                        
| |   |                                                                                                                               
| |  | competition;                                                                                                                  
| |   |                                                                                                                               
| |  | our
        relationships with, and other conditions affecting, our customers;                                                
| |   |                                                                                                                               
| |  | employee
        workforce factors;                                                                                           
| |   |                                                                                                                               
| |  | our
        assumptions concerning economically recoverable coal reserve estimates;                                           
| |   |                                                                                                                               
| |  | future
        economic or capital market conditions;                                                                         
| |   |                                                                                                                               
| |  | our
        plans and objectives for future operations and expansion or consolidation;
        and                            

-29-

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| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | the
        closing or successful integration of the Triad acquisition.

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

We wish to caution
  readers that forward-looking statements, including disclosures which use words
  such as believe, intend, expect, may,
  should, anticipate, could, estimate,
  plan, predict, project, or their negatives,
  and similar statements, are subject to certain risks and uncertainties which
  could cause actual results to differ materially from expectations.  These
  risks and uncertainties include, but are not limited to, the following: a change
  in the demand for coal by electric utility customers; the loss of one or more
  of our largest customers; inability to secure new coal supply agreements or
  to extend existing coal supply agreements at market prices; failure to exploit
  additional coal reserves, including contiguous reserves to those currently held
  by Triad; inability to sell the coal from Mine 15 into the metallurgical coal
  market; failure to diversify our operations; increased capital expenditures;
  encountering difficult mining conditions; increased compliance costs; bottlenecks
  or other difficulties in transporting coal to our customers; lack of availability
  of financing sources; the effects of regulation and competition; additional
  turnover of employees and independent contractors; the risk that the Company
  is unable to close the Triad acquisition or to successfully integrate the Triad
  business; and the risk factors detailed in our Form S-1 registration statement
  filed with the Securities and Exchange Commission on April 19, 2005, as amended,
  which factors are incorporated herein by reference.

|                |                                                                   
|--------------- | ------------------------------------------------------------------
|ITEM
        3. | QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our $75 million Term Credit
  Facility has a fixed interest rate and is not sensitive to changes in the general
  level of interest rates.  Our Senior Secured Credit Facility has floating
  interest rates based on LIBOR or the Base Rate as defined in the credit agreement. 
  We expect that our proposed new senior secured credit facility also will have
  floating interest rates.

As of March 31, 2005, we
  had $20 million outstanding under the term component of the Senior Secured Credit
  Facility.  We do not expect to use interest rate swaps to manage this risk. 
  A 100 basis point (1.0%) increase in the average interest rate for our floating
  rate borrowings would increase our annual interest expense by approximately
  $0.2 million.

We manage our commodity price
  risk through the use of long-term coal supply agreements, which we define as
  contracts with a term of one year or more, rather than through the use of derivative
  instruments.  We believe that the percentage of our sales pursuant to long-term
  contracts was approximately 80% for the three months ended March 31, 2005.

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

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

|               |                                
|-------------- | -------------------------------
|ITEM
       4. | CONTROLS
        AND PROCEDURES

Evaluation of Disclosure
  Controls and Procedures

As of the end of the fiscal
  quarter covered by this Form 10-Q, we evaluated, under the supervision and with
  the participation of our management, including our Chief Executive Officer and
  Chief Accounting Officer, the effectiveness of the design and operation of our
  disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. 
  Based upon that evaluation, our Chief Executive Officer and Chief Accounting
  Officer concluded that our disclosure controls and procedures are effective
  as of the end of such fiscal quarter.  Disclosure controls and procedures
  are controls and procedures that are designed to ensure that information required
  to be disclosed in reports filed or submitted under the Exchange Act is recorded,
  processed, summarized and reported within the time periods specified in the
  Securities and Exchange Commissions rules and forms.  Internal control
  over financial reporting is a process to provide reasonable assurance regarding
  the reliability of financial reporting and the preparation of financial statements
  for external purposes in accordance with generally accepted accounting principles.

-30-

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Changes in Internal Controls
  Over Financial Reporting

There has been no change
  in the Companys internal control over financial reporting during the three
  months ended March 31, 2005 that has materially affected, or is reasonably likely
  to materially affect, the Companys internal control over financial reporting.

Beginning with
  our annual report for the year ending December 31, 2005, Section 404 of the
  Sarbanes-Oxley Act of 2002, or Section 404, will require us to include an internal
  control report of management with our annual report on Form 10-K.  That
  report must include managements assessment of the effectiveness of our
  internal control over financial reporting as of the end of the fiscal year and
  will also include our independent auditors evaluation of managements
  assessment and the effectiveness of our internal control over financial reporting. 
  We cannot assure you that we will be able to complete the work necessary for
  our management to issue its management report in a timely manner, or that we
  will be able to complete any work required for our management to be able to
  conclude that our internal control over financial reporting is effective. 
  If we fail to timely remedy any deficiencies, significant deficiencies or additional
  material weaknesses that we or our auditors may identify, we may be unable to
  accurately report our financial results, detect fraud or comply with the requirements
  of Section 404.  In addition, we can give no assurance that our independent
  auditors will agree with our managements assessment or conclude that our
  internal control over financial reporting is effective.

-31-

---



PART
  II
  OTHER INFORMATION

|                |                                                                    
|--------------- | -------------------------------------------------------------------
|ITEM
        2. | UNREGISTERED
        SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period covered
  by this report, we issued common stock to the following persons or classes of
  persons, in reliance upon the exemption contained in Section 4(2) of the Securities
  Act of 1933, as follows:

|**Recipient**                         | **** | **No.
      Shares** | **** | **Date
      of Issuance** | **** | **Consideration**      
|------------------------------------- | ---- | -------------------- | ---- | -------------------------- | ---- | -----------------------
|Operating
      and senior management |      | 25,000               |      | January
      10, 2005     |      | Services
      rendered



|                |         
|--------------- | --------
|ITEM
        6. | EXHIBITS

The
  following exhibits are filed herewith:

| |                                                                                                                      |        
| | -------------------------------------------------------------------------------------------------------------------- | -------
| |                                                                                                                      | Exhibit
| |                                                                                                                      |        
| |                                                                                                                      |        
| | Certification
        of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002.  | 31.1   
| |                                                                                                                      |        
| | Certification
        of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002. | 31.2   
| |                                                                                                                      |        
| | Certification
        of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002.  | 32.1   
| |                                                                                                                      |        
| | Certification
        of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002. | 32.2   

-32-

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

May 11, 2005

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