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 endedSeptember 30, 2004 |  | Commission
  FileNumber ___________
|-------------------------------------------------- |  | -----------------------------------

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.

YESo          
NOx

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

YESo          
NOx

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.

YESx          
NOo

The
number of shares of Common Stock of the registrant outstanding as of November 15,
2004 was 14,728,994.

-1-

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FORM 10-Q INDEX

|          |                                                                                                                                                                                                                                                                                     | Page
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|          |                                                                                                                                                                                                                                                                                     |     
|          |                                                                                                                                                                                                                                                                                     |     
|PART
  I  | FINANCIAL INFORMATION                                                                                                                                                                                                                                                               |     
|          |                                                                                                                                                                                                                                                                                     |     
|Item 1.   | Financial Statements                                                                                                                                                                                                                                                                |     
|          |                                                                                                                                                                                                                                                                                     |     
|          | Condensed
  Consolidated Balance Sheets as of September 30, 2004 (Successor) and December 31, 2003 (Predecessor)                                                                                                                                                                    | 3   
|          |                                                                                                                                                                                                                                                                                     |     
|          | Condensed
  Consolidated Statements of Operations for the three months ended September 30, 2004 (Successor) and September 30, 2003 (Predecessor)                                                                                                                                    | 5   
|          |                                                                                                                                                                                                                                                                                     |     
|          | Condensed
  Consolidated Statements of Operations for the five months ended September 30, 2004 (Successor), the four months ended April 30, 2004
  (Predecessor) and the nine months ended September 30, 2003 (Predecessor)                                                         | 6   
|          |                                                                                                                                                                                                                                                                                     |     
|          | Condensed
  Consolidated Statements of Change in Shareholders Equity (Deficit) and
  Comprehensive Income (Loss) for the five months ended September 30, 2004 (Successor), the four months ended April 30, 2004
  (Predecessor) and the year ended December 31, 2003 (Predecessor) | 7   
|          |                                                                                                                                                                                                                                                                                     |     
|          | Condensed
  Consolidated Statements of Cash Flows for the five months ended September 30, 2004 (Successor), the four months ended April 30, 2004
  (Predecessor) and the nine months ended September 30, 2003 (Predecessor)                                                         | 8   
|          |                                                                                                                                                                                                                                                                                     |     
|          | Notes to
  Condensed Consolidated Financial Statements                                                                                                                                                                                                                              | 9   
|          |                                                                                                                                                                                                                                                                                     |     
|Item 2.   | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                                                                                                                                                                                             | 21  
|          |                                                                                                                                                                                                                                                                                     |     
|Item 3    | Quantitative and Qualitative Disclosure about Market Risk                                                                                                                                                                                                                           | 33  
|          |                                                                                                                                                                                                                                                                                     |     
|Item 4.   | Controls and Procedures                                                                                                                                                                                                                                                             | 33  
|          |                                                                                                                                                                                                                                                                                     |     
|PART
  II | OTHER INFORMATION                                                                                                                                                                                                                                                                   |     
|          |                                                                                                                                                                                                                                                                                     |     
|Item 6.   | Exhibits                                                                                                                                                                                                                                                                            | 34  
|          |                                                                                                                                                                                                                                                                                     |     
|          | Signatures                                                                                                                                                                                                                                                                          | 35  

Certifications
pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002

-2-

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PART I
FINANCIAL INFORMATION

ITEM
1.          FINANCIAL
STATEMENTS

JAMES RIVER COAL COMPANYAND SUBSIDIARIES

Condensed Consolidated Balance Sheets

Successor
  
  PredecessorSeptember 30, 2004
  
  December 31, 2003Assets (note 1)
  
  (Unaudited)Current assets:Cash
  
  
  $
  17,314,243
  
  
  
  
  4,889,860Receivables:Trade
  
  
  
  28,972,974
  
  
  
  
  17,630,894Other
  
  
  
  4,471,491
  
  
  
  
  4,323,962Total
  receivables
  
  
  
  33,444,465
  
  
  
  
  21,954,856Inventories:Coal
  
  
  
  4,581,693
  
  
  
  
  3,277,545Materials
  and supplies
  
  
  
  4,552,852
  
  
  
  
  4,624,368Total
  inventories
  
  
  
  9,134,545
  
  
  
  
  7,901,913Prepaid
  royalties
  
  
  
  6,470,888
  
  
  
  
  8,417,179Other
  current assets
  
  
  
  6,084,285
  
  
  
  
  4,742,159Total
  current assets
  
  
  
  72,448,426
  
  
  
  
  47,905,967Property, plant, and
  equipment, at cost:Land
  
  
  
  2,673,642
  
  
  
  
  6,666,179Mineral
  rights
  
  
  
  158,317,310
  
  
  
  
  216,336,371Buildings,
  machinery and equipment
  
  
  
  90,582,757
  
  
  
  
  230,345,517Mine
  development costs
  
  
  
  2,630,837
  
  
  
  
  11,207,557Construction-in-progress
  
  
  
  4,292,633
  
  
  
  
  997,531Total
  property, plant, and equipment
  
  
  
  258,497,179
  
  
  
  
  465,553,155Less
  accumulated depreciation, depletion, and amortization
  
  
  
  13,559,335
  
  
  
  
  208,397,196Property,
  plant and equipment, net
  
  
  
  244,937,844
  
  
  
  
  257,155,959Restricted cash (note 1(d))
  
  
  
  8,383,156
  
  
  
  
  8,320,633Other assets
  
  
  
  9,173,959
  
  
  
  
  4,905,838Total
  assets
  
  
  $
  334,943,385
  
  
  
  
  318,288,397


See accompanying notes to
condensed consolidated financial statements

-3-

---

JAMES RIVER COAL COMPANYAND SUBSIDIARIES

Condensed Consolidated Balance Sheets

Successor
  
  PredecessorSeptember 30, 2004
  
  December 31, 2003Liabilities and Shareholders Equity (Deficit)
  
  (Unaudited)Current liabilities:Current
  maturities of long-term debt (note 3)
  
  
  $
  1,800,000
  
  
  
  
  -Current
  installments of obligations under capital leases
  
  
  
  410,588
  
  
  
  
  613,399Accounts
  payable
  
  
  
  15,580,336
  
  
  
  
  18,565,800Accrued
  salaries, wages, and employee benefits
  
  
  
  3,488,044
  
  
  
  
  2,275,358Workers
  compensation benefits
  
  
  
  9,500,000
  
  
  
  
  9,000,000Black
  lung benenfits
  
  
  
  2,500,000
  
  
  
  
  2,200,000Accrued
  taxes
  
  
  
  5,895,515
  
  
  
  
  3,448,804Other
  current liabilities
  
  
  
  3,761,610
  
  
  
  
  2,793,540Total
  current liabilities
  
  
  
  42,936,093
  
  
  
  
  38,896,901Long-term debt, less
  current maturities (note 3)
  
  
  
  93,200,000
  
  
  
  
  -Other liabilities:Noncurrent
  portion of workers compensation benefits
  
  
  
  43,887,379
  
  
  
  
  41,781,574Noncurrent
  portion of black lung benefits
  
  
  
  23,636,131
  
  
  
  
  11,508,341Pension
  obligations
  
  
  
  16,166,290
  
  
  
  
  14,314,814Asset
  retirement obligations (note 7)
  
  
  
  15,069,752
  
  
  
  
  13,673,545Obligations
  under capital leases, excluding current installments
  
  
  
  803,481
  
  
  
  
  1,457,079Deferred
  income taxes
  
  
  
  27,391,587
  
  
  
  
  -Other
  
  
  
  665,026
  
  
  
  
  661,746Total
  other liabilities
  
  
  
  127,619,646
  
  
  
  
  83,397,099Liabilities subject to
  compromise
  
  
  
  -
  
  
  
  
  319,594,962Total
  liabilities
  
  
  
  263,755,739
  
  
  
  
  441,888,962Shareholders equity
  (deficit):Preferred
  Stock, $1.00 par value. Authorized 10,000,000 shares
  
  
  
  -
  
  
  
  
  -Common
  stock, $.01 par value. Authorized 100,000,000 shares; (40,000
          shares as of
  December 31, 2003); issued and outstanding 14,728,994
          shares (16,890
  shares as of December 31, 2003)
  
  
  
  147,290
  
  
  
  
  169Paid-in-capital
  
  
  
  67,788,786
  
  
  
  
  226,410Deferred
  stock-based compensation
  
  
  
  (4,259,582
  )
  
  
  
  -Retained
  earnings (accumulated deficit)
  
  
  
  7,511,152
  
  
  
  
  (107,989,099
  )Subscribed
  shares
  
  
  
  -
  
  
  
  
  (821,229
  )Accumulated
  other comprehensive loss
  
  
  
  -
  
  
  
  
  (15,016,816
  )Total
  shareholders equity (deficit)
  
  
  
  71,187,646
  
  
  
  
  (123,600,565
  )Commitments and
  contingencies (note 5)Total
  liabilities and shareholders equity (deficit)
  
  
  $
  334,943,385
  
  
  
  
  318,288,397


See accompanying notes to condensed consolidated
financial statements

-4-

---

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months
  Ended 09/30/04
  
  Three Months
  Ended 09/30/03Revenues
  
  
  $
  89,881,236
  
  
  
  
  79,884,920Cost of sales:Cost
  of coal sold
  
  
  
  73,582,204
  
  
  
  
  71,290,882Depreciation,
  depletion, and amortization
  
  
  
  8,022,741
  
  
  
  
  9,544,442Total
  cost of sales
  
  
  
  81,604,945
  
  
  
  
  80,835,324Gross
  profit (loss)
  
  
  
  8,276,291
  
  
  
  
  (950,404
  )Selling, general, and
  administrative expenses
  
  
  
  4,841,852
  
  
  
  
  3,700,344Total
  operating income (loss)
  
  
  
  3,434,439
  
  
  
  
  (4,650,748
  )Interest expense (note 3)
  
  
  
  2,068,491
  
  
  
  
  320,138Interest income
  
  
  
  (36,836
  )
  
  
  
  -Miscellaneous income, net
  
  
  
  (377,058
  )
  
  
  
  (28,036
  )Total
  other expense, net
  
  
  
  1,654,597
  
  
  
  
  292,102Income
  (loss) before reorganization items and 
               income
  tax expense
  
  
  
  1,779,842
  
  
  
  
  (4,942,850
  )Reorganization items, net
  (note 6)
  
  
  
  -
  
  
  
  
  2,471,400Income
  (loss) before income taxes
  
  
  
  1,779,842
  
  
  
  
  (7,414,250
  )Income tax expense
  
  
  
  381,312
  
  
  
  
  -Net income (loss)
  attributable to 
               common shareholders
  
  
  $
  1,398,530
  
  
  
  
  (7,414,250
  )Earnings (loss) per common
  share, adjusted for split (notes 8 and 11)Basic
  earnings (loss) per common share
  
  
  $
  0.10
  
  
  
  
  (438.97
  )Shares
  used to calculate basic earnings (loss) per share
  
  
  
  13,799,994
  
  
  
  
  16,890Diluted
  earnings (loss) per common share
  
  
  $
  0.10
  
  
  
  
  (438.97
  )Shares
  used to calculate dilutive earning (loss) per share
  
  
  
  14,628,994
  
  
  
  
  16,890


See accompanying notes to condensed
consolidated financial statements

-5-

---

JAMES RIVER COAL COMPANYAND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

Successor
  
  
  Predecessor
  
  PredecessorFive Months
  Ended 09/30/04
  
  
  Four Months
  Ended 04/30/04
  
  Nine Months
  Ended 09/30/03Revenues
  
  
  $
  154,366,048
  
  
  
  
  
  113,948,594
  
  
  
  
  235,960,061Cost of sales:Cost
  of coal sold
  
  
  
  120,892,056
  
  
  
  
  
  89,293,722
  
  
  
  
  213,238,696Depreciation,
  depletion, and amortization
  
  
  
  13,561,116
  
  
  
  
  
  12,313,798
  
  
  
  
  31,062,116Total
  cost of sales
  
  
  
  134,453,172
  
  
  
  
  
  101,607,520
  
  
  
  
  244,300,812Gross
  profit (loss)
  
  
  
  19,912,876
  
  
  
  
  
  12,341,074
  
  
  
  
  (8,340,751
  )Selling, general, and
  administrative expenses
  
  
  
  7,407,405
  
  
  
  
  
  5,022,953
  
  
  
  
  15,807,596Total
  operating income (loss)
  
  
  
  12,505,471
  
  
  
  
  
  7,318,121
  
  
  
  
  (24,148,347
  )Interest expense (note 3)
  
  
  
  3,370,548
  
  
  
  
  
  566,498
  
  
  
  
  18,178,714Interest income
  
  
  
  (50,894
  )
  
  
  
  
  -
  
  
  
  
  (143,626
  )Miscellaneous income, net
  
  
  
  (665,813
  )
  
  
  
  
  (330,063
  )
  
  
  
  (1,077,773
  )Total
  other expense , net
  
  
  
  2,653,841
  
  
  
  
  
  236,435
  
  
  
  
  16,957,315Income
  (loss) before reorganization items and
               income
  tax expense
  
  
  
  9,851,630
  
  
  
  
  
  7,081,686
  
  
  
  
  (41,105,662
  )Reorganization items, net
  (note 6)
  
  
  
  -
  
  
  
  
  
  (100,907,413
  )
  
  
  
  5,012,028Income
  (loss) before income taxes
  
  
  
  9,851,630
  
  
  
  
  
  107,989,099
  
  
  
  
  (46,117,690
  )Income tax expense (benefit)
  
  
  
  2,108,248
  
  
  
  
  
  -
  
  
  
  
  (2,890,828
  )Net
  income (loss) before cumulative effect of
               accounting
  change
  
  
  
  7,743,382
  
  
  
  
  
  107,989,099
  
  
  
  
  (43,226,862
  )Cumlative effect of change
  in accounting prinicple (note 7)
  
  
  
  -
  
  
  
  
  
  -
  
  
  
  
  (3,044,999
  )Net
  income (loss)
  
  
  
  7,743,382
  
  
  
  
  
  107,989,099
  
  
  
  
  (46,271,861
  )Preferred dividends (note
  4)
  
  
  
  -
  
  
  
  
  
  -
  
  
  
  
  (340,000
  )Net
  income (loss) attributable to
               common
  shareholders
  
  
  $
  7,743,382
  
  
  
  
  
  107,989,099
  
  
  
  
  (46,611,861
  )Earnings (loss) per common share, adjusted for split (notes 8 and 11)Basic
  earnings (loss) per common share
  
  
  $
  0.56
  
  
  
  
  
  6,393.67
  
  
  
  
  (2,759.73
  )Shares
  used to calculate basic earnings (loss) per share
  
  
  
  13,799,994
  
  
  
  
  
  16,890
  
  
  
  
  16,890Diluted
  earnings (loss) per common share
  
  
  $
  0.53
  
  
  
  
  
  6,393.67
  
  
  
  
  (2,759.73
  )Shares
  used to calculate dilutive earnings (loss) per share
  
  
  
  14,628,994
  
  
  
  
  
  16,890
  
  
  
  
  16,890


See accompanying notes to condensed
consolidated financial statements

-6-

---

JAMES
RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders
Equity (Deficit) and Comprehensive Income (Loss)
Four months ended April 30, 2004 (unaudited), five months ended September 30,
2004 (unaudited)
and year ended December 31, 2003

Predecessor
  Company
  
  Common
  stock
  
  Paid-in-
  capital
  
  Deferred stock-
  based
  Compensation
  
  Retained
  earnings
  (accumulated
  deficit)
  
  Subscribed
  shares
  
  Accumulated
  other
  comprehensive
  loss
  
  TotalBalances, December 31, 2002
  
  $
  169
  
  
  226,410
  
  
  
  -
  
  
  
  (47,842,783
  )
  
  (905,741
  )
  
  
  (20,203,806
  )
  
  
  (68,725,751
  )Net loss
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  (59,806,316
  )
  
  -
  
  
  
  -
  
  
  
  (59,806,316
  )Minimum pension liability
     adjustment
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  -
  
  
  -
  
  
  
  (1,194,440
  )
  
  
  (1,194,440
  )Reclassification to interest
     expense, net of taxes
     of $2,890,828
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  -
  
  
  -
  
  
  
  6,381,430
  
  
  
  6,381,430Comprehensive loss
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (54,619,326
  )Forgiveness of receivable
  for
     subscribed shares
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  -
  
  
  84,512
  
  
  
  -
  
  
  
  84,512Preferred dividends
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  (340,000
  )
  
  -
  
  
  
  -
  
  
  
  (340,000
  )Balances, December 31, 2003
  
  
  169
  
  
  226,410
  
  
  
  -
  
  
  
  (107,989,099
  )
  
  (821,229
  )
  
  
  (15,016,816
  )
  
  
  (123,600,565
  )Net income
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  107,989,099
  
  
  -
  
  
  
  -
  
  
  
  107,989,099Minimum pension liability
     adjustment
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  -
  
  
  -
  
  
  
  (691,879
  )
  
  
  (691,879
  )Comprehensive income
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  107,297,220Application of fresh start
  accounting (note 2):Cancellation
  of
          Predecessor
  common 
          stock
  
  
  (169
  )
  
  (226,410
  )
  
  
  -
  
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  (226,579
  )Elimination
  of
          Predecessor
          accumulated other
          comprehensive
  loss
          and subscribed
  shares
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  -
  
  
  821,229
  
  
  
  15,708,695
  
  
  
  16,529,924Issuance
  of Successor
          common stock
  
  
  138,000
  
  
  63,153,076
  
  
  
  -
  
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  63,291,076Balances, April 30, 2004
  
  
  138,000
  
  
  63,153,076
  
  
  
  -
  
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  63,291,076Sucessor
  CompanyNet income
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  7,743,382
  
  
  -
  
  
  
  -
  
  
  
  7,743,382Deferred compensation
     related to
  restricted stock
     awards
  
  
  9,290
  
  
  4,635,710
  
  
  
  (4,645,000
  )
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  -Cost to register common
  stock
  
  
  
  
  
  
  
  
  
  
  
  
  
  (232,230
  )
  
  
  
  
  
  
  
  
  
  (232,230
  )Amortization of deferred
     stock-based
  compensation
  
  
  -
  
  
  -
  
  
  
  385,418
  
  
  
  -
  
  
  -
  
  
  
  -
  
  
  
  385,418Balances, September 30, 2004
  
  $
  147,290
  
  
  67,788,786
  
  
  
  (4,259,582
  )
  
  
  7,511,152
  
  
  -
  
  
  
  -
  
  
  
  71,187,646


See
accompanying notes to condensed consolidated financial statements

-7-

---

JAMES RIVER COAL COMPANYAND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows
(Unaudited)

Successor
  
  Predecessor
  
  PredecessorFive Months
  Ended 09/30/04
  
  Four Months
  Ended 04/30/04
  
  Nine Months
  Ended 09/30/03Cash flows from operating
  activities:Net
  income (loss)
  
  
  $
  7,743,382
  
  
  
  
  107,989,099
  
  
  
  
  (46,271,861
  )Adjustments to reconcile net income (loss) to net cash provided by
          operating
  activitiesDepreciation,
  depletion, and amortization 
                    of
  property, plant, and equipment
  
  
  
  13,561,116
  
  
  
  
  12,313,798
  
  
  
  
  31,261,465Accretion
  of asset retirement obligations
  
  
  
  502,500
  
  
  
  
  397,272
  
  
  
  
  858,210Amortization
  of deferred stock-based compensation
  
  
  
  385,418
  
  
  
  
  -
  
  
  
  
  -Deferred
  income tax benefit
  
  
  
  (197,026
  )
  
  
  
  -
  
  
  
  
  (2,890,828
  )Gain (loss) on sale or disposal of property, plant, and equipment
  
  
  
  (51,645
  )
  
  
  
  18,964
  
  
  
  
  86,227Fresh
  start accounting adjustment
  
  
  
  -
  
  
  
  
  (111,532,809
  )
  
  
  
  -Non-cash
  reorganization items
  
  
  
  -
  
  
  
  
  10,010,000
  
  
  
  
  -Cumulative
  effect of accounting change
  
  
  
  -
  
  
  
  
  -
  
  
  
  
  3,044,999Realized
  loss on termination of interest rate swap agreement
  
  
  
  -
  
  
  
  
  -
  
  
  
  
  9,272,258Unrealized
  gain on interest rate swap
  
  
  
  -
  
  
  
  
  -
  
  
  
  
  (949,469
  )Changes
  in operating assets and liabilities:(Increase) decrease
  in receivables
  
  
  
  2,393,042
  
  
  
  
  (12,882,651
  )
  
  
  
  (127,150
  )(Increase)
  decrease in inventories
  
  
  
  3,874,014
  
  
  
  
  (4,027,646
  )
  
  
  
  (680,550
  )(Increase)
  decrease in prepaid royalties and other current
                              assets
  
  
  
  1,131,041
  
  
  
  
  (1,235,876
  )
  
  
  
  2,317,432(Increase) decrease in other assets
  
  
  
  (6,499,930
  )
  
  
  
  131,872
  
  
  
  
  1,795,070Increase
  (decrease) in accounts payable
  
  
  
  (10,712,664
  )
  
  
  
  (2,921,240
  )
  
  
  
  11,812,354Increase
  (decrease) in accrued salaries, wages, and
                              employee
  benefits
  
  
  
  (1,012,769
  )
  
  
  
  1,429,455
  
  
  
  
  (216,932
  )Increase
  (decrease) in accrued taxes
  
  
  
  2,504,913
  
  
  
  
  139,391
  
  
  
  
  (10,054
  )Increase
  (decrease) in other current liabilities
  
  
  
  (275,671
  )
  
  
  
  1,534,869
  
  
  
  
  6,249,632Increase
  in workers compensation benefits
  
  
  
  1,188,379
  
  
  
  
  1,417,426
  
  
  
  
  4,429,460(Decrease)
  in black lung benefits
  
  
  
  (635,171
  )
  
  
  
  (547,039
  )
  
  
  
  (187,252
  )Increase
  (decrease) in pension obligations
  
  
  
  (1,464,141
  )
  
  
  
  (609,157
  )
  
  
  
  2,652,012Increase
  (decrease) in asset retirement obligation
  
  
  
  71,322
  
  
  
  
  (108,027
  )
  
  
  
  (282,155
  )Increase
  (decrease) in other liabilities
  
  
  
  7,513
  
  
  
  
  (4,233
  )
  
  
  
  (26,355
  )Net
  cash provided by operating activities
  
  
  
  12,513,623
  
  
  
  
  1,513,468
  
  
  
  
  22,136,513Cash flows from investing
  activities:Additions
  to property, plant, and equipment
  
  
  
  (13,687,612
  )
  
  
  
  (9,521,404
  )
  
  
  
  (14,901,509
  )Proceeds
  from sale of equipment and property
  
  
  
  4,035,038
  
  
  
  
  86,000
  
  
  
  
  10,190(Increase)
  decrease in restricted cash
  
  
  
  (34,970
  )
  
  
  
  (27,553
  )
  
  
  
  2,297,645Net
  cash used in investing activities
  
  
  
  (9,687,544
  )
  
  
  
  (9,462,957
  )
  
  
  
  (12,593,674
  )Cash flows from financing
  activities:Proceeds
  from borrowings
  
  
  
  20,000,000
  
  
  
  
  6,400,000
  
  
  
  
  -Payments
  for registration fees
  
  
  
  (232,230
  )
  
  
  
  -
  
  
  
  
  -Principal
  payments on short-term debt
  
  
  
  (6,400,000
  )
  
  
  
  -
  
  
  
  
  (1,940,000
  )Principal
  payments under capital lease obligations
  
  
  
  (181,011
  )
  
  
  
  (164,798
  )
  
  
  
  (401,552
  )Debt
  issuance costs
  
  
  
  -
  
  
  
  
  (1,874,168
  )
  
  
  
  -Net
  cash provided by (used in) financing activities
  
  
  
  13,186,759
  
  
  
  
  4,361,034
  
  
  
  
  (2,341,552
  )Increase
  in cash
  
  
  
  16,012,838
  
  
  
  
  (3,588,455
  )
  
  
  
  7,201,287Cash at beginning of period
  
  
  
  1,301,405
  
  
  
  
  4,889,860
  
  
  
  
  6,524Cash at end of period
  
  
  $
  17,314,243
  
  
  
  
  1,301,405
  
  
  
  
  7,207,811


See accompanying notes to condensed
consolidated financial statement.

-8-

---

JAMES RIVER COAL COMPANYAND SUBSIDIARIES

Notes
to Condensed Consolidated Financial Statements

(Unaudited)

|(1) | Summary of Significant Accounting Policies and Other Information
|--- | ----------------------------------------------------------------
|    |                                                                 
|    | (a)                                                             
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    | (b)                                                             
|    |                                                                 
|    |                                                                 
|    |                                                                 
|    |                                                                 

-9-

---

| |     | On the
  Effective Date, the Company entered into a new $50 million loan and security
  agreement which is comprised of a $20 million term loan and a $30 million
  revolving credit facility. The loan and security agreement is secured by a
  first lien on substantially all the Companys assets. The Company borrowed
  $20 million under the term loan component to make cash payments to satisfy
  certain claims, administrative expenses, and retire obligations under the
  debtor-in-possession credit facility required under the Plan. The remaining
  $30 million revolving credit facility is available for the Companys working
  capital, general, and letter of credit needs, and is subject to customary borrowing
  conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (c) | Description of Business Organization and
  Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The Company
  is engaged in the mining, processing, purchasing and selling of coal.
  Substantially all coal sales and accounts receivable relate to the electric
  utility and industrial markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The
  consolidated financial statements include the accounts of James River Coal
  Company and its wholly owned subsidiaries. All significant intercompany
  accounts and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (d) | Restricted Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | As of
  September 30, 2004 and December 31, 2003, $8,383,156 and $8,320,633,
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (e) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | Inventories
  of coal and materials and supplies are stated at the lower of cost or market.
  Cost is determined using the average cost for coal inventories and the
  first-in, first-out method for materials and supplies.  Coal inventory costs include labor,
  supplies, equipment cost, depletion, royalties, black lung tax, reclamation
  tax and preparation plant cost.  Coal
  is classified as inventory at the point and time that the coal is extracted
  and removed from the mine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (f) | 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 September 30, 2004
  and December 31, 2003, the Company had accrued $16,119,752 and $14,723,545,
  respectively, related to estimated mine reclamation costs.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (g) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

-10-

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| | (h) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (i) | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Revenues
  include sales to customers of Company-produced coal and coal purchased from
  third parties. The Company recognizes revenue from the sale of
  Company-produced coal and coal purchased from third parties at the time
  delivery occurs and title passes to the customer, which is either upon
  shipment or upon customer receipt of coal based on contractual terms. Also,
  the sales price must be determinable and collection reasonably assured.                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (j) | 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.                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Prior to the
  emergence from bankruptcy and resulting change in stock ownership, the
  Company had consolidated federal NOL carryforwards of approximately $131
  million.  Although the gain on
  extinguishment of debt is not directly taxable, it reduces certain tax
  attributes, including NOLs.  As such,
  the Company expects its NOLs from prior to May 6, 2004 available to offset
  future taxable earnings to be substantially reduced or eliminated.  The loss of NOLs and the Fresh Start
  adjustments made to asset carrying values resulted in a net deferred tax
  liability for the Successor.                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (k) | Equity-Based Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Under the
  2004 Equity Incentive Plan (the Plan), participants of James River Coal
  Company and subsidiaries may be granted stock options (qualified and
  nonqualified), stock appreciation rights (SARs), restricted stock,
  restricted stock units, and performance shares. The total number of shares
  that may be awarded under the Plan is 1,650,000, and no more than 1,000,000
  of the shares reserved under the Plan may be granted in the form of incentive
  stock options.                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Shares
  awarded or subject to purchase under the Plan that are not delivered or
  purchased, or revert to the Company as a result of forfeiture or termination,
  expiration or cancellation of an award or that are used to exercise an award
  or for tax withholding, will be again available for issuance under the
  Plan.  At September 30, 2004, 451,000
  shares were available under the Plan for future awards.                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

-11-

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|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Performance
  Stock Awards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Performance
  stock awards have been made to certain employees pursuant to the Plan.  The number of shares of common stock to be
  received under these awards by such employees at the end of the performance
  period will depend on the attainment of performance objectives based on
  achieving certain financial results and the successful development of a new
  mine.  The expected cost of these
  shares is reflected in income over the performance period.  Since performance-based unvested stock is
  contingent upon satisfying conditions, those unvested shares are considered
  to be contingently issuable shares and are not included in the computation of
  diluted earnings per share.  For the
  five months ended September 30, 2004, 100,000 shares were awarded at an
  estimated fair value of $4.59 per share.
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Stock
  Options Awards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | There were
  270,000 stock options granted during the five months ended September 30,
  2004. The estimated fair value at grant dates for options granted during the
  five months ended September 30, 2004 was less than $.01 per share.  The exercise price ranged from $10.80 to
  $17.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                        | The Company
  accounts for its equity based compensation plan using the intrinsic value
  method pursuant to APB Opinion No. 25, Accounting for Stock Issued to Employees.  The Company recognizes deferred
  compensation on the date of grant if the estimated fair value of the
  underlying common stock exceeds the exercise price (zero exercise price in
  the case of an award of restricted common stock).  Accordingly, no compensation cost has been recognized for the
  granting of stock options to employees because the exercise price was equal
  to or greater than the estimated fair value of the underlying common stock on
  the date of grant.  If compensation
  cost for the equity-based compensation awards had been determined based on
  the fair value at the grant dates for those awards pursuant to FASB Statement
  No. 123, Accounting
  for Stock-Based Compensation, net income, and basic and diluted
  earnings per common share would not have been affected since the fair value
  of the options granted was nominal.
|    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(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 on the basis of 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: (in
  thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|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  |  
|                                                                    |  |   |         |  

-12-

---

James
River Coal Company
Reorganized Condensed Consolidated Balance Sheet
As of April 30, 2004
(in thousands)
(Unaudited)

|                                                             |  | Predecessor
  Company
  4/30/04 |                       | Fresh Start Adjustments |                              | Successor
  Company
  4/30/04 | 
|------------------------------------------------------------ |  | ------------------------------- | --------------------- | ----------------------- | ---------------------------- | ----------------------------- | 
|                                                             |  |                                 |                       |                         |                             
|Assets                                                       |  |                                 | Debt
  Extinguishment |                         | Reorganization
  Adjustments |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|Cash                                                         |  |                                 | $                     | 1,301                   |                              |                               | 
|Receivables                                                  |  |                                 |                       | 35,838                  |                              |                               | 
|Inventories                                                  |  |                                 |                       | 11,930                  |                              |                               | 
|Prepaid
  royalties                                          |  |                                 |                       | 9,932                   |                              |                               | 
|Other
  current assets                                       |  |                                 |                       | 4,463                   |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|Total current
  assets                                       |  |                                 |                       | 63,464                  |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|Land and
  mineral rights                                    |  |                                 |                       | 223,004                 |                              |                               | 
|Buildings,
  machinery, and equipment                        |  |                                 |                       | 236,901                 |                              |                               | 
|Mine
  development costs                                     |  |                                 |                       | 12,984                  |                              |                               | 
|Construction-in-progress                                     |  |                                 |                       | 974                     |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|                                                             |  |                                 |                       | 473,863                 |                              |                               | 
|Less
  accumulated depreciation, depletion, and amortization |  |                                 |                       | 219,604                 |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|Net property,
  plant, and
          equipment               |  |                                 |                       | 254,259                 |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|Restricted
  cash                                            |  |                                 |                       | 8,348                   |                              |                               | 
|Other long-term
  assets                                     |  |                                 |                       | 6,518                   |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 
|Total assets                                                 |  |                                 | $                     | 332,589                 |                              |                               | 
|                                                             |  |                                 |                       |                         |                              |                               | 

-13-

---

James
River Coal Company
Reorganized Condensed Consolidated Balance Sheet
As of April 30, 2004(in thousands)(Unaudited)

|                                                                        |  | Predecessor
  Company
  4/30/04 |                       | Fresh Start Adjustments |                              | Successor
  Company
  4/30/04 | 
|----------------------------------------------------------------------- |  | ------------------------------- | --------------------- | ----------------------- | ---------------------------- | ----------------------------- | 
|                                                                        |  |                                 |                       |                         |                             
|Liabilities and Shareholders Equity
  (Deficit)                        |  |                                 | Debt
  Extinguishment |                         | Reorganization
  Adjustments |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Borrowings
  under DIP credit agreement                                 |  |                                 | $                     | 6,400                   |                              |                               | 
|Current
  installments of obligations
     under capital leases         |  |                                 |                       | 749                     |                              |                               | 
|Accounts
  payable                                                      |  |                                 |                       | 26,293                  |                              |                               | 
|Accrued
  salaries, wages and employee
     benefits                    |  |                                 |                       | 4,501                   |                              |                               | 
|Workers
  compensation benefits                                        |  |                                 |                       | 9,500                   |                              |                               | 
|Black lung
  benefits                                                   |  |                                 |                       | 2,500                   |                              |                               | 
|Accrued
  taxes                                                         |  |                                 |                       | 3,588                   |                              |                               | 
|Other
  current liabilities                                             |  |                                 |                       | 4,037                   |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Total current
  liabilities                                             |  |                                 |                       | 57,568                  |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Long term
  debt                                                        |  |                                 |                       | -                       |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Noncurrent
  portion of workers
     compensation benefits             |  |                                 |                       | 42,699                  |                              |                               | 
|Noncurrent
  portion of black lung
     benefits                        |  |                                 |                       | 10,661                  |                              |                               | 
|Pension
  obligations                                                   |  |                                 |                       | 14,267                  |                              |                               | 
|Asset
  retirement obligations                                          |  |                                 |                       | 13,963                  |                              |                               | 
|Obligations
  under capital leases,
     excluding current installments |  |                                 |                       | 1,159                   |                              |                               | 
|Deferred
  income taxes                                                 |  |                                 |                       | -                       |                              |                               | 
|Other long
  term liabilities                                           |  |                                 |                       | 658                     |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Total other liabilities                                                 |  |                                 |                       | 83,407                  |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Liabilities
  subject to compromise                                     |  |                                 |                       | 319,451                 |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Total liabilities                                                       |  |                                 |                       | 460,426                 |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Common stock                                                            |  |                                 |                       | -                       |                              |                               | 
|Paid-in-capital                                                         |  |                                 |                       | 226                     |                              |                               | 
|Retained
  earnings (accumulated deficit)                               |  |                                 |                       | (111,533                | )                            |                               | 
|Subscribed
  shares                                                     |  |                                 |                       | (821                    | )                            |                               | 
|Accumulated
  other comprehensive
     income (loss)                    |  |                                 |                       | (15,709                 | )                            |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Total shareholders equity (deficit)                                    |  |                                 |                       | (127,837                | )                            |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 
|Total liabilities and shareholders
          equity                    |  |                                 | $                     | 332,589                 |                              |                               | 
|                                                                        |  |                                 |                       |                         |                              |                               | 

-14-

---

| | The following is a description of the fresh start
  adjustments for debt extinguishment and reorganization adjustments:
| | -----------------------------------------------------------------------------------------------------------------------
| |                                                                                                                        
| | Extinguishment of Debt                                                                                                 
| |                                                                                                                        
| | (1)                                                                                                                    
| |                                                                                                                        

|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 thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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)                       

|                                                             |  | Increase/(Decrease) |  
|------------------------------------------------------------ |  | ------------------- | -
|                                                             |  |                     |  
|                                                             |  |                     |  
|Coal inventories                                             |  |                     | $
|Prepaid royalties                                            |  |                     |  
|Other current assets                                         |  |                     |  
|Land and mineral rights                                      |  |                     |  
|Buildings, machinery and
  equipment                         |  |                     |  
|Mine development costs                                       |  |                     |  
|Less accumulated
  depreciation, depletion, and amortization |  |                     |  
|Other long-term assets                                       |  |                     |  
|                                                             |  |                     |  
|Total fair value
  adjustments to identifiable assets        |  |                     | $
|                                                             |  |                     |  

| | (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.                                   

-15-

---

|(3) | Long Term Debt, DIP Financing, and Interest Expense
|--- | ---------------------------------------------------

Long-term
debt at September 30, 2004 is as follows:

| |                                                                       |  | September
  30, 2004 |   |           
| | --------------------------------------------------------------------- |  | -------------------- | - | ----------
| |                                                                       |  |                      |   |           
| | Senior secured credit
  facility:                                     |  |                      |   |           
| | Term
  loan component                                                 |  |                      | $ | 20,000,000
| | Revolver
  component                                                  |  |                      |   | -         
| |                                                                       |  |                      |   |           
| | Term credit facility                                                  |  |                      |   | 75,000,000
| |                                                                       |  |                      |   |           
| |                                                                       |  |                      |   |           
| | Total
  long-term debt                                                |  |                      |   | 95,000,000
| |                                                                       |  |                      |   |           
| | Less amounts classified as
  current                                  |  |                      |   | 1,800,000 
| |                                                                       |  |                      |   |           
| | Total
  long-term debt, less
                    current
  maturities |  |                      | $ | 93,200,000
| |                                                                       |  |                      |   |           

| | (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 as discussed in note (c), 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

-16-

---

|    | (c)    | Debtor-In-Possession Financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        | On
  March 27, 2003, the Company entered into a Secured Super-Priority
  Debtor-In-Possession Revolving Credit Agreement (DIP Credit Agreement) with
  the lenders who are the parties to the Prepetition Credit Agreement. The DIP
  Credit Agreement provided, among other things, for a secured $20 million
  revolving credit facility, a $5 million swing loan facility and a
  $17 million letter of credit facility. The combination of amounts drawn
  under the revolving credit, swing loan, and letter of credit facility could
  not exceed $20 million.                                                                                                                                                                                                                                                                                                                 
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        | Amounts
  borrowed under the DIP Credit Agreement bore interest at a floating rate
  (based on the prime rate or the Federal Funds Rate), plus a margin of 2.5%.
  As security for the DIP Credit Agreement obligation the Company granted the
  lenders liens on all presently owned or hereafter acquired property and
  assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        | The DIP
  Credit Agreement contained financial covenants requiring the Company to act
  in accordance with a budget, maintain minimum levels of earnings before
  interest, taxes, depreciation, depletion, amortization and other noncash
  charges and nonrecurring expenses and limit ordinary operating disbursements.
  As of May 6, 2004, the Company had drawn $6,400,000 under the DIP Credit
  Agreement. There were no amounts outstanding under the DIP Credit Agreement
  as of December 31, 2003. There were $13,507,500 and $11,007,500 of letters of
  credit outstanding as of May 6, 2004 and December 31, 2003,
  respectively.  The Company was charged
  a fee of 3% annually on letters of credits outstanding.                                                                                                                                                 
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        | All
  outstanding amounts on the DIP Credit Agreement were repaid upon emergence
  from bankruptcy on May 6, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (d)    | Interest Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        | 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 $3.8 million, $5.4
  million and $10.8 million higher than reported for the four months ended
  April 30, 2004, the three months ended September 30, 2003 and the nine months
  ended September 30, 2003, respectively. During the four months ended April
  30, 2004, the Company paid $265,505 in interest.  During the five months ended September 30, 2004, the Company
  paid $3,087,962 in interest.                 
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |        | At
  December 31, 2002, the Company was a party to interest rate swap
  agreements with a notional amount of $100,000,000, which required the Company
  to make fixed-rate interest payments in exchange for floating rate interest
  payments related to the Companys Bank Loan Agreement. During the first
  quarter of 2003, the derivative instrument was terminated due to an event of
  default, and the balance due at the date of termination, approximately
  $8,434,000, is included in Liabilities Subject to Compromise as of
  December 31, 2003.                                                                                                                                                                                                                                                                                                                      
|    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(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 Acquiring Person
  (whose Rights will become 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.

-17-

---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 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%.  The amount
  owed was included in Liabilities Subject to Compromise at December 31, 2003.                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 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 $226,667 for the four months ended April 30, 2004 and $170,000
  for both the three and nine months ended September 30, 2003, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(5) | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Company
  has established irrevocable letters of credit totaling $30.5 million as of
  September 30, 2004 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(d)).  The remaining
  letters of credit totaling $22.7 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                                                   |  | Predecessor
  CompanyFour
  MonthsEnded
  4/30/04 |   | Predecessor
  CompanyThree
  Months
  Ended 9/30/03 |   | Predecessor
  CompanyNine
  MonthsEnded
  9/30/03 | 
| | --------------------------------------------------------------------------------- |  | ------------------------------------------------- | - | --------------------------------------------------- | - | ------------------------------------------------- | 
| |                                                                                   |  |                                                   |   |                                                     |   |                                                   | 
| | Professional
  fees and
     administrative expenses                              |  |                                                   | $ | 10,684,816                                          |   |                                                   | 
| | Interest
  income                                                                 |  |                                                   |   | (59,420                                             | ) |                                                   | 
| | Gain on
  extinguishment of
     debt and fresh start
     accounting adjustments |  |                                                   |   | (111,532,809                                        | ) |                                                   | 
| |                                                                                   |  |                                                   |   |                                                     |   |                                                   | 
| |                                                                                   |  |                                                   | $ | (100,907,413                                        | ) |                                                   | 
| |                                                                                   |  |                                                   |   |                                                     |   |                                                   | 

-18-

---

|(7) | Cumulative Effect of Accounting Change for Reclamation Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Effective
  January 1, 2003 the Company changed its method of accounting for
  reclamation liabilities in accordance with the provisions of
  Statement No. 143. As a result of adoption of Statement No. 143,
  the Company recognized an increase in total reclamation liability of
  $6,849,446. The Company recorded the related capitalized asset retirement
  costs by increasing property, plant and equipment, net of accumulated
  depreciation, by $3,804,447.  The
  cumulative effect of the change on prior years resulted in a charge to
  operations of $3,044,999 in the nine months ended September 30, 2004.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(8) | Earnings (Loss) Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Basic
  earnings (loss) per share is computed by dividing net income (loss) available
  to common shareholders by the weighted average number of common shares
  outstanding during the period, excluding restricted common stock subject to
  continuing vesting requirements. 
  Diluted earnings per share is calculated based on the weighted average
  number of common shares outstanding during the period and, when dilutive,
  potential common shares from the exercise of stock options and restricted
  common stock subject to continuing vesting requirements, pursuant to the
  treasury stock method.         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The
  following table provides a reconciliation of the number of shares used to
  calculate basic and diluted earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                   |  | Successor
  CompanyThree
  Months
  Ended 9/30/04 |  |            | Predecessor
  CompanyThree Months
  Ended 9/30/03 | 
| | ----------------------------------------------------------------- |  | ------------------------------------------------- |  | ---------- | ------------------------------------------------- | 
| |                                                                   |  |                                                   |  |            |                                                   | 
| | Weighted
  average number
     of common shares
     outstanding: |  |                                                   |  |            |                                                   | 
| | Basic                                                             |  |                                                   |  | 13,799,994 |                                                   | 
| | Effect
  of dilutive instruments                                  |  |                                                   |  | 829,000    |                                                   | 
| |                                                                   |  |                                                   |  |            |                                                   | 
| | Diluted                                                           |  |                                                   |  | 14,628,994 |                                                   | 
| |                                                                   |  |                                                   |  |            |                                                   | 

| |                                                                 |  | Successor
  CompanyFive
  Months
  Ended 9/30/04 |  |            | Predecessor
  CompanyFour MonthsEnded 4/30/04 |  | Predecessor
  CompanyNine Months
  Ended 9/30/03 | 
| | --------------------------------------------------------------- |  | ------------------------------------------------ |  | ---------- | --------------------------------------------- |  | ------------------------------------------------ | 
| |                                                                 |  |                                                  |  |            |                                               |  |                                                  | 
| |                                                                 |  |                                                  |  |            |                                               |  |                                                  | 
| | Weighted
  average number
     of common shares    outstanding: |  |                                                  |  |            |                                               |  |                                                  | 
| | Basic                                                           |  |                                                  |  | 13,799,994 |                                               |  |                                                  | 
| | Effect
  of dilutive instruments                                |  |                                                  |  | 829,000    |                                               |  |                                                  | 
| |                                                                 |  |                                                  |  |            |                                               |  |                                                  | 
| | Diluted                                                         |  |                                                  |  | 14,628,994 |                                               |  |                                                  | 
| |                                                                 |  |                                                  |  |            |                                               |  |                                                  | 

| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-19-

---

|(9) | Pension Expense                                              
|--- | -------------------------------------------------------------
|    |                                                              
|    | The
  components of net periodic benefit cost are as follows:

| |                                    |  | Successor
  Company
  Five MonthsEnded 9/30/04 |   |            | Predecessor
  Company
  Four MonthsEnded 4/30/04 |  | Predecessor
  Company
  Nine MonthsEnded 9/30/03 | 
| | ---------------------------------- |  | ---------------------------------------------- | - | ---------- | ------------------------------------------------ |  | ------------------------------------------------ | 
| |                                    |  |                                                |   |            |                                                  |  |                                                  | 
| | Service cost                       |  |                                                | $ | 764,220    |                                                  |  |                                                  | 
| | Interest cost                      |  |                                                |   | 1,224,270  |                                                  |  |                                                  | 
| | Expected return on plan assets     |  |                                                |   | (1,075,925 | )                                                |  |                                                  | 
| | Amortization of prior service cost |  |                                                |   |           |                                                  |  |                                                  | 
| | Recognized actuarial loss          |  |                                                |   |           |                                                  |  |                                                  | 
| |                                    |  |                                                |   |            |                                                  |  |                                                  | 
| | Net
  periodic benefit cost        |  |                                                | $ | 912,565    |                                                  |  |                                                  | 
| |                                    |  |                                                |   |            |                                                  |  |                                                  | 

| |                                    |  | Successor
  Company
  Three Months
  Ended 9/30/04 |   |          | Predecessor
  Company
  Three Months 
  Ended 9/30/03 | 
| | ---------------------------------- |  | -------------------------------------------------- | - | -------- | ----------------------------------------------------- | 
| |                                    |  |                                                    |   |          |                                                       | 
| | Service cost                       |  |                                                    | $ | 458,352  |                                                       | 
| | Interest cost                      |  |                                                    |   | 734,564  |                                                       | 
| | Expected return on plan assets     |  |                                                    |   | (645,384 | )                                                     | 
| | Amortization of prior service cost |  |                                                    |   |         |                                                       | 
| | Recognized actuarial loss          |  |                                                    |   |         |                                                       | 
| |                                    |  |                                                    |   |          |                                                       | 
| | Net
  periodic benefit cost        |  |                                                    | $ | 547,532  |                                                       | 
| |                                    |  |                                                    |   |          |                                                       | 

|(10) | Pneumoconiosis (Black Lung) Benefits                            
|---- | ----------------------------------------------------------------
|     |                                                                 
|     | The expense
  for black lung benefits consists of the following:

| |                          |  | Successor
  Company
  Five Months
  Ended 9/30/04 |   |         | Predecessor 
  Company 
  Four Months 
  Ended 4/30/04 |  | Predecessor 
  Company 
  Nine Months 
  Ended 9/30/03 | 
| | ------------------------ |  | ------------------------------------------------- | - | ------- | ------------------------------------------------------ |  | ------------------------------------------------------ | 
| |                          |  |                                                   |   |         |                                                        |  |                                                        | 
| |                          |  |                                                   |   |         |                                                        |  |                                                        | 
| | Service cost             |  |                                                   | $ | 123,874 |                                                        |  |                                                        | 
| | Interest cost            |  |                                                   |   | 319,869 |                                                        |  |                                                        | 
| | Unamortized loss         |  |                                                   |   |        |                                                        |  |                                                        | 
| |                          |  |                                                   |   |         |                                                        |  |                                                        | 
| | Total Black Lung expense |  |                                                   | $ | 443,743 |                                                        |  |                                                        | 
| |                          |  |                                                   |   |         |                                                        |  |                                                        | 

-20-

---

| |                            |  | Successor
  Company
  Three Months
  Ended 9/30/04 |   |         | Predecessor
  Company
  Three Months
  Ended 9/30/03 | 
| | -------------------------- |  | -------------------------------------------------- | - | ------- | ---------------------------------------------------- | 
| |                            |  |                                                    |   |         |                                                      | 
| |                            |  |                                                    |   |         |                                                      | 
| | Service cost               |  |                                                    | $ | 74,320  |                                                      | 
| | Interest
  cost            |  |                                                    |   | 188,349 |                                                      | 
| | Unamortized
  loss         |  |                                                    |   |        |                                                      | 
| |                            |  |                                                    |   |         |                                                      | 
| |                            |  |                                                    |   |         |                                                      | 
| | Total
  Black Lung expense |  |                                                    | $ | 262,669 |                                                      | 
| |                            |  |                                                    |   |         |                                                      | 



|(11) | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | On September
  30, 2004, the Board of Directors approved a two-for-one stock split of the
  Companys common stock.  The stock
  split was payable in the form of a stock dividend and entitled each
  shareholder of record at the close of business on October 22, 2004 to receive
  one share of common stock for every outstanding share of common stock held on
  that date.  The 100% stock dividend
  will be distributed on or about November 5, 2004.  The capital stock accounts, all share data and earnings per
  share in this report give effect to the stock split, applied retroactively,
  to all periods presented for the Successor Company.



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
primarily to electric utility companies and industrial companies.  Our mining operations are managed through
five operating subsidiaries (mining complexes) located throughout eastern
Kentucky.  We operate a total of 14
underground mines as Company mines using our own employees.  We have rights to another six mines, on land
owned or leased by us, that are typically mined by independent contract mine
operators  four of which are underground mines and two of which are surface
mines.  We also operate 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 nine months ended 2004, we generated approximately 70% of our revenues from
several long-term contracts with electrical utilities, including 28% derived
from our largest customer, Georgia Power Company.  Of the remaining revenues, 28% were generated by industrial
accounts and 2% were generated from fees from the handling and marketing of
coal-based synfuel product.  Demand for
coal has increased significantly in 2004 due to a combination of conditions in
the U.S. and worldwide that caused a shortage of certain grades of coal.  Consequently, prices for the grades of coal
we sell have risen significantly since mid-2003.  Due to the fixed prices in the contractual commitments with
utility customers that we renegotiated during the bankruptcy, we will see only
a limited benefit from the current market environment in 2004.

As
compared to the prior year, we experienced a significant increase in mining
costs during the first nine months of 2004. 
The increased costs were primarily due to higher royalties and severance
taxes, lower operating productivity from our deep mines and an increase in roof
support costs due to an increase in steel costs.    As we continue to advance deeper into our mine seams, we incur
added expense for increased travel time to our mine faces, and we must hire
additional personnel to maintain longer belt structures.   We are focused on reducing our operating
costs at each mine and improving miner productivity.  The steps that we have taken to address these issues include
hiring additional management and employees to better manage workers
compensation and other benefit programs. 
We are also investigating steps to reduce the travel time for our miners
by installing new entries closer to current mining areas.

-21-

---

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 in 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 September
30, 2004, we estimate that, as of September 30, 2004, we controlled
approximately 205 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 MonthsEnded
  June 30, 2004 |  | Three MonthsEnded
  September 30, 2004 |  
| | ------------------------------------------------------ |  | --------------------------------- |  | -------------------------------------- | -
| |                                                        |  |                                   |  |                                        |  
| | Proven and Probable
  Reserves beginning of period (1) |  |                                   |  | 207.2                                  |  
| | Coal Extracted                                         |  |                                   |  | (2.4                                   | )
| | Acquisitions (2)                                       |  |                                   |  | 0.4                                    |  
| | Adjustments (3)                                        |  |                                   |  | 0.4                                    |  
| |                                                        |  |                                   |  |                                        |  
| | Proven and Probable
  Reserves end of period           |  |                                   |  | 205.6                                  |  
| |                                                        |  |                                   |  |                                        |  



| | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

-22-

---

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

As
discussed previously, 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.

-23-

---

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 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 financial statements.

Our
interim condensed consolidated financial statements for the three and five
months ended September 30, 2004, the four months ended April 30, 2004, and the
three and nine months ended September 30, 2003 presented in this report are unaudited.  Financial statements for
periods after March 25, 2003 and prior to April 30, 2004 include the effects of
our bankruptcy proceedings.  These
include the classification of certain liabilities as liabilities subject to
compromise, the classification of certain expenses, and gains and losses as reorganization
items, and other matters described in the notes to our consolidated financial
statements.

Results of Operations

Three Months Ended
September 30, 2004 Compared with the Three Months Ended September 30, 2003

The
following compares the three months 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
September 30, 2004 compared to the three months ended September 30, 2003:

|                            |  | Three Months Ended September 30, |   |        | 
|--------------------------- |  | -------------------------------- | - | ------ | 
|                            |  |                                  |   |        | 
|                            |  | 2004                             |   | 2003   | 
|                            |  |                                  |   |        | 
|Volume
  (millions of tons) |  |                                  |   | 2.2    | 
|Revenues
  (000)            |  |                                  |   |        | 
|Coal
  sales                |  |                                  | $ | 88,021 | 
|Synfuel
  handling          |  |                                  |   | 1,860  | 
|Cost of coal
  sold (000)   |  |                                  |   | 73,582 | 

Volume and revenues

For
the three months ended September 30, we shipped 2.6 million tons of coal in
2003 and 2.2 million tons in 2004.  Our
company mines production decreased by approximately 142,000 tons during the
three month period over the comparable period in 2003.  This decrease in production was due to an
overall decrease in productivity, as measured by Linear Feet (of mine advance)
Per Man Hour, of 14%. This decrease was due to adverse geological conditions at
several of our mines, and several major moves of mining equipment and personnel
that occurred as planned in July and August. We also experienced a reduction
during the three month period of 215,000 tons from contract mining operations
and 81,000 tons from coal purchased by us for resale, as a result of three
underground contract mine operators seeking higher-priced opportunities with
our competitors.  Likewise, the
much-improved coal market resulted in our traditional suppliers of purchased
coal moving to higher price opportunities either via direct sales to end users
or sales to our competitors.

-24-

---

Coal
sales revenue for the three months ended September 30 increased from $78.2
million in 2003 to $88.0 million in 2004. 
This increase was due to an increase in our percentage of spot coal
sales, which currently command a higher price, and an increase in the average
sales price per ton for sales under long-term contracts.    For the three months ended September 30,
2004, we sold 1.7 million tons of coal under long-term contracts (77% of total
sales volume) at an average selling price of $35.47.  For the three months ended September 30, 2003, we sold 2.3
million tons of coal (90% of total sales volume) under long-term contracts at
an average selling price of $29.55.  The
increase in average selling price from contract sales from 2003 to 2004 was due
to the renegotiation of below-market contract prices as part of our bankruptcy
proceedings.  For the three months ended
September 30, 2004, we sold 500,000 tons of coal (23% of total sales volume) to
the spot market at an average selling price of $54.03 per ton.  For the three months ended September 30,
2003, we sold approximately 254,000 tons (10% of total sales volume) to the
spot market at an average selling price of $35.57 per ton.

Revenues
related to the handling, loading and shipping of synfuel increased from $1.7
million for the three months ended September 30, 2003 to $1.9 million for the three
months ended September 30, 2004.  This
change reflects an increase in our fees on a per ton basis offset by a 20%
reduction in synfuel shipped.

Cost
of Coal Sold

For
the three months ended September 30, the cost of coal sold, excluding
depreciation, depletion and amortization, increased from $71.3 million in 2003
to $73.6 million in 2004.  Our cost per ton of coal sold increased from $27.65
per ton in the 2003 period to $33.16 per ton in the 2004 period.  This $5.51
increase in cost per ton of coal sold was due to several factors.  Sales related
costs (primarily royalties and severance taxes) increased by $1.78 per ton as a
result of increased sales prices. Labor and benefit costs increased by $1.89 per
ton in the 2004 period due to lower productivity at several mines.  Variable
costs increased by $1.39 per ton, primarily due to a per ton increase in roof
support materials and mining bits costs as a result of difficult mining
conditions and an increase in worldwide steel prices.  These increases in costs
of coal per ton were offset by a decrease in the volume of coal sold.

Nine Months Ended
September 30, 2004 Compared with the Nine Months Ended September 30, 2003

In
order to provide a basis for comparing the nine months ended September 30, 2004
with the nine months ended September 30, 2003, the operating results of the
Successor Company for the five months ended September 30, 2004 have been
combined with the operating results for the Predecessor Company for the four months
ended April 30, 2004, for purposes of the following table and discussion. The
combining of the predecessor and successor accounting periods is not permitted
by generally accepted accounting principles.  
Additionally, as explained above, the operating results of the Successor
Company and the Predecessor Company are not comparable.

The
following table shows selected operating results for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003:

|                            |  | Nine Months Ended September 30, |   |         | 
|--------------------------- |  | ------------------------------- | - | ------- | 
|                            |  |                                 |   |         | 
|                            |  | 2004                            |   | 2003    | 
|                            |  |                                 |   |         | 
|Volume
  (millions of tons) |  |                                 |   | 6.9     | 
|Revenues
  (000)            |  |                                 |   |         | 
|Coal
  sales                |  |                                 | $ | 262,942 | 
|Synfuel
  handling          |  |                                 |   | 5,372   | 
|Cost of coal
  sold (000)   |  |                                 |   | 210,186 | 

Volume
and revenues

For
the nine months ended September 30, we shipped 7.9 million tons of coal in 2003
and 6.9 million tons in 2004.  Our
company mines decreased their production by approximately 58,000 tons during
the nine-month period over the comparable period in 2003.  In addition, there was a reduction during
the nine month period of 514,000 tons from contract mining operations and
398,000 tons from coal purchased by us for resale. The filing of our bankruptcy
petition on March 25, 2003, along with the improved coal market beginning in
late 2003 to the present adversely impacted our sources of both contractor coal
and purchased coal.  We continue to be
challenged in replacing contract mine operators and purchased coal sources due
to the continued strong coal market.  We
(and the rest of the coal and utility industries) were also impacted during the
early part of 2004 by delays and other service problems with the railroads, our
primary means of transporting coal.  We
continue to utilize primarily one railroad for all our shipments, and due to
our dependency on this railroad, our results would be negatively impacted by any
future service problems.

Coal
sales revenue for the nine months ended September 30, increased from $231.2
million in 2003 to $262.9 million in 2004. 
This increase was due to an increase in our percentage of spot coal sales,
which currently command a higher price, and an increase in the average sales
price per ton for sales under long-term contracts.    For the nine months ended September 30, 2004, we sold 5.3
million tons of coal under long-term contracts (78% of total sales volume) at an
average selling price of $35.00.  For the
nine months ended September 30, 2003, we sold 7.3 million tons of coal (93% of
total sales volume) under long-term contracts at an average selling price of
$28.74.  The increase in average selling
price from 2003 to 2004 was due to the renegotiation of below-market contract
prices as part of our bankruptcy proceedings. 
For the nine months ended September 30, 2004, we sold 1.6 million tons
of coal (22% of total sales volume) to the spot market at an average selling
price of $49.48 per ton.  For the nine months
ended September 30, 2003, we sold approximately 571,000 tons (7% of total sales
volume) to the spot market at an average selling price of $36.58 per ton.

-25-

---

Revenues
related to the handling, loading and shipping of synfuel increased from $4.7
million for the nine months ended September 30, 2003 to $5.4 million for the
nine months ended September 30, 2004. 
We processed and shipped 3% less coal as synfuel in 2004 than we
processed and shipped in 2003. However, our fees, on a per ton basis, have
increased during the same period.

Cost
of Coal Sold

For
the nine months ended September 30, the cost of coal sold, excluding
depreciation, depletion and amortization, decreased from $213.2 million in 2003
to $210.2 million in 2004.  The decrease
was due to a reduction in the number of tons shipped.  However, our cost per ton of coal sold increased from $27.03 per
ton in the 2003 period to $30.56 per ton in the 2004 period. This $3.53
increase in cost per ton of coal sold was due to several factors. Higher sales
related costs (primarily royalties and severance taxes) of $1.47 per ton
resulted from increased sales prices. Labor and benefit costs increased by
$1.21 per ton in the 2004 period due to lower productivity at several mines.
Variable costs increased by $0.59, due primarily to higher roof support costs
related to the increased cost of steel. 
The application of fresh start accounting required that we increase the
value of our inventory by approximately $1.1 million on April 30, 2004.  This adjustment increased our cost of coal
sold and reduced gross profit during the five months ended September 30, 2004
by a corresponding amount.

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.  Our liquidity going forward will be
generated by our gross profit on coal sales. 
The gross profit will be driven 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 September 30, 2004, we had available liquidity of approximately $24.6
million.  This consisted of unrestricted
cash on hand of approximately $17.3 million and availability under the revolver
component of our Senior Secured Credit Facility of approximately $7.3 million.

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.  The benefit payments for workers compensation and black lung
benefits will be paid as the claims are submitted over the lives of our
employees.  We believe that these
benefit payments are reasonably predictable and we have reflected them on the
contractual obligations table below.

Our
secondary source of cash is our new working capital revolver facility.  We believe that cash on hand, cash generated
from our operating activities, and availability under our new working capital
revolver will be sufficient to meet our working capital needs, to fund our
capital expenditures for existing operations and to meet our debt service
obligations for the next twelve months. 
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.

Other than ordinary course of business expenses and capital expenditures for existing mines during the next several years, our only
large expected use of cash will be the development of a new mine at our McCoy Elkhorn complex and the other projects described
under "Other Projects" below.  We expect to invest approximately $20 million in additional expenditures during the next 15
months in the development of the new McCoy Elkhorn mine, and from $8 million to $10 million on the other projects.  We expect
that such developments will be funded through cash on hand, cash generated by operations and from the revolver component of our new
Senior Secured Credit Facility.

-26-

---

The
following chart reflects the components of our debt as of September 30, 2004:

| |                                                                    |  | September 30,
  2004 |  
| | ------------------------------------------------------------------ |  | -------------------- | -
| |                                                                    |  |                      |  
| | Senior
  Secured Credit Facility:                                  |  |                      |  
| | Term
  loan component                                              |  |                      | $
| | Revolver
  component                                               |  |                      |  
| |                                                                    |  |                      |  
| | Term Credit
  Facility                                             |  |                      |  
| |                                                                    |  |                      |  
| |                                                                    |  |                      |  
| |                                                                    |  |                      |  
| | Total
  long term debt                                             |  |                      |  
| |                                                                    |  |                      |  
| | Less amounts
  classified as current                               |  |                      |  
| |                                                                    |  |                      |  
| |                                                                    |  |                      |  
| | Total
  long term debt, less
                 current
  maturities |  |                      | $
| |                                                                    |  |                      |  



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 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
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 the same
financial covenants for fixed charge coverage, total leverage, minimum
consolidated tangible net worth, minimum consolidated total EBITDDA (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 September 30, 2004.  As
of such date, the covenants were a minimum fixed charge ratio of .75 to 1.0,
minimum leverage ratio of 2.75 to 1.0, minimum consolidated tangible net worth
of $20 million, minimum consolidated total annualized EBITDDA of $44.5 million
and maximum annual limits on capital expenditures of $35.3 million for all
projects other than the new underground mine under development at our McCoy
Elkhorn mining complex, and $18.5 million for capital expenditures at that new
mine during 2004.

-27-

---

Net
cash provided by operating activities was $14.0 million for the nine months
ended September 30, 2004, and net cash provided by operating activities was
$22.1 million for the nine months ended September 30, 2003.  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).  For the nine months ended
September 30, 2004, the Companys net income, as adjusted for non cash charges,
was offset by a $27.1 million decrease 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,
inventory and accounts payable.   For
the nine months ended September 30, 2003, the Companys net loss, as adjusted
for non cash charges, was offset by a favorable cash impact of a $27.7 million
increase in working capital.

Net
cash used by investing activities increased $6.6 million to $19.2 million for
the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003.  The change was
primarily due to an $8.3 million increase in capital expenditures in 2004 to
$23.2 million as compared to 2003 and $4.0 million received from a sale of
property in 2004.  Capital expenditures
primarily consisted of new and replacement mine equipment and various projects
to improve the efficiency of our mining operations.   The cash used in investing activities in 2003 also included a
$2.3 million reduction in restricted cash.

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 $17.5 million for the nine months
ended September 30, 2004 and net cash used in financing activities was $2.3
million for the nine months ended September 30, 2003.  During 2004, the Company received $20.0 million in proceeds, less
$1.9 million capitalized debt issuance costs, from the Senior Secured Credit
Facility in May 2004.  During 2004, the
Company also borrowed and repaid $6.4 million under its Debtor in Possession
Loan.  The Company had no proceeds from
borrowings and had $1.9 million in principal payments during the nine months
ended September 30, 2003.

Certain Risks

For
a discussion of certain risk factors that may impact our business referred 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 August 13, 2004,
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 September
30, 2004, we had $73.5 million of outstanding surety bonds with third
parties.  These bonds were in place to
secure obligations as follows: post-mining reclamation bonds of $30.8 million,
workers compensation bonds of $41.1 million, wage payment, collection bonds,
and other miscellaneous obligation bonds of $1.6 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 September 30, 2004, we had $28.2 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.  The notes to the
condensed consolidated financial statements included herein, lists and
describes our significant accounting policies. 
The following critical accounting policies have a material affect on
amounts reported in our consolidated financial statements.

-28-

---

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 5.5% at December 31,
2003.   Significant changes to interest
rates result in substantial volatility to our financial statements.  If we were to decrease our estimate of the
discount rate at December 31, 2003 from 5.5% to 4.5%, all other things being
equal, the present value of our workers compensation obligation would increase
by approximately $3.1 million.  A change
in the law, through either legislation or judicial action, could cause these
assumptions to change.  If the estimates
do not materialize as anticipated, our actual costs and cash expenditures could
differ materially from that currently estimated.  Our estimated workers compensation liability as of September 30,
2004 was $53.4 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 5.5% at December 31, 2003. 
Significant changes to interest rates result in substantial volatility
to our financial statements.  If we were
to decrease our estimate of the discount rate from 5.5% at December 31, 2004 to
4.5%, all other things being equal, the present value of our black lung
obligation would increase by approximately $2.3 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 September 30, 2004 was $26.1 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, 2003, the
discount rate used to determine the obligation was 6.0%.  Significant changes to interest rates result
in substantial volatility to our financial statements.  If we were to decrease our estimate of the
discount rate at December 31, 2003 from 6.0% to 5.0%, all other things being
equal, the present value of our pension liability would increase by
approximately $8.8 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% for the years ended December 31,
2003.  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 the year ended December 31, 2003.   Significant changes to these rates would
introduce substantial volatility to our pension expense.

Reclamation and Mine
Closure Obligation

The
Surface Mining Control and Reclamation Act establishes operational, reclamation
and closure standards for all aspects of surface mining as well as most aspects
of underground mining.  Our total
reclamation and mine-closing liabilities are based upon permit requirements and
our engineering estimates related to these requirements.  We adopted Statement No. 143 effective
January 1, 2003.  Prior to the adoption
of Statement No. 143, we accrued for costs of reclamation at a rate per ton
equivalent to the estimated end-of-mine life reclamation costs divided by the
estimated tonnage to be mined.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 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.

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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 of timing of current legal or environmental
matters will have a material impact on our financial condition, results of
operations, or cash flows.

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
September 30, 2004, we had a valuation allowance of approximately $58.3 million
applied against deferred tax assets attributable to federal and state NOLs and
credit carryforwards that we believe will be eliminated in 2005 and are thus
unavailable to us.

Coal Reserves

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

| |  | all
  currently available data;                                             
| | - | ----------------------------------------------------------------------------
| |  | our own
  operational experience and that of our consultants;               
| |  | historical
  production from similar areas with similar conditions;         
| |  | previously
  completed geological and reserve studies;                      
| |  | the assumed
  effects of regulations and taxes by governmental agencies; and
| |  | assumptions
  governing future prices and future operating costs.           

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

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

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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.

Other Supplemental
Information

Laborand Turnover

Recruiting, hiring, and retaining skilled mine production personnel has become prominent
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 17.3% during the past twelve months.  Our net turnover during this period, after considering employees that have
left and been rehired, is approximately 10.4%.  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 through the retention of
current employees, the recruiting of new employees and the return of previous employees to our company.

Sales
Commitments

As
of September 30, 2004, we had the following contractual commitments to ship
coal at a fixed and known price:

| |                           |  | 2005                      |   | 2006  |  | 2007                      | 
| | ------------------------- |  | ------------------------- | - | ----- |  | ------------------------- | 
| |                           |  |                           |   |       |  |                           | 
| |                           |  | Average
  Price
  Per Ton |   | Tons  |  | Average
  Price
  Per Ton | 
| |                           |  |                           |   |       |  |                           | 
| |                           |  |                           |   |       |  |                           | 
| | Total
  Sales Commitments |  |                           | $ | 39.78 |  |                           | 

Project
Development

The
Company undertakes projects to add production, replace production, improve
productivity, improve efficiency, and add reserves. Currently, the Company has
several projects underway:

| |  | Mine 15-
  McCoy Elkhorn Coal Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | This project involves construction of a mine to access what we estimate to be
approximately 14 million tons of reserves in the Glamorgan seam via a slope and shaft along with related surface facilities and an
upgrade to the Bevins Branch preparation plant. The surface site development work was recently completed, and construction of both
the slope and the shaft is underway. Engineering and design work is in the final stages for the preparation plant project. 
The project remains on schedule to begin production during the fourth quarter of 2005.  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.  We are
also negotiating with mineral owners to add additional contiguous reserves to the project.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Other
  Projects:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | In addition to Mine 15, we have eight other projects in various stages of planning and
development.  Five of these projects are expected to begin production before June 30, 2005. We estimate that these five
projects in total will result in approximately 1.5 million tons per year of production.  This tonnage will replace tonnage
that has been lost as a result of contract miners, tonnage lost as a result of company mines being mined out, and incremental
increases in tonnage. Total capital expenditures required to complete these five projects are expected to be between $8 million and
$10 million. We estimate that these projects in total could provide access to approximately 9 million recoverable tons from areas
that are not currently being mined.  In addition, one project, if completed, is expected to add approximately 3 million
recoverable tons to the reserves of an active mine.  Our estimates of recoverable tons for these potential acquisitions were
calculated internallyin the same manner, and based on the same assumptions and qualifications, as described in “Coal
Reserves” above.

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:

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

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

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We wish to caution readers that forward-looking
statements, including disclosures which use words such as believe, intend,
expect, may, should, anticipate, could, estimate, plan,
predict, project, or their negatives, and similar statements, are subject
to certain risks and uncertainties which could cause actual results to differ
materially from expectations. 
These risks and uncertainties include, but are not limited to, the
following:  a change
in the demand for coal
by electric utility customers; the
loss of one or more of our largest
customers; our dependency on one railroad for transportation of our products;
failure to exploit additional coal reserves; failure to diversify our
operations; increased capital expenditures; increased compliance costs; lack of
availability of financing sources; the effects of regulation and competition;
and the risk factors detailed in our registration statement on
Form S-1.

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.  As of September 30, 2004, 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 70% for the nine months ended
September 30, 2004.

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.  During the fiscal quarter
covered by this Form 10-Q, we made the changes as described below in our
internal controls over financial reporting.  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.

Changes in Internal
Controls Over Financial Reporting

In
August of 2004, the Audit Committee was advised by our independent audit firm
that they had identified material weaknesses in our internal controls.   First, the auditors identified a material
weakness related to our controls around the data provided to our actuaries that
was used in the actuarial valuation of our workers compensation and black lung
benefit obligations.  This material weakness
led to a restatement of our 2002 and 2001 financial statements. Second, the
auditors identified a material weakness related to the lack of controls over
our year-end financial closing process and our ability to produce accurate
financial statements.  This weakness
resulted in a significant number of audit adjustments under generally accepted
accounting principles that materially changed our preliminary 2003 financial
statements.  Our independent auditors
also identified a need to add to the staff and strengthen the overall skills of
our accounting department.

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We have taken the following steps to address these findings:

| |  | We have
  evaluated our actuarial process.  We
  have hired a new Vice President of Risk Management to assist us in this
  ongoing evaluation.  In order to
  continue to ensure that the actuarial data provided to our actuary is
  accurate, the new Vice President of Risk Management is evaluating the
  controls over the data provided to the actuaries.                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In addition
  to the hiring of a new Vice President and Chief Accounting Officer in late
  2003, we have also recently hired other experienced accounting personnel to
  ensure the accuracy of our accounting entries and closing process.  The addition of these new accounting
  personnel has allowed the Company to strengthen our controls over financial
  reporting and improve our analysis of financial information.

We
believe that the corrective steps described above will allow us to conclude
that the internal controls over our financial reporting are effective.

PART II
OTHER INFORMATION

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    | 

-34-

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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      

December 13, 2004









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