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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the Quarterly Period Ended September 30, 2008

or



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

For the Transition Period From
to

Commission File Number 001-32331





Foundation Coal
Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 42-1638663                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                                               |  |           
|-------------------------------------------------------------- |  | ----------
|999 Corporate Boulevard, Suite 300 Linthicum Heights, Maryland |  | 21090     
|(Address of Principal Executive Offices)                       |  | (Zip Code)

Registrants telephone number, including area code (410) 689-7500





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  ̈

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):



|                           |  |                      |  |                          |  |                             
|-------------------------- |  | -------------------- |  | ------------------------ |  | ----------------------------
|Large accelerated filer  x |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈ |  | Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

There were 44,555,825 shares of common stock outstanding on October 31, 2008.









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TABLE OF CONTENTS



|         |  |                                                                                                                              |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                              |  | Page
|         |  | PART IFINANCIAL INFORMATION                                                                                                 |  |     
|         |  |                                                                                                                             
|ITEM 1.  |  | FINANCIAL STATEMENTS                                                                                                         |  | 3   
|         |  |                                                                                                                             
|         |  | Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007                                                   |  | 3   
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended September 30, 2008 and 2007 |  | 4   
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Operations and Comprehensive (Loss) Income for the Nine Months Ended September 30, 2008 and 2007  |  | 5   
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007                                  |  | 6   
|         |  |                                                                                                                             
|         |  | Notes to Consolidated Financial Statements                                                                                   |  | 7   
|         |  |                                                                                                                             
|ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                        |  | 19  
|         |  |                                                                                                                             
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                   |  | 40  
|         |  |                                                                                                                             
|ITEM 4.  |  | CONTROLS AND PROCEDURES                                                                                                      |  | 40  
|         |  |                                                                                                                             
|         |  | PART IIOTHER INFORMATION                                                                                                    |  |     
|         |  |                                                                                                                             
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                                                            |  | 41  
|         |  |                                                                                                                             
|ITEM 1A. |  | RISK FACTORS                                                                                                                 |  | 41  
|         |  |                                                                                                                             
|ITEM 2.  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                  |  | 42  
|         |  |                                                                                                                             
|ITEM 3.  |  | DEFAULTS UPON SENIOR SECURITIES                                                                                              |  | 42  
|         |  |                                                                                                                             
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                          |  | 42  
|         |  |                                                                                                                             
|ITEM 5.  |  | OTHER INFORMATION                                                                                                            |  | 42  
|         |  |                                                                                                                             
|ITEM 6.  |  | EXHIBITS                                                                                                                     |  | 42  



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION

Unless the context otherwise indicates, as used in this Form 10-Q the terms we, our, us and similar terms refer to Foundation Coal
Holdings, Inc. and its consolidated subsidiaries.



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except per share data)



|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                                                                                                                                                                                                                          |  | September 30,2008 |           | December 31,2007
|                                                                                                                                                                                                                                          |  | (Unaudited)       |           |                 
|ASSETS                                                                                                                                                                                                                                    |  |                   |           |                  |   |          
|Current assets:                                                                                                                                                                                                                           |  |                   |           |                  |   |          
|Cash and cash equivalents                                                                                                                                                                                                                 |  | $                 | 23,644    |                  | $ | 50,071   
|Trade accounts receivable                                                                                                                                                                                                                 |  |                   | 119,029   |                  |   | 100,931  
|Inventories, net                                                                                                                                                                                                                          |  |                   | 45,325    |                  |   | 44,122   
|Deferred income taxes                                                                                                                                                                                                                     |  |                   | 17,458    |                  |   | 11,358   
|Prepaid expenses                                                                                                                                                                                                                          |  |                   | 28,288    |                  |   | 30,534   
|Other current assets                                                                                                                                                                                                                      |  |                   | 5,676     |                  |   | 6,678    
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Total current assets                                                                                                                                                                                                                      |  |                   | 239,420   |                  |   | 243,694  
|Owned surface lands                                                                                                                                                                                                                       |  |                   | 45,350    |                  |   | 36,807   
|Plant, equipment and mine development costs, net                                                                                                                                                                                          |  |                   | 672,922   |                  |   | 664,429  
|Owned and leased mineral rights, net                                                                                                                                                                                                      |  |                   | 909,384   |                  |   | 928,439  
|Coal supply agreements, net                                                                                                                                                                                                               |  |                   | 8,059     |                  |   | 20,644   
|Other noncurrent assets                                                                                                                                                                                                                   |  |                   | 22,776    |                  |   | 14,151   
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Total assets                                                                                                                                                                                                                              |  | $                 | 1,897,911 |                  | $ | 1,908,164
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|LIABILITIES                                                                                                                                                                                                                               |  |                   |           |                  |   |          
|Current liabilities:                                                                                                                                                                                                                      |  |                   |           |                  |   |          
|Current portion of long-term debt                                                                                                                                                                                                         |  | $                 | 8,375     |                  | $ | -        
|Trade accounts payable                                                                                                                                                                                                                    |  |                   | 52,711    |                  |   | 43,206   
|Accrued expenses and other current liabilities                                                                                                                                                                                            |  |                   | 155,653   |                  |   | 160,991  
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Total current liabilities                                                                                                                                                                                                                 |  |                   | 216,739   |                  |   | 204,197  
|Long-term debt                                                                                                                                                                                                                            |  |                   | 591,410   |                  |   | 599,785  
|Deferred income taxes                                                                                                                                                                                                                     |  |                   | 17,260    |                  |   | 3,161    
|Coal supply agreements, net                                                                                                                                                                                                               |  |                   | 5,556     |                  |   | 9,417    
|Postretirement benefits                                                                                                                                                                                                                   |  |                   | 520,351   |                  |   | 505,787  
|Other noncurrent liabilities                                                                                                                                                                                                              |  |                   | 257,227   |                  |   | 249,480  
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Total liabilities                                                                                                                                                                                                                         |  |                   | 1,608,543 |                  |   | 1,571,827
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Commitments and contingencies (Note 16)                                                                                                                                                                                                   |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                          |  |                  
|STOCKHOLDERS EQUITY                                                                                                                                                                                                                      |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                          |  |                  
|Common stock, $0.01 par value; 100.0 million shares authorized, 47.0 million shares issued and 45.1 million shares outstanding
at September 30, 2008; 46.4 million shares issued and 45.0 million shares outstanding at December 31, 2007 |  |                   | 470       |                  |   | 464      
|Additional paid-in capital                                                                                                                                                                                                                |  |                   | 313,713   |                  |   | 293,920  
|Retained earnings                                                                                                                                                                                                                         |  |                   | 49,521    |                  |   | 86,800   
|Accumulated other comprehensive (loss) income                                                                                                                                                                                             |  |                   | (2)       |                  |   | 2,403    
|Treasury stock, at cost: 1.9 million shares at September 30, 2008; 1.4 million shares at December 31, 2007                                                                                                                                |  |                   | (74,334)  |                  |   | (47,250) 
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Total stockholders equity                                                                                                                                                                                                                |  |                   | 289,368   |                  |   | 336,337  
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          
|Total liabilities and stockholders equity                                                                                                                                                                                                |  | $                 | 1,897,911 |                  | $ | 1,908,164
|                                                                                                                                                                                                                                          |  |                   |           |                  |   |          

The accompanying notes are an integral part of these consolidated financial statements.



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Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited, dollars in thousands, except per share data)



|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                               |  | Three Months EndedSeptember 30, |           
|                                                                                                                                                               |  | 2008                            |            |   | 2007 |  
|Revenues:                                                                                                                                                      |  |                                 |            |   |      |   |            |  
|Coal sales                                                                                                                                                     |  | $                               | 400,699    |   |      | $ | 350,762    |  
|Other revenue                                                                                                                                                  |  |                                 | 8,668      |   |      |   | 8,296      |  
|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|Total revenues                                                                                                                                                 |  |                                 | 409,367    |   |      |   | 359,058    |  
|Costs and expenses:                                                                                                                                            |  |                                 |            |   |      |   |            |  
|Cost of coal sales (excludes depreciation, depletion and amortization)                                                                                         |  |                                 | 349,910    |   |      |   | 283,079    |  
|Selling, general and administrative expenses (excludes depreciation, depletion and amortization)                                                               |  |                                 | 16,003     |   |      |   | 14,263     |  
|Accretion on asset retirement obligations                                                                                                                      |  |                                 | 2,994      |   |      |   | 2,635      |  
|Depreciation, depletion and amortization                                                                                                                       |  |                                 | 51,783     |   |      |   | 49,585     |  
|Amortization of coal supply agreements                                                                                                                         |  |                                 | 185        |   |      |   | (844       | )
|Employee and contract termination costs and other                                                                                                              |  |                                 | -          |   |      |   | 2,314      |  
|Net change in fair value of derivative instruments                                                                                                             |  |                                 | 12,715     |   |      |   | -          |  
|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|(Loss) income from operations                                                                                                                                  |  |                                 | (24,223    | ) |      |   | 8,026      |  
|Other income (expense):                                                                                                                                        |  |                                 |            |   |      |   |            |  
|Interest expense                                                                                                                                               |  |                                 | (11,151    | ) |      |   | (13,389    | )
|Interest income                                                                                                                                                |  |                                 | 253        |   |      |   | 1,056      |  
|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|Loss before income tax benefit and equity in earnings of affiliates                                                                                            |  |                                 | (35,121    | ) |      |   | (4,307     | )
|Income tax benefit                                                                                                                                             |  |                                 | 2,790      |   |      |   | 6,212      |  
|Equity in earnings of affiliates                                                                                                                               |  |                                 | 106        |   |      |   | -          |  
|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|Net (loss) income                                                                                                                                              |  |                                 | (32,225    | ) |      |   | 1,905      |  
|Other comprehensive (loss) income:                                                                                                                             |  |                                 |            |   |      |   |            |  
|Adjustments to unrecognized gains and losses and amortization of employee benefit plan costs, net of tax benefit of $20 in 2008 and tax
expense of $66 in 2007 |  |                                 | (30        | ) |      |   | 96         |  
|Unrealized loss on financial swaps, net of tax benefit of $2,675 in 2008                                                                                       |  |                                 | (4,029     | ) |      |   | -          |  
|Reclassification of unrealized gain on interest rate swap into interest expense                                                                                |  |                                 | -          |   |      |   | (370       | )
|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|Comprehensive (loss) income                                                                                                                                    |  | $                               | (36,284    | ) |      | $ | 1,631      |  
|                                                                                                                                                               |  |                                 |            |   |      |   |            |  
|Basic (loss) earnings per common share                                                                                                                         |  | $                               | (0.71      | ) |      | $ | 0.04       |  
|Diluted (loss) earnings per common share                                                                                                                       |  | $                               | (0.71      | ) |      | $ | 0.04       |  
|Weighted-average shares-basic                                                                                                                                  |  |                                 | 45,345,400 |   |      |   | 45,221,193 |  
|Weighted-average shares-diluted                                                                                                                                |  |                                 | 45,345,400 |   |      |   | 46,412,804 |  
|Dividends declared per share                                                                                                                                   |  | $                               | 0.05       |   |      | $ | 0.05       |  

The accompanying notes are an integral part of these consolidated financial statements.



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Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited, dollars in thousands, except per share data)



|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                   |  | Nine Months EndedSeptember 30, |           
|                                                                                                                                                                   |  | 2008                           |            |   | 2007 |  
|Revenues:                                                                                                                                                          |  |                                |            |   |      |   |            |  
|Coal sales                                                                                                                                                         |  | $                              | 1,212,425  |   |      | $ | 1,096,787  |  
|Other revenue                                                                                                                                                      |  |                                | 21,183     |   |      |   | 25,674     |  
|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|Total revenues                                                                                                                                                     |  |                                | 1,233,608  |   |      |   | 1,122,461  |  
|Costs and expenses:                                                                                                                                                |  |                                |            |   |      |   |            |  
|Cost of coal sales (excludes depreciation, depletion and amortization)                                                                                             |  |                                | 996,671    |   |      |   | 855,160    |  
|Selling, general and administrative expenses (excludes depreciation, depletion and amortization)                                                                   |  |                                | 53,217     |   |      |   | 45,053     |  
|Accretion on asset retirement obligations                                                                                                                          |  |                                | 8,450      |   |      |   | 7,492      |  
|Depreciation, depletion and amortization                                                                                                                           |  |                                | 156,553    |   |      |   | 151,412    |  
|Amortization of coal supply agreements                                                                                                                             |  |                                | 1,507      |   |      |   | (3,441     | )
|Employee and contract termination costs and other                                                                                                                  |  |                                | -          |   |      |   | 14,297     |  
|Net change in fair value of derivative instruments                                                                                                                 |  |                                | 11,653     |   |      |   | -          |  
|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|Income from operations                                                                                                                                             |  |                                | 5,557      |   |      |   | 52,488     |  
|Other income (expense):                                                                                                                                            |  |                                |            |   |      |   |            |  
|Interest expense                                                                                                                                                   |  |                                | (35,431    | ) |      |   | (39,648    | )
|Interest income                                                                                                                                                    |  |                                | 944        |   |      |   | 2,574      |  
|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|(Loss) income before income tax (expense) benefit and equity in losses of affiliates                                                                               |  |                                | (28,930    | ) |      |   | 15,414     |  
|Income tax (expense) benefit                                                                                                                                       |  |                                | (592       | ) |      |   | 7,260      |  
|Equity in losses of affiliates                                                                                                                                     |  |                                | (960       | ) |      |   | -          |  
|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|Net (loss) income                                                                                                                                                  |  |                                | (30,482    | ) |      |   | 22,674     |  
|Other comprehensive (loss) income:                                                                                                                                 |  |                                |            |   |      |   |            |  
|Adjustments to unrecognized gains and losses and amortization of employee benefit plan costs, net of tax benefit of $59 in 2008 and tax
expense of $19,754 in 2007 |  |                                | 554        |   |      |   | 28,806     |  
|Unrealized loss on financial swaps, net of tax benefit of $1,964 in 2008                                                                                           |  |                                | (2,959     | ) |      |   | -          |  
|Reclassification of unrealized gain on interest rate swap into interest expense                                                                                    |  |                                | -          |   |      |   | (1,114     | )
|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|Comprehensive (loss) income                                                                                                                                        |  | $                              | (32,887    | ) |      | $ | 50,366     |  
|                                                                                                                                                                   |  |                                |            |   |      |   |            |  
|Basic (loss) earnings per common share                                                                                                                             |  | $                              | (0.67      | ) |      | $ | 0.50       |  
|Diluted (loss) earnings per common share                                                                                                                           |  | $                              | (0.67      | ) |      | $ | 0.49       |  
|Weighted-average shares-basic                                                                                                                                      |  |                                | 45,251,212 |   |      |   | 45,193,686 |  
|Weighted-average shares-diluted                                                                                                                                    |  |                                | 45,251,212 |   |      |   | 46,459,408 |  
|Dividends declared per share                                                                                                                                       |  | $                              | 0.15       |   |      | $ | 0.15       |  

The accompanying notes are an integral part of these consolidated financial statements.



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Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)



|                                                                                         |  |                                |          |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                         |  | Nine Months EndedSeptember 30, |         
|                                                                                         |  | 2008                           |          |   | 2007 |  
|Operating activities:                                                                    |  |                                |          |   |      |   |          |  
|Net (loss) income                                                                        |  | $                              | (30,482  | ) |      | $ | 22,674   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                                |          |   |      |   |          |  
|Accretion on asset retirement obligations                                                |  |                                | 8,450    |   |      |   | 7,492    |  
|Depreciation, depletion and amortization                                                 |  |                                | 158,060  |   |      |   | 147,971  |  
|Amortization of deferred financing costs                                                 |  |                                | 1,371    |   |      |   | 1,382    |  
|Gain on sale of assets                                                                   |  |                                | (2,203   | ) |      |   | (4,468   | )
|Non-cash stock compensation                                                              |  |                                | 10,173   |   |      |   | 4,601    |  
|Excess tax benefit from stock-based awards                                               |  |                                | (5,898   | ) |      |   | (2,704   | )
|Deferred income taxes                                                                    |  |                                | 13,185   |   |      |   | (26,524  | )
|Asset retirement obligation payments                                                     |  |                                | (2,119   | ) |      |   | (470     | )
|Equity in losses of affiliate                                                            |  |                                | 960      |   |      |   | -        |  
|Unrealized loss from change in fair value of derivative instruments                      |  |                                | 11,653   |   |      |   | -        |  
|Other                                                                                    |  |                                | 1,291    |   |      |   | (160     | )
|Changes in operating assets and liabilities:                                             |  |                                |          |   |      |   |          |  
|Trade accounts receivable                                                                |  |                                | (18,098  | ) |      |   | 9,788    |  
|Inventories, net                                                                         |  |                                | (1,295   | ) |      |   | (2,406   | )
|Prepaid expenses and other current assets                                                |  |                                | 2,135    |   |      |   | (521     | )
|Other noncurrent assets                                                                  |  |                                | (164     | ) |      |   | 37       |  
|Trade accounts payable                                                                   |  |                                | 9,505    |   |      |   | (3,467   | )
|Accrued expenses and other current liabilities                                           |  |                                | (16,064  | ) |      |   | 6,675    |  
|Noncurrent liabilities                                                                   |  |                                | 11,881   |   |      |   | 14,762   |  
|                                                                                         |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                                |  |                                | 152,341  |   |      |   | 174,662  |  
|                                                                                         |  |                                |          |   |      |   |          |  
|Investing activities:                                                                    |  |                                |          |   |      |   |          |  
|Purchases of property, plant and equipment                                               |  |                                | (110,842 | ) |      |   | (120,761 | )
|Acquisition of mineral rights under federal lease                                        |  |                                | (36,108  | ) |      |   | -        |  
|Purchases of equity-method investments                                                   |  |                                | (10,349  | ) |      |   | -        |  
|Proceeds from disposition of property, plant and equipment                               |  |                                | 2,787    |   |      |   | 6,228    |  
|                                                                                         |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                                    |  |                                | (154,512 | ) |      |   | (114,533 | )
|                                                                                         |  |                                |          |   |      |   |          |  
|Financing activities:                                                                    |  |                                |          |   |      |   |          |  
|Payment of cash dividends                                                                |  |                                | (6,798   | ) |      |   | (6,779   | )
|Proceeds from issuance of common stock                                                   |  |                                | 3,728    |   |      |   | 3,221    |  
|Excess tax benefit from stock-based awards                                               |  |                                | 5,898    |   |      |   | 2,704    |  
|Common stock repurchases                                                                 |  |                                | (24,987  | ) |      |   | (23,424  | )
|Other                                                                                    |  |                                | (2,097   | ) |      |   | (99      | )
|                                                                                         |  |                                |          |   |      |   |          |  
|Net cash used in financing activities                                                    |  |                                | (24,256  | ) |      |   | (24,377  | )
|                                                                                         |  |                                |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                     |  |                                | (26,427  | ) |      |   | 35,752   |  
|Cash and cash equivalents at beginning of period                                         |  |                                | 50,071   |   |      |   | 33,720   |  
|                                                                                         |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                               |  | $                              | 23,644   |   |      | $ | 69,472   |  
|                                                                                         |  |                                |          |   |      |   |          |  
|Supplemental cash flow information:                                                      |  |                                |          |   |      |   |          |  
|Cash paid for interest                                                                   |  | $                              | 35,736   |   |      | $ | 40,621   |  
|Cash paid for income taxes, net of refunds                                               |  | $                              | 8,432    |   |      | $ | 10,838   |  

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(1) | Basis of Presentation of Consolidated Financial Statements
|--- | ----------------------------------------------------------

The accompanying interim consolidated financial statements of Foundation Coal Holdings, Inc. and Subsidiaries (the Company) are unaudited and prepared in accordance with the rules and regulations of the United States
Securities and Exchange Commission (SEC) for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America as long as the statements are not misleading. In the opinion of management, these interim consolidated financial statements reflect all normal and recurring adjustments
necessary for a fair presentation of the results for the periods presented. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on
Form 10-K for the twelve months ended December 31, 2007, filed February 29, 2008.

The Companys consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Companys consolidated financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management
estimates and assumptions relate to coal reserves that are the basis for future cash flow estimates and units-of-production depreciation, depletion and amortization calculations; environmental and reclamation obligations; asset impairments;
postemployment, postretirement and other employee benefit liabilities; valuation allowances for deferred income taxes; income tax provision calculations; reserves for contingencies and litigation; and the fair value and accounting treatment of
certain financial instruments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. In
addition, different assumptions or conditions could reasonably be expected to yield different results.

The operating results for the three
and nine months ended September 30, 2008 may not necessarily be indicative of the results to be expected in any other quarter or for the twelve months ended December 31, 2008.



|(2) | Recent Accounting Pronouncements
|--- | --------------------------------

In June 2008, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
(FSP 03-6-1). This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the
computation of both basic and diluted earnings per share. FSP 03-6-1 will be effective for fiscal years beginning after December 15, 2008 and interim periods within those years. Early adoption is not permitted. All prior year EPS data presented
is required to be adjusted retrospectively. The Company expects to adopt FSP 03-6-1 on January 1, 2009 and does not believe it will have a material impact on its consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted
Accounting Principles(SFAS No. 162). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company expects to adopt SFAS No. 162 when it becomes effective and does not believe it will have a material impact on its consolidated financial
statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities
(SFAS No. 161). This standard amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (SFAS No. 133) and establishes, among
other things, the disclosure requirements for derivative instruments and for hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The Company expects to adopt SFAS No. 161 on
January 1, 2009 and does not believe it will have a material impact on its consolidated financial statements.



7



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 clarifies how to measure fair value
as permitted under other accounting pronouncements but does not require any new fair value measurements. SFAS No. 157 was originally effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. On February 12, 2008, the FASB issued FASB Staff Position No. Financial Accounting Standard 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2). FSP No. 157-2 was
effective upon issuance and delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis or at
least once a year, to fiscal years beginning after November 15, 2008. The provisions of FSP No. 157-2 are effective for the Companys fiscal year beginning January 1, 2009. On October 10, 2008, the FASB issued FASB Staff
Position No. Financial Accounting Standard 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP No. 157-3). FSP No. 157-3 clarifies the application of SFAS 157 in
determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. 157-3 became effective upon issuance, including interim periods for which financial statements have not been issued. The Company
adopted FSP No.157-3 upon issuance.

The Company adopted the provisions of SFAS No. 157 on January 1, 2008. SFAS No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Inputs are either observable or unobservable and refer broadly to the assumptions that are used in pricing assets or liabilities.
Observable inputs are reflective of market data and unobservable inputs reflect the entitys own assumptions about pricing assets or liabilities. As defined below, the fair value hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are further described as follows:



|        |  |                                                                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;                                                                                                              
|        | 
|Level 2 |  | Quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of
the asset or liability, or by market-corroborated inputs;
|        | 
|Level 3 |  | Unobservable inputs for the assets or liability in which the fair value measurement is supported by little or no market activity but reflects the best information available to the reporting
entity and may include the entitys own data.            

These levels are not necessarily an indication of the risk or liquidity associated with the
financial assets or liabilities disclosed.

The following table sets forth the Companys financial assets and liabilities measured at
fair value by level within the fair value hierarchy at September 30, 2008. As required by SFAS No. 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement.



|                                   |  |         |        |         |   |         |         |  |  
|---------------------------------- |  | ------- | ------ | ------- | - | ------- | ------- |  | -
|                                   |  | Level 1 |        | Level 2 |   |         | Level 3
|Cash equivalents                   |  | $       | 20,000 |         |   |        |         |  | 
|Sulfur dioxide emission allowances |  |         |       |         | $ | 486     |         |  | 
|Derivative instruments             |  |         |       |         | $ | (16,620 | )       |  | 

The Companys cash equivalents represent investments in a short-term US treasury securities
money market fund consisting of 100% US treasury securities, which are used by the Company primarily for the overnight investment of excess cash and are classified within Level 1 of the fair value hierarchy. The instruments are valued based on
unadjusted market prices in active markets for money market funds held on a short-term basis.

The Companys sulfur dioxide emission
allowances (emission allowances) are reported at fair value and are valued based on quoted prices in markets where there are fewer transactions as they are less actively traded due to the limited market for emission allowances. As such,
the emission allowances are classified within Level 2 of the fair value hierarchy.

The Companys derivative instruments are reported
at fair value, which are derived using valuation models commonly used for derivatives. Where possible, the Company verifies the values produced by such models to market prices. Valuation models require a variety of inputs, including contractual
terms, market fixed prices, inputs from forward price yield curves, notional quantities, measures of volatility and correlations of such inputs. The inputs in such valuation models do not involve significant management judgment. Such instruments are
typically classified within Level 2 of the fair value hierarchy.



8



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(3) | Inventories
|--- | -----------

Inventories consisted of the
following:



|                                                     |  |                   |        |   |                  |   |        |  
|---------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                     |  | September 30,2008 |        |   | December 31,2007 |  
|Saleable coal                                        |  | $                 | 16,430 |   |                  | $ | 16,317 |  
|Raw coal                                             |  |                   | 1,188  |   |                  |   | 2,497  |  
|Materials and supplies                               |  |                   | 35,191 |   |                  |   | 31,930 |  
|                                                     |  |                   |        |   |                  |   |        |  
|                                                     |  |                   | 52,809 |   |                  |   | 50,744 |  
|Less materials and supplies reserve for obsolescence |  |                   | (7,484 | ) |                  |   | (6,622 | )
|                                                     |  |                   |        |   |                  |   |        |  
|                                                     |  | $                 | 45,325 |   |                  | $ | 44,122 |  
|                                                     |  |                   |        |   |                  |   |        |  

Saleable coal represents coal stockpiles ready for shipment to a customer. Raw coal represents
coal that requires further processing prior to shipment.



|(4) | Prepaid Expenses
|--- | ----------------

Prepaid expenses consisted of the
following:



|                               |  |                   |        |                  |   |       
|------------------------------ |  | ----------------- | ------ | ---------------- | - | ------
|                               |  | September 30,2008 |        | December 31,2007
|Prepaid royalties              |  | $                 | 1,243  |                  | $ | 1,358 
|Prepaid longwall move expenses |  |                   | 8,579  |                  |   | 9,636 
|Prepaid SO2emission
allowances |  |                   | 486    |                  |   | 1,711 
|Prepaid taxes                  |  |                   | 6,815  |                  |   | 5,803 
|Prepaid insurance              |  |                   | 9,470  |                  |   | 10,030
|Other                          |  |                   | 1,695  |                  |   | 1,996 
|                               |  |                   |        |                  |   |       
|                               |  | $                 | 28,288 |                  | $ | 30,534
|                               |  |                   |        |                  |   |       



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(5) | Plant, Equipment, Mine Development Costs and Owned and Leased Mineral Rights
|--- | ----------------------------------------------------------------------------

Plant, equipment, mine development costs and owned and leased mineral rights consisted of the following:



|                                                |  |                   |           |                  |   |          
|----------------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                                |  | September 30,2008 |           | December 31,2007
|Owned and leased mineral rights                 |  |                   |           |                  |   |          
|Owned and leased mineral rights                 |  | $                 | 1,291,326 |                  | $ | 1,255,218
|Less accumulated depletion                      |  |                   | (381,942) |                  |   | (326,779)
|                                                |  |                   |           |                  |   |          
|                                                |  | $                 | 909,384   |                  | $ | 928,439  
|                                                |  |                   |           |                  |   |          
|Plant, equipment and mine development costs     |  |                   |           |                  |   |          
|Plant, equipment and asset retirement costs     |  | $                 | 1,005,988 |                  | $ | 921,446  
|Mine development costs                          |  |                   | 65,613    |                  |   | 48,693   
|Internal use software                           |  |                   | 35,244    |                  |   | 35,838   
|Coalbed methane equipment and development costs |  |                   | 17,742    |                  |   | 11,684   
|                                                |  |                   |           |                  |   |          
|                                                |  |                   | 1,124,587 |                  |   | 1,017,661
|                                                |  |                   |           |                  |   |          
|Less accumulated depreciation and amortization: |  |                   |           |                  |   |          
|Plant, equipment and asset retirement costs     |  |                   | (423,145) |                  |   | (332,492)
|Mine development costs                          |  |                   | (10,608)  |                  |   | (7,144)  
|Internal use software                           |  |                   | (13,245)  |                  |   | (11,347) 
|Coalbed methane equipment and development costs |  |                   | (4,667)   |                  |   | (2,249)  
|                                                |  |                   |           |                  |   |          
|                                                |  |                   | (451,665) |                  |   | (353,232)
|                                                |  |                   |           |                  |   |          
|                                                |  | $                 | 672,922   |                  | $ | 664,429  
|                                                |  |                   |           |                  |   |          

On February 20, 2008, the Company was the successful bidder on a new federal coal lease
adjacent to the western boundary of the Eagle Butte mine located north of Gillette, Wyoming. The Companys lease bonus bid was $180,540, payable in five equal annual installments of $36,108. The Company made the first payment of $36,108 during
the first quarter of 2008. The lease became effective on May 1, 2008. The initial payment was capitalized as a component of Owned and leased mineral rights, netin the Consolidated Balance Sheets. Subsequent payments will be capitalized
when paid. The cost of owned and leased mineral rights are depleted using the units-of-production method over proven and probable reserves directly benefiting from the capital expenditure. This federal coal lease contains an estimated
255 million tons of minable coal reserves.



10



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(6) | Other Noncurrent Assets
|--- | -----------------------

Other noncurrent assets
consisted of the following:



|                                          |  |                   |        |                  |   |       
|----------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                          |  | September 30,2008 |        | December 31,2007
|Receivables from asset dispositions       |  | $                 | 943    |                  | $ | 943   
|Unamortized deferred financing costs, net |  |                   | 8,651  |                  |   | 10,022
|Advance mining royalties                  |  |                   | 1,765  |                  |   | 1,615 
|Equity-method investments                 |  |                   | 9,389  |                  |   | -     
|Other                                     |  |                   | 2,028  |                  |   | 1,571 
|                                          |  |                   |        |                  |   |       
|                                          |  | $                 | 22,776 |                  | $ | 14,151
|                                          |  |                   |        |                  |   |       

During the three months ended March 31, 2008, the Company acquired a 49% interest in the
common stock of Target Drilling Inc. (Target), a privately-held contract drilling company for $9,246. The Company has the ability to exercise significant influence over, but not control the operating activities of Target and accordingly
uses the equity method of accounting in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (APB 18). The Company records its proportionate share of
earnings or losses of Target in its Consolidated Statements of Operations and Comprehensive (Loss) Income under the caption Equity in losses of affiliates. The Company adjusts the carrying amount of its investment in Target for its share of
earnings or losses of Target accordingly.

The Company performed a fair value analysis of the net tangible and intangible assets of Target
in order to account for the difference in the cost of its investment and its underlying equity in the net assets that were reflected on the books of Target on the date of acquisition. The Company assigned its proportionate share of the difference
between the historical cost of the identifiable tangible and intangible assets recorded on the books of Target and their respective fair values based on the fair value analysis. The differences assigned to the identifiable tangible and intangible
assets, other than equity-method goodwill, are being amortized over their respective useful lives as a component of Equity in losses of affiliates. The differences assigned consisted of tangible assets of $2,315, intangible assets of $1,955,
excluding equity-method goodwill, equity-method goodwill of $3,826 and a deferred tax liability of $1,779.



|(7) | Accrued Expenses and Other Current Liabilities
|--- | ----------------------------------------------

Accrued expenses and other current liabilities consisted of the following:



|                                           |  |                   |         |                  |   |        
|------------------------------------------ |  | ----------------- | ------- | ---------------- | - | -------
|                                           |  | September 30,2008 |         | December 31,2007
|Wages and employee benefits                |  | $                 | 41,797  |                  | $ | 37,503 
|Employee termination costs                 |  |                   | 110     |                  |   | 214    
|Postretirement benefits other than pension |  |                   | 23,304  |                  |   | 23,304 
|Interest                                   |  |                   | 3,604   |                  |   | 9,011  
|Royalties                                  |  |                   | 7,717   |                  |   | 5,492  
|Taxes, other than income taxes             |  |                   | 36,617  |                  |   | 38,107 
|Asset retirement obligations               |  |                   | 4,002   |                  |   | 4,649  
|Workers compensation                      |  |                   | 12,050  |                  |   | 10,450 
|Accrued capital expenditures               |  |                   | 10,604  |                  |   | 11,641 
|Accrued derivatives                        |  |                   | 16,734  |                  |   | 44     
|Other                                      |  |                   | (886)   |                  |   | 20,576 
|                                           |  |                   |         |                  |   |        
|                                           |  | $                 | 155,653 |                  | $ | 160,991
|                                           |  |                   |         |                  |   |        

The September 30, 2008 accrued derivatives balance consists of $9,039 related to swap
agreements which qualify as cash flow hedges in accordance with SFAS No. 133 and $7,695 representing net unrealized losses related to certain of our coal trading activities as further described in Note 19.



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(8) | Other Noncurrent Liabilities
|--- | ----------------------------

Other noncurrent liabilities
consisted of the following:



|                                |  |                   |         |                  |   |        
|------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                |  | September 30,2008 |         | December 31,2007
|Postemployment benefits         |  | $                 | 5,098   |                  | $ | 5,090  
|Pension benefits                |  |                   | 22,952  |                  |   | 28,564 
|Workers compensation           |  |                   | 21,210  |                  |   | 24,268 
|Black lung reserves             |  |                   | 14,690  |                  |   | 12,377 
|Contract settlement accrual     |  |                   | 6,363   |                  |   | 10,272 
|Asset retirement obligations(1) |  |                   | 165,419 |                  |   | 149,414
|Accrued Wyoming production tax  |  |                   | 17,166  |                  |   | 11,002 
|Deferred credits and other      |  |                   | 4,329   |                  |   | 8,493  
|                                |  |                   |         |                  |   |        
|                                |  | $                 | 257,227 |                  | $ | 249,480
|                                |  |                   |         |                  |   |        
|(1)       See Note 12.         



|(9) | Accumulated Other Comprehensive (Loss) Income
|--- | ---------------------------------------------

Accumulated other comprehensive (loss) income consisted of the following:



|                                                                          |  |                   |         |                  |   |      
|------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -----
|                                                                          |  | September 30,2008 |         | December 31,2007
|Defined benefit pension, postretirement and other company sponsored plans |  | $                 | 2,983   |                  | $ | 2,429
|Unrealized loss on financial swaps(1)                                     |  |                   | (2,985) |                  |   | (26) 
|                                                                          |  |                   |         |                  |   |      
|Total                                                                     |  | $                 | (2)     |                  | $ | 2,403
|                                                                          |  |                   |         |                  |   |      
|(1)       See Note 19.                                                   



|(10) | Pension, Other Postretirement Benefit Plans and Pneumoconiosis
|---- | --------------------------------------------------------------

Components of Net Periodic Pension Costs

The components of net periodic benefit costs are as
follows:



|                               |  |                                 |         |                                |   |         |  |      |         |  |   |        
|------------------------------ |  | ------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                               |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|                               |  | 2008                            |         | 2007                           |   | 2008    |  | 2007
|Service cost                   |  | $                               | 1,699   |                                | $ | 1,657   |  | $    | 5,096   |  | $ | 4,898  
|Interest cost                  |  |                                 | 3,365   |                                |   | 3,102   |  |      | 10,094  |  |   | 9,169  
|Expected return on plan assets |  |                                 | (3,317) |                                |   | (3,113) |  |      | (9,948) |  |   | (9,203)
|Amortization of:               |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Prior service cost             |  |                                 | (2)     |                                |   | 138     |  |      | (7)     |  |   | 407    
|Actuarial losses (gains)       |  |                                 | 116     |                                |   | (2)     |  |      | 348     |  |   | (7)    
|                               |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Net expense                    |  | $                               | 1,861   |                                | $ | 1,782   |  | $    | 5,583   |  | $ | 5,264  
|                               |  |                                 |         |                                |   |         |  |      |         |  |   |        



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



Components of Net Periodic Other Postretirement Benefit Plans Costs

The components of net periodic benefit costs are as follows:



|              |  |                                 |       |                                |   |       |  |      |        |  |   |       
|------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|              |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|              |  | 2008                            |       | 2007                           |   | 2008  |  | 2007
|Service cost  |  | $                               | 1,972 |                                | $ | 1,930 |  | $    | 5,915  |  | $ | 5,850 
|Interest cost |  |                                 | 7,966 |                                |   | 7,583 |  |      | 23,898 |  |   | 22,995
|              |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Net expense   |  | $                               | 9,938 |                                | $ | 9,513 |  | $    | 29,813 |  | $ | 28,845
|              |  |                                 |       |                                |   |       |  |      |        |  |   |       

The Companys postretirement medical and life insurance plans are unfunded.

Components of Pneumoconiosis Costs

The components of net periodic benefit costs are as follows:



|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |      
|-------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                 |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                 |  | 2008                            |       | 2007                           |   | 2008  |  | 2007
|Service cost                     |  | $                               | 271   |                                | $ | 174   |  | $    | 813   |  | $ | 522  
|Interest cost                    |  |                                 | 437   |                                |   | 341   |  |      | 1,309 |  |   | 1,021
|Expected return on plan assets   |  |                                 | (108) |                                |   | (124) |  |      | (323) |  |   | (374)
|Amortization of actuarial losses |  |                                 | 157   |                                |   | 29    |  |      | 472   |  |   | 87   
|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Net expense                      |  | $                               | 757   |                                | $ | 420   |  | $    | 2,271 |  | $ | 1,256
|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |      



|(11) | Stock-Based Compensation
|---- | ------------------------

On July 30, 2004,
the Companys Board of Directors adopted the Foundation Coal Holdings, Inc. 2004 Stock Incentive Plan (the Plan), which is designed to assist the Company in recruiting and retaining key employees, directors and consultants. The
Plan, which was amended and restated, and was effective on May 22, 2008 upon shareholder approval, permits the Company to grant its key employees, directors and consultants nonqualified stock options (options), stock appreciation
rights, restricted stock or other stock-based awards. The shares under the Plan may be issued at an exercise price of no less than 100% of the fair market value of the Companys common stock on the date of grant. The Plan is currently
authorized for the issuance of awards for up to 5,978,483 shares of common stock. At September 30, 2008, 2,105,525 shares of common stock were available for grant under the Plan.

The Company has three types of stock-based awards outstanding: restricted stock units, restricted stock and options. Total compensation expense related
to stock-based awards recognized in Selling, general and administrative expenses for the nine months ended September 30, 2008 was $7,991, consisting of $4,635, $431and $2,925 for restricted stock units, restricted stock and options,
respectively. Total compensation expense related to stock-based awards recognized in Cost of coal sales for the nine months ended September 30, 2008 was $2,182 for restricted stock units. Compensation expense related to stock-based
awards recognized in Selling, general and administrative expenses for the nine months ended September 30, 2007 was $3,653, consisting of $2,221, $294 and $1,138 for restricted stock units, restricted stock and options, respectively.
Compensation expense related to stock-based awards recognized in Cost of coal sales for the nine months ended September 30, 2007 was $948 for restricted stock units. During the first quarter of 2008, the Company modified the vesting
conditions for certain of its outstanding stock-based awards. As a result, the Company remeasured the affected stock-based awards in accordance with SFAS No. 123 (revised 2004), Share-Based Payment and recognized additional compensation
expense of approximately $2,372 and $172 in Selling, general and administrative expensesandCost of coal sales,respectively,during the first quarter of 2008.



|(12) | Asset Retirement Obligations
|---- | ----------------------------

The Companys
mining activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its
operations to protect the public health and environment and believes its operations are in material compliance with all applicable laws and regulations. The Company has made, and expects to make in the future, expenditures to comply with such laws
and regulations, but cannot predict the exact amount of such future expenditures. Estimated future reclamation costs are based principally on legal and regulatory requirements.



13



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



The following table is a reconciliation of the Companys asset retirement obligation liability
from December 31, 2007 through September 30, 2008:



|                                                           |  |   |        
|---------------------------------------------------------- |  | - | -------
|Asset retirement obligation, December 31, 2007             |  | $ | 154,063
|Accretion expense                                          |  |   | 8,450  
|Revisions in estimated cash flows and liabilities incurred |  |   | 9,027  
|Payments                                                   |  |   | (2,119)
|                                                           |  |   |        
|Asset retirement obligation, September 30, 2008            |  | $ | 169,421
|                                                           |  |   |        

The current portions of the asset retirement obligation liabilities of $4,002 and $4,649 at
September 30, 2008 and December 31, 2007, respectively, are included in Accrued expenses and other current liabilities. See Note 7. The noncurrent portions of the Companys asset retirement obligation liabilities of $165,419
and $149,414 at September 30, 2008 and December 31, 2007, respectively, are included in Other noncurrent liabilities. See Note 8. There were no assets that were legally restricted for purposes of settling asset retirement
obligations at September 30, 2008 or December 31, 2007. At September 30, 2008, regulatory obligations for asset retirements are secured by surety bonds in the amount of $274,344. These surety bonds are partially collateralized by
letters of credit issued by the Company.



|(13) | Stockholders Equity, Earnings (Loss) Per Share and Common Share Repurchases
|---- | ----------------------------------------------------------------------------

Stockholders Equity

During the nine months ended September 30, 2008, the Company
declared and paid cash dividends of $6,798.

During the three and nine months ended September 30, 2008, 34,274 and 511,405 options
were exercised, respectively.

Earnings (Loss) Per Share

The following table provides a reconciliation of weighted-average shares outstanding used in the basic and diluted earnings (loss) per share computations
for the periods presented:



|                                            |  |                                 |  |                                |  |            |  |           
|------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ---------- |  | ----------
|                                            |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                            |  | 2008                            |  | 2007                           |  | 2008       |  | 2007      
|Weighted average shares outstanding-basic   |  | 45,345,400                      |  | 45,221,193                     |  | 45,251,212 |  | 45,193,686
|Dilutive impact of stock options            |  | -                               |  | 1,082,141                      |  | -          |  | 1,174,524 
|Dilutive impact of restricted stock plans   |  | -                               |  | 109,470                        |  | -          |  | 91,198    
|                                            |  |                                 |  |                                |  |            |  |           
|Weighted average shares outstanding-diluted |  | 45,345,400                      |  | 46,412,804                     |  | 45,251,212 |  | 46,459,408
|                                            |  |                                 |  |                                |  |            |  |           

For financial reporting purposes, in periods of losses from continuing operations, basic loss per
share and dilutive loss per share are the same. The Company reported a net loss for the three and nine months ended September 30, 2008 and excluded 720,234 and 213,972 shares and 854,461 and 218,420 shares, respectively, from the computation of
diluted loss per share related to outstanding stock options and restricted stock plans, respectively.

Common Share Repurchases

In July 2006, the Board of Directors authorized a stock repurchase program (the Repurchase Program), authorizing the
Company to repurchase shares of its common stock. The Company may repurchase its common stock from time to time, as determined by authorized officers of the Company. In September 2008, the Board of Directors authorized a $100,000 increase to the
Repurchase Program, up to an aggregate amount of $200,000. During the nine months ended September 30, 2008, the Company paid $24,987 to repurchase 515,500 shares of its common stock at an average price of $48.47 per share under the Repurchase
program. At September 30, 2008, $127,863 of funds remained under the Repurchase Program. During the nine months ended September 30, 2008, the Company issued 111,218 shares of common stock to employees upon vesting of restricted stock
units. The Company repurchased 39,151 common shares withheld from employees to satisfy the employees minimum statutory tax withholdings upon vesting.



14



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(14) | Segment Information
|---- | -------------------

The Company produces primarily
steam coal from surface and deep mines for sale to utility and industrial customers, which is distributed by rail, barge and/or truck. The Company operates only in the United States with operating mines in three of the major coal basins. The Company
has four reportable business segments: Northern Appalachia, consisting of two underground mines in southwestern Pennsylvania; Central Appalachia, consisting of seven underground mines and two surface mines in southern West Virginia; the Powder River
Basin, consisting of two surface mines in Wyoming and the Companys Other segment. Other includes an idled underground mine in Illinois; expenses associated with closed mines; Dry Systems Technologies; coal trade activities; selling, general
and administrative expenses not charged out to the Powder River Basin, Northern Appalachia or Central Appalachia mines and the elimination of intercompany transactions. The Company evaluates the performance of its segments based on income (loss)
from operations.

Segment results for the three months ended September 30, 2008 are as follows:



|                                         |  |                   |         |                    |   |         |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ----------------- | ------- | ------------------ | - | ------- | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | Powder RiverBasin |         | NorthernAppalachia |   |         | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Total revenues                           |  | $                 | 131,038 |                    | $ | 129,784 |                   |  | $ | 122,912 |   |  | $            | 25,633  |   |  | $ | 409,367   |  
|Income (loss) from operations            |  |                   | 1,057   |                    |   | (1,421  | )                 |  |   | (1,000  | ) |  |              | (22,859 | ) |  |   | (24,223   | )
|Depreciation, depletion and amortization |  |                   | 12,292  |                    |   | 21,619  |                   |  |   | 16,269  |   |  |              | 1,603   |   |  |   | 51,783    |  
|Amortization of coal supply agreements   |  |                   | 724     |                    |   | (3      | )                 |  |   | (557    | ) |  |              | 21      |   |  |   | 185       |  
|Capital expenditures                     |  |                   | 6,909   |                    |   | 30,370  |                   |  |   | 6,526   |   |  |              | 376     |   |  |   | 44,181    |  
|Total assets at September 30, 2008       |  | $                 | 509,578 |                    | $ | 876,532 |                   |  | $ | 407,110 |   |  | $            | 104,691 |   |  | $ | 1,897,911 |  

Segment results for the three months ended September 30, 2007 are as follows:



|                                         |  |                   |         |                    |   |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ----------------- | ------- | ------------------ | - | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | Powder RiverBasin |         | NorthernAppalachia |   | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Total revenues                           |  | $                 | 120,970 |                    | $ | 117,249           |  | $ | 117,528 |   |  | $            | 3,311   |   |  | $ | 359,058   |  
|Income (loss) from operations            |  |                   | 18,838  |                    |   | 9,046             |  |   | 2,863   |   |  |              | (22,721 | ) |  |   | 8,026     |  
|Depreciation, depletion and amortization |  |                   | 11,451  |                    |   | 18,842            |  |   | 17,149  |   |  |              | 2,143   |   |  |   | 49,585    |  
|Amortization of coal supply agreements   |  |                   | 1,128   |                    |   | 24                |  |   | (2,101  | ) |  |              | 105     |   |  |   | (844      | )
|Capital expenditures                     |  |                   | 14,950  |                    |   | 21,291            |  |   | 7,389   |   |  |              | 1,052   |   |  |   | 44,682    |  
|Total assets at December 31, 2007        |  | $                 | 490,343 |                    | $ | 862,972           |  | $ | 427,040 |   |  | $            | 127,809 |   |  | $ | 1,908,164 |  

Segment results for the nine months ended September 30, 2008 are as follows:



|                                                  |  |                   |         |                    |   |         |                   |  |   |         |   |  |              |         |   |  |   |          
|------------------------------------------------- |  | ----------------- | ------- | ------------------ | - | ------- | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | ---------
|                                                  |  | Powder RiverBasin |         | NorthernAppalachia |   |         | CentralAppalachia |  |   | Other   |   |  | Consolidated
|Total revenues                                    |  | $                 | 376,359 |                    | $ | 463,510 |                   |  | $ | 351,022 |   |  | $            | 42,717  |   |  | $ | 1,233,608
|Income (loss) from operations                     |  |                   | 20,177  |                    |   | 45,489  |                   |  |   | 3,759   |   |  |              | (63,868 | ) |  |   | 5,557    
|Depreciation, depletion and amortization          |  |                   | 35,404  |                    |   | 65,384  |                   |  |   | 50,137  |   |  |              | 5,628   |   |  |   | 156,553  
|Amortization of coal supply agreements            |  |                   | 3,148   |                    |   | (88     | )                 |  |   | (2,364  | ) |  |              | 811     |   |  |   | 1,507    
|Capital expenditures                              |  |                   | 13,294  |                    |   | 78,615  |                   |  |   | 17,750  |   |  |              | 1,183   |   |  |   | 110,842  
|Acquisition of mineral rights under federal lease |  |                   | 36,108  |                    |   | -       |                   |  |   | -       |   |  |              | -       |   |  |   | 36,108   
|Total assets at September 30, 2008                |  | $                 | 509,578 |                    | $ | 876,532 |                   |  | $ | 407,110 |   |  | $            | 104,691 |   |  | $ | 1,897,911

Segment results for the nine months ended September 30, 2007 are as follows:



|                                         |  |                   |         |                    |   |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ----------------- | ------- | ------------------ | - | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | Powder RiverBasin |         | NorthernAppalachia |   | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Total revenues                           |  | $                 | 355,588 |                    | $ | 395,579           |  | $ | 347,185 |   |  | $            | 24,109  |   |  | $ | 1,122,461 |  
|Income (loss) from operations            |  |                   | 60,667  |                    |   | 62,995            |  |   | 3,043   |   |  |              | (74,217 | ) |  |   | 52,488    |  
|Depreciation, depletion and amortization |  |                   | 33,066  |                    |   | 60,387            |  |   | 51,742  |   |  |              | 6,217   |   |  |   | 151,412   |  
|Amortization of coal supply agreements   |  |                   | 3,130   |                    |   | 182               |  |   | (6,806  | ) |  |              | 53      |   |  |   | (3,441    | )
|Capital expenditures                     |  |                   | 26,089  |                    |   | 55,637            |  |   | 24,343  |   |  |              | 14,692  |   |  |   | 120,761   |  
|Total assets at December 31, 2007        |  | $                 | 490,343 |                    | $ | 862,972           |  | $ | 427,040 |   |  | $            | 127,809 |   |  | $ | 1,908,164 |  



15



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



|(15) | Other Revenue
|---- | -------------

Other revenue consisted of the
following:



|                                                                                                                                                                          |  |                                 |         |      |   |       |                                |     |      |  |      |         |  |   |        |  |     | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ----- | ------------------------------ | --- | ---- |  | ---- | ------- |  | - | ------ |  | --- | 
|                                                                                                                                                                          |  | Three Months EndedSeptember 30, |         |      |   |       | Nine Months EndedSeptember 30, |     |      | 
|                                                                                                                                                                          |  | 2008                            |         | 2007 |   |       |                                |     | 2008 |  | 2007 |         |  |  
|Royalty income                                                                                                                                                            |  | $                               | 1,882   |      | $ | 971   |                                |     |      |  | $    | 5,374   |  | $ | 2,843  |  |     | 
|Synfuel fees                                                                                                                                                              |  |                                 | -       |      |   | 1,351 |                                |     |      |  |      | -       |  |   | 4,013  |  |     | 
|Coalbed methane                                                                                                                                                           |  |                                 | 2,911   |      |   | 1,337 |                                |     |      |  |      | 7,641   |  |   | 3,590  |  |     | 
|Transloading and plant processing fees                                                                                                                                    |  |                                 | 549     |      |   | 429   |                                |     |      |  |      | 1,298   |  |   | 921    |  |     | 
|Gain on disposition of assets                                                                                                                                             |  |                                 | 2,095   |      |   | 1,867 |                                | (1) |      |  |      | 2,203   |  |   | 4,468  |  | (1) | 
|Combined Benefit Fund refund                                                                                                                                              |  |                                 | -       |      |   | -     |                                |     |      |  |      | -       |  |   | 1,325  |  |     | 
|Dry Systems Technologies equipment and filter sales                                                                                                                       |  |                                 | 2,237   |      |   | 888   |                                |     |      |  |      | 5,916   |  |   | 2,740  |  |     | 
|Other                                                                                                                                                                     |  |                                 | (1,006) |      |   | 1,453 |                                |     |      |  |      | (1,249) |  |   | 5,774  |  |     | 
|                                                                                                                                                                          |  |                                 |         |      |   |       |                                |     |      |  |      |         |  |   |        |  |     | 
|Total other revenue                                                                                                                                                       |  | $                               | 8,668   |      | $ | 8,296 |                                |     |      |  | $    | 21,183  |  | $ | 25,674 |  |     | 
|                                                                                                                                                                          |  |                                 |         |      |   |       |                                |     |      |  |      |         |  |   |        |  |     | 
|(1)       Gain on sale of assets includes a $2,000 gain on a non-cash exchange of
leased reserves with Boone West Development Co., a subsidiary of Massey Energy Company. | 



|(16) | Commitments and Contingencies
|---- | -----------------------------

General

The Company follows SFAS No. 5, Accounting for Contingencies, in determining its accruals and disclosures with respect
to loss contingencies. Accordingly, estimated losses from loss contingencies and legal expenses associated with loss contingencies are accrued by a charge to income when information available indicates that it is probable that an asset had been
impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the consolidated financial statements when
it is at least reasonably possible that a loss will be incurred and the loss is material.

Commitments

On February 20, 2008, the Company was determined to be the successful bidder on a federal coal lease by the Bureau of Land Management, a unit of the
United States Department of the Interior. The bid was accepted as submitted in the amount of $180,540 for an approximate 1,428 acre tract of federal land. The lease became effective on May 1, 2008. This lease is subject to the deferred bonus
payment provisions of the Code of Federal Regulations and, as such, the Company remits the bonus payment in five equal installments, the first of which was submitted with the bid as a deposit on the lease in February 2008. The remaining four annual
installments of $36,108 are due on the annual anniversary dates of the lease.

See Note 12 regarding our Asset Retirement Obligations.

Guarantees

Neweagle Industries, Inc., Neweagle Coal Sales Corp., Laurel Creek Co., Inc. and Rockspring Development, Inc. (Sellers) are indirect wholly owned subsidiaries of the Company. The Sellers sell coal to Birchwood Power Partners,
L.P. (Birchwood) under a Coal Supply Agreement dated July 22, 1993 (Birchwood Contract). Laurel Creek Co., Inc. and Rockspring Development, Inc. were parties to the Birchwood Contract since its inception, at which time
those entities were not affiliated with Neweagle Industries, Inc., Neweagle Coal Sales Corp. or the Company. Effective January 31, 1994, the Birchwood Contract was assigned to Neweagle Industries, Inc. and Neweagle Coal Sales Corp. by AgipCoal
Holding USA, Inc. and AgipCoal Sales USA, Inc., which at the time were affiliates of Arch Coal, Inc. Despite this assignment, Arch Coal, Inc. (Arch) and its affiliates have separate contractual obligations to provide coal to Birchwood if
Sellers fail to perform. Pursuant to an Agreement & Release dated September 30, 1997, the Company agreed to defend, indemnify and hold harmless Arch and its subsidiaries from and against any claims arising out of any failure of Sellers
to perform under the Birchwood Contract. By acknowledgement dated February 16, 2005, the Company and Arch acknowledged the continuing validity and effect of said Agreement & Release.



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



In the normal course of business, the Company is a party to guarantees and financial instruments with
off-balance sheet risk, such as bank letters of credit, performance or surety bonds and other guarantees and indemnities related to the obligations of its subsidiaries which are not reflected in the accompanying Consolidated Balance Sheets.
Management does not expect any material losses to result from these guarantees and other off-balance sheet instruments.

Contingencies

Extensive regulation of the impacts of mining on the environment and of maintaining workplace safety,
and related litigation, has had or may have a significant effect on the Companys costs of production and results of operations. Further regulations, legislation or litigation in these areas may also cause the Companys sales or
profitability to decline by increasing costs or by hindering the Companys ability to continue mining at existing operations or to permit new operations.

Legal Proceedings

The Company is involved in various claims and other 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, consolidated results of operations or
consolidated cash flows.

Letters of Credit

At September 30, 2008, the Company had $169,245 of letters of credit outstanding under its revolving credit facility.



|(17) | Employee and Contract Termination Costs and Other
|---- | -------------------------------------------------

In April 2007, Wabash Mine Holding Company (Wabash) announced the idling of the mine in southern Illinois. The mining operation had become economically unviable at that time. As a result of the Wabash mine idling, the Company
recognized employee termination costs of $5,967 and $1,405, respectively, in accordance with the provisions of SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No.146) and the provisions of SFAS
No. 112, Employers Accounting for Postemployment Benefits (SFAS No. 112), respectively, during the nine months ended September 30, 2007. During the three months ended September 30, 2007, employee
termination costs of $617 were recognized in accordance with SFAS No. 146 and the Company reduced the estimated cost related to on-going benefit arrangements by $57. Additionally, the Company recorded contract termination costs of $5,171
associated with the idling of the mine. During the three and nine months ended September 30, 2007, the Company also recognized $1,754 of direct and incremental costs related to additional benefit claims for certain severed employees. Employee
and contract termination costs are recorded as Employee and contract termination costs and other in the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Wabash mine is included in the Companys Other segment.
See Note 14.

As of September 30, 2008 and December 31, 2007, the Companys liabilities for employee termination costs were
$110 and $214, respectively, and are included in Accrued expenses and other current liabilities. See Note 7.



|(18) | Income Taxes
|---- | ------------

For the three months ended
September 30, 2008, the income tax benefit of $2,790 represents an effective benefit of 8% on the pre-tax loss of $35,121, compared to an income tax benefit of $6,212, or an effective benefit of 144% on a pre-tax loss of $4,307 for the three
months ended September 30, 2007. The income tax benefit for the three months ended September 30, 2008 is comprised of two elements: (a) a $3,793, or 11% benefit based on forecasted annual results for 2008; offset partially by
(b) a 3% discrete tax expense of $1,003 primarily related to establishing contingency reserves on certain tax positions in accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109(FIN 48).

For the nine months ended September 30, 2008, income tax
expense of $592 represents an effective rate of 2% on the pre-tax loss of $28,930 compared to an income tax benefit of $7,260, or a benefit of 47% on pre-tax income of $15,414 for the nine months ended September 30, 2007. The income tax expense
for the nine months ended September 30, 2008 is comprised of two elements: (a) a $3,370 benefit resulting from the application of a forecasted 12% annual effective rate based on forecasted annual income results for 2008 applied to the nine
month $28,930 pre-tax loss; offset by (b) a discrete tax expense of $3,962 related primarily to changes in a valuation allowance estimate for certain state net operating loss carryforwards and adjustments to other miscellaneous estimates.
Absent the discrete items, the forecasted annual effective rate of 12% for 2008 increased from the 2007 effective benefit of 44% due



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##### Table of Contents

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands)



primarily to the expected impact of excess depletion deduction projections which are anticipated to be different year-over-year. The impact of the permanent
differences for excess depletion deductions changes during interim periods as the Company reconsiders its forecast of full-year pretax income based upon its most recent experience. These changes in estimates are reflected in the effective tax rate
in the period in which the information becomes available to the Company.



|(19) | Derivatives
|---- | -----------

The Company accounts for its
derivative instruments in accordance with SFAS No. 133, as amended. SFAS No. 133, as amended, requires all derivative instruments to be recognized as assets or liabilities and to be measured at fair value. For derivative instruments that
have not been designated as cash flow hedges, changes in fair value are recorded in current period earnings or loss. For derivative instruments that have been designated as cash flow hedges, the effective portion of the changes in fair value are
recorded in Accumulated other comprehensive (loss) income and any portion that is ineffective is recorded in current earnings or losses. Amounts recorded in Accumulated other comprehensive (loss) income are reclassified to earnings or
losses in the period the underlying hedged transaction affects earnings or when the underlying hedged transaction is no longer probable of occurring.

Cash Flow Hedges

The Company is subject to the risk of price volatility for certain of the
materials and supplies used in production, such as diesel fuel and explosives. As a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for both diesel
fuel and explosives. The Company has designated these swap agreements as qualifying cash flow hedges in accordance with SFAS No. 133. As of September 30, 2008, the Company had swap agreements outstanding to hedge the variable cash flows
related to 13,062,000 gallons of anticipated diesel fuel usage for calendar year 2009. As of September 30, 2008, the Company had swap agreements outstanding to hedge the variable cash flows related to approximately 7,500 tons of anticipated
explosive usage for the remainder of 2008 and for 38,000 tons of anticipated explosive usage for calendar year 2009. As of September 30, 2008, a liability of $9,039 related to these cash flow hedges is included in Accrued expenses and other
current liabilities (see Note 7). Unrealized losses recorded in Accumulated other comprehensive (loss) income were $2,985, net of income tax benefit of $1,981. The Company recorded unrealized losses of $4,050 in the Consolidated
Statements of Operations and Comprehensive (Loss) Income for the nine months ending September 30, 2008 under the caption Net change in fair value of derivative instruments for certain diesel fuel related swaps that represented
mark-to-market losses prior to the swaps being designated as qualifying cash flow hedges.

Coal Trading Activities

The Company evaluates its coal trading activities and associated contracts under SFAS No. 133. Contracts that qualify as
derivatives under SFAS No. 133 are accounted for at fair value. Those contracts that qualify as derivatives have not been designated as cash flow hedges and accordingly, the Company includes the unrealized gains and losses in current period
earnings or losses. The Company has recorded net unrealized losses of $7,581 related to trading contracts that qualify as derivatives in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the nine months ended
September 30, 2008 under the caption Net change in fair value of derivative instruments. A liability of $7,695 is included in Accrued expenses and other current liabilities (see Note 7) and an asset of $114 is included in Other
current assets in the Consolidated Balance Sheets as of September 30, 2008.



|(20) | Subsequent Event
|---- | ----------------

In October 2008, the Company
acquired 514,645 shares of its outstanding common stock for a total of $14,276 pursuant to the Repurchase Program, as described in Note 13.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

Special Note Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking
statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet
determinable. These statements may also relate to our future prospects, developments and business strategies.

We have used the words
anticipate, believe, could, estimate, expect, intend, may, plan, predict, project and similar terms and phrases, including
references to assumptions, in this Form 10-Q to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors
relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these
forward-looking statements. The following factors are among those that may cause actual results to differ materially from our forward-looking statements:



| |  |  | market demand for coal, electricity and steel;
| | - |  | ----------------------------------------------



| |  |  | future economic or capital market conditions;
| | - |  | ---------------------------------------------



| |  |  | weather conditions or catastrophic weather-related damage;
| | - |  | ----------------------------------------------------------



| |  |  | our ability to produce coal at existing and planned future operations;
| | - |  | ----------------------------------------------------------------------



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



| |  |  | our plans and objectives for future operations and expansion or consolidation;
| | - |  | ------------------------------------------------------------------------------



| |  |  | our relationships with, and other conditions affecting, our customers;
| | - |  | ----------------------------------------------------------------------



| |  |  | timing of reductions or increases in customer coal inventories;
| | - |  | ---------------------------------------------------------------



| |  |  | long-term coal supply arrangements;
| | - |  | -----------------------------------



| |  |  | risks in coal mining;
| | - |  | ---------------------



| |  |  | environmental laws, including those directly affecting our coal mining and production, and those affecting our customers coal usage;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | railroad, barge, trucking and other transportation performance and costs;
| | - |  | -------------------------------------------------------------------------



| |  |  | our assumptions concerning economically recoverable coal reserve estimates;
| | - |  | ---------------------------------------------------------------------------



| |  |  | employee workforce factors;
| | - |  | ---------------------------



| |  |  | regulatory and court decisions;
| | - |  | -------------------------------



| |  |  | future legislation and changes in regulations or governmental policies or changes in interpretations thereof;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | changes in postretirement benefit and pension obligations;
| | - |  | ----------------------------------------------------------



| |  |  | our liquidity, results of operations and financial condition;
| | - |  | -------------------------------------------------------------



| |  |  | disruptions in delivery or changes in pricing from third party vendors of goods and services which are necessary for our operations, such as fuel, steel products,
explosives and tires;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the global financial crisis and tightening in the credit markets could adversely affect our business and financial results as global demand for coal in the
short-term is uncertain and may lead to reduced coal prices, creating challenges to producers in the industry.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

You
should keep in mind that any forward-looking statement made by us in this Form 10-Q or elsewhere speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these
events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and
uncertainties, you should keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.



19



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##### Table of Contents

Overview

Based on annual production volumes, we are the fourth largest coal producer in the United States, operating eight mining complexes that consist of thirteen individual coal mines. Our mining operations are located in southwest Pennsylvania,
southern West Virginia and the southern Powder River Basin region of Wyoming. Four of our operations are surface mines, two of our operations are underground mines using highly efficient longwall mining technology and the remaining seven operations
are underground mines that utilize continuous miners. In addition to mining coal, we also purchase coal from other producers for resale or for the purpose of blending it with our own production.

For the three months ended September 30, 2008, we sold 17.6 million tons of coal, including 17.1 million tons that were produced and
processed at our operations. For the comparable period in 2007, we sold 18.5 million tons of coal, including 18.0 million tons that were produced and processed at our operations. For the nine months ended September 30, 2008, we sold
53.1 million tons of coal, including 51.2 million tons that were produced and processed at our operations. For the comparable period in 2007, we sold 55.5 million tons of coal, including 54.2 million tons that were produced and
processed at our operations. As of December 31, 2007, we had approximately 1.6 billion tons of proven and probable coal reserves. On February 20, 2008, we were the successful bidder on a new federal coal lease adjacent to the western
boundary of the Eagle Butte mine located north of Gillette, Wyoming. The lease became effective on May 1, 2008. This federal coal lease contains an estimated 255 million tons of minable coal reserves, thereby increasing our proven and
probable coal reserves to greater than 1.8 billion tons. In addition to mining coal, we are also involved in marketing coal produced by others to supplement our own production and, through blending, provide our customers with a wide array of coal
qualities beyond those available from our own production. For the nine months ended September 30, 2008 and 2007, we purchased and resold approximately 1.9 million and 1.3 million tons of coal, respectively.

We are primarily a supplier of steam coal to U.S. utilities for use in generating electricity. We also sell steam coal to industrial plants. Steam coal
sales accounted for approximately 98% and 97% of our coal sales volume for the three month periods ended September 30, 2008 and 2007, respectively, representing approximately 86% and 88% of our coal sales revenue for the three months ended
September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, steam coal sales accounted for approximately 98% and 97% of our coal sales volume, respectively, representing approximately 89% and 90% of
our coal sales revenue in the nine month periods ended September 30, 2008 and 2007, respectively. We sell metallurgical coal to steel producers where it is used to make coke for steel production. Metallurgical coal accounted for approximately
2% and 3% of our coal sales volume for the three month periods ended September 30, 2008 and 2007, respectively, representing approximately 14% and 12% of our coal sales revenue in for the three month periods ended September 30, 2008 and
2007, respectively. Metallurgical coal accounted for approximately 2% and 3% of our coal sales volume for the nine month periods ended September 30, 2008 and 2007, respectively, representing approximately 11% and 10% of our coal sales revenue
in the nine month periods ended September, 2008 and 2007, respectively.

While the majority of our revenues are derived from the sale of
coal, we also realize revenues from coal production royalties, override royalty payments from a coal supply agreement now fulfilled by another producer, fees to transload coal through our Rivereagle facility on the Big Sandy River and revenues from
the sale of coalbed methane, natural gas and Dry Systems Technologies equipment and filters.

Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Coal sales realization per ton sold represents revenue realized on each ton of coal sold. It is calculated by dividing coal sales revenues by tons sold.

Revenues



|                                    |  |                                                |         |                     |   |         |  |         |        |  |     
|----------------------------------- |  | ---------------------------------------------- | ------- | ------------------- | - | ------- |  | ------- | ------ |  | ----
|                                    |  | Three Months EndedSeptember 30,                |         | Increase (Decrease)
|                                    |  | 2008                                           |         | 2007                |   | Amount  |  | Percent
|                                    |  | (Unaudited, in thousands, except per ton data)
|Coal sales                          |  | $                                              | 400,699 |                     | $ | 350,762 |  | $       | 49,937 |  | 14 %
|Other revenue                       |  |                                                | 8,668   |                     |   | 8,296   |  |         | 372    |  | 4 % 
|                                    |  |                                                |         |                     |   |         |  |         |        |  |     
|Total revenues                      |  | $                                              | 409,367 |                     | $ | 359,058 |  | $       | 50,309 |  | 14 %
|                                    |  |                                                |         |                     |   |         |  |         |        |  |     
|Tons sold                           |  |                                                | 17,634  |                     |   | 18,470  |  |         | (836)  |  | (5)%
|Coal sales realization per ton sold |  | $                                              | 22.72   |                     | $ | 18.99   |  | $       | 3.73   |  | 20 %

Coal sales revenues for the three months ended September 30, 2008 increased by $49.9 million,
or 14% compared to coal sales revenues for the three months ended September 30, 2007. Coal sales realization per ton increased 20% period-over-period, while tons



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##### Table of Contents

sold decreased by 5% period-over-period. Consolidated coal sales realization per ton for the three months ended September 30, 2008 reflected increased
prices per ton sold in three of our operating segments, consisting of a 43% increase in Central Appalachia, an 18% increase in Northern Appalachia and an 11% increase in the Powder River Basin.

Coal sales revenues in Northern Appalachia for the three months ended September 30, 2008 increased by $13.8 million, or 12% compared to coal sales
revenues for the three months ended September 30, 2007 primarily due to higher coal sales realization per ton. Coal sales volumes in Northern Appalachia decreased by 0.2 million tons, or 5% period-over-period while coal sales realization
per ton increased 18% period-over-period due to increased pricing per ton sold. Coal sales volumes at the Cumberland mine decreased 0.4 million tons, or 19% compared to the prior year period and production decreased 0.4 million tons, or
21% compared to the prior year period as a result of a longwall move that occurred during the three months ended September 30, 2008, with no corresponding move occurring in the prior year period. Coal sales volumes at the Emerald mine increased
0.2 million tons, or 18% compared to the prior year period and production increased 0.2 million tons, or 20% compared to the prior year period. During the three months ended September 30, 2008, shipments at Emerald included
approximately 0.1 million tons of coal purchased to fulfill existing contracts so that coal produced could be sold at prices more indicative of the current market prices.

Coal sales revenues in Central Appalachia for the three months ended September 30, 2008 increased $8.5 million, or 7% compared to coal sales
revenues for the three months ended September 30, 2007 primarily as a result of higher coal sales realization per ton, partially offset by lower coal sales volumes. Coal sales realization per ton increased 43% period-over-period as a result of
increased pricing per ton sold. Coal sales volumes declined by 0.5 million tons, or 25% in the three months ended September 30, 2008 compared to the prior year period. Coal sales volumes at the Laurel Creek mine decreased 0.3 million
tons, or 56% compared to the prior year period while production decreased 0.2 million tons, or 53% compared to the prior year period. Coal sales volumes and revenues were negatively impacted by the absence of coal purchased and resold due to
the expiration of the synfuel tax credit in December 2007.

Coal sales revenues in the Powder River Basin for the three months ended
September 30, 2008 increased $9.8 million, or 8% compared to coal sales revenues for the three months ended September 30, 2007 as a result of higher coal sales realization per ton partially offset by lower coal sales volumes. Coal sales
realization per ton increased 11% period-over-period as a result of increased pricing per ton sold. Coal sales volumes declined by 0.3 million tons, or 2% in the three months ended September 30, 2008 compared to the prior year period.
Production and shipments decreased 19% period-over-period at Eagle Butte while production and shipments at Belle Ayr increased 14% period-over-period.

Revenues from increased sales by our coal trading group increased $18.0 million in the three months ended September 30, 2008 to $19.7 million compared to $1.7 million in the same period in the previous year.

Other revenues for the three months ended September 30, 2008 increased by $0.4 million (4%) compared to the three months ended
September 30, 2007. The increase was due to: (a) increased coalbed methane revenues ($1.6 million); (b) increased revenues from the sale of equipment and filters by Dry Systems Technologies ($1.3 million); (c) increased royalty
revenue ($0.9 million); partially offset by (d) the absence of synfuel revenues due to the expiration of the synfuel tax credit in December, 2007 ($1.4 million); and (e) lower other miscellaneous revenues ($2.0 million).

Costs and Expenses



|                                                                                                 |  |                                 |         |                     |   |         |  |         |         |  |       
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | ------------------- | - | ------- |  | ------- | ------- |  | ------
|                                                                                                 |  | Three Months EndedSeptember 30, |         | Increase (Decrease)
|                                                                                                 |  | 2008                            |         | 2007                |   | Amount  |  | Percent
|                                                                                                 |  | (Unaudited, in thousands)      
|Cost of coal sales (excludes depreciation, depletion and amortization)                           |  | $                               | 349,910 |                     | $ | 283,079 |  | $       | 66,831  |  | 24 %  
|Selling, general and administrative expenses (excludes depreciation, depletion and amortization) |  |                                 | 16,003  |                     |   | 14,263  |  |         | 1,740   |  | 12 %  
|Accretion on asset retirement obligations                                                        |  |                                 | 2,994   |                     |   | 2,635   |  |         | 359     |  | 14 %  
|Depreciation, depletion and amortization                                                         |  |                                 | 51,783  |                     |   | 49,585  |  |         | 2,198   |  | 4 %   
|Amortization of coal supply agreements                                                           |  |                                 | 185     |                     |   | (844)   |  |         | 1,029   |  | 122 % 
|Employee and contract termination costs and other                                                |  |                                 | -       |                     |   | 2,314   |  |         | (2,314) |  | (100)%
|Net change in fair value of derivative instruments                                               |  |                                 | 12,715  |                     |   | -       |  |         | 12,715  |  | -     
|                                                                                                 |  |                                 |         |                     |   |         |  |         |         |  |       
|Total costs and expenses                                                                         |  | $                               | 433,590 |                     | $ | 351,032 |  | $       | 82,558  |  | 24 %  
|                                                                                                 |  |                                 |         |                     |   |         |  |         |         |  |       



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Cost of coal sales. Cost of coal sales increased $66.8 million for the three months ended
September 30, 2008 compared to the three months ended September 30, 2007, primarily due to: (a) higher repair, maintenance and operating supply costs, including diesel fuel ($24.7 million); (b) increased purchased coal costs as a
result of increased pricing on coal purchases ($21.2 million); (c) increases in labor and benefit costs as a result of both compensation increases and hiring of additional personnel ($13.7 million); (d) increased miscellaneous other
expenses ($5.4 million); and (e) increases in royalties mainly due to mining a higher proportion of coal subject to federal royalty ($6.4 million); partially offset by (f) decreased inventory charges to expense related to an overall lower
ratio of tons sold vs. tons produced in the three months ended September 30, 2008 compared to the prior year period ($4.6 million). Cost of coal sales per ton was $19.84 for the three months ended September 30, 2008 compared to $15.33 per
ton for the three months ended September 30, 2007.

Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 30, 2008 increased $1.7 million compared to the three months ended September 30, 2007. Period-over-period increases were due to: (a) higher expenses incurred for employee
compensation and benefit related expenses ($0.4 million); and (b) higher overhead expenses attributed mainly to an increase in industry association membership fees and legal expenses ($1.9 million); partially offset by (c) lower consulting
fees ($0.6 million).

Accretion on asset retirement obligations.Accretion on asset retirement obligations is a result of
accounting for asset retirement obligations under Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). Accretion represents the increase in
the asset retirement liability to reflect the change in the liability for the passage of time because the initial liability is recorded at present value. Higher accretion expense in 2008 was due to increased asset retirement obligation estimates for
the comparable periods.

Depreciation, depletion and amortization. Depreciation, depletion and amortization includes
depreciation of plant and equipment, cost depletion of amounts assigned to owned and leased mineral rights and amortization of mine development costs, internal use software and leasehold improvements. Depreciation, depletion and amortization expense
increased $2.2 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to higher depreciation and amortization partially offset by decreased cost depletion. Depreciation
and amortization increased by $3.1 million in the three months ended September 30, 2008 compared to the prior year period mainly due to depreciation associated with capital additions to plant and equipment during the twelve months ended
September 30, 2008. Cost depletion decreased by $0.9 million due to decreased production period-over-period.

Coal supply
agreement amortization. Application of purchase accounting in 2004 resulted in the recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced coal supply
agreements, both in relation to market prices at the date of acquisition of mining assets by the Company in 2004. Coal supply agreement amortization increased $1.0 million for the three months ended September 30, 2008 compared to the three
months ended September 30, 2007 primarily due to a decrease in the credit to amortization expense from below market liability contracts of $2.6 million. Amortization of the liability for below market priced coal supply agreements during the
three months ended September 30, 2008 was $0.9 million of credit to expense compared to $3.5 million of credit to expense in the comparable period of the prior year. Amortization of the asset for above market priced coal supply agreements for
the three months ended September 30, 2008 was $1.1 million of expense compared to $2.7 million in the prior year period. As shipments on coal supply agreements valued in purchase accounting are completed, the period-over-period impact of the
amortization on both the asset and liability balances will continue to diminish until approximately 2010 when shipments associated with these coal supply agreements are estimated to be complete.



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##### Table of Contents

Employee and contract termination costs and other.In April 2007, Wabash Mine Holding
Company (Wabash) announced the idling of the mine in southern Illinois. As a result, the Company recognized employee termination costs of $0.6 million in accordance with the provisions of SFAS No.146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No.146) during the three months ended September 30, 2007 and reduced the estimated cost related to on-going benefits by $0.1 million. During the three months ended September 30, 2007,
the Company also recognized $1.8 million of direct and incremental costs related to additional benefit claims for certain severed employees. These costs are recorded as Employee and contract termination costs and other in the Consolidated
Statements of Operations and Comprehensive (Loss) Income.

Change in fair value of derivatives. The Company accounts for its
derivative instruments in accordance with SFAS No. 133, as amended. SFAS No. 133, as amended, requires all derivative instruments to be recognized as assets or liabilities and to be measured at fair value. For derivative instruments that
have not been designated as cash flow hedges, changes in fair value are recorded in current period earnings or losses. For derivative instruments that have been designated as cash flow hedges, the effective portion of the changes in fair value are
recorded in Accumulated other comprehensive (loss) income and any portion that is ineffective is recorded in current earnings or losses. Amounts recorded in Accumulated other comprehensive (loss) income are reclassified to earnings or
losses in the period the underlying hedged transaction affects earnings or when the underlying hedged transaction is no longer probable of occurring.

The Company is subject to the risk of price volatility for certain of the materials and supplies used in production, such as diesel fuel and explosives. As a part of its risk management strategy, the Company enters
into swap agreements with financial institutions to mitigate the risk of price volatility for both diesel fuel and explosives. The Company has designated these swap agreements as qualifying cash flow hedges in accordance with SFAS No. 133, as
amended. The Company recorded unrealized losses of $5.1 million for the three months ending September 30, 2008 under the caption Net change in fair value of derivative instruments for certain diesel fuel related swaps that represented
mark-to-market losses prior to the swaps being designated as qualifying cash flow hedges.

The Company evaluates its coal trading
activities and associated contracts under SFAS No. 133. Contracts that qualify as derivatives under SFAS No. 133 are accounted for at fair value. Those contracts that qualify as derivatives have not been designated as cash flow hedges and
accordingly, the Company includes the unrealized gains and losses in current period earnings or losses. The Company recorded net unrealized losses of $7.6 million related to trading contracts that qualify as derivatives in the Consolidated
Statements of Operations and Comprehensive (Loss) Income for the three months ending September 30, 2008 under the caption Net change in fair value of derivative instruments.



23



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Segment Analysis

Utilizing data published by Argus Media, the following graph sets forth representative steam coal prices in various U.S. markets. The prices are not necessarily representative of the coal prices actually obtained by
the Company. Changes in coal prices have an impact over time on the Companys average sales realization per ton and, ultimately, its consolidated financial results.

LOGO



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##### Table of Contents

The market price of coal is influenced by many factors that vary by region. Such factors include, but are
not limited to: (a) coal quality, which includes energy (heat content), sulfur, ash and moisture content; (b) transportation costs; (c) regional supply and demand; (d) available competitive fuel sources such as natural gas,
nuclear or hydro; and (e) production costs, which vary by mine type, available technology and equipment utilization, productivity, geologic conditions, and mine operating expenses.

The energy content or heat value of coal is a significant factor influencing coal prices as higher energy coal is more desirable to consumers and
typically commands a higher price in the market. The heat value of coal is commonly measured in British thermal units or the amount of heat needed to raise the temperature of one pound of water by one degree Fahrenheit. Coal from the Eastern and
Midwest regions of the United States tends to have a higher heat value than coal found in the Western United States.

Prices for our Powder
River Basin coal, with its lower energy content, lower production cost and often greater distance to travel to the consumer, typically sells at a lower price than Northern and Central Appalachian coal that has a higher energy content and is often
located closer to the end user. Illinois Basin coal generally has lower energy content and higher sulfur than Northern and Central Appalachian coal, but it has higher energy content than Powder River Basin coal.



|                               |  |                                                             |         |                     |   |         |  |         |          |  |       
|------------------------------ |  | ----------------------------------------------------------- | ------- | ------------------- | - | ------- |  | ------- | -------- |  | ------
|                               |  | Three Months EndedSeptember 30,                             |         | Increase (Decrease)
|                               |  | 2008                                                        |         | 2007                |   | Tons/$  |  | Percent
|                               |  | (Unaudited, in thousands, except sales realization per ton)
|Powder River Basin             |  |                                                             |         |                     |   |         |  |         |          |  |       
|Tons sold                      |  |                                                             | 13,017  |                     |   | 13,315  |  |         | (298)    |  | (2)%  
|Coal sales realization per ton |  | $                                                           | 10.02   |                     | $ | 9.05    |  | $       | 0.97     |  | 11 %  
|Total revenues                 |  | $                                                           | 131,038 |                     | $ | 120,970 |  | $       | 10,068   |  | 8 %   
|Cost of coal sales per ton(1)  |  | $                                                           | 8.32    |                     | $ | 6.47    |  | $       | 1.85     |  | 29 %  
|Income from operations         |  | $                                                           | 1,057   |                     | $ | 18,838  |  | $       | (17,781) |  | (94)% 
|                               |  |                                                             |         |                    
|Northern Appalachia            |  |                                                             |         |                     |   |         |  |         |          |  |       
|Tons sold                      |  |                                                             | 2,798   |                     |   | 2,959   |  |         | (161)    |  | (5)%  
|Coal sales realization per ton |  | $                                                           | 46.03   |                     | $ | 38.86   |  | $       | 7.17     |  | 18 %  
|Total revenues                 |  | $                                                           | 129,784 |                     | $ | 117,249 |  | $       | 12,535   |  | 11 %  
|Cost of coal sales per ton(1)  |  | $                                                           | 38.55   |                     | $ | 29.49   |  | $       | 9.06     |  | 31 %  
|(Loss) income from operations  |  | $                                                           | (1,421) |                     | $ | 9,046   |  | $       | (10,467) |  | (116)%
|                               |  |                                                             |         |                    
|Central Appalachia             |  |                                                             |         |                     |   |         |  |         |          |  |       
|Tons sold                      |  |                                                             | 1,621   |                     |   | 2,151   |  |         | (530)    |  | (25)% 
|Coal sales realization per ton |  | $                                                           | 75.13   |                     | $ | 52.69   |  | $       | 22.44    |  | 43 %  
|Total revenues                 |  | $                                                           | 122,912 |                     | $ | 117,528 |  | $       | 5,384    |  | 5 %   
|Cost of coal sales per ton(1)  |  | $                                                           | 65.86   |                     | $ | 45.90   |  | $       | 19.96    |  | 43 %  
|(Loss) income from operations  |  | $                                                           | (1,000) |                     | $ | 2,863   |  | $       | (3,863)  |  | (135)%



|(1) | Excludes selling, general and administrative expense; depreciation, depletion and amortization; accretion expense; and
changes in fair value of derivative instruments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Powder River BasinIncome from operations decreased
$17.8 million period-over-period due to increased operating costs of $22.7 million, a $5.1 million mark-to-market loss on financial swaps related to diesel fuel and a $0.1 million increase in miscellaneous other expenses, partially offset by
increased revenues of $10.1 million. As explained in the revenue section above, the increase in revenues resulted from an 11% increase in coal sales realization per ton. Coal sales volumes in the Powder River Basin decreased 0.3 million tons,
or 2% in the three months ended September 30, 2008 compared to the prior year period. Production and shipments decreased 19% period-over-period at Eagle Butte while production and shipments at Belle Ayr increased 14% period-over-period.
Operating costs increased $22.7 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, reflecting higher period-over-period cost of sales of $22.1 million, an increase in depreciation,
depletion and amortization costs of $0.4 million and an increase in other miscellaneous expenses of $0.2 million.

The $22.1 million
increase in cost of sales referred to above resulted from an increase in cash production costs ($22.3 million), partially offset by decreased miscellaneous other expenses ($0.2 million). The $22.3 million period-over-period increase in cash
production costs were primarily in the following areas: (a) supply and service costs primarily consisting of operating supply costs,



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repair and maintenance expenses, rent, explosives, diesel fuel and outside services ($13.8 million); (b) increased royalty costs mainly due to mining a
higher amount of coal that is subject to federal royalties ($5.1 million); (c) labor and employee benefits ($2.5 million); and (d) miscellaneous other expenses ($0.9 million). Cost of coal sales per ton increased approximately 29%
period-over-period.

Higher total depreciation, depletion and amortization costs of $0.4 million primarily related to higher depreciation
of $0.8 million as a result of higher capital expenditures during the prior twelve months; partially offset by a period-over-period $0.4 million decrease in amortization of coal supply agreements due to the net decrease in amortization expense from
both above market asset contracts and below market liability contracts as shipments on a number of coal supply agreements valued in purchase accounting were completed.

Northern AppalachiaIncome from operations decreased by $10.5 million period-over-period due to increased operating costs of $23.3 million, partially offset by increased revenues of $12.5 million
and decreased miscellaneous other expenses of $0.3 million. As explained in the revenue section above, the increase in revenues resulted from an 18% increase in coal sales realization per ton. Coal sales volumes at the Cumberland mine decreased
0.4 million tons, or 19% compared to the prior year period and production decreased 0.4 million tons, or 21% compared to the prior year period as a result of a longwall move that occurred during the three months ended September 30,
2008, with no corresponding move occurring in the prior year period. Coal sales volumes at the Emerald mine increased 0.2 million tons, or 18% compared to the prior year period and production increased 0.2 million tons, or 20% compared to
the prior year period. During the three months ended September 30, 2008, shipments at Emerald included approximately 0.1 million tons of coal purchased to fulfill existing contracts so that coal produced could be sold at prices more
indicative of the current market prices.

Operating costs increased $23.3 million for the three months ended September 30, 2008
compared to the three months ended September 30, 2007, reflecting higher period-over-period cost of sales of $20.6 million and higher depreciation, depletion and amortization costs of $2.7 million.

The $20.6 million period-over-period increase in cost of sales referred to above was the result of increased cash production costs ($16.7 million);
purchased coal expense for which there was no expense in the comparable period of 2007 ($6.6 million); and increased miscellaneous other costs ($0.2 million); partially offset by decreased inventory charges to expense related to a lower ratio of
tons sold vs. tons produced in the three months ended September 30, 2008 compared to the prior year period ($2.9 million). The $16.7 million increase in cash production costs were primarily incurred in the following areas: (a) higher
supply and service costs primarily consisting of operating supply costs from increased prices for and usage of roof bolts and miner bits, and increased water handling requirements, repairs and maintenance costs due to the timing of rebuilding
longwall and other mining equipment and outside services ($8.1 million); (b) higher labor and employee benefit costs, due to a higher number of employees and period-over-period wage and benefit increases due primarily to the UMWA wage agreement
signed in the second quarter of 2007 ($8.4 million); and (c) increased miscellaneous other expenses ($0.2 million). Cost of coal sales per ton increased approximately 31% period-over-period.

Higher total depreciation, depletion and amortization costs of $2.7 million related to increased depreciation primarily related to longwall shields, face
conveyors, other mining equipment and coalbed methane development costs ($2.9 million); partially offset by lower depletion expense ($0.2 million).

Central AppalachiaIncome from operations decreased by $3.9 million period-over-period due to increased operating costs of $8.4 million and increased miscellaneous other expenses of $0.9 million, partially offset by
increased revenues of $5.4 million. As explained in the revenue section above, the increase in revenues resulted from a 43% increase in coal sales realization per ton, partially offset by a 25% decrease in tons sold. Coal sales volumes in Central
Appalachia decreased at the Laurel Creek and Pioneer mines due to lower production. In general, our production in Central Appalachia has been limited by difficult geologic conditions, increased regulatory activity and shortages of skilled miners at
our underground mines, particularly Laurel Creek. Coal sales volumes and revenues were also negatively impacted by the absence of coal purchased and resold due to the expiration of the synfuel tax credit in December 2007.

The increase in operating costs of $8.4 million for the three months ended September 30, 2008 compared to the three months ended September 30,
2007 was due to an increase in cost of sales ($8.0 million); higher depreciation, depletion and amortization costs of ($0.7 million); partially offset by decreased miscellaneous other costs ($0.3 million). The $8.0 million increase in cost of sales
was a result of increased cash production costs ($14.3 million); partially offset by a reduction in purchased coal expense ($4.4 million); a period-over-period decrease in inventory charges to expense related to a lower ratio of tons sold vs. tons
produced ($1.6 million); and decreased other miscellaneous costs ($0.3 million).



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##### Table of Contents

The $14.3 million period-over-period increase in cash production costs referred to above was primarily
due to increases in the following areas: (a) supply and service costs primarily consisting of repairs and maintenance costs, operating supplies, utilities, explosives, diesel fuel and outside services ($7.2 million); (b) higher labor and
employee benefit costs ($5.4 million); (c) increased royalty expenses ($1.3 million); and (d) increased miscellaneous other expenses ($0.4 million). Cost of coal sales per ton increased approximately 43% period-over-period.

The $0.7 million increase in depreciation, depletion and amortization consisted of a reduced credit to expense for amortization of below market liability
coal supply agreements of $1.5 million as shipments on a number of coal supply agreements valued in purchase accounting were completed; partially offset by lower depreciation of $0.1 million and lower reserve depletion of $0.7 million related to
decreased production period-over-period at the Laurel Creek, Kingston and Pioneer mines.

OtherIncludes the
Companys Illinois Basin operation, including the idled Wabash mine, which ceased operations in the second quarter of 2007; expenses associated with closed mines; Dry Systems Technologies; coal trading operations; and selling, general and
administrative expenses not charged out to the Powder River Basin, Northern Appalachia or Central Appalachia mines. During the three months ended September 30, 2008, the Other segment reported a loss from operations of $22.9 million compared to
a loss from operations of $22.7 million in the three months ended September 30, 2007. The increased period-over-period loss from operations of $0.2 million in 2008 was due primarily to recording a $7.6 million mark-to-market unrealized loss for
certain contracts executed by our coal trading operations that are being accounted for as derivatives and increased selling, general and administrative expenses. The unrealized loss and increased selling, general and administrative expenses were
offset by increased revenues from Dry Systems Technologies and coal trading operations as well as the absence of employee termination costs and other operating costs related to the Wabash mine, which was idled in April, 2007.

Interest Expense, Net



|                                                          |  |                                 |          |                     |   |          |  |         |         |  |      
|--------------------------------------------------------- |  | ------------------------------- | -------- | ------------------- | - | -------- |  | ------- | ------- |  | -----
|                                                          |  | Three Months EndedSeptember 30, |          | Increase (Decrease)
|                                                          |  | 2008                            |          | 2007                |   | Amount   |  | Percent
|                                                          |  | (Unaudited, in thousands)      
|Interest expense-debt related                             |  | $                               | (8,891)  |                     | $ | (10,798) |  | $       | (1,907) |  | (18)%
|Interest expense-amortization of deferred financing costs |  |                                 | (460)    |                     |   | (464)    |  |         | (4)     |  | (1)% 
|Interest expense-surety bond and letter of credit fees    |  |                                 | (1,675)  |                     |   | (1,561)  |  |         | 114     |  | 7 %  
|Interest expense-other                                    |  |                                 | (125)    |                     |   | (566)    |  |         | (441)   |  | (78)%
|                                                          |  |                                 |          |                     |   |          |  |         |         |  |      
|Total interest expense                                    |  |                                 | (11,151) |                     |   | (13,389) |  |         | (2,238) |  | (17)%
|Interest income                                           |  |                                 | 253      |                     |   | 1,056    |  |         | (803)   |  | (76)%
|                                                          |  |                                 |          |                     |   |          |  |         |         |  |      
|Interest expense, net                                     |  | $                               | (10,898) |                     | $ | (12,333) |  | $       | (1,435) |  | (12)%
|                                                          |  |                                 |          |                     |   |          |  |         |         |  |      

Interest expense, net for the three months ended September 30, 2008 decreased compared to the
three months ended September 30, 2007 due to decreased interest expense related to the Senior Secured Credit Facility as a result of lower variable interest rates and repaying $25.1 million of principal in December, 2007; a decrease in other
interest expense related to imputed interest for a deferred financing obligation for longwall shields that was paid in the fourth quarter of 2007; and decreased interest income due to lower interest rates realized on short-term investments and a
lower average outstanding balance of cash held in short-term investments in the three months ended September 30, 2008 compared to the prior year period.

Income Tax Benefit



|                   |  |                                 |       |        |   |        |  |         |         |  |      
|------------------ |  | ------------------------------- | ----- | ------ | - | ------ |  | ------- | ------- |  | -----
|                   |  | Three Months EndedSeptember 30, |       | Change
|                   |  | 2008                            |       | 2007   |   | Amount |  | Percent
|                   |  | (Unaudited, in thousands)      
|Income tax benefit |  | $                               | 2,790 |        | $ | 6,212  |  | $       | (3,422) |  | (55)%

For the three months ended September 30, 2008, the income tax benefit of $2.8 million
represents an effective benefit of 8% on the pre-tax loss of $35.1 million, compared to an income tax benefit of $6.2 million, or an effective benefit of 144% on a pre-tax loss of $4.3 million for the three months ended September 30, 2007. The
income tax benefit for the three months ended September 30, 2008 is comprised of two elements: (a) a $3.8 million, or 11% benefit based on forecasted annual results for 2008; partially offset by (b) a 3% discrete tax expense of $1.0
million primarily related to establishing contingency reserves on certain tax positions in accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48).



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For the three months ended September 30, 2007, the $6.2 million income tax benefit represents a
quarterly effective tax benefit of 144% that is based on a projected full-year effective tax benefit of 47%. The projected tax benefit for 2007 related to the impact of permanent differences for excess depletion deductions. The percentage impact of
permanent differences changes during interim periods, as the company reconsiders its forecast of full-year pretax income, based upon its most recent experience.

The effective tax rate for the three months ended September 30, 2008 includes a change in estimate, reducing income tax expense from the effective rate recognized in the second quarter. The change in estimate
primarily relates to third quarter revisions to the estimated percentage impact of permanent differences related to excess depletion deductions (as discussed above). These changes in estimates were reflected in the effective tax rate in the period
in which the information became available to the Company.

Results of Operations

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Coal sales realization per ton sold represents the revenue realized on each ton of coal sold. It is calculated by dividing coal sales revenues by tons
sold.

Revenues



|                               |  |                                                |           |                     |   |           |  |         |         |  |      
|------------------------------ |  | ---------------------------------------------- | --------- | ------------------- | - | --------- |  | ------- | ------- |  | -----
|                               |  | Nine Months EndedSeptember 30,                 |           | Increase (Decrease)
|                               |  | 2008                                           |           | 2007                |   | Amount    |  | Percent
|                               |  | (Unaudited, in thousands, except per ton data)
|Coal sales                     |  | $                                              | 1,212,425 |                     | $ | 1,096,787 |  | $       | 115,638 |  | 11 % 
|Other revenue                  |  |                                                | 21,183    |                     |   | 25,674    |  |         | (4,491) |  | (17)%
|                               |  |                                                |           |                     |   |           |  |         |         |  |      
|Total revenues                 |  | $                                              | 1,233,608 |                     | $ | 1,122,461 |  | $       | 111,147 |  | 10 % 
|                               |  |                                                |           |                     |   |           |  |         |         |  |      
|Tons sold                      |  |                                                | 53,078    |                     |   | 55,528    |  |         | (2,450) |  | (4)% 
|Coal sales realization per ton |  | $                                              | 22.84     |                     | $ | 19.75     |  | $       | 3.09    |  | 16 % 

Coal sales revenues for the nine months ended September 30, 2008 increased by $115.6 million,
or 11% compared to coal sales revenues for the nine months ended September 30, 2007. Coal sales realization per ton increased 16% period-over-period, while tons sold decreased by 4% period-over-period. Consolidated coal sales realization per
ton for the nine months ended September 30, 2008 reflected increased prices per ton sold in three of our operating segments, consisting of a 28% increase in Central Appalachia, a 12% increase in Northern Appalachia and a 10% increase in the
Powder River Basin.

Coal sales revenues in Northern Appalachia for the nine months ended September 30, 2008 increased by $71.1
million, or 18% compared to coal sales revenues for the nine months ended September 30, 2007 primarily due to a combination of higher coal sales volumes and higher coal sales realization per ton. Coal sales volumes in Northern Appalachia
increased by 0.5 million tons, or 5% period-over-period while coal sales realization per ton increased 12% period-over-period due to increased pricing per ton sold. Despite the scheduled longwall move in September 2008, coal sales volumes at
the Cumberland mine increased 0.1 million tons, or 3% compared to the prior year period and production increased 0.1 million tons, or 1% compared to the prior year period. Coal sales volumes at the Emerald mine increased 0.4 million
tons, or 8% compared to the prior year period and production decreased 0.2 million tons, or 4% compared to the prior year period. Production at Emerald during the nine months ended September 30, 2008 decreased due to a combination of
adverse geologic conditions in both the B and C districts, a second quarter roof fall incident in the C district and increased regulatory activity. This lower production was partially offset by the introduction of
a second longwall operating in a new district at Emerald in late February, 2008 and the installation of a rebuilt longwall in late September 2008. The increase in shipments at Emerald during the nine months ended September 30, 2008 was due
primarily to 0.7 million tons of coal that was purchased to fulfill existing contracts so that coal produced could be sold at prices more indicative of the current market prices. During the nine months ended September 30, 2007, coal sales
volumes and production at Emerald were negatively impacted as a result of a nine day strike by the UMWA.

Coal sales revenues in Central
Appalachia for the nine months ended September 30, 2008 increased $10.1 million, or 3% compared to coal sales revenues for the nine months ended September 30, 2007 primarily as a result of higher coal sales realization per ton, partially
offset by lower coal sales volumes. Coal sales realization per ton increased 28% period-over-period as a result of increased pricing per ton sold. Coal sales volumes declined by 1.2 million tons, or 19% in the nine months ended
September 30, 2008 compared to the prior year period. Coal sales volume at the Laurel Creek mine decreased 0.7 million tons, or 46% compared to the prior year period while production decreased 0.4 million tons, or 34% compared to the
prior year period. Coal sales volumes and revenues were negatively impacted by the absence of coal purchased and resold due to the expiration of the synfuel tax credit in December, 2007.



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Coal sales revenues in the Powder River Basin for the nine months ended September 30, 2008 increased
$19.3 million, or 5% compared to coal sales revenues for the nine months ended September 30, 2007 as a result of higher coal sales realization per ton, partially offset by lower coal sales volumes. Coal sales realization per ton increased 10%
period-over-period due to increased pricing per ton sold. Coal sales volumes in the Powder River Basin decreased 1.6 million tons, or 4% period-over-period due to a combination of transportation interruptions caused by severe flooding
throughout much of the Midwest, heavy rainfall in Wyoming in the later months of the quarter ended June 30, 2008 and the Companys decision to limit production due to market conditions for Powder River Basin coal. A 16% period-over-period
decrease in production and shipments at Eagle Butte was partially offset by a 7% increase in productions and shipments at Belle Ayr.

Coal
sales revenues in the Illinois Basin for the nine months ended September 30, 2008 were $0 compared to coal sales revenues of $11.9 million for the nine months ended September 30, 2007 due to the April 4, 2007 idling of the Wabash mine
in southern Illinois.

Revenues from increased sales by our coal trading group increased $27.0 million in the nine months ended
September 30, 2008 to $30.7 million compared to $3.7 million in the prior year period.

Other revenues for the nine months ended
September 30, 2008 decreased by $4.5 million (17%) compared to the nine months ended September 30, 2007. The decrease was due to: (a) the absence of synfuel revenues due to the expiration of the synfuel tax credit in December,
2007 ($4.0 million); (b) decreased gains on sales of assets ($2.3 million); (c) the absence of a refund from the Combined Benefit Fund received in the first quarter of 2007 ($1.3 million); and (d) lower other miscellaneous revenues
($6.7 million); partially offset by (e) increased royalty revenue ($2.5 million); (f) increased coalbed methane revenues ($4.1 million); and (g) higher revenues from the sale of equipment and filters by Dry Systems Technologies ($3.2
million).

Costs and Expenses



|                                                                                                 |  |                                |           |                     |   |           |  |         |          |  |       
|------------------------------------------------------------------------------------------------ |  | ------------------------------ | --------- | ------------------- | - | --------- |  | ------- | -------- |  | ------
|                                                                                                 |  | Nine Months EndedSeptember 30, |           | Increase (Decrease)
|                                                                                                 |  | 2008                           |           | 2007                |   | Amount    |  | Percent
|                                                                                                 |  | (Unaudited, in thousands)     
|Cost of coal sales (excludes depreciation, depletion and amortization)                           |  | $                              | 996,671   |                     | $ | 855,160   |  | $       | 141,511  |  | 17 %  
|Selling, general and administrative expenses (excludes depreciation, depletion and amortization) |  |                                | 53,217    |                     |   | 45,053    |  |         | 8,164    |  | 18 %  
|Accretion on asset retirement obligations                                                        |  |                                | 8,450     |                     |   | 7,492     |  |         | 958      |  | 13 %  
|Depreciation, depletion and amortization                                                         |  |                                | 156,553   |                     |   | 151,412   |  |         | 5,141    |  | 3 %   
|Amortization of coal supply agreements                                                           |  |                                | 1,507     |                     |   | (3,441)   |  |         | 4,948    |  | 144 % 
|Employee and contract termination costs and other                                                |  |                                | -         |                     |   | 14,297    |  |         | (14,297) |  | (100)%
|Net change in fair value of derivative instruments                                               |  |                                | 11,653    |                     |   | -         |  |         | 11,653   |  | -     
|                                                                                                 |  |                                |           |                     |   |           |  |         |          |  |       
|Total costs and expenses                                                                         |  | $                              | 1,228,051 |                     | $ | 1,069,973 |  | $       | 158,078  |  | 15 %  
|                                                                                                 |  |                                |           |                     |   |           |  |         |          |  |       

Cost of coal sales. Cost of coal sales increased $141.5 million for the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to: (a) higher repair, maintenance and operating supply costs including diesel fuel ($50.6 million); (b) increased purchased coal costs
as a result of increased pricing on coal purchases ($33.8 million); (c) increases in labor and benefit costs as a result of both compensation increases and hiring of additional personnel ($26.6 million); (d) increases in royalties
primarily due to mining a higher proportion of coal subject to federal royalty ($18.3 million); (e) increased miscellaneous other expenses ($8.6 million); (f) increases in outside services ($6.0 million); and (g) increased longwall
move expenses ($2.6 million); partially offset by (h) decreased transportation and loading costs ($5.0 million). Cost of coal sales per ton was $18.78 for the nine months ended September 30, 2008 compared to $15.40 for the nine months
ended September 30, 2007.

Selling, general and administrative expenses. Selling, general and administrative expenses
for the nine months ended September 30, 2008 increased $8.2 million compared to the nine months ended September 30, 2007. Period-over-period increases were due to: (a) higher expenses incurred for employee compensation and benefit
related expenses ($6.9 million) which includes approximately $2.4 million in additional stock-based compensation related to modifying the vesting conditions for certain stock-based awards; and (b) higher overhead expenses attributed mainly to
an increase in industry association membership fees and miscellaneous services ($3.7 million); partially offset by (c) lower consulting fees ($2.4 million).

Accretion on asset retirement obligations.Accretion on asset retirement obligations is a result of accounting for asset retirement obligations under SFAS No. 143. Accretion represents the increase
in the asset retirement liability to reflect the change in the liability for the passage of time because the initial liability is recorded at present value. Higher accretion expense in 2008 was due to increased asset retirement obligation estimates
for the comparable periods.



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##### Table of Contents

Depreciation, depletion and amortization. Depreciation, depletion and amortization includes
depreciation of plant and equipment, cost depletion of amounts assigned to owned and leased mineral rights and amortization of mine development costs, internal use software and leasehold improvements. Depreciation, depletion and amortization expense
increased $5.1 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to higher depreciation and amortization partially offset by decreased cost depletion. Depreciation and
amortization increased by $8.5 million in the nine months ended September 30, 2008 compared to the prior year period mainly due to depreciation associated with capital additions to plant and equipment during the twelve months ended
September 30, 2008 including the completion of an overland conveyor belt that was placed into service in the third quarter of 2007 at the Powder River Basin. Cost depletion decreased by $3.4 million due to decreased production
period-over-period.

Coal supply agreement amortization. Application of purchase accounting in 2004 resulted in the
recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced coal supply agreements, both in relation to market prices at the date of acquisition of mining assets by the
Company in 2004. Coal supply agreement amortization increased $4.9 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to a decrease in the credit to amortization expense
from below market liability contracts of $7.5 million, partially offset by a $2.6 million decrease in amortization expense from above market contracts. Amortization of the liability for below market priced coal supply agreements during the nine
months ended September 30, 2008 was $3.9 million of credit to expense compared to $11.4 million of credit to expense in the comparable period of the prior year. Amortization of the asset for above market priced coal supply agreements during the
nine months ended September 30, 2008 was $5.3 million of expense compared to $7.9 million of expense in the comparable period of the prior year. As shipments on coal supply agreements valued in purchase accounting are completed, the
period-over-period impact of the amortization on both the asset and liability balances will continue to diminish until approximately 2010 when shipments associated with these coal supply agreements are estimated to be complete.

Employee and contract termination costs and other.In April 2007, Wabash announced the idling of the mine in southern Illinois. As a
result, the Company recognized employee termination costs of $5.9 million and $1.4 million in accordance with the provisions of SFAS No.146 and the provisions of SFAS No. 112, Employers Accounting for Postemployment Benefits
(SFAS No. 112), respectively, during the nine months ended September 30, 2007. During the nine months ended September 30, 2007, the Company also recognized $1.8 million of direct and incremental costs related to additional
benefit claims for certain severed employees. Additionally, the Company recorded contract termination costs of $5.2 million associated with the idling of the mine. These costs are recorded as Employee and contract termination costs and other
in the Consolidated Statements of Operations and Comprehensive (Loss) Income.

Change in fair value of derivatives. The
Company accounts for its derivative instruments in accordance with SFAS No. 133, as amended. SFAS No. 133, as amended, requires all derivative instruments to be recognized as assets or liabilities and to be measured at fair value. For
derivative instruments that have not been designated as cash flow hedges, changes in fair value are recorded in current period earnings or loss. For derivative instruments that have been designated as cash flow hedges, the effective portion of the
changes in fair value are recorded in Accumulated other comprehensive (loss) income and any portion that is ineffective is recorded in current earnings or losses. Amounts recorded in Accumulated other comprehensive (loss) income are
reclassified to earnings or losses in the period the underlying hedged transaction affects earnings or when the underlying hedged transaction is no longer probable of occurring.

The Company is subject to the risk of price volatility for certain of the materials and supplies used in production, such as diesel fuel and explosives.
As a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for both diesel fuel and explosives. The Company has designated these swap agreements as
qualifying cash flow hedges in accordance with SFAS No. 133. The Company recorded unrealized losses of $4.1 million for the nine months ending September 30, 2008 under the caption Net change in fair value of derivative instruments
for certain diesel fuel related swaps that represented mark-to-market losses prior to the swaps being designated as qualifying cash flow hedges.

The Company evaluates its coal trading activities and associated contracts under SFAS No. 133. Contracts that qualify as derivatives under SFAS No. 133 are accounted for at fair value. Those contracts that qualify as derivatives
have not been designated as cash flow hedges and accordingly, the Company includes the unrealized gains and losses in current period earnings or losses. The Company recorded net unrealized losses of $7.6 million related to trading contracts that
qualify as derivatives in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the nine months ended September 30, 2008 under the caption Net change in fair value of derivative instruments.



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|                               |  |                                                             |         |                     |   |         |  |         |          |  |      
|------------------------------ |  | ----------------------------------------------------------- | ------- | ------------------- | - | ------- |  | ------- | -------- |  | -----
|                               |  | Nine Months EndedSeptember 30,                              |         | Increase (Decrease)
|                               |  | 2008                                                        |         | 2007                |   | Tons/$  |  | Percent
|                               |  | (Unaudited, in thousands, except sales realization per ton)
|Powder River Basin             |  |                                                             |         |                     |   |         |  |         |          |  |      
|Tons sold                      |  |                                                             | 37,196  |                     |   | 38,783  |  |         | (1,587)  |  | (4)% 
|Coal sales realization per ton |  | $                                                           | 10.05   |                     | $ | 9.14    |  | $       | 0.91     |  | 10 % 
|Total revenues                 |  | $                                                           | 376,359 |                     | $ | 355,588 |  | $       | 20,771   |  | 6 %  
|Cost of coal sales per ton(1)  |  | $                                                           | 8.15    |                     | $ | 6.42    |  | $       | 1.73     |  | 27 % 
|Income from operations         |  | $                                                           | 20,177  |                     | $ | 60,667  |  | $       | (40,490) |  | (67)%
|                               |  |                                                             |         |                    
|Northern Appalachia            |  |                                                             |         |                     |   |         |  |         |          |  |      
|Tons sold                      |  |                                                             | 10,320  |                     |   | 9,792   |  |         | 528      |  | 5 %  
|Coal sales realization per ton |  | $                                                           | 44.58   |                     | $ | 39.72   |  | $       | 4.86     |  | 12 % 
|Total revenues                 |  | $                                                           | 463,510 |                     | $ | 395,579 |  | $       | 67,931   |  | 17 % 
|Cost of coal sales per ton(1)  |  | $                                                           | 33.70   |                     | $ | 27.28   |  | $       | 6.42     |  | 24 % 
|Income from operations         |  | $                                                           | 45,489  |                     | $ | 62,995  |  | $       | (17,506) |  | (28)%
|                               |  |                                                             |         |                    
|Central Appalachia             |  |                                                             |         |                     |   |         |  |         |          |  |      
|Tons sold                      |  |                                                             | 5,220   |                     |   | 6,463   |  |         | (1,243)  |  | (19)%
|Coal sales realization per ton |  | $                                                           | 66.61   |                     | $ | 52.24   |  | $       | 14.37    |  | 28 % 
|Total revenues                 |  | $                                                           | 351,022 |                     | $ | 347,185 |  | $       | 3,837    |  | 1 %  
|Cost of coal sales per ton(1)  |  | $                                                           | 56.55   |                     | $ | 45.68   |  | $       | 10.87    |  | 24 % 
|Income from operations         |  | $                                                           | 3,759   |                     | $ | 3,043   |  | $       | 716      |  | 24 % 



|(1) | Excludes selling, general and administrative expense; depreciation, depletion and amortization; accretion expense; and
changes in fair value of derivative instruments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Powder River BasinIncome from operations decreased
$40.5 million period-over-period due to increased operating costs of $57.2 million, a $4.1 million mark-to-market loss on financial swaps related to diesel fuel, partially offset by increased revenues of $20.8 million. As explained in the revenue
section above, the increased revenues resulted from a 10% increase in coal sales realization per ton, partially offset by a 4% decrease in coal sales volumes. Coal sales volumes in the Powder River Basin decreased 1.6 million tons, or 4%
period-over-period due to a combination of transportation interruptions caused by severe flooding throughout much of the Midwest, heavy rainfall in Wyoming in the later months of the quarter ended June 30, 2008 and the Companys decision
to limit production due to market conditions for Powder River Basin coal. A 16% period-over-period decrease in production and shipments at Eagle Butte was partially offset by a 7% increase in productions and shipments at Belle Ayr. Operating costs
increased $57.2 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, reflecting higher period-over-period cost of sales of $54.1 million, an increase in depreciation, depletion and
amortization costs of $2.4 million and an increase in other miscellaneous expenses of $0.7 million.

The $54.1 million increase in cost of
sales referred to above resulted from an increase in cash production costs ($54.7 million), partially offset by decreased other expenses ($0.6 million). The $54.7 million period-over-period increase in cash production costs were primarily in the
following areas: (a) supply and service costs primarily consisting of operating supply costs, repair and maintenance expenses, rent, explosives, diesel fuel and outside services ($32.0 million); (b) increased royalty costs mainly due to
mining a higher amount of coal that is subject to federal royalties ($15.7 million); (c) labor and employee benefits ($6.5 million); (d) increased miscellaneous expenses ($2.4 million); partially offset by (e) lower tax-related
expenses ($1.9 million). Cost of coal sales per ton increased 27% period-over-period.

Higher total depreciation, depletion and
amortization costs of $2.4 million related primarily to a period-over-period $2.8 million increase in depreciation as a result of higher capital expenditures during the prior twelve months including increased depreciation related to the completion
of an overland conveyor belt that was placed into service during the three months ended September 30, 2007; partially offset by decreased depletion expense related to lower production period-over-period at the Eagle Butte mine ($0.4 million).

Northern AppalachiaIncome from operations decreased by $17.5 million period-over-period due to increased operating
costs of $85.4 million, partially offset by increased revenues of $67.9 million. As explained in the revenue section above, the increase in



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revenues resulted from a 5% period-over-period increase in tons sold and a 12% increase in coal sales realization per ton. Coal sales volumes at the
Cumberland mine increased 0.1 million tons, or 3% compared to the prior year period and production increased 0.1 million tons, or 1% compared to the prior year period. Coal sales volumes at the Emerald mine increased 0.4 million tons,
or 8% compared to the prior year period and production decreased 0.2 million tons, or 4% compared to the prior year period. Production at Emerald during the nine months ended September 30, 2008 decreased due to a combination of adverse
geologic conditions in the B and C districts, a second quarter roof fall incident in the C district and increased regulatory activity. This lower production was partially offset by the introduction of a second
longwall operating in a new district at Emerald in late February, 2008. The increase in shipments at Emerald during the nine months ended September 30, 2008 was due primarily to 0.7 million tons of coal that was purchased to fulfill
existing contracts so that coal produced could be sold at prices more indicative of the current market prices. During the nine months ended September 30, 2007, coal sales volumes and production at Emerald were negatively impacted as a result of
a nine day strike by the UMWA.

Operating costs increased $85.4 million for the nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007, reflecting higher period-over-period cost of sales of $80.7 million and increases in depreciation, depletion and amortization costs of $4.7 million.

The $80.7 million period-over-period increase in cost of sales referred to above was the result of increased cash production costs ($43.7 million);
purchased coal expense for which there was no expense in the comparable period of 2007 ($38.0 million); increased miscellaneous other costs ($0.7 million); partially offset by decreased inventory charges to expense related to a lower ratio of tons
sold vs. tons produced in the nine months ended September 30, 2008 compared to the prior year period ($1.7 million). The $43.7 million increase in cash production costs were primarily incurred in the following areas: (a) higher labor and
employee benefit costs, due to a higher number of employees and period-over-period wage and benefit increases, due primarily to the UMWA wage agreement signed in the second quarter of 2007 ($22.7 million); (b) higher supply and service costs
primarily consisting of operating supply costs from increased prices for and usage of roof bolts and miner bits, increased water handling requirements, repairs and maintenance costs due to the timing of rebuilding longwall and other mining equipment
and outside services ($16.0 million); (c) higher longwall move expenses ($2.6 million); (d) increased royalty expenses ($1.7 million); and (e) increased miscellaneous expenses ($0.7 million). Cost of coal sales per ton increased by
24% period-over-period.

Higher total depreciation, depletion and amortization costs of $4.7 million related primarily to:
(a) increased depreciation primarily related to longwall shields, face conveyors, other mining equipment and coalbed methane development costs ($6.1 million); partially offset by (b) lower depletion expense ($1.1 million); and (c) a
period-over-period decrease in expense associated with the amortization of coal supply agreements as shipments on a number of coal supply agreements valued in purchase accounting were completed ($0.3 million).

Central AppalachiaIncome from operations increased by $0.7 million period-over-period due to increased revenues of $3.8 million that
were partially offset by increased operating costs of $3.1 million. As explained in the revenue section above, the increase in revenues resulted from a 28% increase in coal sales realization per ton, partially offset by a 19% decrease in tons sold.
Coal sales volumes in Central Appalachia decreased at the Laurel Creek and Pioneer mines due to lower production. In general, our production in Central Appalachia has been limited by difficult geologic conditions, increased regulatory activity and
shortages of skilled miners at our underground mines, particularly Laurel Creek. Coal sales volumes and revenues were also negatively impacted by the absence of coal purchased and resold due to the expiration of the synfuel tax credit in December
2007.

The increase in operating costs of $3.1 million for the nine months ended September 30, 2008 compared to the nine months ended
September 30, 2007 was due to increased depreciation, depletion and amortization ($2.8 million); and increased miscellaneous other costs ($0.3 million). Cost of sales was unchanged period-over-period, but included: (a) an increase in cash
production costs ($28.0 million); (b) a period-over-period increase in inventory charges to expense related to a higher ratio of tons sold vs. tons produced ($2.8 million); offset by (c) decreased purchased coal expense ($30.1 million);
and (d) lower miscellaneous costs ($0.7 million).

The $28.0 million period-over-period increase in cash production costs referred to
above was primarily due to increases in the following areas: (a) supply and service costs primarily consisting of repairs and maintenance costs, operating supplies, utilities, explosives, diesel fuel and outside services ($14.5 million);
(b) labor and employee benefits ($9.1 million); (c) royalty expenses ($2.8 million); (d) tax-related expenses ($1.5 million); and (e) miscellaneous other expenses ($0.1 million). Cost of coal sales per ton increased approximately
24% period-over-period.

The $2.8 million increase in depreciation, depletion and amortization consisted of a reduced credit to expense for
amortization of coal supply agreements of $4.4 million as shipments on a number of below market coal supply agreements valued as liabilities in purchase accounting were completed; and higher depreciation of $0.2 million related to capital
expenditures during the prior twelve months; partially offset by lower depletion expense of $1.8 million related to decreased production period-over-period at the Kingston, Pioneer and Laurel creek mines.



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OtherIncludes the Companys Illinois Basin operation, including the idled Wabash
mine, which ceased operations in the second quarter of 2007; expenses associated with closed mines; Dry Systems Technologies; coal trading operations; and selling, general and administrative expenses not charged out to the Powder River Basin,
Northern Appalachia or Central Appalachia mines. During the nine months ended September 30, 2008, the Other segment reported a loss from operations of $63.9 million compared to a loss from operations of $74.2 million in the nine months ended
September 30, 2007. The decreased period-over-period loss from operations of $10.3 million in 2008 was primarily due to the absence of employee termination costs and other operating costs related to the Wabash mine, which was idled in April,
2007, increased revenues from our coal trading operations and Dry Systems Technologies; partially offset by a $7.6 million mark-to-market unrealized loss recorded for certain contracts executed by our coal trading operations that are being accounted
for as derivatives and increased selling, general and administrative expenses.

Interest Expense, Net



|                                                          |  |                                |          |                     |   |          |  |         |         |  |      
|--------------------------------------------------------- |  | ------------------------------ | -------- | ------------------- | - | -------- |  | ------- | ------- |  | -----
|                                                          |  | Nine Months EndedSeptember 30, |          | Increase (Decrease)
|                                                          |  | 2008                           |          | 2007                |   | Amount   |  | Percent
|                                                          |  | (Unaudited, in thousands)     
|Interest expense-debt related                             |  | $                              | (28,760) |                     | $ | (32,363) |  | $       | (3,603) |  | (11)%
|Interest expense-amortization of deferred financing costs |  |                                | (1,371)  |                     |   | (1,382)  |  |         | (11)    |  | (1)% 
|Interest expense-surety bond and letter of credit fees    |  |                                | (4,850)  |                     |   | (4,338)  |  |         | 512     |  | 12 % 
|Interest expense-other                                    |  |                                | (450)    |                     |   | (1,565)  |  |         | (1,115) |  | (71)%
|                                                          |  |                                |          |                     |   |          |  |         |         |  |      
|Total interest expense                                    |  |                                | (35,431) |                     |   | (39,648) |  |         | (4,217) |  | (11)%
|Interest income                                           |  |                                | 944      |                     |   | 2,574    |  |         | (1,630) |  | (63)%
|                                                          |  |                                |          |                     |   |          |  |         |         |  |      
|Interest expense, net                                     |  | $                              | (34,487) |                     | $ | (37,074) |  | $       | (2,587) |  | (7)% 
|                                                          |  |                                |          |                     |   |          |  |         |         |  |      

Interest expense, net for the nine months ended September 30, 2008 decreased compared to the
nine months ended September 30, 2007 due to decreased interest expense related to the Senior Secured Credit Facility as a result of lower variable interest rates and repaying $25.1 million of principal in December, 2007; a decrease in other
interest expense related to imputed interest for a deferred financing obligation for longwall shields that was paid in the fourth quarter of 2007; and decreased interest income due to lower interest rates realized on short-term investments and a
lower average outstanding balance of cash held in short-term investments in the nine months ended September 30, 2008 compared to the prior year period.

Income Tax (Expense) Benefit



|                             |  |                                |       |          |   |        |  |         |         |  |       
|---------------------------- |  | ------------------------------ | ----- | -------- | - | ------ |  | ------- | ------- |  | ------
|                             |  | Nine Months EndedSeptember 30, |       | Increase
|                             |  | 2008                           |       | 2007     |   | Amount |  | Percent
|                             |  | (Unaudited, in thousands)     
|Income tax (expense) benefit |  | $                              | (592) |          | $ | 7,260  |  | $       | (7,852) |  | (108)%

For the nine months ended September 30, 2008, income tax expense of $0.6 million represents
an effective rate of 2% on the pre-tax loss of $28.9 million compared to an income tax benefit of $7.3 million, or a benefit of 47% on pre-tax income of $15.4 million for the nine months ended September 30, 2007. The income tax expense for the
nine months ended September 30, 2008 is comprised of two elements: (a) a $3.4 million benefit resulting from the application of a forecasted 12% annual effective rate based on forecasted annual income results for 2008 applied to the nine
month $28.9 million pre-tax loss; offset by (b) a discrete tax expense of $4.0 million related primarily to changes in a valuation allowance estimate for certain state net operating loss carryforwards and adjustments to other miscellaneous
estimates. Absent the discrete items, the forecasted annual effective rate of 12% for 2008 increased from the 2007 effective benefit of 44% due primarily to the expected impact of excess depletion deduction projections which are anticipated to be
different year-over-year. The impact of the permanent differences for excess depletion deductions changes during interim periods as the Company reconsiders its forecast of full-year pretax income based upon its most recent experience. These changes
in estimates are reflected in the effective tax rate in the period in which the information becomes available to the Company.

During the
nine months ended September 30, 2008, the Internal Revenue Services examination of the Companys federal income tax return for the 2005 tax year was completed with no changes to the tax return. As a result of the closing of this
examination, the Company determined that uncertain tax positions related to its 2005 and prior tax years have been effectively settled. The Company does not anticipate any significant changes in its uncertain tax positions within the next twelve
months.



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Expected Coal Shipments

As of October 3, 2008, we had sales commitments for 100% of our planned 2008 production. As of October 3, 2008, uncommitted and unpriced tonnage
was 6%, 42% and 72% of planned shipments in 2009, 2010 and 2011, respectively.

In 2008 through 2011, the Company expects coal shipments
within the following ranges (millions of tons):



|                   |  |             |  |             |  |             |  |            
|------------------ |  | ----------- |  | ----------- |  | ----------- |  | -----------
|                   |  | 2008        |  | 2009        |  | 2010        |  | 2011       
|East               |  | 20.5 - 21.0 |  | 19.5 - 20.5 |  | 18.5 - 20.5 |  | 18.5 - 20.5
|West               |  | 50.5 - 51.0 |  | 54.0 - 56.0 |  | 54.0 - 56.0 |  | 54.0 - 56.0
|Total consolidated |  | 71.0 - 72.0 |  | 73.5 - 76.5 |  | 72.5 - 76.5 |  | 72.5 - 76.5

Based on its committed and priced planned shipments as of October 3, 2008, the Company
estimates its average realization on committed and priced tonnage will be:



|     |  |      |       |      |   |       |  |      |       |  |   |      
|---- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- |  | - | -----
|     |  | 2008 |       | 2009 |   | 2010  |  | 2011
|East |  | $    | 52.21 |      | $ | 65.41 |  | $    | 68.10 |  | $ | 78.20
|West |  | $    | 10.09 |      | $ | 10.43 |  | $    | 11.14 |  | $ | 12.13

These estimated per ton average realizations include forecasted sulfur dioxide and btu premiums
based on contract terms, projected coal qualities and historical realized premiums. Committed and priced shipments do not include committed shipments subject to price re-determination via an interval within which the price can adjust or index based
adjustments.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of cash have been from sales of our coal production and, to a much
lesser extent, sales of purchased coal to customers, cash from sales of non-core assets and miscellaneous revenues.

Our primary uses of
cash have been our cash production costs, capital expenditures, interest costs, income tax payments, cash payments for employee benefit obligations such as defined benefit pensions and retiree health care benefits, cash outlays related to post
mining asset retirement obligations and support of working capital requirements. Our ability to service debt and acquire new productive assets for use in our operations has been and will be dependent upon our ability to generate cash from our
operations. We generally fund all of our capital expenditure requirements with cash generated from operations. Historically, we have not engaged in financing assets such as through operating leases.

The following is a summary of cash provided by or used in each of the indicated categories of activities during the nine months ended September 30,
2008 and 2007, respectively.



|                                                                                                   |  |                                |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                                   |  | Nine Months EndedSeptember 30, |         
|                                                                                                   |  | 2008                           |          |   | 2007 |  
|                                                                                                   |  | (Unaudited, in thousands)      |         
|Cash provided by (used in):                                                                        |  |                                |          |   |      |   |          |  
|Operating activities                                                                               |  | $                              | 152,341  |   |      | $ | 174,662  |  
|Investing activities                                                                               |  |                                | (154,512 | ) |      |   | (114,533 | )
|Financing activities-stock option exercise proceeds and excess tax benefit from stock-based awards |  |                                | 9,626    |   |      |   | 5,925    |  
|Financing activities-dividends on common stock                                                     |  |                                | (6,798   | ) |      |   | (6,779   | )
|Financing activities-common stock repurchases                                                      |  |                                | (24,987  | ) |      |   | (23,424  | )
|Other                                                                                              |  |                                | (2,097   | ) |      |   | (99      | )
|                                                                                                   |  |                                |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                               |  | $                              | (26,427  | ) |      | $ | 35,752   |  
|                                                                                                   |  |                                |          |   |      |   |          |  

Cash provided by operating activities decreased $22.3 million for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to a $53.2 million decrease in net income and a $36.9 million decrease in cash flows from working capital changes, partially offset by a $67.8 million
increase in non-cash add-backs to net income period- over-period. Working capital changes consist primarily of trade accounts receivable, inventory, prepaid expenses and other current and non-current assets, trade accounts payable, accrued expenses,
other current and non-current liabilities.



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##### Table of Contents

Cash used in investing activities increased $40.0 million for the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007, due primarily to: (a) a $36.1 million lease bonus bid payment related to the successful bid on new federal coal lease located in the Powder River Basin; and (b) $10.3 million
in purchases of equity-method investments; partially offset by (c) decreased capital expenditures, net of proceeds from disposals, for property and equipment of $6.4 million. Capital expenditures in the nine months ended September 30, 2008
totaled $110.8 million which included $44.1 million for the following projects: (a) the acquisition and rebuild of longwall components at Emerald; (b) capital expenditures related to our coal gas recovery projects and land acquisitions and
(c) expenditures for air and bleeder shafts. Capital expenditures in the nine months ended September 30, 2007 totaled $120.8 million, including a total of $43.8 million of expenditures related to the following projects: (a) an
overland coal conveyor at the Belle Ayr Mine in the Powder River Basin; (b) the acquisition and rebuild of longwall components and upgrades to the rail loading facility at Emerald; and (c) the acquisition and implementation of company wide
ERP software.

Cash used in financing activities of $24.3 million during the nine months ended September 30, 2008 consisted of
(a) $25.0 million for the repurchase of common shares in accordance with the stock repurchase program initiated by the Company during the third quarter of 2006 and $2.1 million for the repurchase of common shares withheld from employees to
satisfy employees minimum statutory tax withholding upon vesting of restricted stock units; (b) payment of cash dividends of $6.8 million ($0.05 per share paid in March, June and September 2008); partially offset by (c) cash proceeds
from the exercise of nonqualified stock options and excess tax benefits from stock-based awards ($9.6 million). Cash used in financing activities of $24.4 million during the nine months ended September 30, 2007 consisted of: (a) $23.4
million related to the repurchase of common shares in accordance with the stock repurchase program initiated by the Company during the third quarter of 2006; (b) payment of quarterly cash dividends of $6.8 million ($0.05 per share paid in
March, June and September 2007) and (c) $0.1 million for the repurchase of common shares withheld from employees to satisfy employees minimum statutory tax withholding upon vesting of restricted stock units; partially offset by
(d) $3.2 million in cash proceeds from exercise of nonqualified stock options and (e) $2.7 million in excess income tax benefit from issuance of stock-based awards.

Liquidity and Long-Term Debt

Our primary source of revenue will continue to be from sales of
our coal production and to a much lesser extent, sales of purchased coal to customers. We have borrowing availability under the revolving credit portion of our Senior Secured Credit Facility that expires in 2011, subject to certain conditions. Based
on our current levels of operations, we believe that cash generated from sales, remaining cash on hand, cash flows from operations and available borrowings under the revolving credit portion of our Senior Secured Credit Facility will enable us to
meet liquidity needs for working capital, capital expenditures, debt service and other funding requirements for at least the next twelve months.

As of September 30, 2008, we have outstanding $599.8 million in aggregate indebtedness, with an additional $330.8 million of available borrowings under our revolving credit facility after giving effect to $169.2 million of letters of
credit outstanding as of September 30, 2008. Debt service and projected capital expenditures represent our most significant liquidity requirements.

The recent credit crisis has resulted in unprecedented redemption pressure on money market funds in general. With respect to our short-term investments classified on our Consolidated Balance Sheets in
Cash and cash equivalents, the Company has not been affected, and our investments continue to meet the qualification of cash equivalents.

With respect to recent global economic events, there is an unprecedented uncertainty in the financial markets and this uncertainty brings potential liquidity risks to the Company. Such risks include additional declines in our stock value,
less availability and higher costs of additional credit, potential counterparty defaults and further commercial bank failures. Although the majority of the financial institutions in our bank credit facility appear to be strong, there are no
assurances of their continued existence as the banking industry continues to consolidate. However, we have no indication that any such transactions would impact our current credit facility. The credit worthiness of our customers is constantly
monitored by the Company. We believe that our current group of customers are sound and represent no abnormal business risk.

The recent
deterioration in the securities markets may negatively impact the value of the assets included in our defined benefit pension plans, the effect of which has not been reflected in the accompanying consolidated financial statements, based on the
provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106 and 132(R), which require plan assets and obligations to be
re-measured at December 31, 2008. Should values not recover before December 31, 2008, the decline in fair value of our plans could result in increased total pension costs for 2009 as compared to total pension costs expected during 2008.
Further, the decline in fair value may result in additional cash contributions during 2009 in accordance with plan funding requirements.



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##### Table of Contents

Other

As a regular part of our business, we review opportunities for, and engage in discussions and negotiations concerning, the acquisition of coal mining assets, including Lease by Application (LBA) bids to procure federal coal, and
acquisitions of, or combinations with, coal mining companies. When we believe that these opportunities are consistent with our growth plans and our acquisition criteria, we will make bids or proposals and/or enter into letters of intent and other
similar agreements, which may be binding or nonbinding, that are customarily subject to a variety of conditions and usually permit us to terminate the discussions and any related agreements if, among other things, we are not satisfied with the
results of our due diligence investigation. Any acquisition opportunities we pursue could materially affect our liquidity and capital resources and may require us to incur indebtedness, seek equity capital or both. There can be no assurance that
such additional indebtedness and/or equity capital will be available on terms acceptable to us, if at all.

On February 20, 2008, an
affiliate of the Company successfully bid on a new federal coal lease which contains an estimated 255 million tons of minable coal reserves. The lease bonus bid was $180.5 million to be paid in five equal annual installments of $36.1 million.
The first installment was paid during the three months ended March 31, 2008. The lease became effective on May 1, 2008.

On
July 18, 2006, the Board of Directors authorized a stock repurchase program (the Repurchase Program), authorizing the Company to repurchase shares of its common stock. The Company may repurchase its common stock from time to time as
determined by authorized officers of the Company. In September 2008 the Board of Directors authorized a $100.0 million increase to the Repurchase Program, up to an aggregate amount of $200.0 million. During the nine months ended September 30,
2008, the Company paid $25.0 million to repurchase 515,500 shares of its common stock at an average price of $48.47 pursuant to the Repurchase Program. During the nine months ended September 30, 2007, the Company paid $23.4 million to
repurchase 753,653 shares of its common stock at an average price of $31.08 per share under the Repurchase Program. At September 30, 2008, there was $127.9 million available for future repurchases under the Repurchase Program. Subsequent to the
end of the quarter, in October 2008, the Company repurchased 514,645 shares of its common stock for $14.3 million, bringing the year-to-date average price to $34.75 per share.

Covenant Compliance

Our indirect wholly-owned subsidiary, Foundation Coal Corporation
(FCC) is required to comply with certain financial covenants which are considered material terms of the Senior Secured Credit Facility and the indenture governing FCCs outstanding 7.25% Senior Notes. Information about the financial
covenants is material to an investors understanding of FCCs financial condition and liquidity. The breach of covenants in the Senior Secured Credit Facility that are tied to ratios based on Adjusted EBITDA, as defined below, could result
in a default under the Senior Secured Credit Facility and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our indenture. Additionally, under the Senior Secured
Credit Facility and indenture, FCCs ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Covenants and required levels as defined by the Senior Secured Credit Facility and the indenture governing the outstanding 7.25% Senior Notes are:



|                                                                                                             |  |                                                   |  |                                            
|------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------- |  | -------------------------------------------
|                                                                                                             |  | January 1, 2008 toDecember 31, 2008CovenantLevels |  | January 1, 2009and ThereafterCovenantLevels
|Senior Secured Credit Facility(1)                                                                            |  |                                                   |  |                                            
|Minimum Adjusted EBITDA to cash interest ratio                                                               |  | 2.5x                                              |  | 2.5x                                       
|Maximum total debt less unrestricted cash to Adjusted EBITDA ratio                                           |  | 3.75x                                             |  | 3.5x                                       
|Indenture(2)                                                                                                 |  |                                                   |  |                                            
|Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions |  | 2.0x                                              |  | 2.0x                                       



|(1) | The Senior Secured Credit Facility requires FCC to maintain an Adjusted EBITDA to cash interest ratio at a minimum of
2.5x and a total debt less unrestricted cash to Adjusted EBITDA ratio starting at a maximum of 3.75x in each case for the most recent twelve-month period. Failure to satisfy these ratio requirements would constitute a default by FCC under the Senior
Secured Credit Facility. If lenders under the Senior Secured Credit Facility fail to waive any such default, repayment obligations under the Senior Secured Credit Facility could be accelerated, which would also constitute a default under the
indenture. Covenants reflect the definition and levels required by the Senior Secured Credit Facility.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The ability for FCC to incur additional debt and make certain restricted payments under our indenture, subject to
specified exceptions, is tied to an Adjusted EBITDA to fixed charge ratio of at least 2.0 to 1.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Adjusted EBITDA is defined as EBITDA further adjusted to exclude non-recurring items, non-cash items and
other adjustments permitted in calculating covenant compliance under the indenture and the Senior Secured Credit Facility. EBITDA, a measure used by management to evaluate its ongoing operations for internal planning and forecasting purposes, is
defined as net income (loss) from operations plus interest expense, net of interest income, income tax expense (benefit), depreciation and amortization and charges for early extinguishment of debt. EBITDA is not a financial measure recognized under
United States generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.

As of September 30, 2008, FCC was in compliance with all required financial covenants of the Senior Secured Credit Facility.

Contractual Obligations

The following is a summary
of our significant future contractual obligations by year as of September 30, 2008:



|                                                         |  |                           |        |           |   |           |  |            |         |       |   |         |  |   |          
|-------------------------------------------------------- |  | ------------------------- | ------ | --------- | - | --------- |  | ---------- | ------- | ----- | - | ------- |  | - | ---------
|                                                         |  | 2008                      |        | 2009-2010 |   | 2011-2012 |  | After 2012 |         | Total
|                                                         |  | (Unaudited, in thousands)
|Long-term debt                                           |  | $                         | -      |           | $ | 50,250    |  | $          | 251,250 |       | $ | 298,285 |  | $ | 599,785  
|Estimated cash interest on long-term debt                |  |                           | 3,677  |           |   | 71,134    |  |            | 49,504  |       |   | 43,251  |  |   | 167,566  
|Estimated cash payments for asset retirement obligations |  |                           | 3,272  |           |   | 9,023     |  |            | 8,376   |       |   | 235,255 |  |   | 255,926  
|Unconditional purchase commitments                       |  |                           | 90,254 |           |   | 68,573    |  |            | -       |       |   | -       |  |   | 158,827  
|Federal coal lease                                       |  |                           | -      |           |   | 72,216    |  |            | 72,216  |       |   | -       |  |   | 144,432  
|Operating leases                                         |  |                           | 1,374  |           |   | 6,151     |  |            | 2,295   |       |   | 4,499   |  |   | 14,319   
|                                                         |  |                           |        |           |   |           |  |            |         |       |   |         |  |   |          
|Total                                                    |  | $                         | 98,577 |           | $ | 277,347   |  | $          | 383,641 |       | $ | 581,290 |  | $ | 1,340,855
|                                                         |  |                           |        |           |   |           |  |            |         |       |   |         |  |   |          

We expect to use cash flows provided by operating activities to invest in the range of $170.0
million to $180.0 million in capital expenditures during calendar year 2008 of which $120.0 million to $130.0 million is to maintain production and replace mining equipment. The additional $50.0 million is expected to be directed toward
improvements in productivity and selective expansions of production. Approximately $33.9 million of the 2008 capital expenditures are included in unconditional purchase commitments shown above. The remaining 2008 unconditional purchase commitments
consist of $39.8 million for purchased coal in normal quantities for delivery to customers and $16.6 million pertaining to forward contracts to purchase explosives and diesel fuel in normal quantities for use at our mines. Unconditional purchase
commitments represent contractual commitments to purchase assets in the future. We expect to contribute between $11.0 million and $12.0 million to our defined benefit retirement plans and to pay approximately $25.1 million of retiree health care
benefits, gross of Medicare Part D subsidies, in calendar year 2008. We also expect to incur approximately $7.3 million per year for surety bond premiums and letters of credit fees. We believe that cash balances plus cash generated by operations
will be sufficient to meet these obligations plus fund requirements for working capital and capital expenditures without incurring additional borrowings.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements.
These arrangements include guarantees, 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. However, the underlying obligations that they secure, such as asset retirement obligations, self-insured workers compensation liabilities, royalty obligations and certain retiree medical obligations, are reflected
in our Consolidated Balance Sheets.

We are required to provide financial assurance in order to perform the post-mining reclamation
required by our mining permits, pay our federal production royalties, pay workers compensation claims under self-insured workers compensation laws in various states, pay federal black lung benefits, pay retiree health care benefits to
certain retired UMWA employees and perform certain other obligations.

In order to provide the required financial assurance, we generally
use surety bonds for post-mining reclamation and royalty payment obligations and bank letters of credit for self-insured workers compensation obligations and UMWA retiree health care obligations. Federal black lung benefits are paid from a
dedicated trust fund that has sufficient assets to fund these obligations for the next several years. Bank letters of credit are also used to collateralize a portion of the surety bonds.

We had outstanding surety bonds with a total face amount of $299.0 million as of September 30, 2008, of which $274.3 million secured reclamation
obligations; $15.7 million secured coal lease obligations; $7.1 million secured self-insured workers compensation obligations; and $1.9 million secured other miscellaneous obligations. In addition, we had $169.2 million of letters of



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##### Table of Contents

credit in place for the following purposes: $37.2 million for workers compensation, including collateral for workers compensation bonds; $8.1
million for UMWA retiree health care obligations; $117.1 million for collateral for reclamation surety bonds; and $6.8 million for other miscellaneous obligations. In the last few years, the market terms under which surety bonds can be obtained have
generally become less favorable to all mining companies. In the event that additional surety bonds become unavailable, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral.

Certain Trends and Uncertainties

Our long-term
outlook for the coal markets in the United States remains positive. The Energy Information Administration in its Annual Energy Outlook2008 forecasts that coal-fired electrical generation will increase by an average annual growth rate of 1.1%
through 2015. For the 12 month period ending on September 30, 2008, electric power generation from coal has increased 0.7% from the same period in 2007. Demand for coal and coal-based electricity generation in the U.S. is being driven by
various factors such as the growing economy, increasing population, increasing demand to power residential electronics, public demands for affordable electricity, relatively high prices for the alternative fossil fuels of gas and oil for electricity
generation, the inability for renewable energy sources such as wind and solar to become the base load source of electric power, geopolitical risks for continuing to import large quantities of global oil and natural gas resources, increasing demand
for coal outside the U.S. resulting in increased exports and the relatively abundant steam coal reserves located within the United States. Despite the recent downturn to the U.S. economy, the October 2008 International Monetary Fund forecast for
U.S. annual GDP growth averages over 2% for the next five years.

According to the U.S. Department of Energy, National Energy Technology
Laboratory, Tracking New Coal-Fired Power Plants, dated June 30, 2008, there are approximately 16,534 megawatts of new coal-fired electrical generation under construction in the United States. There is an additional 1,962 megawatts near
construction and 8,415 megawatts of new coal-fired electrical generating capacity permitted and expected to be constructed. This new capacity will increase the annual coal consumption for electrical generation by an estimated ninety million tons,
much of which is expected to be supplied from the Powder River Basin in Wyoming. Approximately 37,400 megawatts of additional coal-fired electrical generation has been announced and is in the early stages of permitting and development.

During 2008 coal exports from the United States increased significantly in response to strong worldwide demand for coal. The largest increases in
international coal demand are from the rapidly growing and industrializing economies of China and India. Due partly to weather-related and infrastructure constraints in Australia and reduced exports from South Africa and other coal exporting
countries, the seaborne coal trade has struggled to keep up with these increases in demand. Seaborne coal shipments traditionally destined for Europe have been diverted to Asia creating opportunities to increase exports from the United States. Coal
export volumes increased nearly 20% in 2007 compared to 2006. Export volumes for 2008 are forecast to increase by an estimated 43% to levels last seen over a decade ago. The surge in demand for exports, combined with a relatively weak U.S. dollar
and increased domestic coal consumption by coal exporting countries, has increased spot prices for metallurgical and thermal coals produced in the Eastern United States by an estimated 300% and 250%, respectively, since 2007. The increases in coal
exports have also tightened fundamentals in the domestic steam and metallurgical coal markets leading to higher prices in the Eastern U.S. regions.

According to the World Energy Outlook 2007 (WEO), global primary energy demand will grow by more than 42% by 2030, with coal rising most in absolute terms and fossil fuel accounting for most of the increase between now and 2030.
China and India have contributed more than half the increase in global demand for energy, and over 80% for coal, since 2000. The WEO estimates these two growing economies will contribute more than 40% of the increase in global energy demand through
2030. China and India account for 72% of the growth of coal use in power generation. The WEO has a general conclusion that dependence on coal for power rises strongly in countries with emerging economies and relatively large coal reserves, while it
stagnates in the more developed nations and nations with smaller coal reserves.

Ultimately, the global demand for and use of coal may be
limited by any global treaties which place restrictions on carbon dioxide emissions. As part of the United Nations Framework Convention on Climate Change, representatives from 187 nations met in Bali, Indonesia in December 2007 to discuss a program
to limit greenhouse gas emissions after 2012. The United States participated in the conference. The convention adopted what is called the Bali Action Plan. The Bali Action Plan contains no binding commitments, but concludes that
deep cuts in global emissions will be required and provides a timetable for two years of talks to shape the first formal addendum to the 1992 United Nations Framework Convention on Climate Change treaty since the Kyoto Protocol. The
ultimate outcome of the Bali Action Plan, and any treaty or other arrangement ultimately adopted by the United States or other countries, may have a material adverse impact on the global supply and demand for coal. This is particularly true if cost
effective technology for the capture and sequestration of carbon dioxide is not sufficiently developed.

Proposed coal-fired electric
generating facilities that do not include technologies to capture and store carbon dioxide are facing increasing opposition from environmental groups as well as state and local governments who are concerned with global climate change and uncertain
financial impacts of potential greenhouse gas regulations. Coal-fired generating plants incorporating carbon



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dioxide capture and storage technologies are more expensive to build than conventional pulverized coal generating plants and the technologies are still in
the developmental stages. This dynamic may cause power generating companies to cut back on plans to build coal-fired plants in favor of alternative forms of baseload electrical generation in the near-term. Nevertheless, the level of interest in new
coal-fired generating facilities remains strong. In combination with heightened interest in coal gasification and coal liquefaction, this level of interest is a potential indicator of increasing demand for coal in the United States.

Based on weekly production reporting through September 30, 2008 from the Energy Information Administration, year-to-date Appalachian production has
risen over the comparable period of 2007 by approximately 1.4% as high prices have encouraged increased output. Through September 30, 2008, year-to-date Western coal production has increased approximately 2.4% from the comparable period of the
prior year. Judicial decisions in Central Appalachia with respect to permits to construct valley fills at surface mines are likely to slow the process of obtaining surface mining permits in that region with resultant uncertainties for producers.
Spot market prices for Central Appalachian and Northern Appalachian coals increased by roughly 235% and 245%, respectively, for the month of September, 2008, compared to the same month one year earlier. Spot market prices for the month of September
for Powder River Basin coal are down approximately 12% from the previous year, as utility stockpiles of PRB coal are at above-average levels. Long-term, the delicate balance of coal supply and increasing coal demand is expected to result in strong,
but volatile fundamentals for the U.S. coal industry.

Our revenues depend on the price at which we are able to sell our coal. The current
pricing environment for U.S. steam coal production is strong in relation to historical pricing levels. Prices for high quality metallurgical coal, used to manufacture coke for steelmaking, remained strong through September, 2008 in response to
increased worldwide demand for steel and production and transportation constraints in exporting metallurgical coal from Australia.

The
worldwide economic slowdown and the current volatility and uncertainty in the credit markets are beginning to have an impact on the demand and price of coal. Weakening global energy fundamentals, including the decline in demand and prices for both
natural gas and crude oil have driven spot prices of coal lower in the financial markets. Some steel manufacturers are shutting-in capacity due to the lack of near-term visibility around demand for steel for construction and other down-stream
products. A protracted economic slowdown could slacken demand for metallurgical and steam coals and could negatively influence pricing in the near-term. Longer-term, coal industry fundamentals remain intact. Coal has been the fastest growing fossil
fuel for five consecutive years, and significant additional growth is expected worldwide. The seaborne coal market has grown to nearly 1 billion tons annually, and U.S. exports are projected to continue to increase. These factors should lead to a
tight market for coal, both globally and in the United States, in the coming years. While these threats are real and will almost certainly have some impact on coal pricing, we do not believe it will change the long-term view for coal.

Our results of operations are dependent upon the prices we charge for our coal as well as our ability to improve productivity and control costs. We spend
more than $500 million per year to procure goods and services in support of our business activities, excluding capital expenditures. Principal commodities include maintenance and repair parts and services, electricity, fuel, roof control and support
items, explosives, tires, conveyance structure, ventilation supplies and lubricants. We use suppliers for a significant portion of our equipment rebuilds and repairs both on- and off-site, as well as construction and reclamation activities and to
support computer systems.

The Companys management continues to aggressively control costs and strives to improve operating
performance to mitigate external cost pressures. As with most of our competitors, we are experiencing increases in operating costs related to fuel, explosives, steel, tires, contract services and healthcare and have taken measures to mitigate the
increases in these costs at all operations. Each of our regional mining operations has developed its own supplier base consistent with local needs. We have a centralized sourcing group for major supplier contract negotiation and administration, for
the negotiation and purchase of major capital goods, and to support the business units. The supplier base has been relatively stable for many years, but there has been some consolidation. We are not dependent on any one supplier in any region. We
promote competition between suppliers and seek to develop relationships with those suppliers whose focus is on lowering our costs. We seek suppliers who identify and concentrate on implementing continuous improvement opportunities within their area
of expertise. To the extent upward pressure on costs exceeds our ability to realize sales increases, or if we experience unanticipated operating or transportation difficulties, our operating margins would be negatively impacted. In addition,
historically low long-term interest rates have had a negative impact on expenses related to our actuarially determined, employee-related liabilities. Employee labor costs have increased primarily due to the demands associated with attracting and
retaining a stable workforce.

We may also continue to experience difficult geologic conditions, delays in obtaining permits, labor
shortages, unforeseen equipment problems and shortages of critical materials such as tires and explosives that may limit our ability to produce at forecasted levels. To the extent upward pressure on costs exceed our ability to realize sales
increases, or if we experience unanticipated operating or transportation difficulties, our operating margins would be negatively impacted. See the Special Note Regarding Forward-Looking Statements contained elsewhere in this Quarterly Report on Form
10-Q for additional considerations regarding our outlook.



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Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements in ITEM I.



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

Price Risk

We have some exposure to price risk for supplies that are used directly or indirectly in the normal course of
production such as diesel fuel, steel and other items such as explosives. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers and may use financial derivative contracts from time to time,
primarily swap contracts with financial institutions, for a certain percentage of our monthly requirements.

Notional amounts outstanding
under explosives-related swap contracts, scheduled to expire in 2008, were 135,000 mmbtu of natural gas. We expect to use approximately 12,810 tons of explosives in the remainder of 2008. Through our hedging contracts, we have fixed prices for
approximately 59% of our remaining expected explosive needs for 2008.

Notional amounts outstanding under explosives-related swap
contracts, scheduled to expire in 2009, were 684,000 mmbtu of natural gas. We expect to use approximately 53,840 tons of explosives in 2009. Through our hedging contracts, we have fixed prices for approximately 71% of our expected explosive needs
for 2009.

Notional amounts outstanding under diesel fuel-related swap contracts, scheduled to expire in 2008, were 3,000 barrels of crude
oil. We expect to use approximately 4,677,230 gallons of diesel fuel in the remainder of 2008. Through our derivative swap contracts and physical forward contracts, we have fixed prices for approximately 92% of our expected diesel fuel needs for
2008.

Notional amounts outstanding under diesel fuel-related swap contracts, scheduled to expire in 2009, were 311,000 barrels of crude
oil. We expect to use approximately 22,618,560 gallons of diesel fuel in 2009. Through our derivative swap contracts and physical forward contracts, we have fixed prices for approximately 76% of our expected diesel fuel needs for 2009.

Credit Risk

Our credit risk is primarily with
electric power generators and, to a lesser extent, steel producers. Most electric power generators to whom we sell have investment grade credit ratings. Our policy is to independently evaluate each customers creditworthiness prior to entering
into transactions and to constantly monitor outstanding accounts receivable against established credit limits. When appropriate (as determined by our credit management function), we have taken steps to reduce our credit exposure to customers that do
not meet our credit standards or whose credit has deteriorated. These steps include obtaining letters of credit or cash collateral, requiring prepayments for shipments or establishing customer trust accounts held for our benefit in the event of a
failure to pay.

Interest Rate Risk

Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. We have exposure to changes in interest rates through our bank
term loan and our revolving credit facility. To achieve risk mitigation objectives, we have in the past managed our interest rate exposure through the use of interest rate swaps.

The interest rate on the outstanding principal of our Senior Secured Credit Facility was 4.88% as of September 30, 2008. A hypothetical 1% increase
in interest rates would have increased our interest expense approximately $2.3 million for the nine months ended September 30, 2008.

As we continue to monitor the interest rate environment in concert with our risk mitigation objectives, consideration is being given to future interest rate risk reduction strategies.



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

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, evaluated, summarized and reported accurately within the time periods specified in the Securities and Exchange Commissions rules and forms.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



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As of the end of the period covered by this report, an evaluation was performed under the supervision and
with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and
15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective and are designed to (a) ensure that information required to be
disclosed by us in reports we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms; and (b) ensure that information
required to be disclosed by us in reports filed or submitted under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2008 that have
materially affected, or are reasonably likely to affect, our internal control over financial reporting.

PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

Information required by this
Item is contained in Note 16, PART I, ITEM 1 entitled Commitments and Contingencies contained in this Report and is incorporated herein by reference.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

In the Environmental and Other
Regulatory Matters section and the Risk Factors section of our Annual Report Form 10K filed for the year ending December 31, 2007 we discuss the Clean Air Interstate Rule (CAIR) issued by the EPA in 2005. After the passage of CAIR,
different entities and organizations challenged the rule on various bases. The U.S. Court of Appeals for the D.C. Circuit (State of North Carolina, et al. v. EPA, No. 05-1244) on July 11, 2008 issued its decision in litigation challenging
CAIR. The decision vacates CAIR and the CAIR federal implementation plan in their entirety. The decision remands CAIR to EPA to promulgate a rule that complies with the courts opinion. The court ruled against EPA on several of the core aspects
of the rule, including: CAIRs use of unrestricted interstate trading; the 2015 compliance deadline for Phase 2 of CAIR; the use of Title IV allowances at a heightened surrender ratio for compliance with the SO2 part of CAIR; and EPAs
determination of the SO2 and NOx emission budgets. The court also struck down emission allowance trading in CAIR, holding that unrestricted trading might result in no emission reductions in an upwind state, thereby preventing EPA from fulfilling its
responsibility under the Clean Air Act to prohibit sources in one state from contributing to nonattainment in another state. This ruling may significantly impact EPAs potential future ability to address interstate pollution transport with a
cap-and-trade system. The court also rejected an EPA fairness argument and ruled that it was inappropriate for EPA to divide a region wide NOx budget among the states, and essentially remove each states responsibility to eliminate
its own significant contribution to downwind pollution. As a result of the decision, the NOx State Implementation Plan Call trading program (terminated only as part of the CAIR rulemaking), will continue in the absence of CAIR. As such, downwind
states retain the right under the Clean Air Act to petition for immediate relief from unlawful interstate pollution.

In late September
2008, the EPA and various other organizations, including the National Mining Association of which we are a member, petitioned the U.S. Court of Appeals for a rehearing. On October 21, 2008 the court asked the petitioners and the EPA to brief
several matters such as whether the petitioners sought for the rule to be vacated in its entirety, and whether the court should stay its mandate until EPA promulgates a new rule. If the decision is not modified on appeal, the parties may elect to
appeal this decision to the United States Supreme Court. Alternatively, the EPA may commence the process of developing new regulations to accomplish some or all of the objectives under CAIR, or may pursue both paths. Congress may proceed to pass
legislation to accomplish some or all of the objectives of the CAIR which was struck down. Individual states covered by CAIR may proceed to develop their own regulations in this area which may differ, and therefore may be more difficult to implement
and operate within. The decision may affect the price of allowances purchased and sold related to emission of SO2 and NOx, and this in turn may increase or decrease the demand for certain coals. If the prices for allowances change, this may affect
the penalties imposed or premiums paid under the contracts through which we sell our coal. These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations or cash flow.

There have been no other material changes from risk factors previously disclosed in the Companys Annual Report on Form 10-K for the twelve
months ended December 31, 2007, filed February 29, 2008.



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

Issuer Purchase of equity securities(1)



|                                             |  |                                    |  |                             |       |                                                                                    |         |                                                                                              |   |        
|-------------------------------------------- |  | ---------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------- | - | -------
|                                             |  | Total Number ofShares Purchased(2) |  | Average Price Paidper Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced
ShareRepurchaseProgram |         | Approximate DollarValue of Shares thatMay Yet BePurchased Underthe Program
(000somitted)(3)
|July 1, 2008 through July 31, 2008           |  | 82,300                             |  | $                           | 60.72 |                                                                                    | 82,300  |                                                                                              | $ | 47,852 
|August 1, 2008 through August 31, 2008       |  | 167,218                            |  | $                           | 59.89 |                                                                                    | 166,800 |                                                                                              | $ | 37,861 
|September 1, 2008 through September 30, 2008 |  | 266,400                            |  | $                           | 37.53 |                                                                                    | 266,400 |                                                                                              | $ | 127,863
|                                             |  |                                    |  |                             |       |                                                                                    |         |                                                                                              |   |        
|Total                                        |  | 515,918                            |  | $                           | 48.48 |                                                                                    | 515,500 |                                                                                              | $ | 127,863
|                                             |  |                                    |  |                             |       |                                                                                    |         |                                                                                              |   |        



|(1) | On July 18, 2006, the Company announced a share repurchase program that authorizes the Company to repurchase
$100,000,000 of its common stock. On September 29, 2008, the Company announced an increase in the share repurchase program that authorizes the Company to repurchase an additional $100,000,000 of its common stock, from time to time, as
determined by authorized officers of the Company, up to an aggregate amount of $200,000,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes the repurchase of 418 common shares withheld from employees to satisfy employees minimum statutory tax
withholding upon vesting of restricted stock units.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Management cannot estimate the number of shares that will be repurchased because decisions to purchase are based on
company outlook, business conditions and current investment opportunity.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

(a) None.

(b) None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

No matters were submitted to vote of security holders during the period covered by this report.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

(a) None.

(b) None.



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

The exhibits to this report are listed
in the Exhibit Index.



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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.



|                       |  |                               
|---------------------- |  | ------------------------------
|Date: November 7, 2008 |  | FOUNDATION COAL HOLDINGS, INC.
|                       |  | (Registrant)                  



|                                                                                              
|----------------------------------------------------------------------------------------------
|                                                                                              
|/s/ JAMES F. ROBERTS                                                                          
|James F. Roberts                                                                              
|Chief Executive Officer and Chairman (Principal Executive Officer)                            
|                                                                                              
|/s/ FRANK J. WOOD                                                                             
|Frank J. Wood                                                                                 
|Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.1        |  | Third Amended and Restated Certificate of Incorporation of the Company, previously filed as an exhibit to the Companys Form 10-Q on August 9, 2006, and incorporated by
reference.                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|3.2        |  | Amended and Restated By-laws of the Company, previously filed as an exhibit to the Companys Form 8-K on May 22, 2006, and incorporated by reference.                                                                                                                                                                                                                                                                                                                                                                                                 
|           | 
|4.1        |  | Form of certificate of the Companys common stock, previously filed as an exhibit to the Companys Registration Statement on Form S-1 (File No. 333-118427) and incorporated by
reference.                                                                                                                                                                                                                                                                                                                                                            
|           | 
|4.2        |  | Amended and Restated Stockholders Agreement, dated as of October 4, 2004, by and among the Company, Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment Partnership IV-A
L.P., First Reserve Fund IX, L.P., AMCI Acquisition, LLC and the management stockholders parties thereto, previously filed as an exhibit to the Companys Registration Statement on Form S-1 (File No. 333-118427) and incorporated by reference.                                                                                                         
|           | 
|4.2.1      |  | Termination Agreement, dated as of February 6, 2006, by and among the Company, Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment Partnership IV-A L.P., First Reserve Fund
IX, L.P., AMCI Acquisition, LLC (nka AMCI Acquisition III, LLC), and the management stockholders parties thereto, terminating the Amended and Restated Stockholders Agreement dated as of October 4, 2004, by and among the same parties, previously
filed as an exhibit to the Companys Form 8-K on February 23, 2006 and incorporated by reference.
|           | 
|4.3        |  | Senior Notes Indenture, dated as of July 30, 2004, among Foundation PA Coal Company (nka Foundation PA Coal Company, LLC), the Guarantors named therein and The Bank of New York, as Trustee,
previously filed as an exhibit to the Companys Registration Statement on Form S-1 (File No. 333-118427) and incorporated by reference.                                                                                                                                                                                                                 
|           | 
|4.3.1      |  | Supplemental Indenture dated as of September 6, 2005 among Foundation Mining, LP, a subsidiary of Foundation Coal Corporation, Foundation PA Coal Company, LLC and The Bank of New York, as
Trustee, previously filed as an exhibit to the Companys Form 10-Q on November 14, 2005 and incorporated by reference.                                                                                                                                                                                                                                    
|           | 
|4.3.2      |  | Supplemental Indenture dated as of October 5, 2007, among Foundation PA Coal Terminal, LLC, a subsidiary of Foundation Coal Corporation, Foundation PA Coal Company, LLC and The Bank of New York,
as Trustee, filed as an exhibit to the Companys 10-Q on November 9, 2007 and incorporated by reference.                                                                                                                                                                                                                                           
|           | 
|31.1*      |  | Certification of periodic report by the Companys Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 
|           | 
|31.2*      |  | Certification of periodic report by the Companys Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 
|           | 
|32.1*      |  | Certification of periodic report by the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                      
|           | 
|32.2*      |  | Certification of periodic report by the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                      



|* | Filed herewith.
|- | ---------------