Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:

• References to "we," "us," "our" or "AHGP" mean Alliance Holdings GP, L.P., individually as the parent company, and not on a consolidated basis.

• References to "AHGP Partnership" mean the business and operations of Alliance Holdings GP, L.P., the parent company, as well as its consolidated subsidiaries, which include Alliance Resource Management GP, LLC and Alliance Resource Partners, L.P. and its consolidated subsidiaries.

• References to "AGP" mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., also referred to as our general partner.

• References to "ARLP Partnership" mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.

• References to "ARLP" mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.

• References to "MGP" mean Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P.

• References to "SGP" mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P.

• References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.

• References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P.

Summary

We have no operating activities apart from those conducted by the ARLP Partnership, and our cash flows currently consist primarily of distributions from ARLP for our ARLP partnership interests, including the incentive distribution rights that we own. We reflect our ownership interest in the ARLP Partnership on a consolidated basis, which means that our financial results are combined with the ARLP Partnership's financial results and the results of our other subsidiaries. The non-controlling partners' interest in the ARLP Partnership is reflected as an expense in our results of operations. In addition to the ARLP Partnership, our historical consolidated results of operations include the results of operations of MGP, our wholly-owned subsidiary. The AHGP Partnership's results of operations principally reflect the results of operations of the ARLP Partnership adjusted for non-controlling partners' interest in the ARLP Partnership's net income. Accordingly, the discussion of our financial position and results of operations in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflects the operating activities and results of operations of the ARLP Partnership.

The ARLP Partnership is a diversified producer and marketer of coal to major United States utilities and industrial users. The ARLP Partnership began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become what it believes to be the fourth largest coal producer in the eastern United States. The ARLP Partnership currently operates eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. The ARLP Partnership is constructing a ninth mining complex in Kentucky and also operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. As is customary in the coal industry, the ARLP Partnership has entered into long-term coal supply agreements with many of its customers, and it has contractual commitments for substantially all of its remaining 2008 production.

We have four reportable segments: the Illinois Basin, Central Appalachia, Northern Appalachia and Other and Corporate. The first three segments correspond to the three major coal producing regions in the eastern United States. Coal quality, coal seam height, mining and transportation methods and regulatory issues are similar within each of these three segments.

• Illinois Basin segment is comprised of Webster County Coal, LLC's ("Webster County Coal") Dotiki mine, Gibson County Coal, LLC's Gibson North mine and Gibson South property, Hopkins County Coal, LLC's ("Hopkins County Coal") Elk Creek mine, White County Coal, LLC's ("White County Coal") Pattiki mine and Warrior Coal, LLC's ("Warrior Coal") Cardinal mine, River View Coal, LLC's ("River View") property and certain properties of Alliance Resource Properties, LLC ("Alliance Resource Properties"). In 2007, mine development began at the River View property. The ARLP Partnership is in the process of permitting the Gibson South property for future mine development.

• Central Appalachian segment is comprised of Pontiki Coal, LLC's ("Pontiki Coal") Pond Creek and Van Lear mines, and MC Mining, LLC's ("MC Mining") Excel No. 3 mine.

• Northern Appalachian segment is comprised of Mettiki Coal, LLC, Mettiki Coal (WV) LLC's Mountain View mine, two small third-party mining operations, and the Tunnel Ridge, LLC ("Tunnel Ridge") and Penn Ridge Coal, LLC ("Penn Ridge") coal properties. The ARLP Partnership is in the process of permitting the Tunnel Ridge and Penn Ridge properties for future mine development.

• Other and Corporate segment includes marketing and administrative expenses, the Mt. Vernon dock activities, coal brokerage activity, Mid-America Carbonated, LLC ("MAC"), Matrix Design Group, LLC ("Matrix Design") and certain properties of Alliance Resource Properties,.

Expiration of Federal Non-Conventional Source Fuel Tax Credit

Historically, the ARLP Partnership received material revenues from coal sales, rental, marketing and other services provided under synfuel-related agreements at three of its mining operations. As anticipated, operations at these third-party synfuel facilities ended in December 2007 as the federal non-conventional source fuel tax credits expired. As a result, the ARLP Partnership no longer sells its coal to the synfuel operators, but sells that coal directly to its customers, including Louisville Gas and Electric Company, Seminole Electric Cooperative, Inc, Tennessee Valley Authority and Virginia Electric and Power Company, each of which individually accounted for 10% or more of the ARLP Partnership's total revenues for the three months ended June 30, 2008 ("2008 Quarter") and six months ended June 30, 2008 ("2008 Period"), among other customers.

Comparison of our operating results for the 2008 Quarter and the three months ended June 30, 2007 ("2007 Quarter") and the 2008 Period and the six months ended June 30, 2007 ("2007 Period") was affected by the following significant items:

• Gain on sale of non-core coal reserves of $5.2 million in the 2008 Quarter;

• Gain of $2.8 million on settlement of claims against the third-party that provided security services at the time of the December 2004 MC Mining mine fire ("MC Mining Fire Incident") was recognized in the 2008 Quarter. Additionally, in the 2007 Quarter the ARLP Partnership recognized a net gain of $11.5 million from an insurance settlement of claims relating to the MC Mining Fire Incident, as well as a reduction in operating expenses of approximately $0.8 million. Please read "-MC Mining Mine Fire" below; and

• The 2007 Quarter and the 2007 Period realized net income of approximately $8.8 million and $16.9 million, respectively, from various coal synfuel-related agreements. The ARLP Partnership's synfuel related arrangements are discussed in more detail above.

Results of Operations

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

We reported income before non-controlling interest of $36.1 million for the 2008 Quarter compared to $45.6 million for the 2007 Quarter. This decrease of $9.5 million was principally due to the significant items discussed above and higher depreciation, depletion and amortization resulting from capital expenditures associated with the ARLP Partnership's growth initiatives, partially offset by improved coal sales. The ARLP Partnership had tons sold of 6.6 million and tons produced of 6.5 million for the 2008 Quarter compared to 6.3 million tons sold and 5.6 million tons produced for the 2007 Quarter. Increased operating expenses during the 2008 Quarter primarily reflect the increase in tons produced and higher sales related expenses resulting from increased coal sales, as well as higher regulatory compliance costs and other factors described below.

                                                     Three Months Ended June 30,
                                                2008        2007        2008      2007
                                                 (in thousands)         (per ton sold)
   Tons sold                                      6,622       6,279        N/A       N/A
   Tons produced                                  6,467       5,638        N/A       N/A
   Coal sales                                 $ 261,567   $ 242,364   $  39.50   $ 38.60
   Operating expenses and outside purchases   $ 195,915   $ 185,575   $  29.59   $ 29.55

Coal sales. Coal sales for the 2008 Quarter increased 7.9% to $261.6 million from $242.4 million for the 2007 Quarter. The increase of $19.2 million reflected tons sold of 6.6 million (contributing $13.2 million of the increase) for the 2008 Quarter compared to 6.3 million for the 2007 Quarter and higher average coal sales prices (contributing $6.0 million of the increase). Tons produced increased 14.7% to 6.5 million tons for the 2008 Quarter from 5.6 million tons for the 2007 Quarter.

Operating expenses. Operating expenses increased 7.5% to $191.4 million for the 2008 Quarter from $178.0 million for the 2007 Quarter. The increase of $13.4 million resulted from the impact of the following specific factors:

• Labor and benefit expenses per ton produced decreased to $10.11 per ton in the 2008 Quarter from $10.43 per ton in the 2007 Quarter reflecting decreased workers' compensation costs partially offset by increased headcount due to capacity expansion, pay rate and benefit increases and increased health care costs;

• Material and supplies, and maintenance expenses per ton produced increased 1.9% and 1.6%, respectively, to $9.79 and $3.20 per ton, respectively, in the 2008 Quarter from $9.61 and $3.15 per ton, respectively, in the 2007 Quarter. The respective increases of $0.18 and $0.05 per ton produced resulted from increased costs for certain products and services (particularly roof support, seals, power and fuel) used in the mining process and higher regulatory compliance costs;

• Production taxes and royalties (which are incurred as a percentage of coal sales revenue or volumes) increased $0.8 million as a result of increased tons sold and increased average coal sales prices;

• Reduced expenses of $0.8 million in the 2008 Quarter as compared to the 2007 Quarter were associated with the purchase and sale of coal during the 2007 Quarter under a settlement agreement the ARLP Partnership entered into with ICG, LLC ("ICG") in November 2005. For more information, please read our Annual Report on Form 10-K for the year ended December 31, 2007, "Other" under "Item 8. Financial Statements and Supplementary Data - Note
19. Commitments and Contingencies." Consistent with the guidance in the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force ("EITF") No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty, Pontiki Coal's sale of coal to ICG and Alliance Coal's purchase of coal from ICG pursuant to that settlement agreement are combined. Therefore, the excess of Alliance Coal's purchase price from ICG over Pontiki Coal's sales price to ICG is reported as an operating expense. The ARLP Partnership fully satisfied its coal sales agreement with ICG in April 2007;

• The 2008 Quarter operating expenses benefited from a $1.9 million gain on settlement of claims relating to the Vertical Belt Incident at the ARLP Partnership's Pattiki mine; and

• The 2007 Quarter includes a $0.8 million reduction in operating expenses as a result of the final insurance settlement of the MC Mining Fire Incident. Please read "-MC Mining Mine Fire" below.

General and administrative. General and administrative expenses for the 2008 Quarter increased to $12.6 million compared to $8.8 million in the 2007 Quarter. The increase was primarily due to higher salary and benefit costs related to increased staffing levels and higher incentive and unit-based compensation expense.

Other sales and operating revenues. Other sales and operating revenues are principally comprised of Mt. Vernon transloading revenues, products and services provided by MAC and Matrix Design, and other outside services. The 2007 Quarter also includes rental and service fees from third-party coal synfuel facilities. Other sales and operating revenues decreased to $3.5 million for the 2008 Quarter from $10.2 million for the 2007 Quarter. The decrease of $6.7 million was primarily attributable to the loss of synfuel-related benefits due to the expiration of the non-conventional synfuel tax credits on December 31, 2007, partially offset by increased revenues from transloading services and MAC product sales. The ARLP Partnership's synfuel-related arrangements are discussed in more detail above under "-Summary."

Outside purchases. Outside purchases decreased to $4.6 million for the 2008 Quarter from $7.6 million in the 2007 Quarter. The decrease of $3.0 million was primarily attributable to a decrease in outside purchases at the ARLP Partnership's Illinois Basin and Central Appalachian regions partially offset by increased outside purchases in the Northern Appalachian region to supply attractive opportunities in the spot and export markets.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $25.6 million for the 2008 Quarter from $21.4 million for the 2007 Quarter. The increase of $4.2 million was primarily attributable to additional depreciation expense associated with continuing capital expenditures related to infrastructure improvements, efficiency projects and expansion of production capacity.

Interest expense. Interest expense, net of capitalized interest increased to $3.2 million for the 2008 Quarter from $2.8 million for the 2007 Quarter. The increase of $0.4 million was principally attributable to increased interest expense due to increased borrowings under the revolving credit facility in addition to interest expense incurred on the ALRP Partnership's recently completed $350 million private placement of senior notes, partially offset by reduced interest expense from the ARLP Partnership's August 2007 principal payment of $18.0 million on its existing senior notes. The ARLP Partnership's recently completed $350 million private placement of senior notes is discussed in more detail below under "-Debt Obligations."

Interest income. Interest income decreased to $0.2 million for the 2008 Quarter from $0.6 million for the 2007 Quarter. The decrease of $0.4 million resulted from decreased interest income earned on short-term investments, which were substantially liquidated to fund increased capital expenditures.

Transportation revenues and expenses. Transportation revenues and expenses each increased to $11.0 million for the 2008 Quarter compared to $10.6 million for the 2007 Quarter. The increase of $0.4 million was primarily attributable to higher average transportation rates which were 9.4% higher on a per ton basis in the 2008 Quarter compared to the 2007 Quarter. The cost of transportation services are passed through to the ARLP Partnership's customers. Consequently, the ARLP Partnership does not realize any gain or loss on transportation revenues.

Income before income taxes, minority interest and non-controlling interest. Income before income taxes, minority interest and non-controlling interest for the 2008 and 2007 Quarters was $36.1 million and $46.2 million, respectively, and reflects the impact of the changes in revenues and expenses described above.

Income tax expense (benefit). Income tax benefit for the 2008 Quarter was $0.1 million compared to income tax expense of $0.7 million for the 2007 Quarter. The income tax benefit for the 2008 Quarter was primarily due to operating losses associated with Matrix Design, a business owned by the ARLP Partnership's subsidiary, Alliance Services, Inc. ("ASI"). For the 2007 Quarter income tax expense, ASI received a material amount of income from services the ARLP Partnership provided to a third-party coal synfuel facility, which ceased operations on December 31, 2007 with the expiration of the synfuel tax credits The ARLP Partnership's synfuel-related arrangements are discussed in more detail above under "-Summary."

Minority interest. In March 2006, one of ARLP's subsidiaries, White County Coal and Alexander J. House ("House") entered into a limited liability company agreement to form MAC. MAC was formed

to engage in the development and operation of a rock dust mill and to manufacture and sell rock dust. We consolidate MAC's financial results in accordance with FASB Interpretation ("FIN") No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. Based on the guidance in FIN No. 46R, we concluded that MAC is a variable interest entity and that the ARLP Partnership is the primary beneficiary. House's portion of MAC's net income was $102,000 for the 2008 Quarter and a net loss of $85,000 for the 2007 Quarter and is recorded as minority interest on our condensed consolidated income statement.

Segment Adjusted EBITDA. Our 2008 Quarter Segment Adjusted EBITDA decreased $1.3 million, or 1.6%, to $77.4 million from 2007 Quarter Segment Adjusted EBITDA of $78.7 million. Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are (in thousands):

                                                   Three Months Ended
                                                        June 30,
                                                   2008          2007          Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                                   $  47,306     $  46,372     $        934        2.0 %
Central Appalachia                                  16,927        26,489           (9,562 )    (36.1 )%
Northern Appalachia                                  7,613         5,655            1,958       34.6 %
Other and Corporate                                  5,653           169            5,484         (1 )
Elimination                                           (102 )          -              (102 )       (1 )

Total Segment Adjusted EBITDA (2)                $  77,397     $  78,685     $     (1,288 )     (1.6 )%

Tons sold
Illinois Basin                                       4,959         4,503              456       10.1 %
Central Appalachia                                     866           919              (53 )     (5.8 )%
Northern Appalachia                                    797           857              (60 )     (7.0 )%
Other and Corporate                                     -             -                -          -
Elimination                                             -             -                -          -

Total tons sold                                      6,622         6,279              343        5.5 %

Coal sales
Illinois Basin                                   $ 168,656     $ 153,170     $     15,486       10.1 %
Central Appalachia                                  52,736        52,394              342        0.7 %
Northern Appalachia                                 40,175        35,874            4,301       12.0 %
Other and Corporate                                     -            926             (926 )       (1 )
Elimination                                             -             -                -          -

Total coal sales                                 $ 261,567     $ 242,364     $     19,203        7.9 %

Other sales and operating revenues
Illinois Basin                                   $     145     $   7,594     $     (7,449 )    (98.1 )%
Central Appalachia                                      -             -                -          -
Northern Appalachia                                  1,094         1,070               24        2.2 %
Other and Corporate                                  5,070         2,447            2,623         (1 )
Elimination                                         (2,763 )        (873 )         (1,890 )       (1 )

Total other sales and operating revenues         $   3,546     $  10,238     $     (6,692 )    (65.4 )%

Segment Adjusted EBITDA Expense
Illinois Basin                                   $ 121,495     $ 114,392     $      7,103        6.2 %
Central Appalachia                                  38,599        37,396            1,203        3.2 %
Northern Appalachia                                 33,656        31,289            2,367        7.6 %
Other and Corporate                                  4,575         3,204            1,371       42.8 %
Elimination                                         (2,660 )        (873 )         (1,787 )       (1 )

Total Segment Adjusted EBITDA Expense (3)        $ 195,665     $ 185,408     $     10,257        5.5 %

(1) Percentage change was greater than or equal to 100%.

• the financial performance of the ARLP Partnership's assets without regard to financing methods, capital structure or historical cost basis;

• the ability of the ARLP Partnership's assets to generate cash sufficient to pay interest costs and support its indebtedness;

• the ARLP Partnership's operating performance and return on investment as compared to those of other companies in the coal energy sector, without regard to financing or capital structures; and

• the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to the above explanation of EBITDA. In addition, the exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses which are primarily controlled by our segments.

The following is a reconciliation of Segment Adjusted EBITDA to income before non-controlling interest (in thousands):

                                                       Three Months Ended
                                                            June 30,
                                                       2008          2007
          Segment Adjusted EBITDA                    $  77,397     $  78,685

          General and administrative                   (12,612 )      (8,794 )
          Depreciation, depletion and amortization     (25,600 )     (21,425 )
          Interest expense, net                         (3,041 )      (2,266 )
          Income tax (expense) benefit                      70          (669 )
          Minority interest (expense)                     (102 )          85

          Income before non-controlling interest     $  36,112     $  45,616

(3) Segment Adjusted EBITDA Expense includes operating expenses, outside purchases and other income. Transportation expenses are excluded as these expenses are passed through to the ARLP Partnership's customers, and consequently it does not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by the ARLP Partnership's management to assess the operating performance of our segments. Segment Adjusted EBITDA Expense is a key component of EBITDA in addition to coal sales and other sales and operating revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to the ARLP Partnership's operating expenses. Outside purchases are included in Segment Adjusted EBITDA Expense because tons sold and coal sales include sales from outside purchases.

The following is a reconciliation of Segment Adjusted EBITDA Expense to Operating expense (in thousands):

                                                  Three Months Ended
                                                       June 30,
                                                  2008          2007
              Segment Adjusted EBITDA Expense   $ 195,665     $ 185,408

              Outside purchases                    (4,552 )      (7,607 )
              Other income                            250           167

              Operating expense                 $ 191,363     $ 177,968

Illinois Basin - Segment Adjusted EBITDA, as defined in reference (2) to the table above, increased 2.0% or $0.9 million to $47.3 million in the 2008 Quarter, from $46.4 million in the 2007 Quarter. This increase was primarily the result of increased coal sales and the $1.9 million gain on settlement of claims relating to the Pattiki Vertical Belt Incident as discussed above, partially offset by the loss of synfuel related benefits. The increase in coal sales in . . .