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 "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., also referred to as our managing general partner.

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

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

• References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P., also referred to as our operating subsidiary.

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

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

Summary

We are a diversified producer and marketer of coal to major United States utilities and industrial users. We began mining operations in 1971 and, since then, have grown through acquisitions and internal development to become what we believe to be the fifth largest coal producer in the eastern United States. We currently operate eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. We are constructing mining complexes in Kentucky and West Virginia, and also operate a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. As is customary in the coal industry, we have entered into long-term coal supply agreements with many of our customers, and we have contractual commitments for substantially all of our 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, 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, Gibson County Coal (South), LLC's ("Gibson South") property, 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. We are 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.

• Other and Corporate segment includes marketing and administrative expenses, the Mt. Vernon dock activities, coal brokerage activity, Mid-America Carbonates, 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, we received material revenues from coal sales, rental, marketing and other services provided under synfuel-related agreements at three of our 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, we no longer sell coal to the synfuel operators, but instead sell that coal directly to our customers, including (but not exclusively) 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 our total revenues for the three months ended September 30, 2008 ("2008 Quarter") and nine months ended September 30, 2008 ("2008 Period").

Results of Operations

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

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

• Gain of $1.9 million on settlement of claims relating to the 2005 failure of the vertical belt system (the "Vertical Belt Incident") at our Pattiki mine in the 2008 Period recorded as a reduction to operating expenses. The Vertical Belt Incident temporarily idled our Pattiki mine in June and July of 2005 following the failure of the vertical conveyor belt system used in conveying raw coal out of the mine. The 2008 Period gain resulted from a settlement reached with the third-party installer of the vertical belt system and represents a partial recovery of expenses incurred in 2005;

• 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 Period. Additionally, in the 2007 Period we 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;

• The 2007 Quarter and the 2007 Period realized net income of approximately $8.0 million and $24.9 million, respectively, from various coal synfuel-related agreements. The expiration of the federal non-conventional source fuel tax credit and its impact on our results of operations are discussed in more detail above; and

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

We reported net income of $29.1 million for the 2008 Quarter compared to $38.7 million for the 2007 Quarter. This decrease of $9.6 million was principally due to the expiration of the non-conventional synfuel tax credits on December 31, 2007, higher depreciation, depletion and amortization resulting from capital expenditures associated with our growth initiatives and increased interest expense, net of interest income due to our $350 million private placement of Series A and Series B Senior Notes (collectively, the "2008 Senior Notes") in June 2008, partially offset by improved coal sales. Our synfuel-related arrangements and the 2008 Senior Notes are discussed in more detail above under "-Summary" and below under "-Debt Obligations," respectively. We had tons sold and tons produced of 6.6 million for the 2008 Quarter compared to 6.2 million tons sold and 6.1 million tons produced for the 2007 Quarter. Increased operating expenses during the 2008 Quarter primarily reflect the increase in tons produced, as well as higher regulatory compliance costs and other factors described below.

                                                   Three Months Ended September 30,
                                                 2008        2007        2008      2007
                                                  (in thousands)         (per ton sold)
   Tons sold                                       6,603       6,230        N/A       N/A
   Tons produced                                   6,561       6,083        N/A       N/A
   Coal sales                                 $  269,318   $ 242,412   $  40.79   $ 38.91
   Operating expenses and outside purchases   $  206,316   $ 180,594   $  31.25   $ 28.99

Coal sales. Coal sales for the 2008 Quarter increased 11.1% to $269.3 million from $242.4 million for the 2007 Quarter. The increase of $26.9 million reflected tons sold of 6.6 million (contributing $14.5 million of the increase) for the 2008 Quarter compared to 6.2 million for the 2007 Quarter and record average coal sales prices (contributing $12.4 million of the increase). Tons produced increased 7.9% to 6.6 million tons for the 2008 Quarter from 6.1 million tons for the 2007 Quarter.

Operating expenses. Operating expenses increased 12.7% to $199.3 million for the 2008 Quarter from $176.9 million for the 2007 Quarter. The increase of $22.4 million resulted from an increase in operating expenses associated with additional 297,000 produced tons sold as well as the following specific factors:

• Labor and benefit expenses per ton produced, excluding workers' compensation costs which decreased $5.7 million primarily reflecting discount rate changes, increased to $9.63 per ton in the 2008 Quarter from $8.81 per ton in the 2007 Quarter. This increase of $0.82 per ton represents pay rate and benefit increases, increased health care costs, increased headcount due to capacity expansion and increased regulatory compliance;

• Material and supplies, and maintenance expenses per ton produced increased 17.9% and 16.8%, respectively, to $10.46 and $3.48 per ton, respectively, in the 2008 Quarter from $8.87 and $2.98 per ton, respectively, in the 2007 Quarter. The respective increases of $1.59 and $0.50 per ton produced resulted from increased costs for certain products and services (particularly roof support, power, fuel and other consumables) used in the mining process, as well as reduced productivity and higher compliance costs associated with more stringent regulatory enforcement in addition to increased coal transportation costs and water treatment costs in our Northern Appalachian region; and

General and administrative. General and administrative expenses were comparable at $7.2 million for both the 2008 Quarter and the 2007 Quarter.

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 and administrative services revenue from affiliates. The 2007 Quarter also includes rental and service fees from third-party coal synfuel facilities. Other sales and operating revenues decreased to $4.8 million for the 2008 Quarter from $9.0 million for the 2007 Quarter. The decrease of $4.2 million was primarily attributable to the loss of $6.8 million 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 and Matrix Design product sales. Our synfuel-related arrangements are discussed in more detail above under "-Summary."

Outside purchases. Outside purchases increased to $7.0 million for the 2008 Quarter from $3.7 million in the 2007 Quarter. The increase of $3.3 million was primarily attributable to an increase in outside purchases in the Northern Appalachian region to supply attractive opportunities in the spot and export markets, partially offset by decreased outside purchases in our Illinois Basin and Central Appalachian regions.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $25.4 million for the 2008 Quarter from $21.8 million for the 2007 Quarter. The increase of $3.6 million was primarily attributable to additional depreciation expense associated with continuing capital expenditures related to infrastructure improvements, efficiency projects, reserve acquisitions and expansion of production capacity.

Interest expense. Interest expense, net of capitalized interest increased to $8.1 million for the 2008 Quarter from $3.0 million for the 2007 Quarter. The increase of $5.1 million was principally attributable to increased interest expense resulting from the 2008 Senior Notes, partially offset by reduced interest expense from our August 2008 principal repayment of $18.0 million on our original senior notes issued in 1999. The 2008 Senior Notes are discussed in more detail below under "-Debt Obligations."

Interest income. Interest income increased to $2.1 million for the 2008 Quarter from $0.3 million for the 2007 Quarter. The increase of $1.8 million resulted from interest income earned on short-term investments purchased with funds received from our issuance of the 2008 Senior Notes, which is discussed in more detail below under "-Debt Obligations."

Transportation revenues and expenses. Transportation revenues and expenses each increased to $11.7 million for the 2008 Quarter compared to $9.1 million for the 2007 Quarter. The increase of $2.6 million was primarily attributable to average transportation rates that were 27.7% higher on a per ton basis in the 2008 Quarter compared to the 2007 Quarter. The cost of transportation services are passed through to our customers. Consequently, we do not realize any gain or loss on transportation revenues.

Income before income taxes and minority interest. Income before income taxes and minority interest for the 2008 and 2007 Quarters was $29.4 million and $39.2 million, respectively, and reflects the impact of the changes in revenues and expenses described above.

Income tax expense (benefit). Income tax expense for the 2008 Quarter was $92,000 compared to income tax expense of $550,000 for the 2007 Quarter. The income tax expense for the 2008 Quarter was primarily due to operating income associated with Matrix Design, a business owned by our subsidiary,

Alliance Services, Inc. ("ASI"). The 2007 Quarter income tax expense was impacted by ASI's receipt of a material amount of income from services we provided to a third-party coal synfuel facility, which ceased operations on December 31, 2007 with the expiration of the synfuel tax credits Our synfuel-related arrangements are discussed in more detail above under "-Summary."

Minority interest. In March 2006 our subsidiary, 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 Financial Accounting Standards Board ("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 we are the primary beneficiary. House's portion of MAC's net income and net loss was $153,000 and $63,000 for the 2008 Quarter and the 2007 Quarter, respectively, and is recorded as minority interest on our condensed consolidated income statement.

Segment Adjusted EBITDA. Our 2008 Quarter Segment Adjusted EBITDA decreased $2.9 million, or 4.1%, to $68.0 million from 2007 Quarter Segment Adjusted EBITDA of $70.9 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
                                                      September 30,
                                                   2008          2007          Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                                   $  45,068     $  51,826     $     (6,758 )    (13.0 )%
Central Appalachia                                  10,998         9,200            1,798       19.5 %
Northern Appalachia                                 10,270        10,216               54        0.5 %
Other and Corporate                                  1,666          (327 )          1,993         (1 )
Elimination                                            (18 )          -               (18 )       -

Total Segment Adjusted EBITDA (2)                $  67,984     $  70,915     $     (2,931 )     (4.1 )%

Tons sold
Illinois Basin                                       4,934         4,519              415        9.2 %
Central Appalachia                                     810           851              (41 )     (4.8 )%
Northern Appalachia                                    859           860               (1 )     (0.1 )%
Other and Corporate                                     -             -                -          -
Elimination                                             -             -                -          -

Total tons sold                                      6,603         6,230              373        6.0 %

Coal sales
Illinois Basin                                   $ 173,096     $ 154,060     $     19,036       12.4 %
Central Appalachia                                  49,829        49,244              585        1.2 %
Northern Appalachia                                 46,393        39,108            7,285       18.6 %
Other and Corporate                                     -             -                -          -
Elimination                                             -             -                -          -

Total coal sales                                 $ 269,318     $ 242,412     $     26,906       11.1 %

Other sales and operating revenues
Illinois Basin                                   $     158     $   6,687     $     (6,529 )    (97.6 )%
Central Appalachia                                      15            -                15         -
Northern Appalachia                                  1,161         1,121               40        3.6 %
Other and Corporate                                  5,508         2,579            2,929         (1 )
Elimination                                         (2,091 )      (1,411 )           (680 )    (48.2 )%

Total other sales and operating revenues         $   4,751     $   8,976     $     (4,225 )    (47.1 )%

Segment Adjusted EBITDA Expense
Illinois Basin                                   $ 128,186     $ 108,922     $     19,264       17.7 %
Central Appalachia                                  38,846        40,044           (1,198 )     (3.0 )%
Northern Appalachia                                 37,284        30,012            7,272       24.2 %
Other and Corporate                                  3,843         2,906              937       32.2 %
Elimination                                         (2,074 )      (1,411 )           (663 )    (47.0 )%

Total Segment Adjusted EBITDA Expense (3)        $ 206,085     $ 180,473     $     25,612       14.2 %

(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 those stated in 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 consolidated Segment Adjusted EBITDA to net income (in thousands):

                                                       Three Months Ended
                                                          September 30,
                                                       2008          2007
          Segment Adjusted EBITDA                    $  67,984     $  70,915

          General and administrative                    (7,184 )      (7,175 )
          Depreciation, depletion and amortization     (25,403 )     (21,804 )
          Interest expense, net                         (6,016 )      (2,764 )
          Income tax (expense) benefit                     (92 )        (550 )
          Minority interest (expense)                     (153 )          63

          Net income                                 $  29,136     $  38,685

(3) Segment Adjusted EBITDA Expense includes operating expenses, outside purchases and other income. Transportation expenses are excluded as these expenses are passed through to our customers, and consequently we do not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by our 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 our 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 consolidated Segment Adjusted EBITDA Expense to Operating expense (in thousands):

                                                                   Three Months Ended
                                                                     September 30,
                                                                  2008           2007
Segment Adjusted EBITDA Expense                                 $ 206,085      $ 180,473
Outside purchases                                                  (6,995 )       (3,737 )
Other income                                                          231            121

Operating expense (excluding depreciation, depletion and
amortization)                                                   $ 199,321      $ 176,857

Illinois Basin - Segment Adjusted EBITDA, as defined in reference (2) to the table above, decreased 13.0%, or $6.7 million to $45.1 million in the 2008 Quarter, from $51.8 million in the 2007 Quarter. This decrease was primarily the result of the loss of synfuel related benefits as discussed above partially offset by increased coal sales. The increase in coal sales in the 2008 Quarter of $19.0 million or 12.4%, to $173.1 million, as compared to $154.1 million in the 2007 Quarter reflects an increase of 415,000 tons sold to 4.9 million in the 2008 Quarter compared to 4.5 million tons in the 2007 Quarter, which was driven by increased production capacity at the Elk Creek mine and increased production at the Gibson and Warrior mines. Other sales and operating revenues decreased $6.5 million primarily due to the expiration of the non-conventional synfuel-related tax credits on December 31, 2007 and the resulting loss of benefits derived from supplying third-party coal synfuel facilities with coal feedstock and related services. Our synfuel-related arrangements are discussed in more detail above under "-Summary." Total Segment Adjusted EBITDA Expense, as defined in reference (3) to the above table, for the 2008 Quarter increased 17.7% to $128.2 million from $108.9 million in the 2007 Quarter. The increase in the 2008 Quarter Segment Adjusted EBITDA Expense compared to the 2007 Quarter reflects the impact of the cost increases described above under consolidated operating expenses and costs associated with higher produced tons sold. The 2007 Quarter Segment Adjusted EBITDA Expense also benefited from certain favorable operating tax adjustments and net gains of $2.8 million from the sale of surplus equipment.

Central Appalachia - Segment Adjusted EBITDA, as defined in reference (2) to the table above, increased $1.8 million to $11.0 million for the 2008 Quarter compared to the 2007 Quarter Segment Adjusted EBITDA of $9.2 million. The increase was primarily the result of improved contract pricing and increased sales in a higher priced spot market, resulting in an average coal sales price increase of 6.2% to $61.52 per ton in the 2008 Quarter, as compared to $57.92 per ton in the 2007 Quarter. Segment Adjusted EBITDA Expense, as defined in reference (3) to the above table, for the 2008 Quarter decreased 3.0% to $38.8 million from $40.0 million in the 2007 Quarter reflecting lower produced tons sold and decreased workers compensation costs partially offset by cost increases described above under consolidated operating expenses and certain favorable operating tax adjustments in the 2007 Quarter. The Segment Adjusted EBITDA Expense per ton sold during the 2008 Quarter was $47.96, an increase of 1.8%, as compared to $47.10 per ton in the 2007 Quarter. The increase in the 2008 Quarter Segment Adjusted EBITDA Expense per ton sold compared to the 2007 Quarter reflects the impact of the cost increases described above.

Northern Appalachia - Segment Adjusted EBITDA, as defined in reference (2) to the table above, increased 0.5%, to $10.3 million for the 2008 Quarter as . . .