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 primarily to major U.S. 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 U.S. We operate eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. We recently initiated operations at a newly constructed mining complex in Kentucky which is now our ninth mining complex and are constructing a new mining complex in West Virginia. We 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.

We have four reportable segments: 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 U.S. 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 Dotiki mining complex, Gibson County Coal, LLC's Gibson North mining complex, Hopkins County Coal LLC's Elk Creek mining complex, White County Coal LLC's ("White County Coal") Pattiki mine and Warrior Coal, LLC's ("Warrior") mining complex, River View Coal, LLC's ("River View") newly constructed mining complex which recently initiated operations, the Gibson County Coal (South), LLC ("Gibson South") property and certain properties of Alliance Resource Properties, LLC ("Alliance Resource Properties"). 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 and MC Mining, LLC's mining complexes.

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

Overview

On a macro level, although some segments of the U.S. economy are beginning to show signs of stability, growth in general remains elusive and electric power generation continues to be constrained. This weakness is evident in the following statistics reported in October 2009 by the Energy Information Administration ("EIA") for the twelve months ended July 2009:

• Net electricity generation in the U.S. dropped 7.6 percent.

• Industrial production fell 13.1 percent.

• Low prices continued to benefit natural gas-fired generation, which showed the largest absolute fuel specific increase.

• In contrast, the drop in coal-fired generation was the largest absolute fuel specific decline - falling 15 percent during this period.

Reflecting these factors, utility coal stock piles have continued to climb, with current levels well above historical averages and representing an estimated 70 days of consumption and we believe the overhang in customer inventories is likely to continue into the first half of 2010.

Despite near-term challenges, we strengthened our long-term contract position and have secured commitments and pricing for substantially all of ARLP's remaining 2009 production, approximately 90% to 95% of currently estimated 2010 production and approximately 80% to 85% of currently estimated production for 2011. We also continue to see encouraging long-term indicators and remain positive on the future of coal. For 2010, industrial and power demand is likely to increase with improved economic activity and the EIA is forecasting coal demand will likely climb 2% as power demand recovers and natural gas prices edge up from 2009 lows.

Longer term, coal remains the fastest growing fuel source worldwide and the International Energy Agency expects global demand for coal to outpace the combined growth in demand for natural gas, nuclear, hydro, wind and solar through 2025. In the U.S., power generators continue to install scrubber technology on existing facilities and approximately 19 gigawatts of new coal-fired electricity generation capacity is progressing toward commercial operation. We believe anticipated higher coal demand, coupled with significant reductions in coal production from economic, regulatory and legislative pressures, are setting the stage for potential coal supply shortages over the next few years.

Results of Operations

Comparison of our operating results for the nine months ended September 30, 2009 ("2009 Period") and September 30, 2008 ("2008 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 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.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

We reported Net Income of ARLP of $36.4 million for the three months ended September 30, 2009 ("2009 Quarter") compared to $29.1 million for the three months ended September 30, 2008 ("2008 Quarter"). This increase of $7.3 million was principally due to improved contract pricing resulting in an average coal sales price of $45.58 per ton sold, as compared to $40.79 per ton sold for the 2008 Quarter. We sold 6.2 million tons and produced 6.3 million tons in the 2009 Quarter, compared to 6.6 million tons sold and produced in the 2008 Quarter. Unplanned customer outages, contractual deferrals and weak spot market demand continued to impact coal sales and production volumes in the 2009 Quarter as compared to the 2008 Quarter. Increased operating expenses (excluding outside coal purchases) during the 2009 Quarter primarily reflect the increase in labor and labor-related expenses, as well as higher sales-related expenses, and other factors described below.

                                                     Three Months Ended September 30,
                                                   2009        2008        2009      2008
                                                    (in thousands)         (per ton sold)
Tons sold                                            6,179       6,603        N/A       N/A
Tons produced                                        6,304       6,561        N/A       N/A
Coal sales                                      $  281,628   $ 269,318   $  45.58   $ 40.79
Operating expenses and outside coal purchases   $  205,357   $ 206,316   $  33.23   $ 31.25

Coal sales. Coal sales for the 2009 Quarter increased 4.6% to $281.6 million from $269.3 million for the 2008 Quarter. The increase of $12.3 million in coal sales reflected the benefit of higher average coal sales prices (contributing $29.6 million in additional coal sales) partially offset by lower sales volumes due to unplanned customer outages, contractual deferrals and weak spot market demand (reducing coal sales by $17.3 million). Average coal sales prices increased $4.79 per ton sold to $45.58 per ton in the 2009 Quarter compared to the 2008 Quarter, primarily as a result of improved contract pricing in the Illinois Basin and Central Appalachian regions.

Operating expenses. Operating expenses increased 2.8% to $204.8 million for the 2009 Quarter from $199.3 million for the 2008 Quarter. Higher operating expenses of $5.5 million resulted from the specific factors listed below:

• Labor and benefit expenses per ton produced, excluding workers' compensation, increased 14.6% to $11.04 per ton in the 2009 Quarter from $9.63 per ton in the 2008 Quarter. This increase of $1.41 per ton represents pay rate increases and higher benefit expenses, primarily increased health care costs and retirement expenses, and the impact of increased headcount as we continue to hire and train new employees for the River View and Tunnel Ridge mine development projects;

• Material and supplies per ton produced decreased 8.3% to $9.59 per ton in the 2009 Quarter from $10.46 per ton in the 2008 Quarter. The decrease of $0.87 per ton produced resulted from decreased costs for certain products and services, primarily roof support (decrease of $0.64 per ton), seals (decrease of $0.16 per ton), fuel used in the mining process (decrease of $0.14 per ton) and outside services (decrease of $0.10 per ton), offset partially by increased costs per ton in various other categories;

• Maintenance expenses per ton produced increased 2.0% to $3.55 per ton in the 2009 Quarter from $3.48 per ton in the 2008 Quarter. The increase of $0.07 per ton produced resulted primarily from higher repair costs related to longwall equipment;

• Mine administration expenses decreased $1.9 million for the 2009 Quarter compared to the 2008 Quarter, primarily as a result of lower estimated regulatory costs;

• Contract mining expenses decreased $2.9 million for the 2009 Quarter compared to the 2008 Quarter. The decrease reflects a curtailment of third-party mining operations in our Northern Appalachian segment in response to weak demand in export and spot coal markets;

• Production taxes and royalties expenses (which were incurred as a percentage of coal sales and coal volumes) increased $0.39 per produced tons sold in the 2009 Quarter compared to the 2008 Quarter primarily as a result of increased average coal sales prices;

• Operating expenses increased due to higher beginning coal inventory cost per ton of $35.76 for 915,000 tons in the 2009 Quarter compared to $33.45 per ton for 341,000 tons in the 2008 Quarter;

• Operating expenses decreased due to a 281,000 ton reduction in produced tons sold reflecting unplanned customer outages, contractual deferrals and lower export and spot market demand; and

• Operating expenses incurred during the 2009 Quarter related to our River View and Tunnel Ridge mine development projects increased $2.3 million over the 2008 Quarter. These expenses are generally included in the variances discussed above.

General and administrative. General and administrative expenses for the 2009 Quarter increased to $10.0 million compared to $7.2 million in the 2008 Quarter. The increase of $2.8 million was primarily due to higher unit-based incentive 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 and administrative services revenue from affiliates. Other sales and operating revenues increased to $6.4 million for the 2009 Quarter from $4.8 million for the 2008 Quarter. The increase of $1.6 million was primarily attributable to increased Matrix Design product sales and Mt. Vernon transloading revenues partially offset by decreases in other outside services and MAC product sales.

Outside coal purchases. Outside coal purchases decreased to $0.5 million for the 2009 Quarter compared to $7.0 million in the 2008 Quarter. The decrease of $6.5 million was primarily attributable to a decrease in outside coal purchases at our Central and Northern Appalachian regions due to reduced demand in the spot and export coal markets.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $28.1 million for the 2009 Quarter from $25.4 million for the 2008 Quarter. The increase of $2.7 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 decreased to $7.7 million for the 2009 Quarter from $8.1 million for the 2008 Quarter. The decrease of $0.4 million was principally attributable to reduced interest expense resulting from our August 2009 principal repayment of $18.0 million on our original senior notes issued in 1999.

Interest income. Interest income decreased to $0.1 million for the 2009 Quarter compared to $2.1 million for the 2008 Quarter. The decrease of $2.0 million resulted from a decrease in short-term investments, which were originally purchased with proceeds from the $350 million private placement of senior notes received in June 2008 discussed in more detail below under "-Debt Obligations." Short-term investments are lower in the 2009 Quarter due to increased capital expenditures for the 2009 Period discussed in more detail below under "-Capital Expenditures."

Transportation revenues and expenses. Transportation revenues and expenses were $11.7 million each for the 2009 and 2008 Quarters. The cost of transportation services are passed through to our customers. Consequently, we do not realize any gain or loss on transportation revenues.

Income tax expense (benefit). Income tax expense increased to $0.6 million for the 2009 Quarter compared to $0.1 million for the 2008 Quarter, primarily due to increased operating income of Matrix Design, which is owned by our subsidiary, Alliance Services, Inc. ("ASI").

Net income attributable to noncontrolling interest. The noncontrolling interest represents a 50% third-party interest in MAC. The third-party's portion of MAC's net income was $0.1 million and $0.2 million for the 2009 and 2008 Quarters, respectively. For more information about MAC, please read "Item 1. Financial Statements (Unaudited) - Note 13. Noncontrolling Interest" of this Quarterly Report on Form 10-Q.

Segment Adjusted EBITDA. Our 2009 Quarter Segment Adjusted EBITDA increased $14.8 million, or 21.7%, to $82.8 million from the 2008 Quarter Segment Adjusted EBITDA of $68.0 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,
                                                  2009           2008           Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                                  $  70,090      $  45,068      $     25,022       55.5 %
Central Appalachia                                  6,517         10,998            (4,481 )    (40.7 )%
Northern Appalachia                                 3,234         10,270            (7,036 )    (68.5 )%
Other and Corporate                                 3,189          1,666             1,523       91.4 %
Elimination                                          (280 )          (18 )            (262 )       (1 )

Total Segment Adjusted EBITDA (2)               $  82,750      $  67,984      $     14,766       21.7 %


Tons sold
Illinois Basin                                      4,925          4,934                (9 )     (0.2 )%
Central Appalachia                                    604            810              (206 )    (25.4 )%
Northern Appalachia                                   650            859              (209 )    (24.3 )%
Other and Corporate                                    -              -                 -          -
Elimination                                            -              -                 -          -

Total tons sold                                     6,179          6,603              (424 )     (6.4 )%


Coal sales
Illinois Basin                                  $ 207,410      $ 173,096      $     34,314       19.8 %
Central Appalachia                                 41,357         49,829            (8,472 )    (17.0 )%
Northern Appalachia                                32,861         46,393           (13,532 )    (29.2 )%
Other and Corporate                                    -              -                 -          -
Elimination                                            -              -                 -          -

Total coal sales                                $ 281,628      $ 269,318      $     12,310        4.6 %


Other sales and operating revenues
Illinois Basin                                  $     257      $     158      $         99       62.7 %
Central Appalachia                                     -              15               (15 )       (1 )
Northern Appalachia                                 1,024          1,161              (137 )    (11.8 )%
Other and Corporate                                 9,487          5,508             3,979       72.2 %
Elimination                                        (4,415 )       (2,091 )          (2,324 )       (1 )

Total other sales and operating revenues        $   6,353      $   4,751      $      1,602       33.7 %


Segment Adjusted EBITDA Expense
Illinois Basin                                  $ 137,579      $ 128,186      $      9,393        7.3 %
Central Appalachia                                 34,839         38,846            (4,007 )    (10.3 )%
Northern Appalachia                                30,650         37,284            (6,634 )    (17.8 )%
Other and Corporate                                 6,298          3,843             2,455       63.9 %
Elimination                                        (4,135 )       (2,074 )          (2,061 )    (99.4 )%

Total Segment Adjusted EBITDA Expense (3)       $ 205,231      $ 206,085      $       (854 )     (0.4 )%

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

• the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

• the ability of our assets to generate cash sufficient to pay interest costs and support its indebtedness;

• our 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 and Net Income of ARLP (in thousands):

                                                            Three Months Ended
                                                              September 30,
                                                           2009           2008
    Segment Adjusted EBITDA                              $  82,750      $  67,984

    General and administrative                              (9,959 )       (7,184 )
    Depreciation, depletion and amortization               (28,145 )      (25,403 )
    Interest expense, net                                   (7,563 )       (6,016 )
    Income tax expense                                        (586 )          (92 )

    Net income                                           $  36,497      $  29,289
    Net income attributable to noncontrolling interest         (53 )         (153 )

    Net Income of ARLP                                   $  36,444      $  29,136

(3) Segment Adjusted EBITDA Expense includes operating expenses, outside coal 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 coal purchases are included in Segment Adjusted EBITDA Expense because tons sold and coal sales include sales from outside coal purchases.

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

                                                                  Three Months Ended
                                                                    September 30,
                                                                2009             2008
Segment Adjusted EBITDA Expense                               $ 205,231        $ 206,085
Outside coal purchases                                             (517 )         (6,995 )
Other income                                                        126              231

Operating expense (excluding depreciation, depletion and
amortization)                                                 $ 204,840        $ 199,321

Illinois Basin - Segment Adjusted EBITDA increased 55.5% to $70.1 million in the 2009 Quarter from $45.1 million in the 2008 Quarter. The increase of $25.0 million was primarily attributable to improved contract pricing reflecting a higher average coal sales price of $42.11 per ton during the 2009 Quarter compared to $35.08 per ton for the 2008 Quarter. Coal sales increased 19.8% to $207.4 million in the 2009 Quarter compared to $173.1 million in the 2008 Quarter. The increase of $34.3 million was partially offset by higher Segment Adjusted EBITDA Expense in the 2009 Quarter. Total Segment Adjusted EBITDA Expense for the 2009 Quarter increased 7.3% to $137.6 million from $128.2 million in the 2008 Quarter, primarily as a result of certain cost increases described above under consolidated operating expenses. On a per ton sold basis, Segment Adjusted EBITDA Expense for the 2009 Quarter increased $1.95 to $27.93 per ton compared to the 2008 Quarter Segment Adjusted EBITDA Expense of $25.98 per ton.

Central Appalachia - Segment Adjusted EBITDA decreased 40.7% to $6.5 million for the 2009 Quarter compared to $11.0 million in the 2008 Quarter. The decrease of $4.5 million was primarily the result of lower sales volumes due to unplanned customer outages, weak coal demand in the spot market and higher expenses per ton during the 2009 Quarter, partially offset by improved contract pricing that resulted in an increase in the average coal sales price of $6.91 per ton to $68.43 per ton in the 2009 Quarter, compared to $61.52 per ton in the 2008 Quarter. Although Segment Adjusted EBITDA Expense for the 2009 Quarter decreased 10.3% to $34.8 million from $38.8 million in the 2008 Quarter primarily as a result of lower coal sales volumes, Segment Adjusted EBITDA Expense per ton sold during the 2009 Quarter increased $9.68 per ton sold to $57.64 as compared to $47.96 per ton sold in the 2008 Quarter. The increase in Segment Adjusted EBITDA Expense per ton resulted in part from decreased coal production primarily due to reduced clean coal recovery, unplanned customer outages and lower spot market demand, in addition to certain cost per ton increases described above under consolidated operating expenses. Lower clean coal recovery resulted partly from Pontiki's transition from the depleted Pond Creek coal seam into the thinner Van . . .