You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and notes thereto included elsewhere in this report.

Overview

We are a Delaware limited partnership formed on July 12, 2002 to indirectly acquire substantially all of the assets, liabilities and operations of our predecessor, Crosstex Energy Services, Ltd. We have two industry segments, Midstream and Treating, with a geographic focus along the Texas Gulf Coast, in the north Texas Barnett Shale area and in Louisiana and Mississippi. Our Midstream division focuses on the gathering, processing, transmission and marketing of natural gas and natural gas liquids (NGLs), as well as providing certain producer services, while our Treating division focuses on the removal of contaminants from natural gas and NGLs to meet pipeline quality specifications. For the nine months ended September 30, 2008, 89% of our gross margin was generated in the Midstream division with the balance in the Treating division. We manage our operations by focusing on gross margin because our business is generally to purchase and resell natural gas and NGLs for a margin, or to gather, process, transport, market or treat gas and NGLs for a fee. We buy and sell most of our natural gas at a fixed relationship to the relevant index price so our margins are not significantly affected by changes in gas prices. In addition, we receive certain fees for processing based on a percentage of the liquids produced and enter into hedge contracts for our expected share of the liquids produced to protect our margins from changes in liquids prices. As explained under "Commodity Price Risk" below, we enter into financial instruments to reduce volatility in our gross margin due to price fluctuations.

Our Midstream segment margins are determined primarily by the volumes of natural gas gathered, transported, purchased and sold through our pipeline systems, processed at our processing facilities, and the volumes of NGLs handled at our fractionation facilities. Our Treating segment margins are largely a function of the number and size of treating plants in operation and fees earned for removing impurities at a non-operated processing plant. We generate revenues from five primary sources:

• purchasing and reselling or transporting natural gas on the pipeline systems we own;

• processing natural gas at our processing plants and fractionating and marketing the recovered NGLs;

• treating natural gas at our treating plants;

• recovering carbon dioxide and NGLs at a non-operated processing plant; and

• providing off-system marketing services for producers.

The bulk of our operating profits have historically been derived from the margins we realize for gathering and transporting natural gas through our pipeline systems. Generally, we buy gas from a producer, plant or transporter at either a fixed discount to a market index or a percentage of the market index. We then transport and resell the gas. The resale price is generally based on the same index price at which the gas was purchased, and, if we are to be profitable, at a smaller discount or larger premium to the index than it was purchased. We attempt to execute all purchases and sales substantially concurrently, or we enter into a future delivery obligation, thereby establishing the basis for the margin we will receive for each natural gas transaction. Our gathering and transportation margins related to a percentage of the index price can be adversely affected by declines in the price of natural gas. See "Commodity Price Risk" below for a discussion of how we manage our business to reduce the impact of price volatility.

Processing revenues are generally based on either a percentage of the liquids volume recovered, or a margin based on the value of liquids recovered less the reduced energy value in the remaining gas after the liquids are removed, or a fixed fee per unit processed. Fractionation and marketing fees are generally a fixed fee per unit of products.

We generate treating revenues under three arrangements:

• a volumetric fee based on the amount of gas treated, which accounted for approximately 14% and 12%, of the operating income in our Treating division for the nine months ended September 30, 2008 and 2007, respectively;

• a fixed fee for operating the plant for a certain period, which accounted for approximately 60% and 58% of the operating income in our Treating division for the nine months ended September 30, 2008 and 2007, respectively; and

• a fee arrangement in which the producer operates the plant, which accounted for approximately 26% and 30% of the operating income in our Treating division for the nine months ended September 30, 2008 and 2007, respectively.

Operating expenses are costs directly associated with the operations of a particular asset. Among the most significant of these costs are those associated with direct labor and supervision and associated transportation and communication costs, property insurance, ad valorem taxes, repair and maintenance expenses, measurement and utilities. These costs are normally fairly stable across broad volume ranges, and therefore do not normally decrease or increase significantly in the short term with decreases or increases in the volume of gas moved through the asset.

Recent Developments

Since early September 2008, the economy and financial markets have declined at rates and to levels that were not anticipated. In addition to these declines, our business has also been significantly impacted by the following changes:

• The majority of the Partnership's assets in Texas and Louisiana sustained minimal physical damage as a result of hurricanes Gustav and Ike, which came ashore in September. Most of the Partnership's facilities along the Gulf Coast promptly resumed operations. However, the Sabine plant, because of its proximity to the Louisiana Gulf coast, sustained some damage which should be repaired by mid-December. In addition, several offshore production platforms and pipelines transporting gas production to the Pelican and Bluewater processing plants were damaged by the storm and repair to these facilities are continuing during the fourth quarter of 2008. These storms resulted in an adverse impact to the Partnership's gross margin of approximately $12.0 million and $2.0 million in operating expenses in the third quarter of 2008, and the Partnership anticipates that it will experience a further negative impact to it's gross margin in the fourth quarter of 2008 of approximately $11.0 million.

• Commodity prices have continued to decline. Since the beginning of October until the beginning of November, oil prices have fallen about 35%, natural gas prices about 13% and NGL prices about 38%. These declines have impacted the Partnership's margins expected from processing for the remainder of 2008 and 2009.

• In the north Texas Barnett Shale play, continued delays in infrastructure development, equipment delivery and right-of-way access have led to further delays in the growth of volumes on the Partnership's systems.

• Gas producers have revised their drilling budgets as they react to turbulent capital market conditions. Consequently, the Partnership has adjusted its business outlook to account for the general slowdown in industry drilling activity.

Our Business Strategy through 2009

We are adjusting our overall business strategy in response to the recent events discussed above. We are implementing a strategy to increase our liquidity and improve our profitability by undertaking the following steps:

• Lowering the distribution level on our common units, which is being effected with the distribution payable in November 2008.

• Selling certain non-strategic assets. We have executed agreements to sell certain non-strategic assets that together will generate approximately $105.0 million in proceeds. These transactions are expected to be completed before the end of November 2008.

• Reducing capital expenditures significantly through 2009. Total growth capital investments in the fourth quarter of 2008 and calendar year 2009 are currently anticipated to be approximately $180.0 million.

• Decreasing balances outstanding under the letters of credit.

Expansions

During the nine months ended September 30, 2008, we continued the expansion of our north Texas pipeline gathering system in the Barnett Shale which was acquired in June 2006. Since the date of acquisition through September 30, 2008, we connected approximately 421 new wells to our gathering system including approximately 135 new wells connected during the nine months ended September 30, 2008. Our total throughput on the north Texas gathering systems, including throughput on our north Johnson County expansion discussed below, was approximately 771,000 MMBtu/d for the month of September 2008, up from a monthly throughput of approximately 525,000 MMBtu/d in December 2007.

We continued the construction of our 29-mile north Johnson County expansion, which is part of our north Texas pipeline gathering system, during the nine months ended September 30, 2008. The first phase of this expansion commenced operation in September 2007. The last two phases of the expansion commenced operation in May and July of 2008. The total gathering capacity for this 29-mile expansion is approximately 400 MMcf/d.

We also completed our east Texas natural gas gathering system expansion in May 2008. We added a new pipeline next to our existing system which increased capacity to approximately 100 MMcf/d and added two refrigeration plants to improve the system's ability to process the gas.

On April 28, 2008, we announced plans to construct an $80.0 million natural gas processing facility called Bear Creek in the Barnett Shale region of north Texas. The new plant will have a gas processing capacity of 200 MMcf/d, increasing our total processing capacity in the Barnett Shale to 485 MMcf/d. The Bear Creek plant will be strategically located near our existing midstream assets in Hood County. We had originally planned to complete the Bear Creek plant by the third quarter of 2009. Although the Partnership has commenced construction of the plant, we are now planning to delay certain portions of the construction project because we do not anticipate that the additional capacity provided by the Bear Creek plant will be needed until mid to late 2010 due to reductions and/or delays in drilling activity in the Barnett Shale area.

Results of Operations

Set forth in the table below is certain financial and operating data for the
Midstream and Treating divisions for the periods indicated.


                                               Three Months Ended                Nine Months Ended
                                                 September 30,                     September 30,
                                             2008             2007             2008             2007
                                                              (Dollars in millions)

Midstream revenues                        $   1,310.2      $     926.7      $   4,087.7      $   2,721.2
Midstream purchased gas                      (1,213.5 )         (841.6 )       (3,796.0 )       (2,503.5 )
Profit on energy trading activities               0.6              0.6              2.3              2.2

Midstream gross margin                           97.3             85.7            294.0            219.9

Treating revenues                                19.1             13.1             48.0             40.2
Treating purchased gas                           (6.2 )           (1.6 )          (11.6 )           (6.3 )

Treating gross margin                            12.9             11.5             36.4             33.9

Total gross margin                        $     110.2      $      97.2      $     330.4      $     253.8

Midstream Volumes (MMBtu/d):
Gathering and transportation                2,643,000        2,343,000        2,594,000        2,040,000
Processing                                  1,683,000        2,156,000        2,005,000        2,079,000
Producer services                              74,000           92,000           81,000           95,000
Plants in service at end of period                195              195              195              195

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

Gross Margin and Profit on Energy Trading Activities. Midstream gross margin was $97.3 million for the three months ended September 30, 2008 compared to $85.7 million for the three months ended September 30, 2007, an increase of $11.6 million, or 13.5%. The increase was primarily due to system expansion projects and increased throughput on our gathering and transmission systems. These increases were partially offset by margin decreases in the processing business due to a less favorable NGL market and operating downtime due to the impact of recent hurricanes. Profit on energy trading activities was unchanged for the comparative periods.

System expansion in the north Texas region and increased throughput on the North Texas Pipeline (NTP) contributed $14.9 million of gross margin growth for the three months ended September 30, 2008 over the same period in 2007. The gathering systems in the region and NTP accounted for $10.7 million and $2.3 million of this increase, respectively. The processing facilities in the region contributed an additional $1.9 million of this gross margin increase. System expansion and volume increases on the LIG system contributed margin growth of $1.2 million during the third quarter of 2008 over the same period in 2007. Processing plants in Louisiana reported a margin decline of $2.9 million for the comparative three month periods due to a less favorable NGL processing environment and business interruptions due to the impact of recent hurricanes. These unfavorable processing conditions also impacted the south Texas region where the Vanderbilt system and Gregory Processing Plant had margin declines of $0.8 million and $0.7 million, respectively.

Our processing and gathering systems were negatively impacted by events beyond our control during the third quarter that had a significant effect on gross margin results for the period. Hurricanes Gustav and Ike came ashore along the Gulf coast in September. These storms are estimated to have cost us approximately $12.0 million in gross margin for the three months ended September 30, 2008. The lost margin was primarily experienced at gas processing facilities along the Gulf coast. However, processing facilities further inland in Louisiana and north Texas were indirectly impacted due to disruption in the NGL markets. In addition, approximately $0.9 million in gross margin was lost at the Sabine plant in August due to downtime from fire damage. The fire occurred during an attempt to bring the plant back on line following tropical storm Eduardo.

Treating gross margin was $12.9 million for the three months ended September 30, 2008 compared to $11.5 million in the same period in 2007, an increase of $1.4 million, or 12.3%. Treating plants, dew point control plants, and related equipment in service remained at 195 plants at September 30, 2008 which is unchanged from September 30, 2007. Gross margin growth for the period of $1.1 million is attributed primarily to increased fees per plant and an increase in throughput on the volume based plants. Upstream services also contributed gross margin growth of $0.3 million for the comparable periods.

Operating Expenses. Operating expenses were $47.0 million for the three months ended September 30, 2008 compared to $31.7 million for the three months ended September 30, 2007, an increase of $15.3 million, or 48.3%. The increase is primarily attributable to the following factors:

• $10.9 million increase in Midstream operating expenses primarily due to expansion and growth of our midstream assets in the NTP, NTG, and north Louisiana and east Texas areas. Chemicals and materials increased by $2.3 million, compressor rentals increased by $1.6 million, contractor services and labor costs increased by $5.2 million and ad valorem taxes increased by $1.0 million;

• $2.0 million in Midstream operating expenses due to hurricanes Gustav and Ike. $7.6 million total repair and replacement costs were sustained at our Sabine processing plant, $5.6 million of which will be claimed through our property damage insurer; and

• $2.5 million increase in Treating operating expenses, consisting of a $0.6 million increase for materials and supplies, a $0.8 million increase in contractor services costs to support maintenance projects and a $0.7 million increase in labor costs as a result of market adjustments for field service employees and additional headcount.

General and Administrative Expenses. General and administrative expenses were $16.9 million for the three months ended September 30, 2008 compared to $16.1 million for the three months ended September 30, 2007, an increase of $0.8 million, or 4.8%. The increase is primarily attributable to the following factors:

• $1.6 million increase in bad debt expense due to the SemGroup, L.P. bankruptcy;

• $0.8 million increase in rental expense resulting primarily from the addition of office rent for the expansion of our corporate headquarters; and

• $1.6 million decrease in stock-based compensation expense resulting primarily from the reduction of target performance-based restricted units and restricted shares.

Gain/Loss on Derivatives. We had a loss on derivatives of $1.3 million for the three months ended September 30, 2008 compared to a loss of $0.5 million for the three months ended September 30, 2007. The derivative transaction types contributing to the net loss are as follows (in millions):

                                              Three Months Ended September 30,
                                               2008                       2007
       (Gain) Loss on Derivatives:    Total         Realized      Total       Realized

       Interest rate swaps           $    4.4       $     0.6     $  0.6     $     (0.2 )
       Basis swaps                       (1.4 )          (2.7 )     (0.5 )         (2.1 )
       Third-party on-system swaps       (0.3 )          (0.3 )     (0.2 )         (0.7 )
       Processing margin hedges          (0.9 )             -        0.6            0.5
       Other                             (0.5 )          (0.1 )        -              -

                                     $    1.3       $    (2.5 )   $  0.5     $     (2.5 )

Depreciation and Amortization. Depreciation and amortization expenses were $32.8 million for the three months ended September 30, 2008 compared to $27.5 million for the three months ended September 30, 2007, an increase of $5.4 million, or 19.5%. The increase primarily relates to the NTP and NTG expansion project assets.

Interest Expense. Interest expense was $17.1 million for the three months ended September 30, 2008 compared to $20.7 million for the three months ended September 30, 2007, a decrease of $3.7 million, or 17.7%. The decrease relates primarily to lower interest rates between three-month periods (weighted average rate of 6.0%

in the 2008 period compared to 7.0% in the 2007 period). Net interest expense consists of the following (in millions):

                                             Three Months Ended
                                                September 30,
                                             2008           2007

                    Senior notes           $     8.2       $   8.3
                    Credit facility              8.4          12.8
                    Other                        1.1           0.9
                    Capitalized interest        (0.5 )        (1.2 )
                    Interest income             (0.1 )        (0.1 )

                    Total                  $    17.1       $  20.7

Income taxes. Income tax expense was $1.7 million for the three months ended September 30, 2008 compared to $0.2 million for the three months ended September 30, 2007, an increase of $1.4 million. The increase relates primarily to the Texas margin tax.

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

Gross Margin and Profit on Energy Trading Activities. Midstream gross margin was $294.0 million for the nine months ended September 30, 2008 compared to $219.9 million for the nine months ended September 30, 2007, an increase of $74.1 million, or 33.7%. The increase was primarily due to system expansion projects and increased throughput on our gathering and transmission systems. These increases were partially offset by margin decreases in the processing business due to a less favorable NGL market and operating downtime due to the impact of recent hurricanes. Profit on energy trading activities increased for the comparative periods by approximately $0.2 million.

System expansion in the north Texas region and increased throughput on the NTP contributed $47.8 million of gross margin growth for the nine months ended September 30, 2008 over the same period in 2007. The gathering systems in the region and NTP accounted for $32.3 million and $6.9 million of this increase, respectively. The processing facilities in the region contributed an additional $8.6 million of this gross margin increase. System expansion and volume increases on the LIG system contributed margin growth of $13.0 million during the nine months ended September 30, 2008 over the same period in 2007. Processing plants in Louisiana contributed margin growth of $8.5 million for the comparative nine month period in 2007 due to higher NGL prices and increased volumes at the Gibson and Plaquemine plants and the Riverside fractionation facility during the first nine months of the year. These gains were offset primarily by a less favorable NGL processing environment in the third quarter and business interruptions due to the impact of recent hurricanes. The Vanderbilt system in the south Texas region had a margin increase of $3.6 million for the comparative nine-month periods primarily due to growth in the first half of the year offset by a decline in the third quarter due to the less favorable processing conditions. The Mississippi system had a margin increase of $2.1 million for the nine months ended due to increased throughput. The Arkoma system in Oklahoma experienced a throughput decline for the comparable periods that resulted in a negative margin variance of $1.2 million.

Our processing and gathering systems were negatively impacted by events beyond our control during the third quarter that had a significant effect on gross margin results for the period. Hurricanes Gustav and Ike came ashore along the Gulf coast in September. These storms are estimated to have cost us approximately $12.0 million in gross margin and $1.5 million in repair costs for the three months ended September 30, 2008. The lost margin was primarily experienced at gas processing facilities along the Gulf coast. However, processing facilities further inland in Louisiana and north Texas were indirectly impacted due to disruption in the NGL markets. In addition, approximately $0.9 million in gross margin was lost at the Sabine plant in August due to downtime from fire damage. The fire occurred during an attempt to bring the plant back on line following tropical storm Eduardo.

Treating gross margin was $36.4 million for the nine months ended September 30, 2008 compared to $33.9 million for the same period in 2007, an increase of $2.5 million, or 7.5%. Treating plants, dew point control plants and related equipment in service remained at 195 plants at September 30, 2008 which is unchanged from September 30, 2007. Gross margin growth for the period of $1.6 million is attributed primarily to increased fees per

plant and an increase in throughput on the volume based plants. Upstream services also contributed gross margin growth of $1.0 million for the comparable periods.

Operating Expenses. Operating expenses were $127.4 million for the nine months ended September 30, 2008 compared to $87.6 million for the nine months ended September 30, 2007, an increase of $39.8 million, or 45.4%. The increase is primarily attributable to the following factors:

• $29.6 million increase in Midstream operating expenses primarily due to expansion and growth of our midstream assets in the NTP, NTG, and north Louisiana and east Texas areas. Chemicals and materials increased by $6.8 million, equipment rental increased by $6.0 million, contractor services and labor costs increased $11.9 million and ad valorem taxes increased $1.8 million;

• $2.0 million in Midstream operating expenses due to hurricanes Gustav and Ike. $7.6 million total repair and replacement costs were sustained at our Sabine processing plant, $5.6 million of which will be claimed through our property damage insurer;

• $6.8 million increase in Treating operating expenses including $2.1 million for materials and supplies, contractor services costs of $1.5 million to support maintenance projects and labor costs of $1.9 million as a result of market adjustments for field service employees and additional headcount;

• $1.1 million increase in technical services operating expenses;

• $0.2 million increase in stock-based compensation expense.

General and Administrative Expenses. General and administrative expenses were $49.7 million for the nine months ended September 30, 2008 compared to $43.0 million for the nine months ended September 30, 2007, an increase of $6.7 million, or 15.5%. The increase is primarily attributable to the following factors:

• $3.0 million increase in labor and benefits related to staff additions associated with the requirements of the NTP and the NTG assets and the expansion in north Louisiana;

• $1.6 million increase in bad debt expense due to the SemGroup, L.P. bankruptcy;

• $1.3 million increase in rental expense resulting primarily from the addition of office rent for the expansion of our corporate headquarters;

• $1.4 million increase in other expenses, including professional fees and services and travel and training expenses; and

• $0.6 million decrease in stock-based compensation expense resulting primarily from the reduction of estimated performance-based restricted units and restricted shares.

Gain on Sale of Property. The $1.6 million gain on sale of property for the nine months ended September 30, 2008 represents disposition of various small Treating and Midstream assets. The $1.8 million gain on sale of property for the nine months ended September 30, 2007 consisted of the disposition of unused catalyst material for $1.0 million and the sale of a treating plant for $1.0 million, partially offset by losses of $0.2 million on disposition of other treating equipment.

Gain/Loss on Derivatives. We had a gain on derivatives of $7.2 million for the nine months ended September 30, 2008 compared to a gain of $4.0 million for the nine months ended September 30, 2007. The derivative transaction types . . .