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

Crosstex Energy, Inc. is a Delaware corporation formed on April 28, 2000 to engage in the gathering, transmission, treating, processing and marketing of natural gas and natural gas liquids (NGLs), through its subsidiaries. On July 12, 2002, we formed Crosstex Energy, L.P., a Delaware limited partnership, to acquire indirectly substantially all of the assets, liabilities and operations of its predecessor, Crosstex Energy Services, Ltd. Our assets consist almost exclusively of partnership interests in Crosstex Energy, L.P., a publicly traded limited partnership engaged in the gathering, transmission, treating, processing and marketing of natural gas and NGLs. These partnership interests consist of (i) 16,414,830 common units, representing approximately 35.0% of the limited partner interests in Crosstex Energy, L.P., and (ii) 100% ownership interest in Crosstex Energy GP, L.P., the general partner of Crosstex Energy, L.P., which owns a 2.0% general partner interest and all of the incentive distribution rights in Crosstex Energy, L.P.

Since we control the general partner interest in the Partnership, we reflect our ownership interest in the Partnership on a consolidated basis, which means that our financial results are combined with the Partnership's financial results and the results of our other subsidiaries. The interest owned by non-controlling partners' share of income is reflected as an expense in our results of operations. We have no separate operating activities apart from those conducted by the Partnership, and our cash flows consist almost exclusively of distributions from the Partnership on the partnership interests we own. Our consolidated results of operations are derived from the results of operations of the Partnership and also include our gains on the issuance of units in the Partnership, deferred taxes, interest of non-controlling partners in the Partnership's net income, interest income (expense) and general and administrative expenses not reflected in the Partnership's results of operation. 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" primarily reflects the operating activities and results of operations of the Partnership.

The Partnership has two industry segments, Midstream and Treating, with a geographic focus along the Texas gulf coast, in the north Texas Barnett Shale area and in Mississippi and Louisiana. The Partnership's Midstream division focuses on the gathering, processing, transmission and marketing of natural gas and NGLs, as well as providing certain producer services, while the 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 the Partnership's gross margin was generated in the Midstream division, with the balance in the Treating division. The Partnership focuses on gross margin to manage its operations because its business is generally to purchase and resell natural gas for a margin, or to gather, process, transport, market or treat natural gas or NGLs for a fee. The Partnership buys and sells most of its natural gas at a fixed relationship to the relevant index price so margins are not significantly affected by changes in natural gas prices. In addition, the Partnership receives certain fees for processing based on a percentage of the liquids produced and enters into hedge contracts for its expected share of liquids produced to protect margins from changes in liquid prices. As explained under "Commodity Price Risk" below, the Partnership enters into financial instruments to reduce volatility in gross margin due to price fluctuations.

The Partnership's Midstream segment margins are determined primarily by the volumes of natural gas gathered, transported, purchased and sold through its pipeline systems, processed at its processing facilities and the volumes of NGLs handled at its fractionation facilities. Treating segment margins are largely a function of the number and size of treating plants as well as fees earned for removing impurities at a non-operated processing plant. The Partnership generates revenues from five primary sources:

• purchasing and reselling or transporting natural gas on the pipeline systems it owns;

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

• treating natural gas at its treating plants;

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

• providing off-system marketing services for producers.

The bulk of the Partnership's operating profits have historically been derived from the margins it realizes for gathering and transporting natural gas through its pipeline systems. Generally, the Partnership buys gas from a producer, plant, or transporter at either a fixed discount to a market index or a percentage of the market index. The Partnership then transports and resells the gas. The resale price is generally based on the same index price at which the gas was purchased, and, if the Partnership is to be profitable, at a smaller discount or larger premium to the index than it was purchased. The Partnership attempts to execute all purchases and sales substantially concurrently, or it enters into a future delivery obligation, thereby establishing the basis for the margin it will receive for each natural gas transaction. The Partnership's 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 it manages its 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 per unit of products.

The Partnership generates 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 the 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 the 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 the 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.

Impact of Recent Reduction in Partnership Distribution Level

Since our cash flows consist almost exclusively of distributions from the Partnership on the partnership interests we own, any reduction in the Partnership's distribution level reduces our cash flows. The Partnership is required by its partnership agreement to distribute all its cash on hand at the end of each quarter, less reserves established by its general partner in its sole discretion to provide for the proper conduct of the Partnership's business or to provide for future distributions. Due to the recent tightening of capital markets coupled with the negative impact of hurricanes Ike and Gustav on the Partnership's assets, the Partnership has reduced its third quarter 2008 distribution (to be paid in November 2008) from $0.63 per common unit to $0.50 per common unit. In addition, the Partnership anticipates that its distributions will remain at a reduced level for the remainder of 2008 and during 2009 because it will be required to use cash flows from operations to fund its capital expenditures due to the lack of access to capital markets.

The incentive distribution rights that we indirectly hold entitle us to receive an increasing percentage of cash distributed by the Partnership as certain target distribution levels are reached. Specifically, they entitle us to receive the following:

• 13.0% of all cash distributed in a quarter after each unit has received $0.25 for that quarter,

• 23.0% of all cash distributed after each unit has received $0.3125 for that quarter, and

• 48.0% of all cash distributed after each unit has received $0.375 for that quarter.

The following table shows the distributions we received from the Partnership during 2008 and 2007:

                                                 Quarter Ended           Nine Months Ended
                                                September 30,*             September 30,*
                                               2008         2007         2008          2007

 Common and subordinated units owned by us   $  8,207     $  5,900     $  28,726     $ 17,200
 2% general partner interest                      594          450         2,230        1,295
 Incentive distribution right                   6,675        6,281        30,772       17,545

 Total distributions from the Partnership    $ 15,476     $ 12,631     $  61,728     $ 36,040

* Distributions with respect to calendar quarters are paid approximately 45 days following quarter end.

Under its current capital structure, each $0.01 per unit increase or decrease in distributions by the Partnership increases or decreases total quarterly distributions by $0.9 million and we would receive $0.6 million or 68% of that increase.

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 repairs 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 its 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 the Partnership's common units and the dividend level on our common shares, which is being effected with the distribution and dividend 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 2008, the Partnership continued the expansion of its north Texas pipeline gathering system in the Barnett Shale which was acquired in June 2006. Since the date of acquisition through September 30, 2008, it connected approximately 421 new wells to its gathering systems including approximately 135 new wells connected during 2008. 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 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.

The Partnership completed its east Texas natural gas gathering system expansion in May 2008. The Partnership 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, the Partnership announced plans to construct an $80 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 the Partnership's total processing capacity in the Barnett Shale to 485 MMcf/d. The Bear Creek plant will be strategically located near existing Partnership midstream assets in Hood County. The Partnership had originally planned to complete the Bear Creek plant by the third quarter of 2009. Although the Partnership has commenced construction of the plant, the Partnership is now planning to delay certain portions of the construction project because the Partnership does 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.

The Partnership's 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 the Partnership 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 in 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 48.2%. 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 expense 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 $17.6 million for the three months ended September 30, 2008 compared to $16.9 million for the three months ended September 30, 2007, an increase of $0.7 million, or 4.3%. 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 estimated performance-based restricted units and restricted shares.

Gain/Loss on Derivatives. The Partnership 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 $20.6 million for the three months ended September 30, 2007, a decrease of $3.6 million, or 17.4%.

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 )        (0.2 )

                    Total                  $    17.1       $  20.6

Income taxes. Income tax expense was $2.1 million for the three months ended September 30, 2008 compared to $1.1 million for the three months ended September 30, 2007, an increase of $1.0 million. The increase relates primarily to the Texas margin tax.

Interest of Non-Controlling Partners in the Partnership's Net Income/Loss From Continuing Operations. The interest of non-controlling partners in the Partnership's net loss from continuing operations increased by $5.3 million to a loss of $7.8 million for the three months ended September 30, 2008 compared to a loss of $2.5 million for the three months ended September 30, 2007 due to the changes shown in the following summary (in millions):

                                                                         For the Three Months Ended
                                                                               September 30,
                                                                          2008                2007

Net income (loss) for the Partnership                                 $        (5.2 )      $       2.1
(Income) allocation to CEI for the general partner incentive
distributions                                                                  (6.7 )             (6.3 )
Stock-based compensation costs allocated to CEI for its stock
options and restricted stock granted to Partnership officers,
employees and directors                                                         0.8                1.5
Loss allocation to CEI for its 2% general partner share of
Partnership (income) loss                                                       0.1                0.1

Net loss allocable to limited partners                                        (11.0 )             (2.6 )
Less: CEI's share of net loss allocable to limited partners                     4.1                1.0
Less: Non-controlling partners' share of income from discontinued
operations                                                                     (0.9 )             (1.0 )
. . .