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 in the north Texas Barnett Shale area and in Louisiana. 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 three months ended March 31, 2009, 82.7% 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 for a margin, or to gather, process, transport, market or treat natural 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 margins are not significantly affected by changes in natural 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 liquids produced to protect our margins from changes in liquid prices.

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 as well as fees earned for removing impurities at a non-operated processing plant. We generate Midstream 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;

• providing compression services; and

• providing off-system marketing services for producers.

With respect to our Midstream services, we generally gather or transport gas owned by others through our facilities for a fee, or we buy natural gas from a producer, plant or shipper at either a fixed discount to a market index or a percentage of the market index, then transport and resell the natural gas. In our purchase/sale transactions, 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.

We also realize gross margins in our Midstream segment from our processing services primarily through three different contract arrangements: processing margins (margin), percentage of liquids (POL) or fee based. Under a margin contract arrangement our gross margins are higher during periods of high liquid prices relative to natural gas prices. Gross margin results under a POL contract are impacted only by the value of the liquids produced. Under fee based contracts our margins are driven by throughput volume.

We generate treating revenues under three arrangements:

• a volumetric fee based on the amount of gas treated, which accounted for 5.0% and 30.5%, of the operating income in our Treating division for the three months ended March 31, 2009 and 2008, respectively;

• a fixed fee for operating the plant for a certain period, which accounted for 68.2% and 43.7% of the operating income in our Treating division for the three months ended March 31, 2009 and 2008, respectively; and

• a fee arrangement in which the producer operates the plant, which accounted for 26.8% and 25.7% of the operating income in our Treating division for the three months ended March 31, 2009 and 2008, 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

Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. Numerous events have severely restricted current liquidity in the capital markets throughout the United States and around the world. The ability to raise money in the debt and equity markets has diminished significantly and, if available, the cost of funds has increased substantially. One of the features driving investments in MLPs , including the Partnership, over the past few years has been the distribution growth offered by MLPs due to liquidity in the financial markets for capital investments to grow distributable cash flow through development projects and acquisitions. Future growth opportunities have been and are expected to continue to be constrained by the lack of liquidity in the financial markets.

Conditions in our industry have continued to be challenging in 2009. For example:

• Prices of oil, natural gas and NGLs remain below the market prices realized throughout most of 2008.

• As a result of lower forecasted NGL prices and the related fractionation spreads, we believe that our processing margins in the remainder of 2009 will be substantially lower than the processing margins realized in 2008. For the quarter ended March 31, 2009, approximately 23.8% of our gross margin was attributable to gas processing as compared to 44.0% of our gross margin for quarter ended March 31, 2008.

• The decline in drilling activity by gas producers in our areas of operations that began during the fourth quarter of 2008 as a result of the global economic crisis has continued. Several of our customers, including one of our largest customers in the Barnett Shale, have announced drilling plans for 2009 that are substantially below their drilling levels during 2008.

• Several offshore production platforms and pipelines that transport gas production to our Pelican, Eunice and Sabine Pass processing plants in south Louisiana were damaged by hurricanes Gustav and Ike, which came ashore in the Gulf Coast in September 2008. We do not anticipate that gas production to our south Louisiana plants will recover to pre-hurricane levels until mid-2009, when all repairs to pipeline systems supplying the plants are expected to be complete.

Despite the weaker commodity environment and reduced drilling activity, we are positioning ourselves to benefit from a recovering economy. In particular, during the first quarter of 2009:

• We adjusted our business strategy for 2009 to focus on maximizing our liquidity, maintaining a stable asset base, and improving the profitability of our assets by increasing their utilization while controlling cost. We have also reduced our capital expenditures.

• We began marketing certain non-strategic assets and expect to complete the disposition of these assets within the year.

• We amended our bank credit facility and our senior secured note agreements in February 2009 to negotiate terms that facilitate our compliance with debt covenants while we operate our assets during the current difficult economic conditions. The terms of the amended agreements allow us to maintain a higher level of leverage and to maintain a lower interest coverage ratio; however, our interest costs will increase and our ability to pay distributions and incur additional indebtedness are restricted when we are operating at higher leverage ratios.

Expansions

We have continued our expansion of our north Texas pipeline gathering system in the Barnett Shale during the first quarter of 2009 to handle volume growth and to connect new wells to our gathering system pursuant to existing obligations with producers. We connected approximately 35 new wells during the first quarter of 2009 bringing our total new wells connected to our gathering system to 479 since we acquired the system in June 2006.

We have also continued the expansion of our north Louisiana system to provide additional compression to provide increased capacity to producers in the Haynesville Shale gas play. The expansion is scheduled to be completed in July 2009.

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 and excludes
financial and operating data considered discontinued operations.


                                                   Three Months Ended March 31,
                                                      2009                2008
                                                       (Dollars in millions)

   Midstream revenues                            $         352.4       $     798.9
   Midstream purchased gas                                (284.5 )          (717.6 )
   Profit on energy trading activities                       0.7               0.9

   Midstream gross margin                                   68.6              82.2

   Treating revenues                                        14.3              11.1

   Total gross margin                            $          82.9       $      93.3

   Midstream Volumes (MMBtu/d):
   Gathering and transportation                        2,045,000         2,006,000
   Processing                                          1,101,000         2,004,000
   Producer services                                     113,000            80,000
   Treating plants in service at end of period               185               185

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Gross Margin and Profit on Energy Trading Activities. Midstream gross margin was $68.6 million for the three months ended March 31, 2009 compared to $82.2 million for the three months ended March 31, 2008, a decrease of $13.6 million, or 16.5%. The decrease was primarily due to our processing operations which were negatively impacted by lower NGL prices than in the first quarter of 2008, combined with a decline in inlet volumes. This decrease was partially offset by gross margin gains on our gathering and transmission systems due to expansion projects and increased throughput. Profit on energy trading activities decreased for the comparative periods by approximately $0.2 million.

The weaker processing environment contributed to a significant decline in the gross margin for our processing plants in Louisiana for the quarter ended March 31, 2009. The Plaquemine and Gibson plants reported gross margin declines of $5.4 million and $5.3 million, respectively. The Eunice plant, which is still impacted by supply disruptions from hurricane activity in 2008, experienced a margin decline of $4.6 million for the three months ended March 31, 2009 over the same period in 2008. The Pelican, Sabine Pass and Blue Water plants combined for an additional gross margin decline of $2.9 million. System expansion in the north Texas region and increased throughput on the gathering systems contributed $8.3 million of gross margin growth for the quarter ended March 31, 2009 over the same period in 2008. The processing facilities in the north Texas region, which were also impacted by a weaker NGL market, reported a gross margin decline of $1.5 million. A decrease in throughput volume on the east Texas system resulted in to a margin decline of $0.8 million for the comparable periods.

Treating gross margin was $14.3 million for the three months ended March 31, 2009 compared to $11.1 million for the three months ended March 31, 2008, an increase of $3.2 million, or 29.2%. Treating plants, dew point control plants, and related equipment in service totaled 185 plants at both March 31, 2009 and March 31, 2008. Timing, size and increased monthly fees on plants placed in service versus plants coming out of service and increased fees on existing month to month treating contracts make up $3.1 million of positive gross margin variances. Field services provided to producers also contributed gross margin growth of $0.1 million for the comparable periods.

Operating Expenses. Operating expenses were $31.9 million for the three months ended March 31, 2009 compared to $36.3 million for the three months ended March 31, 2008, a decrease of $4.4 million, or 12.1%. The decrease is primarily attributable to the following factors:

• $1.5 million decrease in Midstream operating expenses resulting primarily from initiatives undertaken in late 2008 and early 2009 to reduce expenses. Contractor services and labor costs decreased by $0.7 million, chemicals and materials decreased by $0.6 million and utilities decreased by $0.3 million. Operating expenses also decreased by $1.0 million between periods because the Blue Water plant ceased operation in January 2009 and the Arkoma gathering system was sold in February 2009. These decreases were partially offset by equipment rental increases of $0.7 million and ad valorem taxes increases of $0.6 million;

• $2.0 million decrease in Treating operating expenses include a $0.5 million decrease for contractor services costs, a $0.5 million decrease for materials and supplies and a $0.6 million decrease for labor costs; and

• $0.8 million decrease in technical services operating expense.

General and Administrative Expenses. General and administrative expenses were $14.2 million for the three months ended March 31, 2009 compared to $15.5 million for the three months ended March 31, 2008, a decrease of $1.2 million, or 8.0%. The decrease is primarily attributable to the following factors:

• $1.1 million decrease in various expenses, including professional fees and services, office supplies and expenses, travel and training resulting from initiatives undertaken in late 2008 and early 2009 to reduce expenses;

• $0.9 million decrease in stock-based compensation expense resulting from the reduction of estimated performance-based restricted units and restricted shares and a workforce reduction in January 2009;

• $0.5 million increase in rental expense resulting primarily from the additional costs associated with the cancelled relocation of our corporate headquarters; and

• $0.3 million increase in labor and benefits related to severance costs associated with a reduction in our workforce.

Gain/Loss on Derivatives. We had a gain on derivatives of $4.3 million for the three months ended March 31, 2009 compared to a gain of $1.0 million for the three months ended March 31, 2008. The derivative transaction types contributing to the net gain are as follows (in millions):

                                                                    Three Months Ended March 31,
                                                                  2009                         2008
(Gain)/Loss on Derivatives:                              Total         Realized       Total        Realized

Basis swaps                                             $   (0.9 )    $     (0.7 )    $ (1.3 )    $     (1.9 )
Processing margin hedges                                    (4.1 )          (4.1 )       0.2             0.2
Storage                                                     (0.2 )          (1.0 )       0.2               -
Third-party on-system swaps                                 (0.2 )          (0.2 )      (0.1 )             -
Less: Derivative gains related to assets held for
sale and included in income from discontinued
operations                                                   1.1             0.4           -             0.3

                                                        $   (4.3 )    $     (5.6 )    $ (1.0 )    $     (1.4 )

Depreciation and Amortization. Depreciation and amortization expenses were $31.6 million for the three months ended March 31, 2009 compared to $28.9 million for the three months ended March 31, 2008, an increase of

$2.7 million, or 9.3%. Midstream depreciation and amortization increased $3.1 million due to the north Texas assets and was offset by a $0.4 million decline due to the first quarter 2009 disposition of the Arkoma system and the Seminole gas processing plant.

Interest Expense. Interest expense was $22.3 million for the three months ended March 31, 2009 compared to $24.6 million for the three months ended March 31, 2008, a decrease of $2.3 million, or 9.3%. The decrease relates primarily to the decrease in LIBOR rates and interest rate swap expense. Net interest expense consists of the following (in millions):

                                                    Three Months Ended
                                                         March 31,
                                                    2009           2008

             Senior notes                         $     8.0       $   6.9
             Credit facility                            7.4           9.9
             Excess leverage fee                        0.6             -
             PIK notes                                  0.4             -
             Capitalized interest                      (0.5 )        (1.0 )
             Mark to market interest rate swaps        (0.4 )         7.9
             Realized interest rate swaps               4.6             -
             Interest income                              -          (0.1 )
             Other                                      2.2           1.0

             Total                                $    22.3       $  24.6

Income Taxes. Income tax expense was $0.6 million for the three months ended March 31, 2009 compared to $0.3 million for the three months ended March 31, 2008, an increase of $0.3 million. The increase relates primarily to the Texas margin tax.

Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt during the three months ended March 31, 2009 of $4.7 million due to the February 2009 amendment to the senior secured note agreement. The modifications to this agreement pursuant to this amendment were substantive as defined EITF Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments" and were accounted for as the extinguishment of the old debt and the creation of new debt. As a result, the unamortized costs associated with the senior secured notes prior to the amendment as well as the fees paid to the senior secured lenders for the February 2009 amendment were expensed in the first quarter of 2009.

Other Income. We recorded $7.1 million in other income during the three months ended March 31, 2008, primarily from the settlement of disputed liabilities that were assumed with an acquisition.

Discontinued Operations. As part of our strategy to increase liquidity in response to the tightening financial markets, we have sold and are also marketing for sale certain non-strategic assets. We sold our undivided 12.4% interest in the Seminole gas processing plant to a third party in November 2008. In addition, we are marketing for sale certain Midstream assets and the related Treating assets as of March 31, 2009. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations related to the Seminole gas processing plant and the assets held for sale are presented in income from discontinued operations for the comparative periods in the statements of operations. Revenues, the related costs of operations, depreciation and amortization, and allocated interest are reflected in the income from discontinued operations. No income taxes are attributed to income from discontinued operations and no general and administrative expenses have been allocated

to income from discontinued operations. Following are the components of revenues and earnings from discontinued operations and operating data (dollars in millions):

                                                         Three Months Ended
                                                              March 31,
                                                         2009          2008

        Midstream revenues                             $   179.2     $   453.3
        Treating revenues                              $     2.0     $     5.3
        Net income from discontinued operations        $     1.8     $     7.8
        Gathering and Transmission Volumes (MMBtu/d)     563,000       537,000
        Processing Volumes (MMBtu/d)                     191,000       214,000

Critical Accounting Policies

Information regarding our Critical Accounting Policies is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

Liquidity and Capital Resources

Cash Flows from Operating Activities. Net cash provided by operating activities
was $10.6 million for the three months ended March 31, 2009 compared to cash
provided by operations of $62.1 million for the three months ended March 31,
2008. Income before non-cash income and expenses and changes in working capital
for comparative periods were as follows (in millions):


                                                        Three Months Ended
                                                             March 31,
                                                         2009           2008

         Income before non-cash income and expenses   $     26.1       $ 48.7
         Changes in working capital                        (15.6 )       13.4

The primary reason for the decrease in income before non-cash income and expenses of $22.6 million from 2008 to 2009 was decreased operating income (update). Our changes in working capital may fluctuate significantly between periods even though our trade receivables and payables are typically collected and paid in 30 to 60 day pay cycles. A large volume of our revenues are collected and a large volume of our gas purchases are paid near each month end or the first few days of the following month so receivable and payable balances at any month end may fluctuate significantly depending on the timing of these receipts and payments. In addition, although we strive to minimize our natural gas and NGLs in inventory, these working inventory balances may fluctuate significantly from period-to-period due to operational reasons and due to changes in natural gas and NGL prices. Our working capital also includes our mark to market derivative assets and liabilities associated with our derivative cash flow hedges which may fluctuate significantly due to the changes in natural gas and NGL prices. The changes in working capital during the three months ended March 31, 2008 and 2009 are due to the impact of the fluctuations discussed above and are not indicative of any change in our operating cash flow trends.

Cash Flows from Investing Activities. Net cash used in investing activities was $34.6 million and $73.2 million for the three months ended March 31, 2009 and 2008, respectively. Our primary investing activities were capital expenditures for internal growth, net of accrued amounts, as follows (in millions):

                                                   Three Months Ended
                                                        March 31,
                                                   2009           2008

              Growth capital expenditures        $    46.6       $  69.9
              Maintenance capital expenditures         2.1           3.6

              Total                              $    48.7       $  73.5

Net cash invested in Midstream assets was $42.4 million and $64.5 million for the three months ended March 31, 2009 and March 31, 2008, respectively. Net cash invested in Treating assets was $5.6 million for the three

months ended March 31, 2009 and $7.5 million for the three months ended March 31, 2008. Net cash invested on other corporate assets was $0.7 million for the three months ended March 31, 2009 and $1.5 million for the three months ended March 31, 2008.

Cash flows from investing activities for the three months ended March 31, 2009 and 2008 also include proceeds from property sales of $11.0 million and $0.3 million, respectively. The Arkoma asset was sold in the quarter ending March 31, 2009 for $11.0 million.

Cash Flows from Financing Activities. Net cash provided by financing activities was $24.8 million and $15.9 million for the three months ended March 31, 2009 and 2008, respectively. Our financing activities primarily relate to funding of capital expenditures. Our financings have primarily consisted of borrowings under our bank credit facility, borrowings under capital lease obligations, equity offerings and senior note repayments during 2009 and 2008 as follows (in millions):

                                                          Three Months Ended
                                                               March 31,
                                                           2009           2008

       Net borrowings under bank credit facility        $     73.0       $ 56.0
       Senior note repayments                                 (2.4 )       (2.4 )
       Net borrowings under capital lease obligations          0.9          4.5
       Debt refinancing costs                                (13.4 )        0.2

Distributions to unitholders and our general partner represent our primary use of cash in financing activities. Unless prohibited by our bank credit facility, we will distribute all available cash, as defined in our partnership agreement, within 45 days after the end of each quarter. Total cash distributions made during the three months ended were as follows (in millions):

                                            Three Months Ended
                                                 March 31,
                                            2009           2008

                     Common units         $    11.4       $  14.9
                     Subordinated units           -           2.8
                     General partner            0.2           7.8

                     Total                $    11.6       $  25.5
. . .