AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 2003

                                                           REGISTRATION NO. 333-
================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM S-4
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                      CRESCENT REAL ESTATE EQUITIES COMPANY
             (Exact Name of Registrant as Specified in its Charter)


                                                           
            TEXAS                              6798                   52-1862813
(State or Other Jurisdiction of   (Primary Standard Industrial    (I.R.S. Employee
 Incorporation or Organization)    Classification Code Number)   Identification No.)


                                 777 MAIN STREET
                                   SUITE 1200
                            FORTH WORTH, TEXAS 76102
                                 (817) 321-2100

       (Address, including zip code, and telephone number, including area
               code, of Registrant's principal executive offices)

                               ------------------
                                  JOHN C. GOFF
                             CHIEF EXECUTIVE OFFICER
                                 777 MAIN STREET
                                   SUITE 1200
                             FORT WORTH, TEXAS 76102
                                 (817) 321-2100
 (Name, address, including zip code, and telephone number, including area code,
                              of agent for service)
                          ----------------------------
                                   Copies to:

      SYLVIA M. MAHAFFEY, ESQ                         DAVID M. DEAN
           SHAW PITTMAN                   CRESCENT REAL ESTATE EQUITIES COMPANY
        2300 N STREET, N.W.                     777 MAIN STREET, SUITE 2100
          WASHINGTON, D.C.                         FORT WORTH, TEXAS 76102
           (202) 663-8000                              (817) 321-2100

                          ----------------------------

   APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

   If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.

   If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering.

   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.

                         CALCULATION OF REGISTRATION FEE




                                               PROPOSED MAXIMUM     PROPOSED MAXIMUM
  TITLE OF EACH CLASS OF       AMOUNT TO BE   OFFERING PRICE PER   AGGREGATE OFFERING       AMOUNT OF
SECURITIES TO BE REGISTERED    REGISTERED           SHARE               PRICE           REGISTRATION FEE
                                                                            
Common stock, par value $.01   $10,828,497            (1)             $ 10,828,497        $ 996.23(2)



(1)  Omitted pursuant to Rule 457(o) of the rules and regulations under the
     Securities Act of 1933, as amended.

(2)  Calculated pursuant to Rule 457(o) of the rules and regulations under the
     Securities Act of 1933, as amended.

                            ------------------------

   THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
   DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
   SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
   REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
   SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
   STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
   PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

================================================================================


THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

                 SUBJECT TO COMPLETION, DATED JANUARY 16, 2003



PROXY STATEMENT/PROSPECTUS


CRESCENT OPERATING, INC.        CRESCENT REAL ESTATE EQUITIES COMPANY
777 MAIN STREET, SUITE 1240     Issuer of the common shares that
FORT WORTH, TEXAS 76102         may be issued to stockholders of Crescent
(817) 321-1601                  Operating, Inc., as described in this proxy
                                statement/prospectus



THE PROXY STATEMENT/PROSPECTUS IS DATED JANUARY __, 2003 AND IS FIRST BEING
MAILED TO STOCKHOLDERS OF CRESCENT OPERATING ON OR ABOUT JANUARY __, 2003.


                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS


     The special meeting of stockholders of Crescent Operating, Inc., a Delaware
corporation, or Crescent Operating, will be held at The Fort Worth Club, located
at 306 West 7th Street, Fort Worth, Texas, on Thursday, March 6, 2003 at 10:00
a.m., Central Time, to vote on a proposal to accept a bankruptcy plan of
Crescent Operating to be implemented under Chapter 11 of the United States
Bankruptcy Code. The Crescent Operating bankruptcy plan provides as follows:


-    Crescent Real Estate Equities Company and its affiliates, or Crescent Real
     Estate, will make sufficient funds available to Crescent Operating to pay
     in full or otherwise resolve the claims of those creditors of Crescent
     Operating that Crescent Operating identified in the original Settlement
     Agreement, other than Crescent Real Estate, and to cover the budgeted
     expenses of implementing the Settlement Agreement and seeking to confirm
     the bankruptcy plan.

-    If the bankruptcy plan is accepted by holders of at least two-thirds of the
     shares of Crescent Operating common stock voted at the special meeting and
     is confirmed by the bankruptcy court, then Crescent Operating will cancel
     all outstanding shares of its common stock and Crescent Real Estate will
     issue to each holder of Crescent Operating common stock a number of common
     shares of Crescent Real Estate equal to:

     -    the ownership percentage of Crescent Operating held by such holder on
          the confirmation date of the bankruptcy plan, multiplied by

     -   $16.0 million less the aggregate amount of claims and expenses,
         including the expenses of Crescent Real Estate but excluding payments
         to satisfy an approximately $15.5 million potential claim against
         Crescent Operating by Bank of America, that Crescent Real Estate pays
         in connection with the Crescent Operating bankruptcy and the
         reorganization transactions, divided by

     -   the average of the daily closing prices per Crescent Real Estate common
         share as reported on the New York Stock Exchange Composite Transactions
         reporting system for the 10 consecutive trading days immediately
         preceding the date of confirmation of the bankruptcy plan.


     As of December 31, 2002, Crescent Real Estate had incurred approximately
$8.5 million in claims and expenses in connection with the Crescent Operating
bankruptcy and the reorganization transactions and expects to incur an aggregate
of $10.6 million to $13.8 million in total claims and expenses. Accordingly, the
total value of the Crescent Real Estate common shares issuable to Crescent
Operating's stockholders is currently expected to be between $5.4 million and
$2.16 million or $0.50 to $0.20 per share of Crescent Operating common stock.
Regardless of the total amount of claims and expenses that are paid by Crescent
Real Estate in connection with the bankruptcy plan and the reorganization
transactions, if the bankruptcy plan is accepted by the requisite vote of
Crescent Operating stockholders and is confirmed by the bankruptcy court, then
the stockholders of Crescent Operating will receive common shares of Crescent
Real Estate with a value of at least $2.16 million, or $0.20 per share of
Crescent Operating common stock. In no event will the Crescent Operating
stockholders be entitled to reconsider their approval of the bankruptcy plan.
Crescent Real Estate common shares are listed on the New York Stock Exchange
under the symbol "CEI."


     THE SOLE DIRECTOR OF CRESCENT OPERATING HAS APPROVED THE BANKRUPTCY PLAN
AND, AFTER CONSULTATION WITH OUTSIDE ADVISORS, HAS DETERMINED THAT THE
BANKRUPTCY PLAN IS FAIR TO, AND IN THE BEST INTERESTS OF, CRESCENT OPERATING'S
STOCKHOLDERS. ACCORDINGLY, THE SOLE DIRECTOR RECOMMENDS THAT YOU VOTE "FOR"
ACCEPTANCE OF THE BANKRUPTCY PLAN.


     INVESTING IN CRESCENT REAL ESTATE COMMON SHARES INVOLVES RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 23.



     Only stockholders of record of Crescent Operating at the close of business
on January 8, 2003 will be entitled to notice of, and to vote at, the special
meeting or any adjournment or postponement thereof.

     Dated January __, 2003          By order of the Sole Director

                                     /s/ JEFFREY L. STEVENS

                                     Jeffrey L. Stevens, Chief Executive Officer



YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING,
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID
ENVELOPE PROVIDED OR VOTE BY TELEPHONE IN ACCORDANCE WITH THE DIRECTIONS
CONTAINED ON THE PROXY CARD. PROXIES ARE REVOCABLE, AND YOU MAY WITHDRAW YOUR
PROXY AND VOTE IN PERSON AT THE SPECIAL MEETING.


Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.



                       WHERE YOU CAN FIND MORE INFORMATION

CRESCENT OPERATING, INC.

         Crescent Operating files annual, quarterly, and special reports, proxy
statements, and other information with the Securities and Exchange Commission.
You may read and copy any document on the Securities and Exchange Commission's
website at http://www.sec.gov or at the Securities and Exchange Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Securities and Exchange Commission's Regional Office at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Crescent Operating's
common stock is traded on the Over The Counter Bulletin Board, or the OTC
Bulletin Board, market under the symbol "COPI.OB."

WHO CAN HELP ANSWER MY QUESTIONS?

         If you have additional questions about the Crescent Operating
bankruptcy plan, you should contact:


                  Crescent Operating, Inc.
                  Attention:  Jeffrey L. Stevens or Kiersten Thompson
                  777 Main Street, Suite 1240
                  Fort Worth, Texas 76102
                  Phone Number: (817) 321-1602


CRESCENT REAL ESTATE EQUITIES COMPANY

         Crescent Real Estate files annual, quarterly, and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document on the Securities and Exchange
Commission's website at http://www.sec.gov or at the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Securities and Exchange Commission's Regional Office at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, Crescent Real Estate's common shares are listed on the New York
Stock Exchange, or NYSE, under the symbol "CEI". You can inspect any reports,
proxy statements and other information at the offices of the NYSE, 20 Broad
Street, New York, NY 10005.

         Crescent Real Estate has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, that registers the distribution to Crescent Operating stockholders of
the Crescent Real Estate common shares to be issued in connection with the
Crescent Operating bankruptcy plan. In addition to serving as a proxy statement
of Crescent Operating for the special meeting of Crescent Operating's
stockholders, this document also serves as a prospectus for the Crescent Real
Estate common shares to be issued under the Crescent Operating bankruptcy plan.
The registration statement, including the attached exhibits and schedules,
contains additional relevant information about Crescent Real Estate. The rules
and regulations of the Securities and Exchange Commission permit Crescent Real
Estate to omit from this document some of the information included in the
registration statement. Copies of the registration statement, including
exhibits, may be inspected without charge at the offices of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies
may be obtained from the Securities and Exchange Commission at prescribed rates.
The registration statement is also available from the Securities and Exchange
Commission's website.

         The Securities and Exchange Commission allows Crescent Real Estate to
"incorporate by reference" information into this document. This means that
Crescent Real Estate can disclose important information to you by referring you
to another document filed with the Securities and Exchange

Commission. The information incorporated by reference is considered to be part
of this proxy statement/prospectus, except to the extent it has been superceded
by information that is included in this document or in a document subsequently
filed with the Securities and Exchange Commission that is incorporated by
reference.

         Crescent Real Estate incorporates by reference important business and
financial information not otherwise included in this proxy statement/prospectus
but contained in the following documents, and any additional documents filed by
Crescent Real Estate with the Securities and Exchange Commission under Sections
13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, between
the date of this proxy statement/prospectus and the date of the Crescent
Operating special meeting:

         -        Crescent Real Estate's Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2002;

         -        Crescent Real Estate's Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 2002;

         -        Amendment No. 1 to Crescent Real Estate's Quarterly Report on
                  Form 10-Q for the quarter ended March 31, 2002.

         -        Crescent Real Estate's Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 2002;

         -        Amendment No. 3 to Crescent Real Estate's Annual Report on
                  Form 10-K/A for the fiscal year ended December 31, 2001.

         -        Amendment No. 2 to Crescent Real Estate's Annual Report on
                  Form 10-K/A for the fiscal year ended December 31, 2001;

         -        Amendment No. 1 to Crescent Real Estate's Annual Report on
                  Form 10-K/A for the fiscal year ended December 31, 2001;

         -        Crescent Real Estate's Annual Report on Form 10-K for the
                  fiscal year ended December 31, 2001;

         -        Crescent Real Estate's Current Report on Form 8-K filed June
                  26, 2002;

         -        Crescent Real Estate's Current Report on Form 8-K filed May
                  14, 2002;

         -        Amendment No. 1 to Crescent Real Estate's Current Report on
                  Form 8-K/A filed April 29, 2002;

         -        Crescent Real Estate's Current Report on Form 8-K filed April
                  25, 2002;

         -        Crescent Real Estate's Current Report on Form 8-K filed April
                  16, 2002;

         -        Crescent Real Estate's Current Report on Form 8-K filed April
                  1, 2002;

         -        Crescent Real Estate's Definitive Proxy Statement on Schedule
                  14A filed May 16, 2002;

         -        Crescent Real Estate's Registration Statement on Form 8-B
                  filed on March 24, 1997 registering the Crescent Common Shares
                  under Section 12(b) of the Exchange Act.

         Documents incorporated by reference are available from Crescent Real
Estate, without charge, excluding any exhibits to those documents, unless the
exhibit is specifically incorporated by reference as an exhibit in this proxy
statement/prospectus. You can obtain documents incorporated by reference in

this proxy statement/prospectus by requesting them in writing or by telephone
from Crescent Real Estate at the following address:

                  Crescent Real Estate Equities Company
                  777 Main Street, Suite 2100
                  Fort Worth, Texas 76102
                  Attention: Keira B. Moody
                  (817) 321-2100



         If you would like to request documents, please do so by February 27,
2003 to receive them before the special meeting. If you request any incorporated
document, Crescent Real Estate will mail it to you by first-class mail, or
another equally prompt means, as soon as practicable following receipt of your
request.


TABLE OF CONTENTS



                                                                                                                    
NOTICES TO STOCKHOLDERS.........................................................................................       vii

QUESTIONS AND ANSWERS ABOUT THE CRESCENT OPERATING BANKRUPTCY PLAN AND THE SPECIAL MEETING......................         1

SUMMARY.........................................................................................................        12

    The Companies...............................................................................................        12

    Agreement for Transfer of Crescent Operating Assets to Crescent Real Estate.................................        16

    Settlement Agreement........................................................................................        16

    Other Crescent Operating Recent Developments................................................................        18

    Summary of the Plan of Reorganization.......................................................................        19

    Release and Waiver of Claims by Crescent Operating and Stockholders of Crescent Operating...................        21

    Special Meeting and Voting..................................................................................        23

    Recommendation of Sole Director of Crescent Operating.......................................................        23

    No Dissenters' Appraisal Rights.............................................................................        24

    Tax Considerations..........................................................................................        24

    Interests of Certain Persons in the Reorganization Transactions.............................................        24

RISK FACTORS....................................................................................................        27

    Risks Associated with the Crescent Operating Bankruptcy Plan................................................        27

    Risks Associated with an Investment in Crescent Real Estate Common Shares...................................        33

COMPARATIVE PER SHARE MARKET PRICE INFORMATION..................................................................        46

SELECTED HISTORICAL FINANCIAL INFORMATION OF CRESCENT REAL ESTATE...............................................        46

SELECTED HISTORICAL FINANCIAL INFORMATION OF CRESCENT OPERATING.................................................        48

SELECTED PRO FORMA FINANCIAL AND OPERATING INFORMATION OF CRESCENT REAL ESTATE..................................        48

COMPARATIVE PER SHARE DATA......................................................................................        50

THE SPECIAL MEETING OF CRESCENT OPERATING STOCKHOLDERS..........................................................        51

    Proxy Statement/Prospectus..................................................................................        51

    Date, Time, and Place of Special Meeting....................................................................        51

    Purpose of the Special Meeting..............................................................................        51

    Stockholder Record Date for the Special Meeting.............................................................        53

    Vote of Crescent Operating Stockholders Required for Acceptance
    of the Crescent Operating Bankruptcy Plan...................................................................        53

    Proxies.....................................................................................................        53

    Proxy Solicitation..........................................................................................        54

    Effect of Abstentions and Broker Non-Votes..................................................................        54



                                       i



                                                                                                                   
THE REORGANIZATION TRANSACTIONS.................................................................................        54

    Reasons for the Reorganization Transactions.................................................................        54

    Summary of the Reorganization Transactions..................................................................        56

    Analysis of Alternatives....................................................................................        67

    Liquidation Analyses........................................................................................        70

    Events Leading to the Reorganization Transactions...........................................................        78

    Recommendation of the Sole Director of Crescent Operating...................................................        85

    Opinion of Crescent Operating's Financial Advisor...........................................................        85

    Interests of Certain Persons in the Reorganization Transactions.............................................        92

    Restrictions on Sales of Crescent Real Estate Common Shares by Affiliates of Crescent Operating.............        94

    Listing on the New York Stock Exchange of Crescent Real Estate Common Shares to be Issued in the
    Reorganization Transactions.................................................................................        94

    No Dissenters' Appraisal Rights.............................................................................        94

THE PLAN OF REORGANIZATION......................................................................................        94

    Overview and Incorporation by Reference.....................................................................        94

    Brief Explanation of Chapter 11.............................................................................        95

    Classification and Treatment of Claims and Interests........................................................        95

    Conditions to Occurrence of the Effective Date..............................................................        97

    Executory Contracts and Unexpired Leases....................................................................        98

    Modifications of Plan of Reorganization; Severability of Provisions.........................................        98

    Confirmation of the Plan of Reorganization..................................................................        98

    Implementation of the Plan of Reorganization................................................................        102

    Manner of Distribution of Property under the Plan of Reorganization.........................................        104

    Effects of Confirmation of the Plan of Reorganization.......................................................        106

    The Solicitation; Voting....................................................................................        110

    Acceptance or Cramdown......................................................................................        111

FEDERAL INCOME TAX CONSIDERATIONS...............................................................................        112

    Tax Consequences of the Crescent Operating Bankruptcy Plan..................................................        112

    Taxation of Crescent Real Estate............................................................................        113

    Taxation of Taxable U.S. Shareholders.......................................................................        121

    Taxation of Tax-Exempt U.S. Shareholders....................................................................        123


                                       ii




                                                                                                                   
    Taxation of Non-U.S. Shareholders...........................................................................        123

    State and Local Tax Consequences............................................................................        126

    Tax Aspects of Crescent Real Estate's Investment in Crescent Partnership and Subsidiary Partnerships........        126

DESCRIPTION OF CRESCENT OPERATING'S BUSINESS....................................................................        128

    Overview of Crescent Operating..............................................................................        128

    Business Segments...........................................................................................        129
         Equipment Sales and Leasing............................................................................        130
         Hospitality............................................................................................        133
         Temperature-Controlled Logistics.......................................................................        136
         Land Development.......................................................................................        140
         Other Investments......................................................................................        143

    Employees...................................................................................................        145

    Properties..................................................................................................        145

    Legal Proceedings...........................................................................................        145

DESCRIPTION OF CRESCENT REAL ESTATE'S BUSINESS..................................................................        147

    Overview of Crescent Real Estate............................................................................        147
    Industry Segments...........................................................................................        147
         Resort/Hotel Segment...................................................................................        153
         Residential Development Segment........................................................................        154
         Temperature-Controlled Logistics Segment...............................................................        155

    Employees...................................................................................................        157

    Properties..................................................................................................        157

    Legal Proceedings...........................................................................................        171

CRESCENT OPERATING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........        171

    Overview....................................................................................................        171

    Recent Developments.........................................................................................        176

    Results of Operations.......................................................................................        176
         Three and Nine Months ended September 30, 2002, as Compared to Three and Nine Months
         Ended September 30, 2001...............................................................................        176
         Year Ended December 31, 2001, as Compared to 2000......................................................        179
         Year Ended December 31, 2000, as Compared to 1999......................................................        182

    Liquidity and Capital Resources.............................................................................        186
         Three and Nine Months ended September 30, 2002.........................................................        187
         Year ended December 31, 2001...........................................................................        189



                                      iii



                                                                                                                   
    Critical Accounting Policies................................................................................        193
    Quantitative and Qualitative Disclosures About Market Risk..................................................        193

CRESCENT REAL ESTATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......        194

    Segment Information.........................................................................................        194
         Office Segment.........................................................................................        194
         Resort/Hotel Segment...................................................................................        196
         Residential Development Segment........................................................................        197
         Temperature-Controlled Logistics Segment...............................................................        200
         Behavioral Healthcare Segment..........................................................................        201

    Results of Operations.......................................................................................        203
         Three Months Ended September 30, 2002 as Compared to Three Months Ended September 30, 2001.............        206
         Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September 30, 2001...............        211
         Year Ended December 31, 2001 as Compared to 2000.......................................................        217
         Year Ended December 31, 2000 as Compared to 1999.......................................................        219

    Liquidity and Capital Resources.............................................................................        222
         Nine Months Ended September 30, 2002...................................................................        222
         Year ended December 31, 2001...........................................................................        226

    Debt Financing Arrangements.................................................................................        256

    Quantitative and Qualitative Disclosure about Market Risk...................................................        261

PRICE RANGE OF CRESCENT OPERATING COMMON STOCK, DIVIDENDS AND RELATED STOCKHOLDER MATTERS.......................        263

PRICE RANGE OF CRESCENT REAL ESTATE COMMON SHARES, DIVIDENDS AND RELATED SHAREHOLDER MATTERS....................        265

SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS OF CRESCENT OPERATING.......................        267

CRESCENT REAL ESTATE MANAGEMENT AND ADDITIONAL INFORMATION......................................................        268

DESCRIPTION OF CAPITAL STOCK OF CRESCENT REAL ESTATE............................................................        273

    Description of Crescent Real Estate Common Shares...........................................................        273

    Description of Series A Preferred Shares....................................................................        276

    Description of Common Share Warrants........................................................................        283

COMPARISON OF RIGHTS OF HOLDERS OF CRESCENT OPERATING COMMON STOCK AND CRESCENT
REAL ESTATE COMMON SHARES.......................................................................................        283

    Form of Entity..............................................................................................        284

    Capitalization..............................................................................................        284




                                       iv



                                                                                                                   
    Classified Board of Directors/Trust Managers; Number of Directors/Trust Managers............................        284

    Removal of Directors/Trust Managers.........................................................................        284

    Filling Vacancies on the Board of Directors/Trust Managers..................................................        285

    Limits on Stockholder Action by Written Consent.............................................................        285

    Ability to Call Special Meetings............................................................................        286

    Advance Notice Provisions for Stockholder Nominations and Proposals.........................................        286

    Vote Required for Certain Stockholder Actions...............................................................        287

    Amendment of Certificate of Incorporation/Declaration of Trust..............................................        288

    Amendment of Bylaws.........................................................................................        288

    Restrictions on Business Combinations.......................................................................        289

    Control Share Acquisition...................................................................................        289

    Dividends...................................................................................................        291

    Appraisal Rights............................................................................................        292

    Limitation of Personal Liability of Directors/Trust Managers and Officers...................................        293

    Indemnification of Directors/Trust Managers and Officers....................................................        293

    Excess Share Provisions.....................................................................................        295

    Anti-Takeover Provisions....................................................................................        296

MATERIAL CONTACTS BETWEEN CRESCENT REAL ESTATE AND CRESCENT OPERATING...........................................        299

    Intercompany Agreement......................................................................................        299

LEGAL MATTERS...................................................................................................        300

EXPERTS.........................................................................................................        300

NOTICE REGARDING ARTHUR ANDERSEN LLP............................................................................        301

STATEMENTS REGARDING FORWARD-LOOKING INFORMATION................................................................        301

    Crescent Operating, Inc. ...................................................................................        302

    Crescent Real Estate Equities Company.......................................................................        304

    Additional Information......................................................................................        305

INDEX TO FINANCIAL STATEMENTS...................................................................................        F-1



                                       v

                                   ANNEX INDEX


         
Annex A  -  Plan of Reorganization

Annex B  -  Settlement Agreement and First Amendment to Settlement Agreement

Annex C  -  Fairness Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.


                                       vi

                             NOTICES TO STOCKHOLDERS

         THE CRESCENT OPERATING BANKRUPTCY PLAN IS TO BE FILED IN CONNECTION
WITH A CASE TO BE COMMENCED IN THE FUTURE BY CRESCENT OPERATING UNDER CHAPTER 11
OF THE U.S. BANKRUPTCY CODE. AT THIS TIME, CRESCENT OPERATING HAS NOT COMMENCED
A CHAPTER 11 CASE. IF SUFFICIENT VOTES ARE RECEIVED ACCEPTING THE CRESCENT
OPERATING BANKRUPTCY PLAN, IT IS CRESCENT OPERATING'S PRESENT INTENTION TO
COMMENCE A CHAPTER 11 CASE AND SEEK TO HAVE THE CRESCENT OPERATING BANKRUPTCY
PLAN CONFIRMED BY THE BANKRUPTCY COURT AS PROMPTLY AS PRACTICABLE. IF THE
CRESCENT OPERATING BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE,
CRESCENT OPERATING WILL STILL FILE THE CHAPTER 11 CASE AND REQUEST THAT THE
BANKRUPTCY COURT CONFIRM THE CRESCENT OPERATING BANKRUPTCY PLAN UNDER THE
PROVISION OF THE BANKRUPTCY CODE WHICH IS COMMONLY REFERRED TO AS THE "CRAMDOWN
PROVISION." THIS PROVISION WOULD PERMIT CONFIRMATION OF THE CRESCENT OPERATING
BANKRUPTCY PLAN IF THE COURT FINDS THAT THE CRESCENT OPERATING BANKRUPTCY PLAN
DOES NOT DISCRIMINATE UNFAIRLY AGAINST, AND IS FAIR AND EQUITABLE TO, CRESCENT
OPERATING'S STOCKHOLDERS. THE CRESCENT OPERATING BANKRUPTCY PLAN PROVIDES THAT,
IF THE CRESCENT OPERATING BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE
OF THE CRESCENT OPERATING STOCKHOLDERS, AND IF THE CRESCENT OPERATING BANKRUPTCY
PLAN IS CONFIRMED BY THE BANKRUPTCY COURT PURSUANT TO THE "CRAMDOWN PROVISION,"
THEN THE STOCKHOLDERS OF CRESCENT OPERATING WILL NOT RECEIVE ANY COMMON SHARES
OF CRESCENT REAL ESTATE.


         THIS PROXY STATEMENT/PROSPECTUS GIVES YOU DETAILED INFORMATION ABOUT
THE PROPOSED CRESCENT OPERATING BANKRUPTCY PLAN. YOU ARE ENCOURAGED TO READ THIS
PROXY STATEMENT/PROSPECTUS CAREFULLY. IN PARTICULAR, YOU SHOULD READ THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 23 FOR A DESCRIPTION OF THE VARIOUS RISKS
YOU SHOULD CONSIDER IN EVALUATING THE PROPOSED CRESCENT OPERATING BANKRUPTCY
PLAN.



         ON FEBRUARY 14, 2002, CRESCENT OPERATING AND CERTAIN OF ITS AFFILIATED
ENTITIES EXECUTED THE SETTLEMENT AGREEMENT, WHICH HAS SINCE BEEN AMENDED AND
WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX B.
CONTEMPORANEOUSLY WITH EXECUTION OF THE SETTLEMENT AGREEMENT, CRESCENT OPERATING
AND CRESCENT REAL ESTATE EXCHANGED MUTUAL RELEASES. IN PERTINENT PART, CRESCENT
OPERATING RELEASED ANY AND ALL CLAIMS THAT IT MIGHT HAVE AGAINST CRESCENT REAL
ESTATE AND CERTAIN AFFILIATES ARISING AT ANY TIME PRIOR TO EXECUTION OF THE
SETTLEMENT AGREEMENT.

         PRIOR TO ENTERING INTO THE SETTLEMENT AGREEMENT, CRESCENT OPERATING,
ANALYZED WHETHER IT HAD CLAIMS AGAINST CRESCENT REAL ESTATE THAT SHOULD BE
PURSUED AS AN ALTERNATIVE TO THE PROPOSED SETTLEMENT AGREEMENT. CRESCENT
OPERATING CONSULTED ITS COUNSEL WHO REVIEWED, AMONG OTHER MATTERS, THE ORIGIN OF
CRESCENT OPERATING'S INDEBTEDNESS TO CRESCENT REAL ESTATE AND THE BUSINESS
RELATIONSHIP BETWEEN CRESCENT OPERATING AND CRESCENT REAL ESTATE THAT BEGAN IN
1997 WHEN THE SHARES OF CRESCENT OPERATING COMMON STOCK WERE DISTRIBUTED TO
CRESCENT REAL ESTATE SHAREHOLDERS. CRESCENT OPERATING INDEPENDENTLY EVALUATED
WHETHER THE BENEFIT TO CRESCENT OPERATING CREDITORS AND STOCKHOLDERS IN
CONSUMMATING THE SETTLEMENT AGREEMENT OUTWEIGHED THE BENEFIT THAT MIGHT BE
OBTAINED FROM NOT ENTERING INTO THE PROPOSED SETTLEMENT AGREEMENT AND INSTEAD
PURSUING CLAIMS AGAINST CRESCENT REAL ESTATE. IN MAKING THIS EVALUATION,
CRESCENT OPERATING TOOK INTO CONSIDERATION THE RELATIVE CERTAINTY OF ITS
CREDITORS AND STOCKHOLDERS REALIZING THE BENEFITS PROVIDED FOR IN THE SETTLEMENT
AGREEMENT AND THE RELATIVE UNCERTAINTY OF RECOVERY IN, AS WELL AS THE COSTS AND
DELAY ASSOCIATED WITH, PROSECUTING ANY CLAIMS, AND PARTICULARLY CLAIMS OF
UNCERTAIN MERIT.

         BASED UPON THE TOTALITY OF THE CIRCUMSTANCES, CRESCENT OPERATING MADE
THE INDEPENDENT JUDGMENT THAT THE BEST INTERESTS OF ITS CREDITORS AND
STOCKHOLDERS WOULD BE SERVED BY ENTERING INTO THE SETTLEMENT AGREEMENT. CRESCENT
OPERATING CONCLUDED THAT THE BENEFITS TO ITS CREDITORS AND STOCKHOLDERS THAT
COULD BE REALIZED THROUGH THE SETTLEMENT AGREEMENT OUTWEIGHED THE COST TO
CRESCENT OPERATING OF GRANTING THE RELEASES TO CRESCENT REAL ESTATE.

         THE SETTLEMENT AGREEMENT AND THE MUTUAL RELEASES


                                      vii


EXECUTED IN CONNECTION WITH THE SETTLEMENT AGREEMENT, INCLUDING CRESCENT
OPERATING'S RELEASE OF ALL CLAIMS IT MAY HAVE AGAINST CRESCENT REAL ESTATE, ARE
ENFORCEABLE WHETHER OR NOT THE BANKRUPTCY PLAN IS APPROVED BY CRESCENT
OPERATING'S STOCKHOLDERS AND WHETHER OR NOT THE BANKRUPTCY PLAN IS CONFIRMED BY
THE BANKRUPTCY COURT. THE SETTLEMENT AGREEMENT ALSO PROVIDES THAT CRESCENT
OPERATING AND CRESCENT REAL ESTATE AND THE DIRECTORS OR TRUST MANAGERS,
OFFICERS, AGENTS AND EMPLOYEES OF EACH WILL BE RELEASED FROM ALL LIABILITIES AND
CLAIMS ARISING PRIOR TO THE EFFECTIVE DATE OF THE BANKRUPTCY PLAN.

         IF THE BANKRUPTCY PLAN IS ACCEPTED BY THE STOCKHOLDERS AND CONFIRMED BY
THE BANKRUPTCY COURT, THEN, ON THE EFFECTIVE DATE OF THE CRESCENT OPERATING
BANKRUPTCY PLAN, EACH STOCKHOLDER OF CRESCENT OPERATING WHO IS A MEMBER OF A
CLASS THAT VOTES TO ACCEPT THE BANKRUPTCY PLAN OR WHO RECEIVES A DISTRIBUTION
UNDER THE BANKRUPTCY PLAN, WILL BE DEEMED TO UNCONDITIONALLY RELEASE CRESCENT
OPERATING AND CRESCENT REAL ESTATE AND ALL CURRENT AND FORMER OFFICERS AND
DIRECTORS OR TRUST MANAGERS OF CRESCENT OPERATING AND CRESCENT REAL ESTATE FROM
ALL CLAIMS AND LIABILITIES, EXCEPT FOR PERFORMANCE OR NONPERFORMANCE UNDER THE
SETTLEMENT AGREEMENT OR THE BANKRUPTCY PLAN AND EXCEPT FOR ANY ACTION OR
OMISSION THAT CONSTITUTES ACTUAL FRAUD OR CRIMINAL BEHAVIOR.

         THE RELEASE OF CRESCENT OPERATING STOCKHOLDER CLAIMS WILL NOT APPLY IF
THE HOLDERS OF THE CRESCENT OPERATING COMMON STOCK, VOTING AS A CLASS, VOTE
AGAINST THE BANKRUPTCY PLAN. IN ADDITION, THE RELEASE OF CRESCENT OPERATING
STOCKHOLDER CLAIMS WILL NOT APPLY TO THE CLAIMS, IF ANY, OF A PERSON WHO SOLD
ITS CRESCENT OPERATING STOCK BEFORE THE RECORD DATE FOR THE VOTE, OR WHO EITHER
VOTED AGAINST THE BANKRUPTCY PLAN OR DID NOT VOTE AND THEREAFTER EITHER DID NOT
RECEIVE OR REFUSED TO ACCEPT A DISTRIBUTION OF CRESCENT REAL ESTATE COMMON
SHARES. THE RELEASE OF CRESCENT OPERATING STOCKHOLDER CLAIMS WILL APPLY TO
CRESCENT OPERATING STOCKHOLDERS ONLY IN THEIR CAPACITY AS CRESCENT OPERATING
STOCKHOLDERS, AND WILL NOT AFFECT THEIR RIGHTS AS HOLDERS OF CRESCENT REAL
ESTATE COMMON SHARES.

         THIS RELEASE WILL BE SUBJECT TO THE EFFECT OF SECTION 29 OF THE
SECURITIES EXCHANGE ACT OF 1934, WHICH PROVIDES THAT ANY AGREEMENT BINDING ANY
PERSON TO WAIVE COMPLIANCE WITH THE EXCHANGE ACT IS VOID. YOU SHOULD BE AWARE
THAT IT IS THE POSITION OF THE SECURITIES AND EXCHANGE COMMISSION THAT THE
RELEASE WILL NOT BE EFFECTIVE WITH RESPECT TO CERTAIN CLAIMS ARISING UNDER
FEDERAL SECURITIES LAWS. IN ADDITION, IT IS THE POSITION OF THE SECURITIES AND
EXCHANGE COMMISSION THAT THE RELEASE OF AFFILIATES OF CRESCENT OPERATING AND THE
CURRENT AND FORMER OFFICERS AND DIRECTORS OR TRUST MANAGERS OF CRESCENT
OPERATING AND CRESCENT REAL ESTATE VIOLATES SECTION 524(E) OF THE BANKRUPTCY
CODE UNLESS SEPARATE CONSIDERATION IS PROVIDED BY THESE PARTIES OR THE RELEASE
IS VOLUNTARY.



         EFFECTIVE OCTOBER 1, 2002, CRESCENT OPERATING AND CRESCENT REAL ESTATE
AMENDED THE SETTLEMENT AGREEMENT. THE AMENDMENT PROVIDES FOR, AMONG OTHER
THINGS, A MINIMUM VALUE OF CRESCENT REAL ESTATE COMMON SHARES TO BE ISSUED IN
CONNECTION WITH THE BANKRUPTCY PLAN IF THE BANKRUPTCY PLAN IS ACCEPTED BY THE
REQUISITE VOTE OF CRESCENT OPERATING STOCKHOLDERS AND CONFIRMED BY THE
BANKRUPTCY COURT.


         NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE CRESCENT OPERATING BANKRUPTCY
PLAN, PASSED ON THE MERITS OR FAIRNESS OF THE CRESCENT OPERATING BANKRUPTCY PLAN
OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

         THIS PROXY STATEMENT/PROSPECTUS HAS NOT BEEN APPROVED BY THE BANKRUPTCY
COURT WITH RESPECT TO ADEQUACY OF INFORMATION. HOWEVER, IF THE CRESCENT
OPERATING BANKRUPTCY PLAN IS ACCEPTED BY THE REQUIRED VOTE, CRESCENT OPERATING
WILL SEEK BANKRUPTCY COURT APPROVAL OF THIS PROXY STATEMENT/PROSPECTUS AS PART
OF THE ORDER CONFIRMING THE CRESCENT OPERATING BANKRUPTCY PLAN.

         THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS SHALL NOT UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR ANY ATTACHMENTS

                                      viii

HERETO OR IN THE AFFAIRS OF CRESCENT REAL ESTATE, CRESCENT OPERATING, OR ANY OF
THEIR SUBSIDIARIES SINCE THE DATE HEREOF.

         PRIOR TO VOTING, STOCKHOLDERS ARE ENCOURAGED TO READ AND CONSIDER
CAREFULLY THIS ENTIRE PROXY STATEMENT/PROSPECTUS INCLUDING THE BANKRUPTCY PLAN
OF REORGANIZATION ATTACHED HERETO AS ANNEX A AND THE MATTERS DESCRIBED IN THIS
PROXY STATEMENT/PROSPECTUS.

         IN MAKING A DECISION IN CONNECTION WITH THE CRESCENT OPERATING
BANKRUPTCY PLAN, STOCKHOLDERS MUST RELY ON THEIR OWN EXAMINATION OF CRESCENT
OPERATING AND CRESCENT REAL ESTATE AND THE TERMS OF THE CRESCENT OPERATING
BANKRUPTCY PLAN, INCLUDING THE MERITS AND RISKS INVOLVED. STOCKHOLDERS SHOULD
NOT CONSTRUE THE CONTENTS OF THIS PROXY STATEMENT/PROSPECTUS AS PROVIDING ANY
LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE. EACH STOCKHOLDER SHOULD CONSULT WITH
ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS WITH RESPECT TO ANY SUCH
MATTERS CONCERNING THIS PROXY STATEMENT/PROSPECTUS, THE CRESCENT OPERATING
BANKRUPTCY PLAN OR THE TRANSACTIONS CONTEMPLATED THEREBY.

                                       ix

                    QUESTIONS AND ANSWERS ABOUT THE CRESCENT
                   OPERATING BANKRUPTCY PLAN AND THE SPECIAL
                                    MEETING


         Unless the context otherwise requires, the terms Crescent Operating and
Crescent Real Estate include the subsidiaries of each and, in the case of
Crescent Real Estate, includes Crescent Real Estate Equities Limited
Partnership, or Crescent Partnership. Unless the context otherwise requires,
"bankruptcy plan" and "Plan of Reorganization" both refer to the Crescent
Operating bankruptcy plan that is described in this proxy statement/prospectus.
The Plan of Reorganization is attached to this proxy statement/prospectus as
Annex A and is incorporated by reference to this proxy statement/prospectus.
Unless the context otherwise requires, "Settlement Agreement" refers to the
Settlement Agreement executed on February 14, 2002, as amended by the First
Amendment to Settlement Agreement executed effective October 1, 2002. The
Settlement Agreement and the First Amendment to Settlement Agreement are
attached to this proxy statement/prospectus as Annex B and are incorporated by
reference to this proxy statement/prospectus.


The Crescent Operating Bankruptcy Plan

Q.       WHAT AM I VOTING ON?


A.       You are voting on a proposal to accept a bankruptcy plan that will
         result in the orderly termination of Crescent Operating's business
         and could result in your receiving Crescent Real Estate common
         shares.


Q.       WHY IS CRESCENT OPERATING PROPOSING THE BANKRUPTCY PLAN?


A.       Crescent Operating is proposing the bankruptcy plan to effect an
         orderly termination of its business. Substantially all of Crescent
         Operating's assets are or were encumbered by liens in favor of Crescent
         Real Estate. Crescent Operating is in default in its obligations to
         Crescent Real Estate. The value of Crescent Operating's assets was, and
         continues to be, insufficient to satisfy the secured claims of Crescent
         Real Estate. On February 14, 2002, Crescent Operating entered into the
         original Settlement Agreement with Crescent Real Estate and transferred
         many of the encumbered assets to Crescent Real Estate in partial
         satisfaction of its claims. The Settlement Agreement requires the
         filing of a prepackaged bankruptcy plan for Crescent Operating. If the
         bankruptcy plan is confirmed, the Settlement Agreement obligates
         Crescent Real Estate to provide Crescent Operating with funds to cover
         budgeted expenses and pay in full or otherwise resolve the claims of
         those creditors of Crescent Operating identified in the original
         Settlement Agreement and gives Crescent Operating stockholders the
         opportunity to receive Crescent Real Estate common shares.


Q.       WHY IS THE SOLE DIRECTOR OF CRESCENT OPERATING RECOMMENDING THAT I VOTE
         FOR THE CRESCENT OPERATING BANKRUPTCY PLAN?

A.       Crescent Operating's sole director is recommending that you vote for
         the Crescent Operating bankruptcy plan because he concluded that the
         bankruptcy plan, which provides for payments to Crescent Operating's
         creditors as well as the opportunity for Crescent Operating
         stockholders to receive Crescent Real Estate common shares with a value
         that is expected to be between $0.20 to $0.50 per share, but will not
         be less than $0.20 per share, of Crescent Operating common stock,

                                       1


         was the best available alternative for Crescent Operating, its
         creditors and stockholders.

         After Crescent Real Estate terminated the asset purchase agreement and
         the securities purchase agreement described below under "The
         Reorganization Transactions - Events Leading to the Reorganization
         Transactions," the sole director, working with Crescent Operating's
         counsel, analyzed Crescent Operating's alternatives. These alternatives
         included the following:


     -    exploring the possibility of obtaining additional funds sufficient to
          satisfy its obligations and continue its ongoing operations;

     -    liquidating Crescent Operating under Chapter 7 of the Bankruptcy Code;

     -    instigating litigation requesting that a court set aside Crescent Real
          Estate's liens or recharacterize the Crescent Real Estate agreements
          as equity infusions rather than loans; and

     -    not settling its claims with Crescent Real Estate and filing for
          bankruptcy to avoid a foreclosure by Crescent Real Estate.


         After analyzing these alternatives, the sole director concluded that
         the bankruptcy plan provided the best alternative with regard to the
         amount and the likelihood of recovery for the creditors and
         stockholders of Crescent Operating. Before finalizing his evaluation,
         however, Crescent Operating's sole director consulted with legal and
         financial advisors and also obtained an opinion stating that the
         aggregate consideration to be received by Crescent Operating and its
         stockholders, taken as a whole, in connection with the transactions
         contemplated by the bankruptcy plan and the Settlement Agreement is
         fair to the public stockholders of Crescent Operating from a financial
         point of view, assuming a distribution of Crescent Real Estate common
         shares with a value of $0.32 to $0.50. However, this opinion maintains
         that it would not necessarily change if Crescent Real Estate were to
         advance additional funds, as Crescent Real Estate agreed to do in the
         October 2002 amendment to the Settlement Agreement and as described
         below in "The Reorganization Transactions - Summary of the
         Reorganization Transactions - Payment by Crescent Real Estate of
         Crescent Operating Claims and Expenses," that reduce the value of
         Crescent Real Estate common shares to below $0.32. See "The
         Reorganization Transactions - Analysis of Alternatives" for a more
         detailed description of the analyses performed on behalf of Crescent
         Operating by the sole director and third-party consultants.

         Crescent Operating's sole director performed these analyses and
         negotiated the bankruptcy plan and Settlement Agreement independently
         from the other four members of the Crescent Operating Board of
         Directors, each of whom also serves as a trust manager of Crescent Real
         Estate. In order to avoid conflicts of interest, none of these four
         directors participated in the negotiations on behalf of Crescent
         Operating, and all four resigned as directors of Crescent Operating on
         February 13, 2002. One of these directors, John C. Goff, participated
         in the initial structuring of the proposed transactions, but did not
         participate in any negotiations due to potential conflicts of interest
         arising primarily from his position as Chief Executive Officer and a
         trust manager of Crescent Real Estate, as more fully described in "The
         Reorganization Transactions - Interests of Certain Persons in the
         Reorganization Transactions." As a result of these analyses, the sole
         director concluded that the Settlement Agreement and the pre-packaged
         bankruptcy were the best available alternatives for the Crescent
         Operating creditors and stockholders and the alternatives most likely
         to maximize stockholder value.


Q.       WHAT IS THE VOTE REQUIRED TO ACCEPT THE CRESCENT OPERATING BANKRUPTCY
         PLAN?


A.       The affirmative vote of two-thirds of the votes cast in person or by
         proxy is required to accept the Crescent Operating bankruptcy plan. In
         addition, at least a majority of the outstanding Crescent Operating
         common stock must be represented at the special meeting to constitute a
         quorum. Holders of Crescent Operating common stock are entitled to one
         vote for each share of Crescent Operating common stock they hold.

                                       2

Q.       WHAT HAPPENS IF THE CRESCENT OPERATING STOCKHOLDERS VOTE FOR ACCEPTANCE
         OF THE CRESCENT OPERATING BANKRUPTCY PLAN?

A.       If the Crescent Operating stockholders cast enough votes to accept the
         Crescent Operating bankruptcy plan, Crescent Operating will file a
         bankruptcy petition under the Bankruptcy Code and will submit the
         bankruptcy plan to the bankruptcy court for confirmation. If the
         bankruptcy court confirms the bankruptcy plan, you will cease to be a
         stockholder of Crescent Operating on the date the bankruptcy plan
         becomes effective. You will receive common shares of Crescent Real
         Estate subject to the conditions discussed below in the answer to the
         question "Are there conditions to my receipt of Crescent Real Estate
         common shares?"


         If the holders of Crescent Operating common stock, voting as a class,
         vote for acceptance of the bankruptcy plan, each stockholder will be
         deemed to unconditionally release Crescent Operating and Crescent Real
         Estate and all current and former officers and directors or trust
         managers of Crescent Operating and Crescent Real Estate from all claims
         and liabilities, except for performance or nonperformance under the
         Settlement Agreement and the bankruptcy plan and except for any action
         or omission that constitutes actual fraud or criminal behavior. The
         Settlement Agreement and the mutual releases executed in connection
         with the Settlement Agreement, including Crescent Operating's release
         of all claims it may have against Crescent Real Estate, are enforceable
         whether or not the bankruptcy plan is approved by Crescent Operating's
         stockholders and whether or not the bankruptcy plan is confirmed by the
         bankruptcy court. If the Crescent Operating stockholders vote to accept
         the bankruptcy plan, but an individual stockholder votes against the
         bankruptcy plan, abstains or does not vote, and either does not receive
         or refuses to accept any distribution under the bankruptcy plan, then
         that stockholder will not be deemed to have released any claims against
         Crescent Real Estate or its current or former officers and trust
         managers or Crescent Operating's current or former officers and
         directors. The release of Crescent Operating stockholder claims will
         apply to Crescent Operating stockholders only in their capacity as
         Crescent Operating stockholders and will not affect their rights as
         holders of Crescent Real Estate common shares.


         In substance, section 524(e) of the Bankruptcy Code provides that the
         release of third party claims against a debtor such as Crescent
         Operating does not release any other person. In addition to the release
         of Crescent Operating, the bankruptcy plan includes releases of
         Crescent Real Estate and all current and former officers and directors
         or trust managers of Crescent Operating or Crescent Real Estate. It is
         the position of the Securities and Exchange Commission that these
         additional releases violate section 524(e) unless separate
         consideration is provided by the specific parties being released or the
         releases are voluntary. Crescent Operating believes the releases
         contemplated by the bankruptcy plan comply with section 524(e) of the
         Bankruptcy Code and applicable law, both because Crescent Real Estate
         is paying substantial consideration to Crescent Operating and its
         stockholders to obtain the releases provided under the bankruptcy plan
         and because the releases are voluntary.

         In addition, as discussed in this proxy statement, Crescent Real Estate
         is providing sufficient funds both to pay in full or otherwise resolve
         the claims of those creditors of Crescent Operating identified in the
         original Settlement Agreement and to cover budgeted expenses of
         Crescent Operating. In addition, Crescent Real Estate is providing a
         distribution to Crescent Operating stockholders of Crescent Real Estate
         common shares if the stockholders vote to accept the bankruptcy plan
         and the bankruptcy court confirms the plan. Accordingly, the
         consideration is being provided either directly by the persons who
         receive the benefit of the releases provided in the bankruptcy plan or
         on their behalf. Whether this consideration for the releases is
         sufficient is an issue of fact that the bankruptcy court has authority
         to determine. If the bankruptcy court

                                       3

         concludes that the releases in the bankruptcy plan violate section
         524(e) of the Bankruptcy Code, the bankruptcy court may refuse to
         confirm the bankruptcy plan as written. In that event, Crescent Real
         Estate does not have an obligation to fund payments to Crescent
         Operating's creditors or to make a distribution to stockholders of
         Crescent Operating even though the stockholders cast enough votes to
         accept the Crescent Operating bankruptcy plan proposed to them.


         Crescent Operating also believes that the release by any stockholder
         who accepts the bankruptcy plan is voluntary. Any Crescent Operating
         stockholder who does not wish to provide the release may retain full
         rights to pursue claims against Crescent Real Estate, Crescent
         Operating and their current and former officers and directors or trust
         managers by voting against the bankruptcy plan, abstaining or not
         voting, and either not receiving or refusing to accept any distribution
         under the bankruptcy plan.


Q.       IS THE TOTAL VALUE OF THE CRESCENT REAL ESTATE COMMON SHARES BEING
         OFFERED TO CRESCENT OPERATING STOCKHOLDERS IN THE CRESCENT OPERATING
         BANKRUPTCY PLAN SUBJECT TO ADJUSTMENT?

A.       Yes. The total value of the Crescent Real Estate common shares offered
         to Crescent Operating stockholders will depend on the dollar amount of
         claims and expenses paid by Crescent Real Estate in connection with the
         Crescent Operating bankruptcy and the reorganization transactions, but
         will not be less than approximately $2.16 million, or $0.20 per share
         of Crescent Operating common stock.

Q.       HOW WILL CRESCENT REAL ESTATE AND CRESCENT OPERATING DETERMINE THE
         TOTAL VALUE OF THE CRESCENT REAL ESTATE COMMON SHARES BEING OFFERED TO
         CRESCENT OPERATING STOCKHOLDERS PURSUANT TO THE CRESCENT OPERATING
         BANKRUPTCY PLAN?

A.       The total value of the Crescent Real Estate common shares offered to
         Crescent Operating stockholders will equal the greater of:


     -    approximately $2.16 million; or


     -    $16.0 million minus the total amount of payments made by Crescent Real
          Estate for claims and expenses relating to the Crescent Operating
          bankruptcy and the reorganization transactions, including expenses of
          Crescent Real Estate but excluding payments in satisfaction of the
          Bank of America claim.


         As of December 31, 2002, Crescent Real Estate had incurred
         approximately $8.5 million in claims and expenses in connection with
         the Crescent Operating bankruptcy and the reorganization transactions
         and expects to incur an aggregate of $10.6 million to $13.8 million in
         total claims and expenses.


Q.       HOW MUCH DO CRESCENT OPERATING AND CRESCENT REAL ESTATE EXPECT CRESCENT
         REAL ESTATE TO PAY FOR CLAIMS AND EXPENSES, AND WHAT IS THE TOTAL VALUE
         OF THE CRESCENT REAL ESTATE COMMON SHARES THAT CRESCENT OPERATING AND
         CRESCENT REAL ESTATE BELIEVE WILL BE ISSUED TO CRESCENT OPERATING
         STOCKHOLDERS?

A.       Crescent Operating and Crescent Real Estate currently estimate that
         Crescent Real Estate will advance funds to pay in full or otherwise
         resolve total claims and expenses of between $10.6 million and $13.8
         million. Accordingly, the total value of the Crescent Real Estate
         common shares issued to the Crescent Operating stockholders is expected
         to be between $5.4 million and

                                       4


         $2.16 million, or $0.50 to $0.20 per share of Crescent Operating common
         stock. If a material variance in this estimated range of aggregate
         claims and expenses occurs after the date that Crescent Operating mails
         this proxy statement/prospectus to its stockholders, then Crescent
         Operating will issue a press release and file a Current Report on Form
         8-K with the Securities and Exchange Commission disclosing the material
         variance. Regardless of the actual amount of claims and expenses, in no
         event will the stockholders of Crescent Operating have the opportunity
         to reconsider approval of the bankruptcy plan. As of December 31, 2002,
         Crescent Real Estate had incurred approximately $8.5 million in claims
         and expenses.


Q.       CAN THE TOTAL CLAIMS AND EXPENSES THAT CRESCENT REAL ESTATE PAYS IN
         CONNECTION WITH THE CRESCENT OPERATING BANKRUPTCY AND THE
         REORGANIZATION TRANSACTIONS REDUCE THE VALUE OF THE DISTRIBUTION OF
         CRESCENT REAL ESTATE COMMON SHARES TO THE CRESCENT OPERATING
         STOCKHOLDERS TO LESS THAN $0.20 PER SHARE?


A.       No. Regardless of the total amount of claims and expenses that are paid
         by Crescent Real Estate in connection with the bankruptcy plan and the
         reorganization transactions, if the bankruptcy plan is accepted by the
         requisite vote of the Crescent Operating stockholders and is confirmed
         by the bankruptcy court, then Crescent Operating stockholders will
         receive common shares of Crescent Real Estate with a value of at least
         $2.16 million, or $0.20 per share of Crescent Operating common stock.


Q.       HOW IS THE VALUE OF THE CRESCENT REAL ESTATE COMMON SHARES CALCULATED?

A.       The value of the Crescent Real Estate common shares to be issued
         pursuant to the bankruptcy plan is computed based on the average of the
         closing prices of the Crescent Real Estate common shares on the New
         York Stock Exchange, or the NYSE, for the ten trading days immediately
         preceding the date of confirmation of the Crescent Operating bankruptcy
         plan.

Q.       ARE THERE CONDITIONS TO MY RECEIPT OF CRESCENT REAL ESTATE COMMON
         SHARES?

A.       Yes.  There are three principal conditions:

     -    Crescent Operating stockholders must accept the Crescent Operating
          bankruptcy plan by the requisite vote (2/3 or more of the number of
          votes cast at the meeting in person or by proxy);

     -    the bankruptcy court must confirm the Crescent Operating bankruptcy
          plan, including the releases incorporated in the bankruptcy plan; and

     -    you must be a Crescent Operating stockholder on the confirmation date.

Q.       WHAT SHOULD I KNOW ABOUT CRESCENT REAL ESTATE AND THE CRESCENT REAL
         ESTATE COMMON SHARES?

A.       Crescent Real Estate is a real estate investment trust. This proxy
         statement/prospectus contains a description of Crescent Real Estate and
         its business, as well as its financial statements. You should carefully
         review this proxy statement/prospectus, including the annexes hereto,
         before casting your vote. An investment in Crescent Real Estate common
         shares involves risks, as described in "Risk Factors - Risks Associated
         with an Investment in Crescent Real Estate Common Shares". The common
         shares of Crescent Real Estate trade publicly on the NYSE under the
         symbol "CEI."

                                       5

Q.       WHAT HAPPENS IF THE CRESCENT OPERATING STOCKHOLDERS VOTE AGAINST
         ACCEPTANCE OF THE CRESCENT OPERATING BANKRUPTCY PLAN?


A.       If a sufficient number of Crescent Operating stockholders vote against
         the Crescent Operating bankruptcy plan, such that not enough votes are
         cast to accept the bankruptcy plan, the bankruptcy plan provides that
         none of the stockholders of Crescent Operating will receive Crescent
         Real Estate common shares under the plan. Crescent Operating will still
         file a bankruptcy petition under the Bankruptcy Code and seek to have
         the bankruptcy plan, as currently proposed to the stockholders of
         Crescent Operating, confirmed by the bankruptcy court pursuant to the
         "cramdown" provision of the Bankruptcy Code. If the bankruptcy court
         confirms the plan pursuant to the "cramdown" provision, Crescent
         Operating stockholders will not receive common shares of Crescent Real
         Estate but will still cease to be stockholders of Crescent Operating on
         the date the bankruptcy plan becomes effective. In this circumstance,
         the stockholder releases described in the answer to the question "What
         happens if the Crescent Operating stockholders vote FOR acceptance of
         the Crescent Operating bankruptcy plan?" will not take effect, and the
         Crescent Operating stockholders will not be deemed to have released any
         of their direct claims against Crescent Operating or Crescent Real
         Estate or against the current and former officers and the directors or
         trust managers of either Crescent Operating or Crescent Real Estate. In
         addition, each Crescent Operating stockholder would retain the right to
         seek to enforce a Crescent Operating cause of action against parties
         other than Crescent Real Estate and the other parties released under
         the Settlement Agreement. Crescent Operating's pre-bankruptcy release
         of its claims against Crescent Real Estate, including claims by
         stockholders seeking to enforce, on behalf of Crescent Operating, a
         claim of Crescent Operating against Crescent Real Estate, however, will
         remain in effect.



         The bankruptcy court has authority to determine whether Crescent
         Operating's release of its claims, or the other transactions under the
         Settlement Agreement, could be avoided or set aside as a fraudulent
         transfer under either Texas law or section 548 of the Bankruptcy Code.
         The primary consideration in a fraudulent transfer action is whether
         the transferor received reasonably equivalent value in exchange for the
         transfer. In this case, Crescent Operating believes that the payments
         and other consideration that Crescent Real Estate is providing pursuant
         to the Settlement Agreement in connection with the bankruptcy plan
         constitute reasonably equivalent value for the consideration Crescent
         Operating gave Crescent Real Estate in the Settlement Agreement.
         Fraudulent transfer claims are typically brought for the benefit of
         creditors. In this case, Crescent Real Estate agreed, if the bankruptcy
         plan is confirmed, to pay in full or otherwise resolve the claims of
         the Crescent Operating creditors that Crescent Operating identified at
         the time of the execution of the original Settlement Agreement. As a
         result, these creditors, rather than being harmed by the Settlement
         Agreement, will benefit from the Settlement Agreement.


         If the bankruptcy court refuses to confirm the bankruptcy plan
         described in this proxy statement, Crescent Operating may seek to have
         an alternative plan confirmed by the court. In that event, Crescent
         Operating creditors and stockholders will receive further notice
         regarding the alternative plan.

Q.       WHAT RIGHTS DO I HAVE IF I OPPOSE THE CRESCENT OPERATING BANKRUPTCY
         PLAN?

A.       If you oppose the bankruptcy plan, you may vote against it. There are
         no dissenters' appraisal rights available under applicable state
         corporate law with respect to the Crescent Operating bankruptcy plan.
         After the bankruptcy plan is filed with the bankruptcy court, you may
         hire an attorney to argue your position to the court and you may file
         pleadings with the bankruptcy court

                                       6

         explaining why you believe the bankruptcy plan should not be confirmed,
         whether or not the Crescent Operating stockholders approved the
         bankruptcy plan.


         As described previously in "What happens if the Crescent Operating
         stockholders vote AGAINST acceptance of the Crescent Operating
         bankruptcy plan?", Crescent Operating will file its bankruptcy petition
         and seek to have the bankruptcy plan confirmed even if the requisite
         numbers of Crescent Operating stockholders do not vote to accept the
         bankruptcy plan. Crescent Operating believes it will be successful in
         obtaining confirmation of the bankruptcy plan, even over the
         stockholders' failure to approve the bankruptcy plan or a stockholder's
         objection, but it is not a certainty that the court will confirm the
         bankruptcy plan.


         If the Crescent Operating bankruptcy plan is confirmed by the
         bankruptcy court, all of the stockholders of Crescent Operating will be
         bound by all of the terms and conditions of the bankruptcy plan.
         However, Crescent Operating stockholders who sell their shares of
         Crescent Operating common stock before the voting record date, as well
         as Crescent Operating stockholders who vote against the bankruptcy
         plan, abstain from voting or do not vote on the bankruptcy plan, and
         who do not receive or refuse to accept a distribution under the
         bankruptcy plan, will not be bound by the releases in the bankruptcy
         plan. If the class of Crescent Operating stockholders votes against the
         bankruptcy plan, the Crescent Operating stockholders will not release
         any direct, or non-derivative, claims against third parties. Each
         Crescent Operating stockholder would retain the right to assert any
         direct claims that the stockholder may have against Crescent Operating
         or Crescent Real Estate, or the officers and directors or trust
         managers of either entity, including claims alleging violations of
         applicable state or federal securities laws. In addition, each Crescent
         Operating stockholder would retain the right to seek to enforce a
         Crescent Operating cause of action against parties other than Crescent
         Real Estate and the other parties released under the Settlement
         Agreement. The Settlement Agreement and the mutual releases executed in
         connection with the Settlement Agreement, including Crescent
         Operating's release of all claims it may have against Crescent Real
         Estate and affiliates arising prior to the execution of the original
         Settlement Agreement, are enforceable whether or not the bankruptcy
         plan is approved by Crescent Operating's stockholders and whether or
         not the bankruptcy plan is confirmed by the bankruptcy court. The
         bankruptcy court has the authority to determine whether Crescent
         Operating's release of its claims, or the other transactions under the
         Settlement Agreement, could be avoided or set aside as a fraudulent
         transfer under either state law or section 548 of the Bankruptcy Code.
         The primary consideration in a fraudulent transfer action is whether
         the transferor received reasonably equivalent value for the transfer.
         In this case, Crescent Operating believes that the payments and other
         consideration that Crescent Real Estate is providing pursuant to the
         Settlement Agreement and in connection with the bankruptcy plan
         constitute reasonably equivalent value for the consideration Crescent
         Operating gave Crescent Real Estate in the Settlement Agreement.
         Fraudulent transfer claims are typically brought for the benefit of
         creditors. In this case, Crescent Real Estate agreed, if the bankruptcy
         plan is confirmed, to pay all the claims of the Crescent Operating
         creditors that Crescent Operating identified at the time of the
         Settlement Agreement. As a result, these creditors, rather than being
         harmed by the Settlement Agreement, in fact will benefit from the
         Settlement Agreement.

Q.       WAS A FAIRNESS OPINION RENDERED IN CONNECTION WITH THE CRESCENT
         OPERATING BANKRUPTCY PLAN?


A.       Yes. The sole director of Crescent Operating has received and relied
         upon an opinion from Houlihan Lokey Howard & Zukin Financial Advisors,
         Inc., an investment-banking firm, dated February 14, 2002, that,
         subject to and based on the considerations in its opinion, the
         aggregate consideration to be received by Crescent Operating and its
         stockholders, taken as a whole, in connection with the transactions


                                       7

         contemplated by the bankruptcy plan and the Settlement Agreement is
         fair to the public stockholders of Crescent Operating from a financial
         point of view, assuming a distribution of Crescent Real Estate common
         shares with a value of $0.32 to $0.50. However, Houlihan Lokey's
         opinion specifically stated that its opinion would not necessarily
         change if Crescent Real Estate were to advance additional funds, as
         Crescent Real Estate agreed to do in the October 2002 amendment to the
         Settlement Agreement and as described below in "The Reorganization
         Transactions - Summary of the Reorganization Transactions - Payment by
         Crescent Real Estate of Crescent Operating Claims and Expenses," that
         reduce the value of Crescent Real Estate common shares to below $0.32.
         The full text of Houlihan Lokey's opinion, which sets forth, among
         other things, the assumptions made, procedures followed, matters
         considered and limitations on the review undertaken by Houlihan Lokey,
         is attached as Annex C to this proxy statement/prospectus. Crescent
         Operating urges you to read the Houlihan Lokey opinion in its entirety.
         See "The Crescent Operating Bankruptcy Plan - Opinion of Crescent
         Operating's Financial Advisor" for a more detailed description of the
         opinion and the background of the opinion. In addition, you should read
         "Risk Factors - Limitations on the scope of Houlihan Lokey's fairness
         opinion could lead to Crescent Operating stockholders to assign too
         much importance to the fairness opinion in making their decision on
         whether to vote to approve the bankruptcy plan" for a discussion of
         issues and concerns related to the date and the limited scope of
         Houlihan Lokey's opinion.

Q.       WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE CRESCENT OPERATING
         BANKRUPTCY PLAN?

A.       The distribution to you of Crescent Real Estate common shares will be
         treated as a distribution in liquidation of Crescent Operating. You
         will realize gain or loss based on the difference between your basis in
         your shares of Crescent Operating common stock and the fair market
         value of the Crescent Real Estate common shares you receive. In
         general, if you are not a dealer in securities, you must treat this
         gain or loss as a long term capital gain or loss if you held your
         shares of Crescent Operating common stock for more than one year or,
         otherwise, as a short term capital gain or loss. If you acquired shares
         of Crescent Operating common stock at different times, the
         determination of gain or loss and the holding period is made on the
         facts specific to each share. Your basis in the Crescent Real Estate
         common shares you will receive will be the fair market value of the
         Crescent Real Estate common shares at the time of distribution.

Q.       ARE THERE ANY RISKS IN THE CRESCENT OPERATING BANKRUPTCY PLAN?

A.       Yes. If there are enough votes to accept the Crescent Operating
         bankruptcy plan, you are expected to receive Crescent Real Estate
         common shares only if the bankruptcy plan is confirmed and you own
         shares of Crescent Operating common stock on the date that the Crescent
         Operating bankruptcy plan is confirmed. The number of Crescent Real
         Estate common shares that you will receive is subject to reduction
         depending on the amount of expenses and claims relating to the Crescent
         Operating bankruptcy plan and reorganization transactions that Crescent
         Real Estate pays, however, in no event will the Crescent Operating
         stockholders receive Crescent Real Estate common shares with a value of
         less than approximately $2.16 million or $0.20 per share of Crescent
         Operating common stock if the bankruptcy plan is accepted by the
         Crescent Operating stockholders and confirmed by the bankruptcy court.
         If there are not enough votes of the Crescent Operating stockholders to
         accept the Crescent Operating bankruptcy plan, Crescent Operating will
         still seek confirmation of the bankruptcy plan, but the Crescent
         Operating stockholders will receive no Crescent Real Estate common
         shares. Other risks relating to the bankruptcy plan, including, but not
         limited to, the bankruptcy court denying confirmation of the bankruptcy
         plan and Crescent Real Estate electing not to assume any unidentified
         liabilities of

                                       8

         Crescent Operating are described in "Risk Factors - Risks Associated
         with the Crescent Operating Bankruptcy Plan."

Q.       ARE THERE ANY CONDITIONS TO CONFIRMATION AND IMPLEMENTATION OF THE
         CRESCENT OPERATING BANKRUPTCY PLAN?

A.       Yes. The Crescent Operating bankruptcy plan provides that, except as
         expressly waived by Crescent Operating with the consent of Crescent
         Real Estate, the following are conditions to confirmation and
         implementation of the Crescent Operating bankruptcy plan:

     -    the bankruptcy court has signed a confirmation order confirming the
          Crescent Operating bankruptcy plan, and the clerk of the bankruptcy
          court has duly entered the confirmation order on the docket for the
          bankruptcy case in a form and substance that is acceptable to Crescent
          Operating;

     -    the confirmation order has become effective and has not been stayed,
          modified, reversed or amended; and

     -    Crescent Real Estate has received all regulatory approvals and
          authorizations necessary to create the subsidiary of Crescent Real
          Estate that will acquire Crescent Operating's entire membership
          interest in COPI Cold Storage, LLC, and that will distribute its
          shares to the holders of Crescent Real Estate common shares, other
          than the holders of Crescent Real Estate common shares distributed to
          the Crescent Operating stockholders as a result of the Crescent
          Operating bankruptcy plan.

Q.       WHEN DO YOU EXPECT THE CRESCENT OPERATING BANKRUPTCY PLAN TO BE
         CONFIRMED BY THE BANKRUPTCY COURT?

A.       Crescent Operating's goal is to have the Crescent Operating bankruptcy
         plan confirmed as quickly as possible. Crescent Operating currently
         believes that the Crescent Operating bankruptcy plan will be confirmed
         in the first quarter of 2003.

The Special Meeting

Q.       HOW DO I VOTE?

A.       After you carefully read this document, you may vote by proxy using any
         of the following means:

     -    by indicating on the enclosed proxy card how you want to vote, signing
          it, dating it and mailing it in the enclosed prepaid return envelope;

     -    by touchtone telephone from the U.S. and Canada, using the toll-free
          telephone number on the proxy card; or

     -    in person at the special meeting, unless you are a "street name"
          holder without a proxy signed by your broker.

         You should indicate your vote now by proxy even if you expect to attend
the special meeting and vote in person. Indicating your vote now will not
prevent you from later canceling or revoking your vote at any time prior to the
vote at the special meeting and will ensure that your shares are voted if you
later find you cannot attend the special meeting.

                                       9

Q.       CAN I CHANGE MY VOTE AFTER I HAVE VOTED BY PROXY?

A.       Yes. Unless you hold your shares in "street name" through your broker,
         you can change your vote prior to the taking of the vote at the special
         meeting:

     -    by giving written notice of revocation to the secretary of Crescent
          Operating;

     -    only if the prior vote was by written proxy, by properly submitting a
          duly executed proxy bearing a later date;

     -    only if the prior vote was by telephone, by casting a subsequent vote
          by telephone prior to the special meeting; or

     -    by voting in person at the special meeting.

         Only the last vote of a stockholder will be counted. For a more
complete description of voting procedures, see "The Special Meeting of Crescent
Operating Stockholders - Proxies."

Q.       IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY
         SHARES FOR ME?

A.       No. Unless you provide instructions to your broker on how to vote your
         "street name" shares, your broker will be unable to vote them for you.
         You should follow the directions provided by your broker regarding how
         to instruct your broker to vote your shares. If you wish to change your
         vote, you must contact your broker.

Q.       WHAT IS THE EFFECT OF MY FAILURE TO VOTE?

A.       If you sign and send in your proxy card and do not indicate how you
         want to vote, your shares will be voted in favor of acceptance of the
         Crescent Operating bankruptcy plan. If you do not return your proxy
         card, do not vote by telephone, or do not vote in person at the special
         meeting, your shares will not be voted. IF NOT ENOUGH STOCKHOLDERS OF
         CRESCENT OPERATING VOTE TO ACCEPT THE CRESCENT OPERATING BANKRUPTCY
         PLAN, THE BANKRUPTCY PLAN PROVIDES THAT NONE OF THE STOCKHOLDERS OF
         CRESCENT OPERATING WILL RECEIVE CRESCENT REAL ESTATE COMMON SHARES. See
         "The Special Meeting of Crescent Operating Stockholders - Effect of
         Abstentions and Broker Non-Votes" for more information regarding the
         effect of your failure to vote.

Q.       DO I NEED TO SEND ANYTHING IN ADDITION TO MY PROXY AT THIS TIME?

A.       No. If Crescent Real Estate issues common shares to Crescent Operating
         stockholders, then after you receive written notice that the Crescent
         Operating bankruptcy plan has become effective, the disbursement agent
         will send you a letter and written instructions relating to any
         information that is required from you to ensure that the stock
         certificates representing your Crescent Real Estate common shares are
         issued and delivered to you. You will receive your Crescent Real Estate
         common shares promptly after the disbursement agent receives the
         requested information from you.

Q.       WHO CAN HELP ANSWER MY QUESTIONS?

A.       If you would like additional copies of this document, or have any
         questions about the Crescent Operating bankruptcy plan, you should
         contact:

                                       10


                            Crescent Operating, Inc.
                 Attention: Jeffrey L. Stevens or Kiersten Thompson
                          777 Main Street, Suite 1240
                            Fort Worth, Texas 76102
                          Phone Number: (817) 321-1602


                                       11

                                     SUMMARY

         This summary highlights selected information presented in this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the Crescent Operating bankruptcy plan to be
voted on at the special meeting more fully, you should carefully read this
entire proxy statement/prospectus and the documents to which this proxy
statement/prospectus refers. See "Where You Can Find More Information." In
particular, you should read the documents attached to this proxy
statement/prospectus, including the Plan of Reorganization attached as Annex A
and the Settlement Agreement attached as Annex B, both of which are incorporated
by reference into this proxy statement/prospectus.

THE COMPANIES


CRESCENT OPERATING, INC.
777 Main Street, Suite 1240
Fort Worth Texas 76102
(817) 321-1602



Overview

         Crescent Operating, Inc., a Delaware corporation, was formed on April
1, 1997, by Crescent Real Estate. Effective June 12, 1997, Crescent Real Estate
distributed shares of Crescent Operating common stock to shareholders of
Crescent Real Estate and limited partners of Crescent Partnership, and, on that
date, Crescent Operating became a public company. Crescent Operating was formed
to be the lessee and operator of certain assets owned or to be acquired by
Crescent Real Estate.

         As of December 31, 2001, Crescent Operating, through various
subsidiaries and affiliates, had assets and operations consisting of four
business segments:

        -     equipment sales and leasing segment;

        -     hospitality segment;

        -     temperature-controlled logistics segment; and

        -     land development segment.



         In February and March 2002, pursuant to the terms of the Settlement
Agreement, Crescent Operating transferred to Crescent Real Estate, in lieu of
foreclosure, the assets of its hospitality segment, and, pursuant to a strict
foreclosure, the interests in its land development segment. As a result,
Crescent Operating no longer has operations in these two segments. In addition,
on February 6, 2002, Crescent Machinery Company, through which Crescent
Operating operates its equipment sales and leasing segment, filed for protection
under the federal bankruptcy laws. Crescent Machinery has filed schedules of
assets and liabilities in its bankruptcy case. Those schedules indicate that
virtually all of Crescent Machinery's assets are subject to lien claims of
certain secured lenders. Moreover, the schedules indicate that the collateral
securing the claims of these creditors has a value at or below the amount owed
to the lenders. In fact, the only unencumbered assets owned by Crescent
Machinery are several parcels of real estate that Crescent Machinery estimates
to have a fair market value of approximately $3.0 million and miscellaneous
inventory and accounts receivable of undetermined value. The value of the real
estate will need to be first used to pay administrative expense claims in the
bankruptcy case, after which it might be


                                       12

available for distribution to unsecured creditors. There are approximately $17.0
million of unsecured claims in the Crescent Machinery bankruptcy case. Crescent
Operating expects the Crescent Machinery creditors to object to Crescent
Operating receiving any distribution unless those creditors are paid in full.
Although there can be no assurance as to the outcome of the Crescent Machinery
bankruptcy case, Crescent Operating believes the prudent course is to estimate
that it would not receive a material distribution in respect of either its
unsecured claim in the Crescent Machinery case or in respect of its ownership of
100% of the Crescent Machinery common stock.

         As of the date of this proxy statement/prospectus, the only remaining
operating assets of Crescent Operating are its 40% interest in AmeriCold
Logistics, LLC and its 100% equity interest in Crescent Machinery.

Historical Operations

         As of December 31, 2001, Crescent Operating owned the following:

         -        The equipment sales and leasing segment, consisting of a 100%
                  interest in Crescent Machinery and its subsidiary, a
                  construction equipment sales, leasing and service company
                  which had as many as 18 locations in seven states. As of
                  September 30, 2002, Crescent Machinery operated nine locations
                  in three states.

         -        The hospitality segment, consisting of the following assets:

                  -        Crescent Operating's lessee interests in three
                           upscale business class hotels owned by Crescent Real
                           Estate. The hotels are the Denver Marriott City
                           Center, the Hyatt Regency Albuquerque, and the
                           Renaissance Hotel in Houston, Texas.

                  -        Lessee interests in three destination resort
                           properties owned by Crescent Real Estate. The
                           properties are the Hyatt Regency Beaver Creek, the
                           Ventana Inn and Spa and the Sonoma Mission Inn and
                           Spa (including the Sonoma Mission Inn Golf and
                           Country Club).

                  -        Lessee interests in two destination fitness resort
                           and spa properties owned by Crescent Real Estate. The
                           properties are Canyon Ranch-Tucson and Canyon
                           Ranch-Lenox.

                  -        A 5% economic interest in CRL Investments, Inc., or
                           CRL, which has an investment in the Canyon Ranch Day
                           Spa in the Venetian Hotel in Las Vegas, Nevada and
                           participates in the future use of the "Canyon Ranch"
                           name. Crescent Real Estate owned the remaining 95%
                           economic interest.

         Crescent Operating's lessee interests in these eight properties and its
interest in CRL are referred to as the hotel operations.

         -        The temperature-controlled logistics segment, consisting of a
                  40% interest in the operations of AmeriCold Logistics, LLC,
                  which operates 100 refrigerated storage properties with an
                  aggregate storage capacity of approximately 525 million cubic
                  feet. Crescent Real Estate has a 40% interest in AmeriCold
                  Corporation, which owned 89 of the 100 properties.

         -        The land development segment, consisting of the following
                  assets:

                                       13

         -        A 4.65% economic interest in Desert Mountain, a master
                  planned, luxury residential and recreational community in
                  northern Scottsdale, Arizona. Crescent Real Estate owned an
                  88.35% economic interest in Desert Mountain.

         -        A 52.5% general partner interest in The Woodlands Operating
                  Company, L.P.

         -        A 2.625% economic interest in The Woodlands Land Development
                  Company L.P. Crescent Real Estate owned a 49.875% economic
                  interest in this entity.

         -    A 60% general partner interest in COPI Colorado, LP, a company
              that has a 10% economic interest in Crescent Resort Development,
              Inc., or CRDI, formerly Crescent Development Management Corp.
              Crescent Real Estate owned the remaining 90% economic interest in
              CRDI.

         These interests are referred to as the land development interests.

Structure

         The following chart depicts the structure of Crescent Operating's
ownership of assets as of September 30, 2002. As a result of the transactions
described in this section, the entities in Crescent Operating's hospitality and
land development segments no longer hold any assets and, therefore, do not
appear on this chart. Subsequent to the consummation of the bankruptcy plan and
the reorganization transactions, Crescent Operating and its subsidiaries will be
dissolved.

                             [ORGANIZATIONAL CHART]

                                       14

CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(817) 321-2100


Overview

         Crescent Real Estate Equities Company was organized in 1994 and
operates as a real estate investment trust, or REIT, for federal income tax
purposes. Together with its subsidiaries, Crescent Real Estate provides
management, leasing and development services for some of its properties.

         Crescent Real Estate conducts all of its business through Crescent
Partnership and its other subsidiaries. Crescent Real Estate is structured to
facilitate and maintain the qualification of Crescent Real Estate as a REIT.
This structure permits persons contributing properties, or interests in
properties, to Crescent Real Estate to defer some or all of the tax liability
that they otherwise might have incurred in connection with the sale of assets to
Crescent Real Estate.


         In February 2002, pursuant to the terms of the Settlement Agreement,
Crescent Real Estate acquired from Crescent Operating, through transfers in lieu
of foreclosure, the interests in Crescent Operating's hospitality segment and,
pursuant to a strict foreclosure, the assets of Crescent Operating's land
development segment. Crescent Real Estate holds these assets and interests
through two newly organized corporations and one newly organized limited
liability company that are wholly owned subsidiaries of Crescent Real Estate, or
taxable REIT subsidiaries. Crescent Real Estate included these assets in its
resort/hotel and residential development segments beginning on the dates of the
transfers.


Historical Operations

         As of September 30, 2002, Crescent Real Estate's assets and operations
were composed of four major investment segments:

         -        office segment;

         -        resort/hotel segment;

         -        residential development segment; and

         -        temperature-controlled logistics segment.

Within these segments, Crescent Real Estate owned, directly or indirectly, the
following real estate, referred to as the Crescent Real Estate properties, as of
September 30, 2002.

         -        Office segment consisted of 73 office properties located in 25
                  metropolitan submarkets in six states with an aggregate of
                  approximately 28.5 million net rentable square feet.

         -        Resort/hotel segment consisted of five destination resort
                  properties with a total of 1,036 rooms/guest nights and four
                  upscale business-class hotels with a total of 1,771 rooms, or
                  the Crescent Real Estate hotel properties.

                                       15

         -        Residential development segment consisted of Crescent Real
                  Estate's ownership of real estate mortgages and voting and
                  non-voting common stock representing interests ranging from
                  94% to 100% in five unconsolidated residential development
                  corporations, which in turn, through joint venture or
                  partnership arrangements, owned 21 upscale residential
                  development properties. These are referred to as the Crescent
                  Real Estate residential development properties.

         -        Temperature-controlled logistics segment consisted of Crescent
                  Real Estate's 40% interest in a general partnership referred
                  to as the temperature-controlled logistics partnership, which
                  owns all of the common stock, representing substantially all
                  of the economic interest, of AmeriCold Corporation, a REIT,
                  which directly or indirectly owned 88 temperature-controlled
                  logistics properties, or the Crescent Real Estate
                  temperature-controlled logistics properties, with an aggregate
                  of approximately 441.5 million cubic feet, or 17.5 million
                  square feet, of warehouse space.

         -        Other Crescent Real Estate properties consisted of 9
                  behavioral healthcare properties.


AGREEMENT FOR TRANSFER OF CRESCENT OPERATING ASSETS TO CRESCENT REAL ESTATE


         On June 28, 2001, Crescent Operating and Crescent Real Estate entered
into an asset and stock purchase agreement in which Crescent Real Estate agreed
to acquire the hotel operations, the land development interests and other assets
in exchange for $78.4 million. Crescent Real Estate also entered into an
agreement to make a $10.0 million investment in Crescent Machinery, which, along
with capital from a third-party investment firm, was expected to put Crescent
Machinery on solid financial footing.

         Following the date of the agreements, the results of operations for the
hotel operations and the land development interests declined, due in part to the
slowdown in the economy after September 11. In addition, Crescent Machinery's
results of operations suffered because of the economic environment and the
overall reduction in national construction levels that has affected the
equipment rental and sale business, particularly post September 11. As a result,
Crescent Real Estate believes that a significant additional investment would
have been necessary to adequately capitalize Crescent Machinery and satisfy
concerns of Crescent Machinery's lenders.

         On January 23, 2002, Crescent Real Estate terminated the purchase
agreement pursuant to which Crescent Real Estate would have acquired the
Crescent Operating hotel operations, the Crescent Operating land development
interests and other assets. On February 4, 2002, Crescent Real Estate terminated
the agreement relating to its planned investment in Crescent Machinery.

         On February 6, 2002, Crescent Machinery filed for protection under the
federal bankruptcy laws.

         On February 12 and February 13, 2002, Crescent Real Estate delivered
default notices to Crescent Operating relating to approximately $49.0 million of
unpaid rent and approximately $76.2 million of principal and accrued interest
due to Crescent Real Estate under certain secured loans.


SETTLEMENT AGREEMENT

         On February 14, 2002, Crescent Operating and Crescent Real Estate
entered into the Settlement Agreement, which was amended effective October 1,
2002. The amendment provides for, among other things, a minimum value of
Crescent Real Estate common shares to be issued in connection with the
bankruptcy plan if the bankruptcy plan is accepted by the requisite vote of
Crescent Operating stockholders and confirmed by the bankruptcy court. The
Settlement Agreement provided the basis for Crescent Operating


                                       16

to file a prepackaged bankruptcy plan that Crescent Operating believes will
provide for a limited recovery to its stockholders. The principal terms of the
Settlement Agreement are set forth below.


         -        Pursuant to the Settlement Agreement, Crescent Operating
                  transferred the following assets, and related indebtedness,
                  to Crescent Real Estate:


                  -        all of its hotel operations, in lieu of foreclosure,
                           on February 14, 2002, in exchange for a $23.6 million
                           reduction in its rent obligations to Crescent Real
                           Estate; and

                  -        all of its land development interests pursuant to a
                           strict foreclosure on February 14, 2002 and March 22,
                           2002, in exchange for a $40.1 million reduction of
                           its debt obligations to Crescent Real Estate.


         -        If the bankruptcy court confirms the bankruptcy plan, Crescent
                  Real Estate will make sufficient funds available to Crescent
                  Operating to pay in full or otherwise resolve the claims of
                  the creditors that Crescent Operating identified in the
                  original Settlement Agreement and to cover the budgeted
                  expenses of implementing the Settlement Agreement and seeking
                  to confirm the bankruptcy plan. To facilitate Crescent
                  Operating's repayment of $15.0 million, plus interest, that it
                  owes to Bank of America, Crescent Real Estate has allowed
                  Crescent Operating to secure the Bank of America debt with a
                  pledge of Crescent Operating's interest in AmeriCold
                  Logistics, LLC. The Settlement Agreement and the bankruptcy
                  plan contemplate that a Crescent Real Estate affiliate will
                  purchase Crescent Operating's interest in AmeriCold Logistics
                  for between $15.0 to $15.5 million.


         -        If Crescent Operating's stockholders accept the bankruptcy
                  plan by the requisite vote and the bankruptcy court confirms
                  the bankruptcy plan, then Crescent Real Estate will issue
                  common shares of Crescent Real Estate to the Crescent
                  Operating stockholders pursuant to the formula contained in
                  the bankruptcy plan and described in "Summary - Summary of the
                  Plan of Reorganization" below. If the stockholders of Crescent
                  Operating do NOT accept the bankruptcy plan, they will NOT
                  receive a distribution of common shares of Crescent Real
                  Estate.

         -        Crescent Operating stockholders receiving Crescent Real Estate
                  shares, regardless of the value of the shares they receive,
                  will be deemed to have released all claims they may have
                  against Crescent Operating and Crescent Real Estate and those
                  acting on their behalf that arose before the effective date of
                  the bankruptcy plan. The release of Crescent Operating
                  stockholder claims will apply to Crescent Operating
                  stockholders only in their capacity as Crescent Operating
                  stockholders, and will not affect their rights as shareholders
                  of Crescent Real Estate. IF THE CRESCENT OPERATING
                  STOCKHOLDERS DO NOT CAST ENOUGH VOTES TO ACCEPT THE CRESCENT
                  OPERATING BANKRUPTCY PLAN, CRESCENT OPERATING WILL STILL SEEK
                  TO HAVE ITS BANKRUPTCY PLAN CONFIRMED BY THE BANKRUPTCY COURT
                  PURSUANT TO THE "CRAMDOWN" PROVISION OF THE BANKRUPTCY CODE.
                  IF THE BANKRUPTCY COURT CONFIRMS THE BANKRUPTCY PLAN, CRESCENT
                  OPERATING STOCKHOLDERS WILL NOT RECEIVE COMMON SHARES OF
                  CRESCENT REAL ESTATE BUT WILL STILL CEASE TO BE STOCKHOLDERS
                  OF CRESCENT OPERATING ON THE DATE THE BANKRUPTCY PLAN BECOMES
                  EFFECTIVE.

         -        Crescent Operating will cancel all outstanding shares of its
                  common stock.

                                       17

         -        Crescent Operating and Crescent Real Estate exchanged mutual
                  releases. Pursuant to the Settlement Agreement, Crescent
                  Operating and Crescent Real Estate and the directors,
                  officers, agents and employees of each will be released from
                  all liabilities and claims arising prior to the effective date
                  of the bankruptcy plan.

         -        Pursuant to both the Settlement Agreement and the bankruptcy
                  plan, Crescent Operating will transfer the remaining assets of
                  Crescent Operating at the direction of Crescent Real Estate.

         -        If Crescent Real Estate, in its sole discretion, offers to
                  settle or assume unsecured claims that were not identified by
                  Crescent Operating in the original Settlement Agreement and
                  that are asserted by third parties, and Crescent Operating
                  accepts the offer, then the total value of the Crescent Real
                  Estate common shares paid to Crescent Operating stockholders
                  will be reduced (but not below a total value of approximately
                  $2.16 million, or $0.20 per share of Crescent Operating common
                  stock) by the amount agreed to by Crescent Real Estate and
                  Crescent Operating, and approved by the bankruptcy court, as
                  compensation to Crescent Real Estate for assuming the claims.
                  If Crescent Real Estate and Crescent Operating are not able to
                  agree to Crescent Real Estate's assumption of any such
                  unresolved third party claims that were not identified by
                  Crescent Operating in the original Settlement Agreement and
                  that are an obstacle to confirmation of the Crescent Operating
                  bankruptcy plan, then it is possible that the bankruptcy plan
                  will not be confirmed.

         A copy of the Settlement Agreement, including the amendment to the
Settlement Agreement, is attached as Annex B to this proxy statement/prospectus.
Regardless of whether the bankruptcy plan is approved by Crescent Operating's
stockholders and/or confirmed by the bankruptcy court, (i) the Settlement
Agreement is effective, (ii) the mutual releases executed in connection with the
Settlement Agreement, including Crescent Operating's release of all claims it
may have against Crescent Real Estate, are enforceable, and (iii) Crescent Real
Estate is obligated to assist Crescent Operating in resolving creditor claims
identified by Crescent Operating in the original Settlement Agreement. Crescent
Operating does not believe that the Settlement Agreement or the releases
incorporated therein would be avoidable in bankruptcy if Crescent Operating
elected to file a bankruptcy case independent of the pre-packaged plan.

OTHER CRESCENT OPERATING RECENT DEVELOPMENTS


         Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. Crescent Operating, with the consent of
Crescent Partnership which agreed to subordinate its security interest in
Crescent Operating's 40% interest in AmeriCold Logistics, pledged all of its
interest in AmeriCold Logistics to Bank of America to secure the loan. On August
14, 2002, Bank of America further extended the maturity of this loan to January
15, 2003 and Crescent Operating prepaid interest for that time period in the
amount of $0.3 million. In January 2003, Bank of America further extended the
maturity of this loan to March 15, 2003 and Crescent Operating agreed to prepay
an additional two months of interest at the loan's current rate. These
modifications delay, but do not reduce, any liability that Mr. Rainwater and Mr.
Goff may have under the support agreement in which they personally agree to make
additional equity investments in Crescent Operating if and to the extent
Crescent Operating defaults on payment obligations on its line of credit with
Bank of America. Any further defaults by Crescent Operating under the line of
credit will revive the default that was waived under the August 2002 amendment
to the line of credit.

         Effective February 13, 2002, all of the directors of Crescent
Operating, other than Jeffrey L. Stevens, who became the sole director of
Crescent Operating, resigned. The four directors who resigned continue to serve
as trust managers of Crescent Real Estate. In addition, two of these directors,
Richard E. Rainwater and John C. Goff, also served as officers of both Crescent
Operating and Crescent Real


                                       18

Estate. Mr. Rainwater continues to serve as Chairman of the Board of Crescent
Real Estate and Mr. Goff continues to serve as Vice Chairman of the Board and
Chief Executive Officer of Crescent Real Estate. Both resigned from their
executive officer positions with Crescent Operating effective February 14, 2002.
The directors and officers who resigned determined that resignation was
advisable and in the interest of the Crescent Operating stockholders in order to
avoid potential conflicts of interest and the appearance of impropriety.


         On December 19, 2002, the Official Unsecured Creditors Committee of
Crescent Machinery Company, referred to in this proxy statement/prospectus as
the Crescent Machinery Committee, commenced a lawsuit in the District Court of
Tarrant County, Texas, styled "The Estates of Crescent Machinery and E.L.
Lester, Inc. v. Mark Roberson, Jeffrey Stevens, Gerald Haddock, Rick Knight and
Crescent Operating, Inc." The lawsuit seeks an unspecified amount of direct,
consequential and punitive damages, as well as related attorneys' fees, for
alleged breaches of fiduciary duty, aiding and abetting breaches of fiduciary
duty, negligent misrepresentation, and gross negligence. The Crescent Machinery
Committee has alleged that the creditors of Crescent Machinery have been damage
as a result of the following:

       -  lack of experienced management;

       -  failure to have a written acquisition plan;

       -  withdrawal of acquisition funding by Crescent Operating;

       -  accounting misstatements; and

       -  failure to restructure Crescent Machinery.

         Each of the named individual defendants was either an officer or
director, or both, of Crescent Machinery at the time the alleged breaches
occurred. Pursuant to the certificate of incorporation and bylaws of Crescent
Operating, each of the individual defendants may be entitled to indemnification
by Crescent Operating against some or all of the claims alleged in the lawsuit,
including reimbursement of reasonable attorney's fees incurred in defending the
lawsuit. Crescent Operating has director's and officer's liability insurance in
the face amount of $3.0 million that may afford coverage for these indemnity
claims. Nonetheless, if any of the Crescent Machinery Committee's claims against
these officers and directors are allowed in an amount in excess of any available
insurance, then that claim will have to be satisfied before any distribution
could be made to Crescent Operating's stockholders. Crescent Operating intends
to vigorously defend against the allegations and claims in the lawsuit. There is
a risk that substantial delays could result from the process in which the
Crescent Machinery Committee's lawsuit is adjudicated. In addition, there is a
risk that if the Crescent Machinery Committee were ultimately successful in the
prosecution of its lawsuit, or if Crescent Real Estate, pursuant to the
Settlement Agreement, offers to assume or settle any obligations under the
Crescent Machinery Committee's lawsuit and Crescent Operating accepts the offer,
the total value of the Crescent Real Estate common shares that the Crescent
Operating stockholders will receive will be reduced and the Crescent Operating
stockholders will receive fewer Crescent Real Estate common shares. There is
also a risk that the total obligations of Crescent Operating to the unsecured
creditors of Crescent Operating identified in the original Settlement Agreement,
plus newly asserted claims such as those in the lawsuit, will exceed the amount
of funds that Crescent Real Estate will make available to Crescent Operating for
the payment of such claims and that, as a result, the bankruptcy court will not
confirm the bankruptcy plan. However, even if Crescent Real Estate does offer to
assume or settle obligations under the Crescent Machinery Committee's lawsuit
and Crescent Operating accepts the offer, the total value of Crescent Real
Estate common shares that the Crescent Operating stockholders will be entitled
to receive will be at least $2.16 million, or $0.20 per share of Crescent
Operating common stock, if the bankruptcy plan is accepted by the Crescent
Operating stockholders and confirmed by the bankruptcy court. For more
information regarding this dispute, please see "Description of Crescent
Operating's Business - Legal Proceedings."


SUMMARY OF THE PLAN OF REORGANIZATION


         Crescent Operating's Plan of Reorganization, attached as Annex A to
this proxy statement/prospectus, is a bankruptcy plan that will be filed with
the Bankruptcy Court that is supported by the Settlement Agreement between
Crescent Operating and certain of its affiliates on the one hand and Crescent
Real Estate on the other hand. In the Settlement Agreement, Crescent Real Estate
has agreed to make funds available to Crescent Operating that Crescent Operating
will use to satisfy the claims of those creditors that Crescent Operating
identified in the original Settlement Agreement. Following the satisfaction of
all conditions to the bankruptcy plan, on the effective date of the bankruptcy
plan or the date upon which the bankruptcy plan becomes final, at Crescent Real
Estate's election, or as soon thereafter as practicable, a plan administrator
will make distributions to the holders of allowed claims against Crescent
Operating and prepare Crescent Operating for dissolution.


         The Plan of Reorganization provides that, upon its acceptance by the
Crescent Operating stockholders and its confirmation by the bankruptcy court,
Crescent Real Estate will pay on the effective date of the bankruptcy plan or
the date upon which the bankruptcy plan becomes final, at Crescent Real

                                       19

Estate's election, or as soon thereafter as practicable, to each holder of
Crescent Operating common stock the product of:

         -        the number of shares of Crescent Operating common stock owned
                  by such holder on the confirmation date, divided by the number
                  of shares of Crescent Operating common stock outstanding on
                  the confirmation date, and

         -        the consideration amount, as described below, divided by the
                  average of the daily closing prices per Crescent Real Estate
                  common share as reported on the New York Stock Exchange
                  Composite Transaction reporting system for the 10 consecutive
                  NYSE trading days immediately preceding confirmation of the
                  Crescent Operating bankruptcy plan by the bankruptcy court.

         The consideration amount will equal the greater of:


         -        approximately $2.16 million; or

         -        $16.0 million minus the total amount of payments made by
                  Crescent Real Estate for claims and expenses relating to the
                  Crescent Operating bankruptcy and the reorganization
                  transactions, including expenses of Crescent Real Estate but
                  excluding payments in satisfaction of the Bank of America
                  claim.

As of December 31, 2002, Crescent Real Estate had incurred approximately $8.5
million in claims and expenses and expects to incur an aggregate of $10.6
million to $13.8 million in total claims and expenses. Based on these estimates,
the consideration amount would be between $5.4 million and $2.16 million. If
there occurs a material variance in this estimated range of aggregate claims and
expenses after the date that Crescent Operating mails this proxy
statement/prospectus to its stockholders, then Crescent Operating will issue a
press release and file a Current Report on Form 8-K with the Securities and
Exchange Commission disclosing the material variance. Regardless of the total
amount of claims and expenses paid by Crescent Real Estate in connection with
the Crescent Operating bankruptcy and reorganization transactions, if the
bankruptcy plan is accepted by the Crescent Operating stockholders and confirmed
by the bankruptcy court, the stockholders of Crescent Operating will receive
common shares of Crescent Real Estate with a value of at least $2.16 million, or
$0.20 per share of Crescent Operating common stock.

         No certificate or scrip representing fractional Crescent Real Estate
common shares shall be issued, no cash share be paid in lieu of fractional
shares, and all fractional shares shall be rounded up or down to the nearest
whole Crescent Real Estate common share. If the Crescent Operating stockholders
accept the bankruptcy plan and the bankruptcy court confirms the bankruptcy
plan, the stockholders will be deemed to have released all claims they may have
against Crescent Operating and Crescent Real Estate, as well as their respective
officers, directors, stockholders, employees, consultants, attorneys,
accountants and other representatives, that arose prior to the effective date of
the bankruptcy plan. The release of Crescent Operating stockholder claims will
not apply to the claims, if any, of a person who sold its shares of Crescent
Operating common stock before the record date for voting on the bankruptcy plan
or who voted against the bankruptcy plan, abstained or did not vote on the
bankruptcy plan, and thereafter either did not receive or refused to accept a
distribution of Crescent Real Estate common shares. The releases of Crescent
Operating stockholder claims will apply to Crescent Operating stockholders only
in their capacity as Crescent Operating stockholders, and will not affect their
rights as holders of Crescent Real Estate common shares. The Crescent Operating
common stock will be cancelled upon confirmation of the bankruptcy plan. If the
Crescent Operating stockholders reject the bankruptcy plan, the Crescent
Operating stockholders will receive no distribution under the bankruptcy plan
and will not be deemed to have released any claims. Crescent Operating will seek
to


                                       20

have the bankruptcy plan confirmed over the objection of its stockholders if
they do not vote to accept the bankruptcy plan.

         The bankruptcy plan must be approved by certain of Crescent Operating's
creditors and the bankruptcy court before it can become effective. Please see
"The Plan of Reorganization - Confirmation of the Plan of Reorganization" for a
discussion of the requirements for confirmation.

RELEASE AND WAIVER OF CLAIMS BY CRESCENT OPERATING AND STOCKHOLDERS OF CRESCENT
OPERATING

         The bankruptcy plan provides that on its effective date, Crescent
Operating, on its own behalf and as representative of its bankruptcy estate,
will release unconditionally, and will be deemed to release unconditionally,
from any and all claims, obligations, suits, judgments, damages, rights, causes
of action and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, based in
whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or prior to the effective date of the bankruptcy plan
in any way relating to the releasees, Crescent Operating, the Chapter 11 case or
the bankruptcy plan:

         -        each of Crescent Operating's officers, directors,
                  shareholders, employees, consultants, attorneys, accountants
                  and other representatives;


         -        Crescent Partnership and each of Crescent Partnership's
                  officers, directors, partners, employees, consultants,
                  attorneys, accountants, affiliates and other representatives;

         -        Crescent Real Estate and each of Crescent Real Estate's
                  officers, trust managers, shareholders, employees,
                  consultants, attorneys, accountants, affiliates and other
                  representatives;


         -        the creditors' committee appointed in the Chapter 11
                  proceedings, if any; and

         -        solely in their capacity as members and representatives of the
                  creditors' committee, each member, consultant, attorney,
                  accountant or other representative of the creditors'
                  committee.

         The bankruptcy plan further provides that each holder of a claim or
interest:

         -        who has accepted the bankruptcy plan;

         -        whose claim or interest is in a class that has accepted or is
                  deemed to have accepted the bankruptcy plan pursuant to
                  section 1126 of the Bankruptcy Code; or


         -        who may be entitled to receive a distribution of property
                  pursuant to the bankruptcy plan, shall be deemed to have
                  unconditionally released the above releasees, from any and all
                  rights, claims, causes of action, obligations, suits,
                  judgments, damages and liabilities whatsoever which any such
                  holder may be entitled to assert, whether known or unknown,
                  foreseen or unforeseen, existing or hereafter arising, in law,
                  equity or otherwise, based in whole or in part upon any act or
                  omission, transaction, event or other occurrence taking place
                  on or before the effective date of the bankruptcy plan in any
                  way relating to Crescent Operating, the Chapter 11 case or the
                  bankruptcy plan, provided however, that the foregoing shall
                  not apply to all rights, claims and obligations created by or
                  arising under the bankruptcy plan.

         The release of Crescent Operating stockholder claims will not apply to
the claims, if any, of a person who sold its shares of Crescent Operating common
stock before the record date for voting on the bankruptcy plan or who voted
against the bankruptcy plan, abstained or did not vote, and thereafter either


                                       21

did not receive or refused to accept a distribution of Crescent Real Estate
common shares. The release of Crescent Operating stockholder claims also will
not apply if the holders of Crescent Operating common stock, voting as a class,
vote against the bankruptcy plan. The release of Crescent Operating stockholder
claims will apply to Crescent Operating stockholders only in their capacity as
Crescent Operating stockholders, and will not affect their rights as holders of
Crescent Real Estate common shares.

         In the event that the bankruptcy court concludes that the bankruptcy
plan cannot be confirmed without excising any portion of the release of claims
held by creditors and stockholders, then, with the consent of Crescent Real
Estate in its sole discretion, the bankruptcy plan may be confirmed with the
portion of the releases that the bankruptcy court finds is a bar to confirmation
excised so as to give effect as much as possible to the foregoing releases
without precluding confirmation of the bankruptcy plan. If Crescent Real Estate
does not consent to modification of the release, the bankruptcy plan will not be
confirmed and Crescent Real Estate will not be obligated to pay in full or
otherwise resolve the claims of the creditors that Crescent Operating identified
in the original Settlement Agreement or to make a distribution to Crescent
Operating stockholders.

         In substance, section 524(e) of the Bankruptcy Code provides that the
release of third party claims against a debtor such as Crescent Operating does
not release any other person. In addition to the release of Crescent Operating,
the bankruptcy plan includes releases of Crescent Real Estate and all current
and former officers and directors or trust managers of Crescent Operating or
Crescent Real Estate. It is the position of the Securities and Exchange
Commission that these additional releases violate section 524(e) unless separate
consideration is provided by the specific parties being released or the releases
are voluntary. Crescent Operating believes the releases contemplated by the
bankruptcy plan comply with section 524(e) of the Bankruptcy Code and applicable
law, both because Crescent Real Estate is paying substantial consideration to
Crescent Operating and its stockholders to obtain the releases provided under
the bankruptcy plan and because the releases are voluntary.

         As discussed in this proxy statement, Crescent Real Estate is providing
sufficient funds both to pay in full or otherwise resolve the claims of those
creditors of Crescent Operating identified in the original Settlement Agreement
and to cover budgeted expenses of Crescent Operating. In addition, Crescent Real
Estate is providing a distribution to Crescent Operating stockholders of
Crescent Real Estate common shares if the stockholders vote to accept the
bankruptcy plan and the bankruptcy court confirms the plan. Accordingly, the
consideration is being provided, either directly by the persons who receive the
benefit of the releases provided in the bankruptcy plan or on their behalf.
Whether this consideration for the releases is sufficient is an issue of fact
that the bankruptcy court has authority to determine.

         Crescent Operating also believes that the release by any stockholder
who accepts the bankruptcy plan is voluntary. Any Crescent Operating stockholder
who does not wish to provide the release may retain full rights to pursue claims
against Crescent Real Estate, Crescent Operating and their current and former
officers and directors or trust managers by voting against the bankruptcy plan,
abstaining or not voting, and either not receiving or refusing to accept any
distribution under the bankruptcy plan.

         The releases given by Crescent Operating to Crescent Real Estate in the
Settlement Agreement survive and are effective regardless of whether the
bankruptcy plan is confirmed or the releases described above are included in or
excised from the bankruptcy plan. The Crescent Operating release in the
Settlement Agreement includes a release of all derivative claims, which are
claims brought by a stockholder of a corporation to enforce, on behalf of the
corporation, a cause of action that belongs to the corporation.

                                       22

SPECIAL MEETING AND VOTING


         Crescent Operating will hold its special meeting of stockholders at The
Fort Worth Club, located at 306 West 7th Street, Fort Worth, Texas, on Thursday,
March 6, 2003, at 10:00 a.m. Central Time. At the special meeting, Crescent
Operating stockholders will be asked to consider and vote upon the acceptance of
the Crescent Operating bankruptcy plan.

         A majority of the outstanding shares of common stock of Crescent
Operating entitled to vote is necessary to constitute a quorum for the
transaction of business at the special meeting. The affirmative vote of
two-thirds or more of the votes cast in person or by proxy at the special
meeting is required for acceptance of the Crescent Operating bankruptcy plan.
The Bankruptcy Code deems a class of stockholders to have accepted a bankruptcy
plan if it is accepted by two-thirds of the votes cast at the special meeting,
rather than two-thirds of the outstanding shares. As a result, a failure to
vote, unlike a vote against the bankruptcy plan, has no effect on the outcome of
the vote on the bankruptcy plan, but will affect whether or not a quorum has
been reached at the special meeting.

         Only Crescent Operating stockholders of record as of the close of
business on the record date, January 8, 2003, are entitled to notice of, and to
vote at, the special meeting. At the close of business on the record date,
10,828,497 shares of Crescent Operating common stock were issued, outstanding
and entitled to vote at the special meeting. The trust managers and executive
officers of Crescent Real Estate own shares of Crescent Operating common stock
representing approximately 14.0% of the Crescent Operating common stock
outstanding on the record date and have advised the sole director of Crescent
Operating that they intend to vote their shares in favor of acceptance of the
Crescent Operating bankruptcy plan. Each outstanding share is entitled to one
vote. Shares cannot be voted at the special meeting unless the record holder
thereof is present or represented by proxy.


RECOMMENDATION OF SOLE DIRECTOR OF CRESCENT OPERATING


         Crescent Operating's sole director performed a comprehensive analysis
of Crescent Operating's strategic alternatives for maximizing creditor and
stockholder value. These alternatives, in the judgment of the sole director, are
unlikely to result in any significant recovery for the creditors, other than
Crescent Real Estate. Based upon the liquidation analysis of Crescent Operating,
the director determined that neither creditors, other than Crescent Real Estate,
nor Crescent Operating stockholders would receive anything in a liquidation of
Crescent Operating. Crescent Operating's sole director also consulted with
financial and legal advisors and obtained an opinion stating that the aggregate
consideration to be received by Crescent Operating and its stockholders, taken
as a whole, in connection with the transactions contemplated by the bankruptcy
plan and the Settlement Agreement is fair to the public stockholders from a
financial point of view, assuming a distribution of Crescent Real Estate common
shares with a value of $0.32 to $0.50. However, this opinion maintains that it
would not necessarily change if Crescent Real Estate were to advance additional
funds that reduce the value of Crescent Real Estate common shares to below
$0.32. Based on this information and analysis for Crescent Operating creditors
and stockholders, Crescent Operating's sole director determined that the
Crescent Operating bankruptcy plan was the best available alternative and the
alternative most likely to maximize stockholder value. Crescent Operating's sole
director performed these analyses and negotiated the bankruptcy plan and
Settlement Agreement independently from the persons then serving as the other
four members of the Crescent Operating Board of Directors, each of whom also
serves as a trust manager of Crescent Real Estate. In order to avoid any
conflicts of interest, none of these four directors participated in the
negotiations on behalf of Crescent Operating, and all of them resigned as
directors of Crescent Operating on February 13, 2002. One such director, John C.
Goff, participated in initial structuring of the proposed transactions, but did
not participate in any negotiations due to potential conflicts of interest.



                                       23

         The sole director is recommending that Crescent Operating stockholders
vote for acceptance of the Crescent Operating bankruptcy plan.

NO DISSENTERS' APPRAISAL RIGHTS

         There are no dissenters' appraisal rights available under applicable
state corporate law with respect to the reorganization transactions. If the
Crescent Operating bankruptcy plan is confirmed by the bankruptcy court, all
Crescent Operating stockholders will be bound by all of the terms and conditions
of the Crescent Operating bankruptcy plan, except that those stockholders who
vote against the bankruptcy plan, abstain or do not vote, and who thereafter
either do not receive or refuse to accept any distribution under the bankruptcy
plan, will not be deemed to have released the claims discussed in the bankruptcy
plan.

TAX CONSIDERATIONS

         The distribution of Crescent Real Estate common shares to Crescent
Operating stockholders will be treated as a distribution in liquidation of
Crescent Operating. Stockholders of Crescent Operating will realize gain or loss
based on the difference between their basis in their shares of Crescent
Operating common stock and the fair market value of the Crescent Real Estate
common shares they receive. In general, a Crescent Operating stockholder who is
not a dealer in securities must treat this gain or loss as a long term capital
gain or loss if the stockholder held the shares of Crescent Operating common
stock for more than one year or, otherwise, as a short term capital gain or
loss. If a stockholder acquired shares of Crescent Operating common stock at
different times, the determination of gain or loss and the holding period is
made on the facts specific to each share. The stockholders' basis in the
Crescent Real Estate common shares they will receive will be the fair market
value of the Crescent Real Estate common shares at the time of distribution.

INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION TRANSACTIONS


         Richard E. Rainwater, who serves as the Chairman of the Board of
Crescent Real Estate and served as the Chairman of the Board of Crescent
Operating until February 2002, and John C. Goff, who serves as Vice Chairman and
Chief Executive Officer of Crescent Real Estate and served as Vice Chairman,
President and Chief Executive Officer of Crescent Operating until February 2002,
have financial interests in the Crescent Operating bankruptcy plan. As of the
record date, Mr. Rainwater was the beneficial owner of approximately 11.5% of
the outstanding shares of Crescent Operating common stock and approximately
14.6% of the outstanding Crescent Real Estate common shares, including in each
case shares underlying vested options. As of the same date, Mr. Goff was the
beneficial owner of approximately 6.6% of the outstanding shares of Crescent
Operating common stock and approximately 4.1% of the outstanding Crescent Real
Estate common shares, including in each case shares underlying vested options.
As beneficial owners of Crescent Real Estate common shares, Messrs. Rainwater
and Goff may have interests in the Crescent Operating bankruptcy plan that
differ from those of beneficial owners of Crescent Operating common stock who
are also not owners of Crescent Real Estate common shares. As beneficial owners
of Crescent Operating common stock, Messrs. Rainwater and Goff will receive
Crescent Real Estate common shares if the Crescent Operating bankruptcy plan is
approved by the required vote of the shares of Crescent Operating common stock
and confirmed by the bankruptcy court. Messrs. Rainwater and Goff have stated an
intention to vote in favor of the bankruptcy plan.



         Messrs. Goff and Rainwater are also parties to a support agreement with
Crescent Operating and Bank of America whereby they have personally agreed to
make additional equity investments in Crescent Operating if and to the extent
Crescent Operating defaults on payment obligations on its line of credit with
Bank of America.


                                       24


         Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. The amendment to the line of credit also
waived Crescent Operating's default under the line of credit, as a result of
Crescent Operating's failure to pay the principal balance in full on December
31, 2001. During August 2002, Bank of America further extended the maturity of
this loan to January 15, 2003 and Crescent Operating prepaid interest for that
time period in the amount of $0.3 million. In January 2003, Bank of America
further extended the maturity of this loan to March 15, 2003 and Crescent
Operating agreed to prepay an additional two months of interest at the loan's
current rate. These modifications delay, but do not reduce, any liability that
Mr. Rainwater and Mr. Goff may have under the support agreement. Any future
defaults by Crescent Operating under the line of credit will revive the default
that was waived under the August 2002 amendment to the line of credit. In
connection with the Crescent Operating bankruptcy plan, it is expected that
Crescent Operating's line of credit with Bank of America will be fully repaid,
and Messrs. Goff and Rainwater will be relieved of their potential personal
liability under the support agreement. As of September 30, 2002, the aggregate
amount outstanding under the loan was $15.0 million.


         Mr. Goff was subject to conflicts of interest as a result of his
participation in the initial proposal of the Crescent Operating bankruptcy plan
and related agreements while serving simultaneously as an executive officer and
trust manager of Crescent Real Estate and as an executive officer of Crescent
Operating, but he did not participate in negotiations of the terms of the
Settlement Agreement or the bankruptcy plan.

         Additionally, Jeffrey L. Stevens, Crescent Operating's current chief
executive officer and sole director, will serve as plan administrator of
Crescent Operating's contemplated Chapter 11 bankruptcy. For more information
regarding the plan administrator, see "The Plan of Reorganization -
Implementation of the Plan of Reorganization - The Plan Administrator."

         In addition, pursuant to the Settlement Agreement and the Crescent
Operating bankruptcy plan, the current and former directors and officers of
Crescent Operating and the current and former trust managers and officers of
Crescent Real Estate will receive certain liability releases as described below
in "The Reorganization Transactions - Interests of Certain Persons in the
Reorganization Transactions" and "The Plan of Reorganization - Effects of the
Confirmation of the Plan of Reorganization - Releases."


         In February and March 2002, pursuant to the terms of the Settlement
Agreement, Crescent Operating transferred to Crescent Real Estate, in lieu of
foreclosure, the interests in its hospitality segment and, pursuant to a strict
foreclosure, the assets of its land development segment. Crescent Real Estate
holds these assets and interests through two newly organized corporations and
one newly organized limited liability company that are wholly owned subsidiaries
of Crescent Real Estate, or taxable REIT subsidiaries. In addition, in
connection with the execution of the Settlement Agreement, Crescent Real Estate
and Crescent Operating exchanged mutual releases. In pertinent part, Crescent
Operating released any and all claims that it might have against Crescent Real
Estate and its current and former trust managers and officers, and Crescent Real
Estate released any and all claims that it might have against Crescent Operating
and its current and former directors and officers arising at any time prior to
the original execution of the Settlement Agreement. This release remains
effective regardless of whether the bankruptcy plan is accepted by Crescent
Operating's stockholders and/or confirmed by the bankruptcy court.


         In addition, pursuant to the Crescent Operating bankruptcy plan,
Crescent Real Estate will receive certain liability releases from the Crescent
Operating stockholders as described in "The Plan of Reorganization - Effects of
Confirmation of the Plan of Reorganization - Releases" if the bankruptcy

                                       25

plan is accepted by the requisite vote of the Crescent Operating stockholders
and confirmed by the bankruptcy court.

                                       26

                                  RISK FACTORS


         Before voting in favor of the Crescent Operating bankruptcy plan, you
should be aware that there are risks associated with the Crescent Operating
bankruptcy plan and in receiving Crescent Real Estate common shares. You should
carefully consider these risk factors together with all of the information
included or incorporated by reference in this proxy statement/prospectus before
you decide to vote in favor of the Crescent Operating bankruptcy plan and
possibly receive Crescent Real Estate common shares. This section includes
certain forward-looking statements. Please refer to the explanation of the
qualifications and limitations on such forward-looking statements beginning on
Page 275.


RISKS ASSOCIATED WITH THE CRESCENT OPERATING BANKRUPTCY PLAN

         THE CRESCENT OPERATING BANKRUPTCY PLAN MAY NOT BE CONFIRMED BY THE
BANKRUPTCY COURT, AND CONFIRMATION IS A CONDITION TO THE DISTRIBUTION OF
CRESCENT REAL ESTATE COMMON SHARES TO CRESCENT OPERATING STOCKHOLDERS.


         There are many reasons why the Crescent Operating bankruptcy plan may
not be confirmed by the bankruptcy court. These reasons include the following:


         -        Crescent Operating may not receive the votes necessary to
                  accept the Crescent Operating bankruptcy plan.

         -        Even if Crescent Operating receives the votes necessary to
                  accept the Crescent Operating bankruptcy plan, the bankruptcy
                  court may decide not to confirm the Crescent Operating
                  bankruptcy plan because the Crescent Operating bankruptcy plan
                  provides that Crescent Operating and each holder of Crescent
                  Operating common stock on the confirmation date of the
                  Crescent Operating bankruptcy plan will be deemed to release
                  certain parties from specified liabilities. Crescent Operating
                  may not modify the bankruptcy plan to remove or alter the
                  releases without the consent of Crescent Real Estate. If
                  Crescent Real Estate does not consent to modification of the
                  release, the bankruptcy plan will not be confirmed and
                  Crescent Real Estate will not be obligated to pay in full or
                  otherwise resolve the claims of the creditors that Crescent
                  Operating identified in the original Settlement Agreement or
                  to make a distribution to Crescent Operating stockholders.

         -        Even if Crescent Operating receives the votes necessary to
                  accept the Crescent Operating bankruptcy plan, the bankruptcy
                  court may determine not to consider these votes if it
                  determines that (a) the Crescent Operating bankruptcy plan was
                  not transmitted to substantially all of Crescent Operating's
                  stockholders, (b) an unreasonably short time was prescribed
                  for Crescent Operating's stockholders to accept or reject the
                  Crescent Operating bankruptcy plan, (c) the solicitation was
                  not made in accordance with applicable nonbankruptcy law or,
                  if there is no such law, that this proxy statement/prospectus
                  does not contain adequate information for purposes of section
                  1125(a) of the Bankruptcy Code; or (d) the voting was not
                  limited to persons or entities that were stockholders of
                  record as of the record date.

         -        Even if Crescent Operating receives the votes necessary to
                  accept the Crescent Operating bankruptcy plan, the bankruptcy
                  court may still deny confirmation of the Crescent Operating
                  bankruptcy plan if it determines that the Crescent Operating
                  bankruptcy plan does not meet the requirements of applicable
                  law, including the applicable requirements of section 1129 of
                  the Bankruptcy Code, which requires the Crescent Operating
                  bankruptcy plan be in the "best

                                       27

                  interests" of dissenting members of impaired classes and be
                  "feasible." The requirement that a bankruptcy plan be in the
                  best interests of dissenting members of impaired classes
                  generally means that the value of the consideration to be
                  distributed under the Crescent Operating bankruptcy plan to
                  Crescent Operating's stockholders is not less than those
                  parties would receive if Crescent Operating were liquidated in
                  a hypothetical liquidation under Chapter 7 of the Bankruptcy
                  Code. Under the feasibility requirement, the bankruptcy court
                  must find that confirmation of the Crescent Operating
                  bankruptcy plan is not likely to be followed by the need for
                  further financial reorganization. Thus, Crescent Operating
                  cannot assure you that the bankruptcy court will determine
                  that the Crescent Operating bankruptcy plan is in the "best
                  interests" of dissenting members of impaired classes and is
                  "feasible."


         -        Even if Crescent Operating receives the votes necessary to
                  accept the Crescent Operating bankruptcy plan, Crescent
                  Operating is not permitted by the current bankruptcy plan to
                  seek confirmation of the plan if Crescent Operating cannot pay
                  all unsecured claims in full. Crescent Real Estate has agreed
                  to pay the unsecured claims against Crescent Operating that
                  were identified in the original Settlement Agreement. These
                  claims do not include the claims contained in the lawsuit
                  filed by the Crescent Machinery Committee. If Crescent Real
                  Estate does not offer to assume or settle these claims, or if
                  Crescent Real Estate offers to assume or settle these claims
                  and Crescent Operating does not accept the offer, Crescent
                  Operating will not have sufficient funds to pay its unsecured
                  creditors in full. Because the bankruptcy plan provides that
                  the unsecured creditors will be paid in full, the Bankruptcy
                  Code does not require Crescent Operating to solicit their
                  votes on the bankruptcy plan, and Crescent Operating has not
                  solicited their votes. As a result, Crescent Operating may not
                  seek confirmation of the bankruptcy plan unless the unsecured
                  creditors will be paid in full. The Bankruptcy Code also
                  prohibits Crescent Operating from making any distribution to
                  its stockholders if unsecured claims are not paid in full
                  unless the holders of the unsecured claims agree to such a
                  distribution. For these reasons, Crescent Operating does not
                  expect the bankruptcy court to confirm the current bankruptcy
                  plan if the total unsecured claims against Crescent Operating
                  exceed the amount that Crescent Real Estate will agree to make
                  available to pay unsecured claims. Further, Crescent Operating
                  does not expect Crescent Real Estate to pay unsecured claims
                  in addition to those identified in the original Settlement
                  Agreement without a reduction in the amount of the
                  distribution otherwise available to Crescent Operating
                  stockholders, although the distribution will not be reduced
                  below approximately $2.16 million, or $0.20 per share of the
                  Crescent Operating common stock.


         Crescent Operating no longer has assets that generate revenue. Crescent
Operating is currently operating based upon limited financial support from
Crescent Real Estate. If the Crescent Operating bankruptcy plan is not confirmed
and the reorganization transactions are not otherwise consummated, Crescent
Operating will be unable to continue to operate as a going concern and it is
likely that Crescent Operating would have to liquidate its assets. The auditor's
report filed in connection with Crescent Operating's annual report on Form 10-K
for the year ended December 31, 2001 is qualified by a reference to Crescent
Operating's recurring net losses, net capital deficiency, debts in default and
other liabilities which it is unable to liquidate in the normal course of
business. In addition, the auditor's report mentions the transfer the assets and
operations of Crescent Operating's hospitality and land development segments to
Crescent Real Estate, Crescent Operating's intent to file a pre-packaged
bankruptcy plan, and Crescent Machinery filing for bankruptcy. The auditor's
report states that "these conditions raise substantial doubt about the company's
ability to continue as a going concern."

                                       28

         THE RELEASE OF CRESCENT REAL ESTATE BY CRESCENT OPERATING AND THE
STOCKHOLDERS OF CRESCENT OPERATING AND THE RELEASE OF CRESCENT OPERATING AND ITS
OFFICERS AND DIRECTORS BY THE STOCKHOLDERS OF CRESCENT OPERATING MAY RESULT IN
THE RELEASE OF VIABLE CLAIMS.


         In connection with execution of the Settlement Agreement, Crescent
Operating released all claims that it had or might have had against Crescent
Real Estate and affiliates arising prior to the execution of the original
Settlement Agreement. To the extent that a stockholder has claims which are
derivative of, or derived from, those of Crescent Operating, those derivative
claims, which are claims that may be made by a stockholder of a corporation to
enforce, on behalf of the corporation a claim that belongs to the corporation,
were released in the Settlement Agreement, and are or will be effective whether
or not the Crescent Operating stockholders receive any common shares of Crescent
Real Estate. In addition, the bankruptcy plan provides that Crescent Operating
will release all claims that it has or might have against Crescent Real Estate
and affiliates, whether or not those claims arose prior to execution of the
Settlement Agreement. As a result, if the bankruptcy plan is confirmed, the
Crescent Operating stockholders will not, after confirmation, be able to pursue
any derivative claims against Crescent Real Estate and the other parties
released by Crescent Operating under the Settlement Agreement. Also, if the
Crescent Operating stockholders accept the bankruptcy plan and the bankruptcy
court confirms the bankruptcy plan, each Crescent Operating stockholder that is
a member of the class that accepted the bankruptcy plan and that was a holder on
the confirmation date will be deemed on the effective date of the bankruptcy
plan to unconditionally release certain parties, including, without limitation,
each of Crescent Operating's current and former officers and directors,
employees, agents, attorneys, financial advisors and other representatives,
Crescent Real Estate and each of Crescent Real Estate's current and former
officers and directors, employees, agents, attorneys, financial advisors,
affiliates and other representatives from all claims and liabilities relating to
the reorganization transactions, except for performance or nonperformance under
the Crescent Operating bankruptcy plan or any action or omission that
constitutes actual fraud or criminal behavior. The potential claims covered by
the Crescent Operating stockholders' release include direct claims against
Crescent Operating and its officers and directors and direct claims against
Crescent Real Estate and the other parties released by Crescent Operating under
the Settlement Agreement. However, if a stockholder of Crescent Operating sells
its stock before the voting record date for the bankruptcy plan or if a
stockholder votes against the bankruptcy plan, abstains from voting or does not
vote on the bankruptcy plan, and either does not receive or refuses to accept
any distribution of Crescent Real Estate common shares, that stockholder will
not release its direct claims. The releases of Crescent Operating stockholder
claims will apply to Crescent Operating stockholders only in their capacity as
Crescent Operating stockholders, and will not affect their rights as holders of
Crescent Real Estate common shares. As a result of the releases provided for in
the bankruptcy plan, confirmation of the bankruptcy plan may result in the
release of claims that a Crescent Operating stockholder could otherwise raise if
the bankruptcy court confirms the bankruptcy plan.


         IF THE CRESCENT OPERATING BANKRUPTCY PLAN IS NOT ACCEPTED BY THE
CRESCENT OPERATING STOCKHOLDERS, THE BANKRUPTCY PLAN MAY STILL BE CONFIRMED BY
THE BANKRUPTCY COURT, AND, IN THAT CASE, THE CRESCENT OPERATING STOCKHOLDERS
WOULD RECEIVE NOTHING.

         Section 1129(b) of the Bankruptcy Code contains provisions for the
confirmation of a bankruptcy plan even if the bankruptcy plan is not accepted by
the stockholders of Crescent Operating as long as the bankruptcy plan "does not
discriminate unfairly" and is "fair and equitable" with respect to such class.
This provision is commonly referred to as the "cramdown provision." Crescent
Operating anticipates that it would seek to utilize the "cramdown provision" of
section 1129(b) of the Bankruptcy Code if necessary to confirm the bankruptcy
plan. The bankruptcy plan provides that the stockholders of Crescent Operating
are entitled to receive common shares of Crescent Real Estate only if the
bankruptcy plan is accepted by the required vote of the Crescent Operating
stockholders. Accordingly, if the holders of Crescent Operating common stock,
voting as a class, vote against the bankruptcy plan and if the bankruptcy plan
is instead confirmed pursuant to the "cramdown provision" of section 1129(b) of
the

                                       29

Bankruptcy Code, the stockholders of Crescent Operating will receive nothing
under the bankruptcy plan, their shares of Crescent Operating common stock will
be canceled and the release of stockholder claims will not apply. However, the
Settlement Agreement and the mutual releases executed in connection with the
Settlement Agreement, including Crescent Operating's release of all claims it
may have against Crescent Real Estate, are enforceable whether or not the
bankruptcy plan is approved by Crescent Operating's stockholders or confirmed by
the bankruptcy court.

         CRESCENT OPERATING STOCKHOLDERS MAY RECEIVE FEWER CRESCENT REAL ESTATE
COMMON SHARES AS A RESULT OF INCREASED CLAIMS AND EXPENSES AGAINST CRESCENT
OPERATING.


         As payments by Crescent Real Estate for claims and expenses relating to
the Crescent Operating bankruptcy and the reorganization transactions, including
the expenses of Crescent Real Estate but excluding payments in satisfaction of
the Bank of America claim, increase, the total value of the Crescent Real Estate
common shares that the Crescent Operating stockholders will receive will be
reduced and the Crescent Operating stockholders will receive fewer Crescent Real
Estate common shares. The total value of the Crescent Real Estate common shares
that the Crescent Operating stockholders will receive is equal to the greater of
(a) approximately $2.16 million and (b) $16.0 million minus the total amount of
any payments by Crescent Real Estate for claims and expenses relating to the
Crescent Operating bankruptcy and the reorganization transactions, including the
expenses of Crescent Real Estate but excluding payments in satisfaction of the
Bank of America claim. As of December 31, 2002, Crescent Real Estate had
incurred approximately $8.5 million in claims and expenses in connection with
the Crescent Operating bankruptcy and the reorganization transactions.
Currently, Crescent Real Estate and Crescent Operating estimate that Crescent
Real Estate will advance the funds to pay in full or otherwise resolve total
claims and expenses of between $10.6 million and $13.8 million. Accordingly, the
total value of the Crescent Real Estate common shares issued to the Crescent
Operating stockholders is expected to be between $5.4 million and $2.16 million,
or $0.50 to $0.20 per share of Crescent Operating common stock. In addition, if
Crescent Real Estate, pursuant to the Settlement Agreement, offers to assume or
settle any obligations arising from the lawsuit brought by the Crescent
Machinery Committee or another unsecured claim not identified in the original
Settlement Agreement and Crescent Operating accepts the offer, the total value
of the Crescent Real Estate common shares that the Crescent Operating
stockholders will receive will be reduced and the Crescent Operating
stockholders will receive fewer Crescent Real Estate common shares. However,
even if Crescent Real Estate does offer to assume or settle obligations under
the Crescent Machinery Committee's lawsuit and Crescent Operating accepts the
offer, then the total value of the Crescent Real Estate common shares that the
Crescent Operating stockholders will be entitled to receive if the bankruptcy
plan is accepted by the Crescent Operating stockholders and confirmed by the
bankruptcy court will be at least $2.16 million, or $0.20 per share of Crescent
Operating common stock. More information regarding the Crescent Machinery
Committee's claim, is set forth in "Description of Crescent Operating's Business
- Legal Proceedings."


         LIMITATIONS ON THE SCOPE OF HOULIHAN LOKEY'S FAIRNESS OPINION COULD
LEAD CRESCENT OPERATING STOCKHOLDERS TO ASSIGN TOO MUCH IMPORTANCE TO THE
FAIRNESS OPINION IN MAKING THEIR DECISION ON WHETHER TO VOTE TO APPROVE THE
BANKRUPTCY PLAN.

         Houlihan Lokey's fairness opinion is limited in scope and is subject to
various qualifications and assumptions. These limitations, qualifications and
assumptions include the following:


         -        the opinion covers only the fairness to the public
                  stockholders of Crescent Operating of the aggregate
                  consideration to be received by Crescent Operating and its
                  stockholders, taken as a whole, in connection with the
                  transactions contemplated by the bankruptcy plan from a
                  financial point of view and does not opine as to the overall
                  fairness of the bankruptcy plan and the Settlement Agreement
                  to the stockholders;


                                       30

         -        the opinion assumes that the stockholders will receive common
                  shares of Crescent Real Estate with a value of between $0.32
                  and $0.50 per share of Crescent Operating, but it maintains
                  that it would not necessarily change if Crescent Real Estate
                  were to advance additional funds, as Crescent Real Estate
                  agreed to do in the October 2002 amendment to the Settlement
                  Agreement and as described below in "The Reorganization
                  Transaction - Summary of the Reorganization Transactions -
                  Payment by Crescent Real Estate of Crescent Operating Claims
                  and Expenses," that reduced the value of Crescent Real Estate
                  common shares to below $0.32; and

         -        the opinion does not attribute any value to the potential
                  claims against Crescent Real Estate that are being released by
                  Crescent Operating and its stockholders in connection with the
                  bankruptcy plan.

         In addition, the opinion predates the First Amendment to the Settlement
Agreement pursuant to which Crescent Real Estate agreed to issue a minimum
number of its common shares to Crescent Operating stockholders if the bankruptcy
plan is accepted by the Crescent Operating stockholders and approved by the
bankruptcy court. Further, since the date of the opinion, the estimated claims
and expenses to be paid by Crescent Real Estate in connection with the
reorganization transactions have increased as a result of delays in the
commencement of Crescent Operating's solicitation of the vote of its
stockholders that have resulted in, among other things, higher legal and
accounting expenses of Crescent Real Estate and Crescent Operating and ongoing
interest charges and other expenses incurred by Crescent Operating. Accordingly,
the total value of Crescent Real Estate and Crescent Operating common stock
issuable to Crescent Operating stockholders is currently expected to be between
$0.20 and $0.50 per share of the Crescent Operating common stock, rather than
the $0.32 to $0.50 that Houlihan Lokey determined was fair to the Crescent
Operating stockholders from a financial point of view.

         Accordingly, you should consider the following factors that are not
covered by the fairness opinion:


         -        whether the value of the Crescent Real Estate common shares
                  will be within the range assumed in the fairness opinion,
                  particularly since the current estimated value is between
                  $0.20 (which is less than the low end of the range that
                  Houlihan Lokey concluded was fair to the Crescent Operating
                  stockholders from a financial point of view) and $0.50 and
                  since the claims and allegations in the lawsuit filed by the
                  Crescent Machinery Committee were made after the issuance of
                  the fairness opinion;


         -        the value and likelihood of recovery of the potential claims
                  against Crescent Real Estate that are being released as a part
                  of the overall transaction; and

         -        the alternatives to the bankruptcy plan that are or may be
                  available to the Crescent Operating stockholders and the
                  likelihood of their success.

         For information related to Crescent Operating's analysis of these
factors, please see "The Reorganization Transactions - Analysis of
Alternatives."

         THE SOLE DIRECTOR AND FORMER OFFICERS AND DIRECTORS OF CRESCENT
OPERATING HAVE INTERESTS IN THE ACCEPTANCE OF THE CRESCENT OPERATING BANKRUPTCY
PLAN THAT MAY CONFLICT WITH THE INTERESTS OF CRESCENT OPERATING'S STOCKHOLDERS.


         The sole director and the former directors and officers of Crescent
Operating received liability releases for events prior to execution of the
Settlement Agreement. If the Crescent Operating bankruptcy plan


                                       31

becomes effective, these persons also will receive liability releases through
the effective date of the bankruptcy plan. Richard E. Rainwater and John C.
Goff, who are officers and trust managers of Crescent Real Estate and who were
officers and directors of Crescent Operating, also have a financial interest in
the reorganization transactions. See "The Reorganization Transactions -
Interests of Certain Persons in the Reorganization Transactions" for a more
detailed description of these and other benefits to current and former officers
and directors of Crescent Operating resulting from the reorganization
transactions.


         LIABILITY RELEASES. Upon approval of the Crescent Operating bankruptcy
plan, in addition to the releases that Crescent Operating granted in connection
with the Settlement Agreement, which are already effective, each of the present
and former officers and directors of Crescent Operating will be released from
substantially all claims and liabilities related to Crescent Operating's
business, the bankruptcy case, the reorganization transactions, and the Crescent
Operating bankruptcy plan and will be entitled to indemnification to the fullest
extent permitted under applicable law if the Crescent Operating bankruptcy plan
is confirmed.

         OTHER INTERESTS. As of January 8, 2003, Richard E. Rainwater, the
Chairman of the Board of Crescent Real Estate, and John C. Goff, the Chief
Executive Officer, President and Vice Chairman of the Board of Crescent Real
Estate, together with the other trust managers and executive officers of
Crescent Real Estate, beneficially owned an approximately 18.5% equity interest
in Crescent Real Estate in the aggregate. In addition, as of January 8, 2003,
Messrs. Rainwater and Goff beneficially owned an aggregate of approximately
17.4% of the outstanding common stock of Crescent Operating through their
aggregate ownership of Crescent Operating common stock, including shares
underlying vested options. As equity owners of both Crescent Real Estate and
Crescent Operating, and as persons who, until February 2002, also served as
directors and executive officers of Crescent Operating, Messrs. Goff and
Rainwater have a potential conflict of interest in voting on the acceptance of
the Crescent Operating bankruptcy plan and reorganization transactions.
Additionally, Mr. Goff was subject to conflicts of interests as a result of his
participation in the initial proposal of the Crescent Operating bankruptcy plan
and related agreements while serving simultaneously as an executive officer and
trust manager of Crescent Real Estate and as an executive officer of Crescent
Operating. Neither Mr. Rainwater nor, once the original structure of the
bankruptcy plan and reorganization transactions was proposed, Mr. Goff
participated in the negotiation of the Crescent Operating bankruptcy plan and
reorganization transactions, in order to avoid potential conflicts of interest
and the appearance of impropriety.


         THE SETTLEMENT AGREEMENT MAY BE TERMINATED AND CRESCENT OPERATING WOULD
BE UNABLE TO CONFIRM THE CRESCENT OPERATING BANKRUPTCY PLAN.


         If the Settlement Agreement were terminated, Crescent Operating would
be unable to confirm the Crescent Operating bankruptcy plan as currently
proposed, and no alternative to the Crescent Operating bankruptcy plan may be
available or, if available, such alternatives may not be as favorable to the
Crescent Operating stockholders as the Crescent Operating bankruptcy plan. The
Settlement Agreement may be terminated at any time prior to the effective date
of the bankruptcy plan by mutual agreement of Crescent Operating and Crescent
Real Estate, or by either Crescent Operating or Crescent Real Estate if the
other is in material breach after notice and a 10-business-day opportunity to
cure. See "The Reorganization Transactions - Summary of the Reorganization
Transactions - Other Material Terms of the Settlement Agreement" for a
discussion of the events that could lead to the termination of the Settlement
Agreement.


                                       32

         THE SETTLEMENT AGREEMENT LIMITS CRESCENT OPERATING'S ABILITY TO
UNDERTAKE ALTERNATIVE TRANSACTIONS WITH ANYONE OTHER THAN CRESCENT REAL ESTATE,
AND THIS LIMITATION COULD DISCOURAGE THIRD PARTIES FROM MAKING PROPOSALS THAT
WOULD BE MORE FAVORABLE TO CRESCENT OPERATING STOCKHOLDERS THAN THE CRESCENT
OPERATING BANKRUPTCY PLAN.

         The Settlement Agreement places substantial restrictions on Crescent
Operating's ability to contact, solicit, encourage or pursue possible
alternative transactions with any person other than Crescent Real Estate. These
provisions could have the effect of discouraging third parties that might
otherwise have an interest in making a proposal with respect to a transaction
that could result in distributions to Crescent Operating's stockholders that
exceed those provided under the Settlement Agreement and the Crescent Operating
bankruptcy plan. See "The Reorganization Transactions - Summary of the
Reorganization Transactions - Other Material Terms of the Settlement Agreement -
Covenants of Crescent Operating" for a discussion of these provisions.

RISKS ASSOCIATED WITH AN INVESTMENT IN CRESCENT REAL ESTATE COMMON SHARES


         The risk factors enumerated below assume the confirmation and
consummation of the Crescent Operating bankruptcy plan and all transactions
contemplated by the bankruptcy plan, and do not include matters that could
prevent or delay confirmation of the Crescent Operating bankruptcy plan.

         CRESCENT REAL ESTATE MAY BE UNABLE TO INTEGRATE CRESCENT OPERATING'S
RESORT/HOTEL AND RESIDENTIAL DEVELOPMENT SEGMENTS INTO ITS OPERATIONS
SUCCESSFULLY.

         In the first quarter of 2002, in satisfaction of a portion of its
outstanding debt and rental obligations to Crescent Real Estate, Crescent
Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
foreclosure, its lessee interests in eight resort/hotel properties that it
leased from Crescent Real Estate and, pursuant to a strict foreclosure, its
voting interests in three of Crescent Real Estate's residential development
corporations, in which Crescent Real Estate already owned the nonvoting stock,
and other assets. Crescent Real Estate will face significant challenges in
integrating Crescent Operating's hotel and residential development segments into
Crescent Real Estate's resort/hotel and residential development segments in a
timely and efficient manner. The integration will be complex and time-consuming.
The consolidation of operations will require substantial attention from
management. The diversion of management attention and any difficulties
encountered in the transition and integration process, as well as any
unanticipated or undisclosed liabilities, could adversely affect Crescent Real
Estate's results of operations and its ability to make distributions to its
shareholders and decrease its cash flow. In addition, if the transfers are
challenged by Crescent Operating's stockholders or creditors or other claims are
made, Crescent Real Estate could incur additional costs in defending its
position. These risks would increase if the Crescent Operating bankruptcy plan
were not consummated.

         CRESCENT REAL ESTATE'S PERFORMANCE AND VALUE ARE SUBJECT TO GENERAL
RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.

         Crescent Real Estate's economic performance and the value of its real
estate assets, and consequently the value of its investments, are subject to the
risk that if its office, resort/hotel, residential development and
temperature-controlled logistics properties do not generate revenues sufficient
to meet its operating expenses, including debt service and capital expenditures,
its cash flow and ability to pay distributions to its shareholders will be
adversely affected. As a real estate company, Crescent Real Estate is
susceptible to the following real estate industry risks:

         -        downturns in the national, regional and local economic
                  conditions where its properties are located;

                                       33

         -        competition from other office, resort/hotel, residential
                  development and temperature-controlled logistics properties;

         -        adverse changes in local real estate market conditions, such
                  as oversupply or reduction in demand for office space,
                  resort/hotel space, luxury residences or
                  temperature-controlled logistics storage space;

         -        changes in tenant preferences that reduce the attractiveness
                  of its properties to tenants;

         -        tenant defaults;

         -        zoning or regulatory restrictions;

         -        decreases in market rental rates;

         -        costs associated with the need to periodically repair,
                  renovate and relet space;

         -        increases in the cost of adequate maintenance, insurance and
                  other operating costs, including real estate taxes, associated
                  with one or more properties, which may occur even when
                  circumstances such as market factors and competition cause a
                  reduction in revenues from one or more properties; and

         -        illiquidity of real estate investments, which may limit its
                  ability to vary its portfolio promptly in response to changes
                  in economic or other conditions.

         CRESCENT REAL ESTATE MAY EXPERIENCE DIFFICULTY OR DELAY IN RENEWING
LEASES OR RE-LEASING SPACE.

         Crescent Real Estate derives most of its revenue directly or indirectly
from rent received from its tenants. Crescent Real Estate is subject to the
risks that, upon expiration, leases for space in its office properties may not
be renewed, the space may not be re-leased, or the terms of renewal or re-lease,
including the cost of required renovations or concessions to tenants, may be
less favorable than current lease terms. As a result, Crescent Real Estate's
cash flow could decrease and its ability to make distributions to its
shareholders could be adversely affected.

         As of September 30, 2002, office properties with leases with respect to
approximately 1.7 million, 3.6 million and 4.4 million square feet, representing
approximately 7%, 14%, and 17% of net rentable area, expire in 2002, 2003 and
2004, respectively. During these same three years, leases of approximately 34%
of the net rentable area of Crescent Real Estate's office properties in Dallas
and approximately 42% of the net rentable area of its office properties in
Houston expire.

         MANY REAL ESTATE COSTS ARE FIXED, EVEN IF INCOME FROM CRESCENT REAL
ESTATE'S PROPERTIES DECREASES.

         Crescent Real Estate's financial results depend primarily on leasing
space in its office properties to tenants, renting rooms at its resorts and
hotels and successfully developing and selling lots, single family homes,
condominiums, town homes and time share units at Crescent Real Estate's
residential development properties, in each case on terms favorable to Crescent
Real Estate. Costs associated with real estate investment, such as real estate
taxes and maintenance costs, generally are not reduced even when a property is
not fully occupied, the rate of sales at a project decreases, or other
circumstances cause a reduction in income from the investment.

                                       34

         As a result, cash flow from the operations of Crescent Real Estate's
office properties may be reduced if a tenant does not pay its rent. Under those
circumstances, Crescent Real Estate might not be able to enforce its rights as
landlord without delays, and may incur substantial legal costs. The income from
Crescent Real Estate's office properties also may be reduced if tenants are
unable to pay rent or Crescent Real Estate is unable to rent properties on
favorable terms. Crescent Real Estate's income from its resorts and hotels may
be reduced if it is unable to rent a sufficient number of rooms on favorable
terms, and Crescent Real Estate's income from its residential development
properties may decrease if it is unable to sell the lots or other components of
a particular residential development project at the rates or on the terms it
anticipated. Additionally, new properties that Crescent Real Estate may acquire
or develop may not produce any significant revenue immediately, and the cash
flow from existing operations may be insufficient to pay the operating expenses
and debt service associated with that property until the property is fully
leased.

         CRESCENT REAL ESTATE DERIVES THE SUBSTANTIAL MAJORITY OF ITS OFFICE
RENTAL REVENUES FROM ITS GEOGRAPHICALLY CONCENTRATED MARKETS.

         As of September 30, 2002, approximately 73% of Crescent Real Estate's
office portfolio, based on total net rentable square feet, representing 63% of
its total revenues for the year ended December 31, 2001, was located in the
metropolitan areas of Dallas/Fort Worth and Houston, Texas. Due to this
geographic concentration, any deterioration in economic conditions in the
Dallas/Fort Worth or Houston metropolitan areas, or in other geographic markets
in which Crescent Real Estate in the future may acquire substantial assets,
could adversely affect Crescent Real Estate's results of operations and its
ability to make distributions to its shareholders and decrease its cash flow. In
addition, Crescent Real Estate competes for tenants based on rental rates,
attractiveness and location of a property and quality of maintenance and
management services. An increase in the supply of properties competitive with
Crescent Real Estate's properties in these markets could have a material adverse
effect on Crescent Real Estate's ability to attract and retain tenants in these
markets.

         CRESCENT REAL ESTATE MAY HAVE LIMITED FLEXIBILITY IN DEALING WITH ITS
JOINTLY OWNED INVESTMENTS.

         Crescent Real Estate's organizational documents do not limit the amount
of funds that it may invest in properties and assets jointly with other persons
or entities. Approximately 12% of the net rentable area of Crescent Real
Estate's office properties is held jointly with other persons or entities. In
addition, as of September 30, 2002, all of Crescent Real Estate's residential
development and temperature-controlled logistics properties were owned jointly.

         Joint ownership of properties may involve special risks, including the
possibility that Crescent Real Estate's partners or co-investors might become
bankrupt, that those partners or co-investors might have economic or other
business interests or goals which are unlike or incompatible with Crescent Real
Estate's business interests or goals, and that those partners or co-investors
might be in a position to take action contrary to Crescent Real Estate's
suggestions or instructions, or in opposition to Crescent Real Estate's policies
or objectives. Joint ownership gives a third party the opportunity to influence
the return Crescent Real Estate can achieve on some of its investments and may
adversely affect Crescent Real Estate's ability to make distributions to its
shareholders. In addition, in many cases Crescent Real Estate does not control
the timing or amount of distributions that it receives from the joint
investment, and amounts otherwise available for distribution to Crescent Real
Estate may be reinvested in the property or used for other costs and expenses of
the joint operation.

         ACQUISITIONS AND NEW DEVELOPMENTS MAY FAIL TO PERFORM AS EXPECTED.

                                       35

         Crescent Real Estate intends to focus its investment strategy primarily
on investment opportunities and markets considered "demand-driven" within its
office property segment, with a long-term strategy of acquiring properties at a
cost significantly below that which would be required to develop a comparable
property. Acquisition or development of properties entails risks that include
the following, any of which could adversely affect Crescent Real Estate's
results of operations and its ability to meet its obligations:

         -        Crescent Real Estate may not be able to identify suitable
                  properties to acquire or may be unable to complete the
                  acquisition of the properties it selects for acquisition;

         -        Crescent Real Estate may not be able to integrate new
                  acquisitions into its existing operations successfully;

         -        Crescent Real Estate's estimate of the costs of improving,
                  repositioning or redeveloping an acquired property may prove
                  to be too low, and, as a result, the property may fail to meet
                  Crescent Real Estate's estimates of the profitability of the
                  property, either temporarily or for a longer time;

         -        Office properties, resorts or hotels Crescent Real Estate
                  acquires may fail to achieve the occupancy and rental or room
                  rates Crescent Real Estate anticipates at the time it makes
                  the decision to invest in the properties, resulting in lower
                  profitability than expected in analyzing the properties;

         -        Crescent Real Estate's pre-acquisition evaluation of the
                  physical condition of each new investment may not detect
                  certain defects or necessary repairs until after the property
                  is acquired, which could significantly increase Crescent Real
                  Estate's total acquisition costs; and

         -        Crescent Real Estate's investigation of a property or building
                  prior to its acquisition, and any representations it may
                  receive from the seller, may fail to reveal various
                  liabilities, which could effectively reduce the cash flow from
                  the property or building, or increase Crescent Real Estate's
                  acquisition cost.

         CRESCENT REAL ESTATE MAY BE UNABLE TO SELL PROPERTIES WHEN APPROPRIATE
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID.

         Real estate investments generally cannot be sold quickly. In addition,
there are some limitations under federal income tax laws applicable to REITs
that may limit Crescent Real Estate's ability to sell its assets. Crescent Real
Estate may not be able to alter its portfolio promptly in response to changes in
economic or other conditions. Crescent Real Estate's inability to respond
quickly to adverse changes in the performance of its investments could have an
adverse effect on Crescent Real Estate's ability to meet its obligations and
make distributions to its shareholders.

         THE REVENUES FROM CRESCENT REAL ESTATE'S NINE HOTEL PROPERTIES, EVEN
AFTER ACQUISITIONS OF THE CRESCENT OPERATING HOTEL OPERATIONS, DEPEND ON
THIRD-PARTY OPERATORS THAT CRESCENT REAL ESTATE DOES NOT CONTROL.

         Crescent Real Estate owns nine hotel properties, eight of which are
leased to Crescent Real Estate's subsidiaries. Crescent Real Estate currently
leases the remaining hotel property, the Omni Austin Hotel, to a third party
entity, HCD Austin Corporation. To maintain Crescent Real Estate's status as a
REIT, third-party property managers manage each of the nine hotel properties. As
a result, Crescent Real

                                       36

Estate is unable to directly implement strategic business decisions with respect
to the operation and marketing of its hotel properties, such as decisions with
respect to the quality of accommodations, room rate structure, the quality and
scope of amenities such as food and beverage facilities and similar matters. The
amount of revenue that Crescent Real Estate receives from the hotel properties
is dependent on the ability of the property managers to maintain and increase
the gross receipts from these properties. Although Crescent Real Estate consults
with the managers with respect to strategic business plans, the managers are
under no obligation to implement any of Crescent Real Estate's recommendations
with respect to these matters. If the gross receipts of the resort/hotels
decline, Crescent Real Estate's revenues would decrease as well, which could
reduce the amount of cash available to meet its obligations and for distribution
to its shareholders.

         THE REVENUES FROM CRESCENT REAL ESTATE'S NINE HOTEL PROPERTIES ARE
SUBJECT TO RISKS ASSOCIATED WITH THE HOSPITALITY INDUSTRY.

         The following factors, among others, are common to the resort/hotel
industry, and may reduce the receipts generated by Crescent Real Estate's hotel
properties:

         -        based on such features as access, location, quality of
                  accommodations, room rate structure and, to a lesser extent,
                  the quality and scope of other amenities such as food and
                  beverage facilities, Crescent Real Estate's hotel properties
                  compete for guests with other resorts and hotels, a number of
                  which have greater marketing and financial resources than the
                  lessees or the hotel property managers;

         -        if there is an increase in operating costs resulting from
                  inflation or other factors, Crescent Real Estate or the
                  property managers may not be able to offset such increase by
                  increasing room rates;

         -        Crescent Real Estate's hotel properties are subject to
                  fluctuating and seasonal demands for business travelers and
                  tourism; and

         -        Crescent Real Estate's hotel properties are subject to general
                  and local economic conditions that may affect the demand for
                  travel in general and other factors that are beyond Crescent
                  Real Estate's control, such as acts of terrorism.

         In addition, Crescent Real Estate's hotel properties have experienced a
decrease in occupancy rates, revenue per available room and total revenue since
September 11, 2001. For the year ended December 31, 2001, compared to the year
ended December 31, 2000, the weighted average occupancy of Crescent Real
Estate's hotel properties decreased approximately 6%, the average daily rate
decreased approximately 3%, revenue per available room decreased approximately
6% and same store net operating income decreased by an average of 16%. For the
nine months ended September 30, 2002, compared to the nine months ended
September 30, 2001, the weighted average occupancy of Crescent Real Estate's
hotel properties decreased approximately 1%, the average daily rate decreased
approximately 2.0%, the revenue per available room decreased approximately 3.3%
and the same store net operating income decreased by an average of 6.8%.
Military actions against terrorists, new terrorist attacks, actual or
threatened, and other political events could cause a lengthy period of
uncertainty that might increase customer reluctance to travel and therefore
adversely affect Crescent Real Estate's results of operations and its ability to
meet its obligations.

         THE PERFORMANCE OF CRESCENT REAL ESTATE'S RESIDENTIAL DEVELOPMENT
PROPERTIES IS AFFECTED BY NATIONAL, REGIONAL AND LOCAL ECONOMIC CONDITIONS.

                                       37

         Crescent Real Estate's residential development properties, which
include The Woodlands and Desert Mountain, are generally targeted toward
purchasers of high-end primary residences or seasonal secondary residences. As a
result, the economic performance and value of these properties is particularly
sensitive to changes in national, regional and local economic and market
conditions. Economic downturns may discourage potential customers from
purchasing new, larger primary residences or vacation or seasonal homes. In
addition, other factors may affect the performance and value of a property
adversely, including changes in laws and governmental regulations (including
those governing usage, zoning and taxes), changes in interest rates (including
the risk that increased interest rates may result in decreased sales of lots in
any residential development property) and the availability to potential
customers of financing. Adverse changes in any of these factors, each of which
is beyond Crescent Real Estate's control, could reduce the income that it
receives from the properties, and adversely affect Crescent Real Estate's
ability to meet its obligations.

         CRESCENT REAL ESTATE DOES NOT CONTROL REVENUES FROM ITS
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES, AND THE LESSEE MAY BE UNABLE TO
MEET ALL OF ITS RENT OBLIGATIONS.

         Crescent Real Estate owns a 40% interest in the temperature-controlled
logistics partnership that owns AmeriCold Corporation, which in turn directly or
indirectly owns the Crescent Real Estate temperature-controlled logistics
properties. The temperature-controlled logistics properties are operated by, and
leased to, AmeriCold Logistics, L.L.C., owned 60% by Vornado Operating and 40%
by COPI Cold Storage. Crescent Real Estate has no ownership interest in
AmeriCold Logistics and, thus, does not have the authority to control the
management or operation of the Crescent Real Estate temperature-controlled
logistics properties.

         Pursuant to the leases, AmeriCold Logistics may elect to defer a
portion of the rent for the Crescent Real Estate temperature-controlled
logistics properties for up to three years beginning on March 12, 1999, to the
extent that available cash, as defined in the leases, is insufficient to pay
such rent. The leases were amended in February 22, 2001 to extend the rent
deferral period to December 31, 2003. Through September 30, 2002, AmeriCold
Logistics has deferred approximately $70.5 million of rent, of which Crescent
Real Estate's portion is approximately $28.2 million. In December 2001, the
temperature-controlled logistics partnership, as lessor, waived its rights to
collect $39.8 million of the $49.9 million of deferred rent, of which Crescent
Real Estate's share was $15.9 million. The remaining deferred rent, or rent
payable in the future, may not be paid in full on a timely basis.

         Crescent Real Estate cannot assure its shareholders that AmeriCold
Logistics will operate the Crescent Real Estate temperature-controlled logistics
properties in a manner which will enable it to meet its ongoing rental
obligations to Crescent Real Estate. In the event that AmeriCold Logistics is
unable to make its rental payments, Crescent Real Estate's cash flow would be
adversely affected, which could affect Crescent Real Estate's results of
operations, ability to meet its obligations and the amount of distributions made
to Crescent Real Estate's shareholders.

         THE AMOUNT OF DEBT CRESCENT REAL ESTATE HAS AND THE RESTRICTIONS
IMPOSED BY THAT DEBT COULD ADVERSELY AFFECT CRESCENT REAL ESTATE'S FINANCIAL
CONDITION.

         Crescent Real Estate has a substantial amount of debt. As of September
30, 2002, Crescent Real Estate had approximately $2.4 billion of consolidated
debt outstanding, of which approximately $1.6 billion was secured by
approximately 31% of Crescent Real Estate's gross total assets. In addition, as
a result of the acquisition by subsidiaries of Crescent Real Estate of Crescent
Operating's lessee interests in eight hotel properties then leased to
subsidiaries of Crescent Operating, the voting interests in three of Crescent
Real Estate's residential development corporations and other assets, Crescent
Real Estate is now required to consolidate an additional approximately $99.0
million of debt as of September 30, 2002.

                                       38

         Crescent Real Estate's organizational documents do not limit the level
or amount of debt that Crescent Real Estate may incur. Crescent Real Estate does
not have a policy limiting the ratio of its debt to total capitalization or
assets. The amount of debt Crescent Real Estate has and may have outstanding
could have important consequences to Crescent Real Estate's shareholders. For
example, it could:

         -        make it difficult to satisfy Crescent Real Estate's debt
                  service requirements;

         -        prevent Crescent Real Estate from making distributions on its
                  outstanding common shares and preferred shares;

         -        require Crescent Real Estate to dedicate a substantial portion
                  of its cash flow from operations to payments on its debt,
                  thereby reducing funds available for operations, property
                  acquisitions and other appropriate business opportunities that
                  may arise in the future;

         -        require Crescent Real Estate to dedicate increased amounts of
                  its cash flow from operations to payments on its variable
                  rate, unhedged debt if interest rates rise;

         -        limit Crescent Real Estate's flexibility in planning for, or
                  reacting to, changes in its business and the factors that
                  affect the profitability of Crescent Real Estate's business;

         -        limit Crescent Real Estate's ability to obtain additional
                  financing, if Crescent Real Estate needs it in the future for
                  working capital, debt refinancing, capital expenditures,
                  acquisitions, development or other general corporate purposes;

         -        increase the adverse effect on Crescent Real Estate's
                  available cash flow from operations that may result from
                  changes in conditions in the economy in general and in the
                  areas in which Crescent Real Estate's properties are located;
                  and

         -        limit Crescent Real Estate's flexibility in conducting its
                  business, which may place Crescent Real Estate at a
                  disadvantage compared to competitors with less debt.

         Crescent Real Estate's ability to make scheduled payments of the
principal of, to pay interest on, or to refinance, its indebtedness will depend
on Crescent Real Estate's future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond Crescent
Real Estate's control. There can be no assurance that Crescent Real Estate's
business will continue to generate sufficient cash flow from operations in the
future to service its debt or meet its other cash needs. If Crescent Real Estate
is unable to do so, it may be required to refinance all or a portion of its
existing debt, or to sell assets or obtain additional financing. Crescent Real
Estate cannot assure its shareholders that any such refinancing, sale of assets
or additional financing would be possible on terms that Crescent Real Estate
would find acceptable.

         If Crescent Real Estate were to breach certain of its debt covenants,
Crescent Real Estate's lenders could require it to repay the debt immediately,
and, if the debt is secured, could immediately take possession of the property
securing the loan. In addition, if any other lender declared its loan due and
payable as a result of a default, the holders of Crescent Real Estate's public
and private notes, along with the lenders under Crescent Real Estate's credit
facility, might be able to require that those debts be paid immediately. As a
results, any default under Crescent Real Estate's debt covenants could have an
adverse effect on its financial condition, its results of operations, its
ability to meet its obligations and the market value of its shares.

                                       39

         CRESCENT REAL ESTATE IS OBLIGATED TO COMPLY WITH FINANCIAL AND OTHER
COVENANTS IN ITS DEBT THAT COULD RESTRICT ITS OPERATING ACTIVITIES, AND THE
FAILURE TO COMPLY COULD RESULT IN DEFAULTS THAT ACCELERATE THE PAYMENT UNDER ITS
DEBT.

         Crescent Real Estate's secured debt generally contains customary
covenants, including, among others, provisions:

         -        relating to the maintenance of the property securing the debt;

         -        restricting Crescent Real Estate's ability to pledge assets or
                  create other liens;

         -        restricting Crescent Real Estate's ability to incur additional
                  debt;

         -        restricting Crescent Real Estate's ability to amend or modify
                  existing leases; and

         -        restricting Crescent Real Estate's ability to enter into
                  transactions with affiliates.

         Crescent Real Estate's unsecured debt generally contains various
restrictive covenants. The covenants in Crescent Real Estate's unsecured debt
include, among others, provisions restricting its ability to:

         -        incur additional debt;

         -        incur additional debt and subsidiary debt;

         -        make certain distributions, investments and other restricted
                  payments, including distribution payments on Crescent Real
                  Estate's or Crescent Real Estate's subsidiaries' outstanding
                  common and preferred equity;

         -        limit the ability of restricted subsidiaries to make payments
                  to Crescent Real Estate;

         -        enter into transactions with affiliates;

         -        create certain liens;

         -        sell assets;

         -        enter into certain sale-leaseback transactions; and

         -        consolidate, merge or sell all or substantially all of
                  Crescent Real Estate's assets.

         In addition, certain covenants in Crescent Real Estate's bank
facilities require Crescent Real Estate and its subsidiaries to maintain certain
financial ratios.

         Any of the covenants described in this risk factor may restrict
Crescent Real Estate's operations and its ability to pursue potentially
advantageous business opportunities. Crescent Real Estate's failure to comply
with these covenants could also result in an event of default that, if not cured
or waived, could result in the acceleration of all or a substantial portion of
Crescent Real Estate's debt.

                                       40

         RISING INTEREST RATES COULD ADVERSELY AFFECT CRESCENT REAL ESTATE'S
CASH FLOW.

         Of Crescent Real Estate's approximately $2.4 billion of debt
outstanding as of September 30, 2002, approximately $228 million was unhedged
variable rate debt. Crescent Real Estate also may borrow additional funds at
variable interest rates in the future, and Crescent Real Estate has entered, and
in the future may enter, into other transactions to limit its exposure to rising
interest rates. Increases in interest rates, or the loss of the benefits of any
interest rate hedging arrangements, would increase Crescent Real Estate's
interest expense on its variable rate debt, which would adversely affect cash
flow and its ability to service its debt, meet its obligations and make
distributions to its shareholders.

         THE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT
THE MARKET PRICE OF CRESCENT REAL ESTATE'S PUBLICLY TRADED SECURITIES.

         Crescent Real Estate has entered into various private placement
transactions whereby units and limited partnership interests in Crescent
Partnership were issued in exchange for properties or interests in properties.
These units and interests are currently exchangeable for Crescent Real Estate
common shares on the basis of two shares for each one unit or, at Crescent Real
Estate's option, an equivalent amount of cash. Upon exchange for Crescent Real
Estate's common shares, those common shares may be sold in the public market
pursuant to registration rights. As of September 30, 2002, approximately
6,541,234 units were outstanding, which were exchangeable for 13,082,468
Crescent Real Estate common shares or, at Crescent Real Estate's option, an
equivalent amount of cash. In addition, as of December 31, 2001, Crescent
Partnership had outstanding options to acquire approximately 1,197,143 units, of
which 882,857 options were exercisable at a weighted average price of $18.00
with a weighted average remaining contractual life of 4.8 years. Crescent Real
Estate has also reserved a number of common shares for issuance pursuant to its
employee benefit plans, and such common shares will be available for sale from
time to time. As of December 31, 2001, Crescent Real Estate had issued options
to acquire approximately 6,975,334 common shares outstanding, of which
approximately 3,126,684 options were exercisable at a weighted average exercise
price of $24.00, with a weighted average remaining contractual life of seven
years. Crescent Real Estate's employees may also participate in an employee
stock purchase plan that allows them to purchase up to 1,000,000 newly issued
common shares. Crescent Real Estate cannot predict the effect that future sales
of common shares, or the perception that such sales could occur, will have on
the market prices of its equity securities.

         ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY.

         Under various federal, state and local laws, ordinances and
regulations, Crescent Real Estate may be required to investigate and clean up
certain hazardous or toxic substances released on or in properties Crescent Real
Estate owns or operates, and also may be required to pay other costs relating to
hazardous or toxic substances. This liability may be imposed without regard to
whether Crescent Real Estate knew about the release of these types of substances
or was responsible for their release. The presence of contamination or the
failure to remediate properly contaminations at any of Crescent Real Estate's
properties may adversely affect its ability to sell or lease the properties or
to borrow using the properties as collateral. The costs or liabilities could
exceed the value of the affected real estate. Crescent Real Estate has not been
notified by any governmental authority, however, of any non-compliance,
liability or other claim in connection with any of its properties, and Crescent
Real Estate is not aware of any other environmental condition with respect to
any of its properties that management believes would have a material adverse
effect on its business, assets or results of operations taken as a whole.

         The uses of any of Crescent Real Estate's properties prior to Crescent
Real Estate's acquisition of the property and the building materials used at the
property are among the property-specific factors that will affect how the
environmental laws are applied to Crescent Real Estate's properties. In general,
before Crescent Real Estate purchased each of its properties, independent
environmental consultants conducted or updated Phase I environmental
assessments, which generally do not involve invasive

                                       41

techniques such as soil or ground water sampling, and where indicated, based on
the Phase I results, conducted Phase II environmental assessments which do
involve this type of sampling. None of these assessments revealed any materially
adverse environmental condition relating to any particular property not
previously known to Crescent Real Estate. Crescent Real Estate believes that all
of these previously known conditions either have been remediated or are in the
process of being remediated at this time. There can be no assurance, however,
that environmental liabilities have not developed since these environmental
assessments were prepared, or that future uses or conditions, including changes
in applicable environmental laws and regulations, will not result in imposition
of environmental liabilities. If Crescent Real Estate is subject to
environmental liabilities, the liabilities could adversely affect Crescent Real
Estate's results of operations and its ability to meet its obligations, which
could in turn affect the market value of its common shares.

         COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT COULD BE COSTLY.

         Under the Americans with Disabilities Act of 1990, all public
accommodations and commercial facilities must meet certain federal requirements
related to access and use by disabled persons. Compliance with the ADA
requirements could involve removal of structural barriers from certain disabled
persons' entrances. Other federal, state and local laws may require
modifications to or restrict further renovations of Crescent Real Estate's
properties with respect to such accesses. Although Crescent Real Estate believes
that its properties are substantially in compliance with present requirements,
noncompliance with the ADA or related laws or regulations could result in the
United States government imposing fines or private litigants being awarded
damages against Crescent Real Estate. Costs such as these, as well as the
general costs of compliance with these laws or regulations, may adversely affect
Crescent Real Estate's ability to make payments under its debt and adversely
affect the price of its common shares.

         DEVELOPMENT AND CONSTRUCTION RISKS COULD ADVERSELY AFFECT CRESCENT REAL
ESTATE'S PROFITABILITY.

         Crescent Real Estate is currently developing, expanding or renovating
some of its office or hotel properties and may in the future engage in these
activities for other properties it owns. In addition, Crescent Real Estate's
residential development properties engage in the development of raw land and
construction of single-family homes, condominiums, town homes and timeshare
units. These activities may be exposed to the following risks, each of which
could adversely affect Crescent Real Estate's results of operations and its
ability to meet its obligations.

         -        Crescent Real Estate may be unable to obtain, or suffer delays
                  in obtaining, necessary zoning, land-use, building, occupancy
                  and other required governmental permits and authorizations,
                  which could result in increased costs or abandonment of these
                  activities.

         -        Crescent Real Estate may incur costs for development,
                  expansion or renovation of a property which exceed its
                  original estimates due to increased costs for materials or
                  labor or other costs that were unexpected.

         -        Crescent Real Estate may not be able to obtain financing with
                  favorable terms, which may make Crescent Real Estate unable to
                  proceed with development and other related activities on the
                  schedule originally planned or at all.

                                       42

         -        Crescent Real Estate may be unable to complete construction
                  and sale or lease-up of a lot, office property or residential
                  development unit on schedule, which could result in increased
                  debt service expense or construction costs.

         Additionally, the time frame required for development, construction and
lease-up of these properties means that Crescent Real Estate may have to wait a
few years for a significant cash return. As a REIT, Crescent Real Estate is
required to make cash distributions to its shareholders. If Crescent Real
Estate's cash flow from operations is not sufficient, Crescent Real Estate may
be forced to borrow to fund these distributions, which could affect its ability
to meet its other obligations.

         COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED ACQUISITION COSTS.

         Crescent Real Estate plans to make select additional investments from
time to time in the future and may compete for available investment
opportunities with entities that have greater liquidity or financial resources.
Several real estate companies may compete with Crescent Real Estate in seeking
properties for acquisition or land for development and prospective tenants,
guests or purchasers. This competition may increase the costs of any
acquisitions that Crescent Real Estate makes and adversely affect its ability to
meet its obligations by:

         -        reducing the number of suitable investment opportunities
                  offered to Crescent Real Estate; and

         -        increasing the bargaining power of property owners.

         In addition, if a competitor succeeds in making an acquisition in a
market in which Crescent Real Estate's properties compete, ownership of that
investment by a competitor may adversely affect Crescent Real Estate's results
of operations and its ability to meet its obligations by:

         -        interfering with Crescent Real Estate's ability to attract and
                  retain tenants, guests or purchasers; and

         -        adversely affecting Crescent Real Estate's ability to minimize
                  expenses of operation.

         FAILURE TO QUALIFY AS A REIT WOULD CAUSE CRESCENT REAL ESTATE TO BE
TAXED AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR
PAYMENT OF DISTRIBUTIONS.

         Crescent Real Estate intends to continue to operate in a manner that
allows it to meet the requirements for qualification as a REIT under the
Internal Revenue Code of 1986, as amended. A REIT generally is not taxed at the
corporate level on income it distributes to its shareholders, as long as it
distributes at least 90 percent of its income to its shareholders annually and
satisfies certain other highly technical and complex requirements. Unlike many
REITs, which tend to make only one or two types of real estate investments,
Crescent Real Estate invests in a broad range of real estate products. Several
of its investments also are more complicated than those of other REITs. As a
result, Crescent Real Estate is likely to encounter a greater number of
interpretative issues under the REIT qualification rules, and more issues which
lack clear guidance, than are other REITs. Crescent Real Estate, as a matter of
policy, consults with outside tax counsel in structuring its new investments in
an effort to satisfy the REIT qualification rules. Shaw Pittman LLP, tax counsel
to Crescent Real Estate, has given Crescent Real Estate an opinion stating that
Crescent Real Estate qualified as a REIT under the Internal Revenue Code for its
taxable years ending on or before December 31, 2001, that Crescent Real Estate
is organized in conformity with the requirements for qualification as a REIT
under the Internal Revenue Code and that its proposed method of operation will
permit Crescent Real Estate to continue to meet the requirements for

                                       43

qualification and taxation as a REIT. This opinion is based on representations
made by Crescent Real Estate as to factual matters, opinions of other law firms
and on existing law, which is subject to change, both retroactively and
prospectively, and to possibly different interpretations. Shaw Pittman LLP's
opinion also is not binding on either the Internal Revenue Service or the
courts.

         Crescent Real Estate must meet the requirements of the Internal Revenue
Code in order to qualify as a REIT now and in the future. The laws and
regulations governing federal income taxation are the subject of frequent review
and amendment, and proposed or contemplated changes in the laws or regulations
may affect Crescent Real Estate's ability to qualify as a REIT and the manner in
which Crescent Real Estate conducts its business. If Crescent Real Estate fails
to qualify as a REIT for federal income tax purposes, Crescent Real Estate would
not be allowed a deduction for distributions to shareholders in computing
taxable income and would be subject to federal income tax at regular corporate
rates. In addition to these taxes, Crescent Real Estate may be subject to the
federal alternative minimum tax. Unless Crescent Real Estate is entitled to
relief under certain statutory provisions, Crescent Real Estate could not elect
to be taxed as a REIT for four taxable years following any year during which
Crescent Real Estate was first disqualified. Therefore, if Crescent Real Estate
loses its REIT status, Crescent Real Estate could be required to pay significant
income taxes, which would reduce its funds available for investments or for
distributions to its shareholders. This would likely adversely affect the value
of an investment in Crescent Real Estate. In addition, Crescent Real Estate
would no longer be required by law or its operating agreements to make any
distributions to its shareholders.

         PROVISIONS OF CRESCENT REAL ESTATE'S DECLARATION OF TRUST AND BYLAWS
COULD INHIBIT CHANGES IN CONTROL OR DISCOURAGE TAKEOVER ATTEMPTS BENEFICIAL TO
SHAREHOLDERS.

         Certain provisions of Crescent Real Estate's declaration of trust and
bylaws may delay or prevent either a change in control of Crescent Real Estate
or another transaction that could provide its shareholders with a premium over
the then-prevailing market price of Crescent Real Estate's common shares or
which might otherwise be in the best interest of its security holders. These
include a staggered Board of Trust Managers, which makes it more difficult for a
third party to gain control of Crescent Real Estate's Board, and the ownership
limit described below. In addition, any future series of preferred shares may
have certain voting provisions that could delay or prevent a change of control
or other transaction that might involve a premium price or otherwise be
beneficial to its security holders. The declaration of trust also establishes
special requirements with respect to "business combinations," including certain
issuances of equity securities, between Crescent Real Estate and an "interested
shareholder," and mandates procedures for obtaining voting rights with respect
to "control shares" acquired in a control share acquisition.

         OWNERSHIP OF CRESCENT REAL ESTATE'S SHARES IS SUBJECT TO LIMITATION FOR
REIT TAX PURPOSES.

         To remain qualified as a REIT for federal income tax purposes, not more
than 50% in value of Crescent Real Estate's outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the federal
income tax laws applicable to REITs) at any time during the last half of any
taxable year, and Crescent Real Estate's outstanding shares must be beneficially
owned by 100 or more persons at least 335 days of a taxable year. To facilitate
maintenance of its REIT qualification, Crescent Real Estate's declaration of
trust, subject to certain exceptions, prohibits ownership by any single
shareholder of more than 8.0% of its issued and outstanding common shares, or
such greater percentage as established by the Board of Trust Managers, but in no
event greater than 9.9% of its issued and outstanding preferred shares. In
addition, the declaration of trust prohibits ownership by Richard E. Rainwater,
the Chairman of the Board of Trust Managers, together with certain of his
affiliates or relatives, initially of more than 8.0% and subsequently of more
than 9.5% of the issued and outstanding Crescent Real Estate common shares.
Crescent Real Estate refers to these limits collectively as the

                                       44

"ownership limit." Any transfer of shares may be null and void if it causes a
person to violate the ownership limit, and the intended transferee or holder
will acquire no rights in the shares. Those shares will automatically convert
into excess shares, and the shareholder's rights to distributions and to vote
will terminate. The shareholder would have the right to receive payment of the
purchase price for the shares and certain distributions upon Crescent Real
Estate's liquidation. Excess shares will be subject to repurchase by Crescent
Real Estate at its election. While the ownership limit helps preserve Crescent
Real Estate's status as a REIT, it could also delay or prevent any person or
small group of persons from acquiring, or attempting to acquire, control of
Crescent Real Estate and, therefore, could adversely affect Crescent Real
Estate's shareholders' ability to realize a premium over the then-prevailing
market price for their shares.

         CRESCENT REAL ESTATE'S INSURANCE COVERAGE ON ITS PROPERTIES MAY BE
INADEQUATE.


         Crescent Real Estate currently carries comprehensive insurance on all
of its properties, including insurance for liability, fire and flood. Crescent
Real Estate believes this coverage is of the type and amount customarily
obtained for or by an owner of real property assets. Crescent Real Estate
intends to obtain similar insurance coverage on subsequently acquired
properties. Crescent Real Estate's existing insurance policies expire in October
2003.


         As a consequence of the September 11, 2001 terrorist attacks, Crescent
Real Estate may be unable to renew or duplicate its current insurance coverage
in adequate amounts or at reasonable prices. In addition, insurance companies
may no longer offer coverage against certain types of losses, such as losses due
to terrorist acts and toxic mold, or, if offered, the expense of obtaining these
types of insurance may not be justified. Crescent Real Estate therefore may
cease to have insurance coverage against certain types of losses and/or there
may be decreases in the limits of insurance available. If an uninsured loss or a
loss in excess of its insured limits occurs, Crescent Real Estate could lose all
or a portion of the capital it has invested in a property, as well as the
anticipated future revenue from the property, but still remain obligated for any
mortgage debt or other financial obligations related to the property. Crescent
Real Estate cannot guarantee that material losses in excess of insurance
proceeds will not occur in the future. If any of Crescent Real Estate's
properties were to experience a catastrophic loss, it could seriously disrupt
Crescent Real Estate's operations, delay revenue and result in large expenses to
repair or rebuild the property. Also, due to inflation, changes in codes and
ordinances, environmental considerations and other factors, it may not be
feasible to use insurance proceeds to replace a building after it has been
damaged or destroyed. Events such as these could adversely affect Crescent Real
Estate's results of operations and its ability to meet its obligations,
including distributions to its shareholders.

         CRESCENT REAL ESTATE IS DEPENDENT ON ITS KEY PERSONNEL WHOSE CONTINUED
SERVICE IS NOT GUARANTEED.

         To a large extent Crescent Real Estate is dependent on its executive
officers, particularly John C. Goff, Vice Chairman of the Board of Trust
Managers and Chief Executive Officer and Richard E. Rainwater, Chairman of the
Board of Trust Managers, for strategic business direction and real estate
experience. While Crescent Real Estate believes that it could find replacements
for its key personnel, loss of their services could adversely affect Crescent
Real Estate's operations. Crescent Real Estate does not have key man life
insurance for its executive officers.

                                       45






                       COMPARATIVE PER SHARE MARKET PRICE
                                  INFORMATION


         Crescent Real Estate's common shares are traded on the NYSE under the
symbol "CEI," and Crescent Operating's common stock is traded on the OTC
Bulletin Board under the symbol "COPI.OB." On February 13, 2002, the last full
trading day prior the date of the execution of the original Settlement
Agreement, the closing sale price per Crescent Real Estate common share on the
NYSE, the closing sale price per share of Crescent Operating common stock on the
OTC Bulletin Board and the equivalent per share price were as set forth in the
table below. The equivalent per share price is the value of the Crescent Real
Estate common shares that Crescent Operating stockholders will receive for each
share of Crescent Operating stock they own if the Crescent Operating
stockholders approve the Crescent Operating bankruptcy plan, assuming that the
total claims and expenses paid by Crescent Real Estate in connection with the
Crescent Operating bankruptcy agreement and the reorganization transactions is
$10.6 million to $13.8 million. The actual number of the Crescent Real Estate
common shares that Crescent Operating stockholders will receive will be based on
the average of the closing prices of the Crescent Real Estate common shares on
the ten trading days prior to the date of confirmation of the Crescent Operating
bankruptcy plan. In addition, the value of the Crescent Real Estate common
shares that Crescent Operating stockholders will receive may be decreased or
increased, but will not be less than $0.20 per share of Crescent Operating
common stock if the bankruptcy plan is accepted by the Crescent Operating
stockholders and confirmed by the bankruptcy court. See "The Reorganization
Transactions -- Summary of the Reorganization Transactions -- Issuance of
Crescent Real Estate Common Shares to Crescent Operating Stockholders" for a
description of the circumstances under which the value of the Crescent Real
Estate common shares that Crescent Operating stockholders will receive may be
decreased or increased.







                                                                                      EQUIVALENT PER
                                                                                         SHARE PRICE
                                                                       --------------------------------------------------
                          CRESCENT REAL              CRESCENT          ASSUMING $10.6 MILLION        ASSUMING $13.8
                              ESTATE                 OPERATING            IN CRESCENT REAL         MILLION IN CRESCENT
                          COMMON SHARES             COMMON STOCK           ESTATE EXPENSES         REAL ESTATE EXPENSES
                          -------------             ------------           ---------------         --------------------
                                                                                       
February 13, 2002             $17.25                   $0.01                     $0.50                     $0.20




                    SELECTED HISTORICAL FINANCIAL INFORMATION
                            OF CRESCENT REAL ESTATE


      The following table sets forth selected historical financial and operating
information for Crescent Real Estate on a consolidated basis. All information
relating to Crescent Real Estate common shares has been adjusted to reflect the
two-for-one stock split effected in the form of a 100% share dividend paid on
March 26, 1997 to shareholders of record on March 20, 1997. The selected balance
sheet information and operating data for the nine months ended September 30,
2002 and 2001 is based on the unaudited financial statements of Crescent Real
Estate included in this proxy statement/prospectus. The selected balance sheet
information for each of the two years ended December 31, 2000 and 2001, and the
operating data for the three years ended December 31, 1999, 2000 and 2001 is
based on the audited financial statements of Crescent Real Estate included in
this proxy statement/prospectus, and the information for the preceding years is
based on the audited financial statements of Crescent Real Estate


                                       46

previously filed with the Securities and Exchange Commission. The following
information should be read in conjunction with "Crescent Real Estate
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of Crescent Real Estate and
notes to the financial statements included in this proxy statement/prospectus.




                                                                                        YEAR ENDED
                                              NINE MONTHS ENDED SEPTEMBER 30,          DECEMBER 31,
                                            ---------------------------------         -------------
                                                 2002                 2001                 2001
                                            -------------        -------------        -------------
                                                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                             
OPERATING DATA:
   Total revenue                            $     760,191        $     537,181        $     686,194
   Operating (loss) income                         28,650               66,235              (29,923)
   Income before minority interests,
     income taxes, discontinued
     operations, extraordinary item
     and cumulative effect of a
     change in accounting principle                68,277              103,687               25,733
   Basic earnings per common share:
     (Loss) income before
     extraordinary item, discontinued
     operations and cumulative effect
     of a change in accounting
     principle                              $        0.41        $        0.63        $       (0.08)
     Net (Loss) income                               0.37                 0.54                (0.17)
   Diluted earnings per common share:
     (Loss) income before
     discontinued operations,
     extraordinary item and
     cumulative effect of a change in
     accounting principle                   $        0.41        $        0.62        $       (0.08)
     Net (Loss) income                               0.37                 0.53                (0.17)
BALANCE SHEET DATA
    (AT PERIOD END):
   Total assets                             $   4,341,111        $   4,139,905        $   4,142,149
   Total debt                                   2,412,544            2,083,930            2,214,094
   Total shareholders' equity                   1,431,939            1,594,912            1,405,940
OTHER DATA:
   Funds from operations - new
     definition(1)                          $     167,344        $     216,585        $     177,117
   Cash distribution declared per
     common share                           $       1.125        $       1.475        $        1.85
   Weighted average
     common shares and units
     outstanding - basic                      104,526,572          108,170,259          121,017,605
   Weighted average
     common shares and units
     outstanding - diluted                    105,041,173          110,011,558          122,544,421
   Cash flow provided by
     (used in):
     Operating activities                   $     152,706        $     253,817        $     212,813
     Investing activities                         106,012              166,593              209,994
     Financing activities                        (212,361)            (426,213)            (425,488)






                                                                        YEAR ENDED DECEMBER 31,
                                            ----------------------------------------------------------------------------
                                                 2000                 1999                 1998                 1997
                                            -------------        -------------        -------------        -------------
                                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                               
OPERATING DATA:
   Total revenue                            $     707,480        $     734,448        $     698,343        $     447,373
   Operating (loss) income                         86,524              (59,063)             143,893              111,281
   Income before minority interests,
     income taxes, discontinued
     operations, extraordinary item
     and cumulative effect of a
     change in accounting principle               299,692                9,234              183,210              135,024
   Basic earnings per common share:
     (Loss) income before
     extraordinary item, discontinued
     operations and cumulative effect
     of a change in accounting
     principle                              $        2.05        $       (0.09)       $        1.26        $        1.25
     Net (Loss) income                               2.05                (0.06)                1.26                 1.25
   Diluted earnings per common share:
     (Loss) income before
     discontinued operations,
     extraordinary item and
     cumulative effect of a change in
     accounting principle                   $        2.02        $       (0.09)       $        1.21        $        1.20
     Net (Loss) income                               2.02                (0.06)                1.21                 1.20
BALANCE SHEET DATA
    (AT PERIOD END):
   Total assets                             $   4,543,318        $   4,950,561        $   5,043,447        $   4,179,980
   Total debt                                   2,271,895            2,598,929            2,318,156            1,710,125
   Total shareholders' equity                   1,731,327            2,056,774            2,422,545            2,197,317
OTHER DATA:
   Funds from operations - new
     definition(1)                          $     326,897        $     340,777        $     341,713        $     214,396
   Cash distribution declared per
     common share                           $        2.20        $        2.20        $        1.86        $        1.37
   Weighted average
     common shares and units
     outstanding - basic                      127,535,069          135,954,043          132,429,405          106,835,579
   Weighted average
     common shares and units
     outstanding - diluted                    128,731,883          137,891,561          140,388,063          110,973,459
   Cash flow provided by
     (used in):
     Operating activities                   $     275,715        $     336,060        $     299,497        $     211,714
     Investing activities                         428,306             (205,811)            (820,507)          (2,294,428)
     Financing activities                        (737,981)            (167,615)             564,680            2,123,744



____________________________________

(1)  Funds from operations, or FFO, based on the revised definition adopted by
     the Board of Governors of the National Association of Real Estate
     Investment Trusts, or NAREIT, effective January 1, 2000, and as used
     herein, means net income (loss), determined in accordance with GAAP,
     excluding gains (losses) from sales of depreciable operating property,
     excluding extraordinary items, as defined by GAAP, plus depreciation and
     amortization of real estate assets, and after adjustments for
     unconsolidated partnerships and joint ventures. FFO is a non-GAAP measure
     and should not be considered an alternative to GAAP measures, including net
     income and cash generated from operating activities. For a more detailed
     definition and description of FFO and comparisons to GAAP measures, see
     "Crescent Real Estate Management's Discussion and Analysis of Financial
     Condition and Results of Operations."


                                       47

                    SELECTED HISTORICAL FINANCIAL INFORMATION
                              OF CRESCENT OPERATING

      The following table sets forth certain selected historical financial
information for Crescent Operating and for its predecessors, taken as a group.
For purposes of this table, the predecessors consist of Moody-Day, Inc. and
Hicks Muse Tate & First Equity Fund II, L.P., which are collectively referred to
as the Carter-Crowley Asset Group. The selected balance sheet information and
operating data for the nine months ended September 30, 2002 and 2001 is based on
the unaudited financial statements included in this proxy statement/prospectus.
The selected balance sheet information for each of the two years ended December
31, 2000 and 2001, and the operating data for the three years ended December 31,
1999, 2000 and 2001 is based on the audited financial statements of Crescent
Operating included in this proxy statement/prospectus, and the information for
the preceding years is based on the audited financial statements of Crescent
Operating previously filed with the Securities and Exchange Commission. The
following information should be read in conjunction with "Crescent Operating
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of Crescent Operating and
notes to the financial statements included in this proxy statement/prospectus.




                                                                                                                     CARTER-CROWLEY
                                                                                                                        ASSET
                                                                                                                         GROUP
                                                                                                                     (PREDECESSORS)
                                                                                                                     --------------
                                                                                                                        FOR THE
                                                                                                         FOR THE         PERIOD
                                                                                                       PERIOD FROM       FROM
                             FOR THE NINE MONTHS                       FOR THE YEAR ENDED               MAY 9, 1997    JANUARY 1,
                             ENDED SEPTEMBER 30,                          DECEMBER 31,                      TO           1997 TO
                            -----------------------  ------------------------------------------------   DECEMBER 31,      MAY 8
                              2002         2001         2001        2000         1999         1998         1997          1997
                            --------    ---------    ---------    ---------    ---------    ---------    ---------      ------
                                                        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                             
OPERATING DATA:

 Revenues                   $ 25,992    $  50,884    $  67,521    $ 102,591    $  97,615    $  80,754    $  19,600      $4,657
 (Loss) income from
 operations                   (6,059)     (19,937)     (22,893)       1,027        2,440        2,734         (556)        158
 Net income (loss)            10,208      (43,439)     (78,133)      (3,690)      (2,695)       1,141      (22,165)         25
 Income (Loss) per share -
 basic and diluted              0.95        (4.20)       (7.55)       (0.36)       (0.26)        0.10        (2.00)         --

BALANCE SHEET DATA:

 Total assets               $ 61,548    $ 988,544    $ 945,404    $ 910,528    $ 795,653    $ 937,333    $ 602,083          --
 Total debt                   93,440      592,462      587,110      473,517      421,874      371,139      258,129          --
 Total shareholders'         (80,022)     (57,286)     (93,388)     (23,533)     (20,522)     (16,068)      (8,060)         --
 deficit



                   SELECTED PRO FORMA FINANCIAL AND OPERATING
                      INFORMATION OF CRESCENT REAL ESTATE

      The following table sets forth selected pro forma financial and operating
information for Crescent Real Estate for the nine months ended September 30,
2002 and for the year ended December 31, 2001. The pro forma financial and
operating information gives effect to:


                                       48

   -  the transfer to some of Crescent Real Estate's subsidiaries of Crescent
      Operating's lessee interests in Crescent Real Estate's eight resort/hotel
      properties, Crescent Operating's voting interests in three of Crescent
      Real Estate's residential development corporations and other assets owned
      by Crescent Operating;

   -  the capitalization of Crescent Spinco, a newly formed company that will
      commit to purchase Crescent Operating's interest in COPI Cold Storage,
      L.L.C., which owns a 40% partnership interest in the owner of AmeriCold
      Logistics, and the distribution of the common stock of Crescent Spinco to
      Crescent Real Estate shareholders and the unitholders of Crescent Real
      Estate's operating partnership;

   -  the issuance of Crescent Real Estate's common shares to the stockholders
      of Crescent Operating in connection with a prepackaged bankruptcy plan of
      Crescent Operating;

   -  Crescent Real Estate's April 2002 notes offering and the application of
      net proceeds thereof;

   -  Crescent Real Estate's April 2002 Series A Preferred share offering and
      the application of proceeds thereto; and

   -  Crescent Real Estate's May 2002 offering of its Series B Cumulative
      Redeemable Preferred Shares and the application of $81.9 million in net
      proceeds thereof.


      The pro forma financial and operating information set forth below should
 be read in conjunction with, and is qualified in its entirety by, the
 historical and pro forma financial statements and notes to the financial
 statements of Crescent Real Estate included in this proxy statement/prospectus.





                                             NINE MONTHS
                                               ENDED             YEAR ENDED
                                             SEPTEMBER 30,       DECEMBER 31,
                                                 2002               2001
                                             ------------        ----------
                                                           
OPERATING DATA
   Total revenue                             $    853,714        $1,138,968
   Operating income (loss)                         24,746           (36,715)
   Income before minority interests                62,403            16,446
   Basic earnings per common share:
   Income (loss) before
     extraordinary item,
     discontinued operations and
     cumulative effect of change in
     accounting principle                    $       0.34        $    (0.30)
   Diluted earnings per common share:
   Income (loss) before
     extraordinary item and
     cumulative effect of change in
     accounting principle                    $       0.34        $    (0.30)

BALANCE SHEET DATA (AT PERIOD END):
   Total assets                              $  4,341,111               N/A
   Total debt                                   2,428,044               N/A
   Total shareholders' equity                   1,418,595               N/A
   Weighted average
     common shares
     outstanding - basic                      104,670,322               N/A
   Weighted average
     common shares
     outstanding - diluted                    105,184,923               N/A



                                       49

                           COMPARATIVE PER SHARE DATA


      Set forth below are historical and pro forma earnings per share, cash
dividends per share and book value per share data for Crescent Real Estate's
common shares and Crescent Operating's common stock. The data set forth below
should be read in conjunction with Crescent Real Estate's and Crescent
Operating's audited financial statements, including the notes to the financial
statements, which are included in this proxy statement/prospectus. The data
should also be read in conjunction with the unaudited pro forma financial
statements, including the notes to the pro forma financial statements, included
in this proxy statement/prospectus. The pro forma data gives effect to:


   -  the transfer to some of Crescent Real Estate's subsidiaries of Crescent
      Operating's lessee interests in Crescent Real Estate's eight resort/hotel
      properties, Crescent Operating's voting interests in three of Crescent
      Real Estate's residential development corporations and other assets owned
      by Crescent Operating;

   -  the capitalization of Crescent Spinco, which will commit to purchase
      Crescent Operating's interest in COPI Cold Storage, L.L.C., which owns a
      40% partnership interest in the owner of AmeriCold Logistics and the
      distribution of the common stock of Crescent Spinco to Crescent Real
      Estate shareholders and the unitholders of Crescent Real Estate's
      operating partnership;

   -  the issuance of Crescent Real Estate's common shares to the stockholders
      of Crescent Operating in connection with a prepackaged bankruptcy plan of
      Crescent Operating;

   -  Crescent Real Estate's April 2002 notes offering and the application of
      net proceeds thereof;

   -  Crescent Real Estate's April 2002 Series A Preferred share offering and
      the application of proceeds thereto; and


   -  Crescent Real Estate's May 2002 offering of its Series B Cumulative
      Redeemable Preferred Shares and the application of $81.9 million in net
      proceeds thereof.



      The pro forma data are not necessarily indicative of the actual financial
 position that would have occurred, or future operating results that will occur,
 upon consummation of the Crescent Operating bankruptcy plan.



                                                                       NINE MONTHS ENDED         YEAR ENDED
                                                                          SEPTEMBER 30,          DECEMBER 31,
                                                                               2002                   2001
                                                                                           
HISTORICAL -- CRESCENT REAL ESTATE

   Basic earnings per share                                               $    0.34              $   (0.17)
   Diluted earnings per share                                                  0.34                  (0.17)
   Cash dividends per share(1)                                                1.125                   1.85

HISTORICAL -- CRESCENT OPERATING

   Basic earnings per share                                               $    0.95              $   (7.55)
   Diluted earnings per share                                                  0.95                  (7.55)
   Cash dividends per share                                                    --                     --

PRO FORMA COMBINED(2)
   Basic earnings per share                                               $    0.09              $   (0.37)
   Diluted earnings per share                                                  0.09                  (0.37)
   Cash dividends paid per share                                              1.125                   1.85
   Equivalent per Crescent Operating share                                     .015                   .025

STOCKHOLDERS' EQUITY (BOOK VALUE) PER SHARE (END OF PERIOD)
   Historical Crescent Real Estate                                        $   15.42              $   16.34
   Historical Crescent Operating                                              (7.39)                 (8.99)
   Pro forma combined per Crescent Real Estate share (2)                      15.40                    N/A
   Equivalent pro forma combined per Crescent Operating share                  0.20                    N/A


------------------

(1)   On October 17, 2001, Crescent Real Estate announced that its quarterly
      distribution was reduced from $0.55 per common share to $0.375 per common
      share. See "Price Range of Crescent Real Estate Common Shares, Dividends
      and Related Shareholder Matters" for more information regarding Crescent
      Real Estate's distributions.


(2)   The pro forma combined per share data for Crescent Real Estate has been
      prepared as if the Crescent Operating bankruptcy plan and other
      transactions had been consummated as of January 1, 2001, and resulted
      in an increase in weighted average Crescent Real Estate common shares
      outstanding of 143,750 shares for the nine months ended September 30, 2002
      and year ended December 31, 2001.



                                       50

                    THE SPECIAL MEETING OF CRESCENT OPERATING
                                  STOCKHOLDERS

PROXY STATEMENT/PROSPECTUS

      This proxy statement/prospectus is being furnished to you in connection
with the solicitation of proxies by Crescent Operating's sole director in
connection with the Crescent Operating bankruptcy plan.


      This proxy statement/prospectus is first being furnished to Crescent
Operating stockholders on or about January __, 2003.


      Before voting to accept or reject the Crescent Operating bankruptcy plan,
each Crescent Operating stockholder should carefully review the Plan of
Reorganization attached as Annex A and described below under "The Plan of
Reorganization." All descriptions of the Crescent Operating bankruptcy plan that
are contained in this proxy statement/prospectus are subject to the terms and
conditions of the Plan of Reorganization attached as Annex A. Instructions for
voting on the Crescent Operating bankruptcy plan are set forth in the
instructions contained in the enclosed proxy.

DATE, TIME, AND PLACE OF SPECIAL MEETING


      Crescent Operating will hold its special meeting of stockholders at The
Fort Worth Club, located at 306 West 7th Street, Fort Worth, Texas, on
Thursday, March 6, 2003, at 10:00 a.m. Central Time.


PURPOSE OF THE SPECIAL MEETING

      The special meeting is being held so that Crescent Operating stockholders
may consider and vote upon the proposal to accept the Crescent Operating
bankruptcy plan. The bankruptcy plan provides as follows:

   -  Crescent Real Estate Equities Company will make sufficient funds available
      to Crescent Operating to pay in full or otherwise resolve those creditor
      claims of Crescent Operating that Crescent Operating identified in the
      original Settlement Agreement, other than the Crescent Real Estate claims,
      and to cover the budgeted expenses of implementing the Settlement
      Agreement and


                                       51


      seeking to confirm the bankruptcy plan. To facilitate Crescent Operating's
      repayment of $15.0 million, plus interest, that it owes to Bank of
      America, Crescent Real Estate has allowed Crescent Operating to secure the
      Bank of America debt with a pledge of Crescent Operating's interest in
      AmeriCold Logistics, LLC. The Settlement Agreement and the bankruptcy plan
      contemplate that Crescent Spinco, an affiliate of Crescent Real Estate,
      will purchase Crescent Operating's interest in AmeriCold Logistics for
      between $15.0 to $15.5 million.

   -  If Crescent Operating's stockholders accept the bankruptcy plan and the
      bankruptcy court confirms the bankruptcy plan, Crescent Real Estate will
      issue common shares of Crescent Real Estate to the Crescent Operating
      stockholders. In no event will the Crescent Operating stockholders be
      entitled to reconsider their approval of the bankruptcy plan.

   -  The total value of the Crescent Real Estate common shares that the
      Crescent Operating stockholders would receive would be the greater of:


      -  Approximately $2.16 million; or

      -  $16.0 million minus the total amount of payments made by Crescent Real
         Estate for claims and expenses relating to the Crescent Operating
         bankruptcy and the reorganization transactions, including the expenses
         of Crescent Real Estate but excluding payments in satisfaction of the
         Bank of America claim.

   -  As of December 31, 2002, Crescent Real Estate had incurred approximately
      $8.5 million in claims and expenses and expects to incur an aggregate of
      $10.6 million to $13.8 million in total claims and expenses. If there
      occurs a material variance in this estimated range of aggregate claims and
      expenses after the date that Crescent Operating mails this proxy
      statement/prospectus to its stockholders, then Crescent Operating will
      issue a press release disclosing the material variance and will file a
      Current Report on Form 8-K with the Securities and Exchange Commission
      disclosing the same information.

   -  If the Crescent Operating stockholders accept the bankruptcy plan and the
      bankruptcy court confirms the bankruptcy plan, the stockholders will be
      deemed to have released all claims they may have against Crescent
      Operating and Crescent Real Estate, as well as their respective officers,
      directors, stockholders, employees, consultants, attorneys, accountants
      and other representatives, that arose prior to the effective date of the
      bankruptcy plan. The release of Crescent Operating stockholder claims will
      not apply to the claims, if any, of a person who sold its shares of
      Crescent Operating common stock before the record date for voting on the
      bankruptcy plan or who either voted against the bankruptcy plan, abstained
      or did not vote on the bankruptcy plan, and thereafter either did not
      receive or refused to accept a distribution of Crescent Real Estate common
      shares. In addition, the release of Crescent Operating stockholder claims
      will apply to Crescent Operating stockholders only in their capacity as
      Crescent Operating stockholders, and will not affect their rights as
      holders of Crescent Real Estate common shares. The Crescent Operating
      common stock will be cancelled. If the Crescent Operating stockholders
      reject the bankruptcy plan, the Crescent Operating stockholders will
      receive no distribution under the bankruptcy plan and will not be deemed
      to have released any claims. The Settlement Agreement and the mutual
      releases executed in connection with the Settlement Agreement, including
      Crescent Operating's release of all claims that it may have against
      Crescent Real Estate, are enforceable whether or not the bankruptcy plan
      is approved by Crescent Operating's stockholders and whether or not the
      bankruptcy plan is confirmed by the bankruptcy court.



                                       52

   -  Pursuant to both the Settlement Agreement and the bankruptcy plan,
      Crescent Operating will transfer the remaining assets of Crescent
      Operating at the direction of Crescent Real Estate.


STOCKHOLDER RECORD DATE FOR THE SPECIAL MEETING


      Only stockholders of record as the close of business on the record date,
January 8, 2003, are entitled to notice of, and to vote at, the special
meeting. At the record date, 10,828,497 shares of Crescent Operating common
stock were issued, outstanding and entitled to vote at the special meeting. Each
outstanding share is entitled to one vote. The enclosed proxy card shows the
number of shares of Crescent Operating common stock that the recipient of the
proxy card is entitled to vote. Shares cannot be voted at the special meeting
unless the holder thereof is present or represented by proxy.


VOTE OF CRESCENT OPERATING STOCKHOLDERS REQUIRED FOR ACCEPTANCE OF THE CRESCENT
OPERATING BANKRUPTCY PLAN

      A majority of the outstanding shares of Crescent Operating common stock
entitled to vote is necessary to constitute a quorum for the transaction of
business at the special meeting. The affirmative vote of two-thirds of the votes
cast in person or by proxy is required to accept the Crescent Operating
bankruptcy plan. Each holder of common stock is entitled to one vote at the
special meeting for each share of Crescent Operating common stock held by such
stockholder.

PROXIES

      A proxy for use at the special meeting and a return envelope are enclosed.
Shares of Crescent Operating's common stock represented by a properly executed
written proxy and delivered pursuant to this solicitation, and not later
revoked, will be voted at the special meeting in accordance with the
instructions indicated in such proxy. If no instructions are given, the properly
executed proxy will be voted "FOR" acceptance of the Crescent Operating
bankruptcy plan.

      In addition, you may vote your proxy by touchtone telephone from the U.S.
and Canada, using the toll-free telephone number on the proxy card and other
enclosures. "Street name" holders may vote by telephone if their bank or broker
makes those methods available, in which case the bank or broker will enclose the
instructions with the proxy statement. The telephone voting procedures,
including the use of control numbers, are designed to authenticate share owners'
identities, to allow share owners to vote their shares, and to confirm that
their instructions have been properly recorded.

      All stockholders whose shares are not held in "street name" may vote in
person at the special meeting.

      If your broker holds your shares in "street name," your broker will not be
able to vote your shares for you unless you provide instructions to your broker
on how to vote your "street name" shares. You should follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares. If you do not instruct your broker to vote in favor of or against the
Crescent Operating bankruptcy plan, your broker will not be able to vote for
you, and your shares will not be voted. Once you have instructed your broker on
how to vote your shares, you may revoke your proxy or change your vote only by
following the instructions provided by your broker.

      A stockholder who has voted and who does not hold his shares in "street
name" may change his vote at any time prior to the taking of the vote at the
special meeting:

   -  by giving written notice of revocation to the secretary of the special
      meeting;


                                       53

   -  only if the prior vote was by written proxy, by properly submitting a duly
      executed proxy bearing a later date;

   -  only if the prior vote was by telephone, by casting a subsequent vote by
      telephone prior to the special meeting; or

   -  by voting in person at the special meeting.


      Only the last vote of a stockholder will be counted.


      All written notices of revocation should be addressed as follows: Crescent
Operating, Inc., 777 Main Street, Suite 1240, Fort Worth, Texas 76102,
Attention: Jeffrey L. Stevens.



PROXY SOLICITATION

      Crescent Real Estate has agreed to pay all reasonable documented
out-of-pocket expenses incurred by Crescent Operating or its subsidiaries
through the date on which the Crescent Operating bankruptcy plan is confirmed,
subject to certain limitations described in "The Reorganization Transactions."
As a result, all costs of preparing, assembling and mailing proxy solicitation
materials as well as the costs of the proxy solicitation will be borne by
Crescent Real Estate. These costs will be included with other reorganization
costs in the formula used to determine the number of Crescent Real Estate common
shares to be distributed to the stockholders of Crescent Operating under the
Crescent Operating bankruptcy plan. See "Summary - Summary of the Reorganization
Transactions" above. Crescent Operating has engaged an independent proxy
solicitor, D.F. King & Co., Inc., to assist in solicitation of proxies. Under
its engagement agreement, D.F. King will receive approximately $10,000 in fees,
plus $5.00 per soliciting phone call to stockholders, plus expense
reimbursements, all of which will ultimately be borne by Crescent Real Estate.
Crescent Operating has also made arrangements with brokerage firms, banks,
nominees and other fiduciaries to forward proxy solicitation materials for
shares held of record by them to the beneficial owners of such shares and to
obtain the proxies of such beneficial holders. Crescent Real Estate will
reimburse such persons for postage and reasonable clerical expenses incurred in
connection with forwarding such materials and obtaining proxies.

EFFECT OF ABSTENTIONS AND BROKER NON-VOTES

      Under Delaware law and Crescent Operating's bylaws, a majority of the
outstanding shares of Crescent Operating common stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the special
meeting. The affirmative vote of two-thirds of the votes cast in person or by
proxy is required to accept the Crescent Operating bankruptcy plan. As a result,
abstentions and broker non-votes will have no effect on the outcome of the vote
on such proposal.

                         THE REORGANIZATION TRANSACTIONS

REASONS FOR THE REORGANIZATION TRANSACTIONS

      Crescent Operating and its operating units have defaulted in the payments
of debts to Crescent Real Estate. As of February 12, 2002, these debts were
approximately $125.2 million and are secured by substantially all of Crescent
Operating's assets. These debts arose from loans made by Crescent Real Estate to
Crescent Operating and from deferrals by Crescent Real Estate of Crescent
Operating's obligations to pay rent.


                                       54

      On February 12, 2002 and February 13, 2002, Crescent Real Estate notified
Crescent Operating that each of Crescent Operating's obligations to Crescent
Real Estate was in default. Moreover, Crescent Real Estate announced that it
would seek to enforce collection by foreclosure or otherwise of its claims
against Crescent Operating and its operating units as quickly as possible.

      Crescent Operating lacked sufficient liquidity or capital resources to
address the issues arising from the defaults that Crescent Real Estate had
declared. Crescent Operating's operating income had been at or less than the
amount necessary to pay direct operating expenses. Based upon then current and
reasonably forecasted operating results, Crescent Operating did not believe that
it would, in the reasonably foreseeable future, be able to pay all of its
obligations as they accrued. Likewise, it would not be able to repay the
obligations to Crescent Real Estate as to which a default had been declared.

      Crescent Operating analyzed various alternatives for resolution of the
Crescent Real Estate obligations, including a foreclosure or bankruptcy
proceeding. For a description of the various alternatives examined by Crescent
Operating, please see "-- Analysis of Alternatives." Neither of these options
would have likely resulted in any recovery for Crescent Operating's unsecured
creditors and stockholders. In addition, these proceedings would have been
costly and time consuming. Moreover, Crescent Real Estate would likely have
opposed any attempt by Crescent Operating to use its cash collateral to pay the
costs of a bankruptcy proceeding other than to maintain Crescent Real Estate's
collateral. Accordingly, Crescent Operating and Crescent Real Estate determined
it would be in each of its respective best interests to negotiate an alternative
settlement. An alternative that became available to the parties only after the
effectiveness of the REIT Modernization Act on January 1, 2001 was Crescent Real
Estate's acquisition of the Crescent Operating hotel operations and land
development interests. Crescent Real Estate previously was unable to lease or
own these interests without jeopardizing its status as a REIT for federal income
tax purposes. After extensive negotiations and discussions, Crescent Operating
and Crescent Real Estate agreed to the Settlement Agreement and Crescent
Operating bankruptcy plan. The bankruptcy plan is attractive to Crescent
Operating as it provides that consideration will be delivered to all of Crescent
Operating's unsecured creditors identified by Crescent Operating in the original
Settlement Agreement, as well as to the Crescent Operating stockholders. For
Crescent Real Estate, the Settlement Agreement and bankruptcy plan enabled
Crescent Real Estate to obtain the assets of Crescent Operating securing the
Crescent Operating obligations in a quick and efficient manner, without
litigation.

      As essential consideration for its agreement to enter into the Settlement
Agreement, Crescent Real Estate required the execution of a mutual release
between Crescent Real Estate and Crescent Operating. Pursuant to this release,
Crescent Operating released Crescent Real Estate and its affiliates from any and
all claims that Crescent Operating might have that arose at any time prior to
the execution of the Settlement Agreement. This release also provides that
Crescent Real Estate has released Crescent Operating and its affiliates from any
and all claims that it may have that arose at any time prior to the execution of
the Settlement Agreement. Furthermore, as essential consideration for its
agreement to enter into the Settlement Agreement, Crescent Real Estate required
that the bankruptcy plan include a provision that Crescent Operating
stockholders who vote to accept the bankruptcy plan or who accept the
distribution of Crescent Real Estate common shares under the bankruptcy plan,
will be deemed to have released Crescent Real Estate and its affiliates from any
and all claims that may have arisen on or before the effective date of the
bankruptcy plan, except for performance or non-performance under the Settlement
Agreement or the bankruptcy plan and except for any act or omission that
constitutes actual fraud or criminal behavior.

      Prior to entering into the Settlement Agreement, Crescent Operating
analyzed whether it had claims against Crescent Real Estate that should be
pursued as an alternative to the proposed Settlement Agreement. Crescent
Operating consulted its counsel who reviewed, among other matters, the origin of


                                       55

the indebtedness to Crescent Real Estate and the business relationship between
Crescent Operating and Crescent Real Estate that began in 1997 when the shares
of Crescent Operating common stock were distributed to Crescent Real Estate
shareholders. Crescent Operating independently evaluated whether the benefit to
Crescent Operating stockholders in consummating the Settlement Agreement
outweighed the benefit that might be derived from declining the proposed
Settlement Agreement and instead pursuing claims against Crescent Real Estate.
In making this evaluation, Crescent Operating took into consideration the
relative certainty of its creditors and stockholders realizing the benefits
provided for in the Settlement Agreement and the relative uncertainty of
recovery in, as well as the costs and delay associated with, prosecuting any
claims, and particularly claims of uncertain merit. Based upon the totality of
all the circumstances, Crescent Operating made the independent judgment that the
best interests of its creditors and stockholders would be served by entering
into the Settlement Agreement. Crescent Operating concluded that the benefits to
its creditors and stockholders that would be realized through the Settlement
Agreement outweighed the cost to Crescent Operating of granting the releases to
Crescent Real Estate.


      After giving effect to the transfer of Crescent Operating's hospitality
and land development assets and the reduction in Crescent Operating's debt under
the terms of the Settlement Agreement, the outstanding amounts that Crescent
Operating owed to Crescent Real Estate as of September 30, 2002, totaled $68.5
million. This amount consists of $23.7 million of deferred rent obligations and
$44.8 million of principal and accrued interest.


SUMMARY OF THE REORGANIZATION TRANSACTIONS


      The Settlement Agreement, dated as of February 14, 2002 and amended as of
October 1, 2002, between Crescent Partnership, Crescent Real Estate, Crescent
Operating and certain subsidiaries of Crescent Operating, contains the basic
structure of the reorganization transactions. The Settlement Agreement provides
for a "pre-packaged" bankruptcy of Crescent Operating on the terms set forth in
the Settlement Agreement and the Plan of Reorganization. The Settlement
Agreement and the mutual releases executed in connection with the Settlement
Agreement, including Crescent Operating's release of all claims it may have
against Crescent Real Estate, are effective and enforceable, and Crescent Real
Estate is obligated to assist Crescent Operating in resolving creditor claims
identified by Crescent Operating in the original Settlement Agreement, only if
the bankruptcy plan is confirmed by the bankruptcy court. Similarly, the
Settlement Agreement provides that distributions to Crescent Operating
stockholders will be made only if Crescent Operating stockholders accept the
bankruptcy plan and the bankruptcy plan is confirmed. Effective October 1, 2002,
Crescent Operating and Crescent Real Estate amended the Settlement Agreement.
The amendment provides for, among other things, a minimum value of Crescent Real
Estate common shares to be issued in connection with the bankruptcy plan if the
bankruptcy plan is accepted by the requisite vote of Crescent Operating
stockholders and the bankruptcy court confirms the bankruptcy plan.


      The following summarizes the principal reorganization transactions
provided for in the Crescent Operating bankruptcy plan and the Settlement
Agreement and is not intended to be complete. You should refer to the Plan of
Reorganization attached as Annex A and the Settlement Agreement attached as
Annex B for a complete description of the provisions of the Crescent Operating
bankruptcy plan.

Transfer of Assets

      Under the Crescent Operating loans, Crescent Real Estate had a security
interest in substantially all of Crescent Operating's assets and was entitled to
exercise its rights under the loans and related pledge agreements upon a default
by Crescent Operating under the loans. The assets pledged to Crescent Real
Estate included the Crescent Operating hotel operations and the Crescent
Operating land development


                                       56

interests. Crescent Real Estate was entitled to terminate the leases of the
hotel properties upon a default under the leases. Crescent Real Estate notified
Crescent Operating that it was in default under the loans and the leases.

      Hospitality Assets. Pursuant to the Settlement Agreement, in lieu of a
foreclosure by Crescent Real Estate on these equity interests, the lessees of
the hotel properties, all of which are wholly owned subsidiaries of Crescent
Operating, agreed to transfer the Crescent Operating hotel operations to
Crescent Real Estate in exchange for cancellation of an aggregate amount of
rental payments due to Crescent Real Estate equal to the agreed upon value of
the transferred assets, or $23.6 million. The Crescent Operating hotel
operations include all of the hotel property leases and all business contracts,
licenses, furniture, fixtures and equipment, cash and intellectual property
relating to the hospitality business. Crescent Operating also agreed to
cooperate with Crescent Real Estate to assure the transfer of all of the assets
relating to the hospitality business to Crescent Real Estate.

      Crescent Real Estate has not agreed to assume obligations or liabilities
of the lessees that arose prior to the date of the transfer, and has not waived
its rights to seek collection in bankruptcy of the remaining $25.4 million in
unpaid rent due to Crescent Real Estate.

      As of the date hereof, all of the assets associated with the businesses of
the following hotel properties, constituting all of Crescent Operating's
hospitality assets, have been transferred to Crescent Real Estate in lieu of
foreclosure: (i) the Denver Marriott, (ii) the Hyatt Regency Beaver Creek, (iii)
the Hyatt Regency Albuquerque, (iv) Sonoma Mission Inn & Spa, (v) Ventana Inn &
Spa, (vi) Houston Renaissance, (vii) Canyon Ranch - Lenox, and (viii) Canyon
Ranch - Tucson.

      Equity Interests in Residential Land Development and Other Companies.
Beginning in 1997 and ending in 2000, pursuant to various credit and security
agreements, and a pledge agreement, as amended, Crescent Real Estate made
several loans to Crescent Operating which were secured by assets of Crescent
Operating. Crescent Operating agreed, under the Settlement Agreement, to consent
to Crescent Real Estate's acquisition through strict foreclosure of some of
these pledged assets, which included stock, membership interests and partnership
interests, in satisfaction of $40.1 million of Crescent Operating debt, as
follows:

      -     500 shares of voting common stock, $.01 par value, of CRL,
            representing 100% of the issued and outstanding voting capital stock
            and 5% of the issued and outstanding capital stock of CRL;

      -     a 1.5% membership interest in CR License LLC, an Arizona limited
            liability company;

      -     100 shares of common stock, $.01 par value, of WOCOI Investment
            Company, a Texas corporation, representing 100% of the issued and
            outstanding capital stock of WOCOI Investment Company;

      -     500 shares of voting common stock, $.01 par value, of The Woodlands
            Land Company, Inc., a Texas corporation, representing 100% of the
            issued and outstanding voting capital stock and 5% of the issued and
            outstanding capital stock of The Woodlands Land Company;

      -     50 shares of voting common stock, $.01 par value, of Desert Mountain
            Development Corporation, a Delaware corporation, representing 100%
            of the issued and outstanding voting capital stock and 5% of the
            issued and outstanding capital stock of Desert Mountain Development
            Corporation;


                                       57

      -     10 shares of voting common stock, $.01 par value, of CRE Diversified
            Holdings, Inc., a Delaware corporation, representing 100% of the
            issued and outstanding voting capital stock and 1% of the issued and
            outstanding capital stock of CRE Diversified Holdings; and

      -     Crescent Operating's general partner interest in COPI Colorado,
            representing a 60% general partner interest in COPI Colorado.


      Crescent Operating also agreed to cause all of the officers and directors
of the corporate entities that are also officers, directors or employees of
Crescent Operating to resign or to remove them.

      As of the date of this proxy statement/prospectus, Crescent Real Estate
has acquired the equity interests of all of the entities listed above. As a
result, Crescent Real Estate now controls all of those entities.

      Crescent Real Estate has not agreed to assume obligations or liabilities
of those entities that arose prior to the date of the transfer, and has not
waived its rights to collection in the bankruptcy of the remaining $36.6 million
in unpaid indebtedness at September 30, 2002.

      The Settlement Agreement provides that Crescent Operating will transfer
its remaining assets at the direction of Crescent Real Estate. The bankruptcy
plan similarly provides that, in partial satisfaction of Crescent Real Estate's
claim, Crescent Operating will transfer its remaining assets at the direction of
Crescent Real Estate. Those transfers may be made before or after the bankruptcy
plan is filed or confirmed. Crescent Operating and Crescent Real Estate
contemplate that all transfers will be complete on or about the effective date
of the bankruptcy plan. The transfers will be made to Crescent Real Estate or
its affiliates in partial satisfaction of Crescent Operating's debts to Crescent
Real Estate. In the event that Crescent Operating receives a distribution in the
Crescent Machinery bankruptcy or retains its interest in Crescent Machinery
prior to the effective date of the bankruptcy plan, Crescent Real Estate is
likely to elect to have Crescent Operating transfer the distribution or interest
to Crescent Real Estate.

Bankruptcy Plan

      Pursuant to the Settlement Agreement, Crescent Operating has agreed to
file a petition under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware, or such other
jurisdiction as Crescent Real Estate and Crescent Operating shall agree, as soon
as practicable after the date of the special meeting. On the same date, Crescent
Operating will file with the bankruptcy court the Plan of Reorganization in such
form attached as Annex A, this proxy statement/prospectus and all other related
disclosure and solicitation materials delivered to the Crescent Operating
stockholders and impaired creditors in connection with this solicitation.
Crescent Operating has agreed to seek approval of this proxy
statement/prospectus and other disclosure and solicitation materials, and
confirmation of the Crescent Operating bankruptcy plan, within 45 days after
filing the petition with the bankruptcy court.

Payment by Crescent Real Estate of Crescent Operating Claims and Expenses

      Pursuant to the Settlement Agreement, Crescent Real Estate has agreed to
advance funds to Crescent Operating sufficient for Crescent Operating to pay its
reasonable and necessary documented out-of-pocket expenses to the extent
Crescent Operating is unable to pay them, in accordance with the monthly budget
prepared by Crescent Operating. Advances in excess of the budget are at Crescent
Real Estate's discretion. A revolving demand note entered into on February 14,
2002, and amended and restated effective as of October 1, 2002, evidences
Crescent Real Estate's obligation to advance up to $3.2 million to cover these
expenses through September 2002. In addition, Crescent Real Estate has


                                       58

agreed to advance funds to Crescent Operating, under the amended and restated
note, in an aggregate amount of up to $2.7 million, to cover specified known
contingent obligations. Under the amended and restated note, these contingent
obligations are identified as follows:

         -  up to $1,500,000 for federal, state and local taxes and fees that
            may be required to be paid by Crescent Operating;

         -  up to $700,000 for payments owed by Crescent Operating in connection
            with its investment in AmeriCold Logistics; and

         -  up to $500,000 for amounts that may become due to Crescent Machinery
            if a payment by Crescent Machinery to Crescent Operating is
            determined, in connection with the bankruptcy proceedings of
            Crescent Machinery, to be a preference payment that Crescent
            Operating must return to Crescent Machinery; and

      As of the effective date of the amended and restated note, Crescent Real
Estate had advanced the $3.2 million provided for budgeted operating expenses of
Crescent Operating, plus an additional $431,000. The additional $431,000
consists of:

         -  $381,000 to cover out-of-pocket expenses that Crescent Operating
            incurred, as specified in its monthly budget, but requiring an
            advance from Crescent Real Estate because Crescent Operating has not
            yet received the return of its $900,000 overpayment to a health
            insurer that Crescent Operating expected to receive and budgeted for
            receipt in September 2002; and

         -  $50,000 to cover amounts paid by Crescent Operating to Delaware
            counsel for its prior services to Crescent Operating.


      In addition, although the original note provided that Crescent Real Estate
would advance up to $1,725,000 to Crescent Operating for its obligations under
notes payable to E.L. Lester and Company, Harvey Equipment Center, Inc. and L
and H Leasing Company, as payees under the notes, Crescent Real Estate purchased
these notes directly from the payees for $1,321,258. This purchase satisfied
Crescent Operating's contingent obligation relating to these notes and,
accordingly, the up to $1,725,000 Crescent Real Estate had agreed to advance to
Crescent Operating to permit it to satisfy the obligation has been eliminated in
the amended and restated note. Similarly, the up to $900,000 that Crescent Real
Estate had agreed to advance to Crescent Operating if Crescent Operating's
overpayment to a health insurer was not returned by September 2002 has been
reduced to the $381,000 already advanced.


      As a result of the advances and changes in circumstances detailed in the
two preceding paragraphs, the amended and restated note provides for an
aggregate loan in the principal amount of $6,331,000, $3,631,000 of which had
been advanced under the note as of December 31, 2002.


      Crescent Operating's management believes that the aggregate amount
specified in the amended and restated note is a "worst case" estimates and
expects that the actual payments will be less in the aggregate. Crescent
Operating has agreed to seek approval of the bankruptcy court to provide
Crescent Real Estate with a priority claim and lien for the funds Crescent Real
Estate advances under the amended and restated note.


      Under the Settlement Agreement, Crescent Real Estate also has agreed,
under a separate, secured promissory note entered into effective October 1,
2002, to advance up to $2,900,000 in additional funds to Crescent Operating.
Under this secured note, which is a revolving demand note, Crescent Real Estate
has



                                       59



agreed to advance funds sufficient for Crescent Operating to pay its reasonable
and necessary documented out-of-pocket expenses to the extent Crescent Operating
is unable to pay them, in accordance with the monthly budget prepared by
Crescent Operating for expenses through March 2003. Other than as described
below, advances in excess of $2,000,000 are at Crescent Real Estate's
discretion. The secured note is secured by an interest in the $900,000 insurance
overpayment expected to be returned to Crescent Operating by a health insurer by
March 2003. In addition, Crescent Real Estate has agreed to advance up to an
additional $900,000 to Crescent Operating to cover Crescent Operating's budgeted
out-of-pocket expenses in the event that the overpayment is not returned to
Crescent Operating, or in the event that Crescent Operating, in accordance with
the security agreement relating to the return of the overpayment, pays the
amount returned to Crescent Real Estate.


      As Crescent Real Estate advances funds to Crescent Operating to pay for or
otherwise resolve claims and expenses in connection with the Crescent Operating
bankruptcy and the reorganization transactions, including expenses of Crescent
Real Estate, the total value of the Crescent Real Estate common shares to be
offered to the Crescent Operating stockholders (assuming that the stockholders
accept, and the bankruptcy court confirms, the bankruptcy plan) will decrease,
but not below a total value of approximately $2.16 million, or $0.20 per share
of Crescent Operating common stock.

      Crescent Operating believes that, other than claims of trade creditors and
other claims associated with the ordinary, day-to-day business operations of
Crescent Operating, the only other claims against Crescent Operating are
possible liabilities relating to the bankruptcy of Crescent Machinery and the
Bank of America claim.

      The Settlement Agreement provides that, if Crescent Real Estate, in its
sole discretion, offers to settle or assume unsecured claims asserted by third
parties and not identified by Crescent Operating in the original Settlement
Agreement, and Crescent Operating accepts the offer, then the total value of the
Crescent Real Estate common shares paid to Crescent Operating stockholders will
be reduced (but not below a total value of approximately $2.16 million, or $0.20
per share of Crescent Operating common stock) by the amount agreed to by
Crescent Real Estate and Crescent Operating, and approved by the bankruptcy
court, as compensation to Crescent Real Estate for assuming the claims. If
Crescent Real Estate and Crescent Operating are not able to agree to Crescent
Real Estate's assumption of any such unresolved third party claims that were not
identified by Crescent Operating in the original Settlement Agreement and that
are an obstacle to confirmation of the Crescent Operating bankruptcy plan, then
it is possible that the bankruptcy plan will not be confirmed.

Payment of Bank of America Claim


      Crescent Operating is the obligor under a loan from Bank of America in the
principal amount of $15.0 million and does not have sufficient funds to repay
the obligation. Crescent Real Estate holds a first lien security interest in
Crescent Operating's entire membership interest in COPI Cold Storage. Pursuant
to the Settlement Agreement, Crescent Real Estate has agreed to allow Crescent
Operating to grant Bank of America a first priority security interest in
Crescent Operating's entire membership interest in COPI Cold Storage and to
subordinate Crescent Real Estate's security interest in COPI Cold Storage to
Bank of America. Crescent Real Estate has also agreed to use commercially
reasonable efforts to assist Crescent Operating in arranging Crescent
Operating's repayment of its $15.0 million obligation to Bank of America,
together with up to $0.5 million of accrued interest. Crescent Real Estate will
undertake the transactions described below under "-- Spin Off of AmeriCold
Logistics Interest to Crescent Real Estate Shareholders," including the
formation of a new entity referred to as Crescent Spinco, to be owned by the
shareholders of Crescent Real Estate. Crescent Spinco would purchase the
AmeriCold Logistics interest. Crescent Operating has agreed that it will use the
proceeds of the sale of the AmeriCold Logistics interest to repay Bank of
America in full.



                                       60

Spin Off of AmeriCold Logistics Interest to Crescent Real Estate Shareholders
and Crescent Partnership Unitholders


      Pursuant to the Settlement Agreement, Crescent Real Estate will form and
capitalize Crescent Spinco, which will file a Form S-1 registration statement
with the Securities and Exchange Commission. Crescent Real Estate has committed
to cause Crescent Spinco to commit to acquire Crescent Operating's entire
membership interest in COPI Cold Storage for between $15.0 to $15.5 million.
COPI Cold Storage owns a 40% general partner interest in the owner of AmeriCold
Logistics. Upon effectiveness of the Form S-1 registration statement, Crescent
Spinco will distribute its shares to the holders of Crescent Real Estate common
shares and the unitholders of Crescent Partnership and will purchase Crescent
Operating's membership interest in COPI Cold Storage. The distribution of the
Crescent Spinco shares will be made to the holders of Crescent Real Estate
common shares prior to the issuance of Crescent Real Estate common shares to the
Crescent Operating stockholders. As a result, the holders of Crescent Operating
common stock will not receive any interest in Crescent Spinco.


Issuance of Crescent Real Estate Common Shares to Crescent Operating
Stockholders

      If the Crescent Operating stockholders accept Crescent Operating's
bankruptcy plan and the bankruptcy court confirms the bankruptcy plan, Crescent
Real Estate will distribute to each holder of Crescent Operating common stock,
common shares of Crescent Real Estate equal to the product of:

         -  the number of shares of Crescent Operating common stock owned by the
            holder on the confirmation date, divided by the number of shares of
            Crescent Operating common stock outstanding on the confirmation
            date, and


         -  the consideration amount, as described below, divided by the average
            of the daily closing prices per Crescent Real Estate common share as
            reported on the NYSE Composite Transaction reporting system for the
            10 consecutive NYSE trading days immediately preceding confirmation
            of the Crescent Operating bankruptcy plan by the bankruptcy court,
            but in no event will the value of the distributed common shares of
            Crescent Real Estate be less than approximately $0.20 per share of
            Crescent Operating common stock outstanding.


      Crescent Real Estate will make this distribution to the Crescent Operating
stockholders promptly following the effective date of the Crescent Operating
bankruptcy plan or the date upon which the bankruptcy plan becomes final, at
Crescent Real Estate's election, or as soon thereafter as practicable.

      The consideration amount will equal the greater of:


         -  approximately $2.16 million; or


         -  $16.0 million minus the total amount of payments made by Crescent
            Real Estate or claims and expenses relating to the Crescent
            Operating bankruptcy and the reorganization transactions, including
            expenses of Crescent Real Estate but excluding payments in
            satisfaction of the Bank of America claim.

      Crescent Operating and Crescent Real Estate estimate that Crescent Real
Estate will advance the funds to Crescent Operating or pay in full or otherwise
resolve claims and expenses related to the Crescent Operating bankruptcy and the
reorganization transactions, including Crescent Real Estate expenses but
excluding payments in satisfaction of the Bank of America claim, of $10.6
million to $13.8


                                       61

million. These expenses include the payments referred to above in "-- Payment by
Crescent Real Estate of Crescent Operating Claims and Expenses."

      Crescent Operating does not believe that there are any significant claims
against Crescent Operating that Crescent Real Estate has not agreed to use
commercially reasonable efforts to satisfy, with the exception of the disputed
claims of the Crescent Machinery Committee. In addition, Crescent Operating has
determined its ongoing cash flow requirements, which are set forth in a budget
approved by Crescent Real Estate and attached to the up to approximately $2.9
million secured note payable to Crescent Real Estate by Crescent Operating. As a
result, Crescent Operating and Crescent Real Estate believe that the $10.6
million to $13.8 million claims and expenses estimate is based upon reasonable
assumptions. However, Crescent Real Estate's actual expenses will depend on a
number of factors that may differ, some materially, from these assumptions. As a
result, Crescent Operating and Crescent Real Estate cannot assure you that the
consideration amount will not be significantly less than the high estimate of
$5.4 million. In no event, however, will the Crescent Operating stockholders
receive Crescent Real Estate common shares with a total value of less than
approximately $2.16 million, or $0.20 per share of Crescent Operating common
stock if the bankruptcy plan is accepted by the Crescent Operating stockholders
and confirmed by the bankruptcy court.

      For purposes of the following example, assume that

         -  Crescent Real Estate pays $10.6 million in expenses relating to the
            Crescent Operating bankruptcy,


         -  the total number of shares of Crescent Operating common stock
            outstanding is 10,828,497 (the total number of shares of Crescent
            Operating common stock outstanding at January 8, 2003), and


         -  the average of the daily closing prices per Crescent Real Estate
            common share as reported on the NYSE Composite Transaction reporting
            system for the 10 consecutive NYSE trading days immediately
            preceding confirmation of the Crescent Operating bankruptcy plan by
            the bankruptcy court is $20.00.

      Based on the preceding assumptions, Crescent Real Estate will distribute a
total of approximately 0.0249 Crescent Real Estate common shares per share of
Crescent Operating common stock to Crescent Operating stockholders.

      Making the same assumptions described in the second and third bullet
points above, but assuming that Crescent Real Estate instead pays $13.8 million
in expenses relating to the Crescent Operating bankruptcy, Crescent Real Estate
will distribute a total of approximately 0.0102 Crescent Real Estate common
shares per share of Crescent Operating common stock to Crescent Operating
stockholders.


      As soon as practicable after the effective date, Crescent Real Estate will
deposit with the disbursement agent for the Crescent Operating bankruptcy plan,
in trust for the holders of shares of Crescent Operating common stock on such
date, certificates representing the Crescent Real Estate common shares issuable
to the Crescent Operating stockholders. As soon as practicable after the
effective date, the disbursement agent shall mail to each record holder of a
certificate or certificates that immediately prior to the effective date
represented outstanding shares of Crescent Operating common stock, or the
Certificates, a letter of transmittal in form reasonably acceptable to Crescent
Operating, which shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon actual delivery of the
Certificates to the disbursement agent, and shall contain instructions for use
in effecting the surrender of the Certificates. Upon surrender for cancellation
to the disbursement



                                       62

agent of a Certificate, together with such letter of transmittal, duly executed,
the holder of such Certificate shall be entitled to receive a certificate
representing that number of Crescent Real Estate common shares, rounded up or
down to the nearest whole number, provided for in the Crescent Operating
bankruptcy plan, and any Certificate so surrendered shall be canceled.


      After the confirmation date, there will be no further transfers of
Crescent Operating common stock on the stock transfer books of Crescent
Operating. Shares of Crescent Operating common stock will be deemed for all
corporate purposes to evidence only the right to receive the number of Crescent
Real Estate common shares to which the holder is entitled under the Crescent
Operating bankruptcy plan. If a certificate representing Crescent Operating
common stock is presented for transfer on or after the confirmation date, a
certificate representing the appropriate number of whole Crescent Real Estate
common shares will be issued in exchange therefor.


Cancellation of Crescent Operating Common Stock


      At the confirmation date of the Crescent Operating bankruptcy, Crescent
Operating will close its stock transfer books, and no further transfers of
Crescent Operating common stock will be possible. On the date on which the
Crescent Operating bankruptcy plan becomes effective, all shares of Crescent
Operating common stock shall automatically be canceled and retired and shall
cease to exist. Each holder of a stock certificate shall cease to have any
rights with respect thereto, except the right to receive certificates
representing the Crescent Real Estate common shares to which such holder is
entitled based on the number of shares held by the holder on the confirmation
date. No fractional Crescent Real Estate common shares will be issued, no cash
shall be paid in lieu of fractional shares, and any fractional share amounts
shall be rounded up or down to the closest number of whole Crescent Real Estate
common shares. Accordingly, assuming a share price of $20.00 per Crescent Real
Estate common share, a payment by Crescent Real Estate of $13.8 million in
expenses relating to the Crescent Operating bankruptcy and a distribution of
$0.20 per share of Crescent Operating common stock, each Crescent Operating
stockholder must hold at least 50 shares of Crescent Operating common stock in
order to receive any Crescent Real Estate common shares.


Mutual Release


      Pursuant to the Settlement Agreement, on February 14, 2002, Crescent
Operating and the lessees of the hotel properties, on the one hand, and Crescent
Real Estate, on the other hand, have executed and delivered to each other a
general release of each other, their respective officers, directors, trust
managers, agents and employees from all liabilities and claims of any nature
arising from events, matters or transactions occurring prior to the date of the
release, except for liabilities or claims arising under the Settlement
Agreement. This release remains effective regardless of whether the bankruptcy
plan is accepted by Crescent Operating's stockholders and/or confirmed by the
bankruptcy court. Crescent Operating does not believe the release can be avoided
both because Crescent Real Estate is paying substantial consideration to
Crescent Operating and its stockholders to obtain the releases provided under
the bankruptcy plan and because the releases are voluntary.


Termination Agreement

      Pursuant to the Settlement Agreement, on February 14, 2002, Crescent
Operating executed an agreement terminating the Intercompany Agreement between
Crescent Operating and Crescent Real Estate. Under the Intercompany Agreement,
Crescent Operating and Crescent Real Estate granted each other rights to
participate in certain transactions involving the other party. In order to
participate in those transactions, each party was required to contribute
financially to the transactions. Crescent Operating currently neither has funds
available nor a means of obtaining funds to be used for additional investments.


                                       63

As a result, the termination of the Intercompany Agreement is not expected to
affect Crescent Operating's operations.

Other Material Terms of the Settlement Agreement

      Representations and Warranties of Crescent Operating.


      The Settlement Agreement contains representations and warranties made by
Crescent Operating and the Crescent Operating subsidiaries that are parties to
the Settlement Agreement. Crescent Operating and these Crescent Operating
subsidiaries represent and warrant:

      -     that they are duly organized, existing and in good standing;

      -     that they have the requisite power and authority to enter into the
            Settlement Agreement, to undertake the obligations contained therein
            and to consummate the transactions contemplated thereby;

      -     that to Crescent Operating's knowledge, there are no obligations or
            claims existing or assertable against Crescent Operating, other than
            the claims referred to in the Settlement Agreement; and

      -     as to their ownership interests in the entities to be retained by
            Crescent Real Estate pursuant to the Plan of Reorganization.

      Representations and Warranties of Crescent Real Estate and Crescent
Partnership.

      The Settlement Agreement also contains certain representations and
warranties made by Crescent Real Estate and Crescent Partnership to Crescent
Operating and the Crescent Operating subsidiaries. Crescent Real Estate and
Crescent Partnership represent and warrant:

      -     that they are duly organized, existing and in good standing;

      -     that they have the requisite power and authority to enter into the
            Settlement Agreement, to undertake the obligations contained
            therein, and to consummate the transactions contemplated thereby;
            and

      -     that the Crescent Real Estate common shares to be issued to the
            Crescent Operating stockholders pursuant to the Settlement Agreement
            have been duly authorized for issuance and will be validly issued,
            fully paid, nonassessable, and free of any liens upon issuance.

      Each representation, warranty, covenant and agreement contained in the
Settlement Agreement survives indefinitely.

      Covenants of Crescent Operating.


      Pursuant to the Settlement Agreement, Crescent Operating and its
subsidiaries signatory thereto agree:

      -     to obtain and cooperate in obtaining consents, to make filings with
            and to give notices to governmental or regulatory authorities or any
            other person required to consummate the purchase of the assets;

      -     to provide Crescent Partnership and its representatives access to
            its books and records;

      -     not to pursue any agreement or arrangement for the transfer of the
            assets that Crescent Partnership will obtain pursuant to the
            Settlement Agreement;

      -     to conduct business only in the ordinary course, consistent with
            past practices; and


                                       64

      -     to take all commercially reasonable steps to satisfy obligations of
            Crescent Partnership and not to take or fail to take any action that
            could be expected to result in the nonfulfillment of any such
            condition.

      Further, each of Crescent Operating, its subsidiaries signatory to the
Settlement Agreement and the transferred businesses whose stock Crescent
Operating is transferring to Crescent Partnership and their subsidiaries, agrees
to refrain from, without the prior written consent of Crescent Partnership:

      -     acquiring or disposing of any assets and properties used to conduct
            the businesses of the subsidiary signatories or the transferred
            businesses, other than in the ordinary course of business;

      -     creating or incurring a lien on any assets and properties used to
            conduct the businesses of the subsidiary signatories or the
            transferred businesses, other than in the ordinary course of
            business or in favor of Crescent Partnership or its affiliates;

      -     entering into, amending, modifying, terminating, granting any waiver
            under or giving consent to any material contract, other than in the
            ordinary course of business;

      -     violating, breaching or defaulting under, or taking or failing to
            take any action that would constitute a violation, breach of or
            default under, any term of a material contract;

      -     engaging in a business combination;

      -     engaging in transactions with their affiliates, other than in the
            ordinary course of business or on an arm's-length basis;

      -     amending their formation documents;

      -     selling, transferring or otherwise encumbering their stock, or
            agreeing to any restrictions on their stock;

      -     incurring or increasing any indebtedness, other than in the ordinary
            course of business;

      -     giving third-party guarantees;

      -     making capital expenditures or commitments for additions to
            property, plant or equipment constituting capital assets on behalf
            of the businesses of the subsidiary signatories in excess of $75,000
            in the aggregate;

      -     making any significant payments outside a delineated budget.

      The preceding list of restrictions will remain in effect even if the
bankruptcy plan is not confirmed. These restrictions are contained in the
Settlement Agreement, a binding agreement between the parties that will remain
in effect, and with which Crescent Operating intends to comply, even if the
bankruptcy plan is not confirmed.

      Crescent Operating and its subsidiaries are required to comply with the
preceding list of restrictions on their business activities from the original
execution date of the Settlement Agreement until:

      -     the last date on which the remaining consents, approvals, notices or
            waiting periods necessary for any transferred business to transfer,
            and Crescent Partnership to receive, the assets owned by such
            transferred business, or such other date as Crescent Partnership
            determines, provided that Crescent Partnership gives the transferred
            businesses the required notice and allows the transferred business
            time to obtain the necessary consents, approvals, notices or waiting
            periods;

      -     the last date on which Crescent Partnership retains some or all of
            the Crescent Operating equity interests in residential land
            development and other companies in satisfaction of $40.1 million of
            Crescent Operating debt, or such other date as Crescent Partnership
            determines;

      -     any other date to which Crescent Operating consents in writing; or


                                       65

      -     termination of the Settlement Agreement in accordance with its
            terms, except that each transferred business will remain liable to
            Crescent Real Estate and Crescent Operating for any willful breach
            of the Settlement Agreement by the transferred business existing at
            the time of such termination, and Crescent Real Estate or Crescent
            Operating will remain liable to each transferred business for any
            willful breach of the Settlement Agreement by Crescent Real Estate
            or Crescent Operating, respectively, existing at the time of such
            termination.

      Crescent Operating also covenants to cause Jeffrey L. Stevens and any
other Crescent Operating officer, director or employee, other than John C. Goff,
to resign from specified Crescent Operating subsidiaries on the date any stock
of such subsidiaries is transferred to Crescent Partnership.

      Covenants of Crescent Real Estate and Crescent Partnership.


      Pursuant to the Settlement Agreement, Crescent Partnership and Crescent
Real Estate covenant to obtain consents from, to make filings with and to give
notices to governmental or regulatory authorities or any other person required
to consummate the purchase of the assets. Crescent Partnership also agrees to
take all commercially reasonable steps to satisfy identified obligations of the
Crescent Operating and will not take or fail to take any action that could be
expected to result in the nonfulfillment of any condition.

      Indemnification.


      The Settlement Agreement provides for indemnification with respect to
Crescent Operating, Crescent Partnership and Crescent Real Estate as follows:


      -     Crescent Operating shall indemnify Crescent Partnership and Crescent
            Real Estate and their respective officers, directors, trust
            managers, employees and agents against any and all losses suffered
            by any of them relating to any misrepresentation and any
            nonfulfillment of or failure to perform any covenant or agreement;


      -     Crescent Partnership shall indemnify Crescent Operating and its
            officers, directors, employees and agents against any and all losses
            suffered by any of them relating to any misrepresentation and any
            nonfulfillment of or failure to perform any covenant or agreement;

      -     Crescent Real Estate shall indemnify Crescent Operating and its
            officers, directors, employees and agents against any and all losses
            suffered by any of them relating to any misrepresentation and any
            nonfulfillment of or failure to perform any covenant or agreement;
            and

      -     The indemnification obligations are subject to limitations for
            actual damages incurred and reductions for amounts actually received
            by an indemnified party.

      Termination.


      Subject to various limitations, the Settlement Agreement may be
terminated:

      -     by mutual consent of Crescent Operating, each Crescent Operating
            subsidiary that is a party to the Settlement Agreement, Crescent
            Real Estate, and Crescent Partnership;

      -     by Crescent Operating and the Crescent Operating subsidiaries in the
            event of a material breach by Crescent Real Estate or Crescent
            Partnership that is not cured within 10 business days following
            notification of the material breach;

      -     by Crescent Real Estate or Crescent Partnership in the event of a
            material breach by Crescent Operating and the Crescent Operating
            subsidiaries that is not cured within 10 business days following
            notification of the material breach; and


                                       66

      -     by any party, if such party's obligations under the Settlement
            Agreement become impossible or impractical within the use of
            commercially reasonable means, unless such impossibility or
            impracticality is caused by a material breach of such party.

      If the Settlement Agreement is terminated pursuant to the provisions set
forth in the preceding paragraph, the Settlement Agreement shall be null and
void and all liability and obligations of each party shall cease, except that:

      -     the confidentiality provisions of the Settlement Agreement will
            continue to apply;

      -     Crescent Operating or any Crescent Operating subsidiary, where
            applicable, will remain liable to Crescent Real Estate or Crescent
            Partnership for any willful breach of the Settlement Agreement
            existing at the time of termination of the Settlement Agreement; and

      -     Crescent Real Estate or Crescent Partnership will remain liable to
            Crescent Operating or any Crescent Operating subsidiary, where
            applicable, for any willful breach of the Settlement Agreement
            existing at the time of termination of the Settlement Agreement.

ANALYSIS OF ALTERNATIVES

      Crescent Operating, in conjunction with its legal counsel, undertook an
analysis of its claims and defenses to Crescent Real Estate's claims against it
and investigated whether proceedings under the bankruptcy laws might provide
solutions to Crescent Operating's obligations to Crescent Real Estate. Upon
reviewing the agreements creating Crescent Real Estate's claims against Crescent
Operating and security interests in Crescent Operating's assets, Crescent
Operating's counsel advised that the agreements appeared valid and enforceable.
Crescent Operating's counsel advised management that, because Crescent
Operating's existing obligations to Crescent Real Estate were in default,
Crescent Operating would have to obtain Crescent Real Estate's agreement before
incurring additional or replacement debt sufficient to satisfy Crescent
Operating's obligations and continue its ongoing operations. In addition,
Crescent Operating anticipated that it would be unlikely to locate a lender that
would be willing to provide the necessary loans under such circumstances.
Crescent Operating also believed that obtaining additional funds through the
sale of equity would not be a feasible alternative, because the demand for
Crescent Operating's equity was not adequate to meet Crescent Operating's
capital requirements.

      Crescent Operating engaged counsel to examine the facts and circumstances
of Crescent Real Estate's business relationships and connections to Crescent
Operating to determine whether there was any basis to achieve a better result
for Crescent Operating creditors and stockholders than is provided pursuant to
the Settlement Agreement and the bankruptcy plan. Crescent Operating's counsel
advised management that the most likely way to prevent Crescent Real Estate from
enforcing its agreements would be to instigate litigation requesting that a
court set aside Crescent Real Estate's liens or recharacterize the Crescent Real
Estate loans as equity infusions. This type of litigation is very expensive and
difficult to win, and Crescent Operating did not have sufficient funds to pursue
litigation that is generally pursued for the benefit of creditors, not equity
holders. Because each loan from Crescent Real Estate to Crescent Operating would
be analyzed separately, it is unlikely that all of the loans would be
recharacterized. Any loans not recharacterized as equity would have to be repaid
before there could be any distribution to the stockholders of Crescent
Operating. In addition, it is very difficult to predict the effect that
recharacterizing the loans would have on distributions to Crescent Real Estate
and to Crescent Operating's stockholders. Crescent Operating's counsel is not
aware of any case law precedent determining how Crescent Real Estate and
Crescent Operating stockholders would share in any value that would be available
to Crescent Operating if Crescent Real Estate's transactions were altered by a
court. As noted above, these types of claims are usually asserted for the
benefit of creditors, not equity holders, and the only parties that receive any
value are creditors. Since the Settlement Agreement provides for


                                       67

payment in full of Crescent Operating's creditors and is not contingent on the
outcome of risky and expensive litigation, the sole director concluded that the
Settlement Agreement and the bankruptcy plan provide a better outcome to
creditors and stockholders.

      Prior to entering into the Settlement Agreement, Crescent Operating
analyzed whether it had claims against Crescent Real Estate that should be
pursued as an alternative to the proposed Settlement Agreement. Crescent
Operating consulted its counsel who reviewed, among other matters, the origin of
the indebtedness to Crescent Real Estate and the business relationship between
Crescent Operating and Crescent Real Estate that began in 1997 when the shares
of Crescent Operating common stock were distributed to Crescent Real Estate
shareholders. Crescent Operating then independently evaluated whether the
benefit to Crescent Operating creditors and stockholders in consummating the
Settlement Agreement outweighed the benefit that might be derived from declining
the proposed Settlement Agreement and instead pursuing claims against Crescent
Real Estate. In making this evaluation, Crescent Operating took into
consideration the relative certainty of its creditors and stockholders realizing
the benefits provided for in the Settlement Agreement and the relative
uncertainty of recovery in, as well as the costs and delay associated with,
prosecuting any claims, and particularly claims of uncertain merit. Based upon
the totality of the circumstances, Crescent Operating made the independent
judgment that the best interests of its creditors and stockholders would be
served by entering into the Settlement Agreement. Crescent Operating concluded
that the benefits to its creditors and stockholders that would be realized
through the Settlement Agreement outweighed the cost to Crescent Operating of
granting the releases to Crescent Real Estate.

      Without the alternatives provided by the Settlement Agreement and the
bankruptcy plan, Crescent Operating could have been liquidated under Chapter 7
of the Bankruptcy Code by Crescent Real Estate's foreclosure of its liens. In
response, Crescent Operating could have either allowed Crescent Real Estate to
exercise its remedies or Crescent Operating could have not settled its claims
with Crescent Real Estate and filed bankruptcy to avoid the foreclosure. If
Crescent Operating had filed a bankruptcy in response to a foreclosure, unless
Crescent Operating successfully challenged the Crescent Real Estate liens,
Crescent Operating would not have been able to propose and fund a plan that paid
its unsecured creditors or that made any distribution to stockholders because
Crescent Operating has no equity in the assets pledged to Crescent Real Estate.

      Crescent Operating did not consider proposing a pre-packaged bankruptcy
plan that does not pay Bank of America because Crescent Operating wanted to
confirm a bankruptcy plan that made a distribution to its stockholders. Under
the absolute priority rule, Crescent Operating would be prohibited from making a
distribution to its stockholders if it failed to pay its unsecured creditors,
such as Bank of America, in full. Absent the Settlement Agreement, which
provides for and requires a bankruptcy plan that pays Bank of America in full,
it is likely that all of Crescent Operating's assets would be exhausted in
satisfying the secured claims of Crescent Real Estate and there would be no
distribution to holders of unsecured claims or stockholders.

      Crescent Operating did not seek any alternative offers for the purchase of
its hospitality and land development segments. The large amount of debt owed to
Crescent Real Estate carried by Crescent Operating made acquisition of Crescent
Operating unattractive to other third-party buyers. Furthermore, most of
Crescent Operating's debt was secured by liens in favor of Crescent Real Estate
and these liens would have prevented Crescent Operating from transferring its
hospitality and land development assets without the approval of Crescent Real
Estate. Finally, Crescent Operating's management believed that the price offered
by Crescent Real Estate exceeded what could reasonably be expected of a
competing third-party offer.


                                       68

      In either a litigation or a bankruptcy proceeding, the claims of Bank of
America, other than to the extent of its first priority lien on Crescent
Operating's interest in AmeriCold Logistics, and other creditors' claims are
contractually subordinate to the claims and liens held by Crescent Real Estate.
Rights of Crescent Operating stockholders are in turn legally subordinated to
the rights of Bank of America and the rights of other Crescent Operating
creditors. Management concluded that, in the event of a litigation or a
non-negotiated bankruptcy proceeding, there would be few or no assets available
for satisfaction of claims of any creditor other than the senior and secured
claims of Crescent Real Estate. After taking steps to convert all its assets to
cash in an orderly fashion, there would still not be sufficient funds to pay the
outstanding indebtedness to Crescent Real Estate. Management believed that
Crescent Operating may not even have sufficient liquidity to pay its liabilities
on a current basis. Additional costs associated with litigation or a
non-negotiated bankruptcy would diminish further the funds available for
payments to creditors or stockholders. In fact, virtually all of Crescent
Operating's current cash flow is encumbered by liens in favor of Crescent Real
Estate. There is a material risk in a litigation or a non-negotiated bankruptcy
that Crescent Real Estate could successfully object to Crescent Operating's use
of this cash flow for any purpose other than for payment of obligations directly
related to the preservation of Crescent Real Estate's collateral.

      If Crescent Operating is not able to consummate the Crescent Operating
bankruptcy plan, no Crescent Real Estate stock would be issued to Crescent
Operating's stockholders. If the plan is not consummated, Crescent Operating
anticipates that Crescent Real Estate and Bank of America would enforce their
liens. In that event, Crescent Operating would have few, if any, funds available
to pay its administrative or priority tax claims or its other unsecured
creditors. In all likelihood, Bank of America would foreclose its liens in the
AmeriCold Interests in satisfaction of its claims. Any remaining asset value
would continue to be subject to the liens and claims of Crescent Real Estate. As
a result of any failure to consummate the bankruptcy plan, the unsecured
creditors identified by Crescent Operating in the original Settlement Agreement
would probably not be paid and stockholders would receive nothing. Crescent
Operating could file a Chapter 7 bankruptcy liquidation case. Pursuant to
Chapter 7, a third party would be appointed and would liquidate Crescent
Operating's assets for distribution to creditors in accordance with the
priorities established by the Bankruptcy Code. Crescent Operating believes that
in a Chapter 7 proceeding, the trustee would consent to Crescent Real Estate and
Bank of America foreclosing on their respective collateral. Crescent Operating
believes it is also likely that the trustee would not have sufficient funds to
pay administrative, priority tax and unsecured claims in full. Crescent
Operating believes there would not be a distribution to stockholders in a
Chapter 7 liquidation. The liquidation analysis that assumes that the
transactions contemplated by the Settlement Agreement have been consummated is
presented in "--Liquidation Analyses - Table 2 - Liquidation After Giving Effect
to Settlement Agreement."

      In deciding whether to enter into the Settlement Agreement and whether the
Crescent Operating bankruptcy plan is in the best interests of Crescent
Operating's creditors and stockholders, Crescent Operating also prepared an
analysis of the estimated value that might be obtained by holders of general
unsecured claims and Crescent Operating's stockholders if Crescent Operating had
not entered into the Settlement Agreement and Crescent Operating were liquidated
in a hypothetical Chapter 7 case. Based on this analysis, Crescent Operating
believes that liquidation under Chapter 7 would result in no distribution being
made to Crescent Operating's stockholders and creditors, other than Crescent
Real Estate. Crescent Operating then compared the results of this liquidation
analysis to the distributions to be made to creditors and stockholders pursuant
to the Settlement Agreement and the bankruptcy plan and concluded that the
results for these persons under the Settlement Agreement and bankruptcy plan
were superior to the results that would occur if the Settlement Agreement and
bankruptcy plan were not consummated and Crescent Operating's assets were
liquidated under Chapter 7 of the Bankruptcy Code. The liquidation analysis
based on the assumption that the Settlement Agreement and bankruptcy plan


                                       69

were not consummated is presented in "--Liquidation Analyses - Table 1 -
Liquidation Before Giving Effect to Settlement Agreement."

      Crescent Operating believes that, if the Crescent Operating bankruptcy
plan is not consummated, it will be unable to meet its financial obligations and
continue as a going concern. See "-- Liquidation Analyses."

      Given the extent of Crescent Real Estate's liens and the benefits provided
to both Crescent Operating's creditors and stockholders by the Settlement
Agreement, Crescent Operating's sole director determined that the Crescent
Operating bankruptcy plan was the best available alternative and the alternative
most likely to maximize stockholder value.

LIQUIDATION ANALYSES


      If Crescent Operating is not able to consummate the Crescent Operating
bankruptcy plan, no Crescent Real Estate stock could be issued to Crescent
Operating's stockholders. In all likelihood, Bank of America would foreclose its
liens in the AmeriCold Interest in satisfaction of its claims. Any remaining
asset value would continue to be subject to the liens and claims of Crescent
Real Estate. Thus, if the plan were not consummated, the unsecured creditors
identified by Crescent Operating in the original Settlement Agreement would
probably not be paid in full and Crescent Operating stockholders would receive
nothing. Crescent Operating could simply allow Crescent Real Estate and Bank of
America to enforce their liens in the remaining assets. Alternatively, Crescent
Operating could file a Chapter 7 bankruptcy liquidation case. Pursuant to
Chapter 7, a third party would be appointed and would liquidate Crescent
Operating's assets for distribution to creditors in accordance with the
priorities established by the Bankruptcy Code. Crescent Operating believes that
in a Chapter 7 proceeding, the trustee would consent to Crescent Real Estate and
Bank of America foreclosing on their respective collateral. As in the other
alternatives, Crescent Operating believes that, in a Chapter 7 liquidation,
there would not be a distribution to stockholders.


      In deciding to enter into the Settlement Agreement, and to assist in the
determination of whether the Settlement Agreement and the Crescent Operating
bankruptcy plan would be in the best interests of Crescent Operating's creditors
and stockholders, Crescent Operating prepared two liquidation analyses. The
first analysis, which is presented in Tables 1A and 1B, illustrates the
estimated value that might have been distributed to holders of general unsecured
claims and to Crescent Operating's stockholders if Crescent Operating had not
entered into the Settlement Agreement and Crescent Operating was liquidated in a
hypothetical Chapter 7 case as of November 30, 2001. Based on this analysis,
Crescent Operating believes that if it had not entered into the Settlement
Agreement, liquidation under Chapter 7 would have resulted in no distribution
being made to Crescent Operating's stockholders and creditors, other than
Crescent Real Estate. The second analysis, which is presented in Tables 2A and
2B, illustrates the outcome for creditors and stockholders in a Chapter 7
liquidation after giving effect to the transfers and credits provided for in the
Settlement Agreement as of March 31, 2002. Under this analysis stockholders
would receive nothing.

      These analyses are based upon a number of estimates and assumptions,
including those described after the table, that are inherently subject to
significant uncertainties and contingencies, many of which would be beyond the
control of Crescent Operating. Accordingly, while the analyses that follow are
necessarily presented with numerical specificity, there can be no assurance that
the values assumed would be realized if Crescent Operating were in fact
liquidated, nor can there be any assurance that a bankruptcy court would accept
these analyses or concur with such assumptions in making its determinations
under the Bankruptcy Code. Actual liquidation proceeds could be materially lower
or higher than the amounts set forth below, and no representation or warranty
can or is being made with respect to the actual


                                       70

proceeds that could be received in a Chapter 7 liquidation of Crescent
Operating. The liquidation valuations have been prepared solely for the purposes
of estimating proceeds available in a Chapter 7 liquidation of Crescent
Operating and do not represent values that may be appropriate for any other
purpose. Nothing contained in these valuations is intended or may constitute a
concession or admission of Crescent Operating for any other purpose. These
liquidation analyses have not been independently audited or verified.


                                       71

       TABLE 1A - LIQUIDATION BEFORE GIVING EFFECT TO SETTLEMENT AGREEMENT
                 SUMMARY OF LIQUIDATION VALUE OF ASSETS (1) (2)
                        (unaudited, dollars in thousands)




                                                                       Estimated                    Estimated
                                                Estimated          Recovery Range(3)            Recovery Range (3)
                                                  Value          ----------------------      ----------------------
                                             as of 11/30/01      Low (%)       High (%)       Low ($)       High ($)
                                             ---------------     -------       --------      --------       -------
                                                                                           
Cash and cash equivalents                        $    627         100%           100%          $  627       $    627
Accounts receivable                                 1,489          75%            85%           1,117          1,266
Notes receivable                                   10,165           0%             0%               -              -
Prepaid expenses                                    3,637           0%             0%               -              -
Other current assets                               13,599           0%             0%               -              -
                                                ---------                                    --------       --------
TOTAL CURRENT ASSETS                               29,517                                       1,744          1,893

Partnership and member interests (4)               11,874          80%           100%           9,499         11,874
Property and equipment                                 57          25%            50%              14             29
Investment in Crescent Machinery                   29,147           0%             0%               -              -
Intangibles and other assets                           42           0%             0%               -              -
Deferred tax asset                                 10,377           0%             0%               -              -
                                                ---------                                    --------       --------
TOTAL FIXED ASSETS                                 51,497                                       9,513         11,903

    TOTAL LIQUIDATION VALUE OF
    ASSETS (5)                                  $  81,014                                    $ 11,257       $ 13,796



 --------------------------

(1)   All recoveries shown before any possible applicable present value
      discount.

(2)   All recoveries are shown before the addition of certain ongoing operating
      expenses that may be required throughout the Chapter 7 case.

(3)   Recovery ranges estimated by Crescent Operating's management.

(4)   Excludes negative book value investments.


(5)   In preparing these estimates, Crescent Operating management did not assign
      any value to litigation claims against Crescent Real Estate. Crescent
      Operating analyzed the documentation and the surrounding facts and
      circumstances in respect of its relationship with, and its obligations to,
      Crescent Real Estate to determine whether there might be value for
      creditors and stockholders that would support a decision to forgo the
      Settlement Agreement in favor of pursuing litigation. As discussed in "--
      Analysis of Alternatives," Crescent Operating independently concluded that
      it should enter into the Settlement Agreement based on the totality of the
      circumstances, which included as factors the benefits that the Settlement
      Agreement conferred upon creditors and stockholders, the relative
      certainty of the creditors and stockholders of Crescent Operating
      realizing those benefits, and the relative uncertainty of recovery in, as
      well as the costs and delay associated with the prosecution of any claims,
      and particularly claims of uncertain merit. As described in the answer to
      the question "What happens if the Crescent Operating stockholders vote
      AGAINST acceptance of the Crescent Operating bankruptcy plan?", Crescent
      Operating also did not assign any value to potential preference or
      fraudulent transfer claims, primarily because (i) Crescent Real Estate is
      paying substantial consideration to Crescent Operating and its creditors
      and stockholders and (ii) the claims of Crescent Real Estate were fully
      secured.



                                       72

       TABLE 1B - LIQUIDATION BEFORE GIVING EFFECT TO SETTLEMENT AGREEMENT
                          SUMMARY CLAIMS RECOVERIES (1)
                        (unaudited, dollars in thousands)




----------------------------------------------------------------------------------------------------------------------------------
                                                                              Estimated                        Estimated
                                                            Value           Recovery Range                   Recovery Range
                                                            as of       --------------------------        ---------------------
                                                           11/30/01     Low (%)           High (%)        Low ($)      High ($)
                                                           --------     -------           --------        -------      --------
                                                                                                        
ASSETS AVAILABLE FOR SECURED, ADMINISTRATIVE, PRIORITY                                                      $11,257       $13,796
TAX AND UNSECURED CLAIMS

SECURED CLAIMS:
Crescent Real Estate Equities, Ltd. (debt and accrued
    interest)                                               $70,258             16%(2)         20%          $11,257       $13,796
                                                            -------                                         -------       -------

    SECURED CLAIMS RECOVERY                                  70,258                                          11,257        13,796

ASSETS AVAILABLE FOR ADMINISTRATIVE, PRIORITY TAX AND
UNSECURED CLAIMS                                                                                                 --            --

ADMINISTRATIVE CLAIMS:

Trustee expenses (including legal and accounting)               250              0%             0%               --            --
                                                            -------                                         -------       -------
    TOTAL ADMINISTRATIVE CLAIMS                                 250              0%             0%               --            --

PRIORITY TAX CLAIMS:                                          1,500              0%             0%               --            --

                                                                                                                 --            --
NET ASSETS AVAILABLE FOR UNSECURED CLAIMS                      --

UNSECURED CLAIMS:(3)
Bank of America                                              15,000              0%             0%               --            --
Trade Debt                                                      507              0%             0%               --            --
Seller Notes (debt and accrued interest)                      3,660              0%             0%               --            --
Other Accrueds                                                1,164              0%             0%               --            --
                                                            -------                                         -------       -------

    TOTAL UNSECURED CLAIMS(3)                                20,331                                              --            --


                                                            -------                                         -------       -------
NET ASSETS AVAILABLE FOR EQUITY HOLDERS                     $    --                                         $    --       $    --



--------------------------
(1)   Classification of claims for purposes of analysis presented after
      consultation with Crescent Operating's counsel.

(2)   Assumes 100% of liquidation value of assets would be distributed to
      Crescent Real Estate on account of its secured claims.


(3)   The table does not assign any value to the lawsuit filed by the
      Crescent Machinery Committee because Crescent Operating intends to
      vigorously defend against the allegations and claims in the lawsuit. If
      the claims in the lawsuit are successfully pursued, however, they could
      negatively impact Crescent Operating's ability to confirm the bankruptcy
      plan.



                                       73


       TABLE 2A - LIQUIDATION AFTER GIVING EFFECT TO SETTLEMENT AGREEMENT
                          SUMMARY CLAIMS RECOVERIES (1)
                        (unaudited, dollars in thousands)






                                                                          Estimated                       Estimated
                                                 Estimated             Recovery Range (3)              Recovery Range (3)
                                                   Value           ------------------------        -------------------------
                                               as of 3/31/02        Low (%)        High (%)        Low ($)          High ($)
                                               -------------        -------        --------        -------          --------
                                                                                                   
 Cash and cash equivalents                        $   1,105          100%            100%        $  1,105         $   1,105
 Accounts receivable                                    978           75%             85%             734               831
 Notes receivable                                        --            0%              0%              --                --
 Prepaid expenses                                        10            0%              0%              --                --
 Other current assets                                12,483            0%              0%              --                --
                                                 ----------                                      --------         ---------
 TOTAL CURRENT ASSETS                                14,576                                         1,839             1,936

 Partnership and member interests (4)                15,000           70%            100%          10,500            15,000
 Property and equipment                                  50           25%             50%              13                25
 Intangibles and other assets                            --            0%              0%              --                --
 Deferred tax asset                                   6,678            0%              0%              --                --
                                                 ----------                                      --------         ---------
 TOTAL FIXED ASSETS                                  21,728                                        10,513            15,025

     TOTAL LIQUIDATION VALUE OF
     ASSETS (5)                                  $   36,304                                      $ 12,352         $  16,961



___________________________

(1)   All recoveries shown before any possible applicable present value
      discount.

(2)   All recoveries are shown before the addition of certain ongoing operating
      expenses that may be required throughout a Chapter 7 case.

(3)   Recovery ranges estimated by Crescent Operating's management.


(4)   Excludes negative book investments. Includes AmeriCold Logistics interest
      pledged to Bank of America at an agreed upon value.

(5)   In preparing these estimates, Crescent Operating management did not assign
      any value to litigation claims against Crescent Real Estate. Crescent
      Operating analyzed the documentation and the surrounding facts and
      circumstances in respect of its relationship with, and its obligations to,
      Crescent Real Estate to determine whether there might be value for
      creditors and stockholders that would support a decision to forgo the
      Settlement Agreement in favor of pursuing litigation. As discussed in "--
      Analysis of Alternatives," Crescent Operating independently concluded that
      it should enter into the Settlement Agreement based on the totality of the
      circumstances, which included as factors the benefits that the Settlement
      Agreement conferred upon creditors and stockholders, the relative
      certainty of the creditors and stockholders of Crescent Operating
      realizing those benefits, and the relative uncertainty or recovery in, as
      well as the costs and delay associated with the prosecution of any claims,
      and particularly claims of uncertain merit. As described in the answer to
      the Question "What happens if the Crescent Operating stockholders vote
      AGAINST acceptance of the Crescent Operating bankruptcy plan?", Crescent
      Operating also did not assign any value to potential preference or
      fraudulent transfer claims, primarily because (i) Crescent Real Estate is
      paying substantial consideration to Crescent Operating and its creditors
      and stockholders and (ii) the claims of Crescent Real Estate were fully
      secured.



                                       74

      TABLE 2B -- LIQUIDATION AFTER GIVING EFFECT TO SETTLEMENT AGREEMENT
                          SUMMARY CLAIMS RECOVERIES(1)
                       (unaudited, dollars in thousands)




--------------------------------------------------------------------------------------------------------------------------------
                                                                                      Estimated                 Estimated
                                                          Estimated               Recovery Range             Recovery Range
                                                            Claims           ----------------------      -----------------------
                                                          as of 3/31/02      Low (%)      High (%)        Low ($)      High ($)
                                                         ---------------     -------      ---------      ----------   ----------
                                                                                                          
ASSETS AVAILABLE FOR SECURED, ADMINISTRATIVE AND                                                         $ 12,352     $ 16,961
UNSECURED CLAIMS

SECURED CLAIMS:
Bank of America (secured by AmeriCold Logistics
Interest)                                                   $ 15,000            70%          100%          10,500       15,000
Crescent Real Estate Equities, Ltd. (debt and accrued
interest) (secured by blanket lien on all assets;
subordinate to Bank of America in
AmeriCold)                                                    38,688           4.8%(2)       5.1%           1,852        1,961
                                                            --------                                     --------     --------


ASSETS AVAILABLE FOR ADMINISTRATIVE, PRIORITY TAX AND
UNSECURED CLAIMS AFTER SATISFACTION OF SECURED CLAIMS                                                          --           --

ADMINISTRATIVE CLAIMS:

Trustee expenses (including legal and accounting)                250             0%            0%              --           --

                                                            --------                                     --------     --------
    TOTAL ADMINISTRATIVE CLAIMS                                  250                                           --           --

PRIORITY TAX CLAIMS:                                           1,500             0%            0%              --           --

NET ASSETS AVAILABLE FOR UNSECURED CLAIMS                         --                                           --           --

UNSECURED CLAIMS(3)
Trade Debt                                                        --           100%          100%              --           --

Other Accrueds                                                    --           100%          100%              --           --


                                                            --------                                     --------     --------
  TOTAL UNSECURED CLAIMS ()                                       --                                           --           --

NET ASSETS AVAILABLE FOR EQUITY HOLDERS                     $     --                                     $     --     $     --



___________________________

(1)   Classification of claims for purposes of analysis presented after
      consultation with Crescent Operating's counsel.

(2)   Assumes 100% of liquidation value of assets would be distributed to
      Crescent Real Estate on account of its secured claims.


(3)   The table does not assign any value to the lawsuit filed by the
      Crescent Machinery Committee because Crescent Operating intends to
      vigorously defend against the allegations and claims in the lawsuit. If
      the claims in the lawsuit are successfully pursued, however, they could
      negatively impact Crescent Operating's ability to confirm the bankruptcy
      plan.



                                       75

General Assumptions

      Liquidation Before Giving Effect To Settlement Agreement

      Estimated Liquidation Proceeds. Estimates were made of the cash proceeds
that might be available for distribution and the allocation of such proceeds
among various claimants based on their relative priority under the assumption
that Crescent Operating had not entered into and made the transfers and received
the credits on its debt to Crescent Real Estate as provided for in the
Settlement Agreement. It is probable in a Chapter 7 liquidation that the trustee
would conclude that the Chapter 7 estate had no beneficial interest in the
collateral securing the Crescent Real Estate claims. Under such circumstances,
it is reasonable to assume that the Crescent Operating Bankruptcy trustee would
either abandon the estate's interest in the assets or agree to a court order
that Crescent Real Estate could foreclose on its collateral.

      Crescent Operating considered a number of factors and data in estimating
the liquidation proceeds, including the following, in no particular order:

   -  Crescent Operating's operating and projected financial performance;

   -  The attractiveness of each of the operating segments to potential buyers;

   -  The potential universe of possible buyers;

   -  The potential impact of a Chapter 7 case upon the operating segments as
      well as possible buyers' pricing strategies;

   -  The relative timing of the potential sale of Crescent Operating's
      operating segments; and

   -  Analysis of the liabilities and obligations of Crescent Operating's
      operating segments.

      In estimating the liquidation proceeds and applying the foregoing factors
and considerations to make such estimate, both the general economic environment
as well as the current condition of Crescent Operating's business were
considered. See "Crescent Operating Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Crescent
Operating's Business" for information regarding the current condition of
Crescent Operating's business.

      Investment in Crescent Machinery. On February 6, 2002, Crescent Machinery
filed for protection under Chapter 11 in the Bankruptcy Court in Fort Worth,
Texas and filed its Schedules and Statement of Financial Affairs on March 22,
2002. Crescent Operating has reviewed this financial information. Crescent
Operating has discussed with Crescent Machinery management and counsel the
likelihood that Crescent Machinery will emerge from Chapter 11 as an operating
company and the probable impact of such an outcome on Crescent Operating's
equity interest in Crescent Machinery. Based upon its independent review of the
financial information contained in the Crescent Machinery bankruptcy file and
the statements of Crescent Machinery management and counsel regarding Crescent
Machinery's reorganization prospects, Crescent Operating has concluded that it
is highly unlikely that any value will be realized by Crescent Operating in
respect of its stock ownership in Crescent Machinery. Crescent Operating has
claims against Crescent Machinery based upon intercompany advances it made prior
to Crescent Machinery's Chapter 11 filing. It is not possible to predict whether
any monies will be distributed to Crescent Operating in respect of these claims.
For purpose of the liquidation analyses, Crescent Operating has assumed that it
will not receive anything of value for its claims against Crescent Machinery.

      Trustee in Bankruptcy. In a Chapter 7 case, Crescent Operating's
management would be replaced by a Chapter 7 trustee. Under ordinary
circumstances, a Chapter 7 trustee is not authorized to continue operating a
debtor's business. Crescent Operating assumes that any Chapter 7 trustee
appointed would not continue Crescent Operating's business operations. This
liquidation analysis also assumes the Chapter 7 trustee would elect to liquidate
Crescent


                                       76

Operating's assets, as opposed to paying another liquidating agent to conduct
liquidation sales. Crescent Operating cannot assure you that these assumptions
would be made or accepted by a bankruptcy court.

      Nature and Timing of the Liquidation Process. Pursuant to the Bankruptcy
Code, a Chapter 7 trustee must, among other duties, collect and convert the
property of the debtor's estate to cash and close the estate as expeditiously as
is compatible with the best interests of the parties in interest. Solely for
purposes of preparing this liquidation analysis, Crescent Operating assumed that
it would have filed the Chapter 7 liquidation on November 30, 2001.

      Additional Liabilities and Reserves. Crescent Operating believes that
there would be certain actual and contingent liabilities and expenses for which
provision would be required in a Chapter 7 liquidation before distributions
could be made to creditors, including the following:

   -  additional administrative expenses involved in the appointment of a
      trustee and attorneys and other professionals to assist such trustee;

   -  additional expenses and claims, some of which would be entitled to
      priority over Crescent Operating's creditors and stockholders, which would
      be generated during the liquidation and from the rejection of leases and
      other executory contracts in connection with a cessation of Crescent
      Operating's operations; and

   -  a failure to realize any going concern value from Crescent Operating's
      assets since Crescent Operating has pledged substantially all of its
      assets, other than a small amount of cash, to Crescent Real Estate to
      secure repayment of $76.2 million in debt.

      Crescent Operating believes that there is significant uncertainty as to
the reliability of Crescent Operating's estimates of the amounts related to the
foregoing that have been assumed in the liquidation analysis.


      Liquidation After Giving Effect To Settlement Agreement



      Between February 14 and March 22, 2002, Crescent Operating and Crescent
Real Estate consummated a number of transactions provided for in the Settlement
Agreement. These included, among other things, the transfers by Crescent
Operating and its affiliated entities of certain partnership and limited
liability company member interests and rights under various management contracts
to Crescent Real Estate or its designees. In exchange for these transfers,
Crescent Operating received, among other things, a credit on its indebtedness to
Crescent Real Estate in the sum of $40.1 million. In addition, Crescent Real
Estate agreed, on condition the plan were consummated, to fund an amount to
Crescent Operating sufficient to pay its unsecured creditors identified in the
original Settlement Agreement in full, and, under certain circumstances,
Crescent Real Estate common shares would be distributed to Crescent Operating's
stockholders.

      Table 2 illustrates Crescent Operating's estimate of the results of a
liquidation after giving effect to the transfers and credits on Crescent Real
Estate's claims as provided for in the Settlement Agreement. Under these
circumstances Crescent Operating believes shareholders would receive nothing
since Crescent Real Estate's obligation to issue its common shares to Crescent
Operating's stockholders is conditioned, among other things, upon consummation
of the plan.


      Distributions; Absolute Priority. Under a Chapter 7 liquidation, all
secured claims are required to be satisfied from the proceeds of the collateral
securing such claims before any such proceeds would be distributed to any other
claim holders. This liquidation analysis assumes the application of the rule of
absolute priority of distributions with respect to the remaining proceeds of
Crescent Operating. Under that rule, no junior creditor receives any
distribution until all senior creditors are paid in full. To the extent that
proceeds remain after satisfaction of all secured claims, Crescent Operating
believes the unsecured claimants would receive substantially less than pursuant
to the Crescent Operating bankruptcy plan.


                                       77

Conclusion

      Crescent Operating believes that liquidation under Chapter 7 would result
in no distribution being made to Crescent Operating stockholders and that
general unsecured creditors would receive substantially less recovery on their
claims than under the Crescent Operating bankruptcy plan. Crescent Operating
estimates that the amount of its indebtedness to Crescent Real Estate
substantially exceeds the value of the assets securing repayment of that debt.
Accordingly, in a Chapter 7 liquidation, it is likely that the trustee will
abandon Crescent Operating's interest in the pledged assets or agree that the
automatic stay be lifted so that Crescent Real Estate could proceed with
foreclosure. In such a foreclosure, Crescent Real Estate is not likely to
receive the amount of its claims. As a result, Crescent Real Estate could in
fact have a substantial unsecured claim against Crescent Operating. Likewise,
the collateral securing the Bank of America claim may have a value less than the
balance of the Bank of America debt plus the secured claim of Crescent Real
Estate. In a Chapter 7 liquidation, the trustee would probably abandon the
estate's interest in the collateral securing repayment of Crescent Operating's
debt to Bank of America.

EVENTS LEADING TO THE REORGANIZATION TRANSACTIONS

General

      Crescent Operating was formed in 1997 to, among other things, participate
under the Intercompany Agreement with Crescent Real Estate in certain
investments. As a result, over a period of several years, Crescent Operating
became an investor in various entities in diverse business segments. This rapid
growth into diverse fields made it difficult for the general public to
understand and value Crescent Operating's structure. Thus, during 1999,
management of Crescent Operating and its Intercompany Evaluation Committee
commenced negotiations with Crescent Real Estate to sell the entities within
Crescent Operating's hospitality and land development segments to Crescent Real
Estate or one of its affiliates in order to focus upon a core business. Please
see "--Description of Meeting of Intercompany Evaluation Committee and Board of
Directors" for more information regarding the Intercompany Evaluation Committee
and the deliberations of the Committee and the Board of Directors. As part of
these negotiations, the Intercompany Evaluation Committee considered available
options, including a restructuring of Crescent Operating under bankruptcy
reorganization and liquidation under Chapter 7 of the Bankruptcy Code, and
determined that a successful asset sale transaction with Crescent Real Estate or
Crescent Partnership would be in the best interest of the stockholders of
Crescent Operating because it would provide adequate liquidity and allow
Crescent Operating to focus on its equipment sales and leasing business. Based
on that decision, negotiations continued. Crescent Operating's management and
the Intercompany Evaluation Committee established certain criteria that they
believed necessary for any transaction to be successful for Crescent Operating.
These criteria developed into the goals of Crescent Operating for the
transaction, the most significant of which were to (i) decrease Crescent
Operating's debt level to the lowest amount possible, (ii) simplify Crescent
Operating's structure so that it could be understood within the marketplace and
(iii) provide stability and potential growth opportunities to Crescent Machinery
following the transactions. To accomplish this, the Intercompany Evaluation
Committee determined that Crescent Machinery would need a significant amount of
additional funds in connection with any transaction to achieve the established
goals.

      During the period of negotiations, Crescent Operating did not seek any
alternative offers for the purchase of its hospitality and land development
segments. The large amount of debt owed to Crescent Real Estate carried by
Crescent Operating made acquisition of Crescent Operating unattractive to other
third-party buyers. Furthermore, most of Crescent Operating's debt was secured
by liens in favor of Crescent Real Estate and these liens would have prevented
Crescent Operating from transferring its hospitality and land development assets
without the approval of Crescent Real Estate. Finally, Crescent Operating's
management believed that the price offered by Crescent Real Estate exceeded what
could reasonably be expected of a competing third-party offer.

      Crescent Operating's management faced a number of issues that made the
transaction difficult to structure and delayed the finalization of a complete
plan. These issues included the evaluation of tax planning objectives of the
various parties to the restructuring transactions, the need for Crescent Real
Estate to maintain its status as a REIT for


                                       78

federal income tax purposes and consideration of outstanding litigation related
to Charter Behavioral Health Systems, LLC and its bankruptcy. See "-- Legal
Proceedings" below for information on the CBHS bankruptcy. While Crescent
Operating's management was able to continue negotiations while seeking
structures to resolve these issues, complications such as these significantly
delayed the negotiation process. Certain tax and other specific structuring
issues were not resolved until 2002 and the provisions of the REIT Modernization
Act were not final until late 2000, both of which made it impossible for
Crescent Real Estate to consummate the transactions without jeopardizing its
REIT status. Due to the length of time the negotiations spanned, values of
Crescent Operating's investments had to be updated on several occasions to
encompass significant changes to certain of the Crescent Operating's assets and
business enterprises.

      In December 2000, Crescent Operating identified SunTx Fulcrum Fund, L.P.
and its affiliates, a Dallas-based private equity fund focused on making
strategic investments in middle-market companies based primarily in, or with
significant corporations in the southern United States, as an investment group
interested in a potential investment opportunity in Crescent Machinery. Mr. Goff
and Mr. Stevens, on behalf of Crescent Operating's management, immediately began
discussions with SunTx representatives Ned N. Fleming, III and Mark R. Matteson
about making an investment related to Crescent Machinery. Based upon the
opportunities identified through these discussions, SunTx moved forward with its
due diligence process and the negotiation of a securities purchase agreement,
ultimately agreeing to invest $19.0 million of capital into Crescent Machinery.

      In addition to the funds to be provided by SunTx, Crescent Operating's
management, along with the Intercompany Evaluation Committee, agreed that
additional equity would be required to achieve the goals which had been set for
Crescent Operating. At that point in time, Crescent Operating approached
Crescent Real Estate about making a similar equity contribution as part of the
overall transaction. After further negotiations between David M. Dean, on behalf
of Crescent Real Estate, and Crescent Operating, Crescent Real Estate agreed to
invest $10.0 million of capital into Crescent Machinery through an affiliate,
CRE Equipment Holdings, LLC.

      On January 1, 2001, the REIT Modernization Act became effective. This
legislation allows Crescent Real Estate, through its subsidiaries, to operate or
lease certain of its investments that had been previously operated or leased by
Crescent Operating.

      On June 28, 2001, Crescent Operating entered into an asset purchase
agreement with Crescent Real Estate as well as a securities purchase agreement
with SunTx and CRE Equipment Holdings, whereby SunTx and CRE Equipment Holdings
would invest capital in the amount of $19.0 million and $10.0 million,
respectively, into Crescent Machinery. Under the terms of the asset purchase
agreement, Crescent Partnership would pay to Crescent Operating approximately
$78.4 million, payable in cancellation of certain debt and rent obligation and
cash, in exchange for (i) all of the assets related to Crescent Operating's
hospitality business, (ii) all shares of voting common stock owned by Crescent
Operating and its subsidiaries and (iii) all of the membership interests of CR
License LLC owned by Crescent Operating. Also, Crescent Operating agreed not to
encourage or solicit any acquisition proposals by a third party, although
Crescent Operating's Board of Directors could entertain unsolicited offers if it
was concluded in good faith that consideration of such proposals were necessary
to comply with their fiduciary duties.

      In connection with the securities purchase agreement, Crescent Machinery
would have been merged into Crescent Machinery, L.P., or CMC LP. In exchange for
CRE Equipment Holdings and SunTx's investment in CMC LP, CRE Equipment Holdings
would have received 10,000 Series A preferred partnership interests in CMC LP
and SunTx would have received 19,000 Series B preferred partnership interests.
In connection with the purchase of Series B preferred partnership interests,
SunTx would have received a warrant to purchase 2,800,000 shares of Crescent
Operating common stock for $.01 per share. Subject to certain restrictions, both
series of preferred partnership interests would have been exchangeable for
Crescent Operating common stock.


                                       79

      In October 2001, management of Crescent Operating, CRE Equipment Holdings
and SunTx amended the terms of the original securities purchase agreement. Since
the time the asset and securities purchase agreements had been entered into,
there had been a general deterioration of the United States economy and stock
markets, and a significant decline in the price of Crescent Operating's common
stock. As a result, the economic terms of the original securities purchase
agreement and the anticipated terms for the required Crescent Operating rights
offering were no longer acceptable to CRE Equipment Holdings and SunTx. CRE
Equipment Holdings and SunTx indicated that they would be unable to proceed to
consummate the purchase of the preferred partnership interests under the
economic terms of the original securities purchase agreement. Because each
transaction was dependent upon the completion of all other transactions, the
failure to complete the sale of the preferred partnership interests would have
also resulted in the failure to conclude all other transactions, including the
asset sale. As a result, in October 2001, management of Crescent Operating, CRE
Equipment Holdings and SunTx amended the securities purchase agreement,
primarily to revise the rate of exchange for the preferred partnership interests
into shares of Crescent Operating common stock, and in some cases the rate of
conversion for preferred partnership interests into common limited partnership
interests of CMC LP, so that such conversion rates would reflect changes in the
market price of Crescent Operating common stock. Similarly, it was also agreed
that the price to purchase shares of Crescent Operating common stock should be
changed to reflect the market price for Crescent Operating common stock at the
time of the rights offering.

      Crescent Operating filed its definitive proxy statement for the annual
meeting on November 1, 2001, and sent its proxy statement for the annual meeting
to the stockholders on or about November 1, 2001.

      On December 6, 2001, the stockholders of Crescent Operating approved the
reorganization transactions, which noted that Crescent Machinery did not make a
principal payment for October 2001 to four of its primary lenders holding
approximately 85% of its outstanding debt. Further, the closing of the
reorganization transactions required, among other things, for Crescent Machinery
to obtain consents from its lenders to the restructure transaction. At that
time, it was believed that an agreement could be reached with the lenders to
accommodate Crescent Machinery's needs and obtain the necessary consents.
Unfortunately, the overall equipment rental and sales industry was struggling
because of an economic downturn and the September 11 terrorist attacks. Crescent
Machinery was faced with excess inventory at a point when there was a
significant oversupply in the industry and a severe reduction in construction
activity.

      Crescent Machinery was unable to reach satisfactory agreements with its
lenders regarding restructuring of the loans. As a result, Crescent Real Estate
advised Crescent Operating that it believed that substantial additional capital,
beyond the investment called for in the securities purchase agreement, would
have to be made to Crescent Machinery to adequately capitalize Crescent
Machinery and satisfy concerns of Crescent Machinery's lenders. Crescent Real
Estate announced that it was "unwilling to make this non-core investment."
Because all of the reorganization agreements were dependent upon each other,
Crescent Real Estate gave notice that it was terminating the asset purchase
agreement on January 23, 2002, and gave notice that it was terminating the
securities purchase agreement on February 4, 2002.

      In November 2001, Mr. Stevens solely on behalf of Crescent Operating and
Mr. Goff and Mr. Dean, solely on behalf of Crescent Real Estate, entered into
discussions of an alternative plan to allow Crescent Real Estate to acquire
Crescent Operating's land development and hospitality assets. In January 2002,
Mr. Goff suggested an arrangement that would allow Crescent Real Estate to
obtain by agreement Crescent Operating's land development and hospitality assets
in an agreed foreclosure action and in lieu of foreclosure and Mr. Dean devised
a structure that would allow Crescent Real Estate shareholders to acquire the
temperature-control business from Crescent Operating. Once this structure was
proposed, Mr. Goff refrained from participating in any negotiations regarding
prices and consideration in order to avoid any potential conflicts of interest.
After Mr. Stevens examined numerous possible solutions that are more fully
described in "Analysis of Alternatives," he agreed to move forward with the
bankruptcy plan, subject to obtaining a fairness opinion from Houlihan Lokey.
Mr. Stevens, as the sole director independent from Crescent Real Estate,
consulted with independent financial and legal advisors during these
negotiations and believed that the proposed plan would satisfy all of Crescent
Operating's indebtedness to its creditors and leave value to the Crescent


                                       80

Operating stockholders that he felt they would not receive in a bankruptcy
action that was not pre-negotiated. After the 2001 Annual Meeting of
shareholders, no director of Crescent Operating, other than Mr. Stevens acting
as an independent director, negotiated on behalf of Crescent Operating.


      In this time period, Crescent Operating also began negotiations with Bank
of America in connection with Bank of America's approximately $15.5 million
potential claim against Crescent Operating for debt obligations, arising from an
unsecured loan originally funded in 1997. The indebtedness matured on December
31, 2001, but Crescent Operating was unable to pay at that time. Accordingly,
negotiations commenced shortly thereafter in which Crescent Operating, with the
consent of Crescent Real Estate, offered to grant to Bank of America a first
priority security interest in COPI Cold Storage in exchange for the Bank's
agreement to extend the maturity date of the loan to August 15, 2002. Pursuant
to the Settlement Agreement, Crescent Real Estate agreed to permit Crescent
Operating to grant this first priority security interest to Bank of America.
Bank of America agreed to Crescent Operating's proposal, and loan documents
reflecting the arrangement were executed on March 12, 2002, effective as of
December 31, 2001. During August 2002, Bank of America further extended the
maturity of this loan to January 15, 2003 and Crescent Operating prepaid
interest for that time period in the amount of $0.3 million. In January 2003,
Bank of America further extended the maturity of this loan to March 15, 2003 and
Crescent Operating agreed to prepay an additional two months of interest at the
loan's current rate.



      Houlihan Lokey issued its fairness opinion regarding the proposed
transactions on February 14, 2002, and on February 14, 2002, Crescent Operating,
some of its operating subsidiaries, Crescent Real Estate and Crescent
Partnership entered into the original Settlement Agreement memorializing the
negotiations between Mr. Stevens and Mr. Dean.


      Effective October 1, 2002, Crescent Operating and Crescent Real Estate
amended the Settlement Agreement. The amendment provides for, among other
things, a minimum value of Crescent Real Estate common shares to be issued in
connection with the bankruptcy plan if the bankruptcy plan is accepted by the
requisite vote of Crescent Operating stockholders and confirmed by the
bankruptcy court. For more information on the Settlement Agreement and the
Crescent Operating bankruptcy plan, see "The Plan of Reorganization."


Description of Meetings of Intercompany Evaluation Committee and Board of
Directors.

      The Intercompany Evaluation Committee is a standing committee of the Board
of Directors of Crescent Operating established at the first meeting of the Board
of Directors held subsequent to Crescent Operating's becoming a public company
in June 1997. The Committee was formed originally for the purposes of reviewing,
evaluating, analyzing, negotiating the terms of, and making recommendations to
the Board of Directors regarding, business and investment opportunities
presented to Crescent Operating by Crescent Partnership under the Intercompany
Agreement. This review specifically included evaluating whether a transaction
opportunity was consistent with Crescent Operating's purpose and fair to
Crescent Operating. The Committee's scope expanded to include all proposed
transactions with or involving Crescent Partnership or Crescent Real Estate.
Because of its responsibility, the Committee was at all times composed entirely
of directors who were not officers or directors of Crescent Real Estate or
Crescent Partnership. Until March 1999, the sole members of the Committee were
Carl F. Thorne and Jeffrey L. Stevens; in March 1999, William A. Abney, became
the third member of the Committee. Messrs. Thorne and Abney served on the
Committee until the 2001 Annual Meeting of Shareholders held December 6, 2001,
when their terms as directors expired.

      During 1999, 2000 and 2001, the Committee held ten separate meetings:

      -     On March 10 and 11, 1999, the Committee met to consider a proposal
            for the restructuring of its temperature controlled logistics
            investment. This proposal involved a complicated transaction that
            would result in Crescent Operating's effectively surrendering an
            investment in the real estate side of the temperature controlled
            logistics business in exchange for a much larger investment in the
            operational side of the business. The Committee negotiated with
            Crescent Partnership the sale price for Crescent Operating's
            interest in the controlled subsidiary and also negotiated a loan
            from Crescent


                                       81

            Partnership to fund Crescent Operating's investment in the new
            operational entity. When the Committee had obtained satisfactory
            agreements on those two matters, it recommended to the Board of
            Directors that Crescent Operating proceed with the transaction.

      -     On March 27, 1999, the Committee met to consider a request from
            management of the operational entity for the temperature controlled
            logistics business concerning expansion of two existing storage
            facilities. The lessor of the facilities - an entity owned jointly
            by Vornado Trust Realty and Crescent Partnership - had agreed to
            fund the costs of expansion in return for increases in the rental
            rates in the leases for those properties. The Committee recommended
            to the Board of Directors that Crescent Operating proceed with the
            transaction, which required no outlay of cash by Crescent Operating.

      -     On April 22, 1999, the Committee met to evaluate an opportunity
            offered by Crescent Partnership for Crescent Operating to become the
            new lessee of the Renaissance Hotel in Houston, Texas, pursuant to
            the Intercompany Agreement. The Committee recommended to the Board
            of Directors that Crescent Operating accept this opportunity.

      -     On November 8, 1999, the Committee met to consider engaging Sonoma
            Management Corp. I, a company affiliated with Sonoma Management
            Company, to provide asset management services for the hospitality
            properties which Crescent Operating leased from Crescent
            Partnership. At the time of the meeting, Crescent Operating was
            receiving asset management services for certain of its hospitality
            properties under contracts with The Varma Group, the principals of
            which were Sanjay and Johanna Varma, but those contracts would
            expire in 2000, leaving Crescent Operating unable to fulfill its
            obligations as the lessee of those properties. The Varmas had formed
            Sonoma Management Company, with the help of equity investment from
            Crescent Partnership, to acquire hotel and resort properties, and
            had also created Sonoma Management Corp. I to provide property
            management and asset management services. The Varmas were interested
            in providing Crescent Operating asset management services for its
            hospitality properties through Sonoma Management Corp. I when the
            existing asset management agreements expired. After examining the
            proposed terms of the engagement, the Committee directed management
            to renegotiate certain financial terms relating to the engagement.

      -     On July 26, 2000, the Committee met to consider a proposal for the
            restructuring of its interest in the Transportal Network Venture, a
            business venture within its temperature controlled logistics
            segment. The restructuring proposal would relieve Crescent Operating
            of its obligation for certain startup costs, while leaving it with a
            reduced equity interest in the restructured Transportal by
            transferring most of Crescent Operating's interest in Transportal to
            a newly-formed company jointly owned by Crescent Operating and
            Crescent Partnership. The Committee recommended to the Board of
            Directors that Crescent Operating offer Crescent Partnership the
            opportunity to acquire a portion of Crescent Operating's interest in
            Transportal substantially on the terms presented to the Committee
            for its consideration.

      -     On March 29, 2001, the Committee met to consider, with the
            assistance of bankruptcy counsel from Thompson & Knight and a
            bankruptcy analyses presentation prepared by Thompson & Knight,
            whether the interests of Crescent Operating's creditor and
            stockholder constituencies would be better served by reorganization
            through Chapter 11 bankruptcy than by the proposed negotiated
            restructuring with Crescent Partnership and SunTx. The Committee
            concluded that it would not recommend to the Board of Directors the
            course of bankruptcy.

      -     In May 2001, the Committee met to consider proposals made by Mr.
            Goff for resolving two aspects of the proposed negotiated
            restructuring with Crescent Partnership and SunTx in which Mr. Goff
            was


                                       82

            personally interested: modifying Crescent Operating's $15.0 million
            term loan from Bank of America, which was supported by credit
            enhancement provided by Mr. Goff and Richard E. Rainwater, to
            provide debt service relief to Crescent Operating; and liquidating
            COPI Colorado, L.P., a limited partnership which held Crescent
            Operating's investment in Crescent Development Management Corp.,
            which later became Crescent Resort Development, Inc. and in which
            Mr. Goff was a limited partner, to effect the transfer to Crescent
            Partnership of that interest in Crescent Development Management
            Corp. The Committee concluded that both proposals were fair and in
            the best interest of Crescent Operating and recommended to the Board
            of Directors that Crescent Operating undertake to implement both
            proposals.

      -      On June 19, 2001, the Committee met to consider whether the terms
             of the proposed negotiated restructuring with Crescent Partnership
             and SunTx, as set forth in the current drafts of the transaction
             agreements submitted to the Committee, was fair to and in the best
             interests of Crescent Operating. The Committee concluded that
             transaction agreements and the transactions contemplated thereby
             were fair to and in the best interests of Crescent Operating and
             recommended to the Board of Directors that those agreements and
             transactions be approved and undertaken by Crescent Operating.
             Subsequent to entering into the securities purchase agreement,
             effective June 28, 2001, with SunTx, the Committee met twice to
             discuss repricing of the securities to be issued pursuant to that
             agreement, as continued declines in the market price of Crescent
             Operating's common stock caused SunTx to renegotiate the pricing of
             the securities. Agreement on repricing was reached in October 2001,
             when the parties entered into an amended and restated securities
             purchase agreement, effective October 31, 2001.


      From 1999 through January 5, 2003, the Board of Directors of Crescent
Operating held eleven meetings and, in addition, acted by unanimous written
consent three times. At the following meetings and in the following consents,
the Board considered proposed transactions with Crescent Partnership, Crescent
Real Estate or their affiliates:


      -     At a meeting held March 1, 1999, the Board accepted the report and
            recommendation of the Intercompany Evaluation Committee for a $17.5
            million expansion and renovation program at Sonoma Mission Inn & Spa
            to be funded entirely by Crescent Partnership, the owner of that
            resort, in return for amendment of the rental rate paid by Wine
            Country Hotel, LLC, the subsidiary of Crescent Operating that was
            the lessee of Sonoma Mission Inn & Spa, and approved all actions
            taken to effect that transaction. The Board also approved increases
            in the base rentals for all of the hotels and resorts within the
            hospitality segment and the giving by Crescent Operating of its
            limited guaranty of its subsidiaries' obligations under the leases
            in that segment in consideration of capital improvements funded by
            Crescent Partnership, the elimination of certain capital maintenance
            contractual restrictions on certain hospitality segment
            subsidiaries, and the fixing of future monetary obligations of
            Crescent Operating's hospitality subsidiaries upon the termination
            of their respective leases and adopted the recommendations of the
            Compensation Committee of the Board on compensation for the officers
            of Crescent Operating, including Gerald W. Haddock as President and
            Chief Executive Officer, who, at the time, held the same offices at
            Crescent Real Estate.

      -     At a meeting held June 10, 1999, the Board considered the terms of
            an agreement with Mr. Haddock relating to his resignation as an
            officer and director of Crescent Operating. At the same time, Mr.
            Haddock was also resigning as an officer and director of Crescent
            Real Estate . The final agreement with Mr. Haddock was ratified at a
            meeting of the Board held on June 17, 1999.

      -     At a meeting held August 27, 1999, the Board discussed and approved
            the terms of an agreement with Magellan Health Services and Crescent
            Partnership for the restructuring of Charter Behavioral Health
            Systems, LLC or, CBHS, which was consummated in September 1999. At
            the same meeting, the Board received the recommendation of the
            Intercompany Evaluation Committee regarding lease of the


                                       83

            Renaissance Hotel in Houston and approved the lease of that hotel by
            a subsidiary and guaranty of that lease by Crescent Operating. The
            Board also ratified the March 1999 restructuring of its temperature
            controlled logistics investment.

      -     At a meeting held February 11, 2000, the Board discussed the
            imminent bankruptcy of CBHS, which did file a voluntary petition in
            bankruptcy on February 16, 2000, and approved a proposal for a newly
            formed subsidiary of Crescent Operating to offer to purchase the
            core assets of CBHS out of bankruptcy using bank financing
            guaranteed by Mr. Rainwater, Chairman of the Board of Directors and
            Crescent Operating's largest stockholder. Crescent Operating's chief
            financial officer, Richard P. Knight, and its President and Chief
            Executive Officer, Mr. Goff, were appointed a special committee to
            negotiate and approve the terms of an asset purchase agreement for
            CBHS's core assets, to obtain from PricewaterhouseCoopers its
            professional advice about a fair, arm's length fee to be paid to Mr.
            Rainwater for guaranteeing the acquisition debt and to submit that
            advice to the full Board for its approval, and to negotiate and
            approve the other terms of an agreement with Mr. Rainwater to
            procure his guaranty.

      -     At a meeting held March 6, 2000, the Board discussed various
            restructuring alternatives with Crescent Partnership regarding
            different assets of Crescent Operating made possible by the REIT
            Modernization Act. The Board also approved the asset purchase
            agreement for CBHS's core assets, a fee, within the range
            recommended by PricewaterhouseCoopers, to be paid to Mr. Rainwater
            for his guaranty of acquisition indebtedness, and the terms of an
            agreement with Mr. Rainwater for his guaranty; and the engagement of
            Sonoma Management to provide asset management and administrative
            services to the subsidiaries in the hospitality segment, with a
            guaranty by Crescent Operating of the obligations of its
            subsidiaries, on the terms set forth in a global agreement presented
            to the Board.

      -     At a meeting held November 6, 2000, management gave the Board a
            detailed presentation on the current plan for restructuring Crescent
            Operating through a transaction with Crescent Partnership and SunTx
            , for the stated purpose of discerning whether the Board approved of
            the restructuring strategy before management proceeded with
            negotiating transaction agreements. In addition, the Board accepted
            the recommendation of the Intercompany Evaluation Committee to
            approve the restructuring of the Transportal Network Venture.

      -     At a meeting held March 8, 2001, the Board received a report on the
            progress of the restructuring, received the report of Houlihan Lokey
            concerning its fairness opinion on the restructuring transaction and
            met with SunTx representatives. At this meeting, the Board
            determined to investigate the probable consequences to Crescent
            Operating and its constituencies, including its stockholders, of
            pursuing reorganization through bankruptcy, as an alternative to the
            restructuring transaction with Crescent Partnership and SunTx, and
            decided to request from Crescent Operating's legal counsel, Thompson
            & Knight, an analysis of the bankruptcy alternative. The Board also
            considered whether, outside of bankruptcy, the proposed
            restructuring represented the best of Crescent Operating's
            alternatives.

      -     At a meeting held May 7, 2001, the Board listened to bankruptcy
            counsel from Thompson & Knight repeat to the full Board the
            bankruptcy analysis presentation which the counsel had given to the
            Intercompany Evaluation Committee. The Board also approved the
            retention of SunTx under a management agreement for Crescent
            Machinery, and accepted and approved a proposal for Crescent
            Partnership to be substituted for SunTx in the restructuring
            transactions if SunTx failed to close its portion of the
            transactions. In addition, the Board discussed the proposals,
            described above, made by Mr. Goff regarding the modification of
            Crescent Operating's $15.0 million term loan from Bank of America to
            provide debt service relief to Crescent Operating and liquidating
            COPI Colorado, L.P. to


                                       84

            effect the transfer to Crescent Partnership of that interest in
            Crescent Development Management Corp., but made no decisions
            regarding those proposals.

      -     At a meeting held June 22, 2001, the Board found it to be in the
            best interests of Crescent Operating and its stockholders for
            Crescent Operating to enter into and perform the transactions
            contemplated by those agreements with Crescent Partnership and SunTx
            for the restructuring of Crescent Operating, and approved Crescent
            Operating's execution and delivery of those agreements and the
            submission of those agreements and the restructuring transactions
            contemplated thereby to the stockholders of Crescent Operating for
            their consideration and approval at the 2001 annual meeting of
            stockholders.

      -     Following the resignations on February 13, 2002, of all directors
            other than Mr. Stevens, the Board, by written consent, found it to
            be in the best interests of Crescent Operating, its stockholders and
            other constituencies for Crescent Operating and certain subsidiaries
            to enter into and perform the transactions contemplated by the
            Settlement Agreement with Crescent Real Estate.

      -     At a meeting held on October 1, 2002, Mr. Stevens, as sole director
            of Crescent Operating, approved and executed the amendment to the
            Settlement Agreement.


      -     By written consent dated January 5, 2003, Mr. Stevens, as sole
            director of Crescent Operating, called the special meeting of the
            stockholders to be held on March 6, 2003, set a record date of
            January 8, 2003 for the special meeting, and approved various other
            matters related to the special meeting.


RECOMMENDATION OF THE SOLE DIRECTOR OF CRESCENT OPERATING

      The sole director of Crescent Operating recommends that you vote in favor
of the Crescent Operating bankruptcy plan.

OPINION OF CRESCENT OPERATING'S FINANCIAL ADVISOR


      The Crescent Operating Board of Directors retained Houlihan Lokey as its
financial advisor in connection with its evaluation of certain matters related
to the bankruptcy plan and the transactions contemplated by the Settlement
Agreement. On February 14, 2002, using publicly available information and
information provided by Crescent Operating or its entities, Houlihan Lokey
delivered to the Board of Directors its opinion that, as of such date and based
upon and subject to the various limitations, qualifications and assumptions
stated in its opinion, the aggregate consideration to be received by Crescent
Operating and its stockholders, taken as a whole, in connection with the
transactions contemplated by the bankruptcy plan and the Settlement Agreement is
fair to the public stockholders of Crescent Operating from a financial point of
view.


            Houlihan Lokey was retained as an independent financial advisor to
assist the Board of Directors and the Intercompany Evaluation Committee of
Crescent Operating in evaluating, from a financial point of view, only those
aspects of the bankruptcy plan and the transactions contemplated by the
Settlement Agreement that involved related party considerations. Houlihan Lokey
was not requested to make evaluations regarding aspects of the contemplated
transactions that the Board of Directors of Crescent Operating believed it could
capably consider and evaluate and where such related party considerations were
absent. As a result, the opinion of Houlihan Lokey does not address Crescent
Operating's underlying business decision either to effect the transactions
contemplated by the bankruptcy plan and the Settlement Agreement or the
bankruptcy plan itself. Houlihan Lokey was not requested to, and did not,
solicit third party indications of interest in selling all or any part of
Crescent Operating. In addition, Houlihan Lokey did not evaluate, or include in
its analysis any value attributable to, the claims being waived and releases
being granted by Crescent Operating and the Crescent Operating stockholders,
although Houlihan Lokey made an assessment of the value of the assets
transferred to Crescent Real Estate under the bankruptcy plan. At the request of
the Board of Directors of Crescent Operating, Houlihan Lokey did not negotiate
or advise the Board of Directors of alternatives to the bankruptcy plan, the
Settlement Agreement or the transactions contemplated thereby. Houlihan Lokey
did not make, and was not requested by Crescent Operating to make, any
recommendations as to the form or amount of consideration to be paid to Crescent
Operating in connection with the bankruptcy plan and Settlement Agreement.
Houlihan Lokey was not requested to, and did not, opine as to the overall
fairness of the bankruptcy plan and


                                       85

Settlement Agreement to the public stockholders of Crescent Operating.
Similarly, Houlihan Lokey was not requested to, and did not, evaluate the
fairness of the individual transactions contemplated by the bankruptcy plan and
Settlement Agreement. Instead, the Intercompany Evaluation Committee of the
Crescent Operating Board assessed the individual transactions contemplated by
the bankruptcy plan and the Settlement Agreement, and determined that, taken as
a whole, they were fair to the creditors and stockholders of Crescent Operating.
Issues and concerns related to the limited scope of Houlihan Lokey's opinion are
described in detail under the heading "Risk Factors - Risks Associated with the
Crescent Operating Bankruptcy Plan - Limitations on the scope of Houlihan
Lokey's fairness opinion could lead Crescent Operating's stockholders to assign
too much importance to the fairness opinion in making their decision on whether
to vote to approve the bankruptcy plan."

      A copy of Houlihan Lokey's written opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is included as Annex B to this proxy
statement/prospectus. Among other things, the Houlihan Lokey fairness opinion
assumes that Crescent Operating's stockholders will receive shares of Crescent
Real Estate with a value of between $0.32 and $0.50 per share, but specifically
states that it would not necessarily change if Crescent Real Estate makes
available to Crescent Operating additional funds, as Crescent Real Estate agreed
to do in the October 2002 amendment to the Settlement Agreement and as described
in "The Reorganization Transactions - Summary of the Reorganization Transactions
- Payment by Crescent Real Estate of Crescent Operating Claims and Expenses,"
that reduce the value of Crescent Real Estate common shares to below $0.32. YOU
SHOULD READ HOULIHAN LOKEY'S OPINION CAREFULLY AND IN ITS ENTIRETY.

      Houlihan Lokey is a nationally recognized investment-banking firm. The
board of directors of Crescent Operating selected Houlihan Lokey based on
Houlihan Lokey's reputation and experience in investment banking generally and
its recognized expertise in the valuation of assets and businesses related to
the real estate industry. In connection with the prior proposed sale of assets
and stock to Crescent Partnership and sale of preferred partnership interests to
CRE Equipment Holdings, LLC and SunTx, Houlihan Lokey performed various
analyses, including the issuance of a fairness opinion on October 1, 2000.
Houlihan Lokey received $380,000 for the fairness opinion. Other than the
fairness opinions delivered in connection with the previous reorganization
proposals, Houlihan Lokey has no material prior relations with Crescent
Operating or Crescent Operating's affiliates.

      Houlihan Lokey based its opinion of the financial fairness to the public
stockholders of the transactions contemplated by the bankruptcy plan and the
Settlement Agreement on the analyses described below. No restrictions or
limitations were imposed on Houlihan Lokey with respect to its investigation of
Crescent Operating or the procedures followed by Houlihan Lokey in rendering its
opinion.

      In connection with its opinion, Houlihan Lokey made such reviews, analyses
and inquiries as it deemed necessary and appropriate under the circumstances.
Among other things, Houlihan Lokey:

      1.    held discussions with management of Crescent Operating, Crescent
            Real Estate and East West Partners;

      2.    reviewed historical operating statements for the hotel properties;

      3.    reviewed the hotel lease agreements between the affiliates of
            Crescent Operating (as the lessees) and Crescent Real Estate (as the
            lessors);

      4.    reviewed the balance sheet of RoseStar Management, LLC dated as of
            November 30, 2001;

      5.    reviewed projections for the hotel properties, provided by Crescent
            Operating, for the period of operation corresponding with the
            remaining term of the lease;

      6.    reviewed a legal entity ownership chart provided by Crescent
            Operating;


                                       86

      7.    reviewed projections for the life of the CRDI land development
            projects prepared by East West Partners;

      8.    reviewed the internally prepared consolidating balance sheets and
            income statements for East West Resort Transportation LLC and East
            West Resort Transportation II LLC for the period ended December 31,
            2001;

      9.    reviewed historical operating statements and 2002 budgets for CDMC
            Palm Beach;

      10.   reviewed projections for The Woodlands Land Development Company
            provided by Crescent Operating for the periods ending December 31,
            2002 through December 31, 2011;

      11.   reviewed projections for The Woodlands Operating Company provided by
            Crescent Operating for the periods ending December 31, 2002 through
            December 31, 2006;

      12.   reviewed projections for Desert Mountain provided by Crescent
            Operating for the periods ending December 31, 2002 through December
            31, 2010;

      13.   reviewed the publicly available Securities and Exchange Commission
            filings of Crescent Operating, including the Form 10-K for the
            fiscal year ended December 31, 2000 and the Form 10-Q for the period
            ended September 30, 2001;

      14.   reviewed the internally prepared consolidating balance sheet for
            CRDI for the period ended December 31, 2001;

      15.   reviewed the internally prepared consolidating balance sheet of
            Crescent Operating for the periods ended November 30, 2000; December
            31, 2000; and November 30, 2001;

      16.   reviewed the internally prepared liquidation analysis of Crescent
            Operating, which is set forth in "The Reorganization Transactions -
            Liquidation Analyses - Table 1 - Liquidation Before Giving Effect to
            Settlement Agreement;"

      17.   reviewed the AmeriCold management package, including income
            statement and balance sheet, for the fiscal year ended December 31,
            2001;

      18.   reviewed the AmeriCold budget for the fiscal year ended December 31,
            2002;

      19.   reviewed a draft Settlement Agreement dated February 14, 2002; and

      20.   conducted such other studies, analyses and inquiries as Houlihan
            Lokey deemed appropriate.

      The following chart indicates the relationship to Crescent Operating of
each of the entities listed above. As of February 13, 2002, Crescent Operating
had a direct or indirect interest in each of these entities:



                          RELATIONSHIP TO CRESCENT OPERATING AS REPRESENTED
ENTITY                    TO HOULIHAN LOKEY BY CRESCENT OPERATING MANAGEMENT
                       
RoseStar Management, LLC  Crescent Operating has an ownership interest

Crescent Resort           Crescent Operating has an indirect ownership
Development, Inc.         interest

CDMC Palm Beach           Crescent Operating has an indirect ownership
                          interest



                                       87


                       
EastWest Resort           Crescent Operating has an indirect ownership
Transportation LLC        interest


EastWest Resort           Crescent Operating has an indirect ownership
Transportation II LLC     interest


CDMC Palm Beach           Crescent Operating has an indirect ownership
                          interest

Woodlands Land            Crescent Operating has an indirect ownership
Development Co., LP       interest


The Woodlands Operating   Crescent Operating has an indirect ownership
Company, LP               interest


Desert Mountain           Crescent Operating has an indirect ownership
Properties, LP            interest


AmeriCold                 Crescent Operating has an indirect ownership
                          interest


      Houlihan Lokey did not independently verify the accuracy and completeness
of, or assume any responsibility for, the information supplied to it with
respect to Crescent Operating and Crescent Operating's affiliates. Houlihan
Lokey did not make any physical inspection or independent appraisal of any of
the properties or assets of Crescent Operating and Crescent Operating's
affiliates. The opinion is based on business, economic, market and other
conditions that existed and could be evaluated by Houlihan Lokey at the date of
the opinion.

      Houlihan Lokey prepared the opinion in order to provide information to the
Board of Directors in connection with its evaluation of the transactions
contemplated by the bankruptcy plan and Settlement Agreement. The opinion is not
a recommendation to Crescent Operating or any of its stockholders as to whether
to approve or take action in connection with the bankruptcy plan. A copy of the
opinion was delivered to the Board of Directors of Crescent Operating in
accordance with the requirements of Houlihan Lokey's engagement letter with
Crescent Operating. The opinion speaks only as of its date, and Houlihan Lokey
is under no obligation to update the opinion at any time after the date thereof.

      Crescent Operating engaged Houlihan Lokey for total fees of approximately
$225,000 for its services in connection with the opinion, plus reasonable
out-of-pocket expenses incurred by Houlihan Lokey in connection therewith,
including reasonable fees and expenses of its legal counsel. Crescent Operating
paid Houlihan Lokey $225,000 upon execution of the engagement letter, and made
subsequent payments totaling $14,270 for expenses upon receipt of periodic
billings. No portion of the fees is or was contingent upon the consummation of
the bankruptcy plan, Settlement Agreement or the conclusions reached in the
opinion. Crescent Operating has not agreed to make any additional payments to
Houlihan Lokey, other than payments required to be made to cover any additional
expenses incurred by Houlihan Lokey in connection with the preparation of this
proxy statement/prospectus.

Valuation Methodology

      Hotel/Resort Leases.


      In assessing the range of value of the hotel and resort leases, which
include leases for the Denver Marriott, the Hyatt Beaver Creek, the Allegria Spa
at the Hyatt Beaver Creek, the Hyatt Albuquerque, the Sonoma Mission Inn and
Spa, the Ventana Inn and Spa, the Houston Renaissance, the Canyon Ranch Lenox,
the Canyon Ranch Tucson, and the WECCR GP, Houlihan Lokey utilized the
Discounted Cash Flow approach. In order to account for the risk of cash flows
and the time value of money, Houlihan Lokey discounted the projected cash flows
of each lease, as prepared by Crescent Partnership, at rates ranging from 13% to
18.5%, depending on specific qualitative and quantitative factors.


                                       88

These factors included the location of the property, the historical performance
of the property, the implicit risk of the projected cash flows, the market in
which the property was located, the condition of the property, the competitive
position of the property, and the economic outlook in general. Houlihan Lokey
assessed a range of value of approximately $14.4 million to $15.4 million for
the hotel and resort leases, not including the WECCR GP, as discussed below.

      Land Development Projects.

      In assessing the range of value of the land development projects, which
include Desert Mountain, The Woodlands Land Development Company, and certain
projects of CRDI, Houlihan Lokey also utilized the Discounted Cash Flow
approach. In order to account for the risk of cash flows and the time value of
money, Houlihan Lokey discounted estimated cash flows expected to be received by
CRDI or Crescent Operating from the individual real estate project's projected
cash flows, as prepared by Crescent Partnership or East West Partners, at rates
ranging from 10% to 25%, depending on specific qualitative and quantitative
factors. These factors included the location of the property, the historical
performance of the property, the implicit risk of the projected cash flows, the
market in which the property was located, the phase of the project, the
applicable entitlement risk, construction risk, home building risk, financing
risk, or market risk, the competitive position of the property, and the economic
outlook in general.

      For those projects in which Crescent Operating or CRDI had an ownership of
less than 100%, including Desert Mountain, The Woodlands Land Development
Company, The Woodlands Country Club and Convention Center, and the projects of
CRDI, Houlihan Lokey applied the respective ownership percentage to the
discounted cash flow value to assess the ultimate range of value to Crescent
Operating.

      Houlihan Lokey assessed Crescent Operating's assessed range of value at
approximately $4.3 million to $4.6 million for Desert Mountain and approximately
$9.7 million to $10.8 million for The Woodlands Land Development Company. The
value of COPI Colorado and its interest in CRDI is summarized below.

      Crescent Resort Development, Inc. (formerly Crescent Development
Management Corporation)/COPI Colorado.

      In assessing the range of value of CRDI, as represented by Crescent
Operating's ownership of COPI Colorado, Houlihan Lokey summed the assessed value
of CRDI's interests in its land development projects, described above, and
going-concern businesses, described below. The assessed value of CRDI's
interests in its land development projects and going concern businesses was
between $122.591 and $151.123 million, including cash, and deducting the $180.4
million of debt owed to Crescent Partnership. Applying COPI Colorado's 10%
ownership percentage and then adding cash at the COPI Colorado level, Crescent
Operating common stock of 1.1 million shares, and a receivable from CRDI to COPI
Colorado resulted in the total value of COPI Colorado. Houlihan Lokey assessed
the range of value of COPI Colorado, which includes the 10% ownership in CRDI,
from approximately $12.3 million to $15.1 million. Houlihan Lokey assessed that
Crescent Operating's 60% ownership interest in COPI Colorado ranged in value
from approximately $8.0 to $9.8 million.

      The valuation of CRDI included, without limitation, a valuation of the
following going-concern businesses in which CRDI has an interest:

      East West Resort Transportation LLC and East West Resort Transportation II
LLC. In assessing the range of value of East West Resort Transportation LLC and
East West Resort Transportation II LLC, or collectively "East West Resort
Transportation," Houlihan Lokey utilized a variety of valuation methodologies,
including the Market Multiple Approach and the Gordon Growth Approach.

      With respect to the Market Multiple Approach, Houlihan Lokey applied
market-based multiples of comparable public companies to representative
historical levels of East West Resort Transportation. Houlihan Lokey adjusted
that


                                       89

value for debt to arrive at a minority equity value. A 25% control premium
was then applied to arrive at a control equity range of value, and debt was
added back for control enterprise range of value.

      With respect to the Gordon Growth Approach, Houlihan Lokey capitalized a
projected level of earnings of East West Resort Transportation, as provided by
East West Transportation, utilizing discount rates ranging from 14% to 16%, to
consider the risk of the cash flows and the time value of money, and growth
rates ranging from 2% to 4%.

      Utilizing the two approaches, based on a reasonable range of Control
Enterprise Value, adjusted for debt and cash, Houlihan Lokey arrived at a
control equity range of value of East West Resort Transportation. CRDI's 50%
ownership was applied to the control equity value to assess the ultimate range
of equity value to CRDI in East West Resort Transportation. Houlihan Lokey
assessed that CRDI's value in East West Resort Transportation ranged from
approximately $8.8 million to $9.8 million.

      CRDI Palm Beach, Inc. In assessing the range of value of CRDI Palm Beach,
Houlihan Lokey utilized a Direct Capitalization Approach whereby Houlihan Lokey
applied market-based debt free capitalization rates to representative historical
and projected earnings levels of Manalapan Hotel Partners to arrive at a
minority enterprise range of value. Capitalization rates applied to earnings
levels of Manalapan Hotel Partners ranged from 8 to 10% for December 31, 2001
Earnings (loss) before interest expense, income taxes, depreciation and
amortization or EBITDA; 8 to 10% for 2002 expected EBITDA; and 10 to 13% for
"Normalized" EBITDA which was an average EBITDA of fiscal years ended December
31, 1998 through December 31, 2000.

      Utilizing this approach, based on a reasonable range of Minority
Enterprise Value, adjusted for debt and cash, Houlihan Lokey arrived at a
minority equity range of value of Manalapan Hotel Partners. CRDI Palm Beach's
25% ownership was applied to the minority equity range of value to assess the
ultimate range of equity value to CRDI Palm Beach in Manalapan Hotel Partners.
Houlihan Lokey assessed that CRDI Palm Beach's value in Manalapan Hotel Partners
ranged from approximately $0.1 million to $4.0 million.

      The Woodlands Operating Company, L.P. In assessing the range of value of
The Woodlands Operating Company, Houlihan Lokey utilized a variety of valuation
methodologies, including the Market Multiple Approach, and the Enterprise
Discounted Cash Flow approach.

      With respect to the Market Multiple Approach, Houlihan Lokey applied
market-based multiples of comparable public companies, including Grubb & Ellis,
Co., Insignia Financial Group, Inc., Jones Lang LaSalle, Inc. and Trammell Crow
Company, to representative historical and projected earnings levels of The
Woodlands Operating Company and applied a 20% control premium to arrive at a
control equity range of value. The market-based multiples applied to the
Woodlands Operating Company earnings levels ranged from between 5.0x to 5.5x
December 31, 2001 EBITDA and from between 8.0x to 8.5x December 31, 2001
Earnings (loss) before interest expense and income taxes or EBIT. As there is no
debt or preferred stock, the control equity value equals the control enterprise
range of value.

      With respect to the Enterprise Discounted Cash Flow Approach, Houlihan
Lokey discounted the projected cash flows of The Woodlands Operating Company, as
provided by Crescent Operating, at rates ranging from 12% to 16% to consider the
risk of the cash flows and the time value of money. A terminal multiple was then
applied to the terminal year earnings. The sum of the discounted interim cash
flows and the discounted terminal year cash flow represents the control
enterprise range of value.

      Utilizing the two approaches, based on a reasonable range of Control
Enterprise Value, adjusted for debt and cash, Houlihan Lokey arrived at a
control equity range of value of The Woodlands Operating Company. Crescent
Operating's ownership percentage was applied to the control equity range of
value to assess the ultimate range of equity value of Crescent Operating's
interest in The Woodlands Operating Company. Crescent Operating's pro rata
assessed value in the WECCR GP was added to arrive at Crescent Operating's total
value in The Woodlands Operating


                                       90

Company. Houlihan Lokey assessed that Crescent Operating's value in The
Woodlands Operating Company, including the WECCR GP, ranged from approximately
$9.9 million to $11.0 million.

      CRL Investments, Inc. Houlihan Lokey applied an estimate of approximately
$1.2 million, as provided by the management of Crescent Operating, to assess the
range of value of Crescent Operating's investment in CRL.

      Canyon Ranch Tucson - FF&E. Houlihan Lokey applied the book value of
approximately $6.9 million, as provided by the management of Crescent Operating,
to assess the range of value of the fixed assets of the Canyon Ranch - Tucson.

Valuation Summary

      The following table summarizes the assessed range of value of Crescent
Operating's holdings in its hospitality and land development segments:



      DERIVED VALUES (ROUNDED)




                                                                                 Low             High
                                                                                -------         -------
                                                                                 (dollars in millions)
                                                                                           
          Hotel/Resort Leases                                                   $14.430   --     $15.439
          Desert Mountain                                                         4.299   --       4.608
          The Woodlands Land Co.                                                  9.719   --      10.820
          COPI Colorado                                                           8.040   --       9.780
          The Woodlands Operating Co. (includes WECCR GP)                         9.900   --      11.000
          CRL Investments                                                         1.200   --       1.200
          Canyon Ranch Tucson FF&E - Book Value                                   6.874   --       6.874
      Total Value of the Hospitality and Land Development Assets                $54.462   --     $59.721



COPI Cold Storage LLC

      Houlihan Lokey has been asked to rely upon the transaction value implied
by Crescent Spinco's acquisition of Crescent Operating's equity interest in
AmeriCold Logistics. This value was agreed upon based on negotiations between
Crescent Real Estate and Crescent Operating. Crescent Operating determined that
the price was fair in all respects based on its independent analysis of historic
operating results and future estimates of operating income and determined that
the price was sufficient and that it would be considered preemptive and in
excess of a price it could reasonably expect from any third party. Therefore
Crescent Operating did not deem it necessary to incur the expense of hiring
Houlihan Lokey to render a separate fairness opinion with regard to the value of
AmeriCold. No further conclusions have been reached by Houlihan Lokey.

      The aforementioned analyses required studies of the overall market,
economic and industry conditions under which Crescent Operating and its entities
operate, and Crescent Operating's and its entities' operating results. Research
into, and consideration of, these conditions were incorporated into the
analyses.

      In assessing the fairness of the aggregate consideration to be received by
Crescent Operating in connection with the transactions contemplated by the
bankruptcy plan and the Settlement Agreement, Houlihan Lokey analyzed the
reasonableness of the consideration offered by Crescent Real Estate, including
the debt and rent forgiveness, advances up to $10.5 million, between
approximately $0.32 and $0.50 per share of Crescent Real Estate stock and
repayment of the $15 million Bank of America obligation, in exchange for
transfer of Crescent Operating's hospitality and land development assets and
COPI Cold Storage. Based on its analysis, Houlihan Lokey is of the opinion that
the aggregate consideration to be received by Crescent Operating in connection
with the transactions contemplated by the bankruptcy plan and the Settlement
Agreement is fair, from a financial point of view, to the public stockholders of


                                       91

Crescent Operating. Houlihan Lokey did not evaluate, and does not offer any
opinion relating to the other elements of the bankruptcy plan or Settlement
Agreement, individually or in the aggregate.

      The opinion is based on the business, economic, market and other
conditions as they existed as of the date of the opinion. Houlihan Lokey relied
upon and assumed, without independent verification, the accuracy, completeness
and fairness of all of the financial and other information reviewed by it in
connection with rendering the opinion. Houlihan Lokey also assumed that the
financial results and projections provided by Crescent Operating and its
entities have been reasonably prepared and reflect the best current available
estimates of the financial results, condition, and prospects of Crescent
Operating. Houlihan Lokey did not independently verify the accuracy or
completeness of the information supplied to it with respect to Crescent
Operating and its affiliates and does not assume responsibility for such
information. Except as described above, Houlihan Lokey did not make any physical
inspection or independent appraisal of the specific properties, assets or
liabilities of Crescent Operating or its entities.

      The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at the opinion, Houlihan Lokey did not attribute any particular
weight to any one analysis or factor, but rather made qualitative judgments as
to the significance and relevance of each analysis and factor. Houlihan Lokey
believes its analyses and the summary set forth herein must be considered as a
whole and that selecting portions of its analyses or this summary, without
considering all factors and analyses, could create an incomplete view of the
processes underlying the analyses set forth in the opinion. Houlihan Lokey made
numerous assumptions with respect to Crescent Operating and its affiliates,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Crescent
Operating and its affiliates. The estimates contained in such analyses are not
necessarily indicative of an actual range of values or predictive of future
results or values, which may be more or less favorable than suggested by such
analyses. Additionally, analyses relating to the range of value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.

INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION TRANSACTIONS


      Richard E. Rainwater, who serves as the Chairman of the Board of Crescent
Real Estate and served as the Chairman of the Board of Crescent Operating until
February 2002, and John C. Goff, who serves as Vice Chairman and Chief Executive
Officer of Crescent Real Estate and served as Vice Chairman, President and Chief
Executive Officer of Crescent Operating until February 2002, have financial
interests in the Crescent Operating bankruptcy plan. As of the record date, Mr.
Rainwater was the beneficial owner of approximately 11.5% of the outstanding
shares of Crescent Operating common stock and approximately 14.6% of the
outstanding Crescent Real Estate common shares, including in each case shares
underlying vested options. As of the same date, Mr. Goff was the beneficial
owner of approximately 6.6% of the outstanding shares of Crescent Operating
common stock and approximately 4.1% of the outstanding Crescent Real Estate
common shares, including in each case shares underlying vested options. As
beneficial owners of Crescent Real Estate common shares, Messrs. Rainwater and
Goff may have interests in the Crescent Operating bankruptcy plan that differ
from those of beneficial owners of Crescent Operating common stock who are not
also owners of Crescent Real Estate common shares. As beneficial owners of
Crescent Operating common stock, Mr. Rainwater and Mr. Goff will receive
Crescent Real Estate common shares if the Crescent Operating bankruptcy plan is
approved by the required vote of the shares of Crescent Operating common stock
and confirmed by the bankruptcy court.


      Mr. Goff and Mr. Rainwater are also parties to a support agreement with
Crescent Operating and Bank of America relating to Crescent Operating's $15.0
million obligation, plus accrued interest, to Bank of America. At the time
Crescent Operating obtained the loan, Bank of America required, as a condition
to making the loan, that Mr. Rainwater, the Chairman of the Board of Trust
Managers of Crescent Real Estate and member of the strategic planning committee
of Crescent Real Estate Equities, Ltd., and John C. Goff, Vice Chairman of the
Board of Trust Managers and Chief Executive Officer of Crescent Real Estate and
sole director, Chief Executive Officer and President of


                                       92


Crescent Real Estate Equities, Ltd., enter into a support agreement with
Crescent Operating and Bank of America, pursuant to which they agreed to make
additional equity investments in Crescent Operating if Crescent Operating
defaulted on payment obligations under its line of credit with Bank of America
and the net proceeds of an offering of Crescent Operating securities were
insufficient to allow Crescent Operating to pay Bank of America in full.

      Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. Crescent Operating, with the consent of
Crescent Partnership which agreed to subordinate its security interest in
Crescent Operating's 40% interest in AmeriCold Logistics in the Settlement
Agreement, pledged all of its interest in AmeriCold Logistics to Bank of America
to secure the loan. The amendment to the line of credit also waived Crescent
Operating's default under the line of credit, as a result of Crescent
Operating's failure to pay the principal balance in full on December 31, 2001.
During August 2002, Bank of America further extended the maturity of this loan
to January 15, 2003 and Crescent Operating prepaid interest for that time period
in the amount of $0.3 million. In January 2003, Bank of America further extended
the maturity of this loan to March 15, 2003 and Crescent Operating agreed to
prepay an additional two months of interest at the loan's current rate. These
modifications delay, but do not reduce, any liability that Mr. Rainwater and Mr.
Goff may have under the support agreement. Any future defaults by Crescent
Operating under the line of credit will revive the default that was waived under
the August 2002 amendment to the line of credit. In connection with the Crescent
Operating bankruptcy plan, it is expected that Crescent Operating's line of
credit with Bank of America will be fully repaid, and Messrs. Goff and Rainwater
will be relieved of their potential personal liability under the support
agreement. As of September 30, 2002, the aggregate amount outstanding under the
loan was $15.0 million, plus accrued interest.


      In addition, Mr. Goff was subject to conflicts of interest as a result of
his participation in the initial proposal of the Crescent Operating bankruptcy
plan and related agreements while serving simultaneously as an executive officer
and trust manager of Crescent Real Estate and as an executive officer of
Crescent Operating, but he did not participate in negotiations of the terms of
the Settlement Agreement or bankruptcy plan.

      Jeffrey L. Stevens, Crescent Operating's current Chief Executive Officer
and sole director, will serve as plan administrator of Crescent Operating's
contemplated Chapter 11 bankruptcy. For more information regarding the plan
administrator, see "The Plan of Reorganization - Implementation of the Plan of
Reorganization - The Plan Administrator."

      Pursuant to the Crescent Operating bankruptcy plan, the current and former
directors and officers of Crescent Operating and the current and former trust
managers and officers of Crescent Real Estate will also receive certain
liability releases from the Crescent Operating stockholders as described in "The
Plan of Reorganization - Effects of the Confirmation of the Plan of
Reorganization - Releases."


      In February and March 2002, pursuant to the terms of the Settlement
Agreement, Crescent Operating transferred to Crescent Real Estate, in lieu of
foreclosure, the interests in its hospitality segment and, pursuant to a strict
foreclosure, the assets of its land development segment. Crescent Real Estate
holds these assets and interests through two newly organized corporations and
one newly organized limited liability company that are wholly owned subsidiaries
of Crescent Real Estate, or taxable REIT subsidiaries. In addition, in
connection with the execution of the Settlement Agreement, Crescent Real Estate
and Crescent Operating exchanged mutual releases. In pertinent part, Crescent
Operating released any and all claims that it might have against Crescent Real
Estate and its current and former trust managers and officers and Crescent Real
Estate released any and all claims that it might have against Crescent Operating
and its current and former directors and officers arising at any time prior to
execution of the original Settlement Agreement. This release remains effective
regardless of whether the bankruptcy plan is accepted by Crescent Operating's
stockholders and/or confirmed by the bankruptcy court.



                                       93

      In addition, pursuant to the Crescent Operating bankruptcy plan, Crescent
Real Estate will receive certain liability releases from the Crescent Operating
stockholders as described in "The Plan of Reorganization - Effects of
Confirmation of the Plan of Reorganization - Releases."

RESTRICTIONS ON SALES OF CRESCENT REAL ESTATE COMMON SHARES BY AFFILIATES OF
CRESCENT OPERATING

      All Crescent Real Estate common shares received by Crescent Operating
stockholders under the Crescent Operating bankruptcy plan will be freely
transferable, except that Crescent Real Estate common shares received by persons
who are deemed to be "affiliates" of Crescent Operating under the Securities Act
at the time of the special meeting may be resold by them only in transactions
permitted by Rule 145 or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Crescent Operating under the
Securities Act for such purposes generally include individuals or entities that
control, are controlled by, or are under common control with, Crescent Operating
and may include certain officers, former directors and the sole director and
principal stockholders of Crescent Operating. The Crescent Operating bankruptcy
plan requires Crescent Operating to use all reasonable efforts to cause each
person, who in Crescent Operating's reasonable judgment (subject to Crescent
Real Estate's counsel's reasonable satisfaction) may be deemed to be an
affiliate, to execute a written agreement to the effect that such person will
not offer or sell or otherwise dispose of any of the Crescent Real Estate common
shares issued to such person pursuant to the Crescent Operating bankruptcy plan
in violation of the Securities Act or the rules and regulations promulgated by
the Securities and Exchange Commission thereunder.

LISTING ON THE NEW YORK STOCK EXCHANGE OF CRESCENT REAL ESTATE COMMON SHARES TO
BE ISSUED IN THE REORGANIZATION TRANSACTIONS

      Crescent Real Estate has agreed to cause the Crescent Real Estate common
shares to be issued under the Crescent Operating bankruptcy plan and to use its
reasonable best efforts to cause the Crescent Real Estate common shares to be
listed on the NYSE on or prior to the to the confirmation of the Crescent
Operating bankruptcy plan.

NO DISSENTERS' APPRAISAL RIGHTS

      There are no dissenters' appraisal rights available under applicable state
corporate law with respect to the reorganization transactions. However, if a
stockholder opposes the bankruptcy plan, the stockholder may vote against it.
After the bankruptcy plan is filed with the bankruptcy court, a stockholder may
file pleadings with the bankruptcy court explaining why it believes the
bankruptcy plan should not be confirmed. The stockholder may hire an attorney to
argue its position to the court. If the Crescent Operating bankruptcy plan is
confirmed by the bankruptcy court, the Crescent Operating stockholders,
including the stockholders who do not vote to accept the Crescent Operating
bankruptcy plan, will be bound by all of the terms and conditions of the
Crescent Operating bankruptcy plan. However, stockholders who vote against the
bankruptcy plan, abstain or do not vote, and who do not receive or refuse to
accept any consideration under the bankruptcy plan, will not be bound by the
releases in the bankruptcy plan. Additionally, stockholders who sell their stock
before the voting record date will not be bound by the release.

                           THE PLAN OF REORGANIZATION

OVERVIEW AND INCORPORATION BY REFERENCE

      CRESCENT OPERATING HAS NOT COMMENCED THE REORGANIZATION CASE UNDER THE
BANKRUPTCY CODE. HOWEVER, IF CRESCENT OPERATING OBTAINS THE REQUISITE VOTES
ACCEPTING THE BANKRUPTCY PLAN AS A RESULT OF THE SOLICITATION, CRESCENT
OPERATING WILL FILE A VOLUNTARY PETITION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
TO COMMENCE THE REORGANIZATION CASE.


                                       94

      IF THE BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE, CRESCENT
OPERATING WILL LIKELY STILL FILE THE CHAPTER 11 CASE AND REQUEST THAT THE
BANKRUPTCY COURT CONFIRM THE BANKRUPTCY PLAN UNDER THE "CRAMDOWN PROVISION" OF
THE BANKRUPTCY CODE. THIS PROVISION WOULD PERMIT CONFIRMATION OF THE BANKRUPTCY
PLAN IF THE COURT FINDS THAT THE BANKRUPTCY PLAN DOES NOT DISCRIMINATE UNFAIRLY
AND IS FAIR AND EQUITABLE TO CRESCENT OPERATING'S STOCKHOLDERS. THE BANKRUPTCY
PLAN PROVIDES THAT, IF THE BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE
OF THE CRESCENT OPERATING STOCKHOLDERS, AND THE BANKRUPTCY PLAN IS CONFIRMED BY
THE BANKRUPTCY COURT PURSUANT TO THE "CRAMDOWN PROVISION," THE CRESCENT
OPERATING STOCKHOLDERS WILL NOT RECEIVE THE CRESCENT REAL ESTATE COMMON SHARES
ISSUABLE TO THEM IF THE BANKRUPTCY PLAN IS ACCEPTED BY THE REQUIRED VOTE.

      The following is a brief summary of the material provisions of the
Bankruptcy Code and material provisions of the Plan of Reorganization. The
following discussion of the material provisions of the Plan of Reorganization is
only a summary. For a complete and more detailed discussion of these provisions,
please read the Plan of Reorganization, a copy of which is attached as Annex A
to this proxy statement/prospectus and is incorporated herein by reference. The
term "Debtor," as used in this section, refers to Crescent Operating, Inc.

BRIEF EXPLANATION OF CHAPTER 11

      Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to operate its
business in the ordinary course while attempting to reorganize its business for
the benefit of its creditors and equity security holders. In addition to
facilitating the rehabilitation of the debtor, reorganization under Chapter 11
is intended to promote equality of treatment of creditors and equity security
holders of equal rank with respect to the distribution of the debtor's assets.
In furtherance of these goals, upon filing of a petition for reorganization
under Chapter 11, section 362 of the Bankruptcy Code generally provides for an
automatic stay of substantially all actions and proceedings against the debtor
and its properties, including attempts to collect debts or enforce liens that
arose prior to the commencement of the debtor's case under Chapter 11.

      Consummation of a plan of reorganization is the principal objective of a
Chapter 11 reorganization case. In general, a Chapter 11 plan of reorganization:

      -     divides most claims and interests into classes;

      -     specifies the property, distribution or other treatment that each
            member of a class is to receive under the bankruptcy plan on account
            of its claim or interest, if any; and

      -     contains other provisions necessary or appropriate to the
            reorganization of the debtor.

      Confirmation of a plan of reorganization by a bankruptcy court makes the
bankruptcy plan binding upon the debtor, any issuer of securities under the
bankruptcy plan, any person acquiring property under the bankruptcy plan and any
creditor or interest holder of the debtor. Except as specifically provided in
the plan of reorganization or the order confirming the bankruptcy plan, the
order confirming the bankruptcy plan discharges the debtor from any debt that
arose prior to the date that the bankruptcy plan becomes effective to the
fullest extent authorized or provided for by the Bankruptcy Code or other
applicable law, and substitutes for such indebtedness the obligations specified
in the bankruptcy plan of reorganization.

CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS

      The bankruptcy plan classifies claims against and interests in the Debtor
into eight (8) classes. Administrative claims, which are claims for costs and
expenses of administration of the bankruptcy case including (i) the costs of
preserving the Debtor's assets and operating its business after the filing date
and (ii) professional fees incurred in connection with the reorganization, are
not classified. These claims will be paid in full on the effective date (the
date on which all conditions to the effectiveness of the bankruptcy plan are
satisfied) of the bankruptcy plan or as soon


                                       95

thereafter as practicable or when due in the ordinary course of the Debtor's
business. Certain priority tax claims are also not classified. These claims will
also be paid in full on or soon after the effective date.

      Section 1122 of the Bankruptcy Code requires that a claim or interest may
be placed in a particular class only if it is substantially similar to all other
claims in that class. Creditors and interest holders may object to the
classification of claims or interests.

      The bankruptcy plan includes two classes of secured claims; the Crescent
Real Estate secured claims and the Bank of America secured claims. The holders
of claims in these classes are impaired and are entitled to vote on the
bankruptcy plan. Class 1 is the allowed Crescent Real Estate secured claims.
Crescent Real Estate will retain its pre-petition liens and upon Crescent Real
Estate's request, reorganized Crescent Operating shall deliver and transfer to
Crescent Real Estate any and all Crescent Operating property pledged to Crescent
Real Estate. The parties anticipate that any and all remaining assets of
Crescent Operating, other than the 40% partnership interest of COPI Cold Storage
in AmeriCold Logistics, will be transferred to Crescent Real Estate prior to or
on the bankruptcy plan effective date on account of Crescent Real Estate's Class
1 secured claims. Class 2 is the Bank of America secured claims. Bank of
America's claim will either (i) be paid in full as soon after the effective date
as is practicable, or (ii) the Debtor will deliver the 40% partnership interest
of COPI Cold Storage in AmeriCold Logistics, Bank of America's collateral, to
Bank of America in full satisfaction of it's allowed secured claim.

      Class 3 includes claims entitled to priority treatment under 11 U.S.C.
Section 507(a) other than administrative claims and pre-petition priority tax
claims. Class 3 is not impaired and is not entitled to vote on the bankruptcy
plan. These claims will be paid in full. Class 3 claims will consist primarily
of unpaid pre-petition salaries and benefits. Crescent Operating estimates that
Class 3 claims will be approximately $1.1 million.


      Class 4 includes the claims of general unsecured creditors. Class 4 is not
impaired and is not entitled to vote on the bankruptcy plan. Because the Debtor
is essentially a holding company, it does not have significant general unsecured
claims. The holders of Class 4 unsecured claims will be paid in full as soon as
practicable after the later of (i) the effective date, (ii) the date on which
the claim is no longer disputed, or (iii) the date such payment becomes due in
the ordinary course of business. Crescent Operating estimates that the total
Class 4 claims will be approximately $0.5 million. This estimate does not
include the claims that the Crescent Machinery Committee has alleged in its
lawsuit against Crescent Operating. If the total obligations of Crescent
Operating to the unsecured creditors of Crescent Operating identified in the
original Settlement Agreement, plus newly asserted claims such as those of the
Crescent Machinery Committee, exceed the amount of funds that Crescent Real
Estate will make available to Crescent Operating for the payment of these
claims, there is a risk that the bankruptcy court will not confirm the
bankruptcy plan.


      Class 5 includes the holders of certain promissory notes secured by assets
of Crescent Machinery, a Crescent Operating subsidiary that commenced a Chapter
11 bankruptcy case on February 6, 2001. Class 5 is impaired and the holders of
the allowed claims in Class 5 are entitled to vote on the bankruptcy plan.
Crescent Real Estate purchased the promissory notes from their original holders
in February 2002 for $1.7 million. This amount will be included as an expense
for purposes of determining the number of Crescent Real Estate common shares to
be distributed to the stockholders of Crescent Operating pursuant to the
bankruptcy plan. The amount of principal and interest outstanding on the Class 5
claims as of September 30, 2002 was $2.8 million. If the bankruptcy plan is
confirmed, Crescent Real Estate will not receive a distribution on account of
its Class 5 claim from Crescent Operating but will retain its liens on certain
assets of Crescent Machinery.

      Class 6 includes Crescent Real Estate's unsecured claims. Class 6 is
impaired and Crescent Real Estate is entitled to vote on the bankruptcy plan.
Upon Crescent Real Estate's request, Crescent Operating shall deliver and
transfer to Crescent Real Estate any and all Crescent Operating property not
otherwise distributed under the bankruptcy plan; provided, however, that if the
bankruptcy plan is confirmed, whether consensually or over the objection of
other holders of allowed claims or interests, Crescent Real Estate agrees not to
object to confirmation on


                                       96

the grounds that it may not receive a distribution under the bankruptcy plan on
account of its unsecured claim and that its unsecured claim is treated less
favorably than other unsecured claims. The treatment of Crescent Real Estate's
secured Class 1 and unsecured Class 6 claims leaves open the possibility that
Crescent Operating assets may be transferred to Crescent Real Estate after the
effective date of the bankruptcy plan. The vast majority of Crescent Operating's
assets have already been transferred to Crescent Real Estate and it is
contemplated that all assets of value, other than the interest in COPI Cold
Storage, will be transferred to Crescent Real Estate before the effective date.

      Class 7 consists of the interests of holders of Crescent Operating common
stock. Class 7 is impaired and is entitled to vote on the bankruptcy plan. Class
7 is treated differently depending on whether or not Class 7 accepts the
bankruptcy plan. If Class 7 accepts the bankruptcy plan, Crescent Real Estate
will pay on the effective date of the bankruptcy plan or the date upon which the
bankruptcy plan becomes final, at Crescent Real Estate's election, or as soon
thereafter as practicable to each holder of Crescent Operating common stock, the
product of (i) (A) the number of shares of Crescent Operating common stock owned
by such holder on the confirmation date, divided by (B) the total number of
shares of Crescent Operating common stock outstanding on the confirmation date,
and (ii) the quotient of (A) the consideration amount, as described below, and
(B) the average of the daily closing prices per Crescent Real Estate common
share as reported on the New York Stock Exchange Composite Transaction reporting
system for the 10 consecutive NYSE trading days immediately preceding the date a
confirmation order is entered on the docket in the bankruptcy case. The
consideration amount will equal the greater of:


      -     approximately $2.16 million; or


      -     $16.0 million minus the total amount of payments made by Crescent
            Real Estate or claims and expenses relating to the Crescent
            Operating bankruptcy and the reorganization transactions including
            expenses of Crescent Real Estate but excluding payments in
            satisfaction of the Bank of America claim.


      No certificate or scrip representing fractional Crescent Real Estate
common shares shall be issued, no cash shall be paid in lieu of fractional
shares, and all fractional shares shall be rounded up or down to the nearest
whole Crescent Real Estate common share. The Crescent Operating common stock
shall be cancelled. If Class 7 rejects the bankruptcy plan, and the bankruptcy
plan is still confirmed by the bankruptcy court, Class 7 will receive no
distribution under the bankruptcy plan, and the Crescent Operating stock shall
still be cancelled.


      Class 8 consists of the holders of all warrants and stock options that are
still exercisable but that have not been exercised. Class 8 is impaired but it
is not entitled to vote on the bankruptcy plan because it is deemed to have
rejected the bankruptcy plan. Class 8 will receive no distribution under the
bankruptcy plan and the warrants and stock options shall be cancelled on the
effective date.

      The creditors in Class 1 and Class 2 are Crescent Real Estate and Bank of
America. Each of these impaired creditors will be provided with this proxy
statement/prospectus in connection with solicitation of its pre-petition
approval of the bankruptcy plan. Crescent Operating anticipates that all voting
on the bankruptcy plan will be completed in the pre-petition period.

CONDITIONS TO OCCURRENCE OF THE EFFECTIVE DATE

      The bankruptcy plan provides that, except as expressly waived by Debtor
with the consent of Crescent Real Estate, it is a condition to the effectiveness
of the bankruptcy plan that:

      -     the bankruptcy court has signed the confirmation order, and the
            clerk of the bankruptcy court has duly entered the confirmation
            order on the docket for the reorganization case in a form and
            substance that is acceptable to Debtor;

      -     the confirmation order has become effective and has not been stayed,
            modified, reversed or amended; and


                                       97

      -     Crescent Real Estate has received all regulatory approvals and
            authorizations necessary to create Crescent Spinco and effect the
            related transaction.

EXECUTORY CONTRACTS AND UNEXPIRED LEASES

      An executory contract generally is described as a contract on which
performance remains due from both parties to the contract. The bankruptcy plan
provides for the rejection of all executory contracts and unexpired leases to
which Debtor is a party as of the date of the confirmation of the bankruptcy
plan, except for any executory contract or unexpired lease that (i) has been
assumed or rejected pursuant to a final order or (ii) is the subject of a
pending motion for authority to assume the contract or lease filed by Debtor
prior to the date of the confirmation of the bankruptcy plan. Because Crescent
Operating is essentially a holding company, it is not a party to material
executory contracts, other than the Settlement Agreement, or unexpired leases.
Crescent Operating does not intend to reject the Settlement Agreement. If
Crescent Operating were to reject the Settlement Agreement, it would constitute
a breach of the Settlement Agreement. Crescent Real Estate would be relieved of
its obligation to pay Crescent Operating's creditors and to distribute Crescent
Real Estate common shares to Crescent Operating stockholders under the terms of
the bankruptcy plan. As a result, the bankruptcy plan would not be feasible.
Additionally, Crescent Operating would be liable for the damages, if any, that
its breach caused Crescent Real Estate. Rejection of the Settlement Agreement
would not affect or undo Crescent Operating's transfers of Crescent Real
Estate's collateral to it. Crescent Operating, however, would lose all of the
benefits it otherwise would have received under the Settlement Agreement
following any rejection of the Settlement Agreement.

      The bankruptcy plan establishes a bar date for the filing of claims
arising out of the rejection of executory contracts and unexpired leases.

MODIFICATIONS OF PLAN OF REORGANIZATION; SEVERABILITY OF PROVISIONS

      Crescent Operating reserves the right, in accordance with the Bankruptcy
Code, to amend or modify the bankruptcy plan prior to the entry of the
confirmation order. After the entry of the confirmation order, Crescent
Operating, as it is reorganized pursuant to the bankruptcy plan, may, upon order
of the bankruptcy court, amend or modify the bankruptcy plan in accordance with
section 1127(b) of the Bankruptcy Code, or remedy any defect or omission or
reconcile any inconsistency in the bankruptcy plan in such manner as may be
necessary to carry out the purpose and intent of the bankruptcy plan. Any
modifications of the bankruptcy plan, whether before or after confirmation,
requires the consent of Crescent Real Estate in its sole discretion.

      If, prior to the confirmation of the bankruptcy plan, any term or
provision of the bankruptcy plan that does not govern the treatment of claims,
interests or the conditions of the effective date of the bankruptcy plan, is
held by the bankruptcy court to be invalid, void or unenforceable, the
bankruptcy court will have the power to alter and interpret such term or
provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void or unenforceable, and such term or provision will then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
bankruptcy plan will remain in full force and effect and will in no way be
affected, impaired or invalidated by such holding, alteration or interpretation.
The confirmation order shall constitute a judicial determination and will
provide that each term and provision of the bankruptcy plan, as it may have been
altered or interpreted in accordance with the foregoing, is valid and
enforceable pursuant to its terms.

CONFIRMATION OF THE PLAN OF REORGANIZATION

The Confirmation Hearing

      Section 1128(a) of the Bankruptcy Code requires the bankruptcy court,
after notice, to hold a confirmation hearing at which Crescent Operating will
seek confirmation of the bankruptcy plan. Section 1128(b) of the Bankruptcy


                                       98

Code provides that any party in interest may object to confirmation of a
bankruptcy plan. Even if the bankruptcy plan is accepted by the class of
Crescent Operating stockholders, an individual stockholder may object to
confirmation of the bankruptcy plan.

      Notice of the confirmation hearing will be provided to all holders of
claims and interests, and to other parties in interest, in a notice to be
approved by the bankruptcy court at Crescent Operating's request. Crescent
Operating will seek approval of a confirmation notice providing that (1) the
confirmation hearing may be adjourned from time to time by the bankruptcy court
without further notice except for an announcement of the adjourned date made at
the confirmation hearing or any adjournment thereof, (2) objections to
confirmation must be made in writing, specifying in detail the name and address
of the person or entity objecting, the grounds for the objection, and the nature
and amount of the claim or interest held by the objector, if applicable, and (3)
objections must be filed with the bankruptcy court, together with proof of
service, and served upon the parties designated in the confirmation notice, on
or before the time and date designated in the confirmation notice as being the
last day for serving and filing objections to confirmation of the bankruptcy
plan. Objections to confirmation of the bankruptcy plan are governed by
bankruptcy rule 9014 and the local rules of the bankruptcy court. UNLESS AN
OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED IT MAY NOT BE CONSIDERED BY
THE BANKRUPTCY COURT.

Requirements For Confirmation Under Section 1129(A) Of The Bankruptcy Code

      In order for the bankruptcy plan to be confirmed, and regardless of
whether all impaired classes of claims and interests vote to accept the
bankruptcy plan, the Bankruptcy Code requires the bankruptcy court to determine
independently that the bankruptcy plan complies with the requirements of section
1129(a) of the Bankruptcy Code.

      The requirements of section 1129(a) include, among others:

      -     that the bankruptcy plan complies, and Crescent Operating in
            proposing the bankruptcy plan has complied, with the applicable
            provisions of Chapter 11;

      -     that the bankruptcy plan is proposed in good faith and not by any
            means forbidden by law;

      -     that any payment made or to be made by Crescent Operating or by a
            person issuing securities or acquiring property under the bankruptcy
            plan for services, costs or expenses in connection with the
            reorganization case, or in connection with the bankruptcy plan and
            incident to the reorganization case, has been approved by or is
            subject to approval by the bankruptcy court as reasonable;

      -     as discussed more fully below, that, to the extent any holder of a
            claim or interest in an impaired class under the bankruptcy plan has
            not accepted the bankruptcy plan, the bankruptcy plan is in the
            "best interests" of such holder; and

      -     as discussed more fully below, that the bankruptcy plan is
            "feasible."

      Crescent Operating believes that all applicable requirements of section
1129(a) of the Bankruptcy Code will be satisfied at the confirmation hearing.

      Best Interests Test. Under the "best interests" test, a plan is
confirmable if, with respect to each impaired class of claims or interests, each
holder thereof either (1) accepts the bankruptcy plan or (2) will receive or
retain under the bankruptcy plan, on account of its claim or interest, property
of a value, as of the effective date of the bankruptcy plan that is not less
than the value such holder would receive or retain if the debtor were liquidated
under Chapter 7 of the Bankruptcy Code on the same date.


                                       99

      To determine what amount the holders in each impaired class of claims or
interests would receive if the debtor were liquidated on the effective date of
the bankruptcy plan , the bankruptcy court must determine the dollar amount that
would be generated from a liquidation of the assets and properties of the debtor
in the context of a hypothetical Chapter 7 liquidation case. The cash amount
that would be available for non-administrative priority and unsecured claims
against, and interests in, the debtor would consist of the proceeds from
disposition of the assets of the debtor, augmented by the cash held by the
debtor at the time of the commencement of the hypothetical Chapter 7 case. This
amount would be reduced by the amount of any secured claims, the costs and
expenses of the hypothetical Chapter 7 liquidation, unpaid administrative
expenses of the Chapter 11 case and additional administrative expense claims
resulting from the termination of the debtor's business in Chapter 7.

      Liquidation costs under Chapter 7 would include fees payable to the
Chapter 7 trustee, fees payable to attorneys and other professionals that the
trustee might engage, asset disposition expenses, litigation costs and claims
arising from the operations of Crescent Operating's business during the Chapter
7 case. Administrative claims in the liquidation would also include unpaid
expenses incurred by the debtor during the Chapter 11 case, such as compensation
for attorneys, financial advisors and accountants, as well as costs and expenses
of members of any committee appointed in the Chapter 11 case. In addition,
administrative claims may arise by reason of the breach or rejection in the
hypothetical Chapter 7 case of executory contracts or unexpired leases entered
into or assumed by Crescent Operating during the pendency of the Chapter 11
case.


      To determine if the bankruptcy plan is in the best interests of Crescent
Operating's stockholders, the value of the distributions to Crescent Operating's
stockholders from proceeds of a hypothetical Chapter 7 liquidation, less the
estimated costs and expenses attributable thereto, is compared to the value
offered under the bankruptcy plan to such stockholders. For a summary of the
liquidation analysis, and the material assumptions Crescent Operating relied
upon, see "The Reorganization Transactions - Liquidation Analyses." Crescent
Operating is not aware of any events subsequent to the liquidation analyses
dates that would materially impact the liquidation analyses. There can be no
assurance that the assumptions underlying the liquidation analyses would be made
or accepted by the bankruptcy court. However, as set forth below, Crescent
Operating believes that hypothetical liquidation under Chapter 7 would result in
no distributions being made to general unsecured creditors or Crescent
Operating's stockholders, compared to full payment of claims of general
unsecured creditors, and distributions of Crescent Real Estate common shares to
Crescent Operating's stockholders whose stock is being cancelled. Based upon the
liquidation analysis, Crescent Operating believes that the bankruptcy plan is in
the best interests of Crescent Operating's stockholders because such holders
will receive distributions under the bankruptcy plan of a value, as of the
effective date greater than the amount such holders would receive if the debtor
were liquidated under Chapter 7 of the Bankruptcy Code as of the same date.


Feasibility of the Plan of Reorganization.

      The court may confirm the bankruptcy plan only if it finds that the
bankruptcy plan is feasible and is not likely to be followed by the liquidation
or further need for reorganization of the debtor. In this case, Crescent
Operating is liquidating and thus the bankruptcy plan is feasible if reorganized
Crescent Operating can make the distributions required by the bankruptcy plan.

      The bankruptcy plan's feasibility is primarily dependent on Crescent Real
Estate's performance of its obligations under the Settlement Agreement. Pursuant
to the Settlement Agreement, Crescent Real Estate will make sufficient funds
available to Crescent Operating to pay in full or otherwise resolve those
creditor claims of Crescent Operating that Crescent Operating identified in the
original Settlement Agreement, other than the Crescent Real Estate claims, and
to cover budgeted expenses of implementing the Settlement Agreement and seeking
to confirm the bankruptcy plan. Specifically, Crescent Real Estate has committed
to pay up to $5.0 million of Crescent Operating's cash flow shortage from the
original execution of the Settlement Agreement through the entry of a final
decree in the bankruptcy case. These operating expenses include the anticipated
unsecured claims of parties with whom Crescent Operating does business on an
ordinary course basis as well as all the expense of consummating the Settlement
Agreement, including the transactions between Crescent Real Estate and Crescent
Operating affiliates, and the


                                      100

expenses of the bankruptcy case. Crescent Operating believes that this amount is
sufficient to pay the designated expenses. However, if it is insufficient, the
bankruptcy plan may not be feasible unless Crescent Real Estate agrees to fund
any excess.


      In connection with the Settlement Agreement and with the purpose of
facilitating confirmation of the bankruptcy plan, Crescent Real Estate has
agreed to subordinate its lien in the COPI Cold Storage equity interests to
allow Crescent Operating to pledge this asset to Bank of America. Crescent Real
Estate also will create a new subsidiary, Crescent Spinco, to purchase the COPI
Cold Storage equity interests and to thereby provide Crescent Operating with
funds to satisfy the Bank of America claim. If Crescent Real Estate is
unsuccessful in obtaining the requisite regulatory and other approvals for the
creation of Crescent Spinco, the bankruptcy plan will still be feasible as to
Bank of America since it will hold a first lien security interest on the COPI
Cold Storage equity interests, which have a value sufficient to satisfy Bank of
America's claim.

      Finally, Crescent Real Estate has advanced or agreed to advance additional
amounts of up to $8.772 million to satisfy all other claims against Crescent
Operating. These amounts, and other amounts that Crescent Real Estate funds to
Crescent Operating, or to creditors on Crescent Operating's behalf, to make the
bankruptcy plan feasible, will reduce the value of the distribution to Crescent
Operating stockholders. However, if the bankruptcy plan is accepted by the
Crescent Operating stockholders and approved by the bankruptcy court, the
distribution to Crescent Operating will not be less than approximately $2.16
million, or $0.20 per share of Crescent Operating common stock, regardless of
the other amounts that Crescent Real Estate funds. Crescent Operating currently
estimates that Crescent Real Estate will need to advance funds sufficient to pay
in full or otherwise resolve total claims and expenses of between $10.6 million
to $13.8 million.


      The most significant element of the bankruptcy plan's feasibility is
Crescent Real Estate's ability to perform its obligations under the Settlement
Agreement. Crescent Operating believes that Crescent Real Estate has the ability
to perform its obligations and will perform. There are no material uncertainties
regarding Crescent Real Estate's ability to perform. Crescent Real Estate will
use funds obtained primarily from cash flow provided by operating activities to
meet its obligations.


      Crescent Real Estate has not agreed to pay all claims against Crescent
Operating, but has agreed to pay all claims that were identified by Crescent
Operating in the original Settlement Agreement. On December 19, 2002, the
Crescent Machinery Committee filed a lawsuit against Crescent Operating and
certain of its current and former officers and directors seeking an unspecified
amount of direct, consequential and punitive damages, as well as related
attorneys' fees, for alleged breaches of fiduciary duty, aiding and abetting
breaches of fiduciary duty, negligent misrepresentation, and gross negligence.
If a court determines that Crescent Operating has liability to Crescent
Machinery, the amount of Crescent Operating's liability to its unsecured
creditors may exceed the amounts that Crescent Real Estate will agree to make
available to Crescent Operating for payments on account of creditors' claims.
Because Crescent Operating has no other sources of funds to pay its creditors'
claims, the bankruptcy plan may not be feasible if Crescent Operating is found
liable to Crescent Machinery and the amount owed to all unsecured creditors
exceeds the amount that Crescent Real Estate will agree to pay under the
Settlement Agreement.


      Crescent Real Estate has agreed that if the bankruptcy plan is confirmed,
Crescent Real Estate's administrative expense claim arising out of its funding
of Crescent Operating's post-petition operations and professional fees will be
satisfied in the same manner as its Class 1 claims and Crescent Real Estate will
not object to the bankruptcy plan on the grounds that its administrative expense
claim is not getting paid in full in cash on the effective date of the
bankruptcy plan.


                                      101


IMPLEMENTATION OF THE PLAN OF REORGANIZATION

Funding of Obligations by Crescent Partnership and Crescent Real Estate under
Settlement Agreement.

      On the effective date, to the extent that Crescent Operating has
insufficient funds to make the payments to holders of allowed administrative and
priority claims and Class 3, 4 and 5 Claims, Crescent Partnership shall provide
Crescent Operating with sufficient funds to pay such allowed claims in
accordance with, and as limited by, the terms of the Settlement Agreement.

Transfer of Crescent Real Estate Common Shares to Plan Administrator.


      If Class 7 (the holders of Crescent Operating common stock) accepts the
bankruptcy plan, Crescent Real Estate shall deposit with the plan administrator,
in trust for the holders of Crescent Operating common stock whose shares are
being canceled under the bankruptcy plan, certificates representing the Crescent
Real Estate common shares issuable to the Crescent Operating common
stockholders.


Registration of Crescent Real Estate Common Shares

      Prior to the effective date, Crescent Real Estate will have registered
under the Securities Act of 1933 all of the Crescent Real Estate common shares
issuable under the bankruptcy plan.

Purchase of COPI Cold Storage Interests by Crescent Spinco

      Prior to the effective date, Crescent Real Estate shall spin-off to
Crescent Real Estate's shareholders Crescent Spinco, which will be capitalized
with at least $15.0 million. Crescent Spinco shall acquire all of Crescent
Operating's interest in COPI Cold Storage. The purchase price for the equity
interests in COPI Cold Storage shall be an amount to be agreed upon between
Crescent Partnership and Crescent Operating, which shall be not less than $15.0
million and not more than $15.5 million. Crescent Operating shall use all of the
proceeds as are necessary to repay the full principal balance (including accrued
and unpaid interest) of the Bank of America secured claims.

Issuance of New Crescent Operating Common Stock

      On the effective date, pursuant to the confirmation order and without any
further action by the stockholders or directors of the Debtor or the reorganized
Crescent Operating, the reorganized Crescent Operating shall issue a single
share of Crescent Operating common stock which shall be held by the plan
administrator as nominee for the holders of allowed claims against Debtor.

Cancellation of Old Crescent Operating Common Stock


      On the effective date, the Crescent Operating common stock shall be
canceled, and the statements of resolution governing such Crescent Operating
common stock shall be rendered void. Thereafter, the only outstanding share of
common stock of the reorganized Crescent Operating will be held by the plan
administrator, as nominee. If the bankruptcy plan is accepted by the
stockholders of Crescent Operating and confirmed by the bankruptcy court, the
holders of Crescent Operating common stock on the date of entry of the
confirmation order shall be entitled to receive common shares of Crescent Real
Estate as set forth elsewhere in this proxy statement.


Corporate Action

      Upon entry of the confirmation order, the following shall be and be deemed
authorized and approved in all respects: (i) the filing by reorganized Crescent
Operating of the Amended Certificate of Incorporation, and (ii) the Amended
Bylaws. On the effective date, or as soon thereafter as is practicable, the
reorganized Crescent Operating


                                      102

shall file with the Secretary of State of the State of Delaware, in accordance
with applicable state law, the Amended Certificate of Incorporation which shall
conform to the provisions of the bankruptcy plan and prohibit the issuance of
non-voting equity securities. On the effective date, the matters provided under
the bankruptcy plan involving the capital and corporate structures and
governance of the reorganized Crescent Operating shall be deemed to have
occurred and shall be in effect from and after the effective date pursuant to
applicable state laws without any requirement of further action by the
stockholders or directors of the Debtor or the reorganized Crescent Operating.
On the effective date, the reorganized Debtor shall be authorized and directed
to take all necessary and appropriate actions to effectuate the transactions
contemplated by the bankruptcy plan and this proxy statement/prospectus.

The Plan Administrator

      On the effective date, the officers and board of directors of the Debtor
shall be deemed removed from office pursuant to the confirmation order and the
operation of the reorganized Debtor in accordance with the provisions of the
bankruptcy plan shall become the general responsibility of the plan
administrator pursuant to and in accordance with the provisions of the
bankruptcy plan and Plan Administration Agreement. Mr. Jeffrey L. Stevens,
Crescent Operating's current chief executive officer and sole director, will
serve as plan administrator. The primary responsibility of the plan
administrator is to make the distributions provided in the bankruptcy plan, to
wind up Crescent Operating's affairs and to prepare it for dissolution.

      Responsibilities. The responsibilities of the plan administrator shall
include prosecuting objections to and estimations of claims; calculating and
making all distributions in accordance with the bankruptcy plan; filing all
required tax returns and paying taxes and all other obligations on behalf of the
reorganized Debtor; providing to Crescent Partnership on a monthly basis an
accounting of claims paid; an estimation of claims remaining to be paid; funds
held by reorganized Crescent Operating; and additional funds required from
Crescent Partnership to pay allowed claims and the expenses of reorganized
Crescent Operating, including the expenses of the plan administrator; and such
other responsibilities as may be vested in the plan administrator pursuant to
the bankruptcy plan, the bankruptcy plan Administration Agreement or bankruptcy
court order or as may be necessary and proper to carry out the provisions of the
bankruptcy plan.

      Powers. The powers of the plan administrator shall, without bankruptcy
court approval in each of the following cases, include the power to invest funds
in, and withdraw, make distributions and pay taxes and other obligations owed by
the reorganized Debtor from the Debtor's bank accounts in accordance with the
plan; the power to engage employees and professional persons to assist the plan
administrator with respect to its responsibilities; the power to compromise and
settle claims and causes of action on behalf of or against the reorganized
Debtor; and such other powers as may be vested in or assumed by the plan
administrator pursuant to the plan, the Plan Administration Agreement, the
Amended Certificate of Incorporation, the Amended By-Laws or bankruptcy court
order or as may be necessary and proper to carry out the provisions of the plan.

      Compensation. In addition to reimbursement for the actual out-of-pocket
expenses incurred, the plan administrator shall be entitled to reasonable
compensation for services rendered on behalf of the reorganized Debtor in an
amount and on such terms as may be agreed to by the Debtor as reflected in the
Plan Administration Agreement. Any dispute with respect to such compensation
shall be resolved by agreement among the parties or, if the parties are unable
to agree, determined by the bankruptcy court.

      Information and Reporting. The plan administrator shall file reports with
the bankruptcy court no less often than as soon as practicable after the end of
every calendar quarter with respect to the status of the execution and
implementation of the bankruptcy plan, including amounts expended for
administrative expenses, amounts distributed to creditors and the amount of
unpaid or disputed claims.


                                      103

      Termination. The duties, responsibilities and powers of the plan
administrator shall terminate on the date following the entry of the final
decree in the bankruptcy case on which the reorganized Debtor is dissolved under
applicable state law in accordance with the bankruptcy plan.

MANNER OF DISTRIBUTION OF PROPERTY UNDER THE PLAN OF REORGANIZATION

Distribution Procedures


      Except as otherwise provided in the bankruptcy plan, all distributions of
cash and other property shall be made by the reorganized Debtor or the plan
administrator on the latest of the effective date, the date a claim or interest
becomes an allowed claim or interest, or the date upon which the bankruptcy plan
becomes final, at Crescent Real Estate's election, or as soon thereafter as
practicable. Distributions required to be made on a particular date shall be
deemed to have been made on such date if actually made on such date or as soon
thereafter as practicable. No payments or other distributions of property shall
be made on account of any claim or portion thereof unless and until such claim
or portion thereof is allowed.


      For purposes of applying this section, the holders of allowed interests
under or evidenced by Crescent Operating common stock shall, in the case of
Crescent Operating common stock held in "street name," mean the beneficial
holders thereof as of the confirmation date. The total number of Crescent Real
Estate shares to be distributed under the bankruptcy plan may not be determined
as of the date of the initial distribution.

      If a subsequent distribution is required due to unresolved claims as of
the effective date, it may be made, at Crescent Real Estate's election, in cash
or in additional shares of Crescent Real Estate common shares. If the
distribution is in additional Crescent Real Estate shares, the number of shares
shall be determined using the same Crescent Real Estate stock price as is used
to determine the number of shares in the initial distribution.

Distribution of Crescent Real Estate Common Shares

      The plan administrator shall distribute all of the Crescent Real Estate
common shares to be distributed under the bankruptcy plan. If Class 7 accepts
the bankruptcy plan and the bankruptcy plan is confirmed by the bankruptcy
court, the initial distribution of Crescent Real Estate common shares on account
of allowed interests shall be either on the effective date or, at Crescent Real
Estate's election, on the date upon which the order confirming the bankruptcy
plan became final, or as soon thereafter as practicable. The plan administrator
may employ or contract with other entities to assist in or perform the
distribution of Crescent Real Estate common shares.

Surrender and Cancellation of Old Securities


      As a condition to receiving the Crescent Real Estate common shares, the
record holders of Crescent Operating common stock as of the confirmation date
shall surrender their Crescent Operating common stock, if held in certificate
form, to the plan administrator or its agent. As soon as practicable following
the effective date, the plan administrator shall mail to each record holder of
Crescent Operating common stock as of the confirmation date, a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to the stock certificates shall pass only upon actual delivery of
the Crescent Operating common stock certificates to the plan administrator, and
shall contain instructions for surrendering such certificates. When a holder
surrenders its Crescent Operating common stock to Crescent Operating, Crescent
Operating shall hold the instrument in "book entry only" until such instruments
are canceled. Any holder of Crescent Operating common stock whose instrument has
been lost, stolen, mutilated or destroyed shall, in lieu of surrendering such
instrument, deliver to Crescent Operating: (a) evidence satisfactory to Crescent
Operating of the loss, theft, mutilation or destruction of such instrument, and
(b) such security or indemnity that may be reasonably required by Crescent
Operating to hold the Crescent Operating and Crescent Partnership harmless with
respect to any such representation of the holder. Upon compliance with the
preceding sentence, such holder shall, for all purposes under the bankruptcy
plan, be deemed to have surrendered such instrument. Any holder



                                      104

of Crescent Operating common stock which has not surrendered or been deemed to
have surrendered its Crescent Operating common stock within two years after the
effective date shall have its interest as a holder of Crescent Operating common
stock disallowed, shall receive no distribution on account of its interest as a
holder of Crescent Operating common stock, and shall be forever barred from
asserting any interest on account of its Crescent Operating common stock.


      As of the confirmation date, Crescent Operating shall close its stock
books and transfer ledgers. All Crescent Operating common stock shall represent
only the right to participate in the distributions provided in the bankruptcy
plan on account of such Crescent Operating common stock. If a certificate
representing Crescent Operating common stock is presented for transfer on or
after the confirmation date, a certificate representing the appropriate number
of whole Crescent Real Estate common shares will be issued in exchange therefor.


Disputed Claims

      Notwithstanding any other provisions of the bankruptcy plan, no payments
or distributions shall be made on account of any disputed claim or interest
until such claim or interest becomes an allowed claim or interest, and then only
to the extent that it becomes an allowed claim or interest.

Manner of Payment Under the Plan

      Cash payments made pursuant to the bankruptcy plan shall be in U.S.
dollars by checks drawn on a domestic bank selected by the reorganized Debtor,
or by wire transfer from a domestic bank, at the reorganized Debtor's option,
except that payments made to foreign trade creditors holding allowed claims may
be paid, at the option of reorganized Debtor in such funds and by such means as
are necessary or customary in a particular foreign jurisdiction.

Delivery of Distributions and Undeliverable or Unclaimed Distributions


      Delivery of Distributions in General. Except as provided below for holders
of undeliverable distributions, distributions to holders of allowed claims shall
be distributed by mail as follows: (a) except in the case of the holders of
Crescent Operating common stock, (1) at the addresses set forth on the
respective proofs of claim filed by such holders; (2) at the addresses set forth
in any written notices of address changes delivered to the reorganized Debtor
after the date of any related proof of claim; or (3) at the address reflected on
the schedule of assets and liabilities filed by the Debtor if no proof of claim
or proof of interest is filed and the reorganized Debtor has not received a
written notice of a change of address; and (b) in the case of the holders of
Crescent Operating common stock, as provided in sections 6.3 and 6.4 of the
bankruptcy plan.


Undeliverable Distributions

      Holding and Investment of Undeliverable Property. If the distribution to
the holder of any claim is returned to the reorganized Debtor as undeliverable,
no further distribution shall be made to such holder unless and until the
reorganized Debtor are notified in writing of such holder's then current
address. Subject to section 7.8(b)(ii) of the bankruptcy plan, undeliverable
distributions shall remain in the possession of the reorganized Debtor pursuant
to this section until such times as a distribution becomes deliverable.

      Unclaimed cash (including interest) shall be held in trust in a segregated
bank account in the name of the reorganized Debtor, for the benefit of the
potential claimants of such funds, and shall be accounted for separately. For a
period of two years after the effective date, undeliverable Crescent Real Estate
common shares shall be held in trust for the benefit of the potential claimants
of such securities by the plan administrator in a number of shares sufficient to
provide for the unclaimed amounts of such securities, and shall be accounted for
separately.


                                      105

      Distribution of Undeliverable Property After it Becomes Deliverable and
Failure to Claim Undeliverable Property. Any holder of an allowed claim who does
not assert a claim for an undeliverable distribution held by the reorganized
Debtor within one (1) year after the effective date shall no longer have any
claim to or interest in such undeliverable distribution, and shall be forever
barred from receiving any distributions under the bankruptcy plan. In such
cases, any funds held in reserve for such claim shall become unrestricted cash
of the reorganized Debtor and, upon entry of the final decree and dissolution of
Crescent Operating, shall be delivered to Crescent Partnership.

      De Minimis Distributions. No cash payment of less than twenty-five dollars
($25.00) shall be made to any holder on account of an allowed claim unless a
request therefor is made in writing to the reorganized Debtor.

      Failure to Negotiate Checks. Checks issued in respect of distributions
under the bankruptcy plan shall be null and void if not negotiated within 60
days after the date of issuance. Any amounts returned to the reorganized Debtor
in respect of such checks shall be held in reserve by the reorganized Debtor.
Requests for reissuance of any such check may be made directly to the
reorganized Debtor by the holder of the allowed claim with respect to which such
check originally was issued. Any claim in respect of such voided check is
required to be made before the second anniversary of the effective date. All
claims in respect of void checks and the underlying distributions shall be
discharged and forever barred from assertion against the reorganized Debtor and
their property.

      Compliance with Tax Requirements. In connection with the bankruptcy plan,
to the extent applicable, the reorganized Debtor shall comply with all
withholding and reporting requirements imposed on it by any governmental unit,
and all distributions pursuant to the bankruptcy plan shall be subject to such
withholding and reporting requirements.

      Setoffs. Unless otherwise provided in a final order or in the bankruptcy
plan, the Debtor may, but shall not be required to, set off against any claim
and the payments to be made pursuant to the bankruptcy plan in respect of such
claim, any claims of any nature whatsoever the Debtor may have against the
holder thereof or its predecessor, but neither the failure to do so nor the
allowance of any claim hereunder shall constitute a waiver or release by the
Debtor of any such claims the Debtor may have against such holder or its
predecessor.


      Fractional Interests. The calculation of the percentage distribution of
Crescent Real Estate common shares to be made to holders of Crescent Operating
common stock as provided elsewhere in the bankruptcy plan may mathematically
entitle a holder of Crescent Operating common stock to a fractional interest in
Crescent Real Estate common shares. The number of Crescent Real Estate common
shares to be received by a holder of Crescent Operating common stock shall be
rounded to the next higher or lower whole number of shares. No consideration
shall be provided in lieu of the fractional shares that are rounded down and not
issued. Accordingly, assuming a share price of $20.00 per Crescent Real Estate
common share, a payment by Crescent Real Estate of $13.8 million in expenses
relating to the Crescent Operating bankruptcy and a distribution of $0.20 per
share of Crescent Operating common stock, each Crescent Operating stockholder
must hold at least 50 shares of Crescent Operating common stock in order to
receive any Crescent Real Estate common shares.


EFFECTS OF CONFIRMATION OF THE PLAN OF REORGANIZATION

Discharge and Injunction

      The bankruptcy plan will be binding upon all present and former holders of
claims and equity interests, and their respective successors and assigns,
including the reorganized Debtor. Except as otherwise provided in the bankruptcy
plan or by subsequent order of the bankruptcy court, the confirmation order will
provide, among other things, that from and after the confirmation of the
bankruptcy plan, all persons or entities who have held, hold, or may hold claims
against or equity interests in Debtor are permanently enjoined from taking any
of the following actions against the estate, the reorganized Crescent Operating,
the Creditors' Committee appointed in the Chapter 11 case, if any, Crescent
Partnership, Crescent Real Estate or any of their respective property on account
of any such claims or


                                      106

equity interests: (i) commencing or continuing, in any manner or in any place,
any action or other proceeding; (ii) enforcing, attaching, collecting or
recovering in any manner any judgment, award, decree or order; (iii) creating,
perfecting or enforcing any lien or encumbrance; (iv) asserting a setoff, right
of subrogation or recoupment of any kind against any debt, liability or
obligation due to Debtor other than through a proof of claim or adversary
proceeding; and (v) commencing or continuing, in any manner or in any place, any
action that does not comply with or is inconsistent with the provisions of the
bankruptcy plan; provided, however, that nothing will preclude such persons from
exercising their rights pursuant to and consistent with the terms of the
bankruptcy plan.

Liquidation and Dissolution of Crescent Operating

      The bankruptcy plan is a liquidating plan. Any assets that Crescent
Operating owns on the effective date of the bankruptcy plan will either be used
to satisfy creditor claims or will be transferred to Crescent Real Estate in
accordance with the treatment of the Class 1 and Class 6 claims. Upon
consummation of the bankruptcy plan, the plan administrator will wind up
Crescent Operating's affairs and Crescent Operating will be dissolved.

Releases


      In addition to the releases granted by Crescent Operating to Crescent Real
Estate in connection with the Settlement Agreement, on the effective date of the
bankruptcy plan, the reorganized Debtor, on its own behalf and as representative
of Debtor's estate, will release unconditionally, and is deemed to release
unconditionally (i) each of Debtor's officers, directors, partners, employees,
consultants, attorneys, accountants and other representatives, (ii) Crescent
Partnership and each of Crescent Partnership's officers, directors,
shareholders, employees, consultants, attorneys, accountants, affiliates and
other representatives, (iii) Crescent Real Estate and each of Crescent Real
Estate's officers, directors, shareholders, employees, consultants, attorneys,
accountants, affiliates and other representatives, (iv) the creditors'
committee, if any, and, solely in their capacity as members and representatives
of the creditors' committee, each member, consultant, attorney, accountant or
other representative of the creditors' committee (the entities identified in
(i), (ii), (iii) and (iv) are referred to collectively as, the "releasees"),
from any and all claims, obligations, suits, judgments, damages, rights, causes
of action and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, based in
whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or prior to the effective date in any way relating to
the releasees, Debtor, the Chapter 11 case or the bankruptcy plan. A party who
believes it may have a claim should contact a lawyer to discuss the potential
value of its claim as compared to the value likely to be distributed to
stockholders under the bankruptcy plan.


      On the effective date of the bankruptcy plan, each holder of a claim or
interest (i) who has accepted the bankruptcy plan, (ii) whose claim or interest
is in a class that has accepted or is deemed to have accepted the bankruptcy
plan pursuant to section 1126 of the Bankruptcy Code, or (iii) who may be
entitled to receive a distribution of property pursuant to the bankruptcy plan,
shall be deemed to have unconditionally released the releasees, from any and all
rights, claims, causes of action, obligations, suits, judgments, damages and
liabilities whatsoever which any such holder may be entitled to assert, whether
known or unknown, foreseen or unforeseen, existing or hereafter arising, in law,
equity or otherwise, based in whole or in part upon any act or omission,
transaction, event or other occurrence taking place on or before the effective
date of the bankruptcy plan in any way relating to Debtor, the Chapter 11 case
or the bankruptcy plan, provided however, that the foregoing shall not apply to
all rights, claims and obligations created by or arising under the bankruptcy
plan.


      The release of Crescent Operating stockholder claims will not apply to the
claims, if any, of a person who sold its shares of Crescent Operating common
stock before the record date for voting on the bankruptcy plan or who voted
against the bankruptcy plan, abstained from voting or did not vote and
thereafter either did not receive or refused to accept a distribution of
Crescent Real Estate common shares. The release of Crescent Operating
stockholder claims also will not apply if the holders of Crescent Operating
common stock, voting as a class, vote against the bankruptcy plan. The release
of


                                      107

Crescent Operating stockholder claims will apply to Crescent Operating
stockholders only in their capacity as Crescent Operating stockholders, and will
not affect their rights as holders of Crescent Real Estate common shares.

      In the event that the bankruptcy court concludes that the bankruptcy plan
cannot be confirmed without excising any portion of the release of claims held
by creditors and stockholders, then, with the consent of Crescent Real Estate in
its sole discretion, the bankruptcy plan may be confirmed with the portion of
the releases that the bankruptcy court finds is a bar to confirmation excised so
as to give effect as much as possible to the foregoing releases without
precluding confirmation of the bankruptcy plan. If Crescent Real Estate does not
consent to modification of the release, the bankruptcy plan will not be
confirmed and Crescent Real Estate will not be obligated to pay in full or
otherwise resolve the claims of the creditors that Crescent Operating identified
in the original Settlement Agreement or to make a distribution to Crescent
Operating stockholders.

      In substance, section 524(e) of the Bankruptcy Code provides that the
release of third party claims against a debtor such as Crescent Operating does
not release any other person. In addition to the release of Crescent Operating,
the bankruptcy plan includes releases of Crescent Real Estate and all current
and former officers and directors or trust managers of Crescent Operating or
Crescent Real Estate. It is the position of the Securities and Exchange
Commission that these additional releases violate section 524(e) unless separate
consideration is provided by the specific parties being released or the releases
are voluntary. Crescent Operating believes the releases contemplated by the
bankruptcy plan comply with section 524(e) of the Bankruptcy Code and applicable
law, both because Crescent Real Estate is paying substantial consideration to
Crescent Operating and its stockholders to obtain the releases provided under
the bankruptcy plan and because the releases are voluntary.

      As discussed in this proxy statement, Crescent Real Estate is providing
sufficient funds both to pay in full or otherwise resolve the claims of those
creditors of Crescent Operating that Crescent Operating identified in the
original Settlement Agreement and to cover budgeted expenses of Crescent
Operating. In addition, Crescent Real Estate is providing a distribution to
Crescent Operating stockholders of Crescent Real Estate common shares if the
stockholders vote to accept the bankruptcy plan and the bankruptcy court
confirms the plan. Accordingly, the consideration is being provided, either
directly by the persons who receive the benefit of the releases provided in the
bankruptcy plan or on their behalf. Whether this consideration for the releases
is sufficient is an issue of fact that the bankruptcy court has authority to
determine.


      Moreover, if the Crescent Operating stockholders vote for the bankruptcy
plan, the releases are voluntary. The release of Crescent Operating stockholder
claims will not apply to the claims, if any, of a person who sold their shares
of Crescent Operating common stock before the record date for voting on the
bankruptcy plan or who either voted against the bankruptcy plan, abstained from
voting on the bankruptcy plan or who did not vote on the bankruptcy plan and
thereafter either did not receive or refused to accept a distribution of
Crescent Real Estate common shares. The release of Crescent Operating
stockholder claims will also not apply if the holders of Crescent Operating
common stock, voting as a class, vote against the bankruptcy plan.


Limitation of Liability


      Notwithstanding any other provision of the bankruptcy plan, Crescent
Operating, Crescent Real Estate, and the disbursing agent as well as each of
their respective stockholders, directors, officers, agents, employees, members,
accountants, attorneys, financial advisors and representatives, and affiliates
of Crescent Real Estate, or any one or more of the foregoing, will not be
liable, other than for willful misconduct, to any holder of a claim or interest
or any person or governmental authority, with respect to any action, omission,
forbearance from action, decision, or exercise of discretion taken at any time
prior to the effective date of the bankruptcy plan in connection with, but not
limited to:


      -     Crescent Operating's management or operation, or the discharge of
            Crescent Operating's duties under the Bankruptcy Code or applicable
            nonbankruptcy law;

      -     the filing of the petition for relief;


                                      108

      -     the implementation of any of the transactions provided for, or
            contemplated in, the bankruptcy plan or the collateral documents;

      -     any action taken in connection with either the enforcement of
            Crescent Operating's rights against any person or the defense of
            claims asserted against Crescent Operating with regard to the
            reorganization case;

      -     any action taken in the negotiation, formulation, development,
            proposal, disclosure, confirmation or implementation of the
            bankruptcy plan, including, but not limited to, the Settlement
            Agreement, any competing acquisition proposal or new agreement; or

      -     the administration of the bankruptcy plan or the assets and property
            to be distributed pursuant to the bankruptcy plan.

      Nothing in the limitation of liability will excuse performance or
nonperformance under the Settlement Agreement or any of the documents,
instruments, securities or agreements issued or executed to effectuate the
transactions contemplated by the bankruptcy plan or the Settlement Agreement;
and provided, further, that the liability of any person that solicits acceptance
or rejection of the bankruptcy plan, or that participates in the offer,
issuance, sale or purchase of a security offered or sold under the bankruptcy
plan, on account of such solicitation or participation, or violation of any
applicable law, rule, or regulation governing solicitation of acceptance or
rejection of the bankruptcy plan or the offer, issuance, sale or purchase of
securities, will be limited as set forth in section 1125(e) of the Bankruptcy
Code. Crescent Operating, Crescent Real Estate, and the disbursing agent, as
well as each of their respective shareholders, directors, officers, agents,
employees, members, accountants, attorneys, financial advisors and
representatives, or any one or more of the foregoing, may rely reasonably upon
the opinions of their respective counsel, accountants, and other experts or
professionals and such reliance, if reasonable, will conclusively establish good
faith and the absence of willful misconduct; provided, however, that a
determination that such reliance is unreasonable will not, by itself, constitute
a determination of willful misconduct. In any action, suit or proceeding by any
holder of a claim or interest or any other entity contesting any action by, or
non-action of Crescent Operating, Crescent Real Estate and the disbursing agent
or of their respective shareholders, directors, officers, agents, employees,
members, attorneys, accountants, financial advisors, and representatives, the
reasonable attorneys' fees and costs of the prevailing party will be paid by the
losing party, and as a condition to going forward with such action, suit, or
proceeding at the outset thereof, all parties thereto will be required to
provide appropriate proof and assurances of their capacity to make such payments
of reasonable attorneys' fees and costs in the event they fail to prevail. The
provisions of the limitation of liability are not intended to limit, and will
not limit, any defenses to liability otherwise available to any party in
interest in this reorganization case.


      Notwithstanding the foregoing, in the event that the bankruptcy court
concludes that the bankruptcy plan cannot be confirmed without excising with any
portion of the foregoing limitation of liability provisions, then, with the
consent of Crescent Real Estate in its sole discretion, the bankruptcy plan may
be confirmed with that portion excised or modified, so as to give effect as much
as possible to the foregoing limitation of liability provisions without
precluding confirmation of the bankruptcy plan. The limitation of liability will
not apply to the claims, if any, of a person who sold their Crescent Operating
stock before the record date for voting on the bankruptcy plan or who voted
against the bankruptcy plan, abstained or did not vote, and thereafter either
did not receive or refused to accept a distribution of Crescent Real Estate
common shares. The limitation of liability will also not apply if less than
two-thirds of the shares of Crescent Operating common stock represented at the
special meeting are voted in favor of the bankruptcy plan.


Retention and Enforcement of Causes of Action

      Except as provided in the bankruptcy plan or the confirmation order, any
and all claims, rights, or causes of action that constitute property of the
estate or of Crescent Operating, whether arising under the Bankruptcy Code or
under nonbankruptcy law, including all avoiding power actions under sections
544, 545, 547, 548, 549, and 550 of the Bankruptcy Code or under applicable
nonbankruptcy law as applied through section 544(b) of the Bankruptcy Code, (1)
are expressly retained and may be enforced by Crescent Operating and any
successors in interest, and (2) may be pursued, as appropriate, in accordance
with Crescent Operating's, or its successors', best interests.


                                      109


      To Crescent Operating's best knowledge, no preferential or fraudulent
transfers exist. Other than to the extent discussed in the answer to the
question "What happens if the Crescent stockholders vote AGAINST acceptance of
the Crescent Operating bankruptcy plan?", Crescent Operating has not
investigated whether any transfers of property that could constitute
preferential transfers or fraudulent transfers might have occurred, and
expressly reserves the right to make such an investigation and to pursue
preference and fraudulent transfer claims, if any, that Crescent Operating may
have to the extent permitted by applicable law. Any recoveries from preference
or fraudulent transfer claims would be distributed to Crescent Real Estate under
the bankruptcy plan.


Unclaimed Distributions

      The bankruptcy plan provides that in the event that any distribution of
property remains unclaimed for a period of one year after it has been delivered,
or delivery has been attempted, or has otherwise been made available, such
unclaimed property will be forfeited by such holder, and the unclaimed property
will be distributed pro rata to the other holders of common stock, as
applicable, to whom distributions were made under the bankruptcy plan.

Further Assurances and Authorizations

      Crescent Operating, Crescent Real Estate and all holders of claims or
interests receiving distributions under the bankruptcy plan and all other
parties in interest will, from time to time, if and to the extent necessary,
execute and deliver any agreements or documents and take any other actions as
may be necessary or advisable to effectuate the provisions and intent of the
bankruptcy plan, the Settlement Agreement and any collateral documents.

THE SOLICITATION; VOTING

      Crescent Operating is soliciting votes on the bankruptcy plan only from
creditors with claims in classes 1, 2, 5 and 6 and holders of interests in Class
7 (holder of Crescent Operating common stock). Under the Bankruptcy Code,
holders of claims or interests in an unimpaired class are conclusively presumed
to have accepted the bankruptcy plan and are not entitled to vote on the
bankruptcy plan. Under the bankruptcy plan, Classes 1, 2, 5, 6 and 7 are
impaired. In addition, if holders of claims or interests do not receive or
retain any property under a Chapter 11 plan, the affected class is deemed not to
have accepted the bankruptcy plan. Class 8 which includes holder of Crescent
Operating warrants and stock options will be deemed not to have accepted the
bankruptcy plan on this basis.

      Under the Bankruptcy Code, a class of claims or interests is considered to
be "unimpaired" if a Chapter 11 plan (1) does not alter the legal, equitable and
contractual rights of the holders of such claims or interests or (2)
notwithstanding any contractual or legal entitlement to accelerated payment of a
claim or interest upon default, cures any such default, reinstates the maturity
of such claim or interest, compensates the holder of such claim or interest for
any damages sustained by such holder's reasonable reliance on such contract or
law and does not otherwise alter the legal, equitable or contractual rights of
such holder. As indicated below, classes 3 and 4 are unimpaired under the
bankruptcy plan, and such classes are, therefore, conclusively presumed to have
accepted the bankruptcy plan and are not entitled to vote.


      Holders of claims and interests in classes 1, 2, 5, 6 and 7 are impaired
and will receive or retain property under the bankruptcy plan and, therefore,
are entitled to vote on the bankruptcy plan. An impaired class of interests will
be determined to have accepted the bankruptcy plan if votes to accept the
bankruptcy plan are cast by the holders of at least two-thirds in amount of
allowed interests in such class that actually voted on the bankruptcy plan. As
of the voting record date, 10,828,497 shares of common stock were outstanding
and entitled to vote on the bankruptcy plan.


      Pursuant to bankruptcy rule 3018(b), the bankruptcy court must determine
that the solicitation period prescribed to accept or reject the bankruptcy plan
is not unreasonably short. The bankruptcy court must also determine this
disclosure and proxy statement meets the requirements of the Bankruptcy Code.
Crescent Operating believes the

                                      110

prescribed solicitation period is reasonable and that the court will determine
this disclosure and proxy statement meets applicable requirements. However,
there can be no assurance that the bankruptcy court will agree and, if the
bankruptcy court finds the solicitation to be unreasonably short or that the
disclosure is unsatisfactory, the votes cast will not be counted for purposes of
confirmation of the bankruptcy plan, and Crescent Operating will have to
re-solicit such votes.

      BY VOTING TO ACCEPT THE BANKRUPTCY PLAN, YOU WILL EXPRESSLY WAIVE ANY
RIGHT YOU OR YOUR SUCCESSORS OR ASSIGNS MAY HAVE TO CHANGE OR WITHDRAW YOUR
ACCEPTANCE AFTER THE EXPIRATION DATE UNLESS THE BANKRUPTCY COURT DETERMINES THAT
(1) THE DISCLOSURE YOU RECEIVED WAS NOT ADEQUATE AS REQUIRED BY SECTION 1126(b)
OF THE BANKRUPTCY CODE OR (2) THE BANKRUPTCY PLAN OF REORGANIZATION HAS BEEN
MODIFIED IN A MANNER THAT MATERIALLY AND ADVERSELY CHANGES THE TREATMENT OF YOUR
INTEREST. If you execute and deliver a proxy card without checking either of the
boxes entitled "FOR" or "AGAINST", or if you check both of such boxes, the proxy
will be deemed to constitute acceptance of the bankruptcy plan. If you fail to
execute and deliver your proxy card, you will not be counted for purposes of
determining either acceptance or rejection of the bankruptcy plan by an impaired
class of claims or interests.

      Under section 1126(b) of the Bankruptcy Code, if you accept or reject the
bankruptcy plan before the Chapter 11 case commences, you will be deemed to have
accepted or rejected the bankruptcy plan for purposes of confirmation of the
bankruptcy plan under Chapter 11 if the solicitation complied with any
applicable nonbankruptcy law, rule or regulation governing adequacy of
disclosure in connection with the solicitation, or, if no such law, rule or
regulation applies, the solicitation was made following disclosure of adequate
information as defined in the Bankruptcy Code. In addition, bankruptcy rule
3018(b) requires, in the case of a prepackaged plan of reorganization, that (1)
such plan be disseminated to substantially all holders in any impaired class
that is solicited, (2) with respect to securities held of record, votes be
solicited from the holders of record of such securities on the date specified in
the solicitation and (3) the time prescribed for voting on the bankruptcy plan
not be unreasonably short. Crescent Operating believes this proxy
statement/prospectus and the solicitation comply with the requirements of the
Bankruptcy Code and the bankruptcy rules, as well as the requirements of any
applicable nonbankruptcy laws.

      If Crescent Operating receives the requisite acceptances of the bankruptcy
plan by the expiration date, Crescent Operating will commence the reorganization
case by filing a voluntary petition under Chapter 11 and will thereafter
continue to operate its business as a debtor in possession. You should be aware
Crescent Operating can extend the expiration date in its sole discretion.
Crescent Operating will then use the proxies received pursuant to the
solicitation to seek confirmation of the bankruptcy plan as promptly as
practicable.

ACCEPTANCE OR CRAMDOWN

      Section 1129(b) of the Bankruptcy Code contains provisions for the
confirmation of a plan of reorganization even if the bankruptcy plan is not
accepted by the stockholders in Class 7 as long as the bankruptcy plan "does not
discriminate unfairly" and is "fair and equitable" with respect to such class.
This provision is commonly referred to as the "cramdown provision." Crescent
Operating anticipates that it would seek to utilize the "cramdown provision" of
section 1129(b) of the Bankruptcy Code if necessary to confirm the bankruptcy
plan. The bankruptcy plan provides that the stockholders of Crescent Operating
are entitled to receive common shares of Crescent Real Estate only if the
bankruptcy plan is accepted by the required vote of the Crescent Operating
stockholders. Accordingly, if the bankruptcy plan is confirmed pursuant to the
"cramdown provision" of section 1129(b) of the Bankruptcy Code, the stockholders
of Crescent Operating will receive nothing under the bankruptcy plan, and their
shares of Crescent Operating common stock will be cancelled.

      A plan does not discriminate unfairly if no class receives more than it is
legally entitled to receive for its claims or equity interests. "Fair and
equitable," as defined in section 1129(b)(2) of the Bankruptcy Code, has
different meanings for secured claims, unsecured claims and interests. With
respect to a secured claim, "fair and equitable"


                                      111

means either (i) the impaired secured creditor retains its liens to the extent
of its allowed claim and receives deferred cash payments at least equal to the
allowed amount of its claims with a present value as of the effective date of
the bankruptcy plan at least equal to the value of such creditor's interest in
the property securing its liens, (ii) property subject to the lien of the
impaired secured creditor is sold free and clear of that lien, with that lien
attaching to the proceeds of sale, and such lien proceeds must be treated in
accordance with clauses (i) and (iii) hereof, or (iii) the impaired secured
creditor realizes the "indubitable equivalent" of its claim under the bankruptcy
plan.

      With respect to an unsecured claim, "fair and equitable" means either (i)
each impaired creditor receives or retains property of a value equal to the
amount of its allowed claim or (ii) the holders of claims and equity interests
that are junior to the claims of the dissenting class will not receive any
property under the bankruptcy plan.

      With respect to interests, such as the holders of the common stock
interests in class 7, the condition that a reorganization plan be "fair and
equitable" includes the requirement that each class 7 interest holder receive or
retain property of a value equal to the greater of the allowed amount of any
fixed liquidation preference to which such holder is entitled, any fixed
redemption price to which such holder is entitled or the value of such interest.
Crescent Operating believes that the bankruptcy plan does not discriminate
unfairly against, and is fair and equitable with respect to, class 7, inasmuch
as holders of interests in class 7 would receive nothing in a liquidation of
Crescent Operating.

                        FEDERAL INCOME TAX CONSIDERATIONS

      In the opinion of Crescent Real Estate's tax counsel, Shaw Pittman, LLP,
the discussion in " - Tax Consequences of the Crescent Operating Bankruptcy
Plan," which follows, summarizes the material federal income tax consequences to
Crescent Operating stockholders of the Crescent Operating bankruptcy plan. The
sections " - Taxation of Taxable U.S. Shareholders," " - Taxation of Tax-Exempt
U.S. Shareholders" and " - Taxation of Non-U.S. Shareholders" briefly describe
the opinion of Shaw Pittman, LLP, as to the material federal income tax
consequences to an investor of an investment in Crescent Real Estate. Because
this "Federal Income Tax Considerations" section is a summary, it does not
address all of the tax issues that may be important to you. In addition, this
section does not address the tax issues that may be important to certain types
of shareholders that are subject to special treatment under the federal income
tax laws, such as insurance companies, tax-exempt organizations (except to the
extent discussed in " - Taxation of Tax-Exempt U.S. Shareholders" below),
financial institutions and broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in " - Taxation of Non-U.S.
Shareholders" below).

      The statements in this section are based on the current federal income tax
laws governing Crescent Real Estate's qualification as a REIT. Crescent Real
Estate cannot assure you that new laws, interpretations of laws or court
decisions, any of which may take effect retroactively, will not cause any
statement in this section to be inaccurate.

      Crescent Real Estate urges you to consult your own tax advisor regarding
the specific federal, state, local, foreign and other tax consequences to you of
purchasing, owning and disposing of Crescent Real Estate's securities, Crescent
Real Estate's election to be taxed as a REIT and the effect of potential changes
in applicable tax laws.

TAX CONSEQUENCES OF THE CRESCENT OPERATING BANKRUPTCY PLAN


      The distribution of Crescent Real Estate common shares to Crescent
Operating stockholders will be treated as a distribution in liquidation of
Crescent Operating. Stockholders of Crescent Operating will realize gain or loss
based on the difference between their basis in their shares of Crescent
Operating common stock and the fair market value of the Crescent Real Estate
common shares they receive. In general, a Crescent Operating stockholder who is
not a dealer in securities must treat this gain or loss as a long term capital
gain or loss if the stockholder held the shares of Crescent Operating common
stock for more than one year or, otherwise, as a short term capital gain or
loss. If a stockholder acquired shares of Crescent Operating common stock at
different times, the determination of gain or loss and the holding period is
made on the facts specific to each share. The stockholders'


                                      112

basis in the Crescent Real Estate common shares they will receive will be the
fair market value of the Crescent Real Estate common shares at the time of
distribution.

TAXATION OF CRESCENT REAL ESTATE

      Crescent Real Estate elected to be taxed as a REIT under the federal
income tax laws when it filed its 1994 tax return. Crescent Real Estate has
operated in a manner intended to qualify as a REIT and intends to continue to
operate in that manner. This section discusses the laws governing the federal
income tax treatment of a REIT and its shareholders. These laws are highly
technical and complex.

      In the opinion of Crescent Real Estate's tax counsel, Shaw Pittman LLP,
(i) Crescent Real Estate qualified as a REIT under sections 856 through 859 of
the Internal Revenue Code for each of its taxable years beginning with its
taxable year ended on December 31, 1994, through its taxable year ended on
December 31, 2001; and (ii) it is organized in conformity with the requirements
for qualification as a REIT under the Internal Revenue Code, and its current
method of operation will enable it to meet the requirements for qualification as
a REIT for the current taxable year and for future taxable years, provided that
it has operated and continues to operate in accordance with various assumptions
and factual representations made by Crescent Real Estate concerning its
business, properties and operations. Crescent Real Estate may not, however, have
met or continue to meet such requirements. You should be aware that opinions of
counsel are not binding on the Internal Revenue Service or any court. Crescent
Real Estate's qualification as a REIT depends on its ability to meet, on a
continuing basis, certain qualification tests set forth in the federal tax laws.
Those qualification tests involve the percentage of income that Crescent Real
Estate earns from specified sources, the percentage of its assets that fall
within certain categories, the diversity of the ownership of its shares, and the
percentage of its earnings that it distributes. Accordingly, for the current
taxable year and for future taxable years, no assurance can be given that
Crescent Real Estate's actual operating results will satisfy the qualification
tests. For a discussion of the tax treatment of Crescent Real Estate and its
shareholders if it fails to qualify as a REIT, see " - Requirements for REIT
Qualification - Failure to Qualify."

      If Crescent Real Estate qualifies as a REIT, it generally will not be
subject to federal income tax on the taxable income that it distributes to its
shareholders. The benefit of that tax treatment is that it avoids the "double
taxation" (i.e., at both the corporate and stockholder levels) that generally
results from owning stock in a corporation. However, Crescent Real Estate will
be subject to federal tax in the following circumstances:

      -     Crescent Real Estate will pay federal income tax on taxable income
            (including net capital gain) that it does not distribute to its
            shareholders during, or within a specified time period after, the
            calendar year in which the income is earned;

      -     Crescent Real Estate may be subject to the "alternative minimum tax"
            on any items of tax preference that it does not distribute or
            allocate to its shareholders;

      -     Crescent Real Estate will pay income tax at the highest corporate
            rate on (i) net income from the sale or other disposition of
            property acquired through foreclosure that it holds primarily for
            sale to customers in the ordinary course of business and (ii) other
            non-qualifying income from foreclosure property;

      -     Crescent Real Estate will pay a 100% tax on net income from certain
            sales or other dispositions of property (other than foreclosure
            property) that it holds primarily for sale to customers in the
            ordinary course of business ("prohibited transactions");

      -     if Crescent Real Estate fails to satisfy the 75% gross income test
            or the 95% gross income test (as described below under " -
            Requirements for REIT Qualification - Income Tests"), and
            nonetheless continues to qualify as a REIT because it meets certain
            other requirements, Crescent Real Estate will pay a


                                      113

            100% tax on (i) the gross income attributable to the greater of the
            amount by which it fails the 75% or 95% gross income test,
            multiplied by (ii) a fraction intended to reflect its profitability;

      -     if Crescent Real Estate fails to distribute during a calendar year
            at least the sum of (i) 85% of its REIT ordinary income for such
            year, (ii) 95% of its REIT capital gain net income for such year,
            and (iii) any undistributed taxable income from prior periods, it
            will pay a 4% excise tax on the excess of such required distribution
            over the amount it actually distributed;

      -     if Crescent Real Estate acquires any asset from a C corporation
            (i.e., a corporation generally subject to full corporate-level tax)
            in a merger or other transaction in which Crescent Real Estate
            acquires a "carryover" basis in the asset (i.e., basis determined by
            reference to the C corporation's basis in the asset (or another
            asset)), Crescent Real Estate will pay tax at the highest regular
            corporate rate applicable if it recognizes gain on the sale or
            disposition of such asset during the 10-year period after it
            acquires such asset. The amount of gain on which Crescent Real
            Estate will pay tax is the lesser of (i) the amount of gain that it
            recognizes at the time of the sale or disposition and (ii) the
            amount of gain that it would have recognized if it had sold the
            asset at the time it acquired the asset. The rule described in this
            paragraph will apply assuming that Crescent Real Estate makes an
            election under section 1.337(d)-5T(b) of the Treasury Regulations
            upon its acquisition of an asset from a C corporation; and

      -     Crescent Real Estate will incur a 100% excise tax on transactions
            with a "taxable REIT subsidiary" to the extent that they are not
            conducted on an arm's-length basis.

Requirements for REIT Qualification.


      In order to qualify as a REIT, Crescent Real Estate must be a corporation,
trust or association and meet the following requirements:

      -     it is managed by one or more trustees or directors;

      -     its beneficial ownership is evidenced by transferable shares, or by
            transferable certificates of beneficial interest;

      -     it would be taxable as a domestic corporation, but for sections 856
            through 860 of the Internal Revenue Code;

      -     it is neither a financial institution nor an insurance company
            subject to certain provisions of the Internal Revenue Code;

      -     at least 100 persons are beneficial owners of its shares or
            ownership certificates;

      -     not more than 50% in value of its outstanding shares or ownership
            certificates is owned, directly or indirectly, by five or fewer
            individuals (as defined in the Internal Revenue Code to include
            certain entities) during the last half of any taxable year (the
            "5/50 Rule");

      -     it elects to be a REIT (or has made such election for a previous
            taxable year) and satisfies all relevant filing and other
            administrative requirements established by the Internal Revenue
            Service that must be met to elect and maintain REIT status;

      -     it uses a calendar year for federal income tax purposes and complies
            with the record keeping requirements of the Internal Revenue Code
            and the related Treasury Regulations; and


                                      114

      -     it meets certain other qualification tests, described below,
            regarding the nature of its income and assets.

      Crescent Real Estate must meet requirements 1 through 4 during its entire
taxable year and must meet requirement 5 during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Crescent Real Estate was not required to meet requirements 5 and 6
during 1994. If Crescent Real Estate complies with all the requirements for
ascertaining the ownership of its outstanding shares in a taxable year and has
no reason to know that it violated the 5/50 Rule, it will be deemed to have
satisfied the 5/50 Rule for such taxable year. For purposes of determining share
ownership under the 5/50 Rule, an "individual" generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under Internal Revenue Code section
401(a), and beneficiaries of such a trust will be treated as holding its shares
in proportion to their actuarial interests in the trust for purposes of the 5/50
Rule.

      Crescent Real Estate believes it has issued sufficient common shares with
sufficient diversity of ownership to satisfy requirements 5 and 6 set forth
above. In addition, its declaration of trust restricts the ownership and
transfer of the common shares so that Crescent Real Estate should continue to
satisfy requirements 5 and 6. The provisions of its declaration of trust
restricting the ownership and transfer of the common shares are described in
"Description of Shares of Beneficial Ownership - Restrictions on Ownership and
Transfer."

      Crescent Real Estate currently has several wholly owned corporate
subsidiaries and may have additional corporate subsidiaries in the future. A
corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a qualified REIT subsidiary are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
owned by the parent REIT, which has not elected to be treated as a taxable REIT
subsidiary. Thus, in applying the requirements described herein, any qualified
REIT subsidiary of Crescent Real Estate's will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiary will
be treated as Crescent Real Estate's assets, liabilities, and items of income,
deduction, and credit. Crescent Real Estate believes its wholly owned corporate
subsidiaries that are not taxable REIT subsidiaries are qualified REIT
subsidiaries. Accordingly, they are not subject to federal corporate income
taxation, though they may be subject to state and local taxation.

      A REIT is treated as owning its proportionate share of the assets of any
partnership in which it is a partner and as earning its allocable share of the
gross income of the partnership for purposes of the applicable REIT
qualification tests. Thus, Crescent Real Estate's proportionate share of the
assets, liabilities and items of income of Crescent Partnership and of any other
partnership (or limited liability company treated as a partnership) in which
Crescent Real Estate has acquired or will acquire an interest, directly or
indirectly (a "subsidiary partnership"), are treated as Crescent Real Estate's
assets and gross income for purposes of applying the various REIT qualification
requirements.

      Tax legislation effective in 2001 allows a REIT to own up to 100% of the
outstanding capital stock of one or more taxable REIT subsidiaries, also
referred to as TRSs. A TRS is a fully taxable corporation that pays income tax
at regular corporate rates on its taxable income. A TRS may earn income that
would not be qualifying income if earned directly by the parent REIT. Both the
TRS and the REIT must jointly elect to treat the subsidiary as a TRS. Overall,
no more than 20% of the value of a REIT's assets may consist of securities of
one or more TRSs. In addition, the TRS rules may limit the deductibility of
interest paid or accrued by a TRS to its parent REIT to assure that the TRS is
subject to the appropriate level of corporate taxation. The rules also impose a
100% excise tax on transactions between a TRS and its parent REIT or the REIT's
tenants to the extent that they are not conducted on an arm's-length basis.
Crescent Real Estate currently owns interests in several TRSs, but the
collective value of Crescent Real Estate's

                                      115

interests in the TRSs does not exceed 20% of the value of its assets. In
addition, Crescent Real Estate believes that all transactions between it and its
TRSs have been, and continue to be, conducted on an arm's-length basis.

Income Tests

      Crescent Real Estate must satisfy two gross income tests annually to
maintain its qualification as a REIT:

      -     At least 75% of its gross income (excluding gross income from
            prohibited transactions) for each taxable year must consist of
            defined types of income that it derives, directly or indirectly,
            from investments relating to real property or mortgages on real
            property or temporary investment income (the "75% gross income
            test"). Qualifying income for purposes of the 75% gross income test
            includes "rents from real property," interest on debt secured by
            mortgages on real property or on interests in real property, and
            dividends or other distributions on and gain from the sale of shares
            in other REITs; and

      -     At least 95% of its gross income (excluding gross income from
            prohibited transactions) for each taxable year must consist of
            income that is qualifying income for purposes of the 75% gross
            income test, dividends, other types of interest, gain from the sale
            or disposition of stock or securities, or any combination of the
            foregoing (the "95% gross income test").

Application of Income Tests to Crescent Real Estate

      Crescent Partnership's primary source of income is primarily derived from
leasing the office properties and the Crescent Real Estate hotel properties.
Rents under these leases will constitute "rents from real property," which is
qualifying income for purposes of the 75% and 95% gross income tests, only if
the following requirements are met:

      -     The rent is not based, in whole or in part, on the income or profits
            of any person, although, generally, rent may be based on a fixed
            percentage or percentages of receipts or sales.

      -     Neither Crescent Real Estate nor someone who owns 10% or more of
            Crescent Real Estate's shares owns 10% or more of a tenant (other
            than a TRS that is a tenant of one or more of the Crescent Real
            Estate hotel properties) from which Crescent Partnership or one of
            the subsidiary partnerships receives rent (a "related party
            tenant"). Crescent Real Estate's ownership and the ownership of a
            tenant is determined based on direct, indirect, and constructive
            ownership.

      -     The rent attributable to any personal property leased in connection
            with a lease of property is no more than 15% of the total rent
            received under the lease.

      -     Neither Crescent Partnership nor any of the subsidiary partnerships
            operates or manages its property or furnishes or renders services to
            its tenants, other than through a TRS or through an "independent
            contractor" that is adequately compensated and from which Crescent
            Partnership and the subsidiary partnerships do not derive revenue.
            Crescent Partnership and the subsidiary partnerships may provide
            services directly if the services are "usually or customarily
            rendered" in connection with the rental of space for occupancy only
            and are not otherwise considered rendered to the occupant. In
            addition, Crescent Partnership and the subsidiary partnerships may
            render directly a de minimis amount of "non-customary" services to
            the tenants of a property without disqualifying the income as "rents
            from real property," as long as its income from the services does
            not exceed 1% of its income from the property.

      -     The Crescent Real Estate hotel properties are either (a) leased to
            unrelated tenants, or (b) leased to TRSs and are managed by
            "eligible independent contractors," which are independent
            contractors that, at the time they entered into management
            agreements with the TRSs, were actively engaged in the business of
            operating lodging facilities for people or entities not related to
            Crescent Real Estate or the TRSs.


                                      116

      Crescent Real Estate, based in part upon opinions of its tax counsel or
other lawyers as to whether various tenants constitute related party tenants and
as to whether certain hotel managers constitute eligible independent
contractors, believes that the income it has received since 1994 and will
receive in subsequent taxable years from rent that does not satisfy the five
requirements set forth above will not cause it to fail to meet the gross income
tests.

      Crescent Partnership will also receive fixed and contingent interest on
the mortgages on the Crescent Real Estate residential development properties.
Interest on mortgages secured by real property satisfies the 75% and 95% gross
income tests only if it does not include any amount that is based in whole or in
part upon the income of any person, except that (1) an amount is not excluded
from qualifying interest solely by reason of being based on a fixed percentage
or percentages of receipts or sales and (2) income derived from a shared
appreciation provision in a mortgage is treated as gain recognized from the sale
of the mortgaged property. Some of the residential development property
mortgages contain provisions for contingent interest based upon property sales.
Crescent Real Estate's tax counsel has opined that each of the residential
development property mortgages constitutes debt for federal income tax purposes,
any contingent interest derived therefrom will be treated as being based on a
fixed percentage of sales, and therefore all interest derived therefrom will
constitute interest received from mortgages for purposes of the 75% and 95%
gross income tests. If, however, the contingent interest provisions were instead
characterized as shared appreciation provisions, any resulting income would be
treated as income from prohibited transactions, because the underlying
properties are primarily held for sale to customers in the ordinary course. Such
income would not satisfy the 75% and 95% gross income tests and would be subject
to a 100% tax.

      In applying the 95% and 75% gross income tests, Crescent Real Estate must
consider the form in which its assets are held, whether that form will be
respected for federal income tax purposes, and whether, in the future, such form
may change into a new form with different tax attributes. For example, the
Crescent Real Estate residential development properties are primarily held for
sale to customers in the ordinary course of business, and the income resulting
from such sales, if directly attributed to Crescent Real Estate, would not
qualify under the 75% and 95% gross income tests. In addition, such income would
be considered "net income from prohibited transactions" and thus would be
subject to a 100% tax. The income from such sales, however, will be earned by
the residential development corporations rather than by Crescent Partnership and
will be paid to Crescent Partnership in the form of interest and principal
payments on the residential development property mortgages or distributions with
respect to the stock in the residential development corporations held by
Crescent Partnership. In similar fashion, the income earned by the Crescent Real
Estate hotel properties, if directly attributed to Crescent Real Estate, would
not qualify under the 75% and 95% gross income tests because it would not
constitute "rents from real property." Such income is, however, earned by the
lessees of these Crescent Real Estate hotel properties and what Crescent
Partnership and the subsidiary partnerships receive from the lessees of these
Crescent Real Estate hotel properties is rent with respect to the leases.
Crescent Partnership may also receive distributions on its stock in the TRS
lessees. Crescent Real Estate's tax counsel has opined that:

      -     the Crescent Real Estate residential development properties or any
            interest therein will be treated as owned by the residential
            development corporations;

      -     amounts derived by Crescent Partnership from the residential
            development corporations under the terms of the residential
            development property mortgages will qualify as interest or
            principal, as the case may be, paid on mortgages on real property
            for purposes of the 75% and 95% gross income tests;

      -     amounts derived by Crescent Partnership with respect to the stock of
            the residential development corporations will be treated as
            distributions on stock for purposes of the 75% and 95% gross income
            tests; and

      -     the leases of the Crescent Real Estate hotel properties will be
            treated as leases for federal income tax purposes, and the rent
            payable under the leases of the Crescent Real Estate hotel
            properties will qualify as "rents from real property."


                                      117

      Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving transactions
with terms substantially the same as those with respect to the residential
development corporations and the leases of the Crescent Real Estate hotel
properties. Therefore, the opinions of Crescent Real Estate's tax counsel with
respect to these matters are based upon all of the facts and circumstances and
upon rulings and judicial decisions involving situations that are considered to
be analogous. Opinions of counsel are not binding upon the Internal Revenue
Service or any court, and there can be no complete assurance that the Internal
Revenue Service will not assert successfully a contrary position. If one or more
of the leases of the Crescent Real Estate hotel properties is not a true lease,
part or all of the payments that Crescent Partnership or one of the subsidiary
partnerships receives from the respective lessee may not satisfy the various
requirements for qualification as "rents from real property," or Crescent
Partnership might be considered to operate the Crescent Real Estate hotel
properties directly. In that case, Crescent Real Estate likely would not be able
to satisfy either the 75% or 95% gross income tests and, as a result, likely
would lose its REIT status. Similarly, if the Internal Revenue Service were to
challenge successfully the arrangements with the residential development
corporations, Crescent Real Estate's qualification as a REIT could be
jeopardized.

      If any of the Crescent Real Estate residential development properties were
to be acquired by Crescent Partnership as a result of foreclosure on any of the
residential development property mortgages, or if any of the Crescent Real
Estate hotel properties were to be operated directly by the Partnership or a
subsidiary partnership as a result of a default by the lessee under the lease,
such property would constitute foreclosure property for three years following
its acquisition (or for up to an additional three years if an extension is
granted by the Internal Revenue Service), provided that (i) Crescent Partnership
or its subsidiary partnership conducts sales or operations through an
independent contractor; (ii) Crescent Partnership or its subsidiary partnership
does not undertake any construction on the foreclosed property other than
completion of improvements which were more than 10% complete before default
became imminent; and (iii) foreclosure was not regarded as foreseeable at the
time Crescent Real Estate acquired the residential development property
mortgages or leased the Crescent Real Estate hotel properties. For so long as
any of these properties constitutes foreclosure property, the income from such
sales would be subject to tax at the maximum corporate rates and would qualify
under the 75% and 95% gross income tests. However, if any of these properties
does not constitute foreclosure property at any time in the future, income
earned from the disposition or operation of such property will not qualify under
the 75% and 95% gross income tests and, in the case of the Crescent Real Estate
residential development properties, will be subject to the 100% tax.

      Crescent Real Estate anticipates that it will have certain income that
will not satisfy the 75% or the 95% gross income test. For example, income from
dividends on the stock of the residential development corporations or other TRSs
will not satisfy the 75% gross income test. It is also possible that certain
income resulting from the use of creative financing or acquisition techniques
would not satisfy the 75% or 95% gross income tests. Crescent Real Estate
believes, however, that the aggregate amount of nonqualifying income will not
cause it to exceed the limits on nonqualifying income under the 75% or 95% gross
income tests.

Relief from Consequences of Failing to Meet Income Tests

      If Crescent Real Estate fails to satisfy one or both of the 75% and 95%
gross income tests for any taxable year, it nevertheless may qualify as a REIT
for such year if it qualifies for relief under certain provisions of the
Internal Revenue Code. Those relief provisions generally will be available if
Crescent Real Estate's failure to meet such tests is due to reasonable cause and
not due to willful neglect, Crescent Real Estate attaches a schedule of the
sources of its income to its tax return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. Crescent Real Estate may
not qualify for the relief provisions in all circumstances. In addition, as
discussed above in " - Taxation of Crescent Real Estate," even if the relief
provisions apply, Crescent Real Estate would incur a 100% tax on gross income to
the extent it fails the 75% or 95% gross income test (whichever amount is
greater), multiplied by a fraction intended to reflect its profitability.


                                      118

Asset Tests

      To maintain its qualification as a REIT, Crescent Real Estate also must
satisfy two asset tests at the close of each quarter of each taxable year:

      -     At least 75% of the value of its total assets must consist of cash
            or cash items (including certain receivables), government
            securities, "real estate assets," or qualifying temporary
            investments (the "75% asset test").

      -     "Real estate assets" include interests in real property, interests
            in mortgages on real property and stock in other REITs. "Interests
            in real property" include an interest in mortgage loans or land and
            improvements thereon, such as buildings or other inherently
            permanent structures (including items that are structural components
            of such buildings or structures), a leasehold of real property, and
            an option to acquire real property (or a leasehold of real
            property).

      -     Qualifying temporary investments are investments in stock or debt
            instruments during the one-year period following Crescent Real
            Estate's receipt of new capital that Crescent Real Estate raises
            through equity or long-term (at least five-year) debt offerings.

      -     For investments not included in the 75% asset test, (A) the value of
            Crescent Real Estate's interest in any one issuer's securities may
            not exceed 5% of the value of its total assets (the "5% asset test")
            and (B) Crescent Real Estate may not own more than 10% of the voting
            power or value of any one issuer's outstanding securities (the "10%
            asset test").

      -     As mentioned above, the collective value of Crescent Real Estate's
            interests in TRSs cannot exceed 20% of the value of its assets.

For purposes of the second asset test, the term "securities" does not include
Crescent Real Estate's equity ownership in another REIT, its equity or debt
securities of a qualified REIT subsidiary or a TRS, or its equity interest in
any partnership. The term "securities," however, generally includes Crescent
Real Estate's debt securities issued by a partnership, except that
non-participating debt securities of a partnership are not treated as
"securities" for purposes of the value portion of the 10% asset test if Crescent
Real Estate owns at least a 20% profits interest in the partnership.

      Crescent Real Estate intends to select future investments so as to comply
with the asset tests.

      If Crescent Real Estate failed to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (i) it satisfied the
asset tests at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more nonqualifying assets. If
Crescent Real Estate did not satisfy the condition described in clause (ii) of
the preceding sentence, it still could avoid disqualification as a REIT by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which the discrepancy arose.

      Crescent Partnership owns 100% of the outstanding stock of each
residential development corporation. In order to avoid violating the 10% asset
test, Crescent Real Estate has made a joint election with each residential
development corporation for it to be treated as a TRS. In addition, Crescent
Partnership owns the residential development property mortgages. As stated
above, Crescent Real Estate's tax counsel has opined that each of these
mortgages will constitute debt for federal income tax purposes and therefore
will be treated as a real estate asset; however, the Internal Revenue Service
could assert that such mortgages should be treated as equity interests in their
respective issuers, which would not qualify as real estate assets. By virtue of
Crescent Real Estate's ownership of partnership interests in Crescent
Partnership, Crescent Real Estate will be considered to own its pro rata share
of these assets. Crescent Real Estate also believes that the collective value of
its pro rata shares of the value of the securities of the residential
development corporations and its other TRSs does not exceed 20% of the value of
its assets. These beliefs are based in part upon Crescent Real Estate's analysis
of the estimated values of the various securities owned


                                      119

by Crescent Partnership relative to the estimated value of the total assets
owned by Crescent Partnership. No independent appraisals will be obtained to
support this conclusion, and Crescent Real Estate's tax counsel, in rendering
its opinion as to Crescent Real Estate's qualification as a REIT, is relying on
Crescent Real Estate's conclusions as to the value of the various securities and
other assets. There can be no assurance, however, that the Internal Revenue
Service might not contend that the values of the various securities of the TRSs
held by Crescent Real Estate through Crescent Partnership in the aggregate
exceed the 20% value limitation. Finally, if Crescent Partnership were treated
for tax purposes as a corporation rather than as a partnership, Crescent Real
Estate would violate the 10% asset test and 5% of value limitation, and the
treatment of any of Crescent Partnership's subsidiary partnerships as a
corporation rather than as a partnership could also violate one or the other, or
both, of these limitations. In the opinion of Crescent Real Estate's tax
counsel, for federal income tax purposes Crescent Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See " --
Tax Aspects of Crescent Real Estate's Investments in Crescent Partnership and
Subsidiary Partnerships" below.

      The various percentage value requirements must be satisfied not only on
the date Crescent Real Estate first acquires corporate securities, but also each
time it increases its ownership of securities (including as a result of
increasing its interest in Crescent Partnership either with the proceeds of an
offering or by acquiring units of limited partnership interest from limited
partners upon the exercise of their rights to exchange units of limited
partnership interest for Crescent Real Estate common shares). Although Crescent
Real Estate plans to take steps to ensure that it satisfies the 5% and 25% value
tests for any quarter with respect to which retesting is to occur, there can be
no assurance that such steps (i) will always be successful; (ii) will not
require a reduction in Crescent Real Estate's overall interest in the various
corporations; or (iii) will not restrict the ability of the residential
development corporations to increase the sizes of their respective businesses,
unless the value of Crescent Real Estate's assets is increasing at a
commensurate rate.

Distribution Requirements

      Each taxable year, Crescent Real Estate must distribute dividends (other
than capital gain dividends and deemed distributions of retained capital gain)
to its shareholders in an aggregate amount at least equal to (1) the sum of 90%
of (A) its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain or loss) and (B) its net income (after tax),
if any, from foreclosure property, minus (2) certain items of non-cash income.

      Crescent Real Estate must pay such distributions in the taxable year to
which they relate, or in the following taxable year if Crescent Real Estate
declares the distribution before it timely files its federal income tax return
for such year and pays the distribution on or before the first regular dividend
payment date after such declaration.

      Crescent Real Estate will pay federal income tax on taxable income
(including net capital gain) that it does not distribute to shareholders.
Furthermore, Crescent Real Estate will incur a 4% nondeductible excise tax if it
fails to distribute during a calendar year (or, in the case of distributions
with declaration and record dates falling in the last three months of the
calendar year, by the end of January following such calendar year) at least the
sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT
capital gain income for such year, and (3) any undistributed taxable income from
prior periods. The excise tax is on the excess of such required distribution
over the amounts Crescent Real Estate actually distributed. Crescent Real Estate
may elect to retain and pay income tax on the net long-term capital gain it
receives in a taxable year. See " - Taxation of Taxable U.S. Shareholders." For
purposes of the 4% excise tax, Crescent Real Estate will be treated as having
distributed any such retained amount.

      Crescent Real Estate believes that it has made, and it intends to continue
to make, timely distributions sufficient to satisfy the annual distribution
requirements. In this regard, the Agreement of Limited Partnership of Crescent
Partnership (the "Partnership Agreement") authorizes the General Partner to take
such steps as may be necessary to cause Crescent Partnership to distribute to
its partners an amount sufficient to permit Crescent Real Estate to meet these
distribution requirements. It is possible, however, that, from time to time,
Crescent Real Estate may

                                      120

experience timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at its "real estate investment trust
taxable income." Issues may also arise as to whether certain items should be
included in income. In addition, it is possible that certain creative financing
or creative acquisition techniques used by Crescent Partnership may result in
income (such as income from cancellation of indebtedness or gain upon the
receipt of assets in foreclosure the fair market value of which exceeds Crescent
Partnership's basis in the debt that was foreclosed upon) that is not
accompanied by cash proceeds. In this regard, the modification of a debt can
result in taxable gain equal to the difference between the holder's basis in the
debt and the principal amount of the modified debt. Based on the foregoing,
Crescent Real Estate may have less cash available for distribution in a
particular year than is necessary to meet its annual distribution requirement or
to avoid tax with respect to capital gain or the excise tax imposed on certain
undistributed income for such year. To meet the distribution requirement
necessary to qualify as a REIT or to avoid tax with respect to capital gain or
the excise tax imposed on certain undistributed income, Crescent Real Estate may
find it appropriate to arrange for borrowings through Crescent Partnership or to
pay distributions in the form of taxable share dividends.

      Under certain circumstances, Crescent Real Estate may be able to correct a
failure to meet the distribution requirement for a year by paying deficiency
dividends to its shareholders in a later year. Crescent Real Estate may include
such deficiency dividends in its deduction for dividends paid for the earlier
year. Although Crescent Real Estate may be able to avoid income tax on amounts
distributed as deficiency dividends, it will be required to pay interest to the
Internal Revenue Service based upon the amount of any deduction it takes for
deficiency dividends.

Record Keeping Requirements

      Crescent Real Estate must maintain certain records in order to qualify as
a REIT. In addition, to avoid a monetary penalty, Crescent Real Estate must
request on an annual basis certain information from its shareholders designed to
disclose the actual ownership of its outstanding stock. It has complied, and it
intends to continue to comply, with such requirements.

Failure to Qualify

      If Crescent Real Estate failed to qualify as a REIT in any taxable year,
and no relief provision applied, it would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. In calculating its taxable income in a year in which it
failed to qualify as a REIT, Crescent Real Estate would not be able to deduct
amounts paid out to shareholders. In fact, Crescent Real Estate would not be
required to distribute any amounts to shareholders in such year. In such event,
to the extent of Crescent Real Estate's current and accumulated earnings and
profits, all distributions to shareholders would be taxable as ordinary income.
Subject to certain limitations of the Internal Revenue Code, corporate
shareholders might be eligible for the dividends received deduction. Unless
Crescent Real Estate qualified for relief under specific statutory provisions,
it also would be disqualified from electing taxation as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT.
Crescent Real Estate cannot predict whether in all circumstances it would
qualify for such statutory relief.

TAXATION OF TAXABLE U.S. SHAREHOLDERS


      As long as Crescent Real Estate qualifies as a REIT, a taxable "U.S.
shareholder" must take into account, as ordinary income, distributions out of
Crescent Real Estate's current or accumulated earnings and profits that Crescent
Real Estate does not designate as capital gain dividends or retained long-term
capital gain. A U.S. shareholder will not qualify for the dividends received
deduction generally available to corporations. As used herein, a U.S.
shareholder is a holder of common shares that for U.S. federal income tax
purposes is:


      -     a citizen or resident of the United States;


                                      121

      -     a corporation, partnership, or other entity created or organized in
            or under the laws of the United States or of a political subdivision
            thereof;

      -     an estate whose income is subject to U.S. federal income taxation
            regardless of its source; or

      -     any trust with respect to which (A) a U.S. court is able to exercise
            primary supervision over the administration of such trust and (B)
            one or more U.S. persons have the authority to control all
            substantial decisions of the trust.

      A U.S. shareholder will recognize distributions that Crescent Real Estate
designates as capital gain dividends as long-term capital gain, to the extent
they do not exceed its actual net capital gain for the taxable year, without
regard to the period for which the U.S. shareholder has held its common shares.
Subject to certain limitations, Crescent Real Estate will designate its capital
gain dividends as either 20% or 25% rate distributions. A corporate U.S.
shareholder, however, may be required to treat up to 20% of certain capital gain
dividends as ordinary income.

      Crescent Real Estate may elect to retain and pay income tax on the net
long-term capital gain that it receives in a taxable year. In that case, a U.S.
shareholder would be taxed on its proportionate share of Crescent Real Estate's
undistributed long-term capital gain. The U.S. shareholder would receive a
credit or refund for its proportionate share of the tax Crescent Real Estate
paid. The U.S. shareholder would increase the basis in its stock by the amount
of its proportionate share of Crescent Real Estate's undistributed long-term
capital gain, minus its share of the tax Crescent Real Estate paid.

      A U.S. shareholder will not incur tax on a distribution in excess of
Crescent Real Estate's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of the U.S. shareholder's common
shares. Instead, such distribution will reduce the adjusted basis of such common
shares. A U.S. shareholder will recognize a distribution in excess of both
Crescent Real Estate's current and accumulated earnings and profits and the U.S.
shareholder's adjusted basis in its common shares as long-term capital gain, or
short-term capital gain if the common shares have been held for one year or
less, assuming the common shares are a capital asset in the hands of the U.S.
shareholder. In addition, if Crescent Real Estate declares a distribution in
October, November, or December of any year that is payable to a U.S. shareholder
of record on a specified date in any such month, such distribution shall be
treated as both paid by Crescent Real Estate and received by the U.S.
shareholder on December 31 of such year, provided that Crescent Real Estate
actually pays the distribution during January of the following calendar year.
Crescent Real Estate will notify U.S. shareholders after the close of its
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income or capital gain dividends.

Taxation of U.S. Shareholders on the Disposition of the Common Shares

      In general, a U.S. shareholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the common shares
as long-term capital gain or loss if the U.S. shareholder has held the common
stock for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares held by such shareholder for six months or less, after applying
certain holding period rules, as a long-term capital loss to the extent of
capital gain dividends and other distributions from Crescent Real Estate that
such U.S. shareholder treats as long-term capital gain. All or a portion of any
loss a U.S. shareholder realizes upon a taxable disposition of the common shares
may be disallowed if the U.S. shareholder purchases additional common shares
within 30 days before or after the disposition.

Capital Gains and Losses

      A taxpayer generally must hold a capital asset for more than one year for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 38.6%.
On June 7, 2001, President Bush signed into law the Economic Growth and Tax
Relief Reconciliation Act of 2001. That

                                      122

legislation reduces the highest marginal individual income tax rate of 38.6% to
37.6% for the period from January 1, 2004 to December 31, 2005, and to 35% for
the period from January 1, 2006 to December 31, 2010. The maximum tax rate on
long-term capital gain applicable to non-corporate taxpayers is 20% for sales
and exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "Section 1250 property"
(i.e., depreciable real property) is 25% to the extent that such gain would have
been treated as ordinary income if the property were "Section 1245 property."
With respect to distributions that Crescent Real Estate designates as capital
gain dividends and any retained capital gain that it is deemed to distribute,
Crescent Real Estate may designate, subject to certain limits, whether such a
distribution is taxable to its non-corporate shareholders at a 20% or 25% rate.
Thus, the tax rate differential between capital gain and ordinary income for
non-corporate taxpayers may be significant. A U.S. shareholder required to
include retained long-term capital gains in income will be deemed to have paid,
in the taxable year of the inclusion, its proportionate share of the tax paid by
Crescent Real Estate in respect of such undistributed net capital gains. U.S.
shareholders subject to these rules will be allowed a credit or a refund, as the
case may be, for the tax deemed to have been paid by such shareholders. U.S.
shareholders will increase their basis in their common shares by the difference
between the amount of such includible gains and the tax deemed paid by the U.S.
shareholder in respect of such gains. In addition, the characterization of
income as capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital losses not offset by
capital gains against its ordinary income only up to a maximum annual amount of
$3,000. A non-corporate taxpayer may carry forward unused capital losses
indefinitely. A corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only to
the extent of capital gains, with unused losses being carried back three years
and forward five years.

Information Reporting Requirements and Backup Withholding

      Crescent Real Estate will report to its shareholders and to the Internal
Revenue Service the amount of distributions it pays during each calendar year,
and the amount of tax it withholds, if any. Under the backup withholding rules,
a shareholder may be subject to backup withholding at the rate of 30%, gradually
decreasing to 28% in 2006, with respect to distributions unless such holder (1)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (2) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. A shareholder who does not provide Crescent Real Estate with its correct
taxpayer identification number also may be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, it may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to it.

TAXATION OF TAX-EXEMPT U.S. SHAREHOLDERS

      Most tax-exempt employees' pension trusts are not subject to federal
income tax except to the extent of their receipt of "unrelated business taxable
income," or "UBTI." Distributions by Crescent Real Estate to a shareholder that
is a tax-exempt entity should not constitute UBTI, provided that the tax-exempt
entity has not financed the acquisition of Crescent Real Estate's shares with
"acquisition indebtedness" and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity. In addition, certain pension trusts
that own more than 10% of a "pension-held REIT" must report a portion of the
dividends that they receive from such a REIT as UBTI. Crescent Real Estate has
not been and does not expect to be treated as a pension-held REIT for purposes
of this rule.

TAXATION OF NON-U.S. SHAREHOLDERS

      The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex. This section
is only a summary of such rules. Crescent Operating urges non-U.S. shareholders
to consult their own tax advisors to determine the impact of federal, state, and
local income tax laws on ownership of common shares, including any reporting
requirements.


                                      123

Ordinary Dividends

      A non-U.S. shareholder that receives a distribution that is not
attributable to gain from Crescent Real Estate's sale or exchange of U.S. real
property interests (as defined below) and that Crescent Real Estate does not
designate as a capital gain dividend or retained capital gain will recognize
ordinary income to the extent that Crescent Real Estate pays such distribution
out of its current or accumulated earnings and profits. A withholding tax equal
to 30% of the gross amount of the distribution ordinarily will apply to such
distribution unless an applicable tax treaty reduces or eliminates the tax.
However, if a distribution is treated as effectively connected with the non-U.S.
shareholder's conduct of a U.S. trade or business, the non-U.S. shareholder
generally will be subject to federal income tax on the distribution at graduated
rates, in the same manner as U.S. shareholders are taxed with respect to such
distributions (and also may be subject to the 30% branch profits tax in the case
of a non-U.S. shareholder that is a non-U.S. corporation). Crescent Real Estate
plans to withhold U.S. income tax at the rate of 30% on the gross amount of any
such distribution paid to a non-U.S. shareholder unless (i) a lower treaty rate
applies and the non-U.S. shareholder files IRS Form W-8BEN with Crescent Real
Estate evidencing eligibility for that reduced rate or (ii) the non-U.S.
shareholder files an IRS Form W-8ECI with Crescent Real Estate claiming that the
distribution is effectively connected income.

Return of Capital

      A non-U.S. shareholder will not incur tax on a distribution in excess of
Crescent Real Estate's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of its common shares. Instead,
such a distribution will reduce the adjusted basis of such common shares. A
non-U.S. shareholder will be subject to tax on a distribution that exceeds both
Crescent Real Estate's current and accumulated earnings and profits and the
adjusted basis of its common shares, if the non-U.S. shareholder otherwise would
be subject to tax on gain from the sale or disposition of its common shares, as
described below. Because Crescent Real Estate generally cannot determine at the
time it makes a distribution whether or not the distribution will exceed its
current and accumulated earnings and profits, Crescent Real Estate normally will
withhold tax on the entire amount of any distribution at the same rate as it
would withhold on a dividend. However, a non-U.S. shareholder may obtain a
refund of amounts that Crescent Real Estate withholds if Crescent Real Estate
later determines that a distribution in fact exceeded Crescent Real Estate's
current and accumulated earnings and profits.

Capital Gain Dividends

      For any year in which Crescent Real Estate qualifies as a REIT, a non-U.S.
shareholder will incur tax on distributions that are attributable to gain from
Crescent Real Estate's sale or exchange of "U.S. real property interests" under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). The term "U.S. real property interests" includes certain interests
in real property and stock in corporations at least 50% of whose assets consists
of interests in real property, but excludes mortgage loans and mortgage-backed
securities. Under FIRPTA, a non-U.S. shareholder is taxed on distributions
attributable to gain from sales of U.S. real property interests as if such gain
were effectively connected with a U.S. business of the non-U.S. shareholder. A
non-U.S. shareholder thus would be taxed on such a distribution at the normal
capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of a
nonresident alien individual). A non- U.S. corporate shareholder not entitled to
treaty relief or exemption also may be subject to the 30% branch profits tax on
distributions subject to FIRPTA. Crescent Real Estate must withhold 35% of any
distribution that it could designate as a capital gain dividend. However, if
Crescent Real Estate makes a distribution and later designates it as a capital
gain dividend, then (although such distribution may be taxable to a non-U.S.
shareholder) it is not subject to withholding under FIRPTA. Instead, Crescent
Real Estate must make-up the 35% FIRPTA withholding from distributions made
after the designation, until the amount of distributions withheld at 35% equals
the amount of the distribution designated as a capital gain dividend. A non-U.S.
shareholder may receive a credit against its FIRPTA tax liability for the amount
Crescent Real Estate withholds.


                                      124

      Distributions to a non-U.S. shareholder that Crescent Real Estate
designates at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to Crescent Real Estate's disposition
of a U.S. real property interest generally will not be subject to U.S. federal
income taxation, except as described below under " - Sale of Shares."

Sale of Shares

      A non-U.S. shareholder generally will not incur tax under FIRPTA on gain
from the sale of its common shares as long as Crescent Real Estate is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period non-U.S. persons held,
directly or indirectly, less than 50% in value of the stock. Crescent Real
Estate anticipates that it will continue to be a "domestically controlled REIT."
In addition, a non-U.S. shareholder that owns, actually or constructively, 5% or
less of outstanding common shares at all times during a specified testing period
will not incur tax under FIRPTA if the common shares are "regularly traded" on
an established securities market. If neither of these exceptions were to apply,
the gain on the sale of the common shares would be taxed under FIRPTA, in which
case a non-U.S. shareholder would be taxed in the same manner as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).

      A non-U.S. shareholder will incur tax on gain not subject to FIRPTA if (1)
the gain is effectively connected with the non-U.S. shareholder's U.S. trade or
business, in which case the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (2) the non-U.S.
shareholder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year, in which case the non-U.S. shareholder
will incur a 30% tax on its capital gains. Capital gains dividends not subject
to FIRPTA will be subject to similar rules.

Backup Withholding

      Backup withholding tax (which generally is withholding tax imposed at the
rate of 30%, gradually decreasing to 28% in 2006, on certain payments to persons
that fail to furnish certain information under the United States information
reporting requirements) and information reporting will generally not apply to
distributions to a non-U.S. shareholder provided that the non-U.S. shareholder
certifies under penalty of perjury that the shareholder is a non-U.S.
shareholder, or otherwise establishes an exemption. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of common shares effected at a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of common shares by a foreign office of a
broker that:

      -     is a U.S. person;

      -     derives 50% or more of its gross income for a specified three year
            period from the conduct of a trade or business in the U.S.;

      -     is a "controlled foreign corporation" (generally, a foreign
            corporation controlled by U.S. shareholders) for U.S. tax purposes;
            or

      -     that is a foreign partnership, if at any time during its tax year
            50% or more of its income or capital interest are held by U.S.
            persons or if it is engaged in the conduct of a trade or business in
            the U.S.,

unless the broker has documentary evidence in its records that the holder or
beneficial owner is a non-U.S. shareholder and certain other conditions are met,
or the shareholder otherwise establishes an exemption. Payment of the proceeds
of a sale of common shares effected at a U.S. office of a broker is subject to
both backup withholding and information

                                      125

reporting unless the shareholder certifies under penalty of perjury that the
shareholder is a non-U.S. shareholder, or otherwise establishes an exemption.
Backup withholding is not an additional tax. A non-U.S. shareholder may obtain a
refund of excess amounts withheld under the backup withholding rules by filing
the appropriate claim for refund with the IRS.

STATE AND LOCAL TAX CONSEQUENCES

      Crescent Real Estate and/or you may be subject to state and local tax in
various states and localities, including those states and localities in which
Crescent Real Estate or you transact business, own property or reside. The state
and local tax treatment in such jurisdictions may differ from the federal income
tax treatment described above. Consequently, you should consult your own tax
advisor regarding the effect of state and local tax laws upon an investment in
Crescent Real Estate's securities.

TAX ASPECTS OF CRESCENT REAL ESTATE'S INVESTMENT IN CRESCENT PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS

      The following discussion summarizes certain federal income tax
considerations applicable to Crescent Real Estate's direct or indirect
investments in Crescent Partnership and its subsidiaries. The discussion does
not cover state or local tax laws or any federal tax laws other than income tax
laws.

Classification as Partnerships

      Crescent Real Estate's tax counsel has opined, based on the provisions of
Crescent Partnership Agreement and the partnership agreements and operating
agreements of the various subsidiary partnerships, and certain factual
assumptions and certain representations described in the opinion, that Crescent
Partnership and the subsidiary partnerships will each be treated as a
partnership and not an association taxable as a corporation for federal income
tax purposes, and that Crescent Partnership will not be treated as a "publicly
traded partnership" taxable as a corporation. Unlike a ruling from the Internal
Revenue Service, however, an opinion of counsel is not binding on the Internal
Revenue Service or the courts, and no assurance can be given that the Internal
Revenue Service will not challenge the status of Crescent Partnership and its
subsidiary partnerships as partnerships for federal income tax purposes. If for
any reason Crescent Partnership were taxable as a corporation rather than as a
partnership for federal income tax purposes, Crescent Real Estate would fail to
qualify as a REIT because it would not be able to satisfy the income and asset
requirements. See " -- Taxation of Crescent Real Estate," above. In addition,
any change in Crescent Partnership's status for tax purposes might be treated as
a taxable event, in which case Crescent Real Estate might incur a tax liability
without any related cash distributions. See " -- Taxation of Crescent Real
Estate," above. Further, items of income and deduction for Crescent Partnership
would not pass through to the respective partners, and the partners would be
treated as shareholders for tax purposes. Crescent Partnership would be required
to pay income tax at regular corporate tax rates on its net income, and
distributions to partners would constitute dividends that would not be
deductible in computing Crescent Partnership's taxable income. Similarly, if any
of the subsidiary partnerships were taxable as a corporation rather than as a
partnership for federal income tax purposes, such treatment might cause Crescent
Real Estate to fail to qualify as a REIT, and in any event such partnership's
items of income and deduction would not pass through to its partners, and its
net income would be subject to income tax at regular corporate rates.

Income Taxation of Crescent Partnership and its Partners

      The partners of Crescent Partnership are subject to taxation. Crescent
Partnership itself is not a taxable entity for federal income tax purposes.
Rather, as a partner in Crescent Partnership, Crescent Real Estate is required
to take into account its allocable share of Crescent Partnership's income,
gains, losses, deductions and credits for any taxable year of Crescent
Partnership ending during Crescent Real Estate's taxable year, without regard to
whether Crescent Real Estate has received or will receive any distribution from
Crescent Partnership. Crescent Partnership's income, gains, losses, deductions
and credits for any taxable year will include its allocable share of such items
from its subsidiary partnerships.


                                      126

Partnership Allocations

      Although a partnership agreement generally will determine the allocation
of income and losses among partners, such allocations will be disregarded for
tax purposes if they do not comply with the provisions of section 704(b) of the
Internal Revenue Code and the Treasury regulations promulgated thereunder. If an
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. Crescent Partnership's allocations of taxable income,
gain and loss are intended to comply with the requirements of section 704(b) of
the Internal Revenue Code and the Treasury regulations promulgated thereunder.

Tax Allocations With Respect to Contributed Properties

      Pursuant to section 704(c) of the Internal Revenue Code, income, gain,
loss and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. Crescent Partnership was formed by way of contributions of
appreciated property and has received contributions of appreciated property
since its formation. In general, the fair market value of the properties
initially contributed to Crescent Partnership were substantially in excess of
their adjusted tax bases. The Partnership Agreement requires that allocations
attributable to each item of initially contributed property be made so as to
allocate the tax depreciation available with respect to such property first to
the partners other than the partner that contributed the property, to the extent
of, and in proportion to, such partners' share of book depreciation, and then,
if any tax depreciation remains, to the partner that contributed the property.
Accordingly, the depreciation deductions allocable will not correspond exactly
to the percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Partnership Agreement
provides that any remaining gain will be allocated for tax purposes to the
contributing partners to the extent that tax depreciation previously allocated
to the noncontributing partners was less than the book depreciation allocated to
them. These allocations are intended to be consistent with section 704(c) of the
Internal Revenue Code and with Treasury regulations thereunder. The tax
treatment of properties contributed to Crescent Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.

      In general, the partners who contribute property to Crescent Partnership
will be allocated depreciation deductions for tax purposes which are lower than
such deductions would be if determined on a pro rata basis. In addition, in the
event of the disposition of any of the contributed assets (including Crescent
Real Estate's properties) which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to the
contributing partners, including Crescent Real Estate, and each partner will
generally be allocated only its share of capital gains attributable to
appreciation, if any, occurring after the closing of any offering of securities
hereunder. This will tend to eliminate the Book-Tax Difference over the life of
Crescent Partnership. However, the special allocation rules of section 704(c) do
not always entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed assets in the hands Crescent Partnership will cause
Crescent Real Estate to be allocated lower depreciation and other deductions,
and possibly an amount of taxable income in the event of a sale of such
contributed assets in excess of the economic or book income allocated to it as a
result of such sale. This may cause Crescent Real Estate to recognize taxable
income in excess of cash proceeds, which might adversely affect its ability to
comply with the REIT distribution requirements. See " - Requirements for REIT
Qualification - Distribution Requirements." The foregoing principles also apply
in determining Crescent Real Estate's earnings and profits for purposes of
determining the portion of distributions taxable

                                      127

as dividend income. The application of these rules over time may result in a
higher portion of distributions being taxed as dividends than would have
occurred had Crescent Real Estate purchased the contributed assets at their
agreed values.

Sale of Crescent Partnership's Property

      Generally, any gain realized by Crescent Partnership on the sale of
property held by it for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by Crescent Partnership on the
disposition of contributed properties will be allocated first to its partners
under section 704(c) of the Internal Revenue Code to the extent of their
"built-in gain" on those properties for federal income tax purposes. The
partners' "built-in gain" on the contributed properties sold will equal the
excess of the partners' proportionate share of the book value of those
properties over the partners' tax basis allocable to those properties at the
time of the sale. Any remaining gain recognized by Crescent Partnership on the
disposition of the contributed properties, and any gain recognized by Crescent
Partnership on the disposition of the other properties, will be allocated among
the partners in accordance with their respective percentage interests in
Crescent Partnership.

      Crescent Real Estate's share of any gain realized by Crescent Partnership
on the sale of any property held by Crescent Partnership as inventory or other
property held primarily for sale to customers in the ordinary course of Crescent
Partnership's trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income also may have an adverse effect upon Crescent Real Estate's ability to
satisfy the income tests for REIT status. See " - Requirements for REIT
Qualification - Income Tests." Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of Crescent
Partnership's business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Crescent Partnership
intends to hold its properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning and
operating the properties, and to make such occasional sales of properties as are
consistent with these investment objectives.

Taxation of the Residential Development Corporations and Other TRSs

      A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the residential development corporations and other TRSs
through dividends on non-voting stock thereof held by Crescent Partnership and
interest on the residential development property mortgages held by Crescent
Partnership. The residential development corporations and other TRSs will pay
federal, state and local income taxes on their taxable incomes at normal
corporate rates, which taxes will reduce the cash available for distribution by
Crescent Real Estate to its shareholders. Any federal, state or local income
taxes that the residential development corporations and other TRSs are required
to pay will reduce the cash available for distribution by Crescent Real Estate
to its shareholders.

                  DESCRIPTION OF CRESCENT OPERATING'S BUSINESS


      In February and March of 2002, Crescent Operating transferred to Crescent
Real Estate, in lieu of foreclosure, the assets of its hospitality segment and,
pursuant to a strict foreclosure, the interests in its land development segment
pursuant to the terms of the Settlement Agreement described under "The
Reorganization Transactions - Summary of the Reorganization Transactions." As a
result, Crescent Operating no longer has operations in these two segments. In
addition, on February 6, 2002, Crescent Machinery, through which Crescent
Operating operates its equipment sales and leasing segment, filed for protection
under the federal bankruptcy laws.


OVERVIEW OF CRESCENT OPERATING

Crescent Operating, Inc., a Delaware corporation, was formed on April 1, 1997,
by Crescent Real Estate and its subsidiary Crescent Partnership. Effective June
12, 1997 Crescent Real Estate distributed shares of Crescent

                                      128

Operating common stock to shareholders of Crescent Real Estate and unit holders
of Crescent Partnership, and, on that date, Crescent Operating became a public
company. Crescent Operating was formed to be the lessee and operator of certain
assets owned or to be acquired by Crescent Real Estate that could not be
operated directly or indirectly by Crescent Real Estate without jeopardizing its
status as a REIT. On January 1, 2001, however, the REIT Modernization Act became
effective. This legislation allows Crescent Real Estate, through its
subsidiaries, to operate or lease certain of its investments that had been
previously operated or leased by Crescent Operating.


      Crescent Operating's charter provides that one of its purposes is to
perform the Intercompany Agreement between Crescent Operating and Crescent
Partnership. Under the terms of the Intercompany Agreement, both parties agree
to provide each other with rights to participate in certain transactions. In
addition, Crescent Operating's charter prohibits Crescent Operating from
engaging in activities or making investments that a REIT could make unless, in
accordance with the terms of the Intercompany Agreement, Crescent Partnership
was first given the opportunity but elected not to pursue such activities or
investments. To facilitate the review, evaluation and negotiation of the terms
of and making recommendations with respect to investment opportunities presented
to Crescent Operating by Crescent Partnership, Crescent Operating established
the Intercompany Evaluation Committee, which was composed entirely of directors
of Crescent Operating who were not also officers or directors of Crescent Real
Estate and Crescent Partnership. The scope of the committee eventually expanded
to include analysis of all proposed transaction involving Crescent Real Estate
or Crescent Partnership. Effective February 14, 2002, Crescent Operating entered
into the Settlement Agreement with Crescent Real Estate. The Settlement
Agreement provided for the cancellation of the Intercompany Agreement.


      Crescent Operating was intended to function principally as an operating
company, in contrast to Crescent Real Estate's principal focus on investment in
real estate assets. The operating activities and operating assets made available
to Crescent Operating by Crescent Real Estate were designed to provide Crescent
Real Estate's existing shareholders with the long-term benefits of ownership in
an entity devoted to the conduct of operating business activities in addition to
their investment interest in Crescent Real Estate.

BUSINESS SEGMENTS

      Immediately prior to the asset transfers made pursuant to the Settlement
Agreement on February 14, 2002, Crescent Operating, through various subsidiaries
and affiliates, had assets and operations comprising four business segments: (i)
equipment sales and leasing, (ii) hospitality, (iii) temperature-controlled
logistics and (iv) land development. Within these segments Crescent Operating
owned the following:

      -     The equipment sales and leasing segment consisted of a 100% interest
            in Crescent Machinery and its subsidiary, a construction equipment
            sales, leasing and service company with 14 locations in four states.
            As of September 30, 2002, Crescent Machinery operated nine locations
            in three states.

      -     The hospitality segment consisted of the following assets:

            -     Crescent Operating's lessee interests in three upscale
                  business class hotels owned by Crescent Real Estate. The
                  hotels are the Denver Marriott City Center, the Hyatt Regency
                  Albuquerque and the Renaissance Hotel in Houston, Texas;

            -     Lessee interests in three destination resort properties owned
                  by Crescent Real Estate. The properties are the Hyatt Regency
                  Beaver Creek, the Ventana Inn and Spa, Sonoma Mission Inn and
                  Spa (including the Sonoma Mission Inn golf and Country Club);

            -     Lessee interests in two destination fitness resort and spa
                  properties owned by Crescent Real Estate. The properties are
                  Canyon Ranch-Tucson and Canyon Ranch-Lenox and;


                                      129

            -     A 5% economic interest in CRL, which has an investment in the
                  Canyon Ranch Day Spa in the Venetian Hotel in Las Vegas,
                  Nevada and participates in the future use of the "Canyon
                  Ranch" name. Crescent Real Estate owned the remaining 95%
                  economic interest.

      -     The temperature-controlled logistics segment consisted of a 40%
            interest in the operations of AmeriCold Logistics, which operates
            100 refrigerated storage properties with an aggregate storage
            capacity of approximately 525 million cubic feet. Crescent Real
            Estate has a 40% interest in AmeriCold Corporation, which owned 89
            of the 100 properties.

      -     The land development segment consisted of the following assets:

            -     A 4.65% economic interest in Desert Mountain, a master
                  planned, luxury residential and recreational community in
                  northern Scottsdale, Arizona. Crescent Real Estate owned an
                  88.35% economic interest in Desert Mountain;

            -     A 52.5% general partner interest in The Woodlands Operating
                  Company;

            -     A 2.625% economic interest in The Woodlands Land Development
                  Company L.P. Crescent Real Estate owned a 49.875% economic
                  interest in this entity; and

            -     A 60% general partner interest in COPI Colorado, a company
                  that has a 10% economic interest in CRDI, formerly Crescent
                  Development Management Corp. Crescent Real Estate owned the
                  remaining 90% economic interest in CRDI.

Equipment Sales and Leasing

      Crescent Machinery is engaged in the sale, leasing and service of
construction equipment and accessories to the construction industry located
primarily in three states as of September 30, 2002. Historically, construction
equipment businesses have been owned and operated primarily by individuals in a
localized area. Crescent Machinery has consolidated some of these businesses in
order to gain improvements in purchasing and operating efficiencies. All of the
Crescent Machinery locations represent major lines of equipment. This
differentiates Crescent Machinery from some of its pure rent-to-rent
competition. Crescent Machinery's locations offer new and used equipment for
sale and rent, have factory trained service personnel, and provide parts and
warranty service.

      Effective February 6, 2001, Crescent Operating, Crescent Machinery and
SunTx entered into a Management Rights Agreement. Under the Management
Agreement, Crescent Operating and Crescent Machinery engaged SunTx to provide
general administrative and financial advice regarding all matters not otherwise
reserved for the board of directors for Crescent Machinery for a fee of $1.0
million. This Management Agreement terminated December 31, 2001.

      Like many companies serving the construction industries, Crescent
Machinery was affected in 2001 by multiple factors negatively impacting the
industry. These factors include excess inventories of machines available for
sale or rental, severe price competition, a slowdown in many construction
markets, the reduction in the number of new projects, the general recessionary
economy, and the continued negative effects following the terrorist attacks of
September 11, 2001.


      Beginning in the second quarter of 2001, Crescent Machinery's business
plan focused on right-sizing the business and creating liquidity. This plan
included the reduction of operating costs and excess or underutilized assets. As
of September 30, 2002, Crescent Machinery's net book value of its inventory and
rental fleet was reduced by approximately $48.1 million and operating expenses
have been reduced by $16.4 million since December 31, 2001. Crescent Machinery
also closed its branches in Beaumont, Texas; Van Wert, Ohio; Franklin, Indiana;



                                      130


Honolulu, Hawaii; Santa Rosa, California; Sacramento, California; Sparks,
Nevada; Fresno, California; Tracy, California and Union City, California in
2002. Subsequent to September 30, 2002, Crescent Machinery closed its final West
Coast location leaving it with eight branches in two states.


      As part of that business plan, Crescent Machinery continued reviewing key
factors to its business, including the business mix between the sale of
equipment and various rental and service programs; evaluating the suppliers
Crescent Machinery used or may add in the future to maximize the equipment
solutions Crescent Machinery offered its customers; standardizing best practices
across all branch locations; and implementing new compensation programs that
directly linked pay to performance.


      An essential part of Crescent Machinery's plan involved restructuring its
existing lines of credit to provide debt service relief. Crescent Machinery
defaulted on certain major loans from commercial institutions due to Crescent
Machinery's decision not to pay the principal portion of payment installments
due from September through December 2001 in the total amount of approximately
$6.4 million. Outstanding principal amounts under default by Crescent Machinery
totaled $42.9 million at September 30, 2002. Crescent Machinery's lenders did
not exercise remedies available for Crescent Machinery's payment default.

      Crescent Machinery was unable to reach satisfactory agreements with other
lenders, however, and on February 6, 2002, Crescent Machinery filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy
Court for the Northern District of Texas in Fort Worth, Texas. Crescent
Machinery intends to continue its normal operations in the sale, rental and
servicing of construction equipment, while attempting to reorganize and
restructure its debt to emerge a financially stronger and more competitive
business. Crescent Machinery plans to continue with business as usual during
this process, but certain locations will be evaluated and may be sold or closed
to improve efficiency. Crescent Machinery did reach an agreement with one of its
lenders to take back the equipment it had financed and limit Crescent
Machinery's exposure to shortfall on the sale of the equipment to $500,000. The
lender further agreed to finance the $500,000 over three years at 1% over prime
interest rate. Completion of the return of equipment under this agreement would
eliminate approximately $11.5 million of indebtedness of Crescent Machinery. To
that effect, Crescent Machinery has closed all of its locations outside of Texas
and Oklahoma in 2002.


      In addition to its equity claim as the sole shareholder of Crescent
Machinery, Crescent Operating is a creditor of Crescent Machinery, holding an
unsecured $10.0 million principal amount note receivable from Crescent
Machinery. Crescent Operating does not anticipate receiving a significant
repayment, if any, of this note receivable in the Crescent Machinery bankruptcy
case.

      Crescent Operating is unable to predict as of the date of the filing of
this proxy statement/prospectus whether Crescent Machinery will be able to
successfully reorganize its debt and operations, or what the treatment of
creditors of Crescent Machinery and Crescent Operating, as the sole shareholder
of Crescent Machinery and as a creditor, will be under any proposed plan of
reorganization of Crescent Machinery. The payment rights and other entitlements
of pre-petition creditors of Crescent Machinery, including Crescent Operating,
and Crescent Operating, as Crescent Machinery's sole shareholder, may be
substantially altered by any plan of reorganization confirmed by the bankruptcy
court. Under a plan, pre-petition creditors may receive less than 100% of the
face value of their claims, and the ownership interest of Crescent Operating in
Crescent Machinery may be substantially diluted or cancelled in whole or in
part. Crescent Machinery has filed schedules of assets and liabilities in its
bankruptcy case. Those schedules indicate that virtually all of Crescent
Machinery's assets are subject to lien claims of certain secured lenders.
Moreover, the schedules indicate that the collateral securing the claims of
these creditors has a value at or below the amount owed to the lenders. In fact,
the only unencumbered assets owned by Crescent Machinery are several parcels of
real estate that Crescent Machinery estimates to have a fair market value of
approximately $3.0 million and miscellaneous inventory and accounts receivable
of undetermined value. The value of the real estate will need to be first used
to pay administrative expense claims in the bankruptcy case, after which it
might be available for distribution to unsecured creditors. There are
approximately $17.0 million of unsecured claims in the Crescent Machinery
bankruptcy case. Crescent Operating expects the Crescent Machinery creditors to
object to Crescent Operating receiving any distribution unless those creditors
are paid in full. Although there can be no assurance as to the outcome of the
Crescent Machinery bankruptcy case, Crescent Operating believes the prudent
course is to estimate that it would not receive a material distribution in
respect of either its unsecured note claim in the Crescent Machinery case or in


                                      131

respect of its ownership of 100% of the Crescent Machinery common stock. There
can be no assurance given that a plan of reorganization of Crescent Machinery
will be approved by the creditors, or that the bankruptcy court will confirm any
such plan. If a plan of reorganization is not confirmed by the bankruptcy court,
there can be no assurance that Crescent Machinery will have sufficient funds to
continue as a going concern, to restructure its debt on acceptable terms or
continue its operations. If such a plan is not confirmed by the bankruptcy
court, Crescent Machinery may be forced to liquidate its assets under Chapter 7
of the U.S. Bankruptcy Code and to cease operations, in which case it is
unlikely that Crescent Operating would realize any significant value for its
ownership interest in Crescent Machinery.

      Operational Information.


      The following tables set forth operational statistics for the eight
remaining branch locations with continued operations on a same store basis for
the three and nine months ended September 30, 2002 and for the years ended
December 31, 1999 through December 31, 2001.




                                            THREE MONTHS                 NINE MONTHS
                                         ENDED SEPTEMBER 30,         ENDED SEPTEMBER 30,
                                         -------------------         -------------------
                                         2002          2001          2002          2001
                                                                       
   Revenue:
     New and used equipment .....          30%           51%           37%           43%
     Rental equipment ...........          43%           32%           40%           37%
     Parts, service and supplies           27%           17%           23%           20%
                                         ----          ----          ----          ----
   Total revenue ................         100%          100%          100%          100%
   Expenses:
     Cost of sales:
      New and used equipment ....          91%           96%           89%           92%
      Rental equipment ..........          59%           67%           68%           67%
      Parts, service and supplies          60%           64%           61%           65%
                                         ----          ----          ----          ----
   Total cost of sales ..........          69%           81%           74%           78%
   Gross profit .................          31%           19%           26%           22%
   Operating expenses ...........          53%           26%           47%           26%
                                         ----          ----          ----          ----
   Loss from operations .........         (22%)          (7%)         (21%)          (3%)
                                         ====          ====          ====          ====





                                                        For The Year Ended December 31,
                                                       --------------------------------
                                                       2001          2000          1999
                                                       ----          ----          ----
                                                                          
   Revenue:
     New and used equipment .....                        47%           47%           59%
     Rental equipment ...........                        35%           34%           27%
     Parts, service and supplies                         18%           19%           14%
                                                       ----          ----          ----
   Total revenue ................                       100%          100%          100%
   Expenses:
     Cost of sales:
      New and used equipment ....                        93%           88%           83%
      Rental equipment ..........                        69%           61%           47%
      Parts, service and supplies                        64%           66%           85%
                                                       ----          ----          ----
   Total cost of sales ..........                        80%           75%           73%
   Gross profit .................                        20%           25%           27%
   Operating expenses ...........                        26%           23%           21%
                                                       ----          ----          ----
   Income (loss) from operations                         (5%)           2%            6%
                                                       ====          ====          ====



                                      132


      Net operating loss for continuing operations for the year ended December
31, 2001 was $15.9 million as compared with net operating income of $1.3 million
for the year ended December 31, 2000. Equipment sales and leasing revenue
decreased $24.9 million, or 48.9%, to $26.0 million for the nine months ended
September 30, 2002, compared with $50.9 million for the nine months ended
September 30, 2001. Net operating loss for the nine months ended September 30,
2002 was $3.3 million as compared with net operating loss of $1.6 million for
the nine months ended September 30, 2001. Crescent Operating believes that the
results for the nine months ended September 30, 2002 are not necessarily
indicative of the operating results expected for the full year, due to the
closing of its West Coast branches in 2002 and to the seasonality of the
business.

      Under the agreement relating to Crescent Real Estate's planned investment
in Crescent Machinery, which was terminated on February 4, 2002, Crescent
Operating agreed upon a value for its investment in Crescent Machinery. Such
agreed upon value served as an indicator to Crescent Operating that the
potential existed for the impairment of certain assets as it relates to its
current investment in Crescent Machinery. As required under Statement of
Financial Accounting Standards No. 121, using all information available,
Crescent Operating determined that certain assets within Crescent Machinery have
carrying values which exceed the estimated undiscounted cash flows of those
assets. As a result, Crescent Operating recorded an adjustment of $12.3 million
and $26.9 million as "impairment loss on assets" in Crescent Operating's results
from continuing operations and discontinued operations of closed branches,
respectively, for the year ended December 31, 2001 related to Crescent
Machinery. Crescent Operating will continue to evaluate the assets within
Crescent Machinery for impairment and adjust such carrying values as necessary.


Hospitality

      Effect of the Reorganization Transactions.

      In February 2002, in lieu of a foreclosure by Crescent Real Estate on the
Crescent Operating hotel operations, Crescent Operating caused the lessees of
these properties to transfer all of the leases, business contracts and licenses,
furniture, fixtures and equipment, cash and intellectual property to Crescent
Real Estate in exchange for cancellation of rental payments due to Crescent Real
Estate with an aggregate value equal to the agreed upon value of the transferred
assets, or $23.6 million. See "The Reorganization Transactions -- Summary of the
Reorganization Transactions" for a description of these transfers.

      Overview.

      Prior to the February 2002 transfer of Crescent Operating's hotel
operations to Crescent Partnership, the hospitality segment generally consisted
of the hotel operations. Each of such properties were owned by Crescent
Partnership or its affiliates and all were leased to subsidiaries of Crescent
Operating under long term leases. In addition to these properties, Crescent
Operating also had other investments in CRL.

      The hotel operations were comprised of unique luxury resorts, business and
convention hotels and destination health and fitness resorts and made up a small
portion of the hospitality industry. Because Crescent Operating, for the most
part, relied on third-party operators such as Marriott and Hyatt, Crescent
Operating enjoyed the advantage of the third-party operators' nationwide
advertising, reservation services and strong management.


                                      133

      Each of the hotel operations was under lease with Crescent Real Estate,
with terms expiring from December 2004 to June 2009 and generally providing for
(i) base rent, with periodic rent increases, (ii) percentage rent based on a
percentage of gross hotel revenues less food and beverage revenues above a
specified amount and (iii) a percentage of gross food and beverage revenues
above a specified amount. Under the leases, Crescent Operating's subsidiaries
had assumed the rights and obligations of the property owner under the
respective management agreement with the hotel operators, including the property
management agreements with Sonoma Management Company for Sonoma Mission Inn and
Spa, Sonoma Mission Inn Golf and Country Club and Ventana Inn and Spa, as well
as the obligation to pay all property taxes and other charges against the
property. As part of each of the lease agreements for eight of the hotel
operations, Crescent Real Estate had agreed to fund all capital expenditures
relating to furniture, fixtures and equipment reserves required under the
applicable management agreements. The only exception was Canyon Ranch-Tucson, in
which instance Crescent Operating owned all furniture, fixtures and equipment
associated with the property and funded all related capital expenditures. With
the permission of Crescent Real Estate, Crescent Operating had deferred payment
of rent on the hotel operations. Rent expense accrued but deferred as of
December 31, 2001 was $41.2 million.

      All of Crescent Operating's hotel operations, except for the Sonoma
Mission Inn and Spa, Sonoma Mission Inn Golf and Country Club and the Ventana
Inn and Spa, were managed by third party operators. Crescent Operating and its
hospitality subsidiaries had a Master Asset Management and Administrative
Services Agreement with Sonoma Management to manage the Hyatt Albuquerque, the
Renaissance Hotel Houston and the Denver City Center Marriott. In addition,
Crescent Operating's hospitality subsidiaries had accepted assignment from the
owners of the Sonoma Mission Inn and Spa, the Sonoma Mission Inn Golf and
Country Club and the Ventana Inn and Spa of its property management agreements
with Sonoma Management. The principals of Sonoma Management are Sanjay and
Johanna Varma and Crescent Real Estate is an equity owner in Sonoma Management.
Payment of obligations under the Master Asset Management and Administrative
Services Agreement was guaranteed by Crescent Operating. For each property for
which it provided asset management services, Sonoma Management was receive a
base fee equal to 0.85% of gross revenues of the property managed plus an
incentive fee of 50% of actual net income in excess of budgeted net income. For
each property for which it provided property management services, Sonoma
Management was entitled to receive a base fee equal to 2.0% of gross revenues of
the property plus an incentive fee of 20% of net operating income in excess of a
12% annual return on investment to owner.

      As consideration for its services under the Master Asset Management and
Administrative Services Agreement, Sonoma Management received an annual base fee
(and no incentive fee) for 2001 of approximately $0.6 million, for its asset
management services related to the Hyatt Albuquerque, the Renaissance Houston
Hotel and the Denver City Center Marriott.

      Crescent Operating had limited the potential impact of downturns in the
hospitality industry on Crescent Operating by limiting its guarantee of the rent
payment obligations of its hospitality segment subsidiaries. Crescent
Operating's guarantee related to rent payments was limited to cash generated by
the hospitality segment, i.e. cash flows from segments other than hospitality
would not be used to fund rent payments in the event cash flows of the hotel
operations were less than scheduled rent payments.

      The individual hotel operations were affected by seasonality; however, the
seasonal fluctuations are varied and are determined by both location and the
nature of the business conducted on the property. The effects of seasonality of
the hotel operations are generally offsetting; however, March and October have
the greatest positive impact and November through January have the greatest
negative impact on Crescent Operating's consolidated results.

      The hotel operations in Denver and Albuquerque are business and convention
center hotels that compete against other similar hotels in their markets.
Crescent Operating believes, however, that its destination health and fitness
resorts are unique properties that have very limited competition. In addition,
Crescent Operating believes that the other hotel operations experience limited
or no direct competition due to their high replacement costs and unique

                                      134

concepts or locations. The hotel operations do compete, to a limited extent,
against business class hotels or middle-market resorts in their geographic
areas, as well as against luxury resorts nationwide and around the world.

      Crescent Operating had a 5% economic interest, representing all of the
voting stock, in CRL. CRL has a 30% interest in CR License. CR License is the
entity which owns the rights to the future use of the "Canyon Ranch" name. CRL
also has an approximate 65% economic interest in the Canyon Ranch Spa Club
located in the Venetian Hotel in Las Vegas.

      Operational Information.

      The following table sets forth certain information about the hotel
operations, excluding the Sonoma Mission Inn Golf and Country Club, Houston
Center Athletic Club, or HCAC, CRL and the Four Seasons in Houston for the years
ended December 31, 2001 and 2000. As Crescent Operating only operated this
segment for one and one-half months in 2002, there is no information for the
three and nine months ended September 30, 2002. The information below is based
on available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox, which
are destination health and fitness resorts that measure performance based on
available guest nights.



                                                                                       For the Year Ended December 31,
                                                                            -----------------------------------------------------
                                                                              Average              Average             Revenue
                                                                             Occupancy              Daily                Per
                                                                                Rate                Rate           Available Room
                                                     Lease                  -------------      --------------      --------------
                               Location           Expiration     Rooms      2001     2000      2001      2000      2001      2000
                               --------           ----------     -----      ----     ----      ----      ----      ----      ----

                                                                                                  
Upscale Business Class
Hotels:
Denver Marriott City Center..  Denver, CO          June 2005        613      77%      84%      $123      $120      $ 95      $101
Hyatt Regency Albuquerque....  Albuquerque, NM   December 2005      395      69       69        108       106        74        73
Renaissance Houston..........  Houston, TX         June 2009        389      64       59        113        95        73        56
                                                                 ------     ---      ---       ----      ----      ----      ----
    Total/Weighted Average                                        1,397      71%      73%      $116      $111      $ 83      $ 80
                                                                 ======     ===      ===       ====      ====      ====      ====
Luxury Resorts and Spas:
Hyatt Regency Beaver           Avon, CO          December 2004      276      57%      69%      $278      $254      $159      $176
Creek(1).....................
Sonoma Mission Inn & Spa.....  Sonoma, CA        October 2006       228(2)   59       75        299       302       176       226
Ventana Inn & Spa............  Big Sur, CA       December 2007       62      73       78        420       458       304       358
                                                                 ------     ---      ---       ----      ----      ----      ----
    Total/Weighted Average                                          566      60%      72%      $305      $298      $182      $216
                                                                 ======     ===      ===       ====      ====      ====      ====

                                                                  Guest
                                                                 Nights
                                                                 ------
Destination Fitness
Resorts and Spas:
Canyon Ranch-Tucson..........  Tucson, AZ          July 2006        250(3)
Canyon Ranch-Lenox...........  Lenox, MA         December 2006      212(3)
                                                                 ------     ---      ---       ----      ----      ----      ----
    Total/Weighted Average                                          462      81%(4)   86%(4)   $469(5)   $442(5)   $318(6)   $340(6)
                                                                 ======     ===      ===       ====      ====      ====      ====

Grand Total/Weighted Average                                                 71%      75%      $263      $256      $183      $191
                                                                 ======     ===      ===       ====      ====      ====      ====


(1)   The hotel is undergoing $6.9 million renovation of all guest rooms. The
      project is scheduled to be completed by the second quarter of 2002.

(2)   In January 2000, 20 rooms, which were previously taken out of commission
      for construction of a 30,000 square foot full-service spa in connection
      with an approximately $21.0 million expansion of the hotel, were returned
      to service. The expansion was completed in the second quarter of 2000. The
      expansion also included 30 additional guest rooms. Rates were discounted
      during the construction period, which resulted in a lower average daily
      rate and revenue per available room for the year ended December 31, 1999,
      as compared to December 31, 2000.

(3)   Represents available guest nights, which is the maximum number of guests
      that the resort can accommodate per night.

(4)   Represents the number of paying and complimentary guests for the period,
      divided by the maximum number of available guest nights for the period.

(5)   Represents the average daily "all-inclusive" guest package charges for the
      period, divided by the average daily number of paying guests for the
      period.

(6)   Represents the total "all-inclusive" guest package charges for the period,
      divided by the maximum number of available guest nights for the period.


                                      135

Temperature-Controlled Logistics


      Effect of the Reorganization Transactions


      On February 14, 2002, Crescent Operating agreed in the Settlement
Agreement that a Crescent Real Estate subsidiary, Crescent Spinco, upon the
effectiveness of its registration statement, will distribute its shares to the
holders of Crescent Real Estate common shares and the unitholders of Crescent
Partnership and will purchase Crescent Operating's entire membership interest in
COPI Cold Storage for between $15.0 million to $15.5 million. It is anticipated
that the interest in AmeriCold Logistics will be transferred in 2003. The
proceeds are intended to payoff the Bank of America loan for which Crescent
Operating's 40% interest in AmeriCold Logistics serves as collateral. The
distribution of the Crescent Spinco shares will be made to the holders of
Crescent Real Estate common shares prior to the issuance of Crescent Real Estate
common shares to the Crescent Operating stockholders. As a result, the holders
of Crescent Operating common stock will not receive any interest in Crescent
Spinco.


      Overview

      In October 1997, the Crescent/Vornado REIT partnership, in which Vornado
Realty Trust has a 60% interest and Crescent Real Estate has a 40% interest,
acquired each of AmeriCold Corporation and URS Logistics, Inc. The
Crescent/Vornado REIT partnership acquired the assets of Freezer Services, Inc.
in June 1998 and acquired the Carmar Group in July 1998. In March 1999, a new
partnership doing business under the name AmeriCold Logistics was formed.
Crescent Operating, through its wholly owned subsidiary COPI Cold Storage, has a
40% general partnership interest in AmeriCold Logistics and Vornado Operating
has the remaining 60% general partnership interest. Immediately following its
formation, AmeriCold Logistics purchased all of the non-real estate assets of
the Crescent/Vornado REIT partnership for $48.7 million. AmeriCold Logistics
then leased the real estate assets of the Crescent/Vornado REIT partnership from
that entity and continued to operate the temperature-controlled warehouse
business that was created by consolidating the businesses of AmeriCold
Corporation, URS Logistics, Freezer Services and the Carmar Group. AmeriCold
Logistics currently leases 89 temperature controlled warehouses from the
Crescent/Vornado REIT partnership, which continues to own the real estate, and
manages 11 additional warehouses. AmeriCold Logistics provides the frozen food
industry with refrigerated warehousing and transportation management services.
As of the date of this proxy statement/prospectus, Crescent Operating continues
to own and conduct its temperature-controlled logistics operations through its
wholly owned subsidiary, COPI Cold Storage.



      The temperature-controlled logistics segment consists of a 40% interest in
the operations of AmeriCold Logistics. AmeriCold Logistics, headquartered in
Atlanta, Georgia, has 5,900 employees and operates 101 temperature controlled
storage facilities nationwide with an aggregate of approximately 538 million
cubic feet of refrigerated, frozen and dry storage space. Of the 101 warehouses,
AmeriCold Logistics leases 88 temperature controlled facilities with an
aggregate of approximately 442 million cubic feet from the
temperature-controlled logistics partnerships, and manages 13 additional
facilities containing approximately 96 million cubic feet of space. AmeriCold
Logistics provides the frozen food industry with refrigerated storage and
transportation management services.

      AmeriCold Logistics leases 88 refrigerated storage facilities used in its
business. The leases, as amended, which commenced in March 1999, generally have
a 15-year term with two five-year renewal options and provide for the payment of
fixed base rent and percentage rent based on revenues AmeriCold Logistics
receives from its customers. Fixed base rent was approximately $136.0 million in
2000 and was and will be approximately $137.0 million per annum from 2001
through 2003, $139.0 million per annum from 2004 through 2008 and $141.0 million
per annum from 2009 through February 28, 2014. Percentage rent for each lease is
based on a specified percentage of revenues in excess of a specified base
amount. The aggregate base revenue amount under five of the six leases is
approximately $350.0 million and the weighted average percentage rate is
approximately 36% through 2003, approximately 38% for the period from 2004
through 2008 and approximately 40% for the period from 2009 through February 28,
2014. The aggregate base revenue amount under the sixth lease is approximately
$32.0 million through 2001, and approximately $26.0 million for the period from
2002 through February 28, 2014, and the percentage rate is 24% through 2001,
37.5% for the period from 2002 through 2006, 40% from 2007 through 2011 and 41%
from 2012 through February 28, 2014. AmeriCold Logistics recognized $156.3
million and $170.6 million of rent expense for the year ended December 31, 2001
and December 31, 2000, respectively, which includes, effects of straight-lining,
rent to


                                      136

parties other than the landlord and is before the waiver of rent discussed
below. AmeriCold Logistics is required to pay for all costs arising from the
operation, maintenance and repair of the properties, including all real estate
taxes and assessments, utility charges, permit fees and insurance premiums, as
well as property capital expenditures in excess of $9.5 million annually.
AmeriCold Logistics has the right to defer the payment of 15% of the fixed base
rent and all percentage rent for up to three years beginning on March 11, 1999
to the extent that available cash, as defined in the leases, is insufficient to
pay such rent. AmeriCold Logistics deferred $25.5 million of rent payments for
the period ending December 31, 2001 and $19.0 million for the period ending
December 31, 2000.

      On February 22, 2001, the AmeriCold Logistics leases were restructured to,
among other things, (i) reduce 2001's contractual rent to $146.0 million ($14.5
million less than 2000's contractual rent), (ii) reduce 2002's contractual rent
to $150.0 million, plus contingent rent in certain circumstances, (iii) increase
the Landlord's share of annual maintenance capital expenditures by $4.5 million
to $9.5 million effective January 1, 2000 and (iv) extend the deferred rent
period to December 31, 2003 from March 11, 2002.

      In the fourth quarter ended December 31, 2001, AmeriCold Logistics
reversed $25.5 million of the rent expense recorded for 2001 resulting from
temperature-controlled logistics partnerships waiving of its rights to collect
this portion of the rent. Further, temperature-controlled logistics partnerships
waived $14.3 million of the rent expense recorded by AmeriCold Logistics for
2000 which AmeriCold Logistics recorded as income in the fourth quarter ended
December 31, 2001. The aggregate amount waived by the landlord of $39.8 million
represents a portion of the rent due under the leases which AmeriCold Logistics
deferred in such years.

      Under the terms of the partnership agreement for AmeriCold Logistics,
Vornado Operating has the right to make all decisions relating to the management
and operations of AmeriCold Logistics other than certain major decisions that
require the approval of both Crescent Operating and Vornado Operating. Vornado
Operating must obtain Crescent Operating's approval for specified matters
involving AmeriCold Logistics, including approval of the annual budget,
requiring specified capital contributions, entering into specified new leases or
amending existing leases, selling or acquiring specified assets and any sale,
liquidation or merger of AmeriCold Logistics. If the partners fail to reach an
agreement on such matters during the period from November 1, 2000 through
October 30, 2007, Vornado Operating may set a price at which it commits to
either buy Crescent Operating's investment, or sell its own, and Crescent
Operating will decide whether to buy or sell at that price. If the partners fail
to reach agreement on such matters after October 30, 2007, either party may set
a price at which it commits to either buy the other party's investment, or sell
its own, and the other party will decide whether to buy or sell at that price.
Neither partner may transfer its rights or interest in the partnership without
the consent of the other partner. Vornado Operating has consented to Crescent
Operating's transfer of its membership interest in COPI Cold Storage, and thus
Crescent Operating's general partnership interest in AmeriCold Logistics, to a
subsidiary of Crescent Real Estate. The partnership will continue for a term
through October 30, 2027, except as the partners may otherwise agree.

      As of December 31, 2001, Crescent Operating had not contributed its 40%
portion of a total $10.0 million expected contribution to AmeriCold Logistics.
Accordingly, AmeriCold Logistics cancelled its $4.0 million contribution
receivable in partners capital on December 31, 2001. In the first quarter of
2002, Vornado Operating's previous contribution of $6.0 million, representing
its 60% match of the $10.0 million total expected contribution, was reclassified
as a special equity contribution that: (i) has priority over the original equity
amounts, with voting rights of the partner not effected, (ii) is redeemable only
at AmeriCold Logistics' option, and (iii) accrues interest at 12% compounded
annually from March 7, 2000. The partner's ownership remains at 60%.

      In addition, during 2001, AmeriCold Logistics recorded a charge of $8.9
million comprised of (i) severance and relocation costs associated with a
management restructuring and (ii) expenses arising from the consolidation of a
portion of the corporate office in Portland, Oregon into AmeriCold Logistics
Atlanta headquarters.

      On May 1, 2001, Alec C. Covington became the President and Chief Executive
Officer of AmeriCold Logistics. Mr. Covington succeeded Daniel F. McNamara who
continues as Vice Chairman until May, 2002. Mr.

                                      137

Covington, age 45, was formerly an Executive Vice President of SUPERVALU Inc.
(NYSE:SVU) and President and Chief Operating Officer of the SUPERVALU food
distribution companies division, which is the nation's largest distributor to
grocery retailers having $17.0 billion of revenue and 34 distribution centers.
Previously, Mr. Covington was the President and Chief Operating Officer of the
wholesale division of Richfood Holdings, Inc. when it was acquired by SUPERVALU
in the fall of 1999. He has more than 25 years of wholesale, retail and
supply-chain management experience in the food industry.

      On October 22, 2001, Jonathan C. Daiker joined AmeriCold Logistics as
Chief Financial Officer. Most recently, Mr. Daiker served for five years as
Executive Vice President and Chief Financial Officer of the Simmons Company, a
manufacturer and distributor of mattresses. Prior thereto, from 1981-1995, he
held subsidiary and unit Chief Financial Officer positions with Phillips
Electronics N.V., a multibillion dollar consumer electronics company. Mr.
Daiker, a CPA, began his career with Price Waterhouse & Company.

      AmeriCold Logistics is experiencing cash flow deficits which its
management is currently addressing through sales of non-core assets.


      Recent Developments



      On December 31, 2002, AmeriCold Logistics sold its interests in its
Carthage, Missouri and Kansas City, Kansas quarries to a joint venture owned 56%
by Crescent Real Estate Equities Company and 44% by Vornado Realty Trust for
approximately $20 million. AmeriCold Logistics will continue to manage these
assets on behalf of the new owners.

      On November 5, 2002, AmeriCold Logistics issued a $6.0 million note to
Vornado Operating, effective March 11, 2002, in exchange for Vornado Operating's
$6.0 million special equity contribution. Certain of AmeriCold Logistics' trade
receivables collateralize the loan. The loan bears interest of 12% and requires
monthly interest payments until maturity on December 31, 2004.


      On January 23, 2002, the leases with the temperature-controlled logistics
partnerships were restructured to consolidate four of the non-encumbered leases
into one non-encumbered lease. The restructuring did not affect total
contractual rent due under the combined leases.

      During the first and second quarters of 2002, AmeriCold Logistics
exercised its right, pursuant to the terms of its leases, to defer payment of
rent. As of September 30, 2002, AmeriCold Logistics had deferred $20.6 million
of rent for 2002, bringing the total deferred rent to $30.7 million. For the
years ended December 31, 2001 and December 31, 2000, AmeriCold Logistics had
exercised its right, pursuant to the terms of its leases with the landlord, to
defer payment of $25.5 million and $19.0 million of rent, respectively, of which
Crescent Operating's share was $10.2 million and $7.6 million, respectively.


      Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. On August 14, 2002, Bank of America
further extended the maturity of this loan to January 15, 2003 and Crescent
Operating prepaid the interest for that time period in the amount of $0.3
million. Crescent Operating, with the consent of Crescent Partnership which
agreed to subordinate its security interest in Crescent Operating's 40% interest
in AmeriCold Logistics, pledged all of its interest in AmeriCold Logistics to
Bank of America to secure the loan. In January 2003, Bank of America further
extended the maturity of this loan to March 15, 2003 and Crescent Operating
agreed to prepay an additional two months of interest at the loan's current
rate.



      Operational Information

      As of the date of this proxy statement/prospectus, Crescent Operating
continues to hold a 40% economic interest in AmeriCold Logistics. Crescent
Operating's share of pretax loss from AmeriCold Logistics for the year ended
December 31, 2001 was $2.3 million. AmeriCold Logistics is experiencing cash
flow deficits which management of AmeriCold Logistics is currently addressing
through sales of non-core assets. Crescent Operating has written off its entire
investment in AmeriCold Logistics and does not anticipate recognizing any
additional AmeriCold Logistics losses for accounting purposes.



                                      138

      The following table shows the location and size of facility for each of
the properties operated by AmeriCold Logistics as of September 30, 2002:



                                          Total Cubic                                                   Total Cubic
                       Number of            Footage                                  Number of            Footage
   State              Properties         (in millions)           State              Properties         (in millions)
   -----              ----------         -------------           -----              ----------         -------------
                                                                                        
Alabama                    5                  10.8            Missouri(1)                2                  46.8
Arizona                    1                   2.9            Nebraska                   2                   4.4
Arkansas                   6                  33.1            New York                   1                  11.8
California                 11                 47.1            North Carolina             3                  10.0
Colorado                   1                   2.8            Ohio                       1                   5.5
Florida                    5                   6.5            Oklahoma                   2                   2.1
Georgia                    8                  49.5            Oregon                     6                  40.4
Idaho                      2                  18.7            Pennsylvania               4                  50.8
Illinois                   2                  11.6            South Carolina             1                   1.6
Indiana                    1                   9.1            South Dakota               2                   6.3
Iowa                       2                  12.5            Tennessee                  3                  10.6
Kansas                     2                   5.0            Texas                      5                  39.1
Kentucky                   1                   2.7            Utah                       1                   8.6
Maine                      1                   1.8            Virginia                   3                  13.8
Massachusetts              5                  10.5            Washington                 6                  28.7
Minnesota                  1                   5.9            Wisconsin                  3                  17.4
Mississippi                1                   4.7            Canada                     1                   4.8
                                                                                        ---                -----
                                                              Total                     101                537.9
                                                                                        ===                =====


(1)   Includes one underground facility of approximately 33.1 million cubic
      feet.

      Market Information.

      AmeriCold Logistics provides frozen food manufacturers with refrigerated
warehousing and transportation management services. The temperature-controlled
logistics properties consist of production and distribution facilities.
Production facilities differ from distribution facilities in that they typically
serve one or a small number of customers located nearby. These customers store
large quantities of processed or partially processed products in the facility
until they are further processed or shipped to the next stage of production or
distribution. Distribution facilities primarily serve customers who store a wide
variety of finished products to support shipment to end-users, such as food
retailers and food service companies, in a specific geographic market.

      Transportation management services include freight routing, dispatching,
freight rate negotiation, backhaul coordination, freight bill auditing, network
flow management, order consolidation and distribution channel assessment.
AmeriCold Logistics' temperature-controlled logistics expertise and access to
both the frozen food warehouses and distribution channels enable the customers
of AmeriCold Logistics to respond quickly and efficiently to time-sensitive
orders from distributors and retailers.

      Customers consist primarily of national, regional and local frozen food
manufacturers, distributors, retailers and food service organizations, including
H.J. Heinz & Co., ConAgra, Inc., Sara Lee Corp., Tyson Foods, Inc. and McCain
Foods, Inc.

      Consolidation among retail and food service channels has limited the
ability of manufacturers to pass along cost increases by raising prices. Because
of this, manufacturers have been forced in the recent past to focus more
intensely on supply chain cost, such as inventory management, transportation and
distribution, reduction initiatives in an effort to improve operating
performance.

      AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in the country. AmeriCold Logistics operated an aggregate of
approximately 18% of total public refrigerated warehouse space as of December
31, 2001. No other person or entity operated more than 8% of total public
refrigerated warehouse space as of December 31, 2001. As a result, AmeriCold
Logistics does not have any competitors of comparable size. AmeriCold Logistics
operates in an environment in which competition is national, regional and local
in nature and in which the range of service, temperature-controlled logistics
facilities, customer mix, service performance and price are the principal
competitive factors.


                                      139

Land Development

      Effect of the Reorganization Transactions.

      In February 2002, a subsidiary of Crescent Real Estate acquired, through a
strict foreclosure under the terms of the Settlement Agreement, Crescent
Operating's land development entities other than The Woodlands Operating
Company. Crescent Operating's interest in The Woodlands Operating Company was
subsequently acquired, through a strict foreclosure under the terms of the
Settlement Agreement, by a subsidiary of Crescent Real Estate in March 2002. See
"The Reorganization Transactions - Summary of the Reorganization Transactions"
for a description of this acquisition by strict foreclosure.

      Overview.

      Prior to the transfer of Crescent Operating's land development interests
to Crescent Partnership in February and March 2002 pursuant to the Settlement
Agreement, the land development segment consisted primarily of:

      -     a 4.65% economic interest in Desert Mountain, a master planned,
            luxury residential and recreational community in northern
            Scottsdale, Arizona;

      -     a 52.5% general partner interest in The Woodlands Operating Company,
            which provided management, advisory, landscaping and maintenance
            services to The Woodlands, Texas, an approximately 27,000 acre
            master-planned residential and commercial community, and was the
            lessee of The Woodlands Resort and Conference Center;

      -     a 2.625% economic interest in The Woodlands Land Development
            Company, which owned approximately 6,600 acres for commercial and
            residential development as well as a realty office, an athletic
            center, and interests in both a title company and a mortgage
            company; and

      -     a 60% economic interest in COPI Colorado, an entity that had a 10%
            economic interest in CRDI, formerly CDMC, which invests in entities
            that develop or manage residential and resort properties (primarily
            in Colorado) and provides support services to such properties.

      The land development segment competed against a variety of other housing
alternatives including other planned developments, pre-existing single-family
homes, condominiums, townhouses and non-owner occupied housing, such as luxury
apartments.

      Desert Mountain.

      Desert Mountain is a master planned, mixed use residential and
recreational community located in northern Scottsdale, Arizona. The property
consists of 8,000 acres of land located in the high Sonoran Desert that is zoned
for the development of approximately 4,500 lots. Desert Mountain includes The
Desert Mountain Club, a private golf, tennis and fitness club which serves over
2,300 members and offers five Jack Nicklaus signature 18-hole golf courses and
four clubhouses. One of these courses is Cochise, the site of the Senior PGA
Tour's The Tradition golf tournament. Lyle Anderson, the original developer of
Desert Mountain, provides advisory services in connection with the operation and
development of Desert Mountain. Pursuant to the terms of a limited partnership
agreement, Desert Mountain Development is entitled to receive 93% of the net
cash flow of Desert Mountain after certain payments to the sole limited partner,
Sonora Partners Mountain Partnership which owns the remaining 7% interest, have
been made.


                                      140

      The Woodlands Operating Company.

      The Woodlands, is an approximately 27,000-acre master-planned residential
and commercial community located approximately 27 miles north of Houston, Texas,
unique among developments in the Houston area because it functions as a
self-contained community. Amenities contained in the development, which are not
contained within other local developments, include a shopping mall, retail
centers, office buildings, a hospital, a community college, places of worship, a
conference center, 60 parks, 81 holes of golf, two man made lakes, a riverwalk
and a performing arts pavilion.

      The Woodlands Operating Company was formed to provide management,
advisory, landscaping and maintenance services to entities affiliated with
Crescent Operating and Crescent Real Estate as well as to third parties.
Pursuant to the terms of service agreements, The Woodlands Operating Company
performed general management, landscaping and maintenance, construction, design,
sales, promotional and other marketing services for certain properties in which
Crescent Real Estate owns a direct or indirect interest. In addition, The
Woodlands Operating Company monitored certain of the real estate investments of,
and provides advice regarding real estate and development issues to, such
entities. As compensation for its management and advisory services, The
Woodlands Operating Company was paid a monthly advisory fee on a cost-plus
basis. As compensation for its landscaping and maintenance services, The
Woodlands Operating Company received a monthly fee on a cost-plus basis related
to performing the required landscaping and maintenance services.

      The Woodlands Operating Company also leased The Woodlands Conference
Center and Country Club, an executive conference center with a private golf and
tennis club and certain related assets from The Woodlands Commercial Properties
Company, L.P., a partnership, the interests of which are owned by Crescent Real
Estate and certain Morgan Stanley Group funds. The Woodlands Operating Company
leased The Woodlands Conference Center and Country Club on a triple net basis,
with base rent in the amount of $0.75 million per month during the eight-year
term of the lease. The lease also provides for the payment of percentage rent
for each calendar year in which gross receipts from the operation of The
Woodlands Conference Center and Country Club exceed certain amounts.

      The Woodlands Operating Company partnership agreement provided that
distributions be made to partners in accordance with specified payout
percentages subject to change based upon whether certain established cumulative
preferred returns were earned. As cumulative preferred returns reach certain
thresholds, distributions to Crescent Operating from The Woodlands Operating
Company increased from 42.5% to 49.5% and then from 49.5% to 52.5%. Beginning in
2000, both the 42.5% and the 49.5% thresholds were met by The Woodlands
Operating Company; therefore, the payout percentage to Crescent Operating
increased to 52.5%.

      On March 22, 2002, a subsidiary of Crescent Real Estate acquired, through
a strict foreclosure which was agreed upon under the terms of the Settlement
Agreement, Crescent Operating's interest in The Woodlands Operating Company,
giving Crescent Real Estate an indirect 52.5% general partnership interest in
The Woodlands Operating Company. Prior to this transfer, neither Crescent Real
Estate or its affiliates owned any interest in The Woodlands Operating Company.

      The Woodlands Land Company, Inc.

      Crescent Operating owned all of the voting stock, representing a 5%
economic interest, of The Woodlands Land Company, a residential and commercial
development corporation which was formerly wholly owned by Crescent Partnership,
prior to the original Settlement Agreement on February 14, 2002. The Woodland's
Land Company holds a 52.5% general partner interest in, and is the managing
general partner of, The Woodlands Land Development Company, a Texas limited
partnership in which certain Morgan Stanley funds hold a 47.5% limited partner
interest. The Woodlands Land Development Company primarily owns (i)
approximately 4,900 acres of land capable of supporting the development of more
than 13,100 lots for single-family homes, (ii) approximately 1,700 acres capable
of supporting more than 13.3 million net rentable square feet of commercial
development, (iii) a realty office, (iv) contract rights relating to the
operation of its property, (v) an athletic center and (vi) a 50% interest in a
title company.


                                      141

      The Woodlands Land Development Company partnership agreement provided that
distributions be made to partners in accordance with specified payout
percentages subject to change based upon whether certain established cumulative
preferred returns were earned. As cumulative preferred returns reach certain
thresholds, distributions to The Woodlands Land Company from The Woodlands Land
Development Company increase from 42.5% to 49.5% and then from 49.5% to 52.5%.
In 2001, the 42.5% and 49.5% thresholds were met; therefore, the payout
percentage to Crescent Operating increased to 2.625%.

      Crescent Resort Development, Inc. (formerly Crescent Development
Management Corp.).

      CRDI's investments included direct and indirect economic interests that
vary from 25% to 64% consisting primarily of the following: (i) six residential
and commercial developments and eleven residential developments in Colorado,
South Carolina and California; (ii) a timeshare development in Colorado; (iii)
two transportation companies providing approximately 80% of the airport shuttle
service to Colorado resort areas; (iv) two private clubs consisting of various
recreational and social amenities in Colorado and California; and (v) an
interest in a partnership owning an interest in the Ritz Carlton Hotel in Palm
Beach, Florida. Until December 2000, CRDI had an indirect economic interest in a
real estate company specializing in the management of resort properties in
Colorado, Utah, South Carolina and Montana. That investment was transferred to
CDMC II, a newly formed entity having the same owners, board of directors and
officers as CRDI. In connection with that transfer, CDMC II assumed the
indebtedness of CRDI incurred in connection with that investment, all of which
is owed to Crescent Partnership. Effective March 30, 2001, CDMC II sold that
investment - a membership interest in East West Resorts, LLC - to a company
affiliated with the other owner of East-West Resorts, for cash and a secured
promissory note. CDMC II immediately transferred the cash and note to
Transportal Investment Corp. in exchange for its assumption of all of its
indebtedness and dissolved. Crescent Operating owned 1%, and Crescent
Partnership owned 99%, of Transportal Investment Corp., which owns an interest
in Transportal Network, LLC. Transportal Network is an abandoned venture that
had been planned to provide routing and load management services and facilitate
related purchases over the internet to independent truckers, shippers and
receivers. Transportal Network ceased operations in October 2000.

      Effective September 11, 1998, Crescent Operating and Gerald W. Haddock,
John C. Goff and Harry H. Frampton, III entered into a partnership agreement to
form COPI Colorado. COPI Colorado was formed for the purpose of holding and
managing the voting stock of CRDI (and, consequently, to manage CRDI) and
investing in shares of Crescent Operating common stock. In September, 1998,
Crescent Operating contributed to COPI Colorado $9.0 million in cash in exchange
for a 50% general partner interest in COPI Colorado, and each of Mr. Haddock,
Mr. Goff and Mr. Frampton contributed to COPI Colorado approximately 667 shares
of CRDI voting stock, which each of Mr. Haddock, Mr. Goff and Mr. Frampton owned
individually, in exchange for an approximately 16.67% limited partner interest
in COPI Colorado; as a result and until January 2000, Crescent Operating owned a
50% managing interest in COPI Colorado and Mr. Haddock, Mr. Goff and Mr.
Frampton collectively owned a 50% investment interest in COPI Colorado. Mr.
Haddock assigned his 16.67% limited partner interest to COPI Colorado effective
January 2000, causing the Crescent Operating's general partner interest to
increase from 50% to 60%.

      In forming COPI Colorado, Crescent Operating was able to obtain ownership
of CRDI while investing a portion of the cash otherwise payable to the former
owners of CRDI, two of whom were executive officers of Crescent Operating at the
time, in COPI Colorado, which used the cash to acquire shares of Crescent
Operating common stock.

      COPI Colorado has purchased approximately 1.1 million shares of Crescent
Operating common stock at a total purchase price of $4.3 million. The average
price paid for such shares, excluding brokers' commissions, was $3.88 per share.
COPI Colorado has not purchased shares of Crescent Operating since August 1999.

      Recent Developments.

      On February 13, 2002, in anticipation of Crescent Operating's entering
into the Settlement Agreement, pursuant to which Crescent Operating transferred
its 60% general partnership interest in COPI Colorado to Crescent

                                      142

Partnership, the partners of COPI Colorado caused it to distribute among its
partners, in accordance with their respective ownership percentage, all of the
shares of Crescent Operating's stock it held. Messrs. Goff and Frampton each
received 220,506 shares, while Crescent Operating received 661,518 shares.

      Effective February 14, 2002, Crescent Operating transferred its equity
interests in the land development assets and related liabilities, other than
Crescent Operating's interest in The Woodlands Operating Company, as provided
for in the Settlement Agreement. Crescent Operating transferred its interest in
The Woodlands Operating Company to Crescent Real Estate on March 22, 2002.

      Operational Information.

      Net income for the land development segment was $2.7 million for the year
ended December 31, 2001. Crescent Operating's share of Desert Mountain
Development's net loss for the year ended December 31, 2001 was $0.3 million.
Crescent Operating's share of net income from both The Woodlands Land Company
and WOCOI Investment Company for the year ended December 31, 2001 was $2.6
million. Crescent Operating's share of COPI Colorado's net income for the year
ended December 31, 2001 was $0.2 million.

      The following table sets forth certain information as of December 31, 2001
relating to the residential development properties. As Crescent Operating only
operated the land development segment for one and one-half months in 2002, there
is no information for the three and nine months ended September 30, 2002.



                                                     Total          Total           Average
                                       Total       Lots/Units     Lots/Units        Closed
                                       Lots/        Developed       Closed        Sale Price
                                       Units         Since          Since          Per Lot/         Range of Proposed
  Land Development                    Planned      Inception      Inception         Unit(1)       Sale Prices Per Lot(2)
  ----------------                    -------      ---------      ---------         -------       ----------------------
                                                                                   
  Desert Mountain............          2,665          2,338          2,195        $ 515,000        $400,000-$3,050,000(3)
  The Woodlands..............         37,554         26,027         24,472        $  57,000         $16,000-$1,035,000
  CRDI.......................          2,679          1,274            869             N/A          $25,000-$4,600,000
                                      ------         ------         ------
  Total Land Development.....         42,898         29,639         27,536
                                      ======         ======         ======


______________________

(1)   Based on lots/units closed during Crescent Operating's ownership period.

(2)   Based on existing inventory of developed lots and lots to be developed.

(3)   Includes golf membership, which as of December 31, 2001, was $225,000.

Other Investments

      Charter Behavioral Health Systems, LLC.

      CBHS was the largest provider of behavioral health care treatment in the
United States. From September 9, 1999 to December 29, 2000, Crescent Operating
(which prior thereto had owned 50% of CBHS) owned a 25% common membership
interest and 100% of the preferred membership interests in CBHS, and a limited
partnership interest in COPI CBHS Holdings (controlled by individual officers of
Crescent Operating), in which Crescent Operating owned 100% of the economic
interests, and which owned 65% of the common interests of CBHS. In the fourth
quarter of 1999, CBHS began significant downsizing, including the closing of 18
facilities in December 1999 and 33 facilities in January 2000. Closure of those
facilities resulted in the filing by terminated employees of several lawsuits
against CBHS and others, including Crescent Operating, for alleged violation of
the WARN Act (see "- Legal Proceedings"). On February 16, 2000, CBHS petitioned
for relief under Chapter 11 of the United States Bankruptcy Code. Under the
protection of the bankruptcy court, CBHS has engaged in efforts to sell and
liquidate, in a controlled fashion, all of its ongoing business. On April 16,
2000, the asset purchase agreement to which a newly formed, wholly

                                      143

owned subsidiary of Crescent Operating had agreed to acquire, for $24.5 million,
CBHS's core business assets used in the operation of 37 behavioral healthcare
facilities, subject to certain conditions, terminated by its own terms because
not all of the conditions precedent to closing had been met by that date.
Subsequent to the termination of the asset purchase agreement, CBHS sold or
closed all of its remaining facilities and is in the process of final
liquidation of any remaining assets.

      As a result of the liquidation of CBHS through bankruptcy, the equity
investment in CBHS became worthless. On December 29, 2000 Crescent Operating
sold its 25% common interest and its 100% preferred membership interest in CBHS,
and COPI CBHS Holdings sold its 65% common interest in CBHS, to The Rockwood
Financial Group, Inc. for a nominal sum. The Rockwood Financial Group, Inc. is
wholly owned by Jeffrey L. Stevens, Crescent Operating's Chief Executive Officer
and sole director. The sale of CBHS to the Rockwood Financial Group, Inc. was
effected as part of Crescent Operating's tax planning strategy. For the year
2000, Crescent Operating was faced with a potentially large minimum tax
liability. Crescent Operating sold its interest in CBHS in order to trigger a
loss that would significantly reduce, if not eliminate this alternative minimum
tax liability.

      Magellan Warrants.

      In connection with the transaction in which Crescent Operating acquired
its interest in CBHS in 1997, Crescent Operating purchased, for $12.5 million,
warrants to acquire 1,283,311 shares of common stock of Magellan Health
Services, Inc. for an exercise price of $30.00 per share. The Magellan warrants
are exercisable in varying increments beginning on May 31, 1998 and ending on
May 31, 2009. As of December 31, 2001, the aggregate value of the Magellan
warrants was $4.1 million, calculated using the Black-Scholes method. As of
January 1, 2001, Crescent Operating was required to adopt SFAS No. 133, as
amended by SFAS No. 138. SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, provides that all derivative instruments be recognized as
either assets or liabilities depending on the rights or obligations under the
contract and that all derivative instruments be measured at fair value. Upon
adoption, Crescent Operating was required to record the net comprehensive loss
related to its investment in Magellan warrants as a charge in the statement of
operations. Based on the value of the warrants on December 31, 2000, Crescent
Operating expensed $9.5 million on January 1, 2001 as a cumulative effect of
change in accounting principle. From January 1, 2001 forward, Crescent Operating
records changes in the fair value of these warrants in the statement of
operations as investment income (loss).

      Crescent Operating transferred the Magellan warrants to Crescent Machinery
in 1999 as a contribution to capital. On February 6, 2002, Crescent Machinery
filed for protection under the federal bankruptcy laws. With the commencement of
Crescent Machinery's bankruptcy proceedings, the Magellan warrants became part
of Crescent Machinery's estate, subject to the claims of creditors. The Magellan
warrants are not proposed to be treated in any manner in connection with the
Crescent Operating bankruptcy plan, and, instead, will be part of the resolution
of the Crescent Machinery bankruptcy.

      Crescent Operating had previously written down its investment in the
warrants based on the estimated fair value of the warrants to $3.0 million at
December 31, 2000, using the Black-Scholes pricing model. For the year ended
December 31, 2001, Crescent Operating recorded changes in the fair value of
these warrants as investment income of $1.1 million in Crescent Operating's
statement of operations. For the six months ended June 30, 2002, Crescent
Operating recorded changes in the fair market value of the warrants as an
investment loss of $4.1 million in Crescent Operating's statement of
operations. As of June 30, 2002, the value of the warrants was zero. Crescent
Operating does not anticipate any future recognition of value relating to the
warrants.

      For additional financial information related to Crescent Operating's
business segments, see Crescent Operating's notes to the consolidated financial
statements.


                                      144

EMPLOYEES

      As of December 31, 2001, Crescent Operating and its consolidated
subsidiaries had the number of employees indicated below:


                                                     
Crescent Operating-corporate.................               5
Equipment sales and leasing segment..........             337
Hospitality segment..........................             635
Land development segment.....................             691
                                                        -----
                                                        1,668
                                                        =====


      On May 1, 2001, Richard P. Knight resigned his position as Vice President
and Chief Financial Officer to pursue other interests.

      Crescent Operating has excluded employees of The Woodlands Operating
Company, The Woodlands Land Development Company and AmeriCold Logistics, as
these subsidiaries represent equity investments for financial reporting
purposes.

PROPERTIES

      Immediately prior to Crescent Operating's transfer to Crescent Partnership
on February 14, 2002, Crescent Operating, through its subsidiary, Crescent
Machinery, owned fee simple interests in four properties located in Dallas and
Austin, Texas, Tulsa, Oklahoma and Van Wert, Ohio. Crescent Operating, directly
or indirectly, also held leasehold interests in certain facilities, including
the hotel operations and other leased Crescent Machinery locations,
collectively, the leased properties. Crescent Operating transferred all of the
leasehold interests in the hotel operations to Crescent Partnership in February
2002. Crescent Machinery filed a voluntary petition in bankruptcy on February 6,
2002, and its properties and assets, including but not limited to these fee
simple interests and leaseholds, are subject to the claims of creditors.
Crescent Operating believes it will not likely receive any distribution in
respect of the bankruptcy proceeding. Management believes that, for so long as
it directly or indirectly owned or controlled fee simple interests and
leaseholds, each of such owned and leased properties was adequately maintained
and suitable for use in its respective capacity. Crescent Operating or certain
of its subsidiaries entered into lease agreements in respect of the leased
properties, pursuant to which each respective lessee was responsible for routine
maintenance of the subject property.

      For further description as to the general character of Crescent
Operating's properties by segment, see "Description of Crescent Operating's
Business - Business Segments" above.

LEGAL PROCEEDINGS

      CBHS became the subject of Chapter 11 bankruptcy proceedings by filing a
voluntary petition on February 16, 2000, in United States Bankruptcy Court for
the District of Delaware. Although CBHS is not a subsidiary of Crescent
Operating, Crescent Operating did own a majority (90%) economic interest in CBHS
until December 29, 2000.

      As stated above under "Description of Crescent Operating Business -
Business Segments - Other Investments - Charter Behavioral Health Systems, LLC,"
as a result of the liquidation of CBHS through bankruptcy, the equity investment
in CBHS became worthless. On December 29, 2000, as part of Crescent Operating's
tax planning, Crescent Operating sold its 25% common interest and its 100%
preferred membership interest in CBHS, and COPI CBHS Holdings sold its 65%
common interest in CBHS to The Rockwood Financial Group, Inc. for a nominal sum.


                                      145

      Crescent Operating held no funded or liquidated claims against the estate
of CBHS. Crescent Operating filed proofs of claim against CBHS as a protective
matter for potential indemnification or contribution for third party lawsuits
and claims where Crescent Operating is a named defendant with CBHS, such as
lawsuits based upon alleged WARN Act violations purported to have been committed
by CBHS and/or its subsidiaries in closing behavioral health care facilities in
1999 and 2000. The only such lawsuits that have been brought against Crescent
Operating arise from WARN Act claims. In connection with a settlement entered
into among Crescent Operating, CBHS, the WARN Act plaintiffs, and others,
Crescent Operating's indemnification and contribution claims against CBHS based
on such lawsuits have been resolved. No other claims or lawsuits have been
asserted against Crescent Operating that would give rise to indemnification or
contribution claims by Crescent Operating against CBHS. In the event that, prior
to the bar date for asserting claims against Crescent Operating in its
bankruptcy case, no other claims or lawsuits are asserted against Crescent
Operating that would give rise to indemnification or contribution claims by
Crescent Operating against CBHS, Crescent Operating's claims for indemnification
or contribution in the CBHS case will be disallowed. If any such lawsuits or
claims are brought, Crescent Operating will pursue its indemnification and
contribution claims in the CBHS case as appropriate.

      To date, several lawsuits, all of which seek class action certification,
have been filed against CBHS alleging violations of the WARN Act in the closing
of certain healthcare facilities in 1999 and 2000. Of those lawsuits, three also
named Crescent Operating as a defendant, but all three of those suits have since
been dismissed. An additional suit seeking similar relief was also filed against
Crescent Operating and Crescent Partnership, as well as CBHS.

      A global Stipulation of Settlement of all WARN matters was reached and
filed with the United States District Court and Bankruptcy Court for the
District of Delaware by the WARN Act claimants, CBHS, Crescent Operating,
Crescent Partnership and the Creditors Committee in the CBHS case. The
settlement was approved by the District Court by order dated March 18, 2002. As
it applies to Crescent Operating, the settlement provides that either Crescent
Operating or Crescent Partnership was required to deposit into escrow $500,000
for the benefit of the WARN Act claimants and, upon the settlement becoming
final, Crescent Operating received a complete release for all WARN Act claims
and any other claims in the CBHS case other than potential claims from those
CBHS employees who have opted out of the settlement. It appears that a maximum
of three such employees have opted out and none have made claims against
Crescent Operating to date. Crescent Partnership has paid the $500,000 into
escrow. This payment will not be included as an expense for the purposes of
calculating the aggregate value of the Crescent Real Estate shares to be
distributed to the Crescent Operating stockholders.

      In accordance with an agreement between Gerald Haddock and Crescent
Operating, COPI Colorado redeemed the limited partnership interest of Mr.
Haddock, Crescent Operating's former Chief Executive Officer and President, in
January 2000. COPI Colorado paid Mr. Haddock approximately $2.6 million for his
approximate 16.67% limited partner interest (determined from an independent
appraisal of the value of COPI Colorado). Mr. Haddock challenged the valuation
performed by the independent appraiser and the procedures followed by Crescent
Operating with respect to the redemption and valuation process. On February 7,
2001, Crescent Operating filed a lawsuit in the 141st Judicial Court of Tarrant
County, Texas seeking a declaratory judgment to assist in resolution of Crescent
Operating's dispute with Mr. Haddock. The parties settled their dispute, and the
lawsuit was dismissed effective as of January 2, 2002.


      Crescent Machinery Company is a wholly owned subsidiary of Crescent
Operating. Crescent Machinery is a debtor in possession in a Chapter 11
reorganization case pending in the United States Bankruptcy Court for the
Northern District of Texas. On December 19, 2002, the Crescent Machinery
Committee commenced a lawsuit in the District Court of Tarrant County, Texas,
styled "The Estates of Crescent Machinery and E.L. Lester, Inc. v. Mark
Roberson, Jeffrey Stevens, Gerald Haddock, Rick Knight and Crescent Operating,
Inc." The lawsuit seeks an unspecified amount of direct, consequential and
punitive damages, as well as related attorneys fees, for alleged breaches of
fiduciary duty, aiding and abetting breaches of fiduciary duty, negligent
misrepresentation, and gross negligence. The creditors committee has alleged
that the creditors of Crescent Machinery have been damaged as a result of the
following:

      -   lack of experienced management;

      -   failure to have a written acquisition plan;

      -   withdrawal of acquisition funding by Crescent Operating;

      -   accounting misstatements; and

      -   failure to restructure Crescent Machinery.

      Each of the named individual defendants was either an officer or director,
or both, of Crescent Machinery at the time the alleged breaches occurred.
Pursuant to the certificate of incorporation and bylaws of Crescent Operating,
each of the individual defendants may be entitled to indemnification by Crescent
Operating against some or all of the claims alleged in the lawsuit, including
reimbursement of reasonable attorney's fees incurred in defending the lawsuit.
Even if Crescent Operating were successful in defending against the claims in
the lawsuit, there is the possibility that the plaintiffs may be successful
against one or more of the individual defendants and that such defendant may
have a claim for indemnity against Crescent Operating. Crescent Operating has
director's and officer's liability insurance in the face amount of $3.0 million
that may afford coverage for these indemnity claims. Nonetheless, if any of the
Crescent Machinery Committee's claims against these officers and directors are
allowed in an amount in excess of any available insurance, then that claim will
have to be satisfied before any distribution could be made to Crescent
Operating's stockholders.


      Crescent Operating intends to vigorously defend against the allegations
and claims in the lawsuit.


                                      146


Crescent Operating will ask the Bankruptcy Court to estimate any claims by the
Crescent Machinery Committee at zero for purposes of distribution under Crescent
Operating's plan of reorganization. Crescent Operating believes that there is a
strong likelihood that the bankruptcy court having jurisdiction over its Chapter
11 case will estimate the claim at zero, and, therefore, the distributions that
would otherwise be made to Crescent Operating stockholders will not be
diminished by the assertion of such claim. There can be no assurance, however,
that the Crescent Machinery Committee's claim will be estimated at zero, or even
that the bankruptcy court would conduct an estimation hearing in lieu of the
normal trial procedures in bankruptcy court. Therefore, there is a risk that
substantial delays could result from the process in which the Crescent Machinery
Committee's claim is adjudicated. In addition, there is a risk that if the
Crescent Machinery Committee were ultimately successful in the prosecution of
its claim, or if Crescent Real Estate, pursuant to the Settlement Agreement,
offers to assume or settle any obligations under the Crescent Machinery
Committee's claim and Crescent Operating accepts the offer, the total value of
the Crescent Real Estate common shares that the Crescent Operating stockholders
will receive will be reduced and the Crescent Operating stockholders will
receive fewer Crescent Real Estate common shares. However, even if Crescent Real
Estate does offer to assume or settle obligations under the Crescent Machinery
Committee's claim and Crescent Operating accepts the offer, the total value of
the minimum number of Crescent Real Estate common shares that the Crescent
Operating stockholders will be entitled to receive if the bankruptcy plan is
accepted by the Crescent Operating stockholders and confirmed by the bankruptcy
court will be at least $2.16 million, or $0.20 per share of Crescent Operating
common stock.


                 DESCRIPTION OF CRESCENT REAL ESTATE'S BUSINESS

OVERVIEW OF CRESCENT REAL ESTATE

      Crescent Real Estate operates as a REIT for federal income tax purposes,
and, together with its subsidiaries, provides management, leasing and
development services for some of its properties.

      The direct and indirect subsidiaries of Crescent Real Estate at September
30, 2002 included:


      -     Crescent Real Estate Equities Limited Partnership, or Crescent
            Partnership;

      -     Crescent Real Estate Equities Ltd., or the General Partner of
            Crescent Partnership; and

      -     Subsidiaries of Crescent Partnership and the General Partner of
            Crescent Partnership.


      Crescent Real Estate conducts all of its business through Crescent
Partnership and its other subsidiaries. Crescent Real Estate is structured to
facilitate and maintain the qualification of Crescent Real Estate as a REIT.

INDUSTRY SEGMENTS

      As of September 30, 2002, Crescent Real Estate's assets and operations
were composed of four investment segments:

      -     office segment;

      -     resort/hotel segment;

      -     residential development segment; and


                                      147

      -     temperature-controlled logistics segment.

      Within these segments, Crescent Real Estate owned or had an interest in
the following real estate assets as of September 30, 2002:

      -     Office segment consisted of 73 office properties located in 25
            metropolitan submarkets in six states, with an aggregate of
            approximately 28.5 million net rentable square feet (64 of the
            office properties, including three retail properties, are wholly
            owned and 10 are owned through joint ventures, seven of which are
            consolidated and three of which are unconsolidated);

      -     Resort/hotel segment consisted of five luxury and destination
            fitness resorts and spas with a total of 1,036 rooms/guest nights
            and four upscale business-class hotel properties with a total of
            1,771 rooms;

      -     Residential development segment consisted of Crescent Real Estate's
            ownership of real estate mortgages and voting and non-voting common
            stock representing interests ranging from 94% to 100% in five
            residential development corporations, which in turn, through joint
            venture or partnership arrangements, owned 21 upscale residential
            development properties; and

      -     Temperature-controlled logistics segment consisted of the Crescent
            Real Estate's 40% interest in a general partnership, which owns all
            of the common stock, representing substantially all of the economic
            interest, of AmeriCold Corporation, a REIT, which, as of September
            30, 2002, directly or indirectly owned 88 temperature-controlled
            logistics properties with an aggregate of approximately 441.5
            million cubic feet (17.5 million square feet) of warehouse space.

      See "Note 1. Organization and Basis of Presentation" included in Financial
Statements of Crescent Real Estate for the six months ended September 30, 2002
(unaudited) for a table that lists the principal subsidiaries of Crescent Real
Estate and the properties owned by such subsidiaries.

      See "Note 7. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" included in Financial Statements of Crescent Real
Estate for the nine months ended September 30, 2002 (unaudited) for a table that
lists Crescent Real Estate's ownership in significant unconsolidated companies
and equity investments as of September 30, 2002, including the three office
properties in which Crescent Real Estate owned an interest through
unconsolidated companies and equity investments and Crescent Real Estate's
ownership interests in the residential development segment and the
temperature-controlled logistics segment.

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate Crescent Operating's lessee interests in
the eight Crescent Real Estate hotel properties leased to subsidiaries of
Crescent Operating in lieu of foreclosure and the voting common stock in three
of Crescent Real Estate's residential development corporations pursuant to a
strict foreclosure. Crescent Real Estate fully consolidated the operations of
the eight Crescent Real Estate hotel properties and the three residential
development corporations, beginning on the dates of the transfers of these
assets. See "Note 22. Subsequent Events" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) and "Note
16. COPI" included in the Financial Statement of Crescent Real Estate for the
nine months ended September 30, 2002, (unaudited) for additional information
regarding Crescent Real Estate's agreement with Crescent Operating.

      See "Note 3. Segment Reporting" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) and "Note 6.
Segment Reporting" included in the Financial Statements of Crescent Real Estate
for the nine months ended September 30, 2002 (unaudited) for a table showing
total revenues, funds from operations, and equity in net income of
unconsolidated companies for each of these investment segments for the years
ended December 31, 2001, 2000 and 1999 and the three and nine months ended
September 30, 2002 and 2001 and identifiable assets for each of these investment
segments at December 31, 2001 and 2000 and at September 30, 2002.


                                      148

Office Segment

      Ownership Structure.

      As of September 30, 2002, Crescent Real Estate owned or had an interest in
73 office properties located in 25 metropolitan submarkets in six states, with
an aggregate of approximately 28.5 million net rentable square feet. Sixty-four
of the office properties, including three retail properties, are wholly owned
and 10 are owned through joint ventures, seven of which are consolidated and
three of which are unconsolidated. Crescent Real Estate, as lessor, has retained
substantially all of the risks and benefits of ownership of the office
properties and accounts for its leases as operating leases. Additionally,
Crescent Real Estate provides management and leasing services for some of its
office properties.

      See "Properties" below for more information about Crescent Real Estate's
office properties. In addition, see "Note 1. Organization and Basis of
Presentation" included in Financial Statements of Crescent Real Estate for the
nine months ended September 30, 2002 (unaudited) for a table that lists the
principal subsidiaries of Crescent Real Estate and the properties owned by such
subsidiaries and "Note 7. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" included in Financial Statements of Crescent Real
Estate for the nine months ended September 30, 2002 (unaudited) for a table that
lists Crescent Real Estate's ownership in significant unconsolidated companies
or equity investments and the three office properties in which Crescent Real
Estate owned an interest through these unconsolidated companies or equity
investments.

      Joint Venture Arrangements.

      5 Houston Center

      On June 4, 2001, Crescent Real Estate entered into a joint venture
arrangement with a pension fund advised by JP Morgan Investment Management,
Inc., or JPM, to construct the 5 Houston Center office property within Crescent
Real Estate's Houston Center mixed-use office property complex in Houston,
Texas. The Class A office property will consist of 577,000 net rentable square
feet. The joint venture is structured such that the fund holds a 75% equity
interest, and Crescent Real Estate holds a 25% equity interest in the property.
In addition, Crescent Real Estate is developing, and will manage and lease, the
property on a fee basis.

      Four Westlake Park and Bank One Tower

      On July 30, 2001, Crescent Real Estate entered into joint venture
arrangements with an affiliate of General Electric Pension Fund, or GE, for two
office properties, Four Westlake Park in Houston, Texas, and Bank One Tower in
Austin, Texas. The joint ventures are structured such that GE holds an 80%
equity interest in each of the office properties, Four Westlake Park, a 560,000
square foot Class A office property located in the Katy Freeway submarket of
Houston, and Bank One Tower, a 390,000 square foot Class A office property
located in downtown Austin. Crescent Real Estate continues to hold the remaining
20% equity interests in each office property. In addition, Crescent Real Estate
manages and leases the office properties on a fee basis.

      Three Westlake Park

      On August 21, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of GE. In connection with the formation of the
venture, Crescent Real Estate contributed an office property, Three Westlake
Park in Houston, Texas, and GE made a cash contribution. GE holds an 80% equity
interest in Three Westlake Park, a 415,000 square foot Class A office property
located in the Katy Freeway submarket of Houston, and Crescent Real Estate
continues to hold the remaining 20% equity interest in the office property, with
Crescent Real Estate's interest accounted for under the equity method. Crescent
Real Estate will continue to manage and lease Three Westlake Park on a fee
basis.


                                      149

      Market Information.

      The office properties reflect Crescent Real Estate's strategy of investing
in premier assets within markets that have significant potential for rental
growth. Within its selected submarkets, Crescent Real Estate has focused on
premier locations that management believes are able to attract and retain the
highest quality tenants and command premium rents. Consistent with its long-term
investment strategies, Crescent Real Estate has sought transactions where it was
able to acquire properties that have strong economic returns based on in-place
tenancy and also have a dominant position within the submarket due to quality
and/or location. Accordingly, management's long-term investment strategy not
only demands acceptable current cash flow return on invested capital, but also
considers long-term cash flow growth prospects. In selecting the office
properties, Crescent Real Estate analyzed demographic and economic data to focus
on markets expected to benefit from significant long-term employment growth as
well as corporate relocations.

      Crescent Real Estate's office properties are located primarily in the
Dallas/Fort Worth and Houston, Texas, metropolitan areas, both of which are
projected to benefit from strong population and employment growth over the next
10 years. As indicated in the table below entitled "Projected Population Growth
and Employment Growth for all Company Markets," these core markets are projected
to outperform the 10-year averages for the United States. In addition, Crescent
Real Estate considers these markets "demand-driven" markets due to high levels
of in-migration by corporations, affordable housing costs, moderate cost of
living, and the presence of centrally located travel hubs, making all areas of
the country easily accessible.

      Texas

      As of December 2001, the Texas unemployment rate was 5.7%, slightly better
than the national unemployment rate of 5.8%. According to the Texas Economic
Update, Texas weathered the 2001 economic slowdown better than the nation as a
whole.

      Dallas/Fort Worth

      According to the Bureau of Labor Statistics, 2001 job growth slowed
considerably in the Dallas/Fort Worth area. As of December 2001, the Dallas/Fort
Worth unemployment rate was 5.6%, compared with the Texas unemployment rate of
5.7% and the national unemployment rate of 5.8%. As for Dallas/Fort Worth's 2001
commercial office market, according to CoStar data, citywide net economic
absorption, excluding space available for sublease, was approximately 1.0
million square feet, primarily represented by a positive 1.0 million square feet
of absorption in Class A space. The city's total net absorption, including space
available for sublease, was approximately negative 3.0 million square feet for
2001; however, Class A space represented only approximately negative 700,000
square feet of the negative 3.0 million total square feet.

      Houston

      Houston's employment data held steady through much of 2001, despite the
slowdown in the economy. Approximately 23,000 jobs were created in 2001, an
increase of approximately 1.1% over 2000. As of December 2001, the Houston
unemployment rate was 4.4%, compared with the Texas unemployment rate of 5.7%
and the national unemployment rate of 5.8%. As for Houston's 2001 commercial
office market, according to CoStar data, citywide net economic absorption,
excluding space available for sublease, was 2.0 million square feet, with 2.75
million square feet in Class A space. The city's total net absorption, including
space available for sublease, was negative 200,000 square feet for 2001;
however, Class A space had a positive total net absorption of 1.4 million square
feet.


                                      150

      The demographic conditions, economic conditions and trends, population
growth and employment growth, favoring the markets in which Crescent Real Estate
has invested are projected to continue to exceed the national averages, as
illustrated in the following table.

      Projected Population Growth and Employment Growth for all Crescent Real
Estate Markets.




                                                Population           Employment
                                                  Growth               Growth
    Metropolitan Statistical Area                2002-2011            2002-2011
    -----------------------------                ---------            ---------
                                                               
    Albuquerque, NM                                22.05%               14.15%
    Austin, TX                                     26.02                36.61
    Colorado Springs, CO                           27.48                15.83
    Dallas, TX                                     15.89                20.92
    Denver, CO                                     11.34                19.76
    Fort Worth, TX                                 19.03                22.31
    Houston, TX                                    15.61                22.43
    Miami, FL                                       9.03                15.90
    Phoenix, AZ                                    27.24                33.41
    San Diego, CA                                  17.35                17.29
    UNITED STATES                                   8.49                12.01


----------

SOURCE: COMPILED FROM INFORMATION PUBLISHED BY ECONOMY.COM, INC.

      Crescent Real Estate does not depend on a single customer or a few major
customers within the office segment, the loss of which would have a material
adverse effect on Crescent Real Estate's financial condition or results of
operations. Based on rental revenues from office leases in effect as of December
31, 2001 and September 30, 2002, no single tenant accounted for more than 5% of
Crescent Real Estate's total office segment rental revenues for 2001 or the nine
months ended September 30, 2002.

      Crescent Real Estate applies a well-defined leasing strategy in order to
capture the potential rental growth in Crescent Real Estate's portfolio of
office properties as occupancy and rental rates increase within the markets and
the submarkets in which Crescent Real Estate has invested. Crescent Real
Estate's strategy is based, in part, on identifying and focusing on investments
in submarkets in which weighted average full-service rental rates (representing
base rent after giving effect to free rent and scheduled rent increases that
would be taken into account under generally accepted accounting principles, or
GAAP, and including adjustments for expenses payable by or reimbursed from
tenants) are significantly less than weighted average full-service replacement
cost rental rates (the rate management estimates to be necessary to provide a
return to a developer of a comparable, multi-tenant building sufficient to
justify construction of new buildings) in that submarket. In calculating
replacement cost rental rates, management relies on available third-party data
and its own estimates of construction costs (including materials and labor in a
particular market) and assumes replacement cost rental rates are achieved at a
95% occupancy level. Crescent Real Estate believes that the difference between
the two rates is a useful measure of the additional revenue that Crescent Real
Estate may be able to obtain from a property, because the difference should
represent the amount by which rental rates would be required to increase in
order to justify construction of new properties. For Crescent Real Estate's
office properties, the weighted average full-service rental rate as of December
31, 2001 was $22.42 per square foot, compared to an estimated weighted average
full-service replacement cost rental rate of $30.23 per square foot.

      Competition.

      Crescent Real Estate's office properties, primarily Class A properties
located within the southwest, individually compete against a wide range of
property owners and developers, including property management companies and
other REITs, that offer space in similar classes of office properties - for
example, Class A and Class B

                                      151

properties. A number of these owners and developers may own more than one
property. The number and type of competing properties in a particular market or
submarket could have a material effect on Crescent Real Estate's ability to
lease space and maintain or increase occupancy or rents in its existing office
properties. Crescent Real Estate's management believes, however, that the
quality services and individualized attention that Crescent Real Estate offers
its customers, together with its active preventive maintenance program and
superior building locations within markets, enhance Crescent Real Estate's
ability to attract and retain customers for its office properties. In addition,
as of December 31, 2001, on a weighted average basis, Crescent Real Estate owned
16% of the Class A office space in the 26 submarkets in which Crescent Real
Estate owned Class A office properties, and 24% of the Class B office space in
the two submarkets in which Crescent Real Estate owned Class B office
properties. Crescent Real Estate's management believes that ownership of a
significant percentage of office space in a particular market reduces property
operating expenses, enhances Crescent Real Estate's ability to attract and
retain customers and potentially results in increases in Crescent Real Estate's
net operating income.

      Dispositions.

      During the nine months ended September 30, 2002, Crescent Real Estate
disposed of five fully consolidated office properties. On January 18, 2002,
Crescent Real Estate completed the sale of Cedar Springs Plaza, a wholly owned
office property in Dallas, Texas. On May 29, 2002, Woodlands office Equities -
'95 Limited, or Woodlands Office Equities, owned by Crescent Real Estate and the
Woodlands Commercial Properties Company, L.P., sold two consolidated office
properties located within the Woodlands, Texas. On August 1, 2002, Crescent Real
Estate completed the sale of the 6225 North 24th Street office property in
Phoenix, Arizona. On September 20, 2002, Crescent Real Estate completed the sale
of the Reverchon Plaza office property in Dallas, Texas.

      During the year ended December 31, 2001, five of Crescent Real Estate's
fully consolidated office properties were disposed of. On September 18, 2001,
Crescent Real Estate completed the sale of the two Washington Harbour office
properties. The Washington Harbour office properties were Crescent Real Estate's
only office properties in Washington, D.C. On September 28, 2001, the Woodlands
Office Equities sold two office properties located within The Woodlands, Texas.
On December 20, 2001, Woodlands Office Equities sold another office property
located within The Woodlands, Texas.

      During the nine months ended September 30, 2002, The Woodlands Commercial
Properties Company, L.P., sold two unconsolidated office properties located
within The Woodlands, Texas.

      During the year ended December 31, 2001, two of the unconsolidated
companies in which Crescent Real Estate has an equity interest, sold three
office properties and one retail property. On September 27, 2001, the Woodlands
Commercial Properties Company, owned by The Woodlands Lands Company, Inc. and an
affiliate of Morgan Stanley, sold one office/venture tech property and located
within The Woodlands, Texas. On November 9, 2001, The Woodlands Land Development
Company, L.P., owned by Crescent Real Estate and an affiliate of Morgan Stanley,
sold two office properties and one retail property located within The Woodlands,
Texas.

      Acquisition.
      ------------

      On August 29, 2002, Crescent Real Estate acquired John Manville Plaza, a
29-story, 675,000 square foot Class A office building located in Denver,
Colorado. Crescent Real Estate acquired the property for approximately $91,200.
The property is wholly owned by Crescent Real Estate and included in the office
segment.


                                      152

      Development.

      Avallon IV Office Property

      In May 2001, Crescent Real Estate completed the construction of the
Avallon IV office property in Austin, Texas. The property is a Class A office
property with 86,315 net rentable square feet. Construction of this property
commenced in September 2000.

      5 Houston Center Office Property

      Crescent Real Estate is currently developing the 5 Houston Center office
property in Houston, Texas. Construction of the planned 27-story, Class A office
property consisting of 577,000 net rentable square feet commenced in November
2000, and is expected to be completed in the fourth quarter of 2002. In June
2001, Crescent Real Estate entered into a joint venture arrangement with a
pension fund advised by JPM to construct this office property. The joint venture
is structured such that the fund holds a 75% equity interest, and Crescent Real
Estate holds a 25% equity interest in the property.

      Joint Venture Arrangements.

      Four Westlake Park and Bank One Tower

      One July 30, 2001, Crescent Real Estate entered into joint venture
arrangements with an affiliate GE, in which Crescent Real Estate contributed
two office properties, Four Westlake Park in Houston, Texas, and Bank One Tower
in Austin, Texas into the joint ventures and GE made a cash contribution. The
joint ventures are structured such that GE holds an 80% equity interest in each
of Four Westlake Park. Crescent Real Estate continues to hold the remaining 20%
equity interests in each property. In addition, Crescent Real Estate manages
and leases the office properties on a fee basis.

      Three Westlake Park

      On August 21, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of GE. In connection with the formation of the
venture, Crescent Real Estate contributed an office property, Three Westlake
Park in Houston, Texas, and GE made a cash contribution. GE holds an 80% equity
interest in the Three Westlake Park and Crescent Real Estate continues to hold
the remaining 20% equity interest in the office property. Crescent Real Estate
will continue to manage and lease Three Westlake Park on a fee basis.

      Miami Center

      On September 25, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of a fund managed by JP Morgan Investment
Management, Inc., or JPM, in connection with which JPM purchased a 60% interest
in Crescent Miami Center, L.L.C. with a cash contribution. Crescent Miami
Center, L.L.C. owns an Office Property, Miami Center in Miami, Florida. The
joint venture is structured such that JPM holds a 60% equity interest in Miami
Center, and Crescent Real Estate holds the remaining 40% equity interest in the
office property.

Resort/Hotel Segment

      Ownership Structure.

      Prior to enactment of the REIT Modernization Act, Crescent Real Estate's
status as a REIT for federal income tax purposes prohibited it from operating
the Crescent Real Estate hotel properties. As of December 31, 2001, Crescent
Real Estate owned nine hotel properties, all of which, other than the Omni
Austin Hotel, were leased to subsidiaries of Crescent Operating pursuant to
eight separate leases. The Omni Austin Hotel was leased, under a separate lease,
to HCD Austin Corporation, an unrelated third party.

      Under the leases, each having a term of 10 years, Crescent Real Estate
hotel property lessees assumed the rights and obligations of the property owner
under the respective management agreements with the hotel operators, as well as
the obligation to pay all property taxes and other costs related to the
properties.

      The leases provided for the payment by Crescent Real Estate hotel property
lessees of all or a combination of the following:

      -     base rent, with periodic rent increases if applicable;

      -     percentage rent based on a percentage of gross hotel receipts or
            gross room revenues, as applicable, above a specified amount; and

      -     a percentage of gross food and beverage revenues above a specified
            amount.

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's lessee interests in the eight Crescent Real Estate hotel properties
leased to subsidiaries of Crescent Operating. As a result, these subsidiaries of
Crescent Real Estate became the lessees of the eight Crescent Real Estate hotel
properties.

      See "Note 22. Subsequent Events" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) for
additional information regarding Crescent Real Estate's agreement with Crescent
Operating.

      Joint Venture Arrangement

      Sonoma Mission Inn & Spa


                                      153

      On September 1, 2002, Crescent Real Estate entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts Inc., or FHR,
pursuant to which Crescent Real Estate contributed a resort/hotel property and
FHR purchased a 19.9% equity interest in the limited liability company that owns
Crescent Real Estate's Sonoma Mission Inn & Spa Resort/Hotel Property in Sonoma
County, California. Crescent Real Estate continues to own the remaining 80.1%
interest. Under Crescent Real Estate's agreement with FHR, Crescent Real Estate
will manage the limited liability company that owns the Sonoma Mission Inn &
Spa, and FHR will operate and manage the property under the Fairmont brand.

      CR License, LLC and CRL Investments, Inc.

      As of December 31, 2001, Crescent Real Estate had a 28.5% interest in CR
License, LLC, the entity which owns the right to the future use of the "Canyon
Ranch" name. Crescent Real Estate also had a 95% economic interest, representing
all of the non-voting common stock, in CRL Investments, Inc., which has an
approximately 65% economic interest in the Canyon Ranch Spa Club in the Venetian
Hotel in Las Vegas, Nevada.

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Real Estate acquired, pursuant to
a strict foreclosure, Crescent Operating's 1.5% interest in CR License and 5.0%
interest, representing all of the voting stock, in CRL Investments.

      Market Information.

      Lodging demand is highly dependent upon the global economy and volume of
business travel. Prior to 2001, the hospitality industry enjoyed record profits.
However, the uncertainty surrounding the weak global economy and the costs and
fear resulting from the events of September 11, 2001 are expected to result in
weak performance for much of 2002. This is evidenced by declines in both
business and leisure travel in the United States.

      Competition.

      Most of Crescent Real Estate's upscale business class hotel properties in
Denver, Albuquerque, Austin and Houston are business and convention center
hotels that compete against other business and convention center hotels.
Crescent Real Estate believes, however, that its luxury and destination fitness
resorts and spas are unique properties that have no significant direct
competitors due either to their high replacement cost or unique concept and
location. However, the luxury and destination fitness resorts and spas do
compete against business-class hotels or middle-market resorts in their
geographic areas, as well as against luxury resorts nationwide and around the
world.

Residential Development Segment

      Ownership Structure.

      As of December 31, 2001, Crescent Real Estate owned economic interests in
five residential development corporations through the residential development
property mortgages and the non-voting common stock of these residential
development corporations. The residential development corporations in turn,
through joint ventures or partnership arrangements, own interests in 21
residential development properties. The residential development corporations are
responsible for the continued development and the day-to-day operations of the
Crescent Real Estate residential development properties.

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations. These three residential development corporations, Desert Mountain
Development, The Woodlands Land Company and CRDI, own interests in 16 Crescent
Real Estate residential development properties.


                                      154

      See "Note 22. Subsequent Events" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) for
additional information regarding Crescent Real Estate's agreement with Crescent
Operating.

      Market Information.

      A slowing economy, combined with the events of September 11, 2001
contributed to the reduction in lot absorption, primarily at Desert Mountain.
CRDI, formerly Crescent Development Management Corp., was not significantly
impacted because most of its products were pre-sold. However, CRDI did change
its strategy by delaying the commencement of certain projects, which will impact
its performance in 2002. In addition, The Woodlands experienced a reduction in
lot absorption of its higher priced lots, including Carlton Woods, The
Woodlands' new upscale gated residential development. However, The Woodlands was
not significantly impacted due to the higher prices of the lots sold offsetting
lower lot sales.

      Competition.

      Crescent Real Estate's residential development properties compete against
a variety of other housing alternatives in each of their respective areas. These
alternatives include other planned developments, pre-existing single-family
homes, condominiums, townhouses and non-owner occupied housing, such as luxury
apartments. Crescent Real Estate's management believes that the Crescent Real
Estate properties owned by The Woodlands Land Company, CRDI and Desert Mountain,
representing Crescent Real Estate's most significant investments in residential
development properties, contain certain features that provide competitive
advantages to these developments.

      The Woodlands, which is an approximately 27,000-acre, master-planned
residential and commercial community north of Houston, Texas, is unique among
developments in the Houston area, because it functions as a self-contained
community. Amenities contained in the development, which are not contained
within most other local developments, include a shopping mall, retail centers,
office buildings, a hospital, a community college, places of worship, a
conference center, 85 parks, 117 holes of golf, including a Tournament Players
Course and signature courses by Jack Nicklaus, Arnold Palmer, and Gary Player,
two man-made lakes and a performing arts pavilion. The Woodlands competes with
other master planned communities in the surrounding Houston market.

      Desert Mountain, a luxury residential and recreational community in
Scottsdale, Arizona, which also offers five 18-hole Jack Nicklaus signature golf
courses and tennis courts, has few direct competitors due in part to the
superior environmental attributes and the types of amenities that it offers.

      CRDI invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Crescent Real Estate's management believes CRDI does not have any
direct competitors because the projects and project locations are unique and the
land is limited in most of these locations.

Temperature-Controlled Logistics Segment

      Ownership Structure.

      Effective March 12, 1999, Crescent Real Estate, Vornado Realty Trust,
Crescent Operating, the temperature-controlled logistics partnership and
AmeriCold Corporation (including all affiliated entities that owned any portion
of the business operations of the Crescent Real Estate temperature-controlled
logistics properties at that time) sold all of the non-real estate assets,
encompassing the business operations, for approximately $48.7 million to a
subsidiary of a newly formed partnership called AmeriCold Logistics, which is
owned 60% by Vornado Operating L.P. and 40% by a subsidiary of Crescent
Operating. Crescent Real Estate has no interest in AmeriCold Logistics.


                                      155

      As of September 30, 2002, Crescent Real Estate held a 40% interest in the
temperature-controlled logistics partnership, which owns the AmeriCold
Corporation, which directly or indirectly owns the 88 Crescent Real Estate
temperature-controlled logistics properties, with an aggregate of approximately
441.5 million cubic feet (17.5 million square feet) of warehouse space.

      AmeriCold Logistics, as sole lessee of the Crescent Real Estate
temperature-controlled logistics properties, leases the Crescent Real Estate
temperature-controlled logistics properties from AmeriCold Corporation under
three triple-net master leases, as amended on January 23, 2002. On February 22,
2001, AmeriCold Corporation and AmeriCold Logistics agreed to restructure
certain financial terms of the leases, including the adjustment of the rental
obligation for 2001 to $146.0 million, the adjustment of the rental obligation
for 2002 to $150.0 million (plus contingent rent in certain circumstances), the
increase of the AmeriCold Corporation's share of capital expenditures for the
maintenance of the properties from $5.0 million to $9.5 million (effective
January 1, 2000) and the extension of the date on which deferred rent was
required to be paid to December 31, 2003.

      AmeriCold Logistics deferred $20.6 million of the total $102.4 million of
rent payable for the nine months ended September 30, 2002. Crescent Real
Estate's share of the deferred rent was $8.2 million. Crescent Real Estate
recognizes rental income when earned and collected and has not recognized the
$8.2 million of deferred rent in equity in net income of the temperature
controlled logistics properties for the nine months ended September 30, 2002. In
addition, AmeriCold Logistics deferred $25.5 million of rent for the year ended
December 31, 2001, of which Crescent Real Estate's share was $10.2 million.
AmeriCold Logistics also deferred $19.0 million and $5.4 million of rent for the
years ended December 31, 2000 and 1999, respectively, of which Crescent Real
Estate's share was $7.5 million and $2.1 million, respectively. In December
2001, AmeriCold Corporation waived its rights to collect deferred rent of $39.8
million of the total $49.9 million of deferred rent, of which Crescent Real
Estate's share was $15.9 million. AmeriCold Corporation had recorded adequate
valuation allowances related to the waived deferred rental revenue during the
years ended December 31, 2000, and 2001; therefore, there was no financial
statement impact to AmeriCold Corporation or to Crescent Real Estate related to
AmeriCold Corporation's decision to waive collection of the deferred rent.

      Business and Industry Information.

      AmeriCold Logistics provides frozen food manufacturers with refrigerated
warehousing and transportation management services. The Crescent Real Estate
temperature-controlled logistics properties consist of production and
distribution facilities. Production facilities differ from distribution
facilities in that they typically serve one or a small number of customers
located nearby. These customers store large quantities of processed or partially
processed products in the facility until they are further processed or shipped
to the next stage of production or distribution. Distribution facilities
primarily serve customers who store a wide variety of finished products to
support shipment to end-users, such as food retailers and food service
companies, in a specific geographic market.

      AmeriCold Logistics' transportation management services include freight
routing, dispatching, freight rate negotiation, backhaul coordination, freight
bill auditing, network flow management, order consolidation and distribution
channel assessment. AmeriCold Logistics' temperature-controlled logistics
expertise and access to both the frozen food warehouses and distribution
channels enable the customers of AmeriCold Logistics to respond quickly and
efficiently to time-sensitive orders from distributors and retailers.


                                      156

      AmeriCold Logistics' customers consist primarily of national, regional and
local frozen food manufacturers, distributors, retailers and food service
organizations. A breakdown of AmeriCold Logistics' largest customers include:



                                                          PERCENTAGE OF
                                                           2001 REVENUE
                                                           ------------
                                                       
     H.J. Heinz & Co.........................                  16%
     Con-Agra, Inc...........................                   8
     Sara Lee Corp...........................                   5
     McCain Foods, Inc.......................                   5
     Tyson Foods, Inc........................                   4
     General Mills...........................                   4
     J.R. Simplot............................                   3
     Flowers Food, Inc.......................                   3
     Pro-Fac Cooperative, Inc................                   2
     Farmland Industries, Inc................                   2
     Other...................................                  48
                                                              ---
     TOTAL                                                    100%
                                                              ===


      Consolidation among retail and food service channels has limited the
ability of manufacturers to pass along cost increases by raising prices. Because
of this, manufacturers have been forced in the recent past to focus more
intensely on supply chain cost, such as inventory management, transportation and
distribution, reduction initiatives in an effort to improve operating
performance.

      Competition.

      AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in North America and has more than twice the cubic feet of the
second largest operator. AmeriCold Logistics operated an aggregate of
approximately 18% of total cubic feet of public refrigerated warehouse space as
of December 31, 2001. No other person or entity operated more than 8% of total
public refrigerated warehouse space as of December 31, 2001. As a result,
AmeriCold Logistics does not have any competitors of comparable size. AmeriCold
Logistics operates in an environment in which competition is national, regional
and local in nature and in which the range of service, temperature-controlled
logistics facilities, customer mix, service performance and price are the
principal competitive factors.

      Development.

      AmeriCold Corporation completed the acquisition of one facility in the
first quarter of 2001 for $10.0 million and completed the construction of one
facility in the third quarter of 2001 for $15.8 million, representing in
aggregate approximately 8.5 million cubic feet (0.2 million square feet) of
additional warehouse space.

EMPLOYEES

      As of September 30, 2002, Crescent Real Estate had 650 employees. None of
these employees are covered by collective bargaining agreements. Crescent Real
Estate considers its employee relations to be good.

PROPERTIES

      Crescent Real Estate considers all of its properties to be in good
condition, well-maintained and suitable and adequate to carry on Crescent Real
Estate's business.

Office Properties

      As of September 30, 2002, Crescent Real Estate owned or had an interest in
73 office properties located in 25 metropolitan submarkets in six states with an
aggregate of approximately 28.5 million net rentable square feet. The office
properties were, on a weighted average basis, 89% occupied at September 30,
2002, and are located approximately 43% in central business districts and
approximately 57% in urban markets. Crescent Real Estate's office properties are
located primarily in the Dallas and Houston, Texas, metropolitan areas. As of
September 30, 2002, Crescent Real

                                      157

Estate's office properties in Dallas and Houston represented an aggregate of
approximately 73% of its office portfolio based on total net rentable square
feet (36% for Dallas and 37% for Houston). In addition, Crescent Real Estate
owns a 25% interest in the 5 Houston Center office property which was completed
in September 2002.

      In pursuit of management's objective to dispose of non-strategic and
non-core assets, five of Crescent Real Estate's fully consolidated office
properties were disposed of during the nine months ended September 30, 2002.


                                      158

      Office Properties Tables.

      The following table shows, as of September 30, 2002, certain information
about Crescent Real Estate's office properties. In the table below "CBD" means
central business district.



                                                                                                                     WEIGHTED
                                                                                                                     AVERAGE
                                                                                                                   FULL-SERVICE
                                                                                      NET RENTABLE                 RENTAL RATE
                                     NO. OF                                  YEAR          AREA      PERCENT        PER LEASED
   STATE, CITY, PROPERTY           PROPERTIES           SUBMARKET         COMPLETED     (SQ. FT.)     LEASED        SQ. FT.(1)
   ---------------------           ----------           ---------         ---------     ---------     ------        ----------
                                                                                                 
TEXAS
DALLAS
Bank One Center(2)                      1        CBD                        1987        1,530,957       82%           $23.03
Fountain Place                          1        CBD                        1986        1,200,266       99             20.90
The Crescent Office Towers              1        Uptown/Turtle Creek        1985        1,134,826       98             33.23
Trammell Crow Center(3)                 1        CBD                        1984        1,128,331       87             24.95
Stemmons Place                          1        Stemmons Freeway           1983          634,381       85             17.71
Spectrum Center(4)                      1        Far North Dallas           1983          598,250       82             23.72
Waterside Commons                       1        Las Colinas                1986          458,906       85             18.43
125 E. John Carpenter Freeway           1        Las Colinas                1982          446,031       88             26.88
The Aberdeen                            1        Far North Dallas           1986          320,629      100             19.50
MacArthur Center I & II                 1        Las Colinas              1982/1986       298,161       94             23.41
Stanford Corporate Centre               1        Far North Dallas           1985          275,372       67             23.26
12404 Park Central                      1        LBJ Freeway                1987          239,103      100             19.83
Palisades Central II                    1        Richardson/Plano           1985          237,731       87             18.98
3333 Lee Parkway                        1        Uptown/Turtle Creek        1983          233,543       49             22.39
Liberty Plaza I & II                    1        Far North Dallas         1981/1986       218,813       99             16.15
The Addison                             1        Far North Dallas           1981          215,016       99             20.14
Palisades Central I                     1        Richardson/Plano           1980          180,503       95             21.73
The Crescent Atrium                     1        Uptown/Turtle Creek        1985          164,696       99             30.77
Greenway II                             1        Richardson/Plano           1985          154,329      100             22.56
Greenway I & IA                         2        Richardson/Plano           1983          146,704      100             20.62
Addison Tower                           1        Far North Dallas           1987          145,886       76             21.68
Las Colinas Plaza                       1        Las Colinas                1987          134,953       96             21.23
5050 Quorum                             1        Far North Dallas           1981          133,799       76             18.47
                                        -        ----------------           ----       ----------      ---             -----
Subtotal/Weighted Average              24                                              10,231,186       89%           $23.34
                                       --                                              ----------      ---            ------
FORT WORTH
Carter Burgess Plaza                    1        CBD                        1982          954,895       93%(5)        $17.25
                                        -        ---                        ----       ----------      ------         ------
HOUSTON                                          Richmond-Buffalo
Greenway Plaza Office Portfolio        10        Speedway                 1969-1982     4,348,052       92%           $21.05
Houston Center                          3        CBD                      1974-1983     2,764,417       90             22.27
Post Oak Central                        3        West Loop/Galleria       1974-1981     1,279,759       85             19.91
Four Westlake Park(6)                   1        Katy Freeway               1992          561,065      100             22.07
The Woodlands Office
Properties(7)                           6        The Woodlands            1980-1996       462,775       93             18.48
Three Westlake Park(6)                  1        Katy Freeway               1983          414,792       95(5)          23.74
1800 West Loop South                    1        West Loop/Galleria         1982          399,777       62(5)          19.87
The Park Shops                          1        CBD                        1983          190,729       76             23.27
                                        -        ---                        ----       ----------      ---             -----
Subtotal/Weighted Average(8)           26                                              10,421,366       90%           $21.30
                                       --                                              ----------      ---            ------
AUSTIN
Frost Bank Plaza                        1        CBD                        1984          433,024       96%           $25.26
301 Congress Avenue(9)                  1        CBD                        1986          418,338       83             26.44
Bank One Tower(6)                       1        CBD                        1974          389,503       93             25.15
Austin Centre                           1        CBD                        1986          343,664       83             29.19
The Avallon                             3        Northwest                1993/1997       318,217       93(5)          24.87
Barton Oaks Plaza One                   1        Southwest                  1986           98,955      100             27.68
                                        -        ---------                  ----       ----------      ---             -----
Subtotal/Weighted Average               8                                               2,001,701       90%           $26.09
                                        -                                              ----------      ---            ------
COLORADO
DENVER
Johns Manville Plaza(10)                1        CBD                        1978          675,400      100%           $20.21
MCI Tower                               1        CBD                        1982          550,805       47(5)          22.41
Ptarmigan Place                         1        Cherry Creek               1984          418,630       96             20.14
                                                 Denver Technology
Regency Plaza One                       1        Center                     1985          309,862       84             24.48
55 Madison                              1        Cherry Creek               1982          137,176       99             21.10



                                      159


                                                                                                 
The Citadel                             1        Cherry Creek               1987          130,652       99             25.11
44 Cook                                 1        Cherry Creek               1984          124,174       95             21.02
                                        -        ------------               ----       ----------      ---             -----
Subtotal/Weighted Average               7                                               2,346,699       84%           $21.47
                                        -                                              ----------      ---            ------
COLORADO SPRINGS
Briargate Office and Research
Center                                  1        Colorado Springs           1988          258,766       74%           $20.05
                                        -        ----------------           ----       ----------      ---            ------
FLORIDA
MIAMI
Miami Center(11)                        1        CBD                        1983          782,211       92%           $28.17
Datran Center                           2        South Dade/Kendall       1986/1988       476,412       93             24.53
                                        -        ------------------       ---------    ----------      ---             -----
Subtotal/Weighted Average               3                                 1,258,623                     92%           $26.79
                                        -                                 ---------                    ---            ------
ARIZONA
PHOENIX
Two Renaissance Square                  1        Downtown/CBD               1990          476,373       98%           $26.26
                                        -        ------------               ----       ----------      ---            ------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza                       1        CBD                        1990          366,236       87%           $19.03
                                        -        ---                        ----       ----------      ---            ------
CALIFORNIA
SAN DIEGO
Chancellor Park(12)                     1        University Town Center     1988          195,733       81%           $28.17
                                        -        ----------------------     ----       ----------      ---            ------
TOTAL/WEIGHTED AVERAGE                 73                                              28,511,578       89%(5)        $22.58(13)
                                       ==                                              ==========      ======         =========


(1) Calculated based on base rent payable as of September 30, 2002, without
giving effect to free rent or scheduled rent increases that would be taken into
account under GAAP and including adjustments for expenses payable by or
reimbursable from customers.

(2) Crescent Real Estate has a 49.5% limited partner interest and a 0.5% general
partner interest in the partnership that owns Bank One Center.

(3) Crescent Real Estate owns the principal economic interest in Trammell Crow
Center through its ownership of fee simple title to the property (subject to a
ground lease and a leasehold estate regarding the building) and two mortgage
notes encumbering the leasehold interests in the land and building.

(4) Crescent Real Estate owns the principal economic interest in Spectrum Center
through an interest in Crescent Spectrum Center, L.P. which owns both the
mortgage notes secured by Spectrum Center and the ground lessor's interest in
the land underlying the office building.

(5) Leases have been executed at certain office properties but had not commenced
as of September 30, 2002. If such leases had commenced as of September 30, 2002,
the percent leased for all office properties would have been 91%. The total
percent leased for these properties would have been as follows: Carter Burgess
Plaza - 98%, Three Westlake - 100%, 1800 West Loop - 73%, The Avallon - 100%,
and MCI Tower - 60%.

(6) Crescent Real Estate has a 0.1% general partner interest and a 19.9% limited
partner interest in the partnerships that own Four Westlake Park, Three Westlake
Park and Bank One Tower.

(7) Crescent Real Estate has a 75% limited partner interest and an approximate
10% indirect general partner interest in the partnership that owns the six
office properties that comprise The Woodlands Office Properties.

(8) Excludes the 5 Houston Center office property, which was placed in service
on September 16, 2002. This office property will be included when it becomes
stabilized. At September 30, 2002, it was 34% leased. If executed leases at
September 30, 2002 had commenced, it would have been 88% leased.

(9) Crescent Real Estate has a 1% general partner interest and a 49% limited
partner interest in the partnership that owns 301 Congress Avenue.

(10) Johns Manville Plaza was acquired by Crescent Real Estate on August 29,
2002.

(11) Crescent Real Estate has a 40% member interest in the limited liability
company that owns Miami Center.

(12) Crescent Real Estate owns Chancellor Park through its ownership of a
mortgage note secured by the building and through its direct and indirect
interests in the partnership, which owns the building.

(13) The weighted average full-service rental rate per square foot calculated
based on base rent payable for Crescent Real Estate office properties as of
September 30, 2002, giving effect to free rent and scheduled rent increases that
are taken into consideration under GAAP and also including adjustments for
expenses payable by or reimbursed from customers is $22.71.



                                      160



      The following table shows, as of September 30, 2002, the principal
business conducted by the customers at Crescent Real Estate's office properties,
based on information supplied to Crescent Real Estate from the customers.



                                                  Percent of
    Industry Sector                             Leased Sq. Ft.
    ---------------                             --------------
                                             
Professional Services(1)                              28%
Energy(2)                                             20
Financial Services(3)                                 19
Telecommunications                                     7
Technology                                             7
Other(4)                                               5
Manufacturing                                          4
Food Service                                           3
Government                                             3
Retail                                                 2
Medical                                                2
                                                  ------
TOTAL LEASED                                         100%
                                                  ======
Average Square Footage
Per Customer                                      14,767
                                                  ======


----------

(1)   Includes legal, accounting, engineering, architectural and advertising
      services.

(2)   Includes oil and gas and utility companies.

(3)   Includes banking, title and insurance and investment services.

(4)   Includes construction, real estate, transportation and other industries.


                                      161

      Aggregate Lease Expirations of Office Properties.

      The following tables show schedules of lease expirations for leases in
place as of September 30, 2002, for Crescent Real Estate's total office
properties and for Dallas, Houston and Austin, Texas, and Denver, Colorado,
individually, for each of the 10 years beginning with 2002, assuming that none
of the tenants exercises or has exercised renewal options.

      Total Office Properties.

TOTAL OFFICE PROPERTIES



                                                                                                    PERCENTAGE
                                         NET RENTABLE        PERCENTAGE OF                           TOTAL OF        ANNUAL FULL-
                                             AREA              LEASED NET           ANNUAL         ANNUAL FULL-      SERVICE RENT
                        NUMBER OF        REPRESENTED         RENTABLE AREA       FULL-SERVICE      SERVICE RENT       PER SQUARE
                      TENANTS WITH       BY EXPIRING          REPRESENTED         RENT UNDER       REPRESENTED       FOOT OF NET
YEAR OF LEASE           EXPIRING            LEASES            BY EXPIRING          EXPIRING        BY EXPIRING      RENTABLE AREA
EXPIRATION               LEASES         (SQUARE FEET)            LEASES           LEASES(1)           LEASES          EXPIRING(1)
                         ------         -------------            ------           ---------           ------          -----------
                                                                                                  
2002                        233          1,667,335(2)(3)            6.7%        $ 38,019,466             6.4%           $22.80
2003                        361          3,579,920(4)(5)           14.3           78,035,044            13.1             21.80
2004                        298          4,374,255                 17.4          101,227,128            17.0             23.14
2005                        282          3,585,999                 14.3           83,173,181            14.0             23.19
2006                        180          2,611,299                 10.4           63,952,207            10.7             24.49
2007                        173          2,797,085                 11.2           65,761,851            11.0             23.51
2008                         54          1,071,904                  4.3           25,569,531             4.3             23.85
2009                         37            943,491                  3.8           24,404,507             4.1             25.87
2010                         32          1,535,400                  6.1           42,578,335             7.1             27.73
2011                         27            900,065                  3.6           23,973,071             4.0             26.63
2012 and thereafter          32          2,006,355                  7.9           49,397,995             8.3             24.62
                          -----         ----------                -----         ------------           -----            ------
                          1,709         25,073,108(6)             100.0%        $596,092,316           100.0%           $23.77
                          =====         ==========                =====         ============           =====            ======


(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.

(2) Expirations by quarter are as follows: Q4: 1,667,335 sf.

(3) As of September 30, 2002 leases have been signed for 746,219 net rentable
square feet (representing approximately 45% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.

(4) Expirations by quarter are as follows: Q1: 1,124,696 sf Q2: 986,832 sf Q3:
701,764 sf Q4: 766,628 sf.

(5) As of September 30, 2002 leases have been signed for 1,388,127 net rentable
square feet (representing approximately 39% of expiring square footage and rent
leases and leasing of previously vacant space) commencing in 2003.

(6) Reconciliation of Occupied Square Footage to Total Office NRA:



                                                          SQUARE
                                                           FEET
                                                           ----
                                                     
Occupied square footage                                 25,073,108
Non-revenue generating space                               359,687
                                                        ----------
Total occupied office square footage                    25,432,795
Total vacant square footage                              3,078,783
                                                        ----------
Total office NRA
                                                        28,511,578
                                                        ==========



                                      162


      Dallas Office Properties.



                                                                                                     PERCENTAGE
                                         NET RENTABLE        PERCENTAGE OF                            TOTAL OF          ANNUAL FULL-
                                             AREA              LEASED NET           ANNUAL          ANNUAL FULL-        SERVICE RENT
                        NUMBER OF        REPRESENTED         RENTABLE AREA       FULL-SERVICE       SERVICE RENT         PER SQUARE
                      TENANTS WITH       BY EXPIRING          REPRESENTED         RENT UNDER        REPRESENTED         FOOT OF NET
YEAR OF LEASE           EXPIRING            LEASES            BY EXPIRING          EXPIRING         BY EXPIRING        RENTABLE AREA
EXPIRATION               LEASES         (SQUARE FEET)            LEASES           LEASES(1)            LEASES            EXPIRING(1)
----------               ------         -------------            ------           ---------            ------            -----------
                                                                                                     
       2002                 59             508,984(2)(3)           5.6%         $ 13,873,448              6.3%             $27.26
       2003                 95           1,344,481(4)(5)          14.9            29,662,076             13.5               22.06
       2004                 87           1,235,599                13.7            32,070,950             14.6               25.96
       2005                107           1,847,576                20.5            41,195,819             18.7               22.30
       2006                 43             680,220                 7.5            17,394,448              7.9               25.57
       2007                 51           1,123,308                12.4            27,575,931             12.5               24.55
       2008                 15             516,780                 5.7            12,796,529              5.8               24.76
       2009                  9             409,489                 4.5            10,730,350              4.9               26.20
       2010                 12             670,634                 7.4            19,877,588              9.0               29.64
       2011                  7             251,030                 2.8             6,947,876              3.2               27.68
2012 and thereafter         12             440,292                 5.0             7,869,961              3.6               17.87
                           ---           ---------               -----          ------------            -----              ------
                           497           9,028,393               100.0%         $219,994,976            100.0%             $24.37
                           ===           =========               =====          ============            =====              ======


(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.

(2) Expirations by quarter are as follows: Q4 508,984 sf.

(3) As of September 30, 2002 leases have been signed for 189,931 net rentable
square feet (representing approximately 37% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.

(4) Expirations by quarter are as follows: Q1: 592,840 sf Q2: 405,184 sf Q3:
136,951 sf Q4: 209,506 sf.

(5) As of September 30, 2002 leases have been signed for 492,560 net rentable
square feet (representing approximately 37% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.


                                      163

      Houston Office Properties.



                                                                                                    PERCENTAGE
                                         NET RENTABLE          PERCENTAGE OF                         TOTAL OF        ANNUAL FULL-
                                             AREA                LEASED NET         ANNUAL         ANNUAL FULL-      SERVICE RENT
                        NUMBER OF        REPRESENTED           RENTABLE AREA     FULL-SERVICE      SERVICE RENT       PER SQUARE
                      TENANTS WITH       BY EXPIRING            REPRESENTED       RENT UNDER       REPRESENTED       FOOT OF NET
YEAR OF LEASE           EXPIRING            LEASES              BY EXPIRING        EXPIRING        BY EXPIRING      RENTABLE AREA
EXPIRATION               LEASES         (SQUARE FEET)              LEASES         LEASES(1)           LEASES          EXPIRING(1)
----------               ------         -------------              ------         ---------           ------          -----------
                                                                                                  
2002                        104            829,555(2)(3)             9.0%       $ 17,040,934             8.1%            $20.54
2003                        136          1,166,459(4)(5)            12.6          24,374,256            11.7              20.90
2004                        117          1,898,176                  20.6          39,572,871            18.9              20.85
2005                         88            650,680                   7.1          14,777,526             7.1              22.71
2006                         64          1,124,218                  12.2          25,394,927            12.1              22.59
2007                         65          1,203,580                  13.0          26,247,046            12.5              21.81
2008                         16            350,636                   3.8           7,469,410             3.6              21.30
2009                          8             87,434                   1.0           2,147,400             1.0              24.56
2010                         11            591,928                   6.4          14,602,679             7.0              24.67
2011                         13            534,394                   5.8          12,848,920             6.1              24.04
2012 and thereafter           6            796,770                   8.5          24,763,651            11.9              31.08
                            ---          ---------                 -----        ------------           -----             ------
                            628          9,233,830                 100.0%       $209,239,620           100.0%            $22.66
                            ===          =========                 =====        ============           =====             ======


(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.

(2) Expirations by quarter are as follows: Q4: 829,555 sf.

(3) As of September 30, 2002 leases have been signed for 360,784 net rentable
square feet (representing approximately 43% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.

(4) Expirations by quarter are as follows: Q1: 178,720 sf Q2: 443,970 sf Q3:
372,719 sf Q4: 171,050 sf.

(5) As of September 30, 2002 leases have been signed for 766,894 net rentable
square feet (representing approximately 66% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.


      Austin Office Properties.



                                                                                                    PERCENTAGE
                                         NET RENTABLE          PERCENTAGE OF                         TOTAL OF        ANNUAL FULL-
                                             AREA                LEASED NET         ANNUAL         ANNUAL FULL-      SERVICE RENT
                        NUMBER OF        REPRESENTED           RENTABLE AREA     FULL-SERVICE      SERVICE RENT       PER SQUARE
                      TENANTS WITH       BY EXPIRING            REPRESENTED       RENT UNDER       REPRESENTED       FOOT OF NET
YEAR OF LEASE           EXPIRING            LEASES              BY EXPIRING        EXPIRING        BY EXPIRING      RENTABLE AREA
EXPIRATION               LEASES         (SQUARE FEET)              LEASES         LEASES(1)           LEASES          EXPIRING(1)
----------               ------         -------------              ------         ---------           ------          -----------
                                                                                                  
2002                        17              53,797(2)(3)             3.1%        $1,664,541             3.6%            $30.94
2003                        33             249,460(4)(5)            14.4          6,226,323            13.6              24.96
2004                        19             349,919                  20.2          8,518,887            18.6              24.35
2005                        25             529,901                  30.6         13,812,528            30.1              26.07
2006                        16             320,394                  18.5          9,233,495            20.1              28.82
2007                        10              84,278                   4.9          2,432,875             5.3              28.87
2008                         7              78,902                   4.6          2,321,594             5.1              29.42
2009                         2              29,935                   1.7            833,259             1.8              27.84
2010                         1               1,387                   0.1             31,665             0.1              22.83
2011                        --                  --                   0.0                 --             0.0                 --
2012 and thereafter          1              33,315                   1.9            834,248             1.7              25.04
                           ---           ---------                 -----        -----------           -----             ------
                           131           1,731,288                 100.0%       $45,909,415           100.0%            $26.52
                           ===           =========                 =====        ===========           =====             ======


(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.

(2) Expirations by quarter are as follows: Q4: 53,797 sf.

(3) As of September 30, 2002 leases have been signed for 5,057 net rentable
square feet (representing approximately 9% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.

(4) Expirations by quarter are as follows: Q1: 93,914 sf Q2: 59,276 sf Q3:
76,759 sf Q4: 19,511 sf.

(5) As of September 30, 2002 leases have been signed for 31,762 net rentable
square feet (representing approximately 13% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.



                                      164

      Denver Office Properties.



                                                                                                     PERCENTAGE
                                         NET RENTABLE         PERCENTAGE OF                           TOTAL OF         ANNUAL FULL-
                                             AREA               LEASED NET          ANNUAL          ANNUAL FULL-       SERVICE RENT
                        NUMBER OF        REPRESENTED          RENTABLE AREA      FULL-SERVICE       SERVICE RENT        PER SQUARE
                      TENANTS WITH       BY EXPIRING           REPRESENTED        RENT UNDER        REPRESENTED        FOOT OF NET
YEAR OF LEASE           EXPIRING            LEASES             BY EXPIRING         EXPIRING         BY EXPIRING       RENTABLE AREA
EXPIRATION               LEASES         (SQUARE FEET)             LEASES          LEASES(1)            LEASES           EXPIRING(1)
----------               ------         -------------             ------          ---------            ------           -----------
                                                                                                    
2002                        18              98,070(2)(3)            5.0%        $ 1,835,797               4.2%            $18.72
2003                        38             443,555(4)(5)           22.7           9,430,578              21.4              21.26
2004                        25             397,378                 20.3           8,138,678              18.5              20.48
2005                        19             305,935                 15.7           6,804,690              15.4              22.24
2006                        11             152,776                  7.8           3,804,720               8.6              24.90
2007                        16             144,301                  7.4           3,407,362               7.7              23.61
2008                         6              53,787                  2.8           1,180,878               2.7              21.95
2009                        11             203,472                 10.4           5,211,558              11.8              25.61
2010                         3              91,074                  4.7           2,631,070               6.0              28.89
2011                         1               2,478                  0.1              52,038               0.1              21.00
2012 and thereafter          1              61,080                  3.1           1,599,197               3.6              26.18
                           ---           ---------                -----         -----------             -----             ------
                           149           1,953,906                100.0%        $44,096,566             100.0%            $22.57
                           ===           =========                =====         ===========             =====             ======


(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.

(2) Expirations by quarter are as follows: Q4: 98,070 sf.

(3) As of September 30, 2002 leases have been signed for 93,768 net rentable
square feet (representing approximately 96% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.

(4) Expirations by quarter are as follows: Q1: 76,494 sf Q2: 25,845 sf Q3:
57,113 Q4: 284,103 sf.

(5) As of September 30, 2002 leases have been signed for 37,031 net rentable
square feet (representing approximately 8% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.


                                      165

      Other Office Properties.



                                                                                                     PERCENTAGE
                                         NET RENTABLE         PERCENTAGE OF                           TOTAL OF         ANNUAL FULL-
                                             AREA               LEASED NET           ANNUAL          ANNUAL FULL-      SERVICE RENT
                         NUMBER OF        REPRESENTED         RENTABLE AREA       FULL-SERVICE      SERVICE RENT        PER SQUARE
                       TENANTS WITH       BY EXPIRING         REPRESENTED          RENT UNDER        REPRESENTED        FOOT OF NET
YEAR OF LEASE            EXPIRING            LEASES           BY EXPIRING           EXPIRING         BY EXPIRING       RENTABLE AREA
EXPIRATION                LEASES         (SQUARE FEET)           LEASES             LEASES(1)           LEASES          EXPIRING(1)
----------                ------         -------------           ------             ---------           ------          -----------
                                                                                                     
2002                         35            176,929(2)(3)            5.7%           $ 3,604,746             4.7%           $20.37
2003                         59            375,965(4)(5)           12.0              8,341,811            10.9             22.19
2004                         50             493,183                15.8             12,925,742            16.8             26.21
2005                         43             251,907                 8.1              6,582,618             8.6             26.13
2006                         46             333,691                10.7              8,124,617            10.6             24.35
2007                         31             241,618                 7.7              6,098,637             7.9             25.24
2008                         10              71,799                 2.3              1,801,120             2.3             25.09
2009                          7             213,161                 6.8              5,481,940             7.1             25.72
2010                          5             180,377                 5.8              5,435,333             7.1             30.13
2011                          6             112,163                 3.6              4,124,237             5.4             36.77
2012 and thereafter          12             674,898                21.5             14,330,938            18.6             21.23
                            ---           ---------               -----            -----------           -----            ------
                            304           3,125,691               100.0%           $76,851,739           100.0%           $24.59
                            ===           =========               =====            ===========           =====            ======


(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.

(2) Expirations by quarter are as follows: Q4: 176,929 sf.

(3) As of September 30, 2002 leases have been signed for 96,679 net rentable
square feet (representing approximately 55% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.

(4) Expirations by quarter are as follows: Q1: 182,728 sf Q2: 52,557 sf Q3:
58,222 sf Q4: 82,458 sf.

(5) As of September 30, 2002 leases have been signed for 59,880 net rentable
square feet (representing approximately 16% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.


                                      166

Crescent Real Estate Hotel Properties

      The following tables show certain information for the years ended December
31, 2001, and 2000, and the nine months ended September 30, 2002, and 2001,
respectively, with respect to Crescent Real Estate's hotel properties. The
information for the hotel properties is based on available rooms, except for
Canyon Ranch-Tucson and Canyon Ranch-Lenox, which measure their performance
based on available guest nights.



                                                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                                                     ----------------------------------------------
                                                                                                                        REVENUE
                                                                                        AVERAGE        AVERAGE            PER
                                                                                       OCCUPANCY        DAILY          AVAILABLE
                                                           YEAR                          RATE           RATE       ROOM/GUEST NIGHT
                                                        COMPLETED/        ROOMS/     -------------   -----------   ----------------
RESORT/HOTEL PROPERTY(1)                 LOCATION       RENOVATED      GUEST NIGHTS   2001    2000   2001   2000   2001        2000
-----------------------------------  ---------------  ---------------  ------------  -----   -----   ----   ----   ----        ----
                                                                                                    
UPSCALE BUSINESS-CLASS HOTELS:
  Denver Marriott City Center        Denver, CO         1982/1994            613        77%     84%  $123   $120   $ 95        $101
  Hyatt Regency Albuquerque          Albuquerque, NM       1990              395        69      69    108    106     74          73
  Omni Austin Hotel                  Austin, TX            1986              372        68      81    124    133     84         108
  Renaissance Houston Hotel          Houston, TX        1975/2000            389        64      59    113     95     73          56
                                                                       ------------  -----   -----   ----   ----   ----        ----
      TOTAL/WEIGHTED AVERAGE                                               1,769        71%     75%  $118   $116   $ 83        $ 86
                                                                       ============  =====   =====   ====   ====   ====        ====
LUXURY RESORTS AND SPAS:
  Park Hyatt  Beaver Creek Resort    Avon, CO              1989              276        57%     69%  $278   $254   $159        $176
  and Spa(2)
  Sonoma Mission Inn & Spa           Sonoma, CA       1927/1987/1997         228        59      75    299    302    176         226
  Ventana Inn & Spa                  Big Sur, CA      1975/1982/1988          62        73      78    420    458    304         358
                                                                       ------------  -----   -----   ----   ----   ----        ----
       TOTAL/WEIGHTED AVERAGE                                                566        60%     72%  $305   $298   $182        $216
                                                                       ============  =====   =====   ====   ====   ====        ====

                                                                           GUEST
DESTINATION FITNESS RESORTS & SPAS:                                       NIGHTS
-----------------------------------                                       ------
  Canyon Ranch-Tucson                Tucson, AZ            1980              250(3)
  Canyon Ranch-Lenox                 Lenox, MA             1989              212(3)
                                                                       ------------
                                                                                     -----   -----   ----   ----   ----        ----
      TOTAL/WEIGHTED AVERAGE                                                 462        81%     86%  $622   $593   $482        $487
                                                                       ============  =====   =====   ====   ====   ====        ====
      GRAND TOTAL/WEIGHTED AVERAGE
      FOR RESORT/HOTEL PROPERTIES                                                       70%     76%  $245   $238   $170        $180
                                                                                     =====   =====   ====   ====   ====        ====


(1)   As of December 31, 2001, Crescent Real Estate had leased all of the
      Crescent Real Estate hotel properties, except the Omni Austin Hotel, to
      subsidiaries of Crescent Operating. As of December 31, 2001, the Omni
      Austin Hotel was leased pursuant to a separate lease to HCD Austin
      Corporation. On February 14, 2002, Crescent Real Estate executed the
      Settlement Agreement with Crescent Operating, pursuant to which Crescent
      Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
      foreclosure, Crescent Operating's lessee interests in the eight Crescent
      Real Estate hotel properties.

(2)   The hotel is undergoing a $6.9 million renovation of all guestrooms.

(3)   Represents available guest nights, which is the maximum number of guests
      that the resort can accommodate per night.


                                      167



                                                                                YEAR
                                                                              COMPLETED/                   ROOMS/
RESORT/HOTEL PROPERTY(1)                              LOCATION                RENOVATED                GUEST NIGHTS
------------------------                              --------                ---------                ------------
                                                                                              
UPSCALE BUSINESS-CLASS HOTELS:
  Denver Marriott City Center                     Denver, CO                   1982/1994                      613
  Hyatt Regency Albuquerque                       Albuquerque, NM                1990                         395
  Omni Austin Hotel                               Austin, TX                     1986                         375
  Renaissance Houston Hotel                       Houston, TX                  1975/2000                      388
                                                                                                      -----------
      TOTAL/WEIGHTED AVERAGE                                                                                1,771
                                                                                                      ===========
LUXURY RESORTS AND SPAS:
  Park Hyatt  Beaver Creek Resort
  and Spa Avon Co                                 Avon, CO                       1989                         275
  Sonoma Mission Inn & Spa                        Sonoma, CA                1927/1987/1997                    228
  Ventana Inn & Spa                               Big Sur, CA               1975/1982/1988                     62
                                                                                                      -----------
       TOTAL/WEIGHTED AVERAGE                                                                                 565
                                                                                                      ===========

                                                                                                            GUEST
DESTINATION FITNESS RESORTS & SPAS:                                                                        NIGHTS
  Canyon Ranch-Tucson                             Tucson, AZ                     1980                         259(2)
  Canyon Ranch-Lenox                              Lenox, MA                      1989                         212(2)
                                                                                                      -----------
      TOTAL/WEIGHTED AVERAGE                                                                                  471
                                                                                                      ===========
      Luxury and Destination Fitness
      Resorts combined

      GRAND TOTAL/WEIGHTED AVERAGE
      FOR RESORT/HOTEL PROPERTIES





                                                           FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------------------------------------
                                                                                                   REVENUE
                                                 AVERAGE                   AVERAGE                   PER
                                                OCCUPANCY                   DAILY                 AVAILABLE
                                                  RATE                      RATE              ROOM/GUEST NIGHT
                                            -----------------         ----------------        ----------------
RESORT/HOTEL PROPERTY(1)                    2002         2001         2002        2001        2002        2002
                                            ----         ----         ----        ----        ----        ----
                                                                                        
UPSCALE BUSINESS-CLASS HOTELS:
  Denver Marriott City Center                 77%          81%        $119        $124        $ 92        $100
  Hyatt Regency Albuquerque                   73           70          106         106          77          74
  Omni Austin Hotel                           70           69          117         126          82          87
  Renaissance Houston Hotel                   62           65          111         113          69          74
                                            ----         ----         ----        ----        ----        ----
      TOTAL/WEIGHTED AVERAGE                  71%          72%        $114        $118        $ 81        $ 85
                                            ====         ====         ====        ====        ====        ====
LUXURY RESORTS AND SPAS:
  Park Hyatt  Beaver Creek Resort
  and Spa Avon Co                             61%          62%        $294        $290        $180        $178
  Sonoma Mission Inn & Spa                    63           63          268         299         169         188
  Ventana Inn & Spa                           73           75          394         423         286         316
                                            ----         ----         ----        ----        ----        ----
       TOTAL/WEIGHTED AVERAGE                 63%          64%        $296        $311        $187        $198
                                            ====         ====         ====        ====        ====        ====
DESTINATION FITNESS RESORTS & SPAS:
  Canyon Ranch-Tucson
  Canyon Ranch-Lenox
                                            ----         ----         ----        ----        ----        ----
      TOTAL/WEIGHTED AVERAGE                  80%          83%        $628        $621        $478        $490
                                            ====         ====         ====        ====        ====        ====
      Luxury and Destination Fitness
      Resorts combined                        71%          72%        $463        $469        $319        $331
                                                                                                          ----
      GRAND TOTAL/WEIGHTED AVERAGE
      FOR RESORT/HOTEL PROPERTIES             71%          72%        $244        $249        $172        $178
                                            ====         ====         ====        ====        ====        ====


(1)   As of December 31, 2001, Crescent Real Estate had leased all of the
      Crescent Real Estate hotel properties, except the Omni Austin Hotel, to
      subsidiaries of Crescent Operating. As of December 31, 2001, the Omni
      Austin Hotel was leased pursuant to a separate lease to HCD Austin
      Corporation. On February 14, 2002, Crescent Real Estate executed the
      Settlement Agreement with Crescent Operating, pursuant to which Crescent
      Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
      foreclosure, Crescent Operating's lessee interests in the eight Crescent
      Real Estate hotel properties previously leased to Crescent Operating.

(2)   Represents available guest nights, which is the maximum number of guests
      that the resort can accommodate per night.


                                      168

Crescent Real Estate Residential Development Properties

      The following table shows certain information as of September 30, 2002,
relating to the Crescent Real Estate residential development properties.




                                                                                                             TOTAL        TOTAL
                        RESIDENTIAL                                           RESIDENTIAL       TOTAL      LOTS/UNITS   LOTS/UNITS
RESIDENTIAL             DEVELOPMENT                                           DEVELOPMENT       LOTS/      DEVELOPED      CLOSED
DEVELOPMENT             PROPERTIES           TYPE OF                         CORPORATION'S      UNITS        SINCE        SINCE
CORPORATION(1)               (RDP)            RDP(2)         LOCATION         OWNERSHIP%       PLANNED     INCEPTION    INCEPTION
--------------               -----            ------         --------         ----------       -------     ---------    ---------
                                                                                                   
Desert Mountain      Desert Mountain            SF       Scottsdale, AZ              93.0%       2,665        2,354         2,234
Development                                                                                    -------     --------     ---------
Corporation

The Woodlands        The Woodlands              SF       The Woodlands, TX           42.5%(6)   37,554       26,772        25,290
                     -------------              --       -----------------   ------------      -------     --------     ---------
Land Company,
Inc.

Crescent             Bear Paw Lodge             CO       Avon, CO                    60.0%          53           53            53
Resort               Eagle Ranch                SF       Eagle, CO                   60.0%       1,100(6)       535           484
Development,         Main Street
Inc.                 Junction                   CO       Breckenridge, CO            30.0%          36           36            30
                     Main Street
                     Station                    CO       Breckenridge, CO            30.0%          82           82            77
                     Main Street Station
                     Vacation Club              TS       Breckenridge, CO            30.0%          42           42            21
                     Riverbend                  SF       Charlotte, NC               60.0%         650          205           205
                     Three Peaks
                     (Eagle's Nest)             SF       Silverthorne, CO            30.0%         391(6)       253           184
                     Park Place at
                     Riverfront                 CO       Denver, CO                  64.0%          70(6)        70            64
                     Park Tower at
                     Riverfront                 CO       Denver, CO                  64.0%          61(6)        61            49
                     Promenade Lofts
                     at Riverfront              CO       Denver, CO                  64.0%          66(6)        66            60
                     Cresta                  TH/SFH      Edwards, CO                 60.0%          25(6)        20            18
                     Snow Cloud                 CO       Avon, CO                    64.0%          54           54            48
                     One Vendue Range           CO       Charleston, SC              62.0%          50(6)        --            --
                     Tahoe Mountain
                     Resorts               SF/CO/TH/TS   Tahoe, CA           57.0% - 71.2%            (7)          (7)           (7)
                     -------               -----------   ---------           ------------      -------     --------     ---------

                TOTAL CRESCENT RESORT DEVELOPMENT, INC.                                          2,680        1,477         1,293
                ---------------------------------------                                        -------     --------     ---------

Mira Vista           Mira Vista                 SF       Fort Worth, TX             100.0%         740          740           707
Development          The Highlands              SF       Breckenridge, CO            12.3%         750          503           456
Corp.                                                                                          -------     --------     ---------
                TOTAL MIRA VISTA DEVELOPMENT CORP.                                               1,490        1,243         1,163
                ----------------------------------                                             -------     --------     ---------

Houston Area         Falcon Point               SF       Houston, TX                100.0%         510          364           326
Development          Falcon Landing             SF       Houston, TX                100.0%         623          566           539
Corp.                Spring Lakes               SF       Houston, TX                100.0%         520          338           303
                     ------------               --       -----------         ------------      -------     --------     ---------

                TOTAL HOUSTON AREA DEVELOPMENT CORP.                                             1,653        1,268         1,168
                ------------------------------------                                           -------     --------     ---------

                       TOTAL                                                                    46,042       33,114        31,148
                       =====                                                                   =======     ========     =========




                                      169



                                                                                 AVERAGE
                        RESIDENTIAL                                               CLOSED               RANGE OF
RESIDENTIAL             DEVELOPMENT                                             SALE PRICE             PROPOSED
DEVELOPMENT             PROPERTIES            TYPE OF                            PER LOT/             SALE PRICES
CORPORATION(1)             (RDP)              RDP(2)          LOCATION          UNIT($)(3)         PER LOT/UNIT($)(4)
                           -----              ------          --------          ----------         ------------------
                                                                                 
Desert Mountain       Desert Mountain            SF       Scottsdale, AZ          522,000         400,000 -  4,000,000(5)
Development
Corporation

The Woodlands         The Woodlands              SF       The Woodlands, TX        58,000          16,000 -  2,160,000

Land Company,
Inc.

Crescent              Bear Paw Lodge             CO       Avon, CO              1,450,000         665,000 -  2,025,000
Resort                Eagle Ranch                SF       Eagle, CO                80,000          50,000 -    150,000
Development,          Main Street
Inc.                  Junction                   CO       Breckenridge, CO        460,000         300,000 -    580,000
                      Main Street

                      Station                    CO       Breckenridge, CO        490,000         215,000 -  1,065,000
                      Main Street Station
                      Vacation Club              TS       Breckenridge, CO      1,129,000         380,000 -  4,600,000
                      Riverbend                  SF       Charlotte, NC            30,000          25,000 -     38,000
                      Three Peaks
                      (Eagle's Nest)             SF       Silverthorne, CO        257,000         135,000 -    425,000
                      Park Place at
                      Riverfront                 CO       Denver, CO              415,000         195,000 -  1,445,000
                      Park Tower at
                      Riverfront                 CO       Denver, CO              640,000         180,000 -  2,100,000
                      Promenade Lofts
                      at Riverfront              CO       Denver, CO              426,000         180,000 -  2,100,000
                      Cresta                   TH/SFH     Edwards, CO           1,874,000       1,230,000 -  3,434,000
                      Snow Cloud                 CO       Avon, CO              1,714,000         840,000 -  4,545,000
                      One Vendue Range           CO       Charleston, SC              N/A         450,000 -  3,100,000
                      Tahoe Mountain
                      Resorts               SF/CO/TH/TS   Tahoe, CA                   N/A             N/A          N/A

    TOTAL CRESCENT RESORT DEVELOPMENT , INC.

Mira Vista            Mira Vista             SF           Fort Worth, TX           99,000          50,000 -    265,000
Development           The Highlands          SF           Breckenridge, CO        193,000          55,000 -    625,000
Corp.

    TOTAL MIRA VISTA DEVELOPMENT CORP.

Houston Area          Falcon Point           SF           Houston, TX              42,000          28,000 -     52,000
Development           Falcon Landing         SF           Houston, TX              21,000          20,000 -     26,000
Corp.                 Spring Lakes           SF           Houston, TX              31,000          35,000 -     50,000

    TOTAL HOUSTON AREA DEVELOPMENT CORP.

              TOTAL


(1) As of December 31, 2001, Crescent Real Estate had an approximately 95%, 95%,
90%, 94%, and 94% ownership interest in Desert Mountain Development Corporation,
The Woodlands Land Company, Inc., Crescent Resort Development, Inc., Mira Vista
Development Corp. and Houston Area Development Corp., respectively, through
ownership of non-voting common stock in each of these Residential Development
Corporations. On February 14, 2002, Crescent Real Estate executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of Crescent Real
Estate, in lieu of foreclosure, COPI's ownership interests, representing
substantially all of the voting stock, in Desert Mountain Development
Corporation, The Woodlands Land Company, Inc. and Crescent Resort Development,
Inc.

(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); SFH (Single-Family
Homes) and TS (Timeshare Equivalent Units).

(3) Based on lots/units close during Crescent Real Estate's ownership period.

(4) Based on existing inventory of developed lots and lots to be developed.

(5) Includes golf membership, which as of September 30, 2002, is $0.2 million.

(6) As of September 30, 2002, 65 golf course lots were under contract at Eagle
Ranch representing $4.6 million in sales; one unit was under contract at Park
Place at Riverfront representing $0.2 million in sales; three units were under
contract at Park Tower at Riverfront representing $2.4 million in sales; two
units were under contract at Promenade Lofts representing $0.8 million in sales;
one unit was under contract at Cresta representing $2.6 million in sales; four
lots were under contract at Three Peaks representing $1.2 million in sales and
45 units were under contract at One Vendue Range representing $53.9 million in
sales.

(7) This project is in the early stages of development, and this information is
not available as of September 30, 2002.


                                      170

Crescent Real Estate Temperature-Controlled Logistics Properties

      The following table shows the number and aggregate size of the Crescent
Real Estate temperature-controlled logistics properties by state as of September
30, 2002:



                                       TOTAL CUBIC         TOTAL
                       NUMBER OF         FOOTAGE        SQUARE FEET
STATE                PROPERTIES(1)    (IN MILLIONS)    (IN MILLIONS)
-----------------    -------------    -------------    -------------
                                              
Alabama                    4               10.7             0.3
Arizona                    1               2.9              0.1
Arkansas                   6               33.1             1.0
California                 8               24.9             0.9
Colorado                   1               2.8              0.1
Florida                    5               7.5              0.3
Georgia                    8               49.5             1.7
Idaho                      2               18.7             0.8
Illinois                   2               11.6             0.4
Indiana                    1               9.1              0.3
Iowa                       2               12.5             0.5
Kansas                     2               5.0              0.2
Kentucky                   1               2.7              0.1
Maine                      1               1.8              0.2
Massachusetts              5               10.5             0.5
Mississippi                1               4.7              0.2
Missouri(2)                2               46.8             2.8
Nebraska                   2               4.4              0.2
New York                   1               11.8             0.4
North Carolina             3               10.0             0.4
Ohio                       1               5.5              0.2
Oklahoma                   2               2.1              0.1
Oregon                     6               40.4             1.7
Pennsylvania               2               27.4             0.9
South Carolina             1               1.6              0.1
South Dakota               1               2.9              0.1
Tennessee                  3               10.6             0.4
Texas                      2               6.6              0.2
Utah                       1               8.6              0.4
Virginia                   2               8.7              0.3
Washington                 6               28.7             1.1
Wisconsin                  3               17.4             0.6
                     -------------    -------------    -------------
TOTAL                    88(3)           441.5(3)         17.5(3)
                     =============    =============    =============


(1)   As of September 30, 2002, Crescent Real Estate held a 40% interest in the
      temperature-controlled logistics partnership, which owns AmeriCold
      Corporation, which directly or indirectly owns the 88
      temperature-controlled logistics properties. The business operations
      associated with the temperature-controlled logistics properties are owned
      by AmeriCold Logistics, in which Crescent Real Estate has no interest.
      AmeriCold Corporation is entitled to receive lease payments from AmeriCold
      Logistics.

(2)   Includes an underground storage facility, with approximately 33.1 million
      cubic feet.

(3)   As of September 30, 2002, AmeriCold Logistics operated 101
      temperature-controlled logistics properties with an aggregate of
      approximately 537.9 million cubic feet (20.6 million square feet).

LEGAL PROCEEDINGS

      Currently, there are no material pending legal proceedings, other than
ordinary routine litigation incidental to Crescent Real Estate's business, to
which Crescent Real Estate is a party or to which any of its property is the
subject.

                 CRESCENT OPERATING MANAGEMENT'S DISCUSSION AND
                 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS

OVERVIEW

      The Settlement Agreement discussed above provides for a bankruptcy plan of
Crescent Operating to be implemented under Chapter 11 of the Bankruptcy Code. In
addition, all of Crescent Operating's assets in its hospitality and land
development segments were transferred to Crescent Real Estate pursuant to the
Settlement Agreement. See "The Reorganization Transactions - Summary of the
Reorganization Transactions" for more information about the Settlement
Agreement.


                                      171

      Crescent Operating is a diversified management company that, through
various subsidiaries and affiliates, operated, prior to the February 14 and
March 22, 2002 asset transfers, primarily in four business segments:

      -     equipment sales and leasing;

      -     hospitality;

      -     temperature-controlled logistics; and

      -     land development.


      See "Description of Crescent Operating's Business" above for more
information about Crescent Operating's business segments. As of September 30,
2002, the only remaining operating assets of Crescent Operating were its 40%
interest in AmeriCold Logistics, LLC and its 100% equity interest in Crescent
Machinery.

      The following discussion should be read in conjunction with the "Selected
Historical Financial Information of Crescent Operating" and the financial
statements and notes thereto, appearing elsewhere in this proxy
statement/prospectus. Historical results and percentage relationships set forth
below and in "Selected Historical Financial Information of Crescent Operating"
should not be taken as indicative of future operations of Crescent Operating.

      The following table sets forth financial data for Crescent Operating for
the three and nine months ended September 30, 2002 and for the years ended
December 31, 2001, 2000 and 1999.




                                                    For the              For the              For the
                                              Three Months Ended   Nine Months Ended        Year Ended
                                              September 30, 2002   September 30, 2002   December 31, 2001
                                              ------------------   ------------------   -----------------
                                                                 (dollars in thousands)
                                                                               
REVENUES
  Equipment sales & leasing                        $    7,757          $   25,992            $   67,521
  Hospitality                                              --                  --                    --
                                                   ----------          ----------            ----------
     Total Revenues                                     7,757              25,992                67,521

OPERATING EXPENSES
  Equipment sales & leasing                             8,624              29,340                71,113
  Hospitality
  Hospitality properties rent-CEI                          --                  --                    --
  Land development                                         --                  --                    --
  Corporate general and administrative                    451               2,677                 6,969
  Impairment of assets                                     --                  34                12,332
                                                   ----------          ----------            ----------
     Total operating expenses                           9,075              32,051                90,414
                                                   ----------          ----------            ----------
(LOSS) INCOME FROM OPERATIONS                          (1,318)             (6,059)              (22,893)
                                                   ----------          ----------            ----------
INVESTMENT (LOSS) INCOME                                   --              (4,127)                1,135
EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARIES                                               --              (2,142)               (2,275)
OTHER EXPENSE (INCOME)
  Interest expense                                      1,487               5,037                13,241
  Interest income                                          (5)                (12)                   --
  Gain on lease termination of
    hotel and sale of club                                 --                  --                    --
  Other                                                    47                 221                 1,417
                                                   ----------          ----------            ----------
     Total other expense (income)                       1,529               5,246                14,658
                                                   ----------          ----------            ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
 REORGANIZATION COSTS                                  (2,847)            (17,574)              (38,691)






                                                       For the             For the
                                                     Year Ended         Year Ended
                                                 December 31, 2000   December 31, 1999
                                                 -----------------   -----------------
                                                         (dollars in thousands)
                                                               
REVENUES
  Equipment sales & leasing                          $   69,976       $   62,311
  Hospitality                                            32,615           35,304
                                                     ----------       ----------
     Total Revenues                                     102,591           97,615

OPERATING EXPENSES
  Equipment sales & leasing                              68,710           58,799
  Hospitality                                            22,582           24,649
  Hospitality properties rent-CEI                         8,102            9,105
  Land development                                           --               18
  Corporate general and administrative                    4,224            2,604
  Impairment of assets                                       --               --
                                                     ----------       ----------
     Total operating expenses                           103,618           95,175
                                                     ----------       ----------
(LOSS) INCOME FROM OPERATIONS                            (1,027)           2,440
                                                     ----------       ----------
INVESTMENT (LOSS) INCOME                                    772            1,890
EQUITY IN LOSS OF
UNCONSOLIDATED SUBSIDIARIES                              (6,952)          (3,472)
OTHER EXPENSE (INCOME)
  Interest expense                                       14,123           11,993
  Interest income                                          (439)            (458)
  Gain on lease termination of
    hotel and sale of club                                   --               --
  Other                                                     762               19
                                                     ----------       ----------
     Total other expense (income)                        (5,406)          11,554
                                                     ----------       ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
  REORGANIZATION COSTS                                   (1,851)         (10,696)




                                      172




                                                                               
REORGANIZATION ITEMS
     REORGANIZATION FEES                                  871               2,015                    --
                                                   ----------          ----------            ----------

LOSS FROM OPERATIONS AFTER
REORGANIZATION COSTS, BEFORE TAXES                     (3,718)            (19,589)              (38,691)

INCOME TAX BENEFIT                                       (707)             (2,710)               (8,591)
                                                   ----------          ----------            ----------
LOSS FROM CONTINUING OPERATIONS                        (3,011)            (16,879)              (30,100)

DISCONTINUED OPERATIONS
     (LOSS) INCOME FROM OPERATIONS OF
     DISCONTINUED HOSPITALITY
     AND LAND DEVELOPMENT SEGMENTS (LESS
     APPLICABLE INCOME TAX EXPENSE OF
     $0, $2,502, $7,966, $14,664, AND $6,505,
     AND MINORITY INTERESTS OF $0, $1,897,
     $(13,588), $(26,018) AND $(14,112)                    --               3,272                (5,817)

     LOSS FROM OPERATIONS OF
     DISCONTINUED EQUIPMENT
     SALES AND LEASING BRANCHES
     (LESS APPLICABLE INCOME TAX
     BENEFIT OF $0, $0, $(1,968), $(1,988)
     AND $(874)                                          (553)             (2,998)              (32,707)

     GAIN ON DISPOSAL OF HOSPITALITY AND
     LAND DEVELOPMENT SEGMENTS (LESS
     APPLICABLE INCOME TAX EXPENSE OF
     $0, $17,876, $0, $0, AND $0)                          --              26,813                    --
                                                   ----------          ----------            ----------
     (LOSS) INCOME FROM DISCONTINUED
     OPERATIONS                                          (553)             27,087               (38,524)

INCOME (LOSS) BEFORE ACCOUNTING CHANGE                 (3,564)             10,208               (68,624)

CUMULATIVE EFFECT OF CHANGE IN
     ACCOUNTING PRINCIPLE                                --                  --                  (9,509)
                                                   ----------          ----------            ----------
 NET INCOME (LOSS)                                 $   (3,564)         $   10,208            $  (78,133)
                                                   ==========          ==========            ==========





                                                               
REORGANIZATION ITEMS
     REORGANIZATION FEES                                     --               --
                                                     ----------       ----------

LOSS FROM OPERATIONS
AFTER REORGANIZATION COSTS,
BEFORE TAXES                                             (1,851)         (10,696)

INCOME TAX BENEFIT                                         (929)          (9,102)
                                                     ----------       ----------
LOSS FROM CONTINUING OPERATIONS                            (922)          (1,594)

DISCONTINUED OPERATIONS
     (LOSS) INCOME FROM OPERATIONS OF
     DISCONTINUED HOSPITALITY AND
     LAND DEVELOPMENT SEGMENTS (LESS
     APPLICABLE INCOME TAX EXPENSE OF
     $0, $2,502, $7,966, $14,664 AND
     $6,505 AND MINORITY INTERESTS OF
     $0, $1,897, $(13,588), $(26,018)
     AND $(14,112)                                          106              319

     LOSS FROM OPERATIONS OF
     DISCONTINUED EQUIPMENT
     SALES AND LEASING BRANCHES
     (LESS APPLICABLE INCOME TAX
     BENEFIT OF $0, $0, $(1,968), $(1,988)
     AND $(874)                                          (2,874)          (1,420)

     GAIN ON DISPOSAL OF HOSPITALITY AND
     LAND DEVELOPMENT SEGMENTS (LESS
     APPLICABLE INCOME TAX EXPENSE OF
     $0, $17,876, $0, $0, AND $0)                            --               --
                                                     ----------       ----------
     (LOSS) INCOME FROM DISCONTINUED
     OPERATIONS                                          (2,768)          (1,101)

INCOME (LOSS) BEFORE ACCOUNTING CHANGE                   (3,690)          (2,695)

CUMULATIVE EFFECT OF CHANGE IN
     ACCOUNTING PRINCIPLE                                    --               --
                                                     ----------       ----------
 NET INCOME (LOSS)                                   $   (3,690)      $   (2,695)
                                                     ==========       ==========




                                      173

      The following is a summary of Crescent Operating's estimated financial
information reported by segment for the three and nine months ended September
30, 2002, respectively. As Crescent Operating only operated its hospitality and
land development segments for one and one-half months in 2002, there is no
information available for these segments.

   SEGMENT FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
                             (DOLLARS IN THOUSANDS)




                                          EQUIPMENT           TEMPERATURE
                                            SALES              CONTROLLED
                                         AND LEASING            LOGISTICS              OTHER                 TOTAL
                                         -----------            ---------              -----                 -----
                                                                                              
Revenues ......................          $     7,757           $        --          $        --           $     7,757

Operating expenses ............                8,624                    --                  451                 9,075
                                         -----------           -----------          -----------           -----------

Loss from operations ..........                 (867)                   --                 (451)               (1,318)
Investment loss ...............                   --                    --                   --                    --
Equity in Earnings of
unconsolidated
Subsidiaries ..................                   --                    --                   --                    --
Other (income) expense
      Interest expense ........                  166                    --                1,321                 1,487
      Interest income .........                   (2)                   --                   (3)                   (5)
      Other ...................                   48                    --                   (1)                   47
                                         -----------           -----------          -----------           -----------

Total other expense ...........                  212                    --                1,317                 1,529
                                         -----------           -----------          -----------           -----------
Loss from operations before
reorganization costs ..........               (1,079)                   --               (1,768)               (2,847)
Reorganization Costs
       Professional fees ......                  871                    --                   --                   871
                                         -----------           -----------          -----------           -----------

Loss from operations before
income taxes ..................               (1,950)                   --               (1,768)               (3,718)
Income tax benefit ............                   --                    --                 (707)                 (707)
                                         -----------           -----------          -----------           -----------
Loss from continuing operations          $    (1,950)          $        --          $    (1,061)          $    (3,011)
                                         ===========           ===========          ===========           ===========



   SEGMENT FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
                             (DOLLARS IN THOUSANDS)




                                          EQUIPMENT           TEMPERATURE
                                            SALES              CONTROLLED
                                         AND LEASING            LOGISTICS               OTHER                  TOTAL
                                         -----------            ---------               -----                  -----
                                                                                               
Revenues ......................          $    25,992           $        --           $        --           $    25,992

Operating expenses ............               29,340                    --                 2,711                32,051
                                         -----------           -----------           -----------           -----------

Loss from operations ..........               (3,348)                   --                (2,711)               (6,059)
Investment loss ...............                   --                    --                (4,127)               (4,127)
Equity in Earnings of
unconsolidated
Subsidiaries ..................                   --                (2,142)                   --                (2,142)
Other (income) expense
      Interest expense ........                1,074                    --                 3,963                 5,037
      Interest income .........                   (3)                   --                    (9)                  (12)
      Other ...................                  217                    --                     4                   221
                                         -----------           -----------           -----------           -----------

Total other expense ...........                1,288                    --                 3,958                 5,246
                                         -----------           -----------           -----------           -----------
Loss from operations before
reorganization costs ..........               (4,636)               (2,142)              (10,796)              (17,574)
Reorganization Costs

       Professional fees ......                2,015                    --                    --                 2,015
                                         -----------           -----------           -----------           -----------

Loss from operations before
income taxes ..................               (6,651)               (2,142)              (10,796)              (19,589)
Income tax benefit ............                   --                  (283)               (2,427)               (2,710)
                                         -----------           -----------           -----------           -----------

Loss from continuing operations          $    (6,651)          $    (1,859)          $    (8,369)          $   (16,879)
                                         ===========           ===========           ===========           ===========




                                      174

      The following is a summary of Crescent Operating's estimated financial
information reported by segment for the year ended December 31, 2001:

                          SEGMENT FINANCIAL INFORMATION
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)




                                                  EQUIPMENT                  TEMPERATURE-
                                                    SALES                     CONTROLLED        LAND
                                                 AND LEASING   HOSPITALITY     LOGISTICS     DEVELOPMENT      OTHER         TOTAL
                                                 -----------   -----------     ---------     -----------      -----         -----
                                                                                                        
Revenues .....................................    $  67,521     $      --      $      --      $      --     $      --     $  67,521

Operating expenses ...........................       83,445            --             21             --         6,948        90,414
                                                  ---------     ---------      ---------      ---------     ---------     ---------
Loss from operations .........................       15,924            --            (21)            --        (6,948)      (22,893)
Investment loss ..............................           --            --             --             --         1,135         1,135
Equity in Losses of unconsolidated
   subsidiaries ..............................           --            --         (2,275)            --            --        (2,275)
Other (income) expense
      Interest expense .......................        4,133            --             --             --         9,070        13,203
      Interest income ........................           (8)           --             --             --            46            38
      Other ..................................        1,419            --             --             --            (2)        1,417
                                                  ---------     ---------      ---------      ---------     ---------     ---------
Total other expense ..........................        5,544            --             --             --         9,114        14,658
                                                  ---------     ---------      ---------      ---------     ---------     ---------
Loss income before income taxes ..............      (21,468)           --         (2,296)            --       (14,927)      (38,691)
Income tax provision (benefit)................        1,816            --           (919)            --        (5,856)       (8,591)
                                                  ---------     ---------      ---------      ---------     ---------     ---------
Loss from continuing operations...............      (19,652)           --         (1,377)            --        (9,071)      (30,100)
Discounted operations (note 4 of Financial
 Statements of Crescent Operating)
  (Loss) income from operations
   of discontinued Hospitality and Land
   Development segments (less
   applicable income tax expense of $7,966
   and minority interests of $(13,588)........           --        (8,536)            --          2,719            --        (5,817)
Loss from operations of discontinued equipment
and sales and leasing branches less applicable
income tax benefit of $(1,968)................      (32,707)           --             --             --            --       (32,707)
                                                  ---------     ---------      ---------      ---------     ---------     ---------
(Loss) income from discontinued operations....      (32,707)       (8,536)            --          2,719            --       (38,524)
                                                  ---------     ---------      ---------      ---------     ---------     ---------
(Loss) income before accounting change .......      (52,359)       (8,536)        (1,377)         2,719        (9,071)      (68,624)

Cumulative effect of change in
   accounting principle ......................           --            --             --             --        (9,509)       (9,509)
                                                  ---------     ---------      ---------      ---------     ---------     ---------
Net (loss) income  ...........................    $ (52,359)    $  (8,536)     $  (1,377)     $   2,719     $ (18,580)    $ (78,133)
                                                  =========     =========      =========      =========     =========     =========





                                      175

RECENT DEVELOPMENTS

      For a description of events that have occurred subsequent to September 30,
2001, see "Summary - Other Crescent Operating Recent Developments" above.

RESULTS OF OPERATIONS

Three and Nine Months ended September 30, 2002, as Compared to Three and Nine
Months Ended September 30, 2001

      Revenues.

      Total revenue, which consists of equipment sales and leasing revenue,
decreased $11.2 million, or 58.9%, to $7.8 million for the three months ended
September 30, 2002, compared with $19.0 million for the three months ended
September 30, 2001. Total revenue decreased $24.9 million, or 48.9%, to $26.0
million for the nine months ended September 30, 2002, compared with $50.9
million for the nine months ended September 30, 2001. Significant components of
the decreases were:

      -     a net decrease of $7.3 million and $13.2 million in new and used
            equipment sales for the three and nine months ended September 30,
            2002 as compared to the corresponding periods in 2001 primarily due
            to the slowing economy and the impact of the Chapter 11 bankruptcy
            process on Crescent Machinery's business;

      -     a decrease of $0.9 million and $3.3 million in parts, service and
            supplies revenue for the three and nine months ended September 30,
            2002 as compared to the corresponding periods in 2001 primarily due
            to decreased demand for maintenance and repair work and the impact
            of the Chapter 11 bankruptcy process on Crescent Machinery's
            business; and

      -     a decrease of $3.0 million and $8.4 million in rental revenue for
            the three and nine months ended September 30, 2002 as compared to
            the corresponding period in 2001 primarily due to the slowing
            economy and the impact of the Chapter 11 bankruptcy process on
            Crescent Machinery's business.

      Operating Expenses.


      Total operating expenses decreased $16.8 million, or 64.9%, to $9.1
million for the three months ended September 30, 2002, compared with $25.9
million for the three months ended September 30, 2001. Total operating expenses
decreased $38.7 million, or 54.7%, to $32.1 for the nine months ended September
30, 2002, compared with $70.8 million for the nine months ended September 30,
2001. The decreases in total operating expenses are attributable to the factors
discussed in the following paragraphs.


      Equipment Sales and Leasing Segment

      Equipment sales and leasing expenses decreased $11.7 million, or 57.6%, to
$8.6 million for the three months ended September 30, 2002, compared with $20.3
million for the three months ended September 30, 2001. Equipment sales and
leasing expenses decreased $23.1 million, or 44.1%, to $29.3 million for the
nine months ended September 30, 2002, compared with $52.4 million for the nine
months ended September 30, 2001. Significant components of the decreases were:


                                      176

      -     a decrease of $7.2 million and $12.3 million in new and used
            equipment expenses for the three and nine months ended September 30,
            2002 as compared to the corresponding periods in 2001 directly
            related to the decrease in new and used equipment revenue;


      -     a decrease of $0.6 million and $2.5 million in parts, service and
            supplies expenses for the three and nine months ended September 30,
            2002 as compared to the corresponding periods in 2001 primarily as a
            result of the decrease in parts, service and supplies revenues for
            the same periods;

      -     a $2.3 million and a $5.5 million decrease in rental expenses for
            the three and nine months ended September 30, 2002 as compared to
            the corresponding periods in 2001 primarily due to the decrease in
            rental revenue for the three and nine months ended September 30,
            2002; and

      -     a decrease of $1.6 million and $2.8 million in general and
            administrative expenses for the three and nine months ended
            September 30, 2002 as compared to the corresponding periods in 2001
            primarily due to cost reduction measures put into place.


      Corporate General and Administrative Expenses

      Corporate general and administrative expenses totaled $0.5 million and
$2.7 million for the three and nine months ended September 30, 2002,
respectively, as compared to $0.5 million and $1.5 million for the three and
nine months ended September 30, 2001. The increases are primarily related to
increases in general corporate overhead costs, such as legal and accounting
costs, related to the Settlement Agreement and the proposed prepackaged
bankruptcy.

      Investment Income (Loss).

      There was no investment income (loss) for the three months ended September
30, 2002. Investment income (loss) decreased $10.1 million or 168%, to a $4.1
million loss for the nine months ended September 30, 2002, compared with income
of $6.0 million for the nine months ended September 30, 2001. The decreases are
attributable to the decreases in the fair value of Crescent Operating's Magellan
warrants resulting in investment losses as compared with income for the
corresponding period in 2001.

      Equity in Earnings (Loss) of Unconsolidated Subsidiaries.

      There was no equity in earnings (loss) of unconsolidated subsidiaries for
the three months ended September 30, 2002 due to Crescent Operating not
recording any additional losses related to its investment in AmeriCold Logistics
for the three months ended September 30, 2002 due to Crescent Operating's share
of historical losses being in excess of its investment balance.


      Equity in earnings (loss) of unconsolidated subsidiaries decreased $2.3
million or 52.3%, to a loss of ($2.1) million for the nine months ended
September 30, 2002, compared with a loss of $4.4 million for the nine months
ended September 30, 2001. The nine month decrease was primarily due to equity in
loss of AmeriCold Logistics in the amount of ($0.7) million and to the
realization of other comprehensive income (loss) of ($1.4) million.


      Other (Income) Expense.

      Other (income) expense decreased $0.4 million, or 21.1%, to $1.5 million
for the three months ended September 30, 2002, compared with $1.9 million for
the three months ended September 30, 2001.


                                      177

For the nine months ended September 30, 2002, other (income) expenses decreased
$2.5 million, or 32.5%, to $5.2 million, compared with $7.7 million for the nine
months ended September 30, 2001. Significant components of the decreases were
primarily attributable to net decreases in interest expense of $1.7 million for
the nine months ended September 30, 2002.

      Reorganization Items

      Crescent Operating incurred $0.9 million and $2.0 million in professional
fees for the three and nine months ended September 30, 2002 due to Crescent
Machinery Company's reorganization through bankruptcy that were not incurred
during the corresponding periods in 2001.

      Income Tax Provision (Benefit).

      Income tax benefit of $0.7 million for the three months ended September
30, 2002 represents a decrease of $0.5 million from the $1.2 million benefit
provided for the three months ended September 30, 2001. Income tax benefit of
$2.7 million for the nine months ended September 30, 2002 represents a decrease
of $1.7 million from the $4.4 million benefit provided for the nine months ended
September 30, 2001. Income tax provision attributable to discontinued operations
for the nine months ended September 30, 2002 was comprised of a $2.2 million
expense for the hospitality segment and a $0.3 million expense for the land
development segment. Income tax provision for the nine months ended September
30, 2002 of $17.9 was attributable to the gain from the disposal of discontinued
operations resulting primarily from the cancellation of corporate level
indebtedness pursuant to the Settlement Agreement.

      Crescent Operating generally provides for taxes using a 40% effective rate
on Crescent Operating's share of income or loss. Management continues to
evaluate its ability to realize the deferred tax assets quarterly by assessing
the need for a valuation allowance. An inability of Crescent Operating to
execute business plans for certain of its segments could affect the ultimate
realization of the deferred tax assets.

      Minority Interests.

      Minority interests were eliminated as a result of the assignment of the
land development and hospitality segments to Crescent Real Estate pursuant to
the Settlement Agreement.

      Discontinued Operations.


      Pursuant to the Settlement Agreement, Crescent Operating transferred its
interests in the hospitality and land development segments as of February 14,
2002 and March 22, 2002. Crescent Operating had a deminimus loss from
discontinued operations related to the hospitality and land development segments
for the three months ending September 30, 2002. Crescent Operating realized
income from discontinued operations of $3.3 million, after minority interest of
$1.9 million and a $2.5 million income tax expense, related to the hospitality
and land development segments for the nine months ended September 30, 2002. The
gain on disposal of discontinued operations was zero for the three months ended
September 30, 2002 and $26.8 million, net of a $17.9 million income tax expense,
for the nine months ended September 30, 2002.

      In December 2001, Crescent Operating adopted Statements of Financial
Accounting Standards SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. During the second and third quarters of 2002, Crescent
Machinery closed down six branch locations and is currently in the process of
closing one



                                      178

additional branch location. Crescent Operating realized a $2.5 million decrease
in loss from discontinued operations related to the equipment sales and leasing
segment for the three months ended September 30, 2002 as compared to the
corresponding period in 2001. Crescent Operating realized a $2.4 million
decrease in loss from discontinued operations related to the equipment sales and
leasing segment for the nine months ended September 30, 2002 as compared to the
corresponding period in 2001. The decreases for the three and nine months ended
September 30, 2002 as compared to the three and nine months ended September 30,
2001 are primarily attributable to the timing of the closings of the
discontinued branch locations.

      Cumulative Effect of Change in Accounting Principal.

      Cumulative effect of change in accounting principle decreased $9.5
million, or 100%, for the nine months ended September 30, 2002 as compared to
the corresponding period in 2001. The change from the prior period was due to
the prior year's adoption of SFAS No. 133 on January 1, 2001, whereby Crescent
Operating realized a $9.5 million loss related to its investment in Magellan
warrants, calculated as the difference between the original cost of the Magellan
warrants of $12.5 million and their estimated fair value at December 31, 2001,
$3.0 million, as calculated using the Black-Scholes pricing model.

Year Ended December 31, 2001, as Compared to 2000

      Revenues.


      Total revenue decreased $35.1 million, or 34.2%, to $67.5 million for the
year ended December 31, 2001, compared with $102.6 million for the year ended
December 31, 2000. The decrease in total revenue is attributable to the
following:

      Equipment Sales and Leasing Segment

      Equipment sales and leasing revenue decreased $2.5 million, or 3.6%, to
$67.5 million for the year ended December 31, 2001, compared with $70.0 million
for the year ended December 31, 2000. The decrease in revenue is discussed
below. In addition, Crescent Operating believes that revenue was impacted
significantly and negatively by the general recession and additionally as a
consequence of the September 11, 2001 terrorist attacks against the United
States and the continuing threat of terrorism as certain industries reduce their
construction expenditures.

      -     a decrease of $1.3 million in new and used equipment sales due to
            weaker market conditions and increased demand from customers for
            rentals as compared to purchases; and

      -     a decrease in parts, service and supplies revenue of $1.6 million
            for the current year primarily due to decreased demand for
            maintenance and repair work; partially offset by

      -     an increase in rental revenue of $0.4 million during the year ended
            December 31, 2001 primarily due to same store rental growth.

      Hospitality Segment

      Hospitality revenue from continuing operations decreased $32.6 million, or
100%, for the year ended December 31, 2001 as compared to hospitality revenue
from continuing operations of $32.6 million for the year ended December 31,
2000. The decrease in revenue was due to the sale of the Four Seasons Hotel in
Houston on November 3, 2000.


                                      179





      Operating Expenses.


      Total operating expenses decreased $13.2 million, or 12.7%, to $90.4
million for the year ended December 31, 2001, compared with $103.6 million for
the year ended December 31, 2000. The increase in operating expenses is
attributable to the following:


      Equipment Sales and Leasing Segment


      Equipment sales and leasing expenses increased $14.7 million, or 21.4%, to
$83.4 million for the year ended December 31, 2001, compared with $68.7
million for the year ended December 31, 2000. Significant components of the
overall increase were:

      -     an adjustment of $12.3 million related to impairment of property,
            equipment and goodwill at Crescent Machinery;

      -     a $2.1 million increase in rental expenses due mainly to an
            increase in rental inventory resulting in increased depreciation
            expense and maintenance costs for the year ended December 31, 2001;
            partially offset by

      -     an increase of $1.0 million in general and administrative expenses
            due primarily to increases in corporate payroll, insurance expenses
            and professional fees; and

      -     a $0.5 million increase expenses in new and used equipment expenses;
            partially offset by

      -     a $1.2 million decrease in parts, service and supplies expenses due
            primarily to reductions in sales of new and used equipment.

      Hospitality Segment

      Hospitality expenses from continuing operations decreased $30.7 million,
or 100%, for the year ended December 31, 2001 as compared to hospitality
expenses from continuing operations of $30.7 million for the year ended December
31, 2000. The decrease was due to the sale of the Four Seasons Hotel in Houston
on November 3, 2000.


                                      180




      Corporate General and Administrative Expenses.

      Corporate general and administrative expenses increased $2.8 million, or
66.7%, to $7.0 million for the year ended December 31, 2001, compared with $4.2
million for the year ended December 31, 2000. These expenses consisted of
general corporate overhead costs, such as legal and accounting costs, insurance
costs and corporate salaries. The increase over prior year is primarily
attributable to (i) a reserve recorded by Crescent Operating for amounts due
from Crescent Operating, Inc. Voluntary Employees' Beneficiary Association
Health Care Plan, (ii) management fees payable to SunTx under the Management
Agreement and (iii) professional fees incurred in connection with the proposed
restructuring of Crescent Operating.

      Investment Income.





                                      181


      Investment income increased $0.4 million or 57.1%, to $1.1 million for the
year ended December 31, 2001, compared with $0.7 million for the year ended
December 31, 2000. Significant components of the overall increase were:

      o    an increase in investment income of Magellan warrants in the amount
           of $1.1 million; partially offset by

      o    no gains on sales of investments in 2001 compared to gains on sale of
           CS I and CS II in the amount of $0.7 million which occurred in 2000.

      Equity in Losses of Unconsolidated Subsidiaries

      Equity in losses of unconsolidated subsidiaries decreased $4.7 million or
67.1% to $(2.3) million for the year ended December 31, 2001, compared with loss
of $(7.0) million for the year ended December 31, 2000. Significant components
of the overall decrease were:


      o    no equity in income of Transportal Network as compared to income of
           $0.4 million in 2000, partially offset by

      o    a decrease in equity in loss of AmeriCold Logistics in the amount of
           $5.1 million.

     Other Expense (Income)

     Other expense (income) decreased $20.1 million to $14.7 million for the
year ended December 31, 2001, compared with income of $(5.4) million for the
year ended December 31, 2000. Significant components of the decrease were:

o        no gain on sale of the Four Seasons Hotel in Houston of $18.3 million;

o        no gain on sale of the Houston Center Athletic Club of $1.6 million;

o        a decrease in interest expense of $0.9 million for the year ended
         December 31, 2001 primarily due to lower debt balances as compared to
         the year ended December 31, 2000; and

o        a decrease in interest income in the amount of $0.4 million due to a
         put option to sell Crescent Operating's remaining 20% of its 5%
         interest in the temperature controlled logistics partnerships in 2000;
         partially offset by

o        an increase in other expense in the amount of $0.7 million due to
         increases in bad debt expense within the equipment sales and leasing
         segment.



      Income Tax (Benefit) Provision.


      Income tax benefit of $8.6 million for the year ended December 31, 2001
represents an increase of $7.7 million from the year ended December 31, 2000.
Income tax benefit consisted of a $5.9 million benefit at the corporate level, a
$1.8 million benefit for the Equipment Sales and Leasing segment, and a $0.9
million benefit for the Temperature Controlled Logistics segment.

      Management continues to evaluate its ability to realize the deferred tax
assets quarterly by assessing the need for a valuation allowance. An inability
of Crescent Operating to execute business plans for certain of Crescent
Operating's segments could affect the ultimate realization of the deferred tax
assets.


      Minority Interests

      Minority interest s were eliminated as a result of the assignment of the
land development and hospitality segments to Crescent Real Estate pursuant to
the Settlement Agreement.

      Discontinued Operations


      On January 1, 2002, Crescent Operating adopted Statements of Financial
Accounting Standards SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No.144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. Pursuant to the Settlement Agreement, Crescent Operating
transferred its interests in the hospitality and land development segments as of
February 14, 2002 and March 22, 2002. Crescent Operating has reclassed results
from operations for the hospitality and land development segments as
discontinued operations for the years ended December 31, 2001, 2000 and 1999.
Crescent Operating realized losses from discontinued operations of $5.8 million
after minority interest of $13.6 million and a $8.0 million income tax expense,
related to the hospitality and land development segments for the year ended
December 31, 2001, as compared to income from discontinued operations of $0.1
million after minority interest of $26.0 million and income tax expense of $14.7
million, for the year ended December 31, 2000. Significant components of the
$5.9 million decrease in discontinued operations related to the hospitality and
land development segments were:





      o     decrease in income from the hospitality segment due to decreases in
            occupancy from weaker market conditions; and

      o     fewer home sales and member ships within the land development
            segment due to weaker market conditions.


      In addition, during 2002, Crescent Machinery closed down ten branch
locations. Crescent Operating realized a loss $32.7 million, net of income tax
benefit of $2.0 million, from discontinued operations related to the equipment
sales and leasing segment for the year ended December 31, 2001 as compared to a
loss of $2.9 million, net of income tax benefit of $2.0 million for the year
ended December 31, 2000. Significant components of the $29.8 million decrease
were:

      o     an adjustment of $26.9 million related to impairment of property;
            equipment and goodwill at the closed branches; and

      o     decreases in new and used equipment income and parts, supplies and
            service income due to weaker market conditions and increased demand
            for rentals as compared to purchases.


Year Ended December 31, 2000, as Compared to 1999

      Revenues.


                                      182


      Total revenue increased $5.0  million, or 5.1%, to $102.6 million for the
year ended December 31, 2000, compared with $97.6 million for the year ended
December 31, 1999. The increase in total revenue is attributable to the
following:



      Equipment Sales and Leasing Segment

Equipment sales and leasing revenue increased $7.7 million, or 12.4%, to $70.0
million for the year ended December 31, 2000, compared with $62.3 million for
the year ended December 31, 1999. Significant components of the increase were:



      o     an increase in rental revenue of $6.4 million during the year ended
            December 31, 2000 primarily due to acquisitions since January 1,
            1999 and same store rental growth; and



      o     an increase in parts, service and supplies revenue of $4.7 million
            for the current year primarily due to increased demand for
            maintenance and repair work; partially offset by



      o     a decrease of $3.4 million in new and used equipment sales due to
            increased demand from customers for rentals as compared to
            purchases.



      Hospitality Segment

Hospitality revenue from continuing operations decreased $2.7 million, or 7.6%,
to $32.6 million for the year ended December 31, 2000 as compared to hospitality
revenue from continuing operations of $35.3 million for the year ended December
31, 1999. The $2.7 million decrease in revenue was due to the sale of the Four
Seasons Hotel in Houston on November 3, 2000.



                                      183





      Operating Expenses.


      Total operating expenses increased $8.4 million, or 8.8%, to $103.6
million for the year ended December 31, 2000, compared with $95.2 million for
the year ended December 31, 1999. The increase in operating expenses is
attributable to the following:


      Equipment Sales and Leasing Segment


      Equipment sales and leasing expenses increased $9.9 million, or 16.8%, to
$68.7 million for the year ended December 31, 2000, compared with $58.8 million
for the year ended December 31, 1999. Significant components of the overall
increase were:



      -     a $6.4 million increase in rental expenses due mainly to an
            increase in rental inventory resulting in increased depreciation
            expense for the year ended December 31, 2000;



      -     a $3.2 million increase in operating expenses due primarily to
            acquisitions since January 1, 1999 and to the startup of the Fort
            Worth location in late 1999; and



      -     a $1.4 million increase in parts, service and supplies expenses as a
            result of an increase in parts, service and supplies revenue;
            partially offset by



      -     a $1.1 million decrease in new and used equipment expenses as a
            result of a decrease in new and used equipment sales.






                                      184



         Hospitality Segment

     Hospitality expenses from continuing operations decreased $3.1 million, or
9.2%, to $30.7 million for the year ended December 31, 2000 as compared to
hospitality expenses from continuing operations of $33.8 million for the year
ended December 31, 1999. The decrease of $3.1 million was due to the sale of the
Four Seasons Hotel in Houston on November 3, 2000.


      Corporate General and Administrative Expenses.


      Corporate general and administrative expenses increased $1.6 million, or
61.5%, to $4.2 million for the year ended December 31, 2000, compared with $2.6
million for the year ended December 31, 1999. These expenses consisted of
general corporate overhead costs, such as legal and accounting costs, insurance
costs and corporate salaries. The increase over prior year is primarily
attributable to (i) costs of approximately $0.5 million incurred in connection
with proceedings in bankruptcy court and litigation outside of bankruptcy court
arising from Crescent Operating's ownership interest in CBHS, (ii) professional
fees of approximately $0.6 million incurred in connection with the proposed
restructuring of Crescent Operating and (iii) transaction costs of approximately
$0.5 million incurred by Crescent Operating in conjunction with the negotiation,
execution and termination of the asset purchase agreement with CBHS.


      Investment Income.


      Investment income decreased $1.2 million or 63.2%, to $0.7 million for the
year ended December 31, 2000, compared with $1.9 million for the year ended
December 31, 1999. Significant components of the overall decrease were:






      -     a decrease in gain on sale of CS I and CS II of $0.8 million to $0.7
            million for the year ended December 31, 2000 as compared to a gain
            of $1.5 million for the year ended December 31, 1999;


      -     no recognition of income of $0.2 million from the investment in
            Hicks Muse as it was sold in 1999; and

      -     no gain on sale from the Corporate Arena of $0.2 million recognized
            for the year ended December 31, 1999.


                                      185


      Equity in Income (Loss) of Unconsolidated Subsidiaries



      Equity in income (loss) of unconsolidated subsidiaries increased $3.5
million or 100%, to $(7.0) million for the year ended December 31, 2000,
compared with losses of $3.5 million for the year ended December 31, 1999.
Significant components of the overall increase were:





      -     an increase in equity in loss of AmeriCold Logistics in the amount
            of $3.7 million partially due to holding the investment for a full
            year as compared to ten months in the prior year as well as
            increased labor costs;

      -     a decrease in equity in income of HCAC in the amount of $0.3
            million; and


      -     a decrease in equity in income of CS I and CS II in the amount of
            $0.3 million; partially offset by



      -     a decrease in equity in loss of Transportal Network in the amount
            of $0.8 million.



      Other Expense (Income)

      Other expense (income) decreased $17.0 million, or 147%, to $(5.4) million
for the year ended December 31, 2000, compared with $11.6 million for the year
ended December 31, 1999. Significant components of the decrease were:

      -     gain on lease termination resulting from sale of the Four Seasons
            Hotel in Houston of $18.3 million; and

      -     gain on sale of the Houston Center Athletic Club of $1.6 million;
            partially offset by

      -     an increase in interest expense in the amount of $2.1 million for
            the year ended December 31, 2000, resulting from an increase in
            outstanding indebtedness in connection with acquisitions; and

      -     to an increase in other expense in the amount of $0.8 million due to
            increases in bad debt expense within the equipment sales and leasing
            segment.

      Income Tax Benefit

      Income tax benefit of $0.9 million for the year ended December 31, 2000
represents a decrease of $8.2 million from the year ended December 31, 1999.
Income tax benefit consisted of a $4.4 million benefit at the corporate level,
a $1.8 million benefit for the equipment sales and leasing segment and a $3.0
million benefit for the temperature controlled logistics segment partially
offset by income tax expense for the hospitality segment of $8.2 million.

      Management continues to evaluate its ability to realize the deferred tax
assets quarterly by assessing the need for a valuation allowance. An inability
of Crescent Operating to execute business plans for certain of the company's
segments could affect the ultimate realization of the deferred tax assets.

      Minority Interests

      Minority interest were eliminated as a result of the assignment of the
land development and hospitality segments to Crescent Equities pursuant to the
Settlement Agreement.

      Discontinued Operations

      On January 1, 2002, Crescent Operating adopted Statements of Financial
Accounting Standards SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No.144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. Pursuant to the Settlement Agreement, Crescent Operating
transferred its interests in the hospitality and land development segments as of
February 14, 2002 and March 22, 2002. Crescent Operating has reclassed results
from operations for the hospitality and land development segments remaining at
December 31, 2001 as discontinued operations for the year ended December 31,
2001, 2000, and 1999. Crescent Operating realized income from discontinued
operations of $0.1 million after minority interest of $14.7 million and a $22.9
million income tax expense, related to the hospitality and land development
segments for the year ended December 31, 2000, as compared to income from
discontinued operations of $0.3 million after minority interest of $14.1 million
and income tax expense of $6.5 million, for the year ended December 31, 1999.
Significant components of the $0.2 million decrease were:

      -     decreased income from the land development segment due to fewer home
            and lot sales as compared to the prior year; partially offset by

      -     increase income at Sonoma Mission Inn and Spa which can be
            attributed to the 30 additional guest rooms completed in April 2000,
            the return of 20 rooms in January 2000 which were taken out of
            commission in February 1999 to house a temporary spa during the
            construction of the 30,000 square foot full-service spa, as well as
            increased rates in the current year as compared to discounted rates
            used in the prior year during the construction period; and

      -     income from the Renaissance Hotel, which was first leased by the
            Crescent Operating in June 1999;

      -     increased income from the hospitality segment due to increased rates
            and occupancy as compared to 1999.

      During 2002, Crescent Machinery closed down ten branch locations. Crescent
Operating realized a loss $2.9 million, net of income tax benefit of $2.0
million, from discontinued operations related to the equipment sales and leasing
segment for the year ended December 31, 2000 as compared to a loss of $1.4
million, net of income tax benefit of $0.9 million for the year ended December
31, 1999. Significant components of the $1.5 million increase were:

      o     an increase in loss during the year ended December 31, 2000 as
            compared to the year ended December 31, 1999 primarily due to a full
            year recognition of operations from acquisitions throughout 1999;
            and

      o     a decrease in demand of new and used equipment due to increased
            demand from customers for rentals as compared to purchases.


LIQUIDITY AND CAPITAL RESOURCES

      Recognizing that cash flow from its assets would not provide Crescent
Operating with adequate capital to meet its requirements during 2000 and 2001,
Crescent Operating, during the first quarter of 2000, extended certain payment
obligations by reaching agreements with Crescent Real Estate to defer

                                      186



until February 2001 payments on certain of Crescent Operating's obligations to
Crescent Real Estate otherwise scheduled to be made in 2000. During 2001,
Crescent Operating and Crescent Partnership agreed to modify certain debt
agreements, subject to the consummation of the proposed restructuring
transactions, to (i) defer principal and interest payments until the earlier of
December 31, 2001 or the close of the transaction contemplated by the Purchase
Agreement and (ii) cease the accrual of interest on certain debt instruments as
of May 1, 2001. Because the transactions contemplated by the Purchase Agreement
were not consummated, the condition was not met, and the modifications became
ineffective. In addition, in August 2001, November 2001 and again in March 2002,
with an effective date of December 2001, Crescent Operating modified the due
date of its line of credit with Bank of America to be August 15, 2002. On August
14, 2002, the maturity date of Crescent Operating's line of credit with Bank of
America was further extended to January 15, 2003, and Crescent Operating prepaid
interest for that time period in the amount of $0.3 million. Crescent Operating,
with the consent of Crescent Partnership which agreed to subordinate its
security interest in Crescent Operating's 40% interest in AmeriCold Logistics,
pledged all of its interest in AmeriCold Logistics to Bank of America to secure
the loan. In January 2003, Bank of America further extended the maturity of this
loan to March 15, 2003 and Crescent Operating agreed to prepay an additional two
months of interest at the loan's current rate.


      In addition, the recession, magnified by the September 11, 2001 terrorist
attacks, has placed significant pressure on Crescent Operating's ability to meet
its obligations as they come due. Consequently, Crescent Operating and its
operating units have defaulted in the payment of their obligations owed to
Crescent Real Estate and Crescent Partnership. Based upon current and reasonably
forecasted operating results, Crescent Operating will not be able to pay all of
its obligations as they come due. In addition, Crescent Operating's auditors
report included on the consolidated financial statements included in its 2001
Annual Report on Form 10-K expressed substantial doubt about Crescent
Operating's ability to continue to operate as a going concern.

      In February 2002, Crescent Operating was notified by Crescent Real Estate
that Crescent Operating's obligations to Crescent Real Estate were in default.
Moreover, Crescent Real Estate announced that it would seek to enforce
collection by foreclosure or otherwise of its claims against Crescent Operating
and its operating units as quickly as possible. Crescent Operating was unable to
repay the debts to Crescent Real Estate as to which a default had been declared.
Crescent Operating did not have sufficient liquidity to pay its liabilities on a
current basis. In light of these factors, Crescent Operating entered into the
Settlement Agreement with Crescent Real Estate.


      The Settlement Agreement significantly restricts Crescent Operating's
ability to access capital resources. Among other things, the Settlement
Agreement limits Crescent Operating's ability to incur additional indebtedness,
incur liens, pay dividends or make certain other restrictive payments. Based on
these restrictions in the Settlement Agreement and Crescent Operating's current
financial condition, it is unlikely that Crescent Operating would have access to
any third-party financing. In connection with the Settlement Agreement, Crescent
Real Estate did provide Crescent Operating with a $8.6 million facility to
provide liquidity and payment of specific expenditures during the pendency of
the bankruptcy case. This facility was amended effective October 2002 to
decrease the availability of funds to $6.3 million. A second facility was
entered into effective October 2002 to provide $2.9 million of additional funds
to Crescent Operating through the pendency of the bankruptcy case which is
expected to occur in the first quarter of 2003. Pursuant to this facility,
Crescent Real Estate will fund only Crescent Operating's out-of-pocket operating
expenses through the bankruptcy. Even with this financing, it is unlikely that
Crescent Operating will be able to fund its working capital requirements.


      Interest payments and rent payments due to Crescent Real Estate, accrued
but deferred as of September 30, 2002, totaled approximately $9.2 million and
$23.7 million, respectively, and as of December 31, 2001 totaled approximately
$6.4 million and $41.2 million, respectively.

Nine Months ended September 30, 2002

      Cash Flows.


                                      187

      Cash and cash equivalents include amounts from all consolidated
subsidiaries, including subsidiaries not wholly owned. Changes, therefore, do
not necessarily represent increases or decreases in cash directly available to
Crescent Operating.

      Cash and cash equivalents were $4.8 million and $13.9 million at September
30, 2002 and December 31, 2001, respectively. See "Note 1. Organization and
Basis of Presentation," included in the Financial Statements of Crescent
Operating for the nine months ended September 30, 2002. The 65% decrease is
attributable to $11.1 million and $3.5 million of cash used in investing and
financing activities, respectively, partially offset by $5.6 million of cash
provided by operating activities.


      Operating Activities

      Net cash flows provided by operating activities for the nine months ended
September 30, 2002 were $5.6 million compared with net cash used in operating
activities of $166.2 million for the nine months ended September 30, 2001.
Crescent Operating's inflow of cash provided by operating activities of $5.6
million was primarily attributable to inflows from:


      -     net income of $10.2 million;


      -     a decrease in accounts receivable of $6.1 million;


      -     a decrease in inventories of $4.0 million; and

      -     an increase in accounts payable and accrued expenses - Crescent Real
            Estate of $3.2 million.

      The inflow of cash provided by operating activities was partially offset
by outflows from:

      -     an increase in prepaid expenses and current assets of $0.8 million;
            and

      -     a decrease in accounts payable of $1.5 million.


      Investing Activities

      Net cash flows used in investing activities for the nine months ended
September 30, 2002 were $11.1 million compared with net cash provided by
investing activities of $6.3 million for the nine months ended September 30,
2001. Crescent Operating's outflow of cash used in investing activities of $11.1
million was primarily attributable to outflows from disposition of business
interests, net of cash transferred of $15.8 million.

      The outflow of cash used in investing activities was partially offset by
inflows from net proceeds from the sale of property and equipment of $4.8
million.

      Financing Activities


      Net cash flows used in financing activities for the nine months ended
September 30, 2002 were $3.5 million compared with net cash provided by
financing activities of $133.3 million for the nine


                                      188


months ended September 30, 2001. Crescent Operating's outflow of cash used in
financing activities of $3.5 million was primarily attributable to outflow from
payments of all long-term debt of $7.1 million. The outflow of cash provided by
financing activities was partially offset by inflows from:


      -     proceeds of all long-term debt of $3.6 million.

Year ended December 31, 2001


      Cash Flows


      Cash and cash equivalents include amounts from all consolidated
subsidiaries, including subsidiaries not wholly owned. Changes, therefore, do
not necessarily represent increases or decreases in cash directly available to
Crescent Operating.


      Cash and cash equivalents were $0.5 million and $1.0 million at December
31, 2001 and December 31, 2000, respectively. See "Note 1. Organization and
Basis of Presentation," included in the Financial Statements of Crescent
Operating for the year ended December 31, 2001. The 50.0% decrease is
attributable to $14.2 million and $118.7 million of cash provided by investing
and financing activities, respectively, partially offset by $133.4 million of
cash used in operating activities.

      Operating Activities

      Net cash flows used in operating activities for the year ended December
31, 2001 were $133.4 million compared with the net cash used in operating
activities of $46.4 million and $9.1 million for the years ended December 31,
2000 and 1999, respectively. Crescent Operating's outflow of cash used in
operating activities of $133.4 million was primarily attributable to outflows
from:



      -     net operating activities of discontinued operations of $136.7
            million;

      -     net loss of $78.1 million; and

      -     a decrease in other assets of $0.5 million.



      The outflow of cash used in operating activities was partially offset by:


      -     decrease in inventories of $15.8 million;

      -     decrease in accounts receivable of $11.2 million; and

      -     decrease in prepaid expenses and current assets of $0.6 million.



      Investing Activities

      Net cash flows provided by investing activities for the year ended
December 31, 2001 were $14.2 million compared with the net cash provided by
investing activities of $20.4 million and the net cash used in investing
activities of $34.5 million for the years ended December 31, 2000 and 1999,
respectively. Crescent Operating's inflow of cash provided by investing
activities of $14.2 million was primarily attributable to inflows from proceeds
from the sale of property and equipment of $22.4 million, and net investing
activities of discontinued operations of $13.0 million.




                                      189



      The inflow of cash provided by investing activities was partially offset
by purchases of property and equipment of $21.1 million.



      Financing Activities.


      Net cash flows provided by financing activities for the year ended
December 31, 2001 were $118.7 million compared with the net cash provided by
financing activities of $27.0 million and $40.1 million for the years ended
December 31, 2000 and 1999, respectively. Crescent Operating's inflow of cash
provided by financing activities of $118.7 million was primarily attributable to
inflows from net financing activities of discontinued operations of $156.2
million and proceeds of all long-term debt of $39.8 million.

      The inflow of cash provided by financing activities was partially offset
by payments of all long-term debt of $77.4 million.


      Financing Attributable to Corporate and Wholly Owned Subsidiaries.

      As of December 31, 2001, financing instruments attributable to corporate
and wholly owned subsidiaries were as follows:


      -     During 2001, Bank of America extended the maturity date of Crescent
            Operating's $15.0 million unsecured bank line of credit from Bank of
            America, first from August 2001 to November 2001, then from November
            2001 to the earlier of December 31, 2001 or the close of the
            Purchase Agreement, then in March 2002, with an effective date of
            December 31, 2001, from December 2001 to August 2002 and finally in
            August 2002, from August 2002 to January 2003. Crescent Operating,
            with the consent of Crescent Partnership which agreed to subordinate
            its security interest in Crescent Operating's 40% interest in
            AmeriCold Logistics, pledged all of its interest in AmeriCold
            Logistics to Bank of America to secure the loan. The line of credit
            bears interest at the bank's prime rate and all principal and unpaid
            interest on the line of credit is payable January 15, 2003. In
            January 2003, Bank of America further extended the maturity of this
            loan to March 15, 2003 and Crescent Operating agreed to prepay an
            additional two months of interest at the loan's current rate. The
            $15.0 million available under the line of credit from Bank of
            America is fully drawn.


      -     In connection with the formation and capitalization of Crescent
            Operating in the second quarter of 1997, Crescent Operating received
            approximately $14.1 million in cash from Crescent Partnership and
            Crescent Partnership loaned Crescent Operating approximately $35.9
            million pursuant to a five-year term loan, maturing on May 8, 2002,
            of which approximately $16.2 million was outstanding as of December
            31, 2001. The loan is a recourse loan that is collateralized, to the
            extent not prohibited by pre-existing arrangements, by a first lien
            on the assets which Crescent Operating now owns or may acquire in
            the future. The loan bears interest at the rate of 12% per annum,
            compounded quarterly, with required quarterly principal and interest
            payments limited by quarterly cash flow of Crescent Operating as
            defined in the applicable credit agreement.

      -     Effective March 12, 1999, Crescent Operating agreed to make a
            permanent reduction in its $30.4 million 12% line of credit with
            Crescent Partnership commensurate with the proceeds from the sale of
            80% of Crescent Operating's 2% interest in the
            temperature-controlled logistics partnerships. On March 12, 1999,
            Crescent Operating received $13.2 million of proceeds and
            correspondingly permanently reduced the availability under the line
            of credit from $30.4 million


                                      190

            to $17.2 million. The line of credit bears interest at the rate of
            12% per annum, compounded quarterly, payable on an interest-only
            basis during its term, which expires on the later of (i) May 21,
            2002 or (ii) five years after the last draw under the line of credit
            (in no event shall the maturity date be later than June 2007). Draws
            may be made under the line of credit until June 22, 2002. The line
            of credit is a recourse obligation and amounts outstanding
            thereunder are collateralized, to the extent not prohibited by
            pre-existing arrangements, by a first lien on the assets which
            Crescent Operating now owns or may acquire in the future. The line
            of credit is cross-collateralized and cross-defaulted with Crescent
            Operating's other borrowings from Crescent Partnership. As of
            December 31, 2001, $20.2 million was outstanding under the line of
            credit.

      -     Also effective March 12, 1999, Crescent Operating obtained from
            Crescent Partnership a $19.5 million line of credit bearing interest
            at a rate of 9% per annum. The line of credit is payable on an
            interest-only basis during its term, which expires in May 2002. The
            note is cross-collateralized and cross-defaulted with Crescent
            Operating's other borrowings from Crescent Partnership. Upon
            inception of this line of credit, Crescent Operating immediately
            borrowed the full $19.5 million with which it contributed
            approximately $15.5 million in connection with the formation of
            AmeriCold Logistics and used the remaining $4.0 million of proceeds
            to reduce the amount outstanding under the 12% line of credit with
            Crescent Partnership. As of December 31, 2001, $22.0 million was
            outstanding under the line of credit.

      -     Crescent Operating funded its contribution to COPI Colorado using
            the proceeds from a $9.0 million term loan from Crescent
            Partnership. The loan bears interest at 12% per annum, with interest
            payable quarterly and the full original principal amount of $9.0
            million, together with any accrued but unpaid interest, payable in
            May 2002. Crescent Operating's interest in COPI Colorado secures the
            loan, which is cross-collateralized and cross-defaulted with
            Crescent Operating's other borrowings from Crescent Partnership. As
            of December 31, 2001, $10.6 million was outstanding under the line
            of credit.

      -     As a part of the acquisitions of E.L. Lester and Company and Harvey
            Equipment Center, Inc., Crescent Operating issued notes payable in
            the amount of $6.0 million and $1.2 million, respectively. The
            Lester and Harvey notes are payable in semi-annual principal and
            interest payments and bear interest at 7.5% and 8.0%, respectively.
            All principal and unpaid interest on the Harvey and Lester notes are
            due July 2002 and July 2003, respectively. The Lester note is
            collateralized by stock of E.L. Lester and Company. As of December
            31, 2001, the outstanding balances on the Lester and Harvey notes
            were $2.5 million and $0.3 million, respectively.

      -     Crescent Machinery has various equipment notes payable and floor
            plan notes under credit facilities which are collateralized by the
            equipment financed. The equipment notes are payable in monthly
            principal and interest payments and bear interest at 4.5% to 9.5%
            per annum and mature in 2002 due to defaults in payments. The floor
            plan notes do not bear interest, do not require monthly principal or
            interest payments and generally have terms ranging from three to
            twelve months. As of December 31, 2001, the outstanding balance on
            the equipment notes was $80.7 million and on the floor plan notes
            was $4.2 million. At December 31, 2001, Crescent Machinery was in
            default on its loans from commercial institutions because of its
            nonpayment of required principal payments with outstanding principal
            amounts under default by Crescent Machinery of $84.9 million at
            December 31, 2001.

      Subsequent to December 31, 2001, the following events occurred involving
such financing instruments:

      -     On February 15, 2002, Crescent Partnership purchased the Lester and
            Harvey notes from the note holders.


                                      191

      -     Due to its bankruptcy filing and to non-payment of required
            principal payments, Crescent Machinery is currently in default on
            its equipment financing notes. Outstanding principal amounts under
            default by Crescent Machinery totaled $84.9 million at December 31,
            2001. On February 6, 2002, Crescent Machinery Company filed a
            voluntary petition under Chapter 11 of the U.S. Bankruptcy Code with
            the U.S. Bankruptcy Court in Fort Worth, Texas.

      -     On February 13, 2002, Crescent Operating received notice from
            Crescent Partnership that it was in default on the 1997 term loan,
            the 1997 revolving loan, the AmeriCold loan and the COPI Colorado
            loan. On February 14, 2002, pursuant to the Settlement Agreement,
            Crescent Partnership foreclosed on certain collateral securing such
            loans, which had the effect of reducing the aggregate indebtedness
            from $76.2 million to $36.1 million.

      Financing Attributable to Non Wholly Owned Subsidiaries.

      As of December 31, 2001, financing instruments attributable to non wholly
owned subsidiaries were as follows:

      -     Desert Mountain Properties has a credit agreement with Crescent
            Partnership pursuant to which Crescent Partnership has advanced
            funds to Desert Mountain Properties through a "Junior Note". The
            Junior Note evidences a $60.0 million advance from Crescent
            Partnership to Desert Mountain Properties and accrues interest at
            14% per annum. The principal and interest on the Junior Note is
            payable in quarterly installments, based on proceeds from the
            operations of Desert Mountain Properties. As of December 31, 2001,
            the outstanding balance of the Junior Note was $59.0 million.

      -     Desert Mountain Properties entered into a $50.0 million credit
            facility with National Bank of Arizona in May 1998. The facility was
            amended in December 2001. The facility is comprised of (i) a $40.0
            million line of credit available for vertical financing related to
            new home construction and bears an annual interest at the prime rate
            and (ii) a $10.0 million line of credit available for borrowings
            against certain notes receivable issued by Desert Mountain
            Properties and bears an annual interest rate of prime plus 1%. The
            credit facility expires November 2003 with interest payable monthly,
            collateralized by land owned by Desert Mountain Properties, deeds of
            trust on lots sold and home construction. As of December 31, 2001,
            the outstanding balance on the line of credit with National Bank of
            Arizona was $29.9 million.

      -     Desert Mountain Properties has an unsecured promissory note payable
            to Crescent Partnership for $1.0 million. The note bears interest at
            10%, with payments of interest due in quarterly installments.
            Payment of principal is due at the note's expiration of December 31,
            2002.

      -     CRDI has four lines of credit with Crescent Partnership. The first
            line of credit of $56.2 million bears interest at 11.5% per annum,
            compounded annually. Principal and interest payments are due as
            distributions from projects are received, as defined by the
            applicable agreement. The line of credit is due August 2004. As of
            December 31, 2001, $48.4 million was outstanding on the $56.2
            million line of credit. The second line of credit of $100.0 million
            bears interest at 11.5% per annum, compounded annually. Principal
            and interest payments are due as distributions from projects are
            received, as defined by the applicable agreement. The line of credit
            is due September 2008. As of December 31, 2001, $72.3 million was
            outstanding on the $100.00 million line of credit. The third line of
            credit with Crescent Partnership for $40.0 million bears interest at
            11.5% per annum. Principal and interest payments are due as
            distributions are received, as defined by the applicable credit
            agreement. The line of credit is due December 2006. As of December
            31, 2001, $23.4 million was outstanding on the $40.0 million line of
            credit. The fourth line of credit with Crescent Partnership for
            $70.0 million bears interest at 11.5% per annum. Principal and
            interest payments are due as distributions are received, as defined
            by the applicable credit


                                      192

            agreement. The line of credit is due December 2006. As of December
            31, 2001, $36.6 million was outstanding on the $70.0 million line of
            credit. The lines of credit are collateralized by CRDI's interests
            in East West Resort Development partnerships, East West Resorts, LLC
            and other CRDI property. Generally, CRDI's loans with Crescent
            Partnership are cross-collateralized and cross-defaulted.

      -     The operating entities in which CRDI invests have various
            construction loans for East West projects which are collateralized
            by deeds of trust, security agreements and a first lien on the
            assets conveyed. The notes are payable in monthly principal and
            interest payments and bear interest at 4.4% to 11.3% per annum. The
            notes mature between 2002 and 2003. As of December 31, 2001, the
            outstanding balance on these construction notes was $136.6 million
            in the aggregate.

      -     CRL has a line of credit with Crescent Partnership in the amount of
            $7.0 million bearing interest at a rate of 12% per annum. The line
            of credit is due August 2003. The principal and interest are payable
            as CRL receives distributions pursuant to the CR License Operating
            Agreement and the CR Las Vegas Operating Agreement. The $7.0 million
            available under the line of credit was fully drawn as of December
            31, 2001.

      -     In July 2000, CRL obtained from Crescent Partnership a $0.2 million
            term note bearing interest at a rate of 12% per annum. The full
            original principal amount of $0.2 million, together with any accrued
            but unpaid interest is due August 2003. As of December 31, 2001,
            $0.2 million was outstanding on the note.

      In February and March 2002, in accordance with the Settlement Agreement,
Crescent Operating transferred its equity interest in each of the debtors to
Crescent Partnership.

      On a consolidated basis, this had an impact of transferring debt of $414.3
million at December 31, 2001 back to Crescent Partnership.


CRITICAL ACCOUNTING POLICIES

      Crescent Operating's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Crescent Operating to make estimates and judgments that affect the reported
amounts of assets, liabilities, and contingencies as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Crescent Operating evaluates its assumptions and
estimates on an on-going basis. Crescent Operating bases its estimates on
historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Crescent Operating believes
the following critical accounting policies affect the more significant judgments
and estimates used in the preparation of its consolidated financial statements.

Inventories

      Inventories consist of new and used equipment held for sale and equipment
parts, all of which are stated at the lower of cost or market using the
first-in, first-out or specific identification methods.

Property and Equipment

      Property and equipment is recorded at cost. Crescent Operating uses the
straight-line method of depreciation for financial statement purposes. The
estimated useful lives used in computing depreciation are as follows:

         Rental Equipment................................... 2-10 years
         Transportation equipment...........................  3-5 years
         Furniture, fixtures, and other equipment..........  5-10 years

      From time-to-time, Crescent Machinery offers its rental customers the
opportunity to purchase rented equipment for a stated value at a future point in
time. In such instances, Crescent Machinery depreciates the specific rental item
in accordance with the contract. Expenditures for maintenance and repairs are
charged to expense as incurred. Expenditures for renewals or betterments are
capitalized. The cost of property replaced, retired, or otherwise disposed of is
removed from the asset account along with the related accumulated depreciation.
Long-lived assets are evaluated when indications of impairment are present, and
provisions from possible losses are recorded when undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
value.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      At December 31, 2001, Crescent Operating had fixed and variable rate notes
payable and lines of credit subject to market risk related to changes in
interest rates, none of which were entered into for trading purposes. Crescent
Operating endeavored to manage its market risk by attempting to match
anticipated inflow of cash from its operating, investing and financing
activities with anticipated outflow of cash to fund debt payments, investments
and other cash requirements. Crescent Operating has not used derivative
financial instruments to manage interest rate risk.

      As of December 31, 2001, Crescent Operating's subsidiaries had amounts
outstanding under variable rate notes payable and lines of credit totaling
$242.1 million, with a weighted average interest rate of 10.5% per annum. A
hypothetical 10% increase in the weighted average interest rate on Crescent
Operating's variable rate notes and lines of credit would cause a $2.5 million
increase in interest expense and a decrease in Crescent Operating's earnings and
cash flows of $0.7 million, based on the amount of variable rate debt
outstanding as of December 31, 2001. Crescent Operating ceased either to own or
to control such subsidiaries in February 2002 and thus ceased to have market
interest rate exposure with respect to those instruments.

      As of December 31, 2001, Crescent Operating had amounts outstanding under
fixed rate notes payable and lines of credit totaling $345.0 million, with a
weighted average interest rate of 11.4% per annum. Hypothetically, if market
interest rates were substantially lower than the rates on Crescent Operating's
fixed rate notes and credit lines, Crescent Operating would be able to reduce
interest expense


                                      193

if it were able to prepay and/or refinance those instruments. However, as
explained elsewhere in this proxy statement/prospectus, Crescent Operating is
unable to prepay or refinance any of those instruments, either because Crescent
Operating in February 2002 ceased either to own or to control subsidiaries
holding such instruments or because such instruments have matured due to
Crescent Operating's payment default.

      Since December 31, 2001, there have been no material changes to the
information regarding market risk.

                        CRESCENT REAL ESTATE MANAGEMENT'S
                      DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS


      You should read this section in conjunction with the selected financial
data and the consolidated financial statements and the accompanying notes in the
Financial Statements of Crescent Real Estate, respectively, of this proxy
statement/prospectus. Historical results and percentage relationships set forth
in these Items and this section should not be taken as indicative of future
operations of Crescent Real Estate.





SEGMENT INFORMATION

      The economic slowdown in the third quarter of 2001, combined with the
events of the September 11, 2001 have had an adverse impact on resort/hotel
operations and lot sales primarily at the Desert Mountain residential
development property. However, the office property portfolio, which represents
approximately 59% of total assets, continues to be stable with same-store
weighted average occupancy in excess of 90% and average remaining lease term of
approximately five years at September 30, 2002. Although management does not
expect full recovery of these investment segments in the near-term, Crescent
Real Estate remains committed to its fundamental investment segments.

      The following sections include information for each of Crescent Real
Estate's investment segments for the three and nine months ended September 30,
2002 and the year ended December 31, 2001.

Office Segment

      Crescent Real Estate owned or had an interest in 74 office properties as
of December 31, 2001 and 73 office properties (including three retail
properties) as of September 30, 2002.

      The following tables show the same-store net operating income growth for
the approximately 25.4 million square feet of office property space owned as of
December 31, 2001 and the approximately 24.1 million square feet of office
property space owned as of September 30, 2002. These amounts exclude
approximately 1.5 million square feet of office property space at Bank One
Center, in which Crescent Real Estate owns a 50% equity interest, approximately
1.5 million square feet of office property space at Four Westlake Park, Bank One
Tower and Three Westlake Park, in each of which Crescent Real Estate has a 20%
equity interest, approximately 0.1 million square feet of office property space
at Avallon IV, which was completed during the year ended December 31, 2001,
approximately 0.8 million square

                                      194

feet of office property space at Miami Center, in which Crescent Real Estate
owns a 40% equity interest, approximately 0.6 million square feet of office
property space at 5 Houston Center, which was completed on September 16, 2002
and in which Crescent Real Estate owns a 25% equity interest, and approximately
0.7 million square feet of office property space at Johns Manville Plaza, which
Crescent Real Estate acquired on August 29, 2002.



                                    FOR THE THREE MONTHS ENDED SEPTEMBER 30,              FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                    ----------------------------------------              ---------------------------------------
                                                                    PERCENTAGE/                                         PERCENTAGE/
                                                                  POINT INCREASE                                      POINT INCREASE
                                 2002              2001             (DECREASE)          2002              2002          (DECREASE)
                                 ----              ----             ----------          ----              ----          ----------
(IN MILLIONS)
                                                                                                    
Same-store Revenues(1)          $129.0            $132.5              (2.6)%           $392.3            $395.0           (0.7)%
Same-store Expenses              (58.9)            (60.5)             (2.6)%           (181.5)           (180.0)           0.8%
                                ------            ------              ----             ------            ------           ----

Net Operating Income            $ 70.1            $ 72.0              (2.6)%           $210.8            $215.0           (2.0)%
                                ======            ======              ====             ======            ======           ====
Weighted Average
Occupancy                         89.7%             93.0%             (3.3) pts          90.1%             93.2%          (3.1) pts
                                ------            ------              ----             ------            ------           ----




                                      FOR THE YEAR ENDED DECEMBER 31,
                                      -------------------------------
                                                                PERCENTAGE/
                                                              POINT INCREASE
                               2001              2000           (DECREASE)
                               ----              ----           ----------
(IN MILLIONS)
                                                     
Same-store Revenues           $552.5            $519.9               6.3%
Same-store Expenses           (250.1)           (229.3)              9.1%
                              ------            ------            ------
Net Operating Income          $302.4            $290.6               4.1%
                              ======            ======            ======
Weighted Average
Occupancy                       92.3%             91.8%           0.5 pt
                              ------            ------            ------


      The following tables show renewed or re-leased leasing activity and the
percentage increase of leasing rates for signed leases compared to expiring
leases at Crescent Real Estate's office properties owned as of the three and
nine months ended September 30, 2002 and the year ended December 31, 2001.



                                                    FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002,
                                                    ----------------------------------------------
                                                                        EXPIRING                    PERCENTAGE
                                       SIGNED LEASES                     LEASES                     INCREASES
                                       -------------                     ------                     ---------
                                                                                           
Renewed or re-leased(1)                1,108,000 sq ft               1,108,000 sq ft                    N/A
Weighted average full-service
rental rate(2)                        $22.24 per sq ft              $23.70 per sq ft                     (6)%
FFO annual net effective rental
rate(3) (4)                           $12.26 per sq ft              $14.04 per sq ft                    (13)%


----------

(1)   Excludes termination fees.




                                                    FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002,
                                                    --------------------------------------------
                                                                         EXPIRING                     PERCENTAGE
                                       SIGNED LEASES                      LEASES                      INCREASES
                                       -------------                      ------                      ---------
                                                                                             
Renewed or re-leased(1)                2,165,000 sq ft                2,165,000 sq ft.                   N/A
Weighted average full-service
rental rate(2)                        $22.02 per sq ft               $22.27 per sq ft                     (1)%
FFO annual net effective rental
rate(3) (4)                           $12.13 per sq ft               $12.56 per sq ft                     (3)%




                                                          FOR THE YEAR ENDED DECEMBER 31, 2001
                                                          ------------------------------------
                                                                          EXPIRING                    PERCENTAGE
                                       SIGNED LEASES                      LEASES                      INCREASES
                                       -------------                      ------                      ---------
                                                                                             
Renewed or re-leased(1)                1,890,000 sq ft                      N/A                          N/A
Weighted average full-service
rental rate(2)                        $23.67 per sq ft               $20.21 per sq ft                     17%
FFO annual net effective rental
rate(3) (4)                           $14.70 per sq ft               $11.21 per sq ft                     31%


----------

(1)   All of which have commenced or will commence during the next 12 months.




                                      195

(2)   Including free rent, scheduled rent increases taken into account under
      GAAP and including adjustments for expenses payable by or reimbursable
      from customers based on current expense levels. Crescent Real Estate
      discloses 100% of the rental rate related to each tenant regardless of
      Crescent Real Estate's ownership in the building.

(3)   Calculated as weighted average full-service rental rate minus operating
      expenses.

(4)   Funds from operations, or FFO, based on the revised definition adopted by
      the Board of Governors of the National Association of Real Estate
      Investment Trusts, or NAREIT, effective January 1, 2000, and as used
      herein, means net income (loss), determined in accordance with GAAP,
      excluding gains (losses) from sales of depreciable operating property,
      excluding extraordinary items, as defined by GAAP, plus depreciation and
      amortization of real estate assets, and after adjustments for
      unconsolidated partnerships and joint ventures. FFO is a non-GAAP measure
      and should not be considered an alternative to GAAP measures, including
      net income and cash generated from operating activities. For a more
      detailed definition and description of FFO and comparisons to GAAP
      measures, see " - Liquidity and Capital Resources - Funds from Operations"
      below.

Resort/Hotel Segment

      Crescent Real Estate owned nine hotel properties as of September 30, 2002
and December 31, 2001.

      The following table shows same-store net operating income, weighted
average occupancy, average daily rate and revenue per available room/guest for
the Crescent Real Estate hotel properties for the three and nine months ended
September 30, 2002 and the years ended December 31, 2001 and 2000.




                                              FOR THE THREE MONTHS ENDED SEPTEMBER 30,      FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                              ----------------------------------------      ---------------------------------------
                                                                            PERCENTAGE/                                 PERCENTAGE/
                                                                               POINT                                       POINT
UPSCALE BUSINESS-CLASS HOTELS                   2002            2001         DECREASE         2002            2001        CHANGE
-----------------------------                   ----            ----         --------         ----            ----        ------
                                                                                                      
Same-Store NOI (in thousands) ........        $ 3,714         $ 3,672           1%          $13,676         $14,111         (3)%
Weighted average occupancy ...........             73%             72%          1 pts            71%             72%        (1) pts
Average daily rate ...................        $   109         $   111          (2)%         $   114         $   118         (3)%
Revenue per available room/guest night        $    79         $    80          (1)%         $    81         $   859         (5)%




                                              FOR THE THREE MONTHS ENDED SEPTEMBER 30,      FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                              ----------------------------------------      ---------------------------------------
                                                                            PERCENTAGE/                                 PERCENTAGE/
                                                                               POINT                                       POINT
LUXURY AND DESTINATION FITNESS                  2002            2001         DECREASE         2001            2000        CHANGE
RESORTS AND SPAS                                ----            ----         --------         ----            ----        ------
                                                                                                      
Same-Store NOI (in thousands) ........        $ 6,185         $ 7,085         (13)%         $22,707         $24,938         (9)%
Weighted average occupancy ...........             74%             72%          2 pts            71%             72%        (1)pts
Average daily rate ...................        $   117         $   418          --%          $   463         $   469         (1)%
Revenue per available room/guest .....        $   301         $   294           2%          $   319         $   331         (4)%




                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                  -------------------------------
                                                                            PERCENTAGE/
                                                                               POINT
UPSCALE BUSINESS-CLASS HOTELS                   2001            2000          CHANGE
-----------------------------                   ----            ----          ------
                                                                   
Same-Store NOI (in thousands)(1) .....        $20,165         $22,157          (9)%
Weighted average occupancy ...........             71%             75%         (4) pts
Average daily rate ...................        $   118         $   116           2%
Revenue per available room/guest night        $    83         $    86          (3)%


----------

(1)   Excludes the Four Seasons Hotel -- Houston, which was sold on November 3,
      2000.



                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                    -------------------------------
                                                                            PERCENTAGE/
LUXURY AND DESTINATION FITNESS                                                 POINT
RESORTS AND SPAS                                2001            2000          DECREASE
----------------                                ----            ----          --------
                                                                   
Same-Store NOI (in thousands) ........        $29,451         $36,837             (20)%
Weighted average occupancy ...........             69%             79%        (10)pts
Average daily rate ...................        $   470         $   442               6%
Revenue per available room/guest .....        $   318         $   340              (6)%



                                      196

On February 14, 2002, Crescent Real Estate executed an agreement with Crescent
Operating, pursuant to which Crescent Operating transferred to subsidiaries of
Crescent Real Estate, in lieu of foreclosure, Crescent Operating's lessee
interests in the eight Crescent Real Estate hotel properties leased to
subsidiaries of Crescent Operating. As a result, the subsidiaries of Crescent
Real Estate became the lessees of these Crescent Real Estate hotel properties.
Crescent Real Estate fully consolidated the operations of the eight hotel
properties beginning on the date of the transfers.

      CR License, LLC and CRL Investments, Inc.

      As of December 31, 2001, Crescent Real Estate had a 28.5% interest in CR
License, LLC, the entity which owns the right to the future use of the "Canyon
Ranch" name. Crescent Real Estate also had a 95% economic interest, representing
all of the non-voting common stock, in CRL Investments, Inc., which has an
approximately 65% economic interest in the Canyon Ranch Spa Club in the Venetian
Hotel in Las Vegas, Nevada.

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's 1.5% interest in CR License and 5.0% interest, representing all of
the voting stock, in CRL Investments. As a result, as of September 30, 2002,
Crescent Real Estate had a 30.0% interest in CR License, the entity which owns
the right to the future use of the "Canyon Ranch" name. Crescent Real Estate
also had a 100% economic interest, representing all of the common stock in CRL
Investments, which has a approximately 65% economic interest in the Canyon Ranch
Spa Club in the Venetian Hotel in Las Vegas, Nevada.

Residential Development Segment

      As of September 30, 2002, Crescent Real Estate owned or had economic
interests in five residential development corporations. The residential
development corporations in turn, through joint ventures or partnership
arrangements, own interests in 21 residential development properties. The
residential development corporations are responsible for the continued
development and the day to day operations of the residential development
properties.

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations, specifically The Woodlands Land Company, Desert Mountain
Development Corporation and CRDI. Crescent Real Estate fully consolidated the
operations of the three residential development corporations beginning on the
dates of the asset transfers.


      The Woodlands Land Development Company, L.P. and The Woodlands Commercial
Properties Company, The Woodlands, Texas



      The following tables show residential lot sales at an average price per
lot and commercial land sales at an average price per acre for the three and
nine months ended September 30, 2002 and 2001 and the year ended December 31,
2001 and 2000.


                                      197



                                     FOR THE THREE MONTHS ENDED           FOR THE NINE MONTHS ENDED
                                            SEPTEMBER 30,                      SEPTEMBER 30,
                                     ---------------------------          -------------------------
                                        2002              2001              2002              2001
                                      --------          --------          --------          --------
                                                                                
Residential lot sales                      306               432               818             1,296
Average sales price per lot           $ 78,000          $ 75,000          $ 69,000          $ 77,000
Commercial land sales                  8 acres           6 acres          60 acres          83 acres
Average sales price per acre          $384,000          $381,000          $346,000          $331,000




                                        FOR THE YEAR ENDED
                                            DECEMBER 31,
                                      ---------------------------
                                        2001              2000
                                      --------          --------
                                                  
Residential lot sales                    1,718             2,033
Average sales price per lot           $ 72,000          $ 62,000
Commercial land sales                 94 acres          124 acres
Average sales price per acre          $337,000          $308,000


      -     Average sales price per lot decreased by $8,000, or 10% due to fewer
            higher priced lots sold primarily from the Carlton Woods development
            in the nine months ended September 30, 2002, compared to the same
            period 2001. Average sales price per lot increased by $10,000, or
            16%, due to a product mix of higher priced lots from the Carlton
            Woods development in the year ended December 31, 2001, compared to
            the same period in 2000.

      -     Carlton Woods is The Woodlands' new upscale residential development.
            It is a gated community consisting of 491 lots located around a Jack
            Nicklaus signature golf course. As of December 31, 2001, 213 lots
            had sold at prices ranging from $0.1 million to $1.0 million per
            lot, or an average price of $343,000 per lot. As of September 30,
            2002, 233 lots had been sold at prices ranging from $0.1 million to
            $2.2 million per lot, or an average price of $348,000 per lot.
            Additional phases within Carlton Woods are expected to be marketed
            to the public over the next two years.

      -     Future buildout of The Woodlands is estimated at approximately
            12,264 residential lots and approximately 1,599 acres of commercial
            land, of which approximately 1,671 residential lots and 972 acres
            are currently in inventory.


Desert Mountain Properties Limited Partnership, Scottsdale, Arizona


The following tables show residential lot sales at an average price per lot for
the three and nine months ended September 30, 2002 and 2001 and the years ended
December 31, 2001 and 2000.



                                       FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                              SEPTEMBER 30,                        SEPTEMBER 30,
                                       ---------------------------          ---------------------------
                                          2002              2001              2002              2001
                                        --------          --------          --------          --------
                                                                                  
Residential lot sales                          6                17                54                59
Average sales price per lot(1)          $831,000          $470,000          $746,000          $734,000




                                             FOR THE YEAR ENDED
                                                DECEMBER 31,
                                        --------------------------
                                            2001              2000
                                        --------          --------
                                                    
    Residential lot sales                     86               178
    Average sales price per lot (1)     $688,000          $619,000


--------------------

(1) Including equity golf memberships.

      -     With the higher priced residential lots being completed during the
            latter phases of development at Desert Mountain, the average sales
            price per lot increased by $69,000, or 11%, for the year ended


                                      198

            December 31, 2001, as compared to the same period in 2000. As a
            result of product mix and a decline in the economy combined with the
            events of September 11, 2001, the number of lot sales decreased to
            86 lots for the year ended December 31, 2001, as compared to 178
            lots for the same period in 2000.


      -     Approved future buildout is estimated to be approximately 205
            residential lots, of which approximately 120 are currently in
            inventory.

Crescent Resort Development, Inc., formerly Crescent Development Management
Corp., Beaver Creek, Colorado


      The following tables show total active projects, residential lot and
residential unit sales, commercial land sales and average sales price per lot
and unit.



                                                    FOR THE THREE MONTHS                 FOR THE NINE MONTHS
                                                        ENDED SEPTEMBER 30,               ENDED SEPTEMBER 30,
                                                  --------------------------          --------------------------
                                                    2002              2001              2002              2001
                                                  --------          --------          --------          --------
                                                                                           
Active projects                                            14                13                14                13
Residential lot sales                                      30                34               189               108
Residential unit sales:
Townhome sales                                              1                 1                 3                 9
Single-family home sales                                   --                --                --                --
Residential equivalent timeshare unit sales                 2                --                10                --
Condominium sales                                          26                10               222                22
Commercial land sales                                      --                --                --                --
Average sales price per residential lot         $     108,000     $      86,000     $      68,000      $     64,000
Average sales price per residential unit        $ 1.0 million     $ 1.7 million     $     669,000      $1.6 million
Average sales price per residential
equivalent time share unit                      $ 1.1 million                --     $ 1.2 million                --




                                                        FOR THE YEAR ENDED
                                                           DECEMBER 31,
                                                -------------------------------
                                                    2001                 2000
                                                -----------            --------
                                                            
Active projects                                          14                  12
Residential lot sales                                   181                 343
Residential unit sales:
Townhome sales                                           11                  19
Single-family home sales                                 --                   5
Equivalent timeshare unit sales                          11                  --
Condominium sales                                       109                  26
Commercial land sales                              -- acres             9 acres
Average sale price per residential lot        $      73,000       $     136,000
Average sale price per residential unit       $ 1.0 million       $ 1.6 million
Average sales price per time share unit                 N/A                 N/A


      -     Average sales price per lot decreased by $63,000, or 46%, and
            average sales price per unit decreased $0.6 million, or 38%, due to
            lower priced product mix sold in the year ended December 31, 2001,
            as compared to the same period in 2000. Average sales price per unit
            decreased $0.9 million, or 56%, due to lower priced product mix sold
            in the nine months ended September 30, 2002, as compared to the same
            period in 2001.


                                      199

Temperature-Controlled Logistics Segment


      As of September 30, 2002 Crescent Real Estate held a 40% interest in the
temperature-controlled logistics partnership, which owns AmeriCold Corporation,
which directly or indirectly owns the 88 Crescent Real Estate
temperature-controlled logistics properties, with an aggregate of approximately
441.5 million cubic feet, or 17.5 million square feet, of warehouse space. The
business operations associated with the Crescent Real Estate
temperature-controlled logistics properties are owned by AmeriCold Logistics,
which is owned 60% by Vornado Operating, L.P. and 40% by a subsidiary of
Crescent Operating. Crescent Real Estate has no interest in AmeriCold Logistics.


      AmeriCold Logistics, as sole lessee of the Crescent Real Estate
temperature-controlled logistics properties, leases the temperature-controlled
logistics properties from AmeriCold Corporation under three triple-net master
leases, as amended. On February 22, 2001, AmeriCold Corporation and AmeriCold
Logistics agreed to restructure certain financial terms of the leases, including
the adjustment of the rental obligation for 2001 to $146.0 million, the
adjustment of the rental obligation for 2002 to $150.0 million (plus contingent
rent in certain circumstances), the increase of AmeriCold Corporation's share of
capital expenditures for the maintenance of the properties from $5.0 million to
$9.5 million (effective January 1, 2000) and the extension of the date on which
deferred rent was required to be paid to December 31, 2003.

      In the first quarter of 2000, AmeriCold Logistics started to experience a
slowing in revenue growth from the previous year. This was primarily due to
customers focusing more interest on inventory management in an effort to improve
operating performance. Starting in 2000 and continuing into 2001, AmeriCold
Logistics has seen consolidation among retail and food service channels begin to
significantly limit the ability of manufacturers to pass along cost increases by
raising prices. Because of this, manufacturers are focused on supply chain cost
reduction initiatives (such as inventory management, transportation and
distribution) in an effort to improve operating performance. In the second and
third quarters of 2000, AmeriCold Logistics deferred a portion of its rent
payments in accordance with the terms of the leases of the
temperature-controlled logistics properties. For the three months ended June 30,
2000, AmeriCold Corporation recorded a valuation allowance for a portion of the
rent that had been deferred during that period, and for the three months ended
September 30, 2000 recorded a valuation allowance for 100% of the rent that had
been deferred during the three months ended September 30, 2000 and has continued
to record a valuation allowance for 100% of the deferred rent prospectively.
These valuation allowances resulted in a decrease in the equity in net income of
Crescent Real Estate in AmeriCold Corporation. AmeriCold Corporation had not
recorded a valuation allowance with respect to rent deferred by AmeriCold
Logistics prior to the quarter ended June 30, 2000, because the financial
condition of AmeriCold Logistics prior to that time did not indicate the
inability of AmeriCold Logistics ultimately to make the full rent payments. As a
result of continuing net losses and the increased amount of deferred rent,
AmeriCold Corporation determined that the collection of additional deferred rent
was doubtful.

      AmeriCold Logistics deferred $25.5 million of rent for the year ended
December 31, 2001, of which Crescent Real Estate's share was $10.2 million.
AmeriCold Logistics also deferred $19.0 million and $5.4 million of rent for the
years ended December 31, 2000 and 1999, respectively, of which Crescent Real
Estate's share was $7.5 million and $2.1 million, respectively. In December
2001, AmeriCold Corporation waived its rights to collect $39.8 million of the
total $49.9 million of deferred rent, of which Crescent Real Estate's share was
$15.9 million. AmeriCold Corporation and Crescent Real Estate began to recognize
rental income when earned and collected during the year ended December 31, 2000
and continued this accounting treatment for the year ended December 31, 2001;
therefore, there was no financial statement impact to AmeriCold Corporation or
to Crescent Real Estate related to the AmeriCold Corporation's decision in
December 2001 to waive collection of deferred rent.


                                      200


      AmeriCold Logistics deferred $20.6 million of the total $102.4 million of
rent payable for the nine months ended September 30, 2002. Crescent Real
Estate's share of the deferred rent was $8.2 million. Crescent Real Estate
recognizes rental income when earned and collected and has not recognized the
$8.2 million of deferred rent in equity in net income of AmeriCold Corporation
for the nine months ended September 30, 2002.

      The following table shows the total, and Crescent Real Estate's portion
of, deferred rent and valuation allowance rent at December 31, 2001, 2000 and
1999 and for the nine months ended September 30, 2002.



                                  DEFERRED RENT                     VALUATION ALLOWANCE
                          ----------------------------          ---------------------------
                            TOTAL            COMPANY'S                           COMPANY'S
(in millions)              PORTION            PORTION             TOTAL            PORTION
-------------              -------            -------             -----            -------
                                                                     
FOR THE YEAR
ENDED DECEMBER 31,
1999                       $   5.4           $     2.1           $   --           $     --
2000                          19.0                 7.5             16.3                6.5
2001                          25.5                10.2             25.5               10.2
                           -------           ---------           ------           --------
BALANCE AT
DECEMBER 31, 2001          $  10.1            $    3.9             $ --             $   --
                           -------           ---------           ------           --------
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2002         $  20.6           $     8.2           $ 20.6           $    8.2
                           -------           ---------           ------           --------
                           $  30.7           $    12.1           $ 20.6           $    8.2
                           =======           =========           ======           ========


      (1)   Represents the rental obligation (excluding the effect of
            straight-lining rents and deferred rent) of AmeriCold Logistics.


      AmeriCold Corporation completed the acquisition of one facility in the
first quarter of 2001 for $10.0 million and completed the construction of one
facility in the third quarter of 2001 for $15.8 million, representing a total of
approximately 8.5 million cubic feet (0.2 million square feet).


Behavioral Healthcare Segment

      During 1999, Crescent Real Estate's investment segments included a
behavioral healthcare segment. As of December 31, 1999, the behavioral
healthcare segment consisted of 88 behavioral healthcare properties in 24
states, all of which were leased to Charter Behavioral Health Systems, or CBHS,
and its subsidiaries under a triple-net master lease. During the year ended
December 31, 1999, Crescent Real Estate received cash rental payments of
approximately $35.3 million from CBHS. However, during 1999, CBHS's business was
negatively affected by many factors, including adverse industry conditions, and
CBHS failed to perform in accordance with its operating budget. In the third
quarter of 1999 CBHS was unable to meet its rental obligation to Crescent Real
Estate. In the third quarter of 1999, Crescent Real Estate, Crescent Operating,
Magellan and CBHS commenced a recapitalization of CBHS. As part of this
recapitalization, Crescent Real Estate commissioned an independent public
accounting firm to assist in the evaluation of alternatives related to CBHS,
which included an appraisal of the behavioral healthcare properties.


                                      201

      The following financial statement charges were made with respect to
Crescent Real Estate's investment in the behavioral healthcare properties in the
third quarter of 1999:


   -  CBHS rent was reflected on a cash basis beginning in the third quarter of
      1999 due to the uncertainty that CBHS would be able to fulfill its rental
      obligations under the lease;


   -  Crescent Real Estate wrote-off the rent that was deferred according to the
      CBHS lease agreement from the commencement of the lease in June of 1997
      through June 30, 1999. The balance written-off totaled $25.6 million;

   -  Crescent Real Estate wrote-down its behavioral healthcare real estate
      assets by approximately $103.8 million to a book value of $245.0 million;

   -  Crescent Real Estate wrote-off the book value of warrants to purchase
      common shares of Magellan of $12.5 million;

   -  Crescent Real Estate recorded approximately $15.0 million of additional
      expense to be used by CBHS as working capital; and

   -  Crescent Real Estate ceased recording depreciation expense in the
      beginning of November of 1999 on the behavioral healthcare properties that
      were classified as held for disposition.

      On February 16, 2000, CBHS and all of its subsidiaries that were subject
to the master lease with Crescent Real Estate filed voluntary Chapter 11
bankruptcy petitions in the United States Bankruptcy Court for the District of
Delaware.

      During the year ended December 31, 2000, payment and treatment of rent for
the behavioral healthcare properties was subject to a rent stipulation agreed to
by certain of the parties involved in the CBHS bankruptcy proceeding. Crescent
Real Estate received approximately $15.4 million in rent and interest from CBHS
during the year ended December 31, 2000. Crescent Real Estate also completed the
sale of 60 behavioral healthcare properties previously classified as held for
disposition during the year ended December 31, 2000 (contained in Net Investment
in Real Estate). The sales generated approximately $233.7 million in net
proceeds and a net gain of approximately $58.6 million for the year ended
December 31, 2000. During the year ended December 31, 2000, Crescent Real Estate
recognized an impairment loss of approximately $9.3 million on the behavioral
healthcare properties held for disposition. This amount represents the
difference between the carrying values and the estimated sales prices less the
costs of the sales. At December 31, 2000, the carrying value of the 28
behavioral healthcare properties classified as held for disposition was
approximately $68.5 million (contained in Net Investment in Real Estate).
Depreciation has not been recognized since the dates the behavioral healthcare
properties were classified as held for sale.

      Crescent Real Estate received approximately $6.0 million in repayment of a
working capital loan from CBHS during the year ended December 31, 2001. Crescent
Real Estate also completed the sale of 18 behavioral healthcare properties
previously classified as held for disposition during the year ended December 31,
2001. The sales generated approximately $34.7 million in net proceeds and a net
gain of approximately $1.6 million for the year ended December 31, 2001. During
the year ended December 31, 2001, Crescent Real Estate recognized an impairment
loss of approximately $8.5 million on the behavioral healthcare properties held
for disposition. This amount represents the difference between the carrying
values and the estimated sales prices less the costs of the sales.


                                      202

      As of September 30, 2002, Crescent Real Estate owned 7 behavioral
healthcare properties, all of which were classified as held for sale. The
carrying value of the behavioral healthcare properties at September 30, 2002 was
approximately $21.0 million. During the nine months ended September 30, 2002,
Crescent Real Estate recognized an impairment charge of approximately $0.6
million on one of the behavioral healthcare properties held for sale. This
amount represents the difference between the carrying value and the estimated
sales price less costs of the sale for this property. Depreciation expense has
not been recognized since the dates the behavioral healthcare properties were
classified as held for sale. Crescent Real Estate has entered into contracts or
letters of intent to sell three behavioral healthcare properties and is actively
marketing for sale the remaining seven behavioral healthcare properties. The
sales of these behavioral healthcare properties are expected to close within the
year.

RESULTS OF OPERATIONS

      The following tables show Crescent Real Estate's financial data as a
percentage of total revenues for the three and nine months ended September 30,
2002 and 2001 and the three years ended December 31, 2001, 2000 and 1999 and the
variance in dollars between the three and nine months ended September 30, 2002
and 2001 and between the years ended December 31, 2001 and 2000 and the years
ended December 31, 2000 and 1999. See "Note 9. Segment Reporting" included in
the Financial Statements of Crescent Real Estate for the nine months ended
September 30, 2002 (unaudited) and "Note 3. Segment Reporting" included in the
Financial Statements of Crescent Real Estate for the year ended December 31,
2001 (audited) for financial information about investment segments.


                                      203




                                              FINANCIAL DATA AS A PERCENTAGE OF TOTAL    FINANCIAL DATA AS A PERCENTAGE OF TOTAL
                                                REVENUES FOR THE THREE MONTHS ENDED         REVENUES FOR THE NINE MONTHS ENDED
                                                -----------------------------------         ----------------------------------
                                                             SEPTEMBER 30,                             SEPTEMBER 30,
                                                       2002                2001                  2002                2001
                                                       ----                ----                  ----                ----
                                                                                                     
REVENUES

   Office properties                                   59.1%               87.2%                 56.5%               84.9%
   Resort/Hotel properties                             22.6                  7.2                 19.5                 8.3
   Residential Development Property                    17.6                  --                  23.3                  --
   Interest and other income                            0.7                 5.6                   0.7                 6.8
                                                      -----               -----                 -----               -----
    TOTAL REVENUES                                    100.0%              100.0%                100.0%              100.0%
                                                      -----               -----                 -----               -----

EXPENSES

  Office Property operating expenses                   25.0%               37.5%                 24.9%               36.5%
  Resort/Hotel Property expense                        17.9                  --                  14.6                  --
  Residential Development Property expense             16.9                  --                  21.2                  --
  Corporate general and administrative                  3.3                 3.6                   2.6                 3.4
  Interest expense                                     18.9                25.9                  17.9                25.9
  Amortization of deferred financing costs              1.1                 1.4                   1.0                 1.3
  Depreciation and amortization                        15.4                17.9                  14.1                16.9
  Impairment and other charges related to
  real estate assets                                     --                 2.1                    --                 3.5
                                                      -----               -----                 -----               -----
    TOTAL EXPENSES                                     98.5%               88.4%                 96.3%               87.5%
                                                      -----               -----                 -----               -----

OPERATING INCOME                                        1.5%               11.6%                  3.7%               12.5%
                                                      -----               -----                 -----               -----

OTHER INCOME AND EXPENSES
Equity in net income of unconsolidated
    companies:
    Office properties                                   0.4%                0.9%                  0.5%                0.7%
    Resort/Hotel properties                              --                  --                    --                  --
    Residential development properties                  1.7                 4.2                   3.0                 5.2
    Temperature-controlled logistics properties        (1.2)               (1.2)                 (0.5)                0.4
    Other                                              (0.3)                1.0                  (0.7)                0.5
                                                      -----               -----                 -----               -----
    TOTAL EQUITY IN NET INCOME FROM

    UNCONSOLIDATED COMPANIES                            0.6%                4.9%                  2.3%                6.8%

   Gain on property sales, net                          9.3                 0.6                   2.9                 0.1
                                                      -----               -----                 -----               -----

TOTAL OTHER INCOME AND EXPENSE                          9.9%                5.5%                  5.2%                6.9%
                                                      -----               -----                 -----               -----
INCOME BEFORE MINORITY INTERESTS, INCOME
TAXES, DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE                                              11.4%               17.1%                  8.9%               19.4%

   Minority interests                                  (1.6)               (4.6)                 (2.3)               (4.8)
   Income tax benefit                                   1.0                  --                   0.9                  --
                                                      -----               -----                 -----               -----

INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN AN
ACCOUNTING PRINCIPAL                                   10.8%               12.5%                  7.5%               14.6%

   Discontinued operations - income and gain
   on assets sold and held for sale                     0.6                 0.3                   0.8                 0.3
   Cumulative effect of a change in
   accounting principal                                  --                  --                  (1.4)                --
   Extraordinary item - extinguishment of
   debt                                                  --                (5.7)                   --                (2.0)
                                                      -----               -----                 -----               -----

NET INCOME                                             11.4%                7.1%                  6.9%               12.9%

   6 3/4% Series A Preferred Share
   distributions                                       (1.9)               (2.0)                 (1.6)               (1.9)
    9 -1/2% Series B Share distributions               (0.7)                 --                  (0.4)                 --
                                                      -----               -----                 -----               -----
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS             8.8%                5.1%                  4.9%               11.0%
                                                      =====               =====                 =====               =====


                                      204





                                                                             TOTAL VARIANCE IN DOLLARS BETWEEN
                                                                        -------------------------------------------
                                                                         THREE MONTHS ENDED     NINE MONTHS ENDED
                                                                         SEPTEMBER 30, 2001        SEPTEMBER 30,
                                                                              AND 2002             2001 AND 2002
                                                                              --------             -------------
                                                                                          
REVENUES
   Office properties                                                           $ (4.5)                $(27.0)
   Resort/Hotel properties                                                       43.7                  103.7
   Residential Development Property                                              43.8                  176.9
   Interest and other income                                                     (7.9)                 (30.6)
                                                                               ------                 ------
    TOTAL REVENUES                                                             $ 75.1                 $223.0
                                                                               ------                 ------

EXPENSES

  Office Property operating expenses                                           $ (2.8)                $ (7.2)
  Resort/Hotel Property expense                                                  44.6                  110.7
  Residential Development Property expense                                       42.1                  161.3
  Corporate general and administrative                                            1.9                    1.5
  Interest expense                                                                2.2                   (3.3)
  Amortization of deferred financing costs                                        0.3                    0.5
  Depreciation and amortization                                                   7.3                   16.0
  Impairment and other charges related to real estate assets                     (3.6)                 (18.9)
                                                                               ------                 ------
    TOTAL EXPENSES                                                             $ 92.0                 $260.6
                                                                               ------                 ------

OPERATING INCOME                                                               $(16.9)                $(37.6)
                                                                               ------                 ------

OTHER INCOME

Equity in net income of unconsolidated companies:

    Office properties                                                          $ (0.6)                $ (0.1)
    Resort/Hotel properties                                                      (0.1)                  (0.1)
    Residential development properties                                           (3.0)                  (4.8)
    Temperature-controlled logistics properties                                  (1.0)                  (6.1)
    Other                                                                        (2.5)                  (8.2)
                                                                               ------                 ------
    TOTAL EQUITY IN NET INCOME FROM UNCONSOLIDATED COMPANIES                   $ (7.2)                $(19.3)

   Gain on property sales, net                                                   22.1                   21.5
                                                                               ------                 ------

    TOTAL OTHER INCOME AND EXPENSE                                             $ 14.9                 $  2.2
                                                                               ------                 ------
INCOME BEFORE MINORITY INTERESTS, INCOME TAXES, DISCONTINUED
    OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
    PRINCIPLE                                                                  $ (2.0)                $(35.4)

   Minority interests                                                             3.9                    8.7
   Income tax benefit                                                             2.7                    6.6
                                                                               ------                 ------

INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
A CHANGE IN AN ACCOUNTING PRINCIPAL                                            $  4.6                 $(20.1)

   Discontinued operations - income and gain on assets sold
   and held for sale                                                              0.9                    4.7
   Cumulative effect of a change in accounting principal                         --                    (10.5)
   Extraordinary item - extinguishment of debt                                   --                     10.8
                                                                               ------                 ------

NET INCOME                                                                     $  5.5                 $(15.1)

   6 3/4% Series A Preferred Share distributions                                 (1.2)                  (2.0)
    9 -1/2% Series B Preferred Share distributions                               (2.0)                  (3.0)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                    $  2.3                 $(20.1)
                                                                               ======                 ======



                                      205




                                                        FINANCIAL DATA AS A PERCENTAGE OF
                                                         TOTAL REVENUES FOR THE YEAR ENDED      TOTAL VARIANCE IN DOLLARS BETWEEN
                                                                   DECEMBER 31,                    THE YEARS ENDED DECEMBER 31,
                                                        ----------------------------------      ---------------------------------
                                                                                                           (IN MILLIONS)
                                                        2001           2000          1999         2001 AND 2000   2000 AND 1999
                                                        ----           ----          ----         -------------   -------------
                                                                                                   
REVENUES

   Office properties                                    87.5%          84.1%          82.0%          $  5.2          $ (7.6)
   Resort/Hotel properties                               6.7           10.2            9.0            (26.4)            6.9
   Interest and other income                             5.8            5.7            9.0             (0.1)          (26.3)
                                                      ------         ------         ------           ------          ------
    TOTAL REVENUES                                     100.0%         100.0%         100.0%          $(21.3)         $(27.0)
                                                      ------         ------         ------           ------          ------

EXPENSES

  Operating expenses                                    37.8%          34.6%          34.2%          $ 13.6          $ (6.9)
  Corporate general and administrative                   3.5            3.4            2.2              0.1             7.8
  Interest expense                                      26.4           28.7           26.1            (20.8)           11.2
  Amortization of deferred financing costs               1.4            1.1            1.4             (0.2)           (0.9)
  Depreciation and amortization                         18.0           17.2           17.6              2.1            (7.8)
  Settlement of merger dispute                            --             --            2.0               --           (15.0)
  Impairment and other charges related to
  real estate assets                                     3.7            2.5           24.3              7.5          (160.9)
  Impairment and other charges related to
  Crescent Operating                                    13.5             --             --             92.8              --
                                                      ------         ------         ------           ------          ------
    TOTAL EXPENSES                                     104.5%          87.5%         107.8%            95.1          (172.5)
                                                      ------         ------         ------           ------          ------

OPERATING (LOSS) INCOME                                 (4.5)%         12.5%          (7.9)%         $(116.4)        $145.5

OTHER INCOME

Equity in net income of unconsolidated companies:

    Office properties                                    0.9            0.5            0.7              2.9            (2.1)
    Residential development properties                   6.0            7.6            5.8            (12.5)           10.6
    Temperature-controlled logistics properties          0.2            1.0            2.0             (6.3)           (7.6)
    Other                                                0.4            1.6            0.7             (8.6)            6.5
                                                      ------         ------         ------           ------          ------
    TOTAL EQUITY IN NET INCOME FROM

    UNCONSOLIDATED COMPANIES                             7.5%          10.7%           9.2%          $(24.5)         $  7.4

   Gain on property sales, net                           0.6           19.4             --           (133.1)          137.5
                                                      ------         ------         ------           ------          ------

    TOTAL OTHER INCOME AND EXPENSE                       8.1%          30.1%           9.2%          $(157.6)        $144.9
                                                      ------         ------         ------           ------          ------
(LOSS) INCOME BEFORE MINORITY INTERESTS,
    EXTRAORDINARY ITEM AND DISCONTINUED
    OPERATIONS                                           3.6%          42.6%           1.4%          $(274.0)        $290.4

   Minority interests                                   (3.1)          (7.2)          (0.3)            29.4           (48.7)
                                                      ------         ------         ------           ------          ------

NET (LOSS) INCOME BEFORE EXTRAORDINARY
ITEM AND DISCONTINUED OPERATIONS                         0.5%          35.4%           1.1%          $(244.6)        $241.7

   Extraordinary item - extinguishment of
   debt                                                 (1.6)          (0.6)            --             (6.9)           (3.9)
    Discontinued Operations                              0.2            0.4            0.5             (1.4)           (0.7)
                                                      ------         ------         ------           ------          ------

NET (LOSS) INCOME                                       (0.9)%         35.2%           1.6%         $(252.9)         $237.1

   6 3/4% Series A Preferred Share
   distributions                                        (2.0)          (1.9)          (1.8)              --              --
   Share repurchase agreement return                      --           (0.4)          (0.1)             2.9            (2.3)
   Forward share purchase
   agreement return                                       --             --           (0.6)              --             4.3
                                                      ------         ------         ------           ------          ------

NET (LOSS) INCOME AVAILABLE TO COMMON
    SHAREHOLDERS                                        (2.9)%         32.9%          (0.9)%        $(250.0)         $239.1
                                                      ======         ======         ======           ======          ======



Three Months Ended September 30, 2002 as Compared to Three Months Ended
September 30, 2001

      Revenues.


                                      206

      Total revenues increased $75.1 million, or 43.3%, to $248.5 million for
the quarter ended September 30, 2002, as compared to $173.4 million for the
quarter ended September 30, 2001. The components of the increase are:

   -  an increase in residential development property revenue of $43.8 million
      due to the consolidation of three residential development corporations
      beginning on February 14, 2002, as a result of the Crescent Operating
      transaction (previously Crescent Real Estate recorded its share of
      earnings under the equity method); and

   -  an increase in hotel property revenue of $43.7 million due to the
      consolidation of the operations of eight of the resort/hotel properties
      beginning on February 14, 2002, as a result of the Crescent Operating
      transaction (previously Crescent Real Estate recognized lease payments
      related to these properties); partially offset by

   -  a decrease in interest and other income of $7.9 million primarily
      attributable to the $5.1 million of income and gain recognized on the sale
      of marketable securities and other income recognized in the third quarter
      of 2001; and

   -  a decrease in Crescent Real Estate office property revenue of $4.5 million
      primarily due to:

      -  a decrease of $7.9 million from the disposition of five office
         properties in 2001;

      -  the contribution of two office properties to joint ventures in 2001;

      -  the contribution of two office properties to joint ventures in 2002;

      -  decreased expense recovery revenue of $1.6 million and decreased rental
         revenues of $0.8 million, partially offset by

         -  net insurance proceeds of approximately $5.0 million received in
            September 2002 as a result of an insurance claim on one of Crescent
            Real Estate's office properties that had been damaged as a result of
            a tornado and

         -  $1.3 million of rental revenue from the office property acquired in
            the third quarter of 2002.

      Expenses.

      Total expense increased $92.0 million, or 60.1%, to $245.0 million for the
three months ended September 30, 2002, as compared to $153.0 million for the
three months ended September 30, 2001. The primary components of this increase
are:

   -  an increase in resort/hotel property expense of $44.6 million due to the
      consolidation of the operations of eight of the resort/hotel properties
      beginning February 14, 2002, as a result of the Crescent Operating
      transaction (previously Crescent Real Estate recognized lease payments
      related to these properties);

   -  an increase in residential development property expense of $42.1 million
      due to the consolidation of three residential development corporations
      beginning February 14, 2002, as a result of the


                                      207

      Crescent Operating transaction (previously Crescent Real Estate recorded
      its share of earnings under the equity method); and

   -  an increase in depreciation and amortization expense of $7.3 million
      primarily due to the consolidation of the operations of three residential
      development corporations beginning February 14, 2002, as a result of the
      Crescent Operating transaction partially offset by

      -  a decrease due to the recognition in the second quarter of 2001 of $3.6
         million due to the impairment charges relating to the behavioral
         healthcare properties; and

      -  a decrease in office property operating expense of $2.8 million
         primarily due to the disposition of five office properties in 2001, the
         contribution of two office properties to joint ventures in 2001 and the
         contribution of two office properties to joint ventures in 2002.

      Other Income and Expense.

      Other income increased $14.9 million, or 156.8%, to $24.4 million for the
three months ended September 30, 2002, as compared to $9.5 million for the three
months ended September 30, 2001, as a result of:

   -  an increase due to the recognition in the third quarter of 2002 of a $23.2
      million gain on two properties that were contributed to joint ventures and
      the sale of Canyon Ranch - Tucson Land compared with the recognition of a
      $1.1 million gain on property sales in the third quarter of 2001;
      partially offset by

   -  a decrease in equity in net income of unconsolidated companies of $7.2
      million, primarily due to the consolidation of three residential
      development corporations beginning February 14, 2002, as a result of the
      Crescent Operating transaction (previously Crescent Real Estate recorded
      its interests in the residential development corporations under the equity
      method).

      Income Tax Benefit.

      Crescent Real Estate recognized consolidated income tax benefit of $2.7
million for the three months ended September 30, 2002, primarily related to
hotel and residential development operations. Because these operations were not
consolidated for the three months ended September 30, 2001, no consolidated
income tax expense was recognized for that period.

      Discontinued Operations.


      The income from discontinued operations from assets sold and held for sale
      increased $0.9 million, or 180%, to $1.4 million for the three months
      ended September 30, 2002, compared to $0.5 million for the three months
      ended September 30, 2001. This increase is primarily due to the gains on
      disposals, net of minority interest, of two office properties sold during
      the three months ended September 30, 2002.




                                      208




SEGMENT ANALYSIS

Office Segment




                                               FOR THE THREE MONTHS ENDED
                                                        SEPTEMBER 30,                      VARIANCE
                                                --------------------------           ----------------------
                                                  2002              2001              $                %
                                                --------          --------           ----             ----
                                                                         (IN MILLIONS)
                                                                                          
Office Property Revenue                         $  146.8          $  151.3           (4.5)            (3.0)
Office Property Operating Expense                   62.2              64.9           (2.7)            (4.2)
Equity in Earnings of Unconsolidated
  office properties                                  0.9               1.5           (0.6)           (40.0)



      The primary components of the decrease in office property revenues are as
follows:

   -  decreased revenue of $7.9 million due to the disposition of five office
      properties in 2001, the contribution of two office properties to joint
      ventures in 2001 and the contribution of two office properties to joint
      ventures in 2002;




   -  decreased recovery revenue of $1.6 million primarily due to lease
      turnover; and

   -  decreased rental revenues of $0.8 million; partially offset by

   -  net insurance proceeds of $5.0 million received in September 2002 as a
      result of an insurance claim on one of Crescent Real Estate's office
      properties that had been damaged as a result of a tornado; and

   -  $1.3 million of rental revenue from the office property acquired in the
      third quarter in 2002.

      The components of the decrease in office property operating expense are as
follows:

   -  decreased expenses of $3.1 million due to the disposition of five office
      properties in 2001, the contribution of two office Properties to joint
      ventures in 2001 and the contribution of two office properties to joint
      ventures in 2002;

   -  decreased office property utility expense of $2.4 million due to lower
      rates as a result of a one-year energy contract effective beginning in
      first quarter of 2002 for certain Texas properties; and

   -  decreased real estate taxes of $1.6 million; partially offset by


                                      209

   -  increased operating expenses of $4.4 million attributable to $2.1 million
      of security and insurance expense primarily related to the events of
      September 11, 2001 and administration expense of $2.3 million including
      legal fees, bad debt expense and payroll costs.

Resort/Hotel Segment

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's lessee interests in the eight hotel properties leased to
subsidiaries of Crescent Operating. The financial statements reflect the
consolidation of the operations for these eight hotel properties for the period
February 14, 2002 through September 30, 2002. Revenues prior to February 14,
2002 represent lease payments to Crescent Real Estate.




                                            FOR THE THREE MONTHS
                                               ENDED SEPTEMBER 30,                       VARIANCE
                                         --------------------------------------------------------------
                                           2002                2001                 $               %
                                         -------             -------              -----            ----
                                                                     (IN MILLIONS)
                                                                                      
Resort/Hotel Property Revenue            $  56.1             $  12.4
Resort/Hotel Property Expense              (44.6)                 --
                                         -------             -------              -----            ----
Net Operating Income                     $  11.5             $  12.4              $(0.9)           (7.3)%
                                         =======             =======              =====            ====



      The decrease in hotel property net operating income is primarily due to
the consolidation of the operations of eight of the hotel properties in 2002 as
compared to the recognition of lease payments from these properties in 2001.

Residential Development Segment

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations: The Woodlands Land Company, Desert Mountain Development Corp. and
CRDI. Crescent Real Estate fully consolidated the operations of the three
residential development corporations beginning on the dates of the asset
transfers.




                                                      FOR THE THREE MONTHS
                                                         ENDED SEPTEMBER 30,                          VARIANCE
                                                    --------------------------------------------------------------------
                                                      2002                2001               $                       %
                                                    -------             -------             ----                   ----
                                                                                (IN MILLIONS)
                                                                                                    
Residential Development Property Revenue            $   43.8            $     --
Residential Development Property Expense               (42.1)                 --

Depreciation/Amortization                               (2.0)                 --
Equity in net income of Unconsolidated
   Residential Development Properties                    4.3                 7.3
Minority Interests                                      (0.4)                 --
Income Tax Benefit                                       0.2                  --
                                                    --------            --------           --------                -----
Operating Results                                   $    3.8            $    7.3           $   (3.5)               (47.9)%
                                                    ========            ========           ========                =====



      The components of the decrease in residential development property net
operating income are:

   -  lower lot sales of $2.2 million at The Woodlands Land Company;


                                      210

   -  lower gain recognized on disposition of properties of $1.7 million at The
      Woodlands Land Company;

   -  a change in presentation of capitalized interest of $2.4 million, due to
      consolidation of Desert Mountain Development Corp. and CRDI in 2002;
      partially offset by

   -  higher unit sales and other operating revenues of $1.7 million at CRDI;
      and

   -  higher average price per lot of $1.1 million at Desert Mountain
      Development Corp.

Temperature-Controlled Logistics Segment




                                                            FOR THE THREE MONTHS
                                                              ENDED SEPTEMBER 30,                       VARIANCE
                                                       ----------------------------            ------------------------
                                                         2002               2001                  $                 %
                                                       -------             -------             -------            -----
                                                                                  (IN MILLIONS)
                                                                                                      
Equity in net (loss) of unconsolidated
Temperature-Controlled Logistics Properties            $  (3.1)            $  (2.1)            $  (1.0)           (47.6)%



      The decrease in equity in earnings of unconsolidated
temperature-controlled logistics properties is primarily due to Crescent Real
Estate's $4.5 million portion of deferred rent recorded in the third quarter of
2002 compared with the Crescent Real Estate's $3.5 million portion of deferred
rent recorded in the third quarter of 2001.

Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September
30, 2001


      Revenues


      Total revenues increased $223.0 million, or 41.5%, to $760.2 million for
the nine months ended September 30, 2002, as compared to $537.2 million for the
nine months ended September 30, 2001. The components of the increase are:

   -  an increase in residential development property revenue of $176.9 million
      due to the consolidation of three residential development corporations
      beginning February 14, 2002, as a result of the Crescent Operating
      transaction (previously Crescent Real Estate recorded its share of
      earnings under the equity method); and

   -  an increase in hotel property revenue of $103.7 million due to the
      consolidation of the operations of eight of the hotel properties beginning
      February 14, 2002, as a result of the Crescent Operating transaction
      (previously Crescent Real Estate recognized lease payments related to
      these properties); partially offset by


   -  a decrease in interest and other income of $30.6 million, primarily due
      to:

      -  the collection of $6.5 million from CBHS in 2001 on a working capital
         loan that was previously expensed in conjunction with the
         recapitalization of CBHS;

      -  the income on marketable securities and the gain recognized on the sale
         of marketable securities aggregating $11.9 million in the first nine
         months of 2001;

      -  the recognition in 2001 of $2.8 million of interest income on Crescent
         Operating notes;


                                      211

      -  the recognition in 2001 of $2.3 million in lease commission and
         development fee revenue for 5 Houston Center office property which was
         under construction;

      -  a decrease in interest income of $1.8 million in 2002 related to lower
         escrow balances for a plaza renovation at an office property that has
         been completed;

      -  a decrease in interest income of $2.6 million on cash and certain notes
         receivable as a result of reduced interest rates; and

      -  a decrease in office property revenue of $27.0 million primarily due to
         the disposition of five office properties in 2001, the contribution of
         two office properties to joint ventures in 2001 and the contribution of
         two office properties to joint ventures in 2002 ($29.7 million), and
         decreased lease termination fees of $2.5 million, partially offset by
         net insurance proceeds of approximately $5.0 million received in
         September 2002 as a result of an insurance claim on one of Crescent
         Real Estate's office properties that had been damaged as a result of a
         tornado.

      Expenses.

      Total expense increased $260.6 million, or 55.3%, to $731.5 million for
the nine months ended September 30, 2002, as compared to $470.9 million for the
nine months ended September 30, 2001. The primary components of this increase
are:

   -  an increase in residential development property expense of $161.3 million
      due to the consolidation of three residential development corporations
      beginning February 14, 2002, as a result of the Crescent Operating
      transaction (previously Crescent Real Estate recorded its share of
      earnings under the equity method); and

   -  an increase in hotel property expense of $110.7 million due to the
      consolidation of the operations of eight of the hotel properties beginning
      February 14, 2002, as a result of the Crescent Operating transaction
      (previously Crescent Operating recognized lease payments related to these
      properties); and

   -  an increase in depreciation and amortization expense of $16.0 million
      primarily due to the consolidation of the operations of three residential
      development corporations beginning February 14, 2002 as a result of the
      Crescent Operating transaction; partially offset by

   -  a decrease due to the recognition in 2001 of $18.9 million in impairment
      charges primarily relating to behavioral healthcare properties of $7.0
      million and the impairment of $11.9 million relating to the conversion of
      the Crescent Real Estate's preferred interest in Metropolitan Partners,
      LLC into common shares of Reckson Associates Realty Corp.;

   -  a decrease in interest expense of $3.3 million primarily attributable to
      capitalizing $5.7 million of interest expense in 2002, a decrease in the
      weighted average interest rate of 19 basis points (from 7.93% to 7.74%),
      or $4.2 million of interest expense, due to the debt refinancing in May of
      2001 and lower LIBOR rates, partially offset by an increase of $6.6
      million due to a $70.6 million increase in the average debt balance, from
      $2,293 million to $2,408 million; and


                                      212

   -  a decrease in office property operating expense of $7.2 million primarily
      due to a decrease of $11.0 million from the disposition of five office
      properties in 2001, the contribution of two office properties to joint
      ventures in 2001 and the contribution of two office properties to joint
      ventures in 2002, partially offset by increases in repairs and maintenance
      of $3.6 million due to timing of expenses.

      Other Income and Expense.

      Other income increased $2.2 million, or 5.9%, to $39.6 million for the
nine months ended September 30, 2002, as compared to $37.5 million for the nine
months ended September 30, 2001, primarily as a result of:

   -  an increase in gain on property sales, net of $21.5 million, primarily due
      to a gain of $17.0 million on the partial sale of the Three Westlake
      Office Property, a gain of $5.5 million on the sale of Canyon Ranch -
      Tucson Land and a gain of $4.6 million on the partial sale of Miami
      Center, net of a loss of $4.9 million on the partial sale of Sonoma
      Mission Inn & Spa and the sale of Washington Harbour Land; partially
      offset by


   -  a decrease in equity in net income of unconsolidated companies of $19.3
      million, primarily due to the $5.2 million impairment of an investment in
      DBL Holdings, Inc. during 2002, and Crescent Real Estate's additional $3.1
      million portion of AmeriCold Logistics' deferral of rent payable, $2.9
      million due to the change in the base rent recognition method for the
      temperature-controlled logistics segment from straight-line to cash basis
      and $4.8 million due to the consolidation of three residential development
      corporations beginning February 14, 2002, as a result of the Crescent
      Operating transaction, (previously Crescent Real Estate recorded its
      investment in the residential development corporations under the equity
      method).


      Income Tax Benefit.

      Crescent Real Estate's $6.6 million total consolidated income tax expense
for the nine months ended September 30, 2002 includes tax expense related to the
operations of the hotel and residential development operations of $0.1 million,
offset by a tax benefit of $6.7 million. The $6.7 million benefit results from
the temporary difference between the financial reporting basis and the
respective tax basis of the hotel leases acquired as part of Crescent Real
Estate's agreement with Crescent Operating. This temporary difference will be
reversed over an estimated five-year period, which is the remaining lease term
of the hotel leases. Cash paid for income taxes totaled approximately $10.2
million for the nine months ended September 30, 2002.

      Discontinued Operations.

      The income from discontinued operations from assets held for sale
increased $4.7 million, or 276.5%, to $6.4 million for the nine months ended
September 30, 2002, compared to $1.7 million for the nine months ended September
30, 2001. This increase is primarily due to:

   -  a gain on disposals of $6.9 million, net of minority interest,
      attributable to the sales of the five office properties in 2002; partially
      offset by

   -  an impairment charge of $0.6 million in 2002, related to a behavioral
      healthcare property. This amount represents the difference between the
      carrying value and the estimated sales price less costs of the sale for
      this property; and


                                      213


   -  a decline in operating income of $1.8 million for the five office
      properties sold in 2002 that contributed a full year of operating income
      in 2001 and a partial year of operating income in 2002.



      Cumulative Effect of a Change in Accounting Principle


      In conjunction with the implementation of SFAS No. 142, "Goodwill and
Other Intangible Assets," Crescent Real Estate reported a cumulative effect of a
change in accounting principle for the nine months ended September 30, 2002,
which resulted in a charge of $10.5 million. This charge is due to an impairment
(net of minority interests and taxes) of the goodwill of AmeriCold Logistics and
CRDI. No such impairment charge was recognized for the nine months ended
September 30, 2001.

      In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this statement did not materially affect Crescent Real
Estate's interim or annual financial statements; however, for the three and nine
months ended September 30, 2002, financial statement presentation was modified
to report the results of operations, including any gains or losses recognized in
accordance with this statement, and the financial position of Crescent Real
Estate's real estate assets sold or classified as held for sale, as discontinued
operations. As a result, Crescent Real Estate has reclassified certain amounts
in prior period financial statements to conform with the new presentation
requirements.


      Extraordinary Item


      In May 2001, $10.8 million of deferred financing costs were written off
due to the early extinguishment of Crescent Real Estate's credit facility with
UBS. The recognition of the write-off was treated as an Extraordinary Item for
the six months ended June 30, 2001. No such event or write-off occurred during
the nine months ended September 30, 2002.


        Segment Analysis

        Office Segment





                                             FOR THE NINE MONTHS ENDED
                                                   SEPTEMBER 30,                             VARIANCE
                                             --------------------------            --------------------------
                                               2002               2001                $                 %
                                             -------            -------            -------           -------
                                                                        (IN MILLIONS)
                                                                                         
Office Property Revenue                      $ 429.3            $ 456.3            $ (27.0)             (6.0)%
Office Property Operating Expense              189.1              196.3               (7.2)             (3.7)
Equity in Earnings of
Unconsolidated Office Properties                 3.7                3.8               (0.1)             (2.6)



      The primary components of the decrease in office property revenue are as
follows:

   -  decreased revenue of $29.7 million due to the disposition of five office
      properties in 2001, the contribution of two office properties to joint
      ventures in 2001 and the contribution of two office properties to joint
      ventures in 2002; and

   -  decreased lease termination fees of $2.5 million; partially offset by


                                      214


   -  net insurance proceeds of $5.0 million received in September 2002 as a
      result of an insurance claim on one of Crescent Real Estate's office
      properties that had been damaged as a result of a tornado.

      The primary components of the decrease in office property operating
expense are as follows:

   -  decreased expenses of $11.0 million due to the disposition of five office
      properties in 2001, the contribution of two office properties to joint
      ventures in 2001 and the contribution of two office properties to joint
      ventures in 2002; and

   -  decreased office property utility expense of $8.5 million due to lower
      rates as a result of a one-year energy contract effective beginning in
      first quarter of 2002 for certain Texas Properties; partially offset by

   -  increased operating expenses of $6.7 million attributable to security and
      insurance expense primarily related to the events of September 11, 2001
      and $5.6 million primarily attributable to the timing of repairs and
      maintenance and increased administrative expenses, including legal fees,
      bad debt expense, and payroll costs.

Resort/Hotel Segment

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's lessee interests in the eight hotel properties leased to
subsidiaries of Crescent Operating. The financial statements reflect the
consolidation of the operations for these eight hotel properties for the period
February 14, 2002 through September 30, 2002. Revenues prior to February 14,
2002 represent lease payments to Crescent Real Estate.




                                          FOR THE NINE MONTHS ENDED
                                                SEPTEMBER 30,                          VARIANCE
                                         ---------------------------            -----------------------
                                           2002                2001               $               %
                                         -------             -------            -------         -------
                                                                   (IN MILLIONS)
                                                                                    
Resort/Hotel Property Revenue            $ 148.1             $  44.5
Resort/Hotel Property Expense             (110.7)                 --
                                         -------             -------              -----           -----
Net Operating Income                     $  37.4             $  44.5              $(7.1)          (16.0)%
                                         =======             =======              =====           =====



      The decrease in hotel property net operating income is primarily due to
the consolidation of the operations of eight of the hotel properties in 2002 as
compared to the recognition of lease payments from these properties in 2001. In
addition, net operating income decreased as a result of the following:

   -  decreases in occupancy from 72% to 71% and decreases in revenue per
      available room from $331 to $319 (3.6% decrease) at the luxury and
      destination fitness resorts and spas; and

   -  decreases in occupancy from 72% to 71%, and revenue per available room
      from $85 to $81 (4.7% decrease) at the business-class hotels.

Residential Development Segment


                                      215

      On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations: The Woodlands Land Company, Desert Mountain Development Corp. and
CRDI. Crescent Real Estate fully consolidated the operations of the three
residential development corporations beginning on the dates of the asset
transfers.




                                                       FOR THE NINE MONTHS ENDED
                                                              SEPTEMBER 30,                             VARIANCE
                                                       ----------------------------           -----------------------------
                                                         2002                2001                $                    %
                                                       --------            --------           --------             --------
                                                                                (IN MILLIONS)
                                                                                                       
Residential Development Property Revenue               $  176.9            $     --
Residential Development Property Expense                 (161.3)                 --

Depreciation/Amortization                                  (4.9)                 --
Equity in net income of Unconsolidated
   Residential Development Properties                      22.9                27.7
Minority Interests                                         (3.0)                 --
Income Tax Provision                                       (3.4)                 --
Cumulative effect of a change in accounting
principle                                                  (1.4)                 --
                                                       --------            --------           --------             --------
Operating Results                                      $   25.8            $   27.7           $   (1.9)                (6.9)%
                                                       ========            ========           ========             ========


      The primary components of the decrease in residential development property
net operating income are:

   -  a decrease of $5.2 million resulting from a change in presentation of
      capitalized interest due to the consolidation of Desert Mountain
      Development Corp. and CRDI in 2002; and


   -  a decrease of $1.4 million resulting from the cumulative effect of a
      change in accounting principle due to net goodwill impairment at CRDI
      resulting from the adoption of SFAS No. 142 on January 1, 2002; partially
      offset by higher lot and unit sales of $8.8 million at CRDI and Desert
      Mountain Development Corp. and $4.3 million due to the gain recognized on
      the disposition of two properties at The Woodlands; offset by lower lot
      sales of $8.1 million at The Woodlands Land Company and Mira Vista
      Development, Corp.


Temperature-Controlled Logistics Segment




                                                       FOR THE NINE MONTHS ENDED
                                                              SEPTEMBER 30,                             VARIANCE
                                                       ----------------------------           -----------------------------
                                                         2002                2001                $                    %
                                                       --------            --------           --------             --------
                                                                                  (IN MILLIONS)
                                                                                                       
Equity in earnings (loss) of unconsolidated
Temperature-Controlled Logistics Properties            $ (3.8)             $  2.3              $ (6.1)             (265.2)



       This decrease in equity in earning of unconsolidated
temperature-controlled logistics properties is primarily due to Crescent Real
Estate's $8.2 million portion of the deferred rent in the first nine months of
2002 compared with the Crescent Real Estate's $5.1 million portion of deferred
rent in the first nine months of 2001, and $2.9 million related to the change in
base rent recognition from straight-line to seasonal for the year, partially
offset by a decrease in interest expense of $0.8 million.


                                      216


Year Ended December 31, 2001 as Compared to 2000


      Revenues.


      Total revenues decreased $21.3 million, or 3.1%, to $686.2 million for the
year ended December 31, 2001, as compared to $707.5 million for the year ended
December 31, 2000. The primary components of the decrease in total revenues are
discussed below.

      The increase in office property revenues of $5.2 million, or 0.9%, for the
year ended December 31, 2001, as compared to the year ended December 31, 2000,
is attributable to:

   -  increased revenues of $32.1 million from the 69 consolidated office
      properties that Crescent Real Estate owned or had an interest in as of
      December 31, 2001, excluding the five office properties held for sale at
      December 31, 2001, primarily as a result of increased full-service
      weighted average rental rates (reflecting increases in both rental revenue
      and operating expense recoveries), and increased occupancy; and


   -  increased other income of $4.2 million, primarily due to parking revenue;
      partially offset by

   -  decreased revenues of $27.2 million due to the disposition of 11 office
      properties and four retail properties during 2000, compared to the
      disposition of five office properties and the joint ventures of two office
      properties during 2001; and

   -  decreased lease termination fees (net of the write-off of deferred rent
      receivables) of $3.9 million, from $12.0 million for the year ended
      December 31, 2000, to $8.0 million for the year ended December 31, 2001.


      The decrease in Crescent Real Estate hotel property revenues of $26.4
million, or 36.6%, for the year ended December 31, 2001, as compared to the year
ended December 31, 2000, is attributable to:

   -  decreased revenues from the upscale business-class hotels of $8.1 million,
      due to the disposition of the Four Seasons Hotel -- Houston in November
      2000;

   -  decreased revenues of $6.3 million due to a decrease in rental income
      attributed to the softening of the economy and the events of September 11,
      2001; and

   -  decreased revenues of $12.0 million due to not recognizing revenue during
      the fourth quarter of 2001 under the leases with Crescent Operating.

      Expenses.


      Total expenses increased $95.1 million, or 15.3%, to $716.1 million for
the year ended December 31, 2001, as compared to $621.0 million for the year
ended December 31, 2000. The primary components of the increase in total
expenses are discussed below.

      The increase in office property operating expenses of $13.6 million, or
5.6%, for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, is attributable to:

   -  increased expenses of $24.7 million from the 69 consolidated office
      properties that Crescent Real Estate owned or had an interest in as of
      December 31, 2001, excluding the five office properties held for sale at
      December 31, 2001, primarily as a result of increased operating expenses
      for



                                      217

      utilities of $7.8 million, taxes of $3.6 million and other increased
      operating expenses such as insurance, security, and technology initiatives
      of $13.3 million during the year ended December 31, 2001, as compared to
      the same period in 2000; partially offset by

   -  decreased expenses of $11.1 million due to the disposition of 11 office
      properties and four retail properties during 2000, compared to the
      disposition of five office properties and the joint ventures of two office
      properties during 2001.

      The decrease in interest expense of $20.8 million, or 10.2%, for the year
ended December 31, 2001, as compared to the same period in 2000, is primarily
attributable to a decrease in the weighted average interest rate of 0.61%, or
$14.0 million of interest expense, combined with a decrease in the average debt
balance of $104.0 million, or $8.0 million of interest expense.

      The increase in impairment and other charges related to real estate assets
of $7.4 million is due to:

   -  the conversion of Crescent Real Estate's preferred member interest in
      Metropolitan Partners, LLC, or Metropolitan, into common stock of Reckson
      Associates Realty Corp., or Reckson, which resulted in an impairment
      charge of $11.8 million; partially offset by

   -  a decrease in the impairment loss of $3.5 million, from $8.5 million in
      2000 to $5.0 million in 2001, recognized on a fund which holds real estate
      and marketable securities, in which Crescent Real Estate has an interest;
      and

   -  a decrease in the impairment of the behavioral healthcare properties of
      $0.9 million.

      The increase in impairment and other charges related to Crescent Operating
of $92.8 million is due to the reduction in net assets of $74.8 million,
primarily attributable to the write-down of debt and rental obligations of
Crescent Operating to the estimated underlying collateral value of assets to be
received from Crescent Operating, and estimated Crescent Operating bankruptcy
costs to be funded by Crescent Real Estate of $18.0 million.

      Other Income.

      Other income decreased $157.5 million, or 73.9%, to $55.76 million for the
year ended December 31, 2001, as compared to $213.2 million for the year ended
December 31, 2000. This decrease is due to:

      The decrease in equity in net income of unconsolidated companies of $24.5
million, or 32.4%, for the year ended December 31, 2001, as compared to the same
period in 2000, is primarily attributable to:

   -  a decrease in equity in net income of unconsolidated Crescent Real Estate
      residential development properties of $12.5 million, or 24%, primarily
      attributable to lower lot sales at Desert Mountain during the year ended
      December 31, 2001, resulting in a decrease of $16.3 million; partially
      offset by higher unit sales at CRDI, resulting in an increase of $4.5
      million;

   -  a decrease in equity in net income of the Crescent Real Estate
      temperature-controlled logistics properties of $6.3 million, or 85%, due
      to the lease restructuring in 2001 and an increase in deferred rent of
      $9.2 million; and

   -  a decrease in equity in net income of other unconsolidated properties of
      $8.6 million, or 75.0%, primarily attributable to lower earnings of $3.8
      million from Metropolitan due to the conversion of Crescent Real Estate's
      preferred member interest into common stock of Reckson in May 2001,


                                      218

      the $1.0 million write-off of Crescent Real Estate's investment in a
      retail distribution company and lower earnings from DBL Holdings, Inc., or
      DBL, of $1.7 million, due to an approximate $12.2 million return of
      investment received in March 2001; partially offset by

   -  an increase in equity in net income of the unconsolidated office
      properties of $2.9 million, or 94.0%, primarily attributable to lower
      interest expense at one unconsolidated office property.


      The net decrease in gain on property sales of $133.1 million for the year
ended December 31, 2001, as compared to the same period in 2000, is attributable
to a decrease in net gains recognized primarily on office, hotel and behavioral
healthcare property sales for the year ended December 31, 2001, as compared with
the same period in 2000.


      Discontinued Operations.


      The income from discontinued operations from assets sold and held for sale
decreased $1.4 million, or 46.7%, to $1.6 million for the year ended December
31, 2001, compared to $3.0 million for the year ended December 31, 2000. This
decrease is primarily due to a decrease in net operating income of two office
properties held for sale of approximately $1.8 million, partially offset by the
increase in net operating income of two of the office properties held for sale
of approximately $0.2 million.


      Extraordinary Items.

      The increase in extraordinary items of $6.9 million, or 176.9%, is
attributable to the write-off of deferred financing costs related to the early
extinguishment of the UBS Facility in May 2001 of $10.8 million, compared with
the write-off of deferred financing costs related to the early extinguishment of
the BankBoston Facility in February 2000 of $3.9 million.


Year Ended December 31, 2000 as Compared to 1999


      Revenues.


      Total revenues decreased $27.0 million, or 3.7%, to $707.4 million for the
year ended December 31, 2000, as compared to $734.4 million for the year ended
December 31, 1999.

      The decrease in office property revenues of $7.6 million, or 1.3%, for the
year ended December 31, 2000, as compared to the same period in 1999, is
attributable to:

   -  decreased revenues of $37.2 million due to the disposition of 11 office
      properties and four retail properties during 2000, which contributed
      revenues during the full year of 1999, as compared to a partial year in
      2000; partially offset by


   -  increased revenues of $24.4 million from the 74 office properties owned as
      of December 31, 2000, excluding the four office properties held for sale
      at December 31, 2000, primarily as a result of increased weighted average
      full-service rental rates at these properties; and

   -  increased revenues of $5.2 million from lease termination fees.

      The increase in Crescent Real Estate hotel property revenues of $6.9
million, or 10.6%, for the year ended December 31, 2000, as compared to the same
period in 1999, is attributable to:


                                      219

   -  increased revenues of $3.1 million at the luxury resorts and spas
      primarily due to an increase in percentage rents resulting from increased
      room revenue due to the 30-room expansion at the Sonoma Mission Inn & Spa
      that opened in April 2000;

   -  increased revenues of $2.6 million at the business class hotels primarily
      due to (i) the reclassification of the Renaissance Houston Hotel from the
      office segment to the resort/hotel segment as a result of the
      restructuring of its lease on July 1, 1999, which resulted in $2.4 million
      of incremental revenues under the new lease and (ii) increased percentage
      rents due to higher room and occupancy rates at the Omni Austin Hotel,
      partially offset by (iii) decreased revenues of $1.2 million due to the
      disposition of one Crescent Real Estate hotel property during the fourth
      quarter of 2000, which contributed revenues during the full year of 1999,
      as compared to a partial year in 2000; and

   -  increased revenues of $1.2 million at the destination fitness resorts and
      spas primarily due to an increase in percentage rents at the Canyon Ranch
      properties as a result of higher room rates.

      The decrease in interest and other income of $26.3 million, or 39.7%, for
the year ended December 31, 2000, as compared to the same period in 1999, is
primarily attributable to the recognition of rent from Charter Behavioral Health
Systems, LLC, or CBHS, on a cash basis beginning in the third quarter of 1999,
the filing of voluntary bankruptcy petitions by CBHS and its subsidiaries on
February 16, 2000, and a rent stipulation agreed to by certain parties to the
bankruptcy proceedings, which resulted in a reduction in Crescent Real Estate
behavioral healthcare property revenues, which are included in interest and
other income, to $15.4 million for the year ended December 31, 2000 as compared
to $41.1 million for the same period in 1999.

      Expenses.


      Total expenses decreased $172.5 million, or 21.7%, to $621.0 million for
the year ended December 31, 2000, as compared to $793.5 million for the year
ended December 31, 1999.

      The decrease in office property operating expenses of $6.9 million, or
2.7%, for the year ended December 31, 2000, as compared to the same period in
1999, is attributable to:

   -  decreased expenses of $17.0 million due to the disposition of 11 office
      properties and four retail properties during 2000, which incurred expenses
      during the full year of 1999, as compared to a partial year in 2000;
      partially offset by


   -  increased expenses of $10.1 million from the 74 office properties owned as
      of December 31, 2000, excluding the four office properties held for sale
      at December 31, 2001, as a result of (i) increased general repair and
      maintenance expenses at these properties of $5.6 million and (ii) an
      increase in real estate taxes of $4.5 million.

      The increase in corporate general and administrative expense of $7.8
million, or 47.9%, for the year ended December 31, 2000, as compared to the same
period in 1999, is primarily attributable to technology initiatives, employee
retention programs, incentive compensation, and additional personnel.

      The increase in interest expense of $11.2 million, or 5.8%, for the year
ended December 31, 2000, as compared to the same period in 1999, is primarily
attributable to an increase in the weighted-average interest rate from 7.4% in
1999 to 8.4% in 2000, partially offset by a decrease in average debt balance
outstanding from $2.6 billion in 1999 to $2.4 billion in 2000.


                                      220

      The decrease in depreciation and amortization expense of $7.8 million, or
6.0%, for the year ended December 31, 2000, as compared to the same period in
1999, is primarily attributable to the cessation of the recognition of
depreciation expense on office properties and the Crescent Real Estate
behavioral healthcare properties from the dates they were classified as held for
disposition.

An additional decrease in expenses of $176.8 million is primarily attributable
to:

   -  non-recurring costs of $15.0 million in connection with the settlement of
      litigation relating to the merger agreement entered into in January 1998
      between Crescent Real Estate and Station Casinos, Inc. in the first
      quarter of 1999; and

   -  a decrease of $169.5 million due to the $162.0 million impairment and
      other charges related to the Crescent Real Estate behavioral healthcare
      properties in the third quarter of 1999 and the $16.8 million impairment
      charge in the fourth quarter of 1999 on one of the office properties held
      for disposition as compared to the $9.3 million impairment related to the
      behavioral healthcare properties in the year ended December 31, 2000;
      partially offset by

   -  an impairment loss of $8.5 million recognized in 2000 on a fund which
      primarily holds real estate investments and marketable securities, in
      which Crescent Real Estate has an interest.

      Other Income.

      Other income increased $144.9 million, or 212.2%, to $213.2 million for
the year ended December 31, 2000, as compared to $68.3 million for the year
ended December 31, 1999. The components of the increase in other income are
discussed below.

      The increase in equity in unconsolidated companies of $7.4 million, or
10.8%, for the year ended December 31, 2000, as compared to the same period in
1999 is attributable to:

   -  an increase in equity in net income of the residential development
      corporations of $10.6 million, or 24.7%, attributable to (i) an increase
      in average sales price per lot and an increase in membership conversion
      revenue at Desert Mountain, partially offset by a decrease in lot
      absorption, which resulted in an increase of $6.0 million in equity in net
      income to Crescent Real Estate; (ii) an increase in residential lot and
      commercial land sales and an increase in average sales price per lot at
      The Woodlands Land Development Company, L.P., partially offset by a
      decrease in average sales price per acre from commercial lands sales,
      which resulted in an increase of $5.9 million in equity in net income to
      Crescent Real Estate; and (iii) an increase in commercial acreage sales at
      CRDI, partially offset by a decrease in single family home sales, which
      resulted in an increase of $0.8 million in equity in net income to
      Crescent Real Estate; partially offset by (iv) a decrease in commercial
      land sales at Houston Area Development Corp., which resulted in a decrease
      of $2.1 million in equity in net income to Crescent Real Estate; and

   -  an increase in equity in net income of the other unconsolidated companies
      of $6.5 million, or 127.5%, primarily as a result of (i) the dividend
      income attributable to the 7.5% per annum cash flow preference of Crescent
      Real Estate's $85.0 million preferred member interest in Metropolitan,
      which Crescent Real Estate purchased in May 1999; and (ii) an increase in
      the equity in earnings from DBL as a result of its investment in G2
      Opportunity Fund, L.P., or G2 Opportunity Fund, which was made in the
      third quarter of 1999; partially offset by


                                      221

   -  a decrease in equity in net income of the temperature-controlled logistics
      partnership of $7.6 million, or 50.7%, resulting primarily from the
      recognition of a rent receivable valuation allowance for the year ended
      December 31, 2000 of $6.5 million; and

   -  a decrease in equity in net income of the unconsolidated office properties
      of $2.1 million, or 39.6%, primarily attributable to an increase in
      interest expense as a result of additional financing obtained in July 2000
      and an increase in the average rate of debt at The Woodlands Commercial
      Properties Company.

      The increase in net gain on property sales of $137.5 million for the year
ended December 31, 2000, as compared to the same period in 1999, is attributable
to net gains primarily recognized on office, hotel and behavioral healthcare
property sales.


      Discontinued Operations

      The income from discontinued operations from assets sold and held for
sale decreased $0.7 million, or 18.9%, to $3.0 million for the year ended
December 31, 2002, as compared to $3.7 million for the year ended December 31,
1999. The decrease is primarily due to a decrease in net operating income of
three office properties held for sale of approximately $1.1 million, partially
offset by the increase in net operating income of one of the office properties
held for sale of approximately $0.4 million.


LIQUIDITY AND CAPITAL RESOURCES

Nine Months Ended September 30, 2002

      Cash Flows.




                                                          FOR THE NINE MONTHS ENDED,
                                                                SEPTEMBER 30,
                                                          ---------------------------
                                                            2002                2001             $ CHANGE
                                                          -------             -------             -------
                                                                                     (IN MILLIONS)
                                                                                         
Cash Provided by Operating Activities                     $ 152.7             $ 253.8             $(101.1)

Cash used in Investing Activities                           106.0               166.6               (60.6)

Cash used in Financing Activities                          (212.4)             (426.2)              213.8
                                                          -------             -------             -------
Increase (Decrease) in Cash and Cash
Equivalents                                               $  46.3             $  (5.8)            $  52.1

Cash and Cash Equivalents, Beginning of Period               36.3                39.0                (2.7)
                                                          -------             -------             -------

Cash and Cash Equivalents, End of Period                  $  82.6             $  33.2             $  49.4
                                                          =======             =======             =======



      Operating Activities.

      Crescent Real Estate's cash provided by operating activities of $152.7
million is attributable to property operations.

      Investing Activities.

      Crescent Real Estate's cash provided by investing activities of $106.0
million is attributable to:

   -  $164.1 million of proceeds from joint venture partners;

   -  $76.6 million of net sales proceeds primarily attributable to the sale of
      five office properties, the sale of three behavioral healthcare
      properties, and the sale of two other assets;

   -  $11.7 million from return of investment in unconsolidated residential
      development properties and office properties;


                                      222

   -  $38.2 million in cash resulting from Crescent Real Estate's February 14,
      2002 transaction with Crescent Operating; and

   -  $12.7 million decrease in restricted cash.

The cash provided by investing activities is partially offset by:

   -  $97.4 million primarily for acquisition of one office property;

   -  $36.6 million for incremental and non-incremental revenue generating
      tenant improvement and leasing costs for office properties;

   -  $28.4 million of additional investment in unconsolidated companies,
      consisting primarily of investments in the upscale residential development
      properties, particularly related to CRDI's investment in the Tahoe
      Mountain Resorts from January 1 through February 14, 2002;

   -  $25.3 million for property improvements for rental properties, primarily
      attributable to non-recoverable building improvements for the office
      properties and replacement of furniture, fixtures and equipment for the
      hotel properties;

   -  $7.8 million increase in notes receivable due to a $7.5 million promissory
      note received in the sale of the Canyon Ranch - Tucson Land; and

   -  $1.7 million for development of investment properties.



        Financing Activities.

      Crescent Real Estate's use of cash for financing activities of $212.4
million is primarily attributable to:

   -  net payments under the Fleet Facility of $476.0 million;

   -  redemptions from GMAC Commercial Mortgage Corporation of preferred
      interests in a subsidiary of Crescent Real Estate of $218.4 million;

   -  a decrease in notes payable of $171.5 million;

   -  distributions to common shareholders and unitholders of $132.5 million;

   -  residential development properties notes payments of $84.9 million;

   -  common share repurchase of $28.5 million;

   -  $8.9 million of deferred financing costs for $375 million senior,
      unsecured notes;

   -  distributions to preferred shareholders of $15.2 million; and

   -  net capital distributions to joint venture partners of $8.5 million,
      primarily due to distributions to joint venture preferred equity partners.


                                      223


      The use of cash for financing activities is partially offset by:

   -  gross proceeds of $375.0 from issuance of senior, unsecured notes:

   -  net proceeds of $81.9 from offering of Series B preferred shares;

   -  net proceeds of $48.2 from offering of Series A preferred shares;

   -  residential development properties notes borrowings of $54.7 million; and

   -  borrowings under the Fleet Facility of $372.0 million.

        Liquidity Requirements.

        As of September 30, 2002, Crescent Real Estate had unfunded capital
expenditures of approximately $40.9 million relating to capital investments. The
table below specifies Crescent Real Estate's total capital expenditures relating
to these projects, amounts funded as of September 30, 2002, amounts remaining to
be funded, and short-term and long-term capital requirements.




                                                                                                     CAPITAL REQUIREMENTS
                                                                AMOUNT                            -----------------------------
                                                               FUNDED AS          AMOUNT          SHORT-TERM       LONG-TERM
                                            TOTAL                 OF             REMAINING          (NEXT 12          (12+
              PROJECT                       Cost(1)            09/30/02           TO FUND          MONTHS)(2)      MONTHS)(2)
              -------                       -------            --------           -------          -----------      ----------
                                                                               (IN MILLIONS)
                                                                                                     
RESIDENTIAL DEVELOPMENT SEGMENT

     Tahoe Mountain Resorts                  $110.0             $ 99.0             $ 11.0           $ 11.0           $   --
                                             ------             ------             ------           ------           ------

OTHER

     SunTx (3)                               $ 19.0             $  7.8             $ 11.2           $  4.0           $  7.2
                                             ------             ------             ------           ------           ------
     Spinco (4)                                15.5                 --               15.5             15.5               --
                                             ------             ------             ------           ------           ------
     Canyon Ranch - Tucson Land -
     Construction loan (5)                      3.2                 --                3.2              1.6              1.6
                                             ------             ------             ------           ------           ------
                                             $ 37.7             $  7.8             $ 29.9           $ 21.1           $  8.8

TOTAL                                        $147.7             $106.8             $ 40.9           $ 32.1           $  8.8
                                             ======             ======             ======           ======           ======



---------------------------------

(1)   All amounts are approximate.

(2)   Reflects Crescent Real Estate's estimate of the breakdown between
      short-term and long-term capital expenditures.


(3)   This commitment is related to Crescent Real Estate's investment in a
      private equity fund.

(4)   Crescent Real Estate expects to form and capitalize a separate entity to
      be owned by Crescent Real Estate's shareholders and unitholders, and to
      cause the new entity to commit to acquire Crescent Operating's entire
      membership interest in AmeriCold Logistics.

(5)   Crescent Real Estate committed to a construction loan to the purchaser of
      the land which will be secured by 20 developed lots and a $0.6 million
      letter of credit.

      Crescent Real Estate expects to fund its short-term capital requirements
of approximately $32.1 million through a combination of cash, net cash flow from
operations, construction financing return of capital (investment) from the
residential development corporations and borrowings under the Fleet Facility.
Crescent Real Estate plans to meet its maturing debt obligations through
December 31, 2003 of approximately $185.7 million, primarily through additional
borrowings under the Fleet Facility and cash from operations of the residential
development segment.

      Crescent Real Estate expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, regular debt
service requirements (including debt service relating to additional and
replacement debt), additional interest expense related to the cash flow hedge
agreements,


                                      224


recurring capital expenditures, non-recurring capital expenditures, such as
tenant improvement and leasing costs, distributions to shareholders and
unitholders, and unfunded expenses related to the Crescent Operating bankruptcy
of approximately $3.2 million to $6.4 million, primarily through cash flow
provided by operating activities. To the extent that Crescent Real Estate's cash
flow from operating activities is not sufficient to finance such short-term
liquidity requirements, Crescent Real Estate expects to finance such
requirements with borrowings under the Fleet Facility.

      Crescent Real Estate's long-term liquidity requirements as of September
30, 2002 consist primarily of debt maturities after December 31, 2003, which
totaled approximately $2.2 billion as of September 30, 2002. Crescent Real
Estate also has $8.8 million of long-term capital requirements. Crescent Real
Estate expects to meet these long-term liquidity requirements primarily through
long-term secured and unsecured borrowings and other debt and equity financing
alternatives as well as cash proceeds received from the sale or joint venture of
properties.

      Debt and equity financing alternatives currently available to Crescent
Real Estate to satisfy its liquidity requirements and commitments for material
capital expenditures include:

   -  Additional proceeds from the Fleet Facility, under which Crescent Real
      Estate had up to $205.8 million of borrowing capacity as of September 30,
      2002;

   -  Additional proceeds from the refinancing of existing secured and unsecured
      debt;

   -  Additional debt secured by existing underleveraged investment properties;

   -  Issuance of additional unsecured debt;

   -  Equity offerings including preferred and/or convertible securities; and

   -  Proceeds from joint ventures and property sales.

        The following factors could limit Crescent Real Estate's ability to
utilize these financing alternatives:

   -  The reduction in net operating income of the properties supporting the
      Fleet Facility to a level that would further reduce the availability under
      the line of credit.

   -  Crescent Real Estate may be unable to obtain debt or equity financing on
      favorable terms, or at all, as a result of the financial condition of
      Crescent Real Estate or market conditions at the time Crescent Real Estate
      seeks additional financing;

   -  Restrictions on Crescent Real Estate's debt instruments or outstanding
      equity may prohibit it from incurring debt or issuing equity at all, or on
      terms available under then-prevailing market conditions; and

   -  Crescent Real Estate may be unable to service additional or replacement
      debt due to increases in interest rates or a decline in the Crescent Real
      Estate's operating performance.

      In addition to Crescent Real Estate's liquidity requirements stated above,
as of September 30, 2002, Crescent Real Estate guaranteed or provided letters of
credit related to approximately $55.9 million of unconsolidated debt and had
obligations to potentially provide an additional $33.8 million in


                                      225


guarantees, primarily related to construction loans. Crescent Real Estate also
guaranteed $15.2 million in letters of credit under its Fleet Facility at
September 30, 2002. See "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" and "Debt Financing Arrangements" included in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information about Crescent Real Estate's unconsolidated
investments and the underlying debt related to these investments.

Year ended December 31, 2001

      Cash and cash equivalents were $36.3 million and $39.0 million at December
31, 2001, and December 31, 2000, respectively. This 6.9% decrease is
attributable to $425.5 million used in financing activities, partially offset by
$210.0 million and $212.8 million provided by investing and operating
activities, respectively.



                                                        DECEMBER
                                                        31, 2001
                                                      -------------
                                                      (in millions)
                                                   
Cash Provided by Operating Activities                     $212.8
Cash Provided by Investing Activities                      210.0
Cash Used in Financing Activities                         (425.5)
                                                          ------
Decrease in Cash and Cash Equivalents                     $ (2.7)
Cash and Cash Equivalents, Beginning of Period              39.0
                                                          ------
Cash and Cash Equivalents, End of Period                  $ 36.3
                                                          ======



      Operating Activities.

      Crescent Real Estate's cash provided by operating activities of $212.8
million is attributable to:

   -  $199.4 million from property operations; and

   -  $13.4 million representing distributions received in excess of equity in
      earnings from unconsolidated companies.

      Investing Activities.

      Crescent Real Estate's cash provided by investing activities of $210.0
million is primarily attributable to:

   -  $200.4 million of net sales proceeds primarily attributable to the
      disposition of the two Washington Harbour office properties, three
      Woodlands office properties and 18 Crescent Real Estate behavioral
      healthcare properties;

   -  $129.7 million of proceeds from joint venture partners, primarily as a
      result of the proceeds of $116.7 million from the joint ventures of two
      existing office properties, Bank One Tower in Austin, Texas and Four
      Westlake Park in Houston, Texas and $12.9 million from the joint venture
      of 5 Houston Center office property, which is currently being developed;

   -  $107.9 million of proceeds from the sale of marketable securities; and


                                      226

   -  $32.0 million from return of investment in unconsolidated office
      properties, residential development properties and other unconsolidated
      companies.

      Crescent Real Estate's cash provided by investing activities is partially
offset by:

   -  $124.6 million of additional investment in unconsolidated companies,
      consisting of investments in (i) the upscale Crescent Real Estate
      residential development properties of $89.0 million, primarily as a result
      of CRDI's investment in Tahoe Mountain Resorts, (ii) Crescent Real Estate
      temperature-controlled logistics properties of $10.8 million, (iii) office
      properties of $16.4 million and (iv) other unconsolidated companies of
      $8.4 million;

   -  $51.8 million for recurring and non-recurring tenant improvement and
      leasing costs for the office properties;

   -  $46.4 million for capital expenditures for rental properties, primarily
      attributable to non-recoverable building improvements for the office
      properties and replacement of furniture, fixtures and equipment for the
      Crescent Real Estate hotel properties;

   -  $23.7 million for the development of investment properties, including
      $12.3 million for development of the 5 Houston Center office property and
      expansions and renovations at the Crescent Real Estate hotel properties;

   -  a $11.2 million increase in notes receivable, primarily as a result of
      approximately $10.0 million related to secured loans to AmeriCold
      Logistics; and

   -  a $2.2 million increase in restricted cash and cash equivalents, primarily
      related to the escrow of funds to purchase a parking garage in Denver,
      Colorado, which was purchased during the first quarter of 2002, partially
      offset by escrow reimbursements for capital expenditures at the Crescent
      Real Estate hotel properties and the office properties.

      Financing Activities.

      Crescent Real Estate's use of cash for financing activities of $425.5
million is primarily attributable to:

   -  net repayment of the UBS Facility of $553.5 million;

   -  distributions to common shareholders and unitholders of $245.1 million;

   -  repayment and retirement of the iStar Financial Note of $97.1 million;

   -  repurchase of Crescent Real Estate's common shares for $77.4 million;

   -  repayment and retirement of the Deutsche Bank Short-term Loan of $75.0
      million;

   -  net capital distributions to joint venture partners of $25.4 million,
      primarily due to distributions to joint venture preferred equity partners;

   -  debt financing costs of $16.0 million; and

   -  distributions to preferred shareholders of $13.5 million.


                                      227

      The use of cash for financing activities is partially offset by:

   -  net borrowings under the Fleet Facility of $283.0 million;

   -  proceeds from notes payable of $393.3 million, primarily attributable to
      the debt refinancing; and

   -  proceeds from the exercise of common share options of $9.8 million.

      Crescent Operating.

      In April 1997, Crescent Real Estate established a new Delaware
corporation, Crescent Operating. All of the outstanding common stock of Crescent
Operating, valued at $0.99 per share, was distributed, effective June 12, 1997,
to those persons who were limited partners of Crescent Partnership or
shareholders of Crescent Real Estate on May 30, 1997, in a spin-off.

      Crescent Operating was formed to become a lessee and operator of various
assets to be acquired by Crescent Real Estate and to perform the intercompany
agreement between Crescent Operating and Crescent Real Estate, pursuant to which
each agreed to provide the other with rights to participate in certain
transactions. Crescent Real Estate was not permitted to operate or lease these
assets under the tax laws in effect and applicable to REITs at that time. In
connection with the formation and capitalization of Crescent Operating, and the
subsequent operations and investments of Crescent Operating since 1997, Crescent
Real Estate made loans to Crescent Operating under a line of credit and various
term loans.

      On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows Crescent Real Estate, through its subsidiaries, to operate or
lease certain of its investments that had been previously operated or leased by
Crescent Operating.

      Crescent Operating and Crescent Real Estate entered into an asset and
stock purchase agreement on June 28, 2001, in which Crescent Real Estate agreed
to acquire the lessee interests in the eight Crescent Real Estate hotel
properties leased to subsidiaries of Crescent Operating, the voting interests
held by subsidiaries of Crescent Operating in three of Crescent Real Estate's
residential development corporations and other assets in exchange for $78.4
million. In connection with that agreement, Crescent Real Estate agreed that it
would not charge interest on its loans to Crescent Operating from May 1, 2001
and that it would allow Crescent Operating to defer all principal and interest
payments due under the loans until December 31, 2001.

      Also on June 28, 2001, Crescent Real Estate entered into an agreement to
make a $10.0 million investment in Crescent Machinery, a wholly owned subsidiary
of Crescent Operating. This investment, together with capital from a third-party
investment firm, was expected to put Crescent Machinery on solid financial
footing.

      Following the date of the agreements relating to the acquisition of
Crescent Operating assets and stock and the investment in Crescent Machinery,
the results of operations for the Crescent Operating hotel operations and the
Crescent Operating land development interests declined, due in part to the
slowdown in the economy after September 11. In addition, Crescent Machinery's
results of operations suffered because of the economic environment and the
overall reduction in national construction levels that has affected the
equipment rental and sale business, particularly post September 11. As a result,
Crescent Real Estate believes that a significant additional investment would
have been necessary to adequately capitalize Crescent Machinery and satisfy
concerns of Crescent Machinery's lenders.


                                      228

      Crescent Real Estate stopped recording rent from the leases of the eight
Crescent Real Estate hotel properties leased to subsidiaries of Crescent
Operating on October 1, 2001, and recorded impairment and other adjustments
related to Crescent Operating in the fourth quarter of 2001, based on the
estimated fair value of the underlying assets. See "Note 16. Crescent Operating"
included in Financial Statements of Crescent Real Estate for the year ended
December 31, 2001 (audited) for a description of these charges.

      On January 22, 2002, Crescent Real Estate terminated the purchase
agreement pursuant to which Crescent Real Estate would have acquired the lessee
interests in the eight Crescent Real Estate hotel properties leased to
subsidiaries of Crescent Operating the voting interests held by subsidiaries of
Crescent Operating in three of the residential development corporations and
other assets. On February 4, 2002, Crescent Real Estate terminated the agreement
relating to its planned investment in Crescent Machinery.

      On February 6, 2002, Crescent Machinery filed for protection under the
federal bankruptcy laws.

      On February 12, 2002, Crescent Real Estate delivered default notices to
Crescent Operating relating to approximately $49.0 million of unpaid rent and
approximately $76.2 million of principal and accrued interest due to Crescent
Real Estate under certain secured loans.

      On February 14, 2002, Crescent Real Estate executed the original
Settlement Agreement with Crescent Operating, pursuant to which Crescent
Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
foreclosure, Crescent Operating's lessee interests in the eight Crescent Real
Estate hotel properties leased to subsidiaries of Crescent Operating and,
pursuant to a strict foreclosure, Crescent Operating's voting interests in three
of Crescent Real Estate's residential development corporations and other assets
and Crescent Real Estate agreed to assist and provide funding to Crescent
Operating for the implementation of a prepackaged bankruptcy of Crescent
Operating. In connection with the transfer, Crescent Operating's rent
obligations to Crescent Real Estate were reduced by $23.6 million, and its debt
obligations were reduced by $40.1 million. These amounts include $18.3 million
of value attributed to the lessee interests transferred by Crescent Operating to
Crescent Real Estate, however, in accordance with GAAP, Crescent Real Estate
assigned no value to these interests for financial reporting purposes.

      Crescent Real Estate holds the lessee interests in the eight Crescent Real
Estate hotel properties and the voting interests in the three residential
development corporations through three newly organized entities that are each
wholly owned taxable REIT subsidiaries of Crescent Real Estate. Crescent Real
Estate included these assets in its resort/hotel segment and its residential
development segment, and fully consolidated the operations of the eight Crescent
Real Estate hotel properties and the three residential development corporations,
beginning on the date of the transfers of these assets.

      The Settlement Agreement provides that Crescent Operating and Crescent
Real Estate will jointly seek to have a pre-packaged bankruptcy plan for
Crescent Operating, reflecting the terms of the Settlement Agreement, approved
by the bankruptcy court. Under the Settlement Agreement, Crescent Real Estate
agreed to provide approximately $14.0 million to Crescent Operating in the form
of cash and common shares of Crescent Real Estate to fund costs, claims and
expenses relating to the bankruptcy and related transactions, and to provide for
the distribution of Crescent Real Estate's common shares to the Crescent
Operating stockholders. Crescent Real Estate has also agreed, however, that it
will issue common shares with a minimum dollar value of approximately $2.16
million to the Crescent Operating stockholders, even if it would cause the total
costs, claims and expenses that it pays to exceed $14.0 million. Currently,
Crescent Real Estate estimates that the value of the common shares that will be
issued to the Crescent Operating stockholders will be approximately $2.16
million to $5.4 million. The actual value of the common shares issued to the
Crescent Operating stockholders will not be determined until


                                      229

the confirmation of Crescent Operating's bankruptcy plan and could vary from the
estimated amounts, but will have a value of at least $2.16 million.

      In addition, Crescent Real Estate has agreed to use commercially
reasonable efforts to assist Crescent Operating in arranging Crescent
Operating's repayment of its $15.0 million obligation to Bank of America,
together with accrued interest. Crescent Real Estate expects to form and
capitalize a new entity, called Crescent Spinco, to be owned by the shareholders
of Crescent Real Estate and the unitholders of Crescent Partnership. Crescent
Spinco would then purchase Crescent Operating's interest in AmeriCold Logistics
for between $15.0 million and $15.5 million. Crescent Operating has agreed that
it will use the proceeds of the sale of the AmeriCold Logistics interest to
repay Bank of America in full.

      Crescent Operating obtained the loan primarily to participate in
investments with Crescent Real Estate. At the time Crescent Operating obtained
the loan, Bank of America required, as a condition to making the loan, that
Richard E. Rainwater, the Chairman of the Board, and John C. Goff, the Chief
Executive Officer of Crescent Real Estate, enter into a support agreement with
Crescent Operating and Bank of America, pursuant to which they agreed to make
additional equity investments in Crescent Operating if Crescent Operating
defaulted on payment obligations under its line of credit with Bank of America
and the net proceeds of an offering of Crescent Operating securities were
insufficient to allow Crescent Operating to pay Bank of America in full.
Effective December 31, 2001, the parties executed an amendment to the line of
credit providing that any defaults existing under the line of credit on or
before March 8, 2002 are temporarily cured unless and until a new default shall
occur.

      Previously, Crescent Real Estate held a first lien security interest in
Crescent Operating's entire membership interest in AmeriCold Logistics. REIT
rules prohibit Crescent Real Estate from acquiring or owning the membership
interest that Crescent Operating owns in AmeriCold Logistics. Under the
Settlement Agreement, Crescent Real Estate agreed to allow Crescent Operating to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to Bank of America.

      If the Crescent Operating bankruptcy plan is approved by the required vote
of the shares of Crescent Operating common stock and confirmed by the bankruptcy
court, the stockholders of Crescent Operating's common shares will receive
Crescent Real Estate's common shares. As stockholders of Crescent Operating, Mr.
Rainwater and Mr. Goff will also receive Crescent Real Estate's common shares.

      Pursuant to the Crescent Operating bankruptcy plan, the current and former
directors and officers of Crescent Operating and the current and former
directors and officers of Crescent Real Estate also have received a release from
Crescent Operating of liability for any actions taken prior to February 14,
2002, and, depending on various factors, will receive certain liability releases
from Crescent Operating and its stockholders.

      Completion and effectiveness of the bankruptcy plan for Crescent Operating
is contingent upon a number of conditions, including the vote of Crescent
Operating's stockholders, the approval of the bankruptcy plan by certain of
Crescent Operating's creditors and the approval of the bankruptcy court.

      Investments in Real Estate Mortgages and Equity of Unconsolidated
Companies.


      Investments in which Crescent Real Estate does not have a controlling
interest are accounted for under the equity method. The following is a summary
of Crescent Real Estate's ownership in significant unconsolidated joint ventures
or equity investments as of September 30, 2002:


                                      230




                                                                                                       CRESCENT REAL ESTATE'S
                                                                                                             OWNERSHIP
ENTITY                                                            CLASSIFICATION                      AS OF SEPTEMBER 30, 2002
------                                                            --------------                      ------------------------
                                                                                                
JOINT VENTURES

Main Street Partners, L.P.                                    Office (Bank One Center)                       50.0%(1)
Crescent Miami Center, L.L.C.                                   Office (Miami Center)                        40.0%(2)
Crescent 5 Houston Center, L.P.                               Office (5 Houston Center)                      25.0%(3)
Austin PT BK One Tower Office Limited Partnership              Office (Bank One Tower)                       20.0%(4)
Houston PT Four Westlake Office Limited
Partnership                                                  Office (Four Westlake Park)                     20.0%(4)
Houston PT Three Westlake Office Limited
Partnership                                                 Office (Three Westlake Park)                     20.0%(4)

EQUITY INVESTMENTS

Mira Vista Development Corp.                           Residential Development Corporation                   94.0%(5)
Houston Area Development Corp.                         Residential Development Corporation                   94.0%(6)
The Woodlands Land Development
Company, L.P. (7)                                      Residential Development Corporation                   42.5%(8)(9)


Blue River Land Company, L.L.C. (7)                      Residential Development Corporation                 31.8%(10)

Manalapan Hotel Partners L.L.C. (7)                    Resort/Hotel (Ritz Carlton Palm Beach)                24.0%(11)

Temperature-Controlled Logistics Partnership              Temperature-Controlled Logistics                   40.0%(12)
The Woodlands Commercial Properties Company, L.P.                      Office                                42.5%%(8)(9)
DBL Holdings, Inc.                                                      Other                                97.4%(13)
CR License, L.L.C.                                                      Other                                30.0%(14)
Woodlands Operating Company, L.P.                                       Other                                42.5%(8)(9)
Canyon Ranch Las Vegas                                                  Other                                65.0%(15)
SunTX Fulcrum Fund, L.P.                                                Other                                33.3%(16)


---------------------------
(1)   The remaining 50.0% interest in Main Street Partners, L.P. is owned by
      Trizec Properties, Inc.

(2)   The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by a
      fund advised by JP Morgan Investment Management, Inc. Crescent Real Estate
      will continue to manage Miami Center on a fee basis.

(3)   The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by
      a pension fund advised by JP Morgan Investment Management, Inc. Crescent
      Real Estate recorded $1,142,000 in development, and leasing fees, related
      to this investment during the nine months ended September 30, 2002. The 5
      Houston Center Office Property was completed on September 16, 2002.

(4)   The remaining 80% interest in Austin PT BK One Tower Office Limited
      Partnership, Houston PT Three Westlake Office Limited Partnership and
      Houston PT Four Westlake Office Limited Partnership is owned by an
      affiliate of General Electric Pension Fund. Crescent Real Estate recorded
      $473,000 in management and leasing fees for these office properties during
      the nine months ended September 30, 2002.

(5)   The remaining 6.0% interest in Mira Vista Development, Corp., or MVDC,
      which represents 100% of the voting stock, is owned 4.0% by DBL Holdings,
      Inc., or DBL, and 2.0% by third parties.

(6)   The remaining 6.0% interest in Houston Area Development Corp., or HADC,
      which represents 100% of the voting stock, is owned 4.0% by DBL and 2.0%
      by a third party.

(7)   On February 14, 2002, Crescent Real Estate executed an agreement with
      Crescent Operating, pursuant to which Crescent Operating transferred to
      subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure,
      Crescent Operating's interests in the voting stock in three of Crescent
      Real Estate's residential development corporations (Desert Mountain
      Development Corp., The Woodlands Land Company, Inc. and CRDI, and in CRL
      Investments, Inc. Crescent Operating transferred its 60% general partner
      interest in COPI Colorado, L.P. which owns 10% of the voting stock in
      CRDI, which increased Crescent Real Estate's ownership interest in CRDI
      from 90% to 96%. As a result, Crescent Real Estate fully consolidated the
      operations of these entities beginning on the dates of the asset
      transfers. The Woodlands Land


                                      231

      Development Company, L.P. is an unconsolidated equity investment of The
      Woodlands Land Company. Blue River Land Company, L.L.C., and Manalapan
      Hotel Partners, L.L.C., are unconsolidated equity investments of CRDI.

(8)   The remaining 57.5% interest in The Woodlands Land Development Company
      L.P., The Woodlands Commercial Properties Company, L.P. and The Woodlands
      Operating Company, L.P. are owned by an affiliate of Morgan Stanley.

(9)   Distributions are made to partners based on specified payout percentages.
      During the nine months ended September 30, 2002, the payout percentage to
      Crescent Real Estate was 52.5%.

(10)  Of the remaining 68.2% interest in Blue River Land Company, L.L.C., 0.7%
      is indirectly owned by John Goff, Vice-Chairman of the Board of Trust
      Managers and Chief Executive Officer of Crescent Real Estate, through his
      20% ownership of COPI Colorado, L.P. and 67.5% is owned by parties
      unrelated to Crescent Real Estate.

(11)  Of the remaining 76.0% interest in Manalapan Hotel Partners, L.L.C., 0.5%
      is indirectly owned by John Goff, Vice-Chairman of the Board of Trust
      Managers and Chief Executive Officer of Crescent Real Estate, through his
      20% ownership of COPI Colorado, L.P. and 75.5% is owned by parties
      unrelated to Crescent Real Estate.

(12)  The remaining 60.0% interest in the Temperature-Controlled Logistics
      Partnership is owned by Vornado Realty Trust, L.P.

(13)  John Goff, Vice-Chairman of the Board of Trust Managers and Chief
      Executive Officer of Crescent Real Estate, obtained the remaining 2.6%
      economic interest in DBL (including 100% of the voting interest in DBL) in
      exchange for his voting interests in MVDC and HADC, originally valued at
      approximately $381,000, and approximately $63,000 in cash, or total
      consideration valued at approximately $444,000. At September 30, 2002, Mr.
      Goff's book value in DBL was approximately $401,000.

(14)  The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
      of the management company of two of Crescent Real Estate's hotel
      properties.

(15)  The remaining 35% interest in Canyon Ranch Las Vegas is owned by an
      affiliate of the management company of two of Crescent Real Estate's hotel
      properties.


(16)  The objective of the SunTX Fulcrum Fund, L.P., or the Fund, is to invest
      in a portfolio of acquisitions that offer the potential for substantial
      capital appreciation. The remaining 66.7% of the Fund is owned by a group
      of individuals unrelated to Crescent Real Estate. Crescent Real Estate's
      ownership percentage will decline by the closing date of the Fund as
      capital commitments from third parties are secured. Crescent Real Estate's
      projected ownership interest at the closing of the Fund is approximately
      7.5% based on the Fund manager's expectations for the final Fund
      capitalization. Crescent Real Estate accounts for its investment in the
      Fund under the cost method. Crescent Real Estate's investment at September
      30, 2002 was $7,800,000.




                                      232

      Unconsolidated Debt Analysis.

      The significant terms of Crescent Real Estate's share of unconsolidated
debt financing arrangements existing as of September 30, 2002 are shown below:





                                                              COMPANY'S
                               COMPANY'S         DEBT          SHARE OF        CURRENT                        FIXED/VARIABLE
                              OWNERSHIP %      BALANCE       BALANCE (4)         RATE        MATURITY        SECURED/UNSECURED
                              -----------      -------       -----------         ----        --------        -----------------
                                                                                        
TEMPERATURE CONTROLLED
LOGISTICS SEGMENT:

AmeriCold Notes(1)                40%        $  541,326         216,530        7.0%         4/11/2008          Fixed/Secured

OFFICE SEGMENT:
Main Street Partners, L.P.
(2)(3)(4)                         50%           133,403          66,702        5.9%         12/1/2004        Variable/Secured
Crescent 5 Houston Center,
L.P. (5)                          25%            48,654          12,164        4.1%         5/31/2004        Variable/Secured
Austin PT Bk One Tower
Office Limited Partnership        20%            38,012           7,602        7.1%          8/1/2006          Fixed/Secured
Houston PT Four Westlake
Office Limited Partnership        20%            48,873           9,775        7.1%          8/1/2006          Fixed/Secured
Houston PT Three Westlake
Office Limited Partnership        20%            33,000           6,600        5.6%          9/1/2007          Fixed/Secured

Crescent Miami Center, LLC        40%            81,000          32,400        5.0%          9/1/2007          Fixed/Secured
The Woodlands Commercial
Properties Co.                  42.5%
   Bank Boston credit
   facility(3)                                   64,861          27,566        4.3%         11/30/2002       Variable/Secured
   Fleet National Bank(3)                         3,398           1,444        3.8%         10/31/2003       Variable/Secured

                                                451,201         164,253

RESIDENTIAL DEVELOPMENT

SEGMENT:
The Woodlands Land
Development Co. (6)             42.5%
   Fleet credit
   facility (3)(7)(8)                           216,460          91,996        4.3%         11/30/2002       Variable/Secured
   Fleet National Bank (3)(9)                     6,971           2,963        3.8%         10/31/2003       Variable/Secured
   Fleet National Bank (10)                      24,531          10,426        4.6%         12/31/2005       Variable/Secured
   Jack Eckerd Corp.                                101              43        4.8%          7/1/2005        Variable/Secured
   Mitchell Mortgage Company                      2,734           1,162        5.8%          1/1/2004          Fixed/Secured
   Mitchell Mortgage Company                      1,257             534        6.3%          7/1/2005          Fixed/Secured
   Mitchell Mortgage Company                      1,962             834        5.5%         10/1/2005          Fixed/Secured
   Mitchell Mortgage Company                      3,548           1,508        8.0%          4/1/2006          Fixed/Secured
   Mitchell Mortgage Company                      1,405             597        7.0%         10/1/2006          Fixed/Secured

                                                258,969         110,063
Resort Hotel Segment
Manalapan Hotel Partners

Dresdner Bank AG (11)             24%            65,470          15,713        9.8%         12/29/2002       Variable/Secured


TOTAL UNCONSOLIDATED DEBT                    $1,316,966        $506,559        6.0%



AVERAGE REMAINING TERM                                                                     3.4 years(12)



-----------------------
(1)   Consists of several notes. Maturity date is based on largest debt
      instrument. All interest rates are fixed.

(2)   Senior Note - Note A: $84.0 million at variable interest rate, LIBOR + 189
      basis points, $4.9 million at variable interest rate; LIBOR + 250 basis
      points with a LIBOR floor of 2.50%. Note B: $24.7 million at variable
      interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
      Mezzanine Note - $19.8 million at variable interest rate, LIBOR + 890
      basis points with a LIBOR floor of 3.0%. Interest-rate cap agreement
      maximum LIBOR of 4.52% on all notes. All notes are amortized on a 25-year
      amortization schedule.

(3)   This facility has two one-year extension options.

(4)   Crescent Real Estate obtained a letter of credit to guarantee the
      repayment of up to $4.3 million of principal of the Main Street Partners,
      L.P. loan.

(5)   Crescent Real Estate has made a full and unconditional guarantee of loan
      from Fleet up to $82.5 million for the construction of 5 Houston Center.
      At September 30, 2002, $48.7 million was outstanding.

(6)   On February 14, 2002, Crescent Real Estate executed an agreement with
      Crescent Operating to transfer, pursuant to a strict foreclosure, Crescent
      Operating's 5% interest in The Woodlands Land Company. Therefore, as of
      February 14, 2002, The Woodlands Land Company is fully consolidated. This
      schedule reflects The Woodlands Land Company's 42.5% interest in The
      Woodlands Land Development Company.

(7)   There was an interest rate cap agreement executed with this agreement
      which limits interest rate exposure on the notional amount of $145.0
      million to a maximum LIBOR rate of 9.0%.

(8)   To mitigate interest rate exposure, The Woodlands Land Development Company
      has entered into an interest rate swap against the $50.0 million notional
      amount to effectively fix the interest rate at 5.28%. The Woodlands Land
      Development Company has also entered into an interest rate swap against
      $50.0 million notional amount to effectively fix the interest rate at
      4.855%.

(9)   There was an interest rate cap agreement executed with this agreement
      which limits interest rate exposure on the notional amount of $33.8
      million to a maximum LIBOR rate of 9.0%.

(10)  There was an interest rate cap agreement executed with this agreement
      which limits interest rate exposure on the notional amount of $19.5
      million to a maximum LIBOR rate of 8.5%.

(11)  Crescent Real Estate guarantees $3.0 million of this facility.


                                      233


      The following table shows, as of September 30, 2002, information about
Crescent Real Estate's share of unconsolidated fixed and variable-rate debt and
does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.




                                                                                                    WEIGHTED
                                                                                  WEIGHTED           AVERAGE
                                             AMOUNT            % OF DEBT         AVERAGE RATE       MATURITY(1)
                                             ------            ---------         ------------       -----------
                                        (IN THOUSANDS)
                                                                                       
     FIXED-RATE DEBT                     $    277,542              55%               6.8%           5.4 years
     VARIABLE RATE DEBT                       229,017              45%               5.1%           1.0 years
                                         ------------             ---                ---            ---------
     TOTAL DEBT                          $    506,559             100%               6.0%           3.4 years
                                         ============             ===                ===            =========



--------------------

(1)   Based on contractual maturities.

      Listed below are Crescent Real Estate's share of aggregate principal
payments, year by year, required as of September 30, 2002 related to Crescent
Real Estate's unconsolidated debt. Scheduled principal installments and amounts
due at maturity are included.




                                   SECURED DEBT(1)
                                   ---------------
                                   (IN THOUSANDS)
                                
                   2002                $  136,063
                   2003                     5,581
                   2004                    78,944
                   2005                    12,060
                   2006                    18,381
                Thereafter                255,530
                                       ----------
                                       $  506,559
                                       ==========



-------------------------------------

(1)   These amounts do not represent the effect of two one-year extension
      options on two of the Woodlands Fleet National Bank loans, totaling $95.0
      million that have initial maturity dates of November 2002 and October
      2003.

      Joint Venture Arrangements.

      5 Houston Center

      On June 4, 2001, Crescent Real Estate entered into a joint venture
arrangement with a pension fund advised by JPM, to construct the 5 Houston
Center office property within Crescent Real Estate's Houston Center mixed-use
office property complex in Houston, Texas. The Class A office property will
consist of 577,000 net rentable square feet. The joint venture is structured
such that the fund holds a 75% equity interest, and Crescent Real Estate holds a
25% equity interest in the property, which is accounted for under the equity
method. Crescent Real Estate contributed approximately $8.5 million of land and
$12.3 million of development costs to the joint venture entity and received
$14.8 million in net proceeds. No gain or loss was recognized by Crescent Real
Estate on this transaction. In addition, Crescent Real Estate is developing, and
will manage and lease the property on a fee basis. During the year ended
December 31, 2001, Crescent Real Estate recognized $2.3 million for these
services.

      During the second quarter of 2001, the joint venture entity obtained an
$82.5 million construction loan guaranteed by Crescent Real Estate, due May
2004, that bears interest at Prime (as defined in the loan agreement) plus 100
basis points or LIBOR plus 225 basis points, at the discretion of the borrower.
The interest rate on the loan at December 31, 2001, was 4.12%. The balance
outstanding on this construction loan at December 31, 2001, was $10.4 million.

      Four Westlake Park and Bank One Tower

      On July 30, 2001, Crescent Real Estate entered into joint venture
arrangements with an affiliate GE, in which Crescent Real Estate contributed two
office properties, Four Westlake Park in Houston, Texas, and Bank One Tower in
Austin, Texas into the joint ventures and GE made a cash contribution. The joint
ventures are structured such that GE holds an 80% equity interest in each of
Four Westlake Park, a 560,000 square foot Class A office property located in the
Katy Freeway submarket of Houston, and Bank One Tower, a 390,000 square foot
Class A office property located in downtown Austin.


                                      234

Crescent Real Estate continues to hold the remaining 20% equity interests in
each property, which are accounted for under the equity method. The joint
ventures generated approximately $120.0 million in net cash proceeds to Crescent
Real Estate, including distributions to Crescent Real Estate resulting from the
sale of its 80% equity interest and from mortgage financing at the joint venture
level. None of the mortgage financing at the joint venture level is guaranteed
by Crescent Real Estate. Crescent Real Estate has no commitment to reinvest the
cash proceeds back into the joint ventures. The joint ventures were accounted
for as partial sales of these office properties, resulting in a gain of
approximately $7.6 million, net of a deferred gain of approximately $1.9
million. In addition, Crescent Real Estate manages and leases the office
properties on a fee basis. During the year ended December 31, 2001, Crescent
Real Estate recognized $0.2 million for these services.

      Three Westlake Park


      On August 21, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of GE. In connection with the formation of the
venture, Crescent Real Estate contributed an office property, Three Westlake
Park in Houston, Texas, and GE made a cash contribution. GE holds an 80% equity
interest in the Three Westlake Park, a 415,000 square foot Class A Office
Property located in the Katy Freeway submarket of Houston, and Crescent Real
Estate continues to hold the remaining 20% equity interest in the office
property, with Crescent Real Estate's interest accounted for under the equity
method. The joint venture generated approximately $47.1 million in net cash
proceeds to Crescent Real Estate, including distributions resulting from the
sale of Crescent Real Estate's 80% equity interest and $6.6 million from
Crescent Real Estate's portion of mortgage financing at the joint venture level.
None of the mortgage financing at the joint venture level is guaranteed by
either Crescent Real Estate or GE. Crescent Real Estate has no commitment to
reinvest the cash proceeds back into the joint venture. The joint vent