CRESCENT REAL ESTATE EQUITIES CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO

COMMISSION FILE NUMBER 1-13038

CRESCENT REAL ESTATE EQUITIES COMPANY
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(Exact name of registrant as specified in its charter)

TEXAS 52-1862813
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)

777 Main Street, Suite 2100, Fort Worth, Texas 76102
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(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code (817) 321-2100
--------------

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.

YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 11, 2002, the aggregate market value of the 96,368,621 common
shares and 8,000,000 preferred shares held by non-affiliates of the registrant
was approximately $1.8 billion and $156.0 million, respectively, based upon the
closing price of $18.51 for common shares and $19.50 for preferred shares on the
New York Stock Exchange.

Number of Common Shares outstanding as of March 11, 2002: 119,365,362
Number of Preferred Shares outstanding as of March 11, 2002: 8,000,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2002 Annual Meeting of Shareholders to be held in
June 2002 are incorporated by reference into Part III.

TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

THE COMPANY

Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes, (a "REIT"), and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.

The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.

The direct and indirect subsidiaries of Crescent Equities at December
31, 2001 included:

o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
The "Operating Partnership."

o CRESCENT REAL ESTATE EQUITIES, LTD.
The "General Partner" of the Operating Partnership.

o SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE
GENERAL PARTNER

Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.

As of December 31, 2001, the Company's assets and operations were
composed of four investment segments:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

2

Within these segments, the Company owned or had an interest in the
following real estate assets (the "Properties") as of December 31, 2001:

o OFFICE SEGMENT consisted of 74 office properties (collectively
referred to as the "Office Properties"), located in 26
metropolitan submarkets in six states, with an aggregate of
approximately 28.0 million net rentable square feet.

o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,028 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,769 rooms (collectively referred to as the
"Resort/Hotel Properties").

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and non-voting common stock
representing interests ranging from 90% to 95% in five
unconsolidated residential development corporations
(collectively referred to as the "Residential Development
Corporations"), which in turn, through joint venture or
partnership arrangements, owned 21 upscale residential
development properties (collectively referred to as the
"Residential Development Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in a general partnership (the
"Temperature-Controlled Logistics Partnership"), which owns
all of the common stock, representing substantially all of the
economic interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a REIT,
which, as of December 31, 2001, directly or indirectly owned
89 temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 445.2 million
cubic feet (17.7 million square feet) of warehouse space.

See "Note 1. Organization and Basis of Presentation" included in "Item
8. Financial Statements and Supplementary Data" for a table that lists the
principal subsidiaries of Crescent Equities and the Properties owned by such
subsidiaries.

See "Note 4. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" included in "Item 8. Financial Statements and
Supplementary Data" for a table that lists the Company's ownership in
significant unconsolidated companies and equity investments as of December 31,
2001, including the four Office Properties in which the Company owned an
interest through unconsolidated companies and equity investments and the
Company's ownership interests in the Residential Development Segment and the
Temperature-Controlled Logistics Segment.

On February 14, 2002, the Company executed an agreement with Crescent
Operating, Inc. ("COPI"), pursuant to which COPI transferred to the Company, in
lieu of foreclosure, the lessee interests in the eight Resort/Hotel Properties
leased to subsidiaries of COPI and the voting common stock in three of the
Company's Residential Development Corporations. The Company will fully
consolidate the operations of the eight Resort/Hotel Properties and the three
Residential Development Corporations, beginning on the date of the transfers of
these assets. See "Note 20. Subsequent Events" included in "Item 8. Financial
Statements and Supplementary Data" for additional information regarding the
Company's agreement with COPI.

For purposes of investor communications, the Company classifies its
luxury and destination fitness resorts and spas and upscale Residential
Development Properties as a single group referred to as the "Resort and
Residential Development Sector" due to their similar targeted customer
characteristics. This group does not contain the four upscale business-class
hotel properties. Additionally, for investor communications, the Company
classifies its Temperature-Controlled Logistics Properties and its upscale
business-class hotel properties as the "Investment Sector." However, for
purposes of segment reporting as defined in Statement of Financial Accounting
Standard ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Information" and this Annual Report on Form 10-K, the Resort/Hotel
Properties, including the upscale business-class hotel properties, the
Residential Development Properties and the Temperature-Controlled Logistics
Properties are considered three separate reportable segments.

See "Note 3. Segment Reporting" included in "Item 8. Financial
Statements and Supplementary Data" 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 identifiable assets for each of these investment segments at December
31, 2001 and 2000.

3

BUSINESS OBJECTIVES AND STRATEGIES

BUSINESS OBJECTIVES

The Company's primary business objective is to provide its shareholders
with an attractive yet predictable growth in cash flow and underlying asset
value. Additionally, the Company is focused on increasing funds from operations
and cash available for distribution, while optimizing the corresponding growth
rates. The Company also strives to attract and retain the best talent available
and to empower management through the development and implementation of a
cohesive set of operating, investing and financing strategies that will align
their interests with the interests of the Company's shareholders.

OPERATING STRATEGIES

The Company seeks to enhance its operating performance by
distinguishing itself as the leader in its core investment segments through
customer service and asset quality.

The Company's operating strategies include:

o operating the Office Properties as long-term investments;

o providing exceptional customer service;

o increasing occupancies, rental rates and same-store net
operating income; and

o emphasizing brand recognition of the Company's premier Class A
Office Properties and luxury and destination fitness resorts
and spas.

INVESTING STRATEGIES

The Company focuses on assessing investment opportunities and markets
considered "demand-driven," or to have high levels of in-migration by
corporations, affordable housing costs, moderate costs of living, and the
presence of centrally located travel hubs, primarily within the Office Segment.
These investment opportunities are evaluated in light of the Company's long-term
investment strategy of acquiring properties at a significant discount to
replacement cost in an environment in which the Company believes values will
appreciate and equal or exceed replacement costs. Investment opportunities are
expected to provide growth in cash flow after applying management skills,
renovation and expansion capital and strategic vision.

The Company's investment strategies include:

o capitalizing on strategic acquisition opportunities, primarily
within the Company's Office Segment;

o evaluating the expected returns on acquisition opportunities
in relation to the Company's cost of capital;

o selectively developing the Company's commercial land
inventory, primarily in its Office and Resort/Hotel Segments
in order to meet the needs of customers;

o selectively developing luxury and destination fitness resorts
and spas;

o monetizing the current investments of the Company in the five
Residential Development Corporations and reinvesting returned
capital from the Residential Development Segment primarily
into the Office Segment where the Company expects to achieve
favorable rates of return; and

o evaluating future repurchases of the Company's common shares,
considering stock price, cost of capital, alternative
investment options and growth implications.

4

FINANCING STRATEGIES

The Company implements a disciplined set of financing strategies in
order to fund its operating and investing activities.

The Company's financing strategies include:

o funding operating expenses, debt service payments and
distributions to shareholders and unitholders primarily
through cash flow from operations;

o taking advantage of market opportunities to refinance existing
debt and reduce interest cost, replace secured debt with
unsecured debt, manage the Company's debt maturity schedule
and expand the Company's lending group;

o actively managing the Company's exposure to variable-rate
debt;

o utilizing a combination of the debt, equity, joint venture
capital and selected asset disposition alternatives available
to the Company to finance acquisition and development
opportunities; and

o recycling capital within the Company through strategic sales
of non-core assets and through joint ventures of selected
Office Properties within the Company's portfolio while
maintaining a minority interest and continuing to lease and
manage the Properties.

EMPLOYEES

As of February 25, 2002, the Company had 794 employees. None of these
employees are covered by collective bargaining agreements. The Company considers
its employee relations to be good.

TAX STATUS

The Company elected under Section 856(c) of the Internal Revenue Code
of 1986, as amended (the "Code"), to be taxed as a REIT under the Code beginning
with its taxable year ended December 31, 1994. As a REIT for federal income tax
purposes, the Company generally is not subject to federal income tax on REIT
taxable income that it distributes to its shareholders. Under the Code, REITs
are subject to numerous organizational and operational requirements, including
the requirement to distribute at least 90% of REIT taxable income each year. The
Company will be subject to federal income tax on its REIT taxable income
(including any applicable alternative minimum tax) at regular corporate rates if
it fails to qualify as a REIT for tax purposes in any taxable year. The Company
will also not be permitted to qualify for treatment as a REIT for federal income
tax purposes for four years following the year during which qualification is
lost. Even if the Company qualifies as a REIT for federal income tax purposes,
it may be subject to certain state and local income and franchise taxes and to
federal income and excise taxes on its undistributed REIT taxable income. In
addition, certain of its subsidiaries are subject to federal, state and local
income taxes.

ENVIRONMENTAL MATTERS

The Company and its Properties are subject to a variety of federal,
state and local environmental, health and safety laws, including:

o Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA");

o Resource Conservation & Recovery Act;

o Federal Clean Water Act;

o Federal Clean Air Act;

o Toxic Substances Control Act; and

5

o Occupational Safety & Health Act.

The application of these laws to a specific property that the Company
owns will be dependent on a variety of property-specific circumstances,
including the former uses of the property and the building materials used at
each property. Under certain environmental laws, principally CERCLA, a current
or previous owner or operator of real estate may be required to investigate and
clean up certain hazardous or toxic substances, asbestos-containing materials,
or petroleum product releases at the property. They may also be held liable to a
governmental entity or third parties for property damage and for investigation
and clean up costs such parties incur in connection with the contamination,
whether or not the owner or operator knew of, or was responsible for, the
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The owner or operator of a site also may be
liable under common law to third parties for damages and injuries resulting from
environmental contamination emanating from the site. Such costs or liabilities
could exceed the value of the affected real estate. The presence of
contamination or the failure to remediate contamination may adversely affect the
owner's ability to sell or lease real estate or to borrow using the real estate
as collateral.

Compliance by the Company with existing environmental, health and
safety laws has not had a material adverse effect on the Company's financial
condition and results of operations, and management does not believe it will
have such an impact in the future. In addition, the Company has not incurred,
and does not expect to incur any material costs or liabilities due to
environmental contamination at Properties it currently owns or has owned in the
past. However, the Company cannot predict the impact of new or changed laws or
regulations on its current Properties or on properties that it may acquire in
the future. The Company has no current plans for substantial capital
expenditures with respect to compliance with environmental, health and safety
laws.

INDUSTRY SEGMENTS

OFFICE SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2001, the Company owned or had an interest in 74
Office Properties located in 26 metropolitan submarkets in six states, with an
aggregate of approximately 28.0 million net rentable square feet. The Company,
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, the Company provides management and leasing services for some of
its Office Properties.

See "Item 2. Properties" for more information about the Company's
Office Properties. In addition, see "Note 1. Organization and Basis of
Presentation" included in "Item 8. Financial Statements and Supplementary Data"
for a table that lists the principal subsidiaries of the Company and the
Properties owned by such subsidiaries and "Note 4. Investments in Real Estate
Mortgages and Equity of Unconsolidated Companies" included in "Item 8. Financial
Statements and Supplementary Data" for a table that lists the Company's
ownership in significant unconsolidated companies or equity investments and the
four Office Properties in which the Company owned an interest through these
unconsolidated companies or equity investments.

JOINT VENTURE ARRANGEMENTS

5 Houston Center

On June 4, 2001, the Company entered into a joint venture arrangement
with a pension fund advised by JP Morgan Investment Management, Inc. ("JPM") to
construct the 5 Houston Center Office Property within the Company'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 the Company holds
a 25% equity interest. In addition, the Company is developing, and will manage
and lease, the Property on a fee basis.

6

Four Westlake Park and Bank One Tower

On July 30, 2001, the Company entered into joint venture arrangements
with an affiliate of General Electric Pension Fund ("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. The Company continues to hold the remaining 20% equity
interests in each Office Property. In addition, the Company manages and leases
the Office Properties on a fee basis.

MARKET INFORMATION

The Office Properties reflect the Company's strategy of investing in
premier assets within markets that have significant potential for rental growth.
Within its selected submarkets, the Company 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, the Company 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, the
Company analyzed demographic and economic data to focus on markets expected to
benefit from significant long-term employment growth as well as corporate
relocations.

The Company'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 Company markets are
projected to outperform the 10-year averages for the United States. In addition,
the Company 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 ("DFW")

According to the Bureau of Labor Statistics, 2001 job growth slowed
considerably in the DFW area. As of December 2001, the DFW unemployment rate was
5.6%, compared with the Texas unemployment rate of 5.7% and the national
unemployment rate of 5.8%. As for DFW'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
(3.0) million square feet for 2001; however, Class A space represented only
approximately (700,000) square feet of the (3.0) million total square feet.

7

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 a (200,000) square feet for 2001; however,
Class A space had a positive total net absorption of 1.4 million square feet.

The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the markets in which the Company 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 COMPANY MARKETS

- ----------
Source: Compiled from information published by Economy.com, Inc.

The Company 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 the Company's financial condition or results of operations.
Based on rental revenues from office leases in effect as of December 31, 2001,
no single tenant accounted for more than 5% of the Company's total Office
Segment rental revenues for 2001.

The Company applies a well-defined leasing strategy in order to capture
the potential rental growth in the Company's portfolio of Office Properties as
occupancy and rental rates increase within the markets and the submarkets in
which the Company has invested. The Company'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 ("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. The Company believes
that the difference between the two rates is a useful measure of the additional
revenue that the Company 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 the
Company'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.

8

COMPETITION

The Company'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 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 the Company's ability to
lease space and maintain or increase occupancy or rents in its existing Office
Properties. Management believes, however, that the quality services and
individualized attention that the Company offers its customers, together with
its active preventive maintenance program and superior building locations within
markets, enhance the Company's ability to attract and retain customers for its
Office Properties. In addition, as of December 31, 2001, on a weighted average
basis, the Company owned 16% of the Class A office space in the 26 submarkets in
which the Company owned Class A office properties, and 24% of the Class B office
space in the two submarkets in which the Company owned Class B office
properties. Management believes that ownership of a significant percentage of
office space in a particular market reduces property operating expenses,
enhances the Company's ability to attract and retain customers and potentially
results in increases in Company net operating income.

DISPOSITIONS

During the year ended December 31, 2001, five of the Company's fully
consolidated Office Properties were disposed of. On September 18, 2001, the
Company completed the sale of the two Washington Harbour Office Properties. The
Washington Harbour Office Properties were the Company's only Office Properties
in Washington, D.C. On September 28, 2001, the Woodlands Office Equities - '95
Limited ("WOE"), owned by the Company and the Woodlands Commercial Properties
Company, L.P., sold two Office Properties located within The Woodlands, Texas.
On December 20, 2001, WOE sold another Office Property located within The
Woodlands, Texas.

During the year ended December 31, 2001, two of the unconsolidated
companies in which the Company has an equity interest, sold three office
properties and one retail property. On September 27, 2001, the Woodlands
Commercial Properties Company, L.P. ("Woodlands CPC"), owned by the Company 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 the Company and an affiliate of Morgan
Stanley, sold two office properties and one retail property located within The
Woodlands, Texas.

DEVELOPMENT

Avallon IV Office Property

In May 2001, the Company 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

The Company 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, the Company 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 the Company holds
a 25% equity interest.

RESORT/HOTEL SEGMENT

OWNERSHIP STRUCTURE

Prior to enactment of the REIT Modernization Act, the Company's status
as a REIT for federal income tax purposes prohibited it from operating the
Resort/Hotel Properties. As of December 31, 2001, the Company owned nine
Resort/Hotel Properties, all of which, other than the Omni Austin Hotel, were
leased to subsidiaries of COPI pursuant to eight separate leases. The Omni
Austin Hotel was leased, under a separate lease, to HCD Austin Corporation.

Under the leases, each having a term of 10 years, the Resort/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 the Resort/Hotel Property
lessees of all or a combination of the following:

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o base rent, with periodic rent increases if applicable;

o percentage rent based on a percentage of gross hotel receipts
or gross room revenues, as applicable, above a specified
amount; and

o a percentage of gross food and beverage revenues above a
specified amount.

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's lessee interests in the eight Resort/Hotel Properties leased
to subsidiaries of COPI. As a result, these subsidiaries of the Company became
the lessees of the eight Resort/Hotel Properties.

See "Note 20. Subsequent Events" included in "Item 8. Financial
Statements and Supplemental Data" for additional information regarding the
Company's agreement with COPI.

CR LICENSE, LLC AND CRL INVESTMENTS, INC.

As of December 31, 2001, the Company had a 28.5% interest in CR
License, LLC, the entity which owns the right to the future use of the "Canyon
Ranch" name. The Company 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, the Company executed an agreement with COPI,
pursuant to which the Company acquired, in lieu of foreclosure, COPI's 1.5%
interest in CR License, LLC and 5.0% interest, representing all of the voting
stock, in CRL Investments, Inc.

MARKET INFORMATION

Lodging demand is highly dependent upon the global economy and volume
of business travel. 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. Although the hospitality
industry will be negatively impacted to the extent demand is less than expected
for much of 2002, management expects a recovery in 2003.

COMPETITION

Most of the Company's upscale business class Resort/Hotel Properties in
Denver, Albuquerque, Austin and Houston are business and convention center
hotels that compete against other business and convention center hotels. The
Company 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.

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RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2001, the Company 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
Residential Development Properties.

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's voting interests in three of the Residential Development
Corporations. These three Residential Development Corporations, Desert Mountain
Development Corporation ("Desert Mountain"), The Woodlands Land Company, Inc.
("The Woodlands") and Crescent Resort Development, Inc. ("CRD") own interests in
16 Residential Development Properties.

See "Note 20. Subsequent Events" included in "Item 8. Financial
Statements and Supplemental Data" for additional information regarding the
Company's agreement with COPI.

MARKET INFORMATION

A slowing economy, combined with the events of September 11, 2001
contributed to the reduction in lot absorption, primarily at Desert Mountain.
CRD (formerly "Crescent Development Management Corp.") was not significantly
impacted because most of its products were pre-sold. However, CRD 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

The Company'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. Management believes that the Properties owned by The Woodlands, CRD
and Desert Mountain, representing the Company'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.

CRD invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Management believes CRD does not have any direct competitors because
the projects and project locations are unique and the land is limited in most of
these locations.

11

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

OWNERSHIP STRUCTURE

Effective March 12, 1999, the Company, Vornado Realty Trust, COPI, the
Temperature-Controlled Logistics Partnership and the Temperature-Controlled
Logistics Corporation (including all affiliated entities that owned any portion
of the business operations of the 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 ("AmeriCold Logistics"), owned 60% by Vornado Operating L.P. and 40%
by a subsidiary of COPI. The Company has no interest in AmeriCold Logistics.

As of December 31, 2001, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 89 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 445.2 million cubic feet (17.7 million square feet) of warehouse
space.

AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended on January 23, 2002. On February 22, 2001, the
Temperature-Controlled Logistics 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 Temperature-Controlled Logistics
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' same-store earnings before interest, taxes,
depreciation and amortization, and rent declined 11% for the year ended December
31, 2001, compared to the same period in 2000. These declines are attributable
to a reduction in total customer inventory stored at the warehouses and a
reduction in the frequency of customer inventory turnover. AmeriCold Logistics
deferred $25.5 million of rent for the year ended December 31, 2001, of which
the Company'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 the Company's share was $7.5 million and $2.1 million,
respectively. In December 2001, the Temperature-Controlled Logistics Corporation
waived its rights to collect deferred rent of $39.8 million of the total $49.9
million of deferred rent, of which the Company's share was $15.9 million. The
Temperature-Controlled Logistics Corporation and the Company had recorded
adequate valuation allowances related to their portions of the waived deferred
rental revenue during the years ended December 31, 2000, and 2001; therefore,
there was no financial statement impact to the Temperature-Controlled Logistics
Corporation or to the Company related to the Temperature-Controlled Logistics
Corporation's decision to waive collection of the deferred rent.

12

BUSINESS AND INDUSTRY 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.

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.

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:

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. As the economy continues to recover from the current recession and
stabilize at a level significantly greater than the trailing six months'
performance, AmeriCold Logistics will continue to examine key areas of its
operations to maximize long-term growth potential. These initiatives include
customer profitability, reductions of energy and labor costs and providing
complete supply chain solutions complemented by information systems to its
customers. In addition, as socioeconomic events create spikes in demand and
upset the planning balance between manufacturers and retailers, AmeriCold will
experience variability in short term revenues. However, as Ameriold Logistics
focuses on its key initiatives, it will forge alliances with existing and new
customers that will encourage movement of product into its facilities and
strengthen long-term revenues.

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,

13

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

The Temperature-Controlled Logistics 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.

ITEM 2. PROPERTIES

The Company considers all of its Properties to be in good condition,
well-maintained and suitable and adequate to carry on the Company's business.

OFFICE PROPERTIES

As of December 31, 2001, the Company owned or had an interest in 74
Office Properties located in 26 metropolitan submarkets in six states with an
aggregate of approximately 28.0 million net rentable square feet. The Company's
Office Properties are located primarily in the Dallas/Fort Worth and Houston,
Texas, metropolitan areas. As of December 31, 2001, the Company's Office
Properties in Dallas/Fort Worth and Houston represented an aggregate of
approximately 77% of its office portfolio based on total net rentable square
feet (41% for Dallas/Fort Worth and 36% for Houston).

In pursuit of management's objective to dispose of non-strategic and
non-core assets, five of the Company's fully consolidated Office Properties were
disposed of during the year ended December 31, 2001. The Company completed the
sale of the two Washington Harbour Office Properties located in Washington,
D.C., and the Woodlands Office Equities - '95 Limited, owned by the Company and
the Woodlands Commercial Properties Company, L. P., sold three Office Properties
located within The Woodlands, Texas.

14

OFFICE PROPERTIES TABLES

The following table shows, as of December 31, 2001, certain information
about the Company's Office Properties. In the table below "CBD" means central
business district. Based on rental revenues from office leases in effect as of
December 31, 2001, no single tenant accounted for more than 5% of the Company's
total Office Segment rental revenues for 2001.

- ----------

(1) Calculated based on base rent payable as of December 31, 2001, 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.

(2) The Company has a 49.5% limited partner interest and a 0.5% general
partner interest in the partnership that owns Bank One Center.

(3) The Company 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) The Company 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) This Office Property was sold subsequent to December 31, 2001.

(6) The Company has a 75% limited partner interest and an approximate 10%
indirect general partner interest in the partnership that owns the
eight Office Properties that comprise The Woodlands Office Properties.

(7) The Company has a 0.1% general partner interest and a 19.9% limited
partner interest in the partnerships that own Four Westlake Park and
Bank One Tower.

(8) The Company has a 1% general partner interest and a 49% limited partner
interest in the partnership that owns 301 Congress Avenue.

(9) The Company 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.

(10) Leases have been executed at certain Office Properties but had not
commenced as of December 31, 2001. If such leases had commenced as of
December 31, 2001, the percent leased for all Office Properties would
have been 93%. The total percent leased for these Properties would have
been as follows: Palisades Central II - 100%; Carter Burgess Plaza -
95%; The Avallon - 100%; and Briargate Office and Research Center -
67%.

(11) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties as
of December 31, 2001, giving effect to free rent and scheduled rent
increases that would be taken into consideration under GAAP and
including adjustments for expenses payable by or reimbursed from
tenants is $22.42.

16

The following table provides information, as of December 31, 2001, for
the Company's Office Properties by state, city and submarket.

- ----------

(1) NRA means net rentable area in square feet.

(2) Market information is for Class A office space under the caption "Class
A Office Properties" and for Class B office space under the caption
"Class B Office Properties." Sources are CoStar Group (for the Dallas
CBD, Uptown/Turtle Creek, Far North Dallas, Las Colinas,
Richardson/Plano, Stemmons Freeway, LBJ Freeway, Fort Worth CBD,
Houston Richmond-Buffalo Speedway, Houston CBD, West Loop/Galleria, and
Katy Freeway submarkets), The Woodlands Operating Company, L.P. (for
The Woodlands submarket), Costar (for the Austin CBD, Northwest and
Southwest submarkets), Cushman & Wakefield of Colorado, Inc. (for the
Denver Cherry Creek, CBD and Denver Technology Center submarkets),
Turner Commercial Research (for the Colorado Springs market), Grubb and
Ellis Company (for the Phoenix Downtown/CBD and Cammelback Corridor
submarkets), Building Interests, Inc. (for the Albuquerque CBD
submarket), RealData Information Systems, Inc. (for the Miami CBD and
South Dade/Kendall submarkets) and Costar/John Burnham & Co. (for the
San Diego University Town Center submarket).

(3) Represents full-service quoted market rental rates. These rates do not
necessarily represent the amounts at which available space at the
Office Properties will be leased. The weighted average subtotals and
total are based on total net rentable square feet of Company Office
Properties in the submarket.

(4) For Office Properties, represents weighted average rental rates per
square foot quoted by the Company, based on total net rentable square
feet of Company Office Properties in the submarket, adjusted, if
necessary, based on management estimates, to equivalent full-service
quoted rental rates to facilitate comparison to weighted average Class
A or Class B, as the case may be, quoted submarket rental rates per
square foot. These rates do not necessarily represent the amounts at
which available space at the Company's Office Properties will be
leased.

(5) Calculated based on base rent payable for Company Office Properties in
the submarket, 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 reimbursed from tenants, divided
by total net rentable square feet of Company Office Properties in the
submarket.

(6) One Office Property in this submarket was sold subsequent to December
31, 2001.

(7) Leases have been executed at certain Office Properties in these
submarkets but had not commenced as of December 31, 2001. If such
leases had commenced as of December 31, 2001, the percent leased for
all Office Properties in the Company's submarkets would have been 93%.
The total percent leased for these Class A Company submarkets would
have been as follows: Richardson/Plano - 99%; Fort Worth CBD - 95%;
Austin-Northwest - 100%; and Colorado Springs - 67%.

(8) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties,
giving effect to free rent and scheduled rent increases that would be
taken into consideration under GAAP and including adjustments for
expenses payable by or reimbursed from tenants is $22.42.

18

The following table shows, as of December 31, 2001, the principal
business conducted by the tenants at the Company's Office Properties, based on
information supplied to the Company from the tenants.

- ----------

(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.

AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES

The following tables show schedules of lease expirations for leases in
place as of December 31, 2001, for the Company'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

- ----------

(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) As of December 31, 2001, leases have been signed for approximately
1,471,592 net rentable square feet (representing approximately 38% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2002.

(3) As of December 31, 2001, leases have been signed for approximately
460,353 net rentable square feet (representing approximately 13% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2003.

19

(4) Reconciliation to the Company's total Office Property net rentable area
is as follows:

DALLAS OFFICE PROPERTIES

(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) As of December 31, 2001, leases have been signed for approximately
277,925 net rentable square feet (representing approximately 23% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2002.

(3) As of December 31, 2001, leases have been signed for approximately
84,062 net rentable square feet (representing approximately 6% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2003.

20

HOUSTON OFFICE PROPERTIES

- ----------

(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) As of December 31, 2001, leases have been signed for approximately
650,146 net rentable square feet (representing approximately 43% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2002.

(3) As of December 31, 2001, leases have been signed for approximately
269,229 net rentable square feet (representing approximately 22% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2003.

AUSTIN OFFICE PROPERTIES

- ----------

(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) As of December 31, 2001, leases have been signed for approximately
103,637 net rentable square feet (representing approximately 52% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2002.

(3) As of December 31, 2001, leases have been signed for approximately
31,762 net rentable square feet (representing approximately 15% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2003.

21

DENVER OFFICE PROPERTIES

- ----------

(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) As of December 31, 2001, leases have been signed for approximately
343,913 net rentable square feet (representing approximately 57% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2002.

(3) As of December 31, 2001, leases have been signed for approximately
22,397 net rentable square feet (representing approximately 5% of
expiring square footage and including renewed leases and leases of
previously unleased space) commencing in 2003.

22

RESORT/HOTEL PROPERTIES

The following table shows certain information for the years ended
December 31, 2001, and 2000, with respect to the Company's Resort/Hotel
Properties. The information for the Resort/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.

- ----------

(1) As of December 31, 2001, the Company had leased all of the Resort/Hotel
Properties, except the Omni Austin Hotel, to subsidiaries of COPI. As
of December 31, 2001, the Omni Austin Hotel was leased pursuant to a
separate lease to HCD Austin Corporation. On February 14, 2002, the
Company executed an agreement with COPI, pursuant to which COPI
transferred to subsidiaries of the Company, in lieu of foreclosure,
COPI's lessee interests in the eight Resort/Hotel Properties.

(2) The hotel is undergoing a $6.9 million renovation of all guestrooms.
The project is scheduled to be completed by the second quarter of 2002.

(3) Represents available guest nights, which is the maximum number of
guests that the resort can accommodate per night.

23

RESIDENTIAL DEVELOPMENT PROPERTIES

The following table shows certain information as of December 31, 2001,
relating to the Residential Development Properties.

- ----------

(1) As of December 31, 2001, the Company 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, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, 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 closed during the Company's ownership period.

(4) Based on existing inventory of developed lots and lots to be developed.

(5) Includes golf membership, which as of December 31, 2001, is $225,000.

(6) As of December 31, 2001, one unit was under contract at Bear Paw Lodge
representing $1.6 million in sales; two lots were under contract at
Eagle Ranch representing $0.3 million in sales; one unit was under
contract at Main Street Junction representing $0.4 million in sales; 73
units were under contract at Main Street Station representing $34.2
million in sales; two lots were under contract at Three Peaks
representing $0.6 million in sales; 10 units were under contract at
Park Place at Riverfront representing $6.8 million in sales; 43 units
were under contract at Park Tower at Riverfront representing $27.6
million in sales; 52 units were under contract at the Promenade Lofts
at Riverfront representing $20.9 million in sales; 20 units were under
contract at Snow Cloud representing $33.7 million in sales and 41 units
were under contract at One Vendue Range representing $47.9 million in
sales.

(7) This project is in the early stages of development, and this
information is not available as of December 31, 2001.

24

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

The following table shows the number and aggregate size of
Temperature-Controlled Logistics Properties by state as of December 31, 2001:

- ----------

(1) As of December 31, 2001, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or
indirectly owns the 89 Temperature-Controlled Logistics Properties. The
business operations associated with the Temperature-Controlled
Logistics Properties are owned by AmeriCold Logistics, in which the
Company has no interest. The Temperature-Controlled Logistics
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 December 31, 2001, AmeriCold Logistics operated 100
temperature-controlled logistics properties with an aggregate of
approximately 524.6 million cubic feet (20.2 million square feet) of
warehouse space.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 2001.

25

]
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common shares have been traded on the New York Stock
Exchange under the symbol "CEI" since the completion of its initial public
offering in May 1994. For each calendar quarter indicated, the following table
reflects the high and low sales prices during the quarter for the common shares
and the distributions declared by the Company with respect to each quarter.

- ----------

(1) On October 17, 2001, the Company announced that the quarterly
distribution was being reduced from $0.55 per common share, or an
annualized distribution of $2.20 per common share, to $0.375 per common
share, or an annualized distribution of $1.50 per common share.

As of March 11, 2002, there were approximately 1,040 holders of record
of the Company's common shares.

DISTRIBUTION POLICY

The actual results of operations of the Company and the amounts
actually available for distribution will be affected by a number of factors,
including:

o the general condition of the United States economy;

o the operating and interest expenses of the Company;

o the ability of tenants to meet their rent obligations;

o general leasing activity in the markets in which the Office
Properties are located;

o consumer preferences relating to the Resort/Hotel Properties;

o cash flows from unconsolidated entities;

o federal, state and local taxes payable by the Company;

o capital expenditure requirements; and

o the adequacy of cash reserves.

On October 17, 2001, the Company announced that due to its revised cash
flow expectations in the uncertain economic environment and measuring its payout
ratios to those of the Company's peer group, the Company was reducing its
quarterly distribution from $0.55 per common share, or an annualized
distribution of $2.20 per common share, to $0.375 per common share, or an
annualized distribution of $1.50 per common share.

Future distributions by the Company will be at the discretion of the
Board of Trust Managers. The Board of Trust Managers has indicated that it will
review the adequacy of the Company's distribution rate on a quarterly basis.

Under the Code, REITs are subject to numerous organizational and
operational requirements, including the requirement to distribute at least 90%
of REIT taxable income each year. Pursuant to this requirement, the Company was
required to distribute $111.7 million and $166.1 million for 2001 and 2000,
respectively. Actual distributions by the Company were $245.1 million and $281.2
million for 2001 and 2000, respectively. The Company reported FFO of $177.1
million and $326.9 million for the years ended December 31, 2001 and 2000,
respectively. Excluding the impairment and other charges

26

related to COPI of $92.8 million, the Company would have reported FFO of $269.9
million for the year ended December 31, 2001.

Distributions by the Company to the extent of its current and
accumulated earnings and profits for federal income tax purposes generally will
be taxable to a shareholder as ordinary dividend income. Distributions in excess
of current and accumulated earnings and profits will be treated as a nontaxable
reduction of the shareholder's basis in such shareholder's shares, to the extent
thereof, and thereafter as taxable gain. Distributions that are treated as a
reduction of the shareholder's basis in its shares will have the effect of
deferring taxation until the sale of the shareholder's shares. No assurances can
be given regarding what portion, if any, of distributions in 2002 or subsequent
years will constitute a return of capital for federal income tax purposes.

Distributions on the Company's common shares are payable at the rate of
$1.50 per annum per common share.

Following is the income tax status of distributions paid during the
years ended December 31, 2001 and 2000 to common shareholders:

Distributions on the 8,000,000 6 3/4% Series A Convertible Cumulative
Preferred Shares issued by the Company in February 1998 are payable at the rate
of $1.6875 per annum per Series A Convertible Cumulative Preferred Share, prior
to distributions on the common shares.

Following is the income tax status of distributions paid during the
years ended December 31, 2001 and 2000 to preferred shareholders:

ISSUANCES OF UNREGISTERED SECURITIES

During the quarter ended December 31, 2001, Crescent Equities issued an
aggregate of 15,556 common shares to holders of Operating Partnership units in
exchange for 7,778 units. The issuances of the common shares were exempt from
registration as private placements under Section 4(2) of the Securities Act.
Crescent Equities has registered the resale of such common shares under the
Securities Act.

27

ITEM 6. SELECTED FINANCIAL DATA

The following table includes certain financial information for the
Company on a consolidated historical basis. All information relating to 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. You should read this section in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data."

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

- ---------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT"), effective January 1, 2000, and as used
herein, means net income (loss) (determined in accordance with GAAP),
excluding gains (or 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. For a more detailed
definition and description of FFO, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."

(2) Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"),
is computed as the sum of (i) net income before minority interests and
extraordinary item, interest expense, depreciation and amortization,
amortization of deferred financing costs, impairment and other charges
related to COPI (ii) less gain on property sales, net. EBITDA is presented
because it provides useful information regarding the Company's ability to
service debt. EBITDA should not be considered as an alternative measure of
operating results or cash flow from operations as determined in accordance
with GAAP. EBITDA as presented may not be comparable to other similarly
titled measures used by other companies.

28

ITEM 7. 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
"Item 6. Selected Financial Data" and "Item 8. Financial Statements and
Supplementary Data," respectively, of this report. Historical results and
percentage relationships set forth in these Items and this section should not be
taken as indicative of future operations of the Company. Capitalized terms used
but not otherwise defined in this section have the meanings given to them in
Items 1 - 6 of this Form 10-K.

This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
characterized by terms such as "believe," "expect" and "may."

Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those described in the
forward-looking statements.

The following factors might cause such a difference:

o The Company's inability to obtain the confirmation of a prepackaged
bankruptcy plan of COPI binding all creditors and COPI stockholders;

o The inability of the Company to successfully integrate the lessee
interests in the Resort/Hotel Properties and the voting interests in
the Residential Development Corporations and related entities into its
current business and operations;

o The inability of the Company to complete the distribution to its
shareholders of the shares of a new entity to purchase COPI's interest
in AmeriCold Logistics;

o Further deterioration in the resort/business-class hotel markets or in
the market for residential land or luxury residences, including
single-family homes, townhomes and condominiums, or in the economy
generally;

o The Company's ability, at its Office Properties, to timely lease
unoccupied square footage and timely re-lease occupied square footage
upon expiration on favorable terms, which may be adversely affected by
changes in real estate conditions (including rental rates and
competition from other properties and new development of competing
properties or a general downturn in the economy);

o Financing risks, such as the ability to generate revenue sufficient to
service and repay existing or additional debt, the ability to meet
applicable debt covenants, the Company's ability to fund the share
repurchase program, increases in debt service associated with increased
debt and with variable-rate debt, and the ability to consummate
financings and refinancings on favorable terms and within any
applicable time frames;

o Further adverse conditions in the temperature-controlled logistics
business (including both industry-specific conditions and a general
downturn in the economy) which may further jeopardize the ability of
AmeriCold Logistics to pay rent;

o Adverse changes in the financial condition of existing tenants;

o The concentration of a significant percentage of the Company's assets
in Texas;

o The Company's ability to find acquisition and development opportunities
which meet the Company's investment strategy;

29

o The existence of complex regulations relating to the Company's status
as a REIT, the effect of future changes in REIT requirements as a
result of new legislation and the adverse consequences of the failure
to qualify as a REIT; and

o Other risks detailed from time to time in the Company's filings with
the SEC.

Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Company is not obligated to update these
forward-looking statements to reflect any future events or circumstances.

The following sections include information for each of the Company's
investment segments for the year ended December 31, 2001.

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 66% of total assets, continues to be stable with same-store
weighted average occupancy in excess of 92% and average remaining lease term of
approximately five years at December 31, 2001. Although management does not
expect full recovery of these investment segments in the near-term, the Company
remains committed to its fundamental investment segments.

OFFICE SEGMENT

As of December 31, 2001, the Company owned or had an interest in 74
Office Properties.

The following table shows 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, which excludes approximately 1.5 million square feet of
Office Property space at Bank One Center, in which the Company owns a 50% equity
interest, approximately 1.0 million square feet of Office Property space at Four
Westlake Park and Bank One Tower, in each of which the Company has a 20% equity
interest, and 0.1 million square feet of Office Property space at Avallon IV,
which was completed during the year ended December 31, 2001.

The following table shows renewed or re-leased leasing activity and the
percentage increase of leasing rates for signed leases compared to expiring
leases at the Company's Office Properties owned as of December 31, 2001.

- ----------
(1) All of which have commenced or will commence during the next 12 months.

(2) Including free rent, scheduled rent increases taken into account under
GAAP and expense recoveries.

(3) Calculated as weighted average full-service rental rate minus operating
expenses.

30

o For 2002, the Company projects same-store net operating income for its
Office Properties to increase between 0% and 4% over 2001, based on an
average occupancy range of 90% to 93%.

RESORT/HOTEL SEGMENT

As of December 31, 2001, the Company owned nine Resort/Hotel
Properties.

The following table shows weighted average occupancy, average daily
rate and revenue per available room/guest for the Resort/Hotel Properties for
the years ended December 31, 2001 and 2000.

- ---------
(1) Excludes the Four Seasons Hotel -- Houston, which was sold on
November 3, 2000.

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's lessee interests in the eight Resort/Hotel Properties leased
to subsidiaries of COPI. As a result, the subsidiaries of the Company became the
lessees of these Resort/Hotel Properties. The Company will fully consolidate the
operations of the eight Resort/Hotel Properties beginning on the date of the
asset transfers. See "Note 20. Subsequent Events" included in "Item 8. Financial
Statements and Supplemental Data" for additional information regarding the
Company's agreement with COPI.

The following table shows the Resort/Hotel Property same-store net
operating income for the years ended December 31, 2001 and 2000, for the nine
Resort/Hotel Properties owned during both of these periods.

- ---------
(1) Excludes the Four Seasons Hotel -- Houston, which was sold on
November 3, 2000.

o For 2002, the Company projects same-store net operating income will
increase between 0% and 3% over 2001. Also, the average daily rate is
expected to increase between 0% and 2% over 2001, and revenue per
available room is expected to increase between 0% and 3% over 2001.

CR License, LLC and CRL Investments, Inc.

As of December 31, 2001, the Company had a 28.5% interest in CR
License, LLC, the entity which owns the right to the future use of the "Canyon
Ranch" name. The Company also had a 95% economic interest, representing all of
the

31

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, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's 1.5% interest in CR License, LLC and 5.0% interest,
representing all of the voting stock, in CRL Investments, Inc.

RESIDENTIAL DEVELOPMENT SEGMENT

As of December 31, 2001, the Company 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, currently 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, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's voting interests in three of the Residential Development
Corporations (The Woodlands Land Company, Inc., Desert Mountain Development
Corporation and Crescent Resort Development, Inc.) The Company will fully
consolidate the operations of the three Residential Development Corporations
beginning on the date of the asset transfers. Management plans to monetize the
Company's current investments in the five Residential Development Corporations
and reinvest returned capital from the Residential Development Segment primarily
into the Office Segment where the Company expects to achieve comparable rates of
return.

The Woodlands Land Development Company, L.P. and The Woodlands Commercial
Properties Company, L.P. (collectively "The Woodlands"), The Woodlands, Texas:

The following table shows residential lot sales at an average price per
lot and commercial land sales at an average price per acre.

o 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.

o 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 have been sold at
prices ranging from $0.1 million to $1.0 million per lot, or an average
price of $343,000 per lot. Additional phases within Carlton Woods are
expected to be marketed to the public over the next two years.

o Future buildout of The Woodlands is estimated at approximately 13,100
residential lots and approximately 1,700 acres of commercial land, of which
approximately 1,555 residential lots and 1,075 acres are currently in
inventory.

o The Company projects residential lot sales at The Woodlands to range
between 1,550 lots and 1,800 lots at an average sales price per lot ranging
between $70,000 and $80,000 for 2002.

32

Desert Mountain Properties Limited Partnership ("Desert Mountain"), Scottsdale,
Arizona:

The following table shows residential lot sales at an average price per
lot.

- ---------
(1) Including equity golf memberships.

o 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 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.

o Approved future buildout is estimated to be approximately 300 residential
lots, of which approximately 140 are currently in inventory.

o As a result of product mix and a decline in the economy, the Company
projects residential lot sales in 2002 to range between 50 lots and 75 lots
at an average sales price per lot ranging between $700,000 and $800,000.

Crescent Resort Development, Inc. ("CRD"), (formerly Crescent Development
Management Corp.), Beaver Creek, Colorado:

The following table shows total active projects, residential lot and
residential unit sales, commercial land sales and average sales price per lot
and unit.

o 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.

o For 2002, the Company projects that residential lot sales will range
between 325 lots and 375 lots at an average sales price per lot ranging
between $110,000 and $130,000. In addition, the Company expects between 280
and 310 residential unit sales, including single family homes, townhomes
and condominiums to be sold at an average sales price per residential unit
ranging between $750,000 and $850,000.

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

As of December 31, 2001, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the

33

89 Temperature-Controlled Logistics Properties. The business operations
associated with the Temperature-Controlled Logistics Properties are owned by
AmeriCold Logistics, which is owned 60% by Vornado Operating, L.P. and 40% by a
subsidiary of COPI. The Company has no interest in AmeriCold Logistics.

AmeriCold Logistics, as sole lessee of the Temperature-Controlled Logistics
Properties, leases the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended on January 23, 2002. On February 22, 2001, the
Temperature-Controlled Logistics 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 Temperature-Controlled Logistics
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' same-store earnings before interest, taxes,
depreciation and amortization, and rent ("EBITDAR") declined 11% for the year
ended December 31, 2001, compared to the same period in 2000. These declines are
attributable to a reduction in total customer inventory stored at the warehouses
and a reduction in the frequency of customer inventory turnover. AmeriCold
Logistics deferred $25.5 million of rent for the year ended December 31, 2001,
of which the Company'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 the Company's share was $7.5 million
and $2.1 million, respectively. In December 2001, the Temperature-Controlled
Logistics Corporation waived its rights to collect deferred rent of $39.8
million of the total 49.9 million of deferred rent, of which the Company's share
was $15.9 million. The Temperature-Controlled Logistics Corporation and the
Company had recorded adequate valuation allowances related to their portions of
the waived deferred rental revenue during the years ended December 31, 2000 and
2001; therefore, there was no financial statement impact to the
Temperature-Controlled Logistics Corporation or to the Company related to the
Temperature-Controlled Logistics Corporation's decision to waive collection of
deferred rent.

Management believes that EBITDAR is a useful financial performance measure
for assessing the relative stability of the financial condition of AmeriCold
Logistics. The following table shows EBITDAR and lease payment for AmeriCold
Logistics for the year ended December 31, 2001 and 2000.

- ---------
(1) EBITDAR does not represent net income or cash flows from operating,
financing or investing activities as defined by GAAP.

(2) Represents the rental obligation (excluding the effect of
straight-lining rents and deferred rent) of AmeriCold Logistics.

o During 2001, the Temperature-Controlled Logistics 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 approximately 8.5 million cubic feet (0.2
million square feet.)

34

RESULTS OF OPERATIONS

The following table shows the Company's financial data as a percentage
of total revenues for the three years ended December 31, 2001, 2000 and 1999 and
the variance in dollars between the years ended December 31, 2001 and 2000 and
the years ended December 31, 2000 and 1999. See "Note 3. Segment Reporting"
included in "Item 8. Financial Statements and Supplementary Data" for financial
information about investment segments.

35

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED
DECEMBER 31, 2000

REVENUES

Total revenues decreased $22.4 million, or 3.1%, to $696.0 million for
the year ended December 31, 2001, as compared to $718.4 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 $4.1 million, or 0.7%, for
the year ended December 31, 2001, as compared to the year ended December 31,
2000, is attributable to:

o increased revenues of $31.3 million from the 74 consolidated
Office Properties that the Company owned or had an interest in
as of 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;

o increased other income of $4.1 million, primarily due to
parking revenue; partially offset by

o decreased revenues of $27.3 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

o decreased lease termination fees (net of the write-off of
deferred rent receivables) of $4.0 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 Resort/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:

o 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;

o 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

o decreased revenues of $12.0 million due to not recognizing
revenue during the fourth quarter of 2001 under the leases
with COPI.

EXPENSES

Total expenses increased $104.2 million, or 16.8%, to $724.2 million
for the year ended December 31, 2001, as compared to $620.0 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 $13.9 million, or
0.6%, for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, is attributable to:

o increased expenses of $24.7 million from the 74 consolidated
Office Properties that the Company owned or had an interest in
as of December 31, 2001, primarily as a result of increased
operating expenses for 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

o decreased expenses of $10.8 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.

36

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 $16.0 million is due to:

o the conversion of the Company's preferred member interest in
Metropolitan Partners, LLC ("Metropolitan") into common stock
of Reckson Associates Realty Corp. ("Reckson"), which resulted
in an impairment charge of $11.9 million; and

o an impairment loss of $5.0 million recognized on a real estate
investment fund, in which the Company has an interest;
partially offset by

o a decrease in the impairment of the behavioral healthcare
properties of $0.9 million.

The increase in impairment and other charges related to COPI 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 COPI to the
estimated underlying collateral value of assets to be received from COPI, and
estimated COPI bankruptcy costs to be funded by the Company of $18.0 million.

OTHER INCOME

Other income decreased $149.0 million, or 72.8%, to $55.7 million for
the year ended December 31, 2001, as compared to $204.6 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:

o a decrease in equity in net income of unconsolidated
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 CRD, resulting in an increase of $4.5 million; and

o a decrease in equity in net income of the
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

o 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 the Company's preferred member interest into
common stock of Reckson in May 2001, the $1.0 million
write-off of the Company's investment in a retail distribution
company and lower earnings from DBL Holdings, Inc. ("DBL") of
$1.7 million, due to an approximate $12.2 million return of
investment received in March 2001; partially offset by

o 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 $124.5 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,
Resort/Hotel and behavioral healthcare property sales for the year ended
December 31, 2001, as compared with the same period in 2000.

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.

37

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED
DECEMBER 31, 1999

REVENUES

Total revenues decreased $27.9 million, or 3.7%, to $718.4 million for
the year ended December 31, 2000, as compared to $746.3 million for the year
ended December 31, 1999.

The decrease in Office Property revenues of $8.5 million, or 1.4%, for
the year ended December 31, 2000, as compared to the same period in 1999, is
attributable to:

o decreased revenues of $38.0 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

o increased revenues of $24.4 million from the 78 Office
Properties owned as of December 31, 2000, primarily as a
result of increased weighted average full-service rental rates
at these Properties; and

o increased revenues of $5.1 million from lease termination
fees.

The increase in Resort/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:

o 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; and

o 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
Resort/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

o 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 39.4%,
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 ("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 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 $181.2 million, or 22.6%, to $620.0 million
for the year ended December 31, 2000, as compared to $801.2 million for the year
ended December 31, 1999.

The decrease in Office Property operating expenses of $7.1 million, or
2.8%, for the year ended December 31, 2000, as compared to the same period in
1999, is attributable to:

o decreased expenses of $17.2 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

o increased expenses of $10.1 million from the 78 Office
Properties owned as of December 31, 2000, 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.

38

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.

The decrease in depreciation and amortization expense of $7.9 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 behavioral healthcare properties
from the dates they were classified as held for disposition.

An additional decrease in expenses of $184.5 million is attributable
to:

o 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 the Company and Station
Casinos, Inc. in the first quarter of 1999; and

o a decrease of $169.5 million due to the impairment and other
charges related to the behavioral healthcare properties in the
third quarter of 1999 and the impairment charge in the fourth
quarter of 1999 on one of the Office Properties held for
disposition as compared to the year ended December 31, 2000.

OTHER INCOME

Other income increased $136.3 million, or 199.6%, to $204.6 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:

o 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 the Company; (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 land sales, which resulted in an increase of
$5.9 million in equity in net income to the Company; and (iii)
an increase in commercial acreage sales at CRD, 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 the Company; 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 the Company;

o 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 the Company's $85.0
million preferred member interest in Metropolitan, which the
Company 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. ("G2"), which was made in the third
quarter of 1999; partially offset by

o 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

o 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, L.P.

39

The increase in net gain on property sales of $128.9 million for the
year ended December 31, 2000, as compared to the same period in 1999, is
attributable to:

o a net gain of $137.4 million primarily recognized on Office,
Resort/Hotel and behavioral healthcare property sales;
partially offset by

o an impairment loss of $8.5 million recognized on a real estate
investment fund, in which the Company has an interest.

40

LIQUIDITY AND CAPITAL RESOURCES

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.

OPERATING ACTIVITIES

The Company's cash provided by operating activities of $212.8 million
is attributable to:

o $199.4 million from Property operations; and

o $13.4 million representing distributions received in excess of
equity in earnings from unconsolidated companies.

INVESTING ACTIVITIES

The Company's cash provided by investing activities of $210.0 million
is primarily attributable to:

o $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
behavioral healthcare properties;

o $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;

o $107.9 million of proceeds from the sale of marketable
securities; and

o $32.0 million from return of investment in unconsolidated
office properties, Residential Development Properties and
other unconsolidated companies.

The Company's cash provided by investing activities is partially offset
by:

o $124.6 million of additional investment in unconsolidated
companies, consisting of investments in (i) the upscale
Residential Development Properties of $89.0 million, primarily
as a result of CRD's investment in Tahoe Mountain Resorts,
(ii) Temperature-Controlled Logistics Properties of $10.8
million, (iii) Office Properties of $16.4 million and (iv)
other unconsolidated companies of $8.4 million;

o $51.8 million for recurring and non-recurring tenant
improvement and leasing costs for the Office Properties;

o $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 Resort/Hotel
Properties;

o $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
Resort/Hotel Properties;

41

o 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

o 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
Resort/Hotel Properties and the Office Properties.

FINANCING ACTIVITIES

The Company's use of cash for financing activities of $425.5 million is
primarily attributable to:

o net repayment of the UBS Facility of $553.5 million;

o distributions to common shareholders and unitholders of $245.1
million;

o repayment and retirement of the iStar Financial Note of $97.1
million;

o repurchase of the Company's common shares for $77.4 million;

o repayment and retirement of the Deutsche Bank Short-term Loan
of $75.0 million;

o net capital distributions to joint venture partners of $25.4
million, primarily due to distributions to joint venture
preferred equity partners;

o debt financing costs of $16.0 million; and

o distributions to preferred shareholders of $13.5 million.

The use of cash for financing activities is partially offset by:

o net borrowings under the Fleet Facility of $283.0 million;

o proceeds from notes payable of $393.3 million, primarily
attributable to the debt refinancing; and

o proceeds from the exercise of common share options of $9.8
million.

COPI

In April 1997, the Company established a new Delaware corporation,
COPI. All of the outstanding common stock of COPI, valued at $0.99 per share,
was distributed, effective June 12, 1997, to those persons who were limited
partners of the Operating Partnership or shareholders of the Company on May 30,
1997, in a spin-off.

COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each agreed to provide the other with rights
to participate in certain transactions. In connection with the formation and
capitalization of COPI, and the subsequent operations and investments of COPI
since 1997, the Company made loans to COPI under a line of credit and various
term loans.

On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Company, through its subsidiaries, to operate or lease
certain of its investments that had been previously operated or leased by COPI.

COPI and the Company entered into an asset and stock purchase agreement
on June 28, 2001, in which the Company agreed to acquire the lessee interests in
the eight Resort/Hotel Properties leased to subsidiaries of COPI, the voting
interests held by subsidiaries of COPI in three of the Company's Residential
Development Corporations and other assets in exchange for $78.4 million. In
connection with that agreement, the Company agreed that it would not charge
interest on its loans to COPI from May 1, 2001 and that it would allow COPI to
defer all principal and interest payments due under the loans until December 31,
2001.

Also on June 28, 2001, the Company entered into an agreement to make a
$10.0 million investment in Crescent Machinery Company ("Crescent Machinery"), a
wholly owned subsidiary of COPI. 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
COPI assets and stock and the investment in Crescent Machinery, the results of
operations for the COPI hotel operations and the COPI land development interests

42

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, the Company believes that a significant additional
investment would have been necessary to adequately capitalize Crescent Machinery
and satisfy concerns of Crescent Machinery's lenders.

The Company stopped recording rent from the leases of the eight
Resort/Hotel Properties leased to subsidiaries of COPI on October 1, 2001, and
recorded impairment and other adjustments related to COPI in the fourth quarter
of 2001, based on the estimated fair value of the underlying assets. See "Note
16. COPI" included in "Item 8. Financial Statements and Supplementary Data" for
a description of these charges.

On January 22, 2002, the Company terminated the purchase agreement
pursuant to which the Company would have acquired the lessee interests in the
eight Resort/Hotel Properties leased to subsidiaries of COPI, the voting
interests held by subsidiaries of COPI in three of the Residential Development
Corporations and other assets. On February 4, 2002, the Company 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, the Company delivered default notices to COPI
relating to approximately $49.0 million of unpaid rent and approximately $76.2
million of principal and accrued interest due to the Company under certain
secured loans.

On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and COPI's voting
interests in three of the Company's Residential Development Corporations and
other assets and the Company agreed to assist and provide funding to COPI for
the implementation of a prepackaged bankruptcy of COPI. In connection with the
transfer, COPI's rent obligations to the Company 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 COPI to
the Company, however, in accordance with GAAP, the Company assigned no value to
these interests for financial reporting purposes.

The Company holds the lessee interests in the eight Resort/Hotel
Properties and the voting interests in the three Residential Development
Corporations through three newly organized entities that are wholly owned
taxable REIT subsidiaries of the Company. The Company will include these assets
in its Resort/Hotel Segment and its Residential Development Segment, and will
fully consolidate the operations of the eight Resort/Hotel Properties and the
three Residential Development Corporations, beginning on the date of the
transfers of these assets.

Under the Agreement, the Company will provide approximately $14.0
million to COPI in the form of cash and common shares of the Company to fund
costs, claims and expenses relating to the bankruptcy and related transactions,
and to provide for the distribution of the Company's common shares to the COPI
stockholders. The Company estimates that the value of the common shares that
will be issued to the COPI stockholders will be between approximately $5.0
million and $8.0 million. The Agreement provides that COPI and the Company will
seek to have a plan of reorganization for COPI, reflecting the terms of the
Agreement and a draft plan of reorganization, approved by the bankruptcy court.
The actual value of the common shares issued to the COPI stockholders will not
be determined until the confirmation of COPI's bankruptcy plan and could vary
substantially from the estimated amount.

In addition, the Company has agreed to use commercially reasonable
efforts to assist COPI in arranging COPI's repayment of its $15.0 million
obligation to Bank of America, together with any accrued interest. COPI obtained
the loan primarily to participate in investments with the Company. At the time
COPI 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 the Company, enter into a support agreement with
COPI and Bank of America, pursuant to which they agreed to make additional
equity investments in COPI if COPI defaulted on payment obligations under its
line of credit with Bank of America and the net proceeds of an offering of COPI
securities were insufficient to allow COPI to pay Bank of America in full. COPI
currently is in default under the line of credit. 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

43

cured unless and until a new default shall occur. The Company believes, based on
advice of counsel, that the support agreement should be unenforceable in a COPI
bankruptcy.

The Company holds a first lien security interest in COPI's entire
membership interest in AmeriCold Logistics. REIT rules prohibit the Company from
acquiring or owning the membership interest that COPI owns in AmeriCold
Logistics. Under the Agreement, the Company agreed to allow COPI 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. In addition, the
Company has agreed to form and capitalize a separate entity to be owned by the
Company's shareholders, and to cause the new entity to commit to acquire COPI's
entire membership interest in the tenant, for approximately $15.5 million. Under
the Agreement, COPI has agreed that it will use the proceeds of the sale of the
membership interest to repay Bank of America in full.

Completion and effectiveness of the plan of reorganization for COPI is
contingent upon a number of conditions, including the vote of COPI's
stockholders, the approval of the plan by certain of COPI's creditors and the
approval of the bankruptcy court.

INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES

Investments in which the Company does not have a controlling interest
are accounted for under the equity method. The following is a summary of the
Company's ownership in significant unconsolidated companies or equity
investments:

- ----------

(1) On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's interest in these entities. The Company will fully
consolidate the operations of these entities, other than CR License, LLC,
beginning on the date of the asset transfers.

(2) See the Residential Development Properties Table included in "Item 2.
Properties" for the Residential Development Corporation's ownership
interest in the Residential Development Properties.

(3) The remaining 5.0% interest in Desert Mountain Development Corporation,
representing 100% of the voting stock, was owned by COPI as of December 31,
2001.

(4) The remaining 5.0% interest in The Woodlands Land Company, Inc.,
representing 100% of the voting stock, was owned by COPI as of December 31,
2001.

(5) The remaining 10.0% interest in Crescent Resort Development, Inc.,
representing 100% of the voting stock, is owned by COPI Colorado, L. P., of
which 60.0% was owned by COPI as of December 31, 2001, with 20% owned by
John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, and 20% owned by a third party.

(6) The remaining 6.0% interest in Mira Vista Development Corp. ("MVDC"),
representing 100% of the voting stock, is owned 4.0% by DBL Holdings, Inc.
("DBL") and 2.0% by third parties.

(7) The remaining 6.0% interest in Houston Area Development Corp. ("HADC"),
representing 100% of the voting stock, is owned 4.0% by DBL and 2.0% by a
third party.

(8) The remaining 60.0% interest in the Temperature-Controlled Logistics
Partnership is owned by Vornado Realty Trust, L.P.

(9) The remaining 57.5% interest in The Woodlands Commercial Properties
Company, L. P. is owned by Morgan Stanley Real Estate Fund II, L. P.
("Morgan Stanley").

(10) Distributions are made to partners based on specified payout percentages.
During the year ended December 31, 2001, the payout percentage to the
Company was 49.5%.

(11) The remaining 50.0% interest in Main Street Partners, L.P. is owned by
TrizecHahn Corporation.

(12) See "5 Houston Center" below.

44

(13) See "Four Westlake Park and Bank One Tower" below.

(14) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, 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 $0.4
million, and approximately $0.06 million in cash, or total consideration
valued at $0.4 million. At December 31, 2001, Mr. Goff's interest in DBL
was approximately $0.6 million.

(15) The remaining 5.0% interest in CRL Investments, Inc. was owned by COPI as
of December 31, 2001.

(16) Of the remaining 71.5% interest in CR License, LLC, 70.0% is owned by a
group of individuals unrelated to the Company, and 1.5% was owned by COPI,
as of December 31, 2001.

JOINT VENTURE ARRANGEMENTS

5 Houston Center

On June 4, 2001, the Company entered into a joint venture arrangement
with a pension fund advised by JP Morgan Investment Management, Inc. ("JPM") to
construct the 5 Houston Center Office Property within the Company'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 the Company holds
a 25% equity interest, which is accounted for under the equity method. The
Company 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 the Company on this transaction. In
addition, the Company is developing, and will manage and lease the Property on a
fee basis. During the year ended December 31, 2001, the Company 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 the Company, 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, the Company entered into joint venture arrangements
with an affiliate of General Electric Pension Fund ("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 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. The
Company 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 proceeds to the Company, including
distributions to the Company resulting from mortgage financing at the joint
venture level. None of the mortgage financing at the joint venture level is
guaranteed by the Company. 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, the
Company manages and leases the Office Properties on a fee basis. During the year
ended December 31, 2001, the Company recognized $0.2 million for these services.

UNCONSOLIDATED PROPERTY DISPOSITIONS

On September 27, 2001, the Woodlands Commercial Properties Company,
L.P., owned by the Company and an affiliate of Morgan Stanley, sold one
office/venture tech property located within The Woodlands, Texas. The sale
generated net proceeds, after the repayment of debt, of approximately $2.7
million, of which the Company's portion was approximately $1.3 million. The sale
generated a net gain of approximately $3.5 million, of which the Company's
portion was approximately $1.7 million. The net proceeds received by the Company
were used primarily to pay down variable-rate debt.

On November 9, 2001, The Woodlands Land Development Company, L.P. owned
by the Woodlands Land Company, Inc. and an affiliate of Morgan Stanley, sold two
office properties and one retail property located within The Woodlands, Texas.
The sales generated proceeds, after the repayment of debt, of approximately
$41.8 million, of which the Company's portion was approximately $19.7 million.
The sales generated a net gain of approximately $8.0 million, of which the
Company's portion was approximately $3.8 million. The net proceeds received by
the Company were used primarily to pay down variable-rate debt.

45

METROPOLITAN

On May 24, 2001, the Company converted its $85.0 million preferred
member interest in Metropolitan and $1.9 million of deferred acquisition costs,
into approximately $75.0 million of common stock of Reckson, resulting in an
impairment charge of approximately $11.9 million. The Company subsequently sold
the Reckson common stock on August 17, 2001, for approximately $78.6 million,
resulting in a gain of approximately $3.6 million. The proceeds were used to pay
down the Fleet Facility.

DISPOSITIONS

During the year ended December 31, 2001, the Company sold five Office
Properties, 18 behavioral healthcare properties and other assets. The sales
generated net proceeds of approximately $200.4 million and a net gain of
approximately $4.4 million.

Office Segment

On July 30, 2001, the GE joint ventures were accounted for as partial
sales of two Office Properties, Four Westlake Park in Houston, Texas, and Bank
One Tower in Austin, Texas, resulting in a net gain of approximately $7.6
million, net of a deferred gain of $1.9 million.

On September 18, 2001, the Company completed the sale of the two
Washington Harbour Office Properties. The sale generated net proceeds of
approximately $153.0 million and a net loss of approximately $9.8 million. The
proceeds from the sale of the Washington Harbour Office Properties were used
primarily to pay down variable-rate debt and repurchase approximately 4.3
million of the Company's common shares. The Washington Harbour Office Properties
were the Company's only Office Properties in Washington, D.C.

On September 28, 2001, The Woodlands Office Equities - '95 Limited
("WOE"), owned by the Company and the Woodlands Commercial Properties Company,
L. P., sold two Office Properties located within The Woodlands, Texas. The sale
generated net proceeds of approximately $11.3 million, of which the Company's
portion was approximately $9.9 million. The sale generated a net gain of
approximately $3.4 million, of which the Company's portion was approximately
$3.0 million. The proceeds received by the Company were used primarily to pay
down variable-rate debt.

On December 20, 2001, WOE sold one Office Property located within The
Woodlands, Texas. The sale generated net proceeds of approximately $2.0 million,
of which the Company's portion was approximately $1.8 million. The sale
generated a net gain of approximately $1.7 million, of which the Company's
portion was approximately $1.5 million. The proceeds received by the Company
were used primarily to pay down variable-rate debt.

Behavioral Healthcare Properties

During the year ended December 31, 2001, the Company completed the sale
of 18 behavioral healthcare properties. 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. The net proceeds from the sale of the 18
behavioral healthcare properties sold during the year ended December 31, 2001
were used primarily to pay down variable-rate debt. As of December 31, 2001, the
Company owned 10 behavioral healthcare properties. The Company is actively
marketing these 10 behavioral healthcare properties for sale.

During the year ended December 31, 2001, the Company recognized an
impairment loss of $8.5 million on seven of the behavioral healthcare properties
held for disposition. This amount represents the difference between the carrying
values and the estimated sales prices less costs of the sales for these seven
properties.

46

RELATED PARTY DISCLOSURES

DBL

As of December 31, 2001, the Company owned 97.44% of DBL with the
remaining 2.56% economic interest in DBL (including 100% of the voting interest
in DBL) held by John Goff, Vice-Chairman of the Board of Trust Managers and
Chief Executive Officer of the Company. Originally, Mr. Goff contributed his
voting interests in MVDC and HADC originally valued at approximately $0.4
million, and approximately $0.06 million in cash, or total consideration valued
at approximately $0.4 million for his interest in DBL.

DBL has two wholly owned subsidiaries, DBL-ABC, Inc., and DBL-CBO,
Inc., the assets of which are described in the following paragraphs, and DBL
directly holds 66% of the voting stock in MVDC and HADC. At December 31, 2001,
Mr. Goff's interest in DBL was approximately $0.6 million.

Since June 1999, the Company has contributed approximately $23.8
million to DBL. The contribution was used by DBL to make an equity contribution
to DBL-ABC, Inc., which committed to purchase a limited partnership interest
representing a 12.5% interest in G2. G2 was formed for the purpose of investing
in commercial mortgage backed securities and other commercial real estate
investments and is managed and controlled by an entity that is owned equally by
Goff-Moore Strategic Partners, LP ("GMSP") and GMAC Commercial Mortgage
Corporation ("GMACCM"). The ownership structure of GMSP consists of 50%
ownership by Darla Moore, who is married to Richard Rainwater, Chairman of the
Board of Trust Managers of the Company, and 50% by John Goff. Mr. Rainwater is
also a limited partner of GMSP. At December 31, 2001, DBL has an approximately
$14.1 million investment in G2.

In March 1999, DBL-CBO, Inc. acquired $6.0 million aggregate principal
amount of Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Island
limited liability company. At December 31, 2001 this investment was valued at
approximately $5.4 million.

COPI Colorado, L. P.

As of December 31, 2001, CRD was owned 90% by the Company and the
remaining 10%, representing 100% of the voting stock, was owned by COPI
Colorado, L.P., of which 60% was owned by COPI, with 20% owned by John Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company and 20% owned by a third party.

On February 14, 2001, the Company executed an agreement with COPI,
pursuant to which COPI transferred to the Company, in lieu of foreclosure,
COPI's 60% general partner interest in COPI Colorado. As a result, the Company
owns a 96% interest in CRD, John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company owns a 2.0% interest in CRD
and the remaining 2.0% interest is owned by a third party. The Company will
fully consolidate the operations of CRD beginning on the date of the asset
transfers.

Loans to Employees and Trust Managers of the Company for Exercise of Stock
Options and Unit Options

As of December 31, 2001, the Company had approximately $32.9 million of
loans outstanding (including approximately $3.9 million loaned during the year
ended December 31, 2001) to certain employees and trust managers of the Company
on a recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company pursuant to the exercise of vested stock and unit options. Pursuant
to the loan agreements, these loans may be repaid in full or in part at any time
without premium or penalty. John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company, had a loan comprising $26.3
million of the $32.9 million total outstanding loans at December 31, 2001.

Every month, federal short-term, mid-term and long-term rates
(Applicable Federal Rates) are determined and published by the IRS based upon
average market yields of specified maturities. Effective November 1, 2001, these
loans were amended to reduce the interest rates for their remaining terms to the
Applicable Federal Rates as of November. As a result, the interest rates on
loans with remaining terms of three years or less at November 1, 2001 were
reduced to approximately 2.7% per year and the interest rates on loans with
remaining terms greater than three years as of November 1, 2001 were reduced to
approximately 4.07% per year. These amended interest rates reflect below
prevailing market interest rates; therefore, the Company recorded $0.8 million
of compensation expense for the year ended December 31, 2001. Approximately $0.5
million of interest was outstanding related to these loans as of December 31,
2001.

47

SHELF REGISTRATION STATEMENT

On October 29, 1997, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the SEC relating to the future
offering of up to an aggregate of $1.5 billion of common shares, preferred
shares and warrants exercisable for common shares. Management believes the Shelf
Registration Statement will provide the Company with more efficient and
immediate access to capital markets when considered appropriate. As of December
31, 2001, approximately $782.7 million was available under the Shelf
Registration Statement for the issuance of securities.

SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY

During the year ended December 31, 2000, the Company formed Funding IX
and contributed seven Office Properties and two Resort/Hotel Properties to
Funding IX. As of December 31 2001, Funding IX held seven Office Properties and
one Resort/Hotel Property.

As of December 31, 2001, GMACCM held $218.4 million of non-voting,
redeemable preferred Class A Units in Crescent Real Estate Funding IX (the
"Class A Units"). The Class A Units receive a preferred variable-rate dividend
currently calculated at LIBOR plus 450 basis points, or approximately 6.6% per
annum as of December 31, 2001, and increasing to LIBOR plus 550 basis points
beginning March 16, 2002. The Class A Units are redeemable at the option of the
Company at the original purchase price.

Funding IX loaned the net proceeds of the sale of Class A Units in
Funding IX and a portion of the net proceeds from the sale of one of the
Resort/Hotel Properties held by Funding IX, through an intracompany loan to
Crescent SH IX, Inc. ("SH IX"), for the purchase of common shares of the
Company. See "Share Repurchase Program" below. This intracompany loan is
eliminated in consolidation. However, the loan from Funding IX to SH IX matures
March 15, 2003 and will be repaid by SH IX to Funding IX at that time. The
proceeds received by Funding IX will be used to redeem Class A Units.

EMPLOYEE STOCK PURCHASE PLAN

On June 25, 2001, the shareholders of the Company approved a new
Employee Stock Purchase Plan (the "ESPP"), that is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code
("IRC") of 1986, as amended. The ESPP is regarded as a noncompensatory plan
under APB No. 25, because it meets the qualifications under IRC 423. Under the
terms of the ESPP, eligible employees may purchase common shares of the Company
at a price that is equal to 90% of the lower of the common shares' fair market
value at the beginning or the end of a quarterly period. The fair market value
of a common share is equal to the last sale price of the common shares on the
New York Stock Exchange. Eligible employees may purchase the common shares
through payroll deductions of up to 10% of eligible compensation. The ESPP is
not subject to the provisions of ERISA. The ESPP was effective October 1, 2001,
and will terminate on May 14, 2011.

The 1,000,000 common shares that may be issued pursuant to the purchase
of common shares under the ESPP represent less than 0.96% of the Company's
outstanding common shares at December 31, 2001.

SHARE REPURCHASE PROGRAM

On October 15, 2001, the Company's Board of Trust Managers authorized
an increase in the amount of outstanding common shares that can be repurchased
from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program") from $500.0 million to $800.0
million.

The Company commenced its Share Repurchase Program in March 2000. As of
December 31, 2001, the Company had repurchased 18,756,423 common shares, 20,286
of which have been retired, at an average price of $19.09 per common share for
an aggregate of approximately $358.1 million. As of December 31, 2001, the
Company held 14,468,623 of the repurchased common shares in SH IX. See "Sale of
Preferred Equity Interests in Subsidiary" above. These common shares are
consolidated as treasury shares in accordance with GAAP. However, these shares
are held in SH IX until all of the Class A Units are redeemed. Distributions
will continue to be paid on these repurchased common shares and will be used to
pay dividends on the Class A Units.

48

The Company expects the Share Repurchase Program to continue to be
funded through a combination of debt, equity, joint venture capital and selected
asset disposition alternatives available to the Company. The amount of common
shares that the Company will actually purchase will be determined from time to
time, in its reasonable judgment, based on market conditions and the
availability of funds, among other factors. There can be no assurance that any
number of common shares will actually be purchased within any particular time
period.

SHARE REPURCHASE AGREEMENT

On November 19, 1999, the Company entered into an agreement (the "Share
Repurchase Agreement") with UBS to purchase a portion of its common shares from
UBS. The Company had the option to settle the Share Repurchase Agreement in cash
or common shares. During the year ended December 31, 2000, the Company purchased
the 5,809,180 common shares from UBS at an average cost of $17.62 per common
share for an aggregate of approximately $102.3 million under the Share
Repurchase Agreement with UBS. The Company has no further obligation under the
Share Repurchase Agreement. The purchases were funded primarily through the sale
of Class A Units in Funding IX. See "Sale of Preferred Equity Interests in
Subsidiary" above.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which provides that all business
combinations in the scope of the statement are to be accounted for under the
purchase method. This statement is effective for all business combinations
initiated after June 30, 2001, as well as all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001,
or later. Since the Company currently accounts for its acquisitions under the
purchase method, management does not believe that the adoption of this statement
will have a material effect on its interim or annual financial statements.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses financial accounting and reporting for
acquired goodwill and other intangible assets. This statement requires that
goodwill and some other intangible assets will no longer be amortized, and
provides specific guidance for testing goodwill for impairment. This statement
is effective for fiscal years beginning after December 15, 2001. The Company
expects its impairment losses to range between $14.0 million and $18.3 million
due to the initial application of this statement. These charges relate to
unconsolidated companies in which the Company had an interest as of December 31,
2001. These charges will be reported as resulting from a change in accounting
principle.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. The Company has determined that SFAS No. 143 will
have no material effect on its interim and annual financial statements.

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. Management does not believe that adoption of this statement will have a
material effect on its interim or annual financial statements; however,
financial statement presentation will be modified to report the results of
operations and financial position of a component of an entity that either has
been disposed of or is classified as held for sale as discontinued operations.
As a result, the Company will reclassify certain amounts in prior period
financial statements to conform with the new presentation requirements.

LIQUIDITY REQUIREMENTS

As of December 31, 2001, the Company had unfunded capital requirements
of approximately $40.4 million relating to capital investments. The table below
specifies the Company's total capital requirements relating to these projects,
amounts funded as of December 31, 2001, amounts remaining to be funded, and
short-term and long-term capital requirements.

49

- ----------

(1) All amounts are approximate.

(2) Reflects the Company's estimate of the breakdown between short-term and
long-term capital expenditures.

(3) This commitment is related to the Company's investment in a private equity
fund.

The Company expects to fund its short-term capital requirements of
approximately $32.8 million through a combination of cash, net cash flow from
operations, return of capital (investment) from the Residential Development
Corporations and borrowings under the Fleet Facility. The Company plans to meet
its maturing debt obligations during 2002 of approximately $245.2 million,
primarily through additional or replacement debt financing or equity
transactions.

The Company expects to meet its other short-term capital 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,
recurring capital expenditures, non-recurring capital expenditures, such as
tenant improvement and leasing costs, and distributions to shareholders and
unitholders, primarily through cash flow provided by operating activities. To
the extent that the Company's cash flow from operating activities is not
sufficient to finance such short-term liquidity requirements, the Company
expects to finance such requirements with available cash proceeds received from
joint ventures and select property sales, and borrowings under the Fleet
Facility or additional debt financing.

The Company expects to fund its long-term capital requirements of
approximately $7.6 million with available cash proceeds received from joint
ventures and select property sales, borrowings under the Fleet Facility or
additional debt financing and return of capital (investment) from the
Residential Development Corporations. The Company's other long-term liquidity
requirements as of December 31, 2001, consist primarily of maturities after
December 31, 2002, under the Company's fixed and variable-rate debt, which
totaled approximately $2.0 billion as of December 31, 2001. The Company also
intends to repay the intracompany loan of approximately $285.0 million from
Funding IX to Crescent SH IX at maturity on March 15, 2003, and to redeem the
approximately $218.4 million of Class A Units in Funding IX with the proceeds
received by Funding IX. The Company 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 joint ventures and select property sales.

Debt and equity financing alternatives currently available to the
Company to satisfy its liquidity requirements and commitments for material
capital expenditures include:

o Additional proceeds from the refinancing of existing secured and
unsecured debt;

o Additional debt secured by existing underleveraged properties,
investment properties, or by investment property acquisitions or
developments;

o Issuance of additional unsecured debt;

o Equity offerings including preferred and/or convertible securities; and

o Proceeds from joint ventures and property sales.

The following factors could limit the Company's ability to utilize these
financing alternatives:

50

o The Company may be unable to obtain debt or equity financing on
favorable terms, or at all, as a result of the financial condition of
the Company or market conditions at the time the Company seeks
additional financing;

o Restrictions on the Company'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

o The Company may be unable to service additional or replacement debt due
to increases in interest rates or a decline in the Company's operating
performance.

In addition to the Company's liquidity requirements stated above, as of
December 31, 2001, the Company also has guarantees or letters of credit related
to approximately $89.3 million, or 17% of the maximum borrowings available under
its unconsolidated debt. At December 31, 2001, the Company had guarantees or
letters of credit related to approximately $17.2 million, or 4%, of its total
outstanding unconsolidated debt. See "Note 4. Investments in Real Estate
Mortgages and Equity of Unconsolidated Companies" included "Item 8. Financial
Statements and Supplementary Data" and for more information about the Company's
unconsolidated investments and the underlying debt related to these investments.

REIT QUALIFICATION

The Company intends to maintain its qualification as a REIT under
Section 856(c) of the Code. As a REIT, the Company generally will not be subject
to corporate federal income taxes as long as it satisfies certain technical
requirements of the Code, including the requirement to distribute 90% of its
REIT taxable income to its shareholders.

51

DEBT FINANCING ARRANGEMENTS

The significant terms of the Company's primary debt financing
arrangements existing as of December 31, 2001, are shown below (dollars in
thousands):

- ----------
(1) At the end of seven years (October 2006), the interest rate will adjust
based on current interest rates at that time. It is the Company's intention
to repay the note in full at such time (October 2006) by making a final
payment of approximately $177.8 million.

(2) The outstanding principal balance of this note at maturity will be
approximately $224.1 million. This note is secured by the Greenway Plaza
Office Properties. The note agreement requires the Company to maintain
compliance with a number of customary covenants, including maintaining the
Properties that secure the note and not creating any lien with respect to
or otherwise encumbering such Properties.

(3) The note has a seven-year period during which only interest is payable
(through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity. In August 2007, the
interest rate will increase, and the Company is required to remit, in
addition to the monthly debt service payment, excess property cash flow, as
defined, to be applied first against principal until the note is paid in
full and thereafter, against accrued excess interest, as defined. It is the
Company's intention to repay the note in full at such time (August 2007) by
making a final payment of approximately $220.5 million. LaSalle Note I is
secured by Properties owned by Crescent Real Estate Funding I, L.P.
("Funding I") (See "Note 1. Organization and Basis of Presentation"
included in "Item 8. Financial Statements and Supplementary Data"). The
note agreement restricts Funding I from engaging in certain activities,
including incurring liens on the Properties securing the note, pledging the
Properties securing the note, incurring certain other indebtedness,
canceling a material claim or debt owed to it, entering into certain
transactions, distributing funds derived from operation of the Properties
securing the note (except as specifically permitted in the note agreement),
or creating easements with respect to the Properties securing the note.

(4) The note has a seven-year period during which only interest is payable
(through March 2003), followed by principal amortization based on a 25-year
amortization schedule through maturity. In March 2006, the interest rate
will increase, and the Company is required to remit, in addition to the
monthly debt service payment, excess property cash flow, as defined, to be
applied first against principal until the note is paid in full and
thereafter, against accrued excess interest, as defined. It is the
Company's intention to repay the note in full at such time (March 2006) by
making a final payment of approximately $154.1 million. LaSalle Note II is
secured by Properties owned by Crescent Real Estate Funding II, L.P.
("Funding II") (See "Note 1. Organization and Basis of Presentation"
included in "Item 8. Financial Statements and Supplementary Data"). The
note agreement restricts Funding II from engaging in certain activities,
including incurring liens on the Properties securing the note, pledging the
Properties securing the note, incurring certain other indebtedness,
canceling a material claim or debt owed to it, entering into certain
affiliate transactions, distributing funds derived

52

from operation of the Properties securing the note (except as specifically
permitted in the note agreement), or creating easements with respect to the
Properties securing the note.

(5) The note requires payments of interest only during its term. The CIGNA Note
is secured by the MCI Tower and Denver Marriott City Center Resort/Hotel
Property. The note agreement has no negative covenants. The deed of trust
requires the Company to maintain the Properties that secure the note, and
requires approval to grant liens, transfer the Properties, or issue new
leases.

(6) The Metropolitan Life Note V requires monthly principal and interest
payments based on a 25-year amortization schedule through maturity, at
which time the outstanding principal balance is due and payable. The note
is secured by the Datran Center Office Property. The note agreement
requires the Company to maintain compliance with a number of customary
covenants, including maintaining the Property that secures the note and not
creating any lien with respect to or otherwise encumbering such Property.

(7) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by the 301 Congress Avenue Office
Property. The note agreement requires the Company to maintain compliance
with a number of customary covenants, including maintaining the Property
that secures the note and not creating any lien with respect to or
otherwise encumbering such Property.

(8) The note requires payments of interest only during its term. The Mitchell
Mortgage Note is secured by three of The Woodlands Office Properties. The
note agreement has no negative covenants.

(9) The note was assumed in connection with an acquisition and was not
subsequently retired by the Company because of prepayment penalties. Under
the terms of the note, principal and interest are payable based on a
25-year amortization schedule. The Company has the option to defease the
note by purchasing Treasury obligations in an amount sufficient to pay the
note without penalty. The Nomura Funding VI Note is secured by Canyon
Ranch-Lenox, the Property owned by Crescent Real Estate Funding VI, L.P.
("Funding VI") (see "Note 1. Organization and Basis of Presentation"
included in "Item 8. Financial Statements and Supplementary Data"). In July
2010, the interest rate due under the note will change to a 10-year
Treasury yield plus 500 basis points or, if the Company so elects, it may
repay the note without penalty at that date. The note agreement requires
Funding VI to maintain compliance with a number of customary covenants,
including a debt service coverage ratio for the Property that secures the
note, a restriction on the ability to transfer or encumber the Property
that secures the note, and covenants related to maintaining its single
purpose nature, including restrictions on ownership by Funding VI of assets
other than the Property that secures the note, restrictions on the ability
to incur indebtedness and make loans, and restrictions on operations.

(10) The outstanding principal balance on this note at maturity will be
approximately $8.5 million. This note is secured by the Avallon IV Office
Property. The note agreement requires that the Company maintains compliance
with a number of customary covenants, including, maintaining the Property
that secures the note and not creating any lien with respect to or
otherwise encumbering such Property.

(11) The note requires quarterly payments of principal and interest based on a
15-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Rigney Promissory
Note is secured by a parcel of land owned by the Company and located across
from an Office Property. The note agreement has no negative covenants.

(12) The notes are unsecured and require payments of interest only during their
terms. The indenture requires the Company to maintain compliance with a
number of customary financial and other covenants on an ongoing basis,
including leverage ratios and debt service coverage ratios, limitations on
the incurrence of additional indebtedness and maintaining the Company's
Properties. The notes were issued in an offering registered with the SEC.

(13) For the method of calculation of the interest rate for the Company's
variable-rate debt, see "Note 6. Notes Payable and Borrowings under the
Fleet Facility" included in "Item 8. Financial Statements and Supplementary
Data."

(14) For a description of the Fleet Fund I and II Term Loan and the Fleet
Facility, see "Note 6. Notes Payable and Borrowings under the Fleet
Facility" included in "Item 8. Financial Statements and Supplementary
Data." The note requires payments of interest only during the first four
years with a one-year extension option. The note, due May 2004, bears
interest at LIBOR plus 325 basis points (at December 31, 2001, the interest
rate was 5.39%). The Fleet Term Loan note is secured by eight Office
Properties in Funding I, and 12 Office Properties in Funding II. The Term
Loan requires the Company maintain compliance with a number of customary
financial and other covenants on an ongoing basis, including leverage
ratios based on book value and debt service coverage ratios, limitations on
additional secured and total indebtedness, limitations on distributions,
and a minimum net worth requirement, and with respect solely to Funding I
and Funding II adjusted net operating income to actual debt service and
adjusted net operating income to pro forma debt service.

(15) This note requires payment of interest only during its term. The notes, due
May 2004, bear interest at the 30-day LIBOR rate plus a spread of 164.7
basis points (at December 31, 2001, the interest rate was 5.15%) for the
Deutsche Bank-CMBS and a spread of 600 basis points (at December 31, 2001,
the interest rate was 9.50%) for the Mezzanine note. The blended rate at
December 31, 2001, was 5.84%. The notes have three-year interest only terms
and two one-year extension options, and are secured by the Crescent Real
Estate Funding X, L.P. ("Funding X") Office Properties and Spectrum Center,
L. P. (See "Note 1. Organization and Basis of Presentation" included in
"Item 8. Financial Statements and Supplementary Data"). The notes require
the Company to maintain compliance with a minimum debt service coverage
ratio.

(16) The JP Morgan Loan Sales Facility is a $50.0 million unsecured credit
facility. The lender is not obligated to fund draws under this loan unless
certain conditions not within the control of the Company are satisfied at
the time of the draw request. As a result, the Company maintains sufficient
availability under the Fleet Facility to repay this loan at any time.

(17) The Fleet Bridge Loan is a $50.0 million unsecured credit facility.

(18) The overall weighted average interest rate does not include the effect of
the Company's cash flow hedge agreements. Including the effect of these
agreements, the overall weighted average interest rate would have been
7.58%.

53

Below are the aggregate principal payments required as of December 31,
2001 under indebtedness of the Company by year. Scheduled principal installments
and amounts due at maturity are included.

- ----------

(1) These amounts do not represent the effect of a one-year extension option
of the Fleet Facility and two one-year extension options on the Deutsche
Bank - CMBS Loan.

The Company has approximately $245.2 million of secured and unsecured
debt due during 2002, consisting primarily of the Cigna Note, the Mitchell
Mortgage Note and the 2002 Notes which are expected to be funded through
replacement debt financing.

The Company's policy with regard to the incurrence and maintenance of
debt is based on a review and analysis of:

o investment opportunities for which capital is required and the
cost of debt in relation to such investment opportunities;

o the type of debt available (secured or unsecured);

o the effect of additional debt on existing coverage ratios;

o the maturity of the proposed debt in relation to maturities of
existing debt; and

o exposure to variable-rate debt and alternatives such as
interest-rate swaps and cash flow hedges to reduce this exposure.

Debt service coverage ratios for a particular period are generally
calculated as net income plus depreciation and amortization, plus interest
expense, plus extraordinary or non-recurring losses, minus extraordinary or
non-recurring gains, divided by debt service (including principal and interest
payable during the period of calculation). The calculation of the debt service
coverage ratio for the Fleet Facility is calculated using the method described
above, including certain pro forma adjustments.

Any uncured or unwaived events of default on the Company's loans can
trigger an acceleration of payment on the loan in default. In addition, a
default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in a default under
the Fleet Facility and the Fleet I and II Term Loan after the notice and cure
periods for the other indebtedness have passed. As of December 31, 2001, the
Company was in compliance with all of its debt service coverage ratios and other
covenants related to its outstanding debt. The Company's debt facilities
generally prohibit loan pre-payment for an initial period, allow pre-payment
with a penalty during a following specified period and allow pre-payment without
penalty after the expiration of that period. During the year ended December 31,
2001, there were no pre-payment penalties. As of December 31, 2001, there were
no provisions related to the Company's existing debt that would require
increased collateral under any situation.

DEBT REFINANCING AND FLEET FACILITY

In May 2001, the Company (i) repaid and retired the UBS Facility which
consisted of the UBS Line of Credit, the UBS Term Loan I and the UBS Term Loan
II; (ii) repaid and retired the iStar Financial Note; and (iii) modified and
replaced the Fleet Term Note II with proceeds from a $970.0 million debt
refinancing. In May 2001, the Company wrote off $10.8 million of deferred
financing costs related to the early extinguishment of the UBS Facility which is
included in Extraordinary Item - Extinguishment of Debt.

54

New Debt Resulting from Refinancing

- ----------

(1) The $400.0 million Fleet Facility is an unsecured revolving line of credit.
The weighted average interest rate from the origination of the loan in May
2001 through December 31, 2001 is 5.38%.

(2) One-year extension option.

(3) Two one-year extension options.

(4) Repaid September 19, 2001.

Debt Repaid or Modified by Refinancing

- ----------

(1) All the amounts listed, other than the Fleet Term Note II, were repaid. In
May 2001, the Fleet Term Note II was modified and replaced by the Fleet Fund
I and II Term Loan.

CASH FLOW HEDGES

The Company uses derivative financial instruments to convert a portion
of its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of December 31, 2001, the Company had entered into
three cash flow hedge agreements which are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133".

The following table shows information regarding the Company's cash flow
hedge agreements as of December 31, 2001 and interest expense for the year ended
December 31, 2001 (dollars in millions):

The Company has designated its three cash flow hedge agreements as cash
flow hedges of LIBOR-based monthly interest payments on a designated pool of
variable-rate LIBOR indexed debt that reprices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in Derivatives
Implementation Group ("DIG") Issue E8. The DIG is a task force designed to
assist the FASB in answering questions that companies have resulting from
implementation of SFAS No. 133 and 138. The Company uses the

55

change in variable cash flows method as described in DIG Issue G7 for
prospective testing as well as for the actual recording of ineffectiveness, if
any. Under this method, the Company will compare the changes in the floating
rate portion of each cash flow hedge to the floating rate of the hedged items.
The cash flow hedges have been and are expected to remain highly effective.
Changes in the fair value of these highly effective hedging instruments are
recorded in accumulated other comprehensive income. The effective portion that
has been deferred in accumulated other comprehensive income will be reclassified
to earnings as interest expense when the hedged items impact earnings. If a cash
flow hedge falls outside 80%-125% effectiveness for a quarter, all changes in
the fair value of the cash flow hedge for the quarter will be recognized in
earnings during the current period. If it is determined based on prospective
testing that it is no longer likely a hedge will be highly effective on a
prospective basis, the hedge will no longer be designated as a cash flow hedge
and no longer qualify for accounting in accordance with SFAS Nos. 133 and 138.

Over the next twelve months, an estimated $16.4 million to $18.4
million will be reclassified from accumulated other comprehensive income to
interest expense and charged against earnings related to the effective portions
of the cash flow hedge agreements.

INTEREST RATE CAPS

In connection with the closing of the Deutsche Bank-CMBS Loan in May
2001, the Company entered into a LIBOR interest rate cap struck at 7.16% for a
notional amount of $220.0 million, and simultaneously sold a LIBOR interest rate
cap with the same terms. Since these instruments do not reduce the Company's net
interest rate risk exposure, they do not qualify as hedges and changes to their
respective fair values are charged to earnings. As the significant terms of
these arrangements are substantially the same, the effects of a revaluation of
these instruments are expected to substantially offset each other.

FUNDS FROM OPERATIONS

FFO, based on the revised definition adopted by the Board of Governors
of the NAREIT, effective January 1, 2000, and as used in this document, means:

o Net Income (Loss) - determined in accordance with GAAP;

o excluding gains (or losses) from sales of depreciable operating
property;

o excluding extraordinary items (as defined by GAAP);

o plus depreciation and amortization of real estate assets; and

o after adjustments for unconsolidated partnerships and joint
ventures.

NAREIT developed FFO as a relative measure of performance and liquidity
of an equity REIT to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. The Company considers
FFO an appropriate measure of performance for an equity REIT, and for its
investment segments. However, FFO:

o does not represent cash generated from operating activities
determined in accordance with GAAP (which, unlike FFO, generally
reflects all cash effects of transactions and other events that
enter into the determination of net income);

o is not necessarily indicative of cash flow available to fund cash
needs; and

o should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the
Company's operating performance, or to cash flow from operating
activities determined in accordance with GAAP as a measure of
either liquidity or the Company's ability to make distributions.

The Company has historically distributed an amount less than FFO,
primarily due to reserves required for capital expenditures, including leasing
costs. The aggregate cash distributions paid to shareholders and unitholders for
the year ended December 31, 2001, and 2000, were $245.1 and $281.2 million,
respectively. The Company reported FFO of $177.1 million and $326.9 million for
the years ended December 31, 2001 and 2000, respectively. Excluding the
impairment and other charges related to COPI of $92.8 million, the Company would
have reported FFO of $269.9 million for the year ended December 31, 2001.

An increase or decrease in FFO does not necessarily result in an
increase or decrease in aggregate distributions because the Company's Board of
Trust Managers is not required to increase distributions on a quarterly basis
unless necessary for the Company to maintain REIT status. However, the Company
must distribute 90% of its REIT taxable income

56

(as defined in the Code). Therefore, a significant increase in FFO will
generally require an increase in distributions to shareholders and unitholders
although not necessarily on a proportionate basis.

Accordingly, the Company believes that to facilitate a clear
understanding of the consolidated historical operating results of the Company,
FFO should be considered in conjunction with the Company's net income (loss) and
cash flows reported in the consolidated financial statements and notes to the
financial statements. However, the Company's measure of FFO may not be
comparable to similarly titled measures of other REITs because these REITs may
apply the definition of FFO in a different manner than the Company.

STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS AND SHARES/UNITS IN THOUSANDS)

- ----------
(1) To calculate basic funds from operations, deduct Unitholder minority
interest.

(2) Includes interest and other income, preferred return paid to GMACCM, other
unconsolidated companies, less depreciation and amortization of non-real
estate assets and amortization of deferred financing costs.

(3) For purposes of this schedule, the behavioral healthcare properties'
financial information has been included in this line item.

(4) See calculations for the amounts presented in the reconciliation following
this table.

57

The following schedule reconciles the Company's basic weighted average
shares to the diluted weighted average shares/units presented above:

RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES

(DOLLARS IN THOUSANDS)

HISTORICAL RECURRING OFFICE PROPERTY CAPITAL EXPENDITURES,
TENANT IMPROVEMENT AND LEASING COSTS

The following table sets forth annual and per square foot recurring
capital expenditures (excluding those expenditures which are recoverable from
tenants) and tenant improvement and leasing costs for the years ended December
31, 2001, 2000 and 1999, attributable to signed leases, all of which have
commenced or will commence during the next 12 months (i.e., the renewal or
replacement tenant began or will begin to pay rent) for the Office Properties
consolidated in the Company's financial statements during each of the periods
presented. Tenant improvement and leasing costs for signed leases during a
particular period do not necessarily equal the cash paid for tenant improvement
and leasing costs during such period due to timing of payments.

58

- ----------
(1) Excludes leasing activity for leases that have less than a one-year term
(i.e., storage and temporary space).

Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Office Property portfolio. The Company maintains an active preventive
maintenance program in order to minimize required capital improvements. In
addition, certain capital improvement costs are recoverable from tenants.

Tenant improvement and leasing costs also may fluctuate in any given
year depending upon factors such as the property, the term of the lease, the
type of lease (renewal or replacement tenant), the involvement of external
leasing agents and overall competitive market conditions. Management believes
that future recurring tenant improvements and leasing costs for the Company's
existing Office Properties will approximate on average for "renewal tenants",
$6.00 to $10.00 per square foot, or $1.20 to $2.00 per square foot per year
based on an average five-year lease term, and, on average for "replacement
tenants," $12.00 to $16.00 per square foot, or $2.40 to $3.20 per square foot
per year based on an average five-year lease term.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's use of financial instruments, such as debt instruments,
subject the Company to market risk which may affect the Company's future
earnings and cash flows as well as the fair value of its assets. Market risk
generally refers to the risk of loss from changes in interest rates and market
prices. The Company manages its market risk by attempting to match anticipated
inflow of cash from its operating, investment and financing activities with
anticipated outflow of cash to fund debt payments, distributions to
shareholders, investments, capital expenditures and other cash requirements. The
Company also enters into derivative financial instruments such as interest rate
swaps to mitigate its interest rate risk on a related financial instrument or to
effectively lock the interest rate on a portion of its variable-rate debt.

The following discussion of market risk is based solely on hypothetical
changes in interest rates related to the Company's variable-rate debt. This
discussion does not purport to take into account all of the factors that may
affect the financial instruments discussed in this section.

INTEREST RATE RISK

The Company's interest rate risk is most sensitive to fluctuations in
interest rates on its short-term variable-rate debt. The Company had total
outstanding debt of approximately $2.2 billion at December 31, 2001, of which
approximately $0.3 billion, or approximately 14%, was unhedged variable-rate
debt. The weighted average interest rate on such variable-rate debt was 3.9% as
of December 31, 2001. A 10% (39.0 basis point) increase in the weighted average
interest rate on such variable-rate debt would result in an annual decrease in
net income and cash flows of approximately $1.0 million based on the unhedged
variable-rate debt outstanding as of December 31, 2001, as a result of the
increased interest expense associated with the change in rate. Conversely, a 10%
(39.0 basis point) decrease in the weighted average interest rate on such
unhedged variable-rate debt would result in an annual increase in net income and
cash flows of approximately $1.0 million based on the unhedged variable rate
debt outstanding as of December 31, 2001, as a result of the decreased interest
expense associated with the change in rate.

59

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

60

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Trust Managers of Crescent Real Estate Equities Company:

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Company and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crescent Real Estate Equities
Company and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Dallas, Texas,
February 21, 2002

61

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

62

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these financial statements.

63

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

64

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

65

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. ORGANIZATION AND BASIS OF PRESENTATION:

ORGANIZATION

Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT"), and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.

The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.

The direct and indirect subsidiaries of Crescent Equities at December
31, 2001, included:

o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
The "Operating Partnership."

o CRESCENT REAL ESTATE EQUITIES, LTD.
The "General Partner" of the Operating Partnership.

o SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE GENERAL
PARTNER

Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.

The following table shows the subsidiaries of the Company that owned or
had an interest in Properties (as defined below) as of December 31, 2001:

Operating Partnership:(1) The Avallon IV, Bank One Center, Bank One Tower,
Datran Center (two Office Properties), Four
Westlake Park, Houston Center (three Office
Properties), The Park Shops at Houston Center, The
Woodlands Office Properties (eight Office
Properties) and 301 Congress Avenue

Crescent Real Estate The Aberdeen, The Avallon I, II & III, Carter
Funding I, L.P.: Burgess Plaza, The Citadel, The Crescent Atrium,
("Funding I") The Crescent Office Towers, Regency Plaza One,
Waterside Commons and 125 E. John Carpenter
Freeway

Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One,
Funding II, L.P.: Briargate Office and Research Center, Hyatt
("Funding II") Regency Albuquerque, Park Hyatt Beaver Creek
Resort and Spa, Las Colinas Plaza, Liberty Plaza I
& II, MacArthur Center I & II, Ptarmigan Place,
Stanford Corporate Centre, Two Renaissance Square
and 12404 Park Central

Crescent Real Estate Greenway Plaza Office Properties (ten Office
Funding III, IV and V, Properties) and Renaissance Houston Hotel
L.P.: ("Funding III, IV
and (V")(2)

Crescent Real Estate Canyon Ranch - Lenox
Funding VI, L.P.:
("Funding VI")

Crescent Real Estate 10 behavioral healthcare properties
Funding VII, L.P.:
("Funding VII")

Crescent Real Estate The Addison, Addison Tower, Austin Centre, The
Funding VIII, L.P.: Avallon V, Canyon Ranch - Tucson, Cedar Springs
("Funding VIII") Plaza, Frost Bank Plaza, Greenway I & IA (two
Office Properties), Greenway II, Omni Austin
Hotel, Palisades Central I, Palisades Central II,
Sonoma Mission Inn & Spa, Stemmons Place, Three
Westlake Park, Trammell Crow Center, 3333 Lee
Parkway, Ventana Inn & Spa, 1800 West Loop South
and 5050 Quorum

66

Crescent Real Estate Chancellor Park, Denver Marriott City Center, MCI
Funding IX, L.P.: Tower, Miami Center, Reverchon Plaza, 44 Cook
("Funding IX") (3) Street, 55 Madison and 6225 N. 24th Street

Crescent Real Estate Fountain Place and Post Oak Central (three Office
Funding X, L.P. Properties)
("Funding X")

Crescent Spectrum Spectrum Center
Center, L.P. (4):

- ----------

(1) The Operating Partnership has a 50% interest in Bank One Center, a 20%
interest in Bank One Tower and a 20% interest in Four Westlake Park. See
"Note 4. Investments in Real Estate Mortgages and Equity of Unconsolidated
Companies" for a description of the ownership structure of these
Properties.

(2) Funding III owns nine of the 10 Office Properties in the Greenway Plaza
Office portfolio and the Renaissance Houston Hotel; Funding IV owns the
central heated and chilled water plant building located at Greenway Plaza;
and Funding V owns Coastal Tower, the remaining Office Property in the
Greenway Plaza Office portfolio.

(3) Funding IX holds its interests in Chancellor Park and Miami Center through
its 100% membership interests in the owners of the Properties, Crescent
Chancellor Park, LLC and Crescent Miami Center, LLC.

(4) Crescent Spectrum Center, L.P. holds its interest in Spectrum Center
through its ownership of the underlying land and notes and a mortgage on
the Property.

As of December 31, 2001, Crescent SH IX, Inc. ("SH IX"), a subsidiary
of the Company, owned 14,468,603 common shares of beneficial interest in
Crescent Equities.

See "Note 6. Notes Payable and Borrowings under Fleet Facility" for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.

See "Note 4. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for a table that lists the Company's ownership in
significant unconsolidated subsidiaries and equity investments as of December
31, 2001 including the four Office Properties in which the Company owned an
interest through these unconsolidated companies and equity investments and the
Company's ownership interests in the Residential Development Segment and the
Temperature-Controlled Logistics Segment.

SEGMENTS

As of December 31, 2001, the Company's assets and operations were
composed of four major investment segments:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

Within these segments, the Company owned or had an interest in the
following real estate assets (the "Properties") as of December 31, 2001:

o OFFICE SEGMENT consisted of 74 office properties (collectively
referred to as the "Office Properties") located in 26
metropolitan submarkets in six states, with an aggregate of
approximately 28.0 million net rentable square feet.

o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,028 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,769 rooms (collectively referred to as the
"Resort/Hotel Properties").

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and non-voting common stock
representing interests ranging from 90% to 95% in five
unconsolidated residential development corporations
(collectively referred to as the "Residential Development
Corporations"), which in

67

turn, through joint venture or partnership arrangements, owned
21 upscale residential development properties (collectively
referred to as the "Residential Development Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in a general partnership (the
"Temperature-Controlled Logistics Partnership"), which owns
all of the common stock, representing substantially all of the
economic interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a REIT,
which, as of December 31, 2001, directly or indirectly owned
89 temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 445.2 million
cubic feet (17.7 million square feet) of warehouse space.

On February 14, 2002, the Company executed an agreement with Crescent
Operating, Inc. ("COPI"), pursuant to which COPI transferred to the Company, in
lieu of foreclosure, the lessee interests in the eight Resort/Hotel Properties
leased to subsidiaries of COPI and COPI's voting common stock in three of the
Company's Residential Development Corporations. See "Note 20. Subsequent Events"
for additional information regarding the Company's agreement with COPI.

For purposes of investor communications, the Company classifies its
luxury and destination fitness resorts and spas and upscale Residential
Development Properties as a single group referred to as the "Resort and
Residential Development Sector" due to their similar targeted customer
characteristics. This group does not contain the four upscale business-class
hotel properties. Additionally, for investor communications, the Company
classifies its Temperature-Controlled Logistics Properties and its upscale
business-class hotel properties as the "Investment Sector." However, for
purposes of segment reporting as defined in Statement of Financial Accounting
Standard ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Information" and this Annual Report on Form 10-K, the Resort/Hotel
Properties, including the upscale business-class hotel properties, the
Residential Development Properties and the Temperature-Controlled Logistics
Properties are considered three separate reportable segments.

See "Note 3. Segment Reporting" 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 identifiable assets for each of these investment segments at
December 31, 2001 and 2000.

BASIS OF PRESENTATION

The accompanying consolidated financial statements of the Company
include all direct and indirect subsidiary entities. The equity interests in
those direct and indirect subsidiaries the Company does not own are reflected as
minority interests. All significant intercompany balances and transactions have
been eliminated.

Certain amounts in prior year financial statements have been
reclassified to conform with current year presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NET INVESTMENTS IN REAL ESTATE

Real estate is carried at cost, net of accumulated depreciation.
Betterments, major renovations, and certain costs directly related to the
acquisition, improvements and leasing of real estate are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows:

Buildings and Improvements 5 to 40 years
Tenant Improvements Terms of leases
Furniture, Fixtures and Equipment 3 to 5 years

An impairment loss is recognized on a property by property basis on
Properties classified as held for use, when expected undiscounted cash flows are
less than the carrying value of the Property. In cases where the Company does
not expect to recover its carrying costs on a Property, the Company reduces its
carrying costs to fair value, and for Properties held

68

for disposition, the Company reduces its carrying costs to the fair value less
costs to sell. See "Note 17. Dispositions" for a description of impairment
losses recognized during 2001, 2000 and 1999.

Depreciation expense is not recognized on Properties classified as held
for disposition.

CONCENTRATION OF REAL ESTATE INVESTMENTS

The Company's Office Properties are located primarily in the
Dallas/Fort Worth and Houston, Texas metropolitan areas. As of December 31,
2001, the Company's Office Properties in Dallas/Fort Worth and Houston
represented an aggregate of approximately 77% of its office portfolio based on
total net rentable square feet. The Dallas/Fort Worth Office Properties
accounted for approximately 41% of that amount and the Houston Office Properties
accounted for the remaining 36%. As a result of the geographic concentration,
the operations of the Company could be adversely affected by a recession or
general economic downturn in the areas where these Properties are located.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash and cash equivalents.

RESTRICTED CASH AND CASH EQUIVALENTS

Restricted cash includes escrows established pursuant to certain
mortgage financing arrangements for real estate taxes, insurance, security
deposits, ground lease expenditures, capital expenditures and monthly interest
carrying costs paid in arrears and capital requirements related to cash flow
hedges.

OTHER ASSETS

Other assets consist principally of leasing costs, deferred financing
costs and marketable securities. Leasing costs are amortized on a straight-line
basis during the terms of the respective leases, and unamortized leasing costs
are written off upon early termination of lease agreements. Deferred financing
costs are amortized on a straight-line basis (when it approximates the effective
interest method) over the terms of the respective loans. The effective interest
method is used to amortize deferred financing costs on loans where the
straight-line basis does not approximate the effective interest method, over the
terms of the respective loans. Marketable securities are considered
available-for-sale and are marked to market value on a monthly basis. The
corresponding unrealized gains and losses are included in accumulated other
comprehensive income. When a decline in the fair value of marketable securities
is determined to be other than temporary, the cost basis is written down to fair
value and the amount of the write-down is included in earnings for the
applicable period. A decline in the fair value of a marketable security is
deemed nontemporary if its cost basis has exceeded its fair value for a period
of six to nine months.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to convert a portion
of its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of December 31, 2001, the Company has entered into
three cash flow hedge agreements which are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."

Under SFAS No. 133, the Company's cash flow hedges are used to mitigate
the variability of cash flows. On a monthly basis, the cash flow hedge is marked
to fair value through comprehensive income and the cash flow hedge's gain or
loss is reported in earnings when the interest on the underlying debt affects
earnings. Any ineffective portion of the hedges is reported in earnings
immediately.

In connection with the debt refinancing in May 2001, the Company
entered into a LIBOR interest rate cap, and simultaneously sold a LIBOR interest
rate cap with the same terms. These instruments do not qualify as hedges and
changes to their respective fair values are charged to earnings monthly.

69

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents and short-term
investments are reasonable estimates of their fair values because of the short
maturities of these instruments. The fair value of notes receivable, which
approximates carrying value, is estimated based on year-end interest rates for
receivables of comparable maturity. Notes payable and borrowings under the
Company's prior line of credit with UBS (the "UBS Facility") and the Company's
line of credit (the "Fleet Facility") have aggregate carrying values which
approximate their estimated fair values based upon the current interest rates
for debt with similar terms and remaining maturities, without considering the
adequacy of the underlying collateral. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 2001 and 2000.

REVENUE RECOGNITION

OFFICE PROPERTIES The Company, as a lessor, has retained substantially
all of the risks and benefits of ownership of the Office Properties and accounts
for its leases as operating leases. Income on leases, which includes scheduled
increases in rental rates during the lease term and/or abated rent payments for
various periods following the tenant's lease commencement date, is recognized on
a straight-line basis. Deferred rent receivable represents the excess of rental
revenue recognized on a straight-line basis over cash received pursuant to the
applicable lease provisions.

RESORT/HOTEL PROPERTIES Prior to the enactment of the REIT
Modernization Act, the Company's status as a REIT for federal income tax
purposes prohibited it from operating the Resort/Hotel Properties. As of
December 31, 2001, the Company had leased all of the Resort/Hotel Properties,
except the Omni Austin Hotel, to subsidiaries of Crescent Operating, Inc.
("COPI") pursuant to eight separate leases. The Omni Austin Hotel had been
leased under a separate lease to HCD Austin Corporation. During 2001 and 2000,
the leases provided for the payment by the lessee of the Resort/Hotel Property
of (i) base rent, with periodic rent increases if applicable, (ii) percentage
rent based on a percentage of gross receipts or gross room revenues, as
applicable, above a specified amount, and (iii) a percentage of gross food and
beverage revenues above a specified amount for certain Resort/Hotel Properties.
Base rental income under these leases was recognized on a straight-line basis
over the terms of the respective leases. Contingent revenue was recognized when
the thresholds upon which it is based had been met. On February 14, 2002, the
Company executed an agreement with COPI, pursuant to which COPI transferred to
subsidiaries of the Company, in lieu of foreclosure, COPI's lessee interests in
the eight Resort/Hotel Properties previously leased to COPI.

INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED
COMPANIES Investments in which the Company does not have a controlling interest
are accounted for under the equity method. See "Note 4. Investments in Real
Estate Mortgages and Equity in Unconsolidated Companies" for a list of the
unconsolidated entities and the Company's ownership of each.

INCOME TAXES

A REIT will generally not be subject to federal income taxation on that
portion of its income that qualifies as REIT taxable income to the extent that
it distributes such taxable income to its shareholders and complies with certain
requirements (including distribution of at least 90% of its REIT taxable
income). As a REIT, the Company is allowed to reduce REIT taxable income by all
or a portion of its distributions to shareholders. Because distributions have
exceeded REIT taxable income, no federal income tax provision (benefit) has been
reflected in the accompanying consolidated financial statements. State income
taxes are not significant.

70

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

EARNINGS PER SHARE

SFAS No.128 "Earnings Per Share" ("EPS") specifies the computation,
presentation and disclosure requirements for earnings per share. Basic EPS
excludes all dilution while Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted into common shares.

The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares is not included in the computation of Diluted EPS for the years
ended December 31, 2001, 2000 and 1999, since the effect of their conversion is
antidilutive.

71

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which provides that all business
combinations in the scope of the statement are to be accounted for under the
purchase method. This statement is effective for all business combinations
initiated after June 30, 2001, as well as all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001,
or later. Since the Company currently accounts for its acquisitions under the
purchase method, management does not believe that the adoption of this statement
will have a material effect on its interim or annual financial statements.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses financial accounting and reporting for
acquired goodwill and other intangible assets. This statement requires that
goodwill and some other intangible assets will no longer be amortized, and
provides specific guidance for testing goodwill for impairment. This statement
is effective for fiscal years beginning after December 15, 2001. The Company
expects its impairment losses to range between $14,000 and $18,300 due to the
initial application of this statement. These charges relate to unconsolidated

72

companies in which the Company had an interest in as of December 31, 2001. These
charges will be reported as resulting from a change in accounting principle.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. The Company has determined that SFAS No. 143 will
have no material effect on its interim and annual financial statements.

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. Management does not believe that adoption of this statement will have a
material effect on its interim or annual financial statements; however,
financial statement presentation will be modified to report the results of
operations and financial position of a component of an entity that either has
been disposed of or is classified as held for sale as discontinued operations.
As a result, the Company will reclassify certain amounts in prior period
financial statements to conform with the new presentation requirements.

3. SEGMENT REPORTING:

The Company currently has four major investment segments: the Office
Segment; the Resort/Hotel Segment; the Residential Development Segment; and the
Temperature-Controlled Logistics Segment. Management organizes the segments
within the Company based on property type for making operating decisions and
assessing performance. Investment segments for SFAS No. 131 are determined on
the same basis.

The Company uses funds from operations ("FFO") as the measure of
segment profit or loss. FFO, based on the revised definition adopted by the
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT"), effective January 1, 2000, and as used in this document, means:

o Net Income (Loss) - determined in accordance with generally
accepted accounting principles ("GAAP");
o excluding gains (or losses) from sales of depreciable
operating property;
o excluding extraordinary items (as defined by GAAP);
o plus depreciation and amortization of real estate assets;
and
o after adjustments for unconsolidated partnerships and joint
ventures.

NAREIT developed FFO as a relative measure of performance and liquidity
of an equity REIT to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. The Company considers
FFO an appropriate measure of performance for an equity REIT, and for its
investment segments. However, the Company's measure of FFO may not be comparable
to similarly titled measures of other REITs because these REITs may apply the
definition of FFO in a different manner than the Company.

73

Selected financial information related to each segment for the years
ended December 31, 2001, 2000 and 1999 is presented below.

- ----------

(1) Excludes financial information for the four Office Properties included in
"Equity of Net Income of Unconsolidated Companies."

(2) For purposes of this Note, the behavioral healthcare properties' financial
information has been included in this line item.

74

(3) Includes interest and other income, behavioral healthcare property income,
preferred return paid to GMAC Commercial Mortgage Corporation ("GMACCM"),
other unconsolidated companies, less depreciation and amortization of
non-real estate assets and amortization of deferred financing costs.

At December 31, 2001, COPI was the Company's largest lessee in terms of
total revenues. COPI was the lessee of eight of the Resort/Hotel Properties for
the year ended December 31, 2001. Total revenues recognized from COPI for the
year ended December 31, 2001 were approximately 6% of the Company's total
revenues. On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's lessee interests in the eight Resort/Hotel Properties
previously leased to COPI.

See "Note 4. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Temperature-Controlled Logistics Properties" for a
description of the sole lessee of the Temperature-Controlled Logistics
Properties.

4. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES:

Investments in which the Company does not have a controlling interest
are accounted for under the equity method. The following is a summary of the
Company's ownership in significant unconsolidated companies or equity
investments:

SUMMARY STATEMENTS OF OPERATIONS:

78

- ----------
(1) The Company has guarantees or letters of credit related to approximately
$89,300, or 17% of its maximum borrowings available under its
unconsolidated debt. At December 31, 2001, the Company had guarantees or
letters of credit related to approximately $17,000, or 4% of its total
outstanding unconsolidated debt.

(2) This column includes information for Four Westlake Park and Bank One Tower.
These Office Properties were contributed by the Company to joint ventures
on July 30, 2001. Therefore, net income for 2001 includes only the months
of August through December for these Properties.

(3) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the Total Combined Assets).

BALANCE SHEETS:

SUMMARY STATEMENTS OF OPERATIONS:

- ----------

(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the Total Combined Assets).

79

SUMMARY STATEMENTS OF OPERATIONS:

- ----------

(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the Total Combined Assets).

5. OTHER ASSETS, NET:

80

6. NOTES PAYABLE AND BORROWINGS UNDER FLEET FACILITY:

The following is a summary of the Company's debt financing at December 31, 2001
and 2000:

- ---------
(1) The UBS Facility was entered into effective January 31, 2000 and amended on
May 10, 2000 and May 18, 2000. As amended, the UBS Facility consisted of
three tranches: the UBS Line of Credit, the UBS Term Loan I and the UBS
Term Loan II. In May 2001, the Company repaid and retired the UBS Facility
with proceeds from a $970,000 debt refinancing. The interest rate on the
UBS Line of Credit and the UBS Term Loan I was equal to LIBOR plus 250
basis points. The interest rate on the UBS Term Loan II was equal to LIBOR
plus 275 basis points. As of December 31, 2000, the interest rate on the
UBS Line of Credit and UBS Term Loan I was 9.20%, and the interest rate on
the UBS Term Loan II was 9.46%. The weighted average interest rate on the
UBS Line of Credit for the year ended December 31, 2000 was 8.91%. The
Fleet Fund I and II Term Loan is the result of the modification of the
Fleet Term Note II. As of December 31, 2000, the UBS Facility was secured
by 25 Office Properties and four Resort/Hotel Properties with a combined
book value of $1,042,207.

(2) For a description of the Fleet Fund I and II Term Loan and the Fleet
Facility, see "Debt Refinancing and Fleet Facility" section below.

(3) The outstanding principal balance of this note at maturity will be
approximately $224,100.

(4) In August 2007, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment, excess
property cash flow, as defined, to be applied first against principal until
the note is paid in full and thereafter, against accrued excess interest,
as defined. It is the Company's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $220,500.

(5) The Fleet Fund I and II Term Loan, entered into in May 2001, modified and
replaced the previously outstanding Fleet Term Note II. Prior to the
modification and replacement, the Fleet Term Note II was due August 31,
2003, bore interest at the 30-Day LIBOR rate plus 234 basis points (at
December 31, 2000, the interest rate was 10.63%) with a four-year
interest-only term, secured by equity interests in Funding I and II with a
combined value of $200,000 at December 31, 2000.

(6) At the end of seven years (October 2006), the interest rate will adjust
based on current interest rates at that time. It is the Company's intention
to repay the note in full at such time (October 2006) by making a final
payment of approximately $177,800.

82

(7) In March 2006, the interest rate will increase, and the Company is required
to remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the note
is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (March 2006) by making a final payment of approximately $154,100.

(8) In July 2010, the interest rate due under the note will change to a 10-year
Treasury yield plus 500 basis points or, if the Company so elects, it may
repay the note without penalty at that date.

(9) The outstanding principal balance of this loan at maturity will be
approximately $8,200.

(10) The notes were issued in an offering registered with the SEC.

(11) Short-term borrowings include the unsecured JP Morgan Loan Sales Facility,
a $50,000 credit facility, and the $50,000 unsecured Fleet Bridge Loan. The
lender under the JP Morgan Loan is not required to fund draws under the
loan unless certain conditions not within the control of the Company are
met. As a result, the Company maintains sufficient availability under the
Fleet Facility to repay the JP Morgan Loan Sales Facility at any time. At
December 31, 2001, $10,000 was outstanding on the JP Morgan Loan Sales
Facility and $5,000 was outstanding on the Fleet Bridge Loan.

Below are the aggregate principal payments required as of December 31,
2001 under indebtedness of the Company by year. Scheduled principal installments
and amounts due at maturity are included.

- ---------
(1) These amounts do not represent the effect of a one-year extension option on
the Fleet Facility and two one-year extension options on the Deutsche
Bank -- CMBS Loan.

The Company has approximately $245,157 of secured and unsecured debt
payments due during 2002, consisting primarily of the Cigna Note, the Mitchell
Mortgage Note and the 2002 Notes which are expected to be funded through
replacement debt financing.

Any uncured or unwaived events of default on the Company loans can
trigger an acceleration of payment on the loan in default. In addition, a
default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5,000 generally will result in a default under the
Fleet Facility and the Fleet I and II Term Loan after the notice and cure
periods for other indebtedness have passed. As of December 31, 2001, the Company
was in compliance with all of its debt service coverage ratios and other
covenants related to its outstanding debt. The Company's debt facilities
generally prohibit loan pre-payment for an initial period, allow pre-payment
with a penalty during a following specified period and allow pre-payment without
penalty after the expiration of that period. During the year ended December 31,
2001, there were no circumstances that would require pre-payment penalties or
increased collateral related to the Company's existing debt.

In addition to the subsidiaries listed in "Note 1. Organization and
Basis of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. The following lists these entities, all of which are
consolidated and are grouped based on the Properties to which they relate:
Funding I and Funding II Properties (CREM Holdings, LLC, Crescent Capital
Funding, LLC, Crescent Funding Interest, LLC, CRE Management I Corp., CRE
Management II Corp.); Funding III Properties (CRE Management III Corp.); Funding
IV Properties (CRE Management IV Corp.); Funding V Properties (CRE Management V
Corp.); Funding VI Properties (CRE Management VI Corp.); Funding VIII Properties
(CRE Management VIII, LLC); Funding IX Properties (CRE Management IX, LLC);
Funding C Properties (CREF X Holdings Management, LLC, CREF X Holdings, L. P.,
CRE Management X, LLC); Spectrum Center Partners, L.P., Spectrum Mortgage
Associates, L. P., CSC Holdings Management, LLC, Crescent SC Holdings, L. P.,
CSC Management, LLC); and 5 Houston Center (Development Property) (C5HC
Management, LLC, Crescent 5 Houston Center, L. P.).

DEBT REFINANCING AND FLEET FACILITY

In May 2001, the Company (i) repaid and retired the UBS Facility which
consisted of the UBS Line of Credit, the UBS Term Loan I and the UBS Term Loan
II; (ii) repaid and retired the iStar Financial Note; and (iii) modified and
replaced the Fleet Term Note II with proceeds from a $970,000 debt refinancing.
In May 2001, The Company wrote off $10,800 of deferred financing costs related
to the early extinguishment of the UBS Facility which is included in
Extraordinary Item -- extinguishment of debt.

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New Debt Resulting from Refinancing

- ---------
(1) The $400,000 Fleet Facility is an unsecured revolving line of credit. The
weighted average interest rate from the origination of the note in May 2001
through December 31, 2001 is 5.38%.

(2) One-year extension option.

(3) Two one-year extension options.

(4) Repaid September 19, 2001.

Debt Repaid or Modified and Replaced by Refinancing

- ---------
(1) All the amounts listed, other than the Fleet Term Note II, were repaid. In
May 2001, the Fleet Term Note II was modified and replaced by the Fleet
Fund I and II Term Loan.

7. INTEREST RATE CAPS:

In connection with the closing of the Deutsche Bank -- CMBS Loan in May
2001, the Company entered into a LIBOR interest rate cap struck at 7.16% for a
notional amount of $220,000, and simultaneously sold a LIBOR interest rate cap
with the same terms. Since these instruments do not reduce the Company's net
interest rate risk exposure, they do not qualify as hedges and changes to their
respective fair values are charged to earnings. As the significant terms of
these arrangements are substantially the same, the effects of a revaluation of
these instruments are expected to substantially offset each other.

8. CASH FLOW HEDGES:

The Company uses derivative financial instruments to convert a portion
of its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of December 31, 2001, the Company had entered into
three cash flow hedge agreements which are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133."

The following table shows information regarding the Company's cash flow
hedge agreements as of December 31, 2001, and interest expense for the year
ended December 31, 2001:

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The Company has designated its three cash flow hedge agreements as cash
flow hedges of LIBOR-based monthly interest payments on a designated pool of
variable-rate LIBOR indexed debt that reprices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in Derivatives
Implementation Group ("DIG") Issue E8. The DIG is a task force designed to
assist the FASB in answering questions that companies have resulting from
implementation of SFAS No. 133 and 138. The Company uses the change in variable
cash flows method as described in DIG Issue G7 for prospective testing as well
as for the actual recording of ineffectiveness, if any. Under this method, the
Company will compare the changes in the floating rate portion of each cash flow
hedge to the floating rate of the hedged items. The cash flow hedges have been
and are expected to remain highly effective. Changes in the fair value of these
highly effective hedging instruments are recorded in accumulated other
comprehensive income. The effective portion that has been deferred in
accumulated other comprehensive income will be reclassified to earnings as
interest expense when the hedged items impact earnings. If a cash flow hedge
falls outside 80%-125% effectiveness for a quarter, all changes in the fair
value of the cash flow hedge for the quarter will be recognized in earnings
during the current period. If it is determined based on prospective testing that
it is no longer likely a hedge will be highly effective on a prospective basis,
the hedge will no longer be designated as a cash flow hedge and no longer
qualify for accounting in accordance with SFAS Nos. 133 and 138.

Over the next twelve months, an estimated $16,400 to $18,400 will be
reclassified from accumulated other comprehensive income to interest expense and
charged against earnings related to the effective portions of the cash flow
hedge agreements.

9. RENTALS UNDER OPERATING LEASES:

During 2001, the Company received rental income from the lessees of
Office Property and Resort/Hotel Property space under operating leases. On
February 14, 2002, the Company executed an agreement with COPI, pursuant to
which the Company acquired, in lieu of foreclosure, the lessee interests in the
eight Resort/Hotel Properties previously leased to COPI. Therefore, no future
rental income from the operating lessee will be recognized for these
Resort/Hotel Properties. The Company recognized percentage rental income from
the Resort/Hotel Properties of approximately $14,665, $24,622 and $19,648 for
the years ended December 31, 2001, 2000 and 1999, respectively.

85

For noncancelable operating leases for consolidated Office Properties
owned as of December 31, 2001, future minimum rentals (base rents) during the
next five years and thereafter (excluding tenant reimbursements of operating
expenses for Office Properties) are as follows:

Generally, the Office Property leases also require that each tenant
reimburse the Company for increases in operating expenses above operating
expenses during the base year of the tenant's lease. These amounts totaled
$98,816, $91,735 and $92,865, for the years ended December 31, 2001, 2000 and
1999, respectively. These increases are generally payable in equal installments
throughout the year, based on estimated increases, with any differences adjusted
at year end based upon actual expenses.

See "Note 2. Summary of Significant Accounting Policies," for further
discussion of revenue recognition, and "Note 3. Segment Reporting," for further
discussion of significant tenants.

10. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company has 12 Properties located on land that is subject to
long-term ground leases, which expire between 2015 and 2080. The Company also
leases parking spaces in a parking garage adjacent to one of its Properties
pursuant to a lease expiring in 2021. Lease expense associated with these leases
during each of the three years ended December 31, 2001, 2000, and 1999 was
$2,766, $2,869 and $2,642, respectively. Future minimum lease payments due under
such leases as of December 31, 2001, are as follows:

COPI COMMITMENTS

See "Note 20. Subsequent Events," for a description of the Company's
commitments related to the agreement with COPI, executed on February 14, 2002.

CONTINGENCIES

Environmental Matters

All of the Properties have been subjected to Phase I environmental
assessments, and some Properties have been subjected to Phase II soil and ground
water sampling as part of the Phase I assessments. Such assessments have not
revealed, nor is management aware of, any environmental liabilities that
management believes would have a material adverse effect on the financial
position or results of operations of the Company.

86

11. STOCK AND UNIT BASED COMPENSATION:

STOCK OPTION PLANS

Crescent Equities has two stock incentive plans, the 1995 Stock
Incentive Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994
Plan"). Due to the approval of the 1995 Plan, additional options and restricted
shares will no longer be granted under the 1994 Plan. Under the 1994 Plan,
Crescent Equities had granted, net of forfeitures, 2,509,800 options and no
restricted shares. The maximum number of options and/or restricted shares that
Crescent Equities was able to initially grant at inception under the 1995 Plan
was 2,850,000 shares. The maximum aggregate number of shares available for grant
under the 1995 Plan increases automatically on January 1 of each year by an
amount equal to 8.5% of the increase in the number of common shares and units
outstanding since January 1 of the preceding year, subject to certain adjustment
provisions. As of January 1, 2001, the number of shares Crescent Equities may
grant under the 1995 Plan is 9,677,794. Under the 1995 Plan, Crescent Equities
had granted, net of forfeitures, options and restricted shares of 8,546,700 and
23,715 respectively, through December 31, 2001. Under both Plans, options are
granted at a price not less than the market value of the shares on the date of
grant and expire ten years from the date of grant. The options that have been
granted under the 1995 Plan vest over five years, with the exception of 500,000
options that vest over two years, 250,000 options that vest over three and a
half years and 60,000 options that vest six months from the initial date of
grant. The options that have been granted under the 1994 Plan vest over periods
ranging from one to five years.

STOCK OPTIONS PLANS

A summary of the status of Crescent Equities' 1994 and 1995 Plans as of
December 31, 2001, 2000 and 1999 and changes during the years then ended is
presented in the table below:

The following table summarizes information about the options
outstanding and exercisable at December 31, 2001:

UNIT PLANS

The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not
trust

87

managers, officers or 10% shareholders of the Company. An aggregate of 100,000
common shares are reserved for issuance upon the exchange of 50,000 units
available for issuance to employees and advisors under the 1995 Unit Plan. As of
December 31, 2001, an aggregate of 7,012 units had been distributed under the
1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of options.
There was no activity in the 1995 Unit Plan in 2001, 2000 or 1999. The 1996 Unit
Plan provides for the grant of options to acquire up to 2,000,000 units. Through
December 31, 2001, the Operating Partnership had granted, net of forfeitures,
options to acquire 1,778,571 units. Forfeited options are available for grant.
The unit options granted under the 1996 Unit Plan were priced at fair market
value on the date of grant, generally vest over seven years, and expire ten
years from the date of grant. Pursuant to the terms of the unit options granted
under the 1996 Unit Plan, because the fair market value of the Company's common
shares equaled or exceeded $25 for each of ten consecutive trading days, the
vesting of an aggregate of 500,000 units was accelerated and such units became
immediately exercisable in 1996. In addition, 100,000 unit options vest 50%
after three years and 50% after five years. Under the 1996 Unit Plan, each unit
that may be purchased is exchangeable, as a result of shareholder approval in
June 1997, for two common shares or, at the option of the Company, an equivalent
amount of cash.

A summary of the status of the Company's 1996 Unit Plan as of December
31, 2001, 2000 and 1999, and changes during the years then ended is presented in
the table below (assumes each unit is exchanged for two common shares):

1996 UNIT INCENTIVE OPTION PLAN

Effective March 5, 2001, the Operating Partnership granted options to
acquire 150,000 Units to Dennis H. Alberts, in connection with his employment as
the Chief Operating Officer of the General Partner and the Company. The Units
were priced at $21.84, which was the fair market value at the date of grant.

STOCK OPTION AND UNIT PLANS

The Company applies APB No. 25 in accounting for options granted
pursuant to the 1995 Plan, the 1994 Plan and the 1996 Unit Plan (collectively,
the "Plans"). Accordingly, no compensation cost has been recognized for the
Plans. Had compensation cost for the Plans been determined based on the fair
value at the grant dates for awards under the Plans, consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:

At December 31, 2001, 2000 and 1999, the weighted average fair value of
options granted was $2.73, $2.46 and $2.80, respectively. The fair value of each
option is estimated at the date of grant using the Black-Scholes option-pricing
model using the following expected weighted average assumptions in the
calculation.

88

12. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY:

During the year ended December 31, 2000, the Company formed Funding IX
and contributed seven Office Properties and two Resort/Hotel Properties to
Funding IX. As of December 31, 2001, Funding IX held seven Office Properties and
one Resort/Hotel Property. The Company owns 100% of the common voting interests
in Funding IX, 0.1% in the form of a general partner interest and 99.9% in the
form of a limited partner interest.

As of December 31, 2001, GMAC Commercial Mortgage Corporation
("GMACCM") held $218,400 of non-voting, redeemable preferred Class A Units in
Funding IX (the "Class A Units"). The Class A Units receive a preferred
variable-rate dividend currently calculated at LIBOR plus 450 basis points, or
approximately 6.6% per annum as of December 31, 2001, and increasing to LIBOR
plus 550 basis points beginning March 15, 2002. The Class A Units are redeemable
at the option of the Company at the original purchase price.

Funding IX contributed the net proceeds of the sale of Class A Units in
Funding IX through an intracompany loan to Crescent SH IX, Inc. ("SH IX"), for
the purchase of common shares of the Company. See "Share Repurchase Program"
below. This intracompany loan is eliminated in consolidation. However, the loan
between Funding IX and SH IX matures March 15, 2003. The Company intends to
repay the loan of approximately $285,000 at that time. The proceeds received by
Funding IX will be used to redeem Class A Units.

13. SHAREHOLDERS' EQUITY:

EMPLOYEE STOCK PURCHASE PLAN

On June 25, 2001, the shareholders of the Company approved a new
Employee Stock Purchase Plan (the "ESPP") that is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code
("IRC") of 1986, as amended. The ESPP is regarded as a noncompensatory plan
under APB No. 25, because it meets the qualifications under IRC 423. Under the
terms of the ESPP, eligible employees may purchase common shares of the Company
at a price that is equal to 90% of the lower of the common shares' fair market
value at the beginning or the end of a quarterly period. The fair market value
of a common share is equal to the last sale price of the common shares on the
New York Stock Exchange. Eligible employees may purchase the common shares
through payroll deductions of up to 10% of eligible compensation. The ESPP is
not subject to the provisions of ERISA. The ESPP was effective October 1, 2001,
and will terminate on May 14, 2011.

The 1,000,000 common shares that may be issued pursuant to the purchase
of common shares under the ESPP represent less than 0.96% of the Company's
outstanding common shares at December 31, 2001.

FORWARD SHARE PURCHASE AGREEMENT

On June 30, 1999, the Company settled the forward share purchase
agreement (the "Forward Share Purchase Agreement") with affiliates of the
predecessor of UBS. As settlement of the Forward Share Purchase Agreement, the
Company made a cash payment of approximately $149,000 to UBS in exchange for the
return by UBS to the Company of 7,299,760 common shares.

The number of common shares returned to the Company is equal to the
4,700,000 common shares originally issued to UBS plus 2,599,760 common shares
subsequently issued by the Company, because of a decline in its stock price. The
additional shares were issued as collateral for the Company's obligation to
purchase 4,700,000 common shares from UBS by August 12, 1999. The settlement
price was calculated based on the gross proceeds the Company received from the
original issuance of 4,700,000 common shares to UBS, plus a forward accretion
component equal to 90-day LIBOR plus 75 basis points, minus an adjustment for
the Company's distributions paid to UBS. The forward accretion component
represented a guaranteed rate of return to UBS.

89

SHARE REPURCHASE PROGRAM

On October 15, 2001, the Company's Board of Trust Managers authorized
an increase in the amount of outstanding common shares that can be repurchased
from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program") from $500,000 to $800,000.

The Company commenced its Share Repurchase Program in March 2000. As of
December 31, 2001, the Company had repurchased 18,756,423 common shares, 20,286
of which have been retired, at an average price of $19.09 per common share for
an aggregate of approximately $358,115. As of December 31, 2001, the Company
held 14,468,623 of the repurchased common shares in SH IX, a wholly-owned
subsidiary. The 14,468,623 common shares were repurchased with the net proceeds
of the sale of Class A Units in Funding IX and with a portion of the net
proceeds from the sale of one of the Properties held by Funding IX. See "Note
12. Sale of Preferred Equity Interests in Subsidiary." These common shares are
consolidated as treasury shares in accordance with GAAP. However, these shares
are held in SH IX until all of the Class A Units are redeemed. Distributions
will continue to be paid on these repurchased common shares and will be used to
pay dividends on the Class A Units.

The Company expects the Share Repurchase Program to continue to be
funded through a combination of debt, equity, joint venture capital and selected
asset disposition alternatives available to the Company, which, in some cases,
may be secured by the repurchased common shares, equity offerings including
preferred and/or convertible securities, and asset sales. The amount of common
shares that the Company will actually purchase will be determined from time to
time, in its reasonable judgment, based on market conditions and the
availability of funds, among other factors. There can be no assurance that any
number of common shares will actually be purchased within any particular time
period.

SHARE REPURCHASE AGREEMENT

On November 19, 1999, the Company entered into an agreement (the "Share
Repurchase Agreement") with UBS to purchase a portion of its common shares from
UBS. The Company had the option to settle the Share Repurchase Agreement in cash
or common shares. During the year ended December 31, 2000, the Company purchased
the 5,809,180 common shares from UBS at an average cost of $17.62 per common
share for an aggregate of approximately $102,333 under the Share Repurchase
Agreement with UBS. The Company has no further obligation under the Share
Repurchase Agreement. The purchases were funded primarily through the sale of
Class A Units in Funding IX. See "Note 12. Sale of Preferred Equity Interests in
Subsidiary."

DISTRIBUTIONS

On October 17, 2001, the Company announced that due to its revised cash
flow expectations in the uncertain economic environment and measuring its payout
ratios to those of the Company's peer group, the Company was reducing its
quarterly distributions from $0.55 per common share, or an annualized
distribution of $2.20 per common share, to $0.375 per common share, or an
annualized distribution of $1.50 per common share.

90

The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the year
ended December 31, 2001.

- ---------
(1) Represents one-half the amount of the distribution per unit because each
unit is exchangeable for two common shares.

(2) These distribution amounts include $7,958 for each of the distributions
paid on February 15, 2001, May 15, 2001, August 15, 2001, and $5,426 for
each of the distributions paid on November 15, 2001 and February 15, 2002,
which were paid on common shares held by the Company in Crescent SH IX, and
which are eliminated in consolidation.

(3) On October 17, 2001, the Company announced a reduction in its quarterly
distribution from $0.55 per common share, or an annualized distribution of
$2.20 per common share, to $0.375 per common share, or an annualized
distribution of $1.50 per common share.

The distributions to common shareholders and unitholders paid during
the year ended December 31, 2000, were $298,547, or $2.20 per common share and
equivalent unit. As of December 31, 2000, the Company was holding 14,468,623 of
its common shares in Crescent SH IX. The distribution amounts above include
$17,313 of distributions for the year ended December 31, 2000, which were paid
for common shares held by the Company, and which are eliminated in
consolidation. The distributions to common shareholders and unitholders paid
during the year ended December 31, 1999, were $298,125, or $2.20 per common
share and equivalent unit.

The distributions to preferred shareholders during the year ended
December 31, 2000, were $13,500, or $1.6875 per preferred share.

Common Shares

Following is the income tax status of distributions paid on common
shares and equivalent units during the years ended December 31, 2001, and 2000
to common shareholders:

Preferred Shares

Following is the income tax status of distributions paid during the
years ended December 31, 2001 and 2000 to preferred shareholders:

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14. MINORITY INTEREST:

Minority interest represents (i) the limited partner interests owned by
limited partners in the Operating Partnership ("units"), and (ii) joint venture
and preferred equity interests held by third parties in other consolidated
subsidiaries. Each unit may be exchanged for either two common shares or, at the
election of the Company, cash equal to the fair market value of two common
shares at the time of the exchange. When a unitholder exchanges a unit, Crescent
Equities' percentage interest in the Operating Partnership increases. During the
year ended December 31, 2001, there were 401,302 units exchanged for 802,604
common shares of Crescent Equities.

15. RELATED PARTY DISCLOSURES:

DBL HOLDINGS, INC. ("DBL")

As of December 31, 2001, the Company owned 97.44% of DBL with the
remaining 2.56% economic interest in DBL (including 100% of the voting interest
in DBL) held by John Goff, Vice-Chairman of the Board of Trust Managers and
Chief Executive Officer of the Company. Originally, Mr. Goff contributed his
voting interests in MVDC and HADC, originally valued at approximately $380, and
approximately $63 in cash, or total consideration valued at approximately $443
for his interest in DBL.

DBL has two wholly owned subsidiaries, DBL-ABC, Inc. and DBL-CBO, Inc.,
the assets of which are described in the following paragraphs and DBL directly
holds 66% of the voting stock in Mira Vista and HADC. At December 31, 2001, Mr.
Goff's interest in DBL was approximately $554.

Since June 1999, the Company contributed approximately $23,800 to DBL.
The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2 Opportunity Fund, LP ("G2"). G2 was formed for the purpose
of investing in commercial mortgage backed securities and other commercial real
estate investments and is managed and controlled by an entity that is owned
equally by Goff-Moore Strategic Partners, LP ("GMSP") and GMACCM. The ownership
structure of GMSP consists of 50% ownership by Darla Moore, who is married to
Richard Rainwater, Chairman of the Board of Trust Managers of the Company and
50% by John Goff. Mr. Rainwater is also a limited partner of GMSP. At December
31, 2001, DBL has an approximately $14,100 investment in G2.

In March 1999, DBL-CBO, Inc. acquired $6,000 aggregate principal amount
of Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Island limited
liability company. At December 31, 2001 this investment was valued at
approximately $5,400.

COPI COLORADO, L. P.

As of December 31, 2001, Crescent Resort Development, Inc. ("CRD") was
owned 90% by the Company and the remaining 10%, representing 100% of the voting
stock, was owned by COPI Colorado, L.P. of which 60% was owned by COPI, with 20%
owned by Mr. John Goff, Vice Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company and 20% owned by a third party.

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to the Company, in lieu of foreclosure,
COPI's 60% general partner interest in COPI Colorado. As a result, the Company
owns a 96% interest in CRD, John Goff, Vice Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company, owns a 2.0% interest and
the remaining 2.0% interest is owned by a third party. The Company will fully
consolidate the operations of CRD beginning on the date of the asset transfer.

LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS

As of December 31, 2001, the Company had approximately $32,900 of loans
outstanding (including approximately $3,855 loaned during the year ended
December 31, 2001) to certain employees and trust managers of the Company on a
recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company pursuant to the exercise of vested stock and unit options. Pursuant
to the loan agreements, these loans may be repaid in full or in part at any time
without

92

premium or penalty. John Goff, Vice-Chairman of the Board of Trust Managers and
Chief Executive Officer of the Company, had a loan representing $26,300 of the
$32,900 total outstanding loans at December 31, 2001.

Every month, federal short-term, mid-term and long-term rates
(Applicable Federal Rates) are determined and published by the IRS based upon
average market yields of specified maturities. The November Applicable Federal
Rates are the new interest rates. Effective November 1, 2001, these loans were
amended to reduce the interest rates for their remaining terms to the Applicable
Federal Rates. As a result, the interest rates on loans with remaining terms of
three years or less at November 1, 2001 were reduced to approximately 2.7% per
year and the interest rates on loans with remaining terms greater than three
years as of November 1, 2001 were reduced to approximately 4.07% per year. These
amended interest rates reflect below prevailing market interest rates;
therefore, the Company recorded $750 of compensation expense for the year ended
December 31, 2001. Approximately $466 of interest was outstanding related to
these loans as of December 31, 2001.

16. COPI:

In April 1997, the Company established a new Delaware corporation,
COPI. All of the outstanding common stock of COPI, valued at $0.99 per share,
was distributed, effective June 12, 1997, to those persons who were limited
partners of the Operating Partnership or shareholders of the Company on May 30,
1997, in a spin-off.

COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each agreed to provide the other with rights
to participate in certain transactions. In connection with the formation and
capitalization of COPI, and the subsequent operations and investments of COPI
since 1997, the Company made loans to COPI under a line of credit and various
term loans.

On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Company, through its subsidiaries, to operate or lease
certain of its investments that had been previously operated or leased by COPI.

COPI and the Company entered into an asset and stock purchase agreement
on June 28, 2001, in which the Company agreed to acquire the lessee interests in
the eight Resort/Hotel Properties leased to subsidiaries of COPI, the voting
interests held by subsidiaries of COPI in three of the Company's Residential
Development Corporations and other assets in exchange for $78,400. In connection
with that agreement, the Company agreed that it would not charge interest on its
loans to COPI from May 1, 2001 and that it would allow COPI to defer all
principal and interest payments due under the loans until December 31, 2001.

Also on June 28, 2001, the Company entered into an agreement to make a
$10,000 investment in Crescent Machinery Company ("Crescent Machinery"), a
wholly owned subsidiary of COPI. 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
COPI assets and stock and the investment in Crescent Machinery, the results of
operations for the COPI hotel operations and the COPI 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, the Company believes that a significant additional
investment would have been necessary to adequately capitalize Crescent Machinery
and satisfy concerns of Crescent Machinery's lenders.

The Company stopped recording rent from the leases of the eight
Resort/Hotel Properties leased to subsidiaries of COPI on October 1, 2001, and
recorded the following impairment and other adjustments related to COPI in the
fourth quarter of 2001, based on the estimated fair value of the underlying
collateral.

93

IMPAIRMENT AND OTHER ADJUSTMENTS RELATED TO COPI

Resort/Hotel Accounts Receivable, net of allowance $ 33,200
Resort/Hotel Straight-Line Rent 12,700
Notes Receivable and Accrued Interest 71,500
Asset transaction costs 2,800
---------
$ 120,200
Less estimated collateral value to be received from COPI:
Estimated Fair Value of Resort/Hotel FF&E $ 6,900
Estimated Fair Value of Voting Stock of
Residential Development Corporations $ 38,500
---------
$ 45,400
---------
Impairment of assets $ 74,800

Plus Estimated Costs Related to a COPI Bankruptcy 18,000
---------
Impairment and other charges related to COPI $ 92,800
=========

For a description of the COPI assets transferred to subsidiaries of the
Company, in lieu of foreclosure, of certain COPI assets, see "Note 20.
Subsequent Events."

17. DISPOSITIONS:

OFFICE SEGMENT

On September 18, 2001, the Company completed the sale of the two
Washington Harbour Office Properties. The sale generated net proceeds of
approximately $153,000 and a net loss of approximately $9,800. The proceeds from
the sale of the Washington Harbour Office Properties were used primarily to pay
down variable-rate debt and repurchase approximately 4.3 million of the
Company's common shares. The Washington Harbour Office Properties were the
Company's only Office Properties in Washington, D.C.

On September 28, 2001, the Woodlands Office Equities -- '95 Limited
("WOE"), owned by the Company and the Woodlands CPC, sold two Office Properties
located within The Woodlands, Texas. The sale generated net proceeds of
approximately $11,281, of which the Company's portion was approximately $9,857.
The sale generated a net gain of approximately $3,418, of which the Company's
portion was approximately $2,987. The proceeds received by the Company were used
primarily to pay down variable-rate debt.

On December 20, 2001, WOE sold one Office Property located within The
Woodlands, Texas. The sale generated net proceeds of approximately $2,016, of
which the Company's portion was approximately $1,761. The sale generated a net
gain of approximately $1,688, of which the Company's portion was approximately
$1,475. The proceeds received by the Company were used primarily to pay down
variable-rate debt.

The following table summarizes the condensed results of operations for
the years ended December 31, 2001, 2000 and 1999 for the five Office Properties
sold during 2001.

- ---------
(1) Net operating income for 2001 only includes the period for which the
disposition Properties were held during the year.

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During the year ended December 31, 2000, the Company completed the sale
of 11 wholly-owned Office Properties. The sale of the 11 Office Properties
generated approximately $268,233 of net proceeds. The proceeds were used
primarily to pay down variable-rate debt. The Company recognized a net gain,
which is included in Gain on Property Sales, net, of approximately $35,841
related to the sale of the 11 Office Properties during the year ended December
31, 2000. During the year ended December 31, 1999, the Company recognized an
impairment loss of approximately $16,800 on one of the 11 Office Properties sold
during the year ended December 31, 2000. The Company also recognized a loss of
approximately $5,000, which is included in Gain on Property Sales, net, during
the year ended December 31, 2000 on one of the 11 Office Properties sold. The
losses represented the differences between the carrying values of the Office
Properties and the sales prices less costs of the sales.

During the year ended December 31, 2000, the Woodlands Retail Equities
- - '96 Limited, owned by the Company and the Woodlands CPC completed the sale of
its retail portfolio, consisting of the Company's four retail properties located
in The Woodlands, Texas. The sale generated approximately $42,700 of net
proceeds, of which the Company's portion was approximately $32,000. The sale
generated a net gain of approximately $6,500, of which the Company's portion was
approximately $4,900. The proceeds received by the Company were used primarily
to pay down variable-rate debt. The net operating income for the years ended
December 31, 2000 and 1999 for the four retail properties was $15 and $3,792,
respectively. Net operating income for the year ended 2000 only includes the
periods for which these properties were held during the year.

RESORT/HOTEL SEGMENT

On November 3, 2000, the Company completed the sale of the Four Seasons
Hotel -- Houston for a sales price of approximately $105,000. The Company used
approximately $19,700 of the proceeds to buy out the Property lease with COPI
and the asset management contract, and for other transaction costs. The sale
generated net proceeds of approximately $85,300. The Company also used
approximately $56,600 of the net proceeds to redeem Class A Units in Funding IX,
through which the Company owned the Property, from GMACCM. See "Note 12. Sale of
Preferred Equity Interests in Subsidiary" for a description of the ownership
structure of Funding IX. The sale generated a net gain, which is included in
Gain on Property Sales, net, of approximately $28,715. The Company's net
operating income for the years ended December 31, 2000 and 1999 for the Four
Seasons Hotel -- Houston was $7,591 and $9,237, respectively. The operating
results of this property are included in operating income for 2000 only for the
periods for which this Property was held during the year.

95

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

19. BEHAVIORAL HEALTHCARE PROPERTIES:

During the years ended December 31, 2001 and 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 Charter
Behavioral Health Systems, LLC ("CBHS") bankruptcy proceeding. The Company
received approximately $6,000 and $15,400, which is included in Interest and
Other Income, in repayments of a working capital loan, rent and interest from
CBHS during the years ended December 31, 2001 and 2000, respectively. The
Company did not incur any expense related to the behavioral healthcare
properties recognized for the years ended December 31, 2001, 2000 or 1999.

During the year ended December 31, 2001, the Company completed the sale
of 18 behavioral healthcare properties. The sales generated approximately
$34,700 in net proceeds and a net gain of approximately $1,600 for the year
ended December 31, 2001. The net proceeds from the sale of the 18 behavioral
healthcare properties sold during the year ended December 31, 2001 were used
primarily to pay down variable-rate debt.

As of December 31, 2001, the Company owned 10 behavioral healthcare
properties, all of which were classified as held for disposition. The carrying
value of the behavioral healthcare properties at December 31, 2001, was
approximately $27,937. Depreciation expense has not been recognized since the
dates the behavioral healthcare properties were classified as held for sale. The
Company is actively marketing for sale these behavioral healthcare properties.

96

During the year ended December 31, 2001, the Company recognized an
impairment loss of approximately $8,500 on the behavioral healthcare properties
held for disposition, which is included in Impairment and Other Charges Related
to Real Estate Assets. This amount represents the difference between the
carrying values and the estimated sales prices less costs of the sales for seven
of the behavioral healthcare properties.

During the year ended December 31, 2000, the Company completed the sale
of 60 behavioral healthcare properties previously classified as held for
disposition. The sales generated approximately $233,700 in net proceeds and a
net gain of approximately $58,600 for the year ended December 31, 2000. During
the year ended December 31, 2000, the Company recognized an impairment loss of
$9,300 on the behavioral healthcare properties held for disposition. This amount
represents the difference between the carrying values and the estimated sales
prices less costs of the sales for 13 of the 28 behavioral healthcare
properties. The net proceeds from the sale of the 60 behavioral healthcare
properties sold during the year ended December 31, 2000 were used primarily to
pay down variable-rate debt.

As of December 31, 1999, the Company owned 88 behavioral healthcare
properties.

20. SUBSEQUENT EVENTS:

OFFICE SEGMENT

On January 18, 2002, the Company completed the sale of the Cedar
Springs Office Property located in Dallas, Texas. The sale generated net
proceeds of approximately $12,000 and a net gain of approximately $4,500. The
proceeds from the sale of Cedar Springs were used primarily to pay down
variable-rate debt.

COPI

On January 22, 2002, the Company terminated the purchase agreement
pursuant to which the Company would have acquired the lessee interests in the
eight Resort/Hotel Properties leased to subsidiaries of COPI, the voting
interests held by subsidiaries of COPI in three of the Residential Development
Corporations and other assets. On February 4, 2002, the Company 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, the Company delivered default notices to COPI
relating to approximately $49,000 of unpaid rent and approximately $76,200 of
principal and accrued interest due to the Company under certain secured loans.

On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI, COPI's voting interests
in three of the Company's Residential Development Corporations and other assets
and the Company agreed to assist and provide funding to COPI for the
implementation of a prepackaged bankruptcy of COPI. In connection with the
transfer, COPI's rent obligations to the Company were reduced by $23,600, and
its debt obligations were reduced by $40,100. These amounts include $18,300 of
value attributed to the lessee interests transferred by COPI to the Company;
however, in accordance with GAAP, the Company assigned no value to these
interests for financial reporting purposes.

The Company holds the lessee interests in the eight Resort/Hotel
Properties and the voting interests in the three Residential Development
Corporations through three newly organized entities that are wholly owned
taxable REIT subsidiaries of the Company. The Company will include these assets
in its Resort/Hotel Segment and its Residential Development Segment, and will
fully consolidate the operations of the eight Resort/Hotel Properties and the
three Residential Development Corporations, beginning on the date of the
transfers of these assets.

Under the Agreement, the Company has agreed to provide approximately
$14,000 to COPI in the form of cash and common shares of the Company to fund
costs, claims and expenses relating to the bankruptcy and related transactions,
and to provide for the distribution of the Company's common shares to the COPI
stockholders. The Company estimates that the value of the common shares that
will be issued to the COPI stockholders will be approximately $5,000 to $8,000.
The Agreement provides that COPI and the Company will seek to have a plan of
reorganization for COPI, reflecting the terms of the Agreement and a draft plan
of reorganization, approved by the bankruptcy court. The actual value of the
common shares

97

issued to the COPI stockholders will not be determined until the confirmation of
COPI's bankruptcy plan and could vary substantially from the estimated amount.

In addition, the Company has agreed to use commercially reasonable
efforts to assist COPI in arranging COPI's repayment of its $15,000 obligation
to Bank of America, together with any accrued interest. COPI obtained the loan
primarily to participate in investments with the Company. At the time COPI
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 the Company, enter into a support agreement with COPI
and Bank of America, pursuant to which they agreed to make additional equity
investments in COPI if COPI defaulted on payment obligations under its line of
credit with Bank of America and the net proceeds of an offering of COPI
securities were insufficient to allow COPI to pay Bank of America in full. The
Company believes, based on advice of counsel, that the support agreement should
be unenforceable in a COPI bankruptcy. 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.

The Company holds a first lien security interest in COPI's entire
membership interest in Americold Logistics. REIT rules prohibit the Company from
acquiring or owning the membership interest that COPI owns in Americold
Logistics. Under the Agreement, the Company agreed to allow COPI 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. In addition, the
Company has agreed to form and capitalize a separate entity to be owned by the
Company's shareholders, and to cause the new entity to commit to acquire COPI's
entire membership interest in the tenant for approximately $15,500. Under the
Agreement, COPI has agreed that it will use the proceeds of the sale of the
membership interest to repay Bank of America in full.

Completion and effectiveness of the plan of reorganization for COPI is
contingent upon a number of conditions, including the vote of COPI's
stockholders, the approval of the plan by certain of COPI's creditors and the
approval of the bankruptcy court.

The following Unaudited Condensed Consolidated Pro Forma Financial
Statements are based upon the historical financial statements of the Company and
of the assets being transferred to the Company from COPI under the Agreement.
The Unaudited Condensed Consolidated Pro Forma Balance Sheet as of December 31,
2001 is presented as if principal transactions contemplated by the Agreement had
been completed on December 31, 2001. The Unaudited Condensed Consolidated Pro
Forma Statements of Operations for the years ended December 31, 2001 and 2000
are presented as if these transactions had occurred as of the beginning of the
respective periods.

The Unaudited Condensed Consolidated Pro Forma Financial Statements
have been prepared based on a number of assumptions, estimates and uncertainties
including, but not limited to, estimates of the fair values of assets received
and liabilities assumed and estimated transaction costs. As a result of these
assumptions, estimates and uncertainties, the accompanying Unaudited Condensed
Consolidated Pro Forma Financial Statements do not purport to predict the actual
financial condition as of December 31, 2001 or results of operations that would
have been achieved had the principal transactions contemplated by the Agreement
had been completed as of January 1, 2001 or 2000.

98

UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET

UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS

(1) Represents earnings per share for income before extraordinary item and
cumulative effect of change in accounting principle.

The unaudited pro forma condensed consolidated balance sheet combines
the Company's consolidated historical balance sheet for the year ended December
31, 2001 with the following adjustments:

o Reflects the inclusion of the assets and liabilities of the
eight Hotel/Resort Properties as of December 31, 2001;

o Eliminates the eight Hotel/Resort Properties' initial working
capital receivable on the Company's balance sheet with the
offsetting net working capital payable;

o Adjusts the historical balance sheet to consolidate the
balance sheets of Desert Mountain Development Corporation
("DMDC"), The Woodlands Land Company ("TWLC"), other entities,
and COPI Colorado (which, as the owner of 100% of the voting
stock of Crescent Resort Development, Inc. ("CRD"),
consolidates the balance of CRD) as a result of the Company's
retention of voting stock of DMDC, TWLC and other entities,
and the Company's retention of the 60% general partnership
interest in COPI Colorado.

o Eliminates the Company's equity investment in the historical
December 31, 2001 balance sheet for DMDC, TWLC, CRD and other
entities;

99

o Eliminates the intercompany loans and associated accrued
interest and capitalized interest between the Company and
DMDC, CRD and other entities;

o Reflects the Company's capitalization of a new entity to be
owned by shareholders that will be committed to acquire COPI's
membership interest in AmeriCold Logistics; and

o Reflects the issuance of $5,000 of the Company's shares to
COPI stockholders.

The unaudited pro forma condensed consolidated operating results
combine the Company's consolidated historical statements of operations for the
years ended December 31, 2001 and 2000 with the following adjustments:

o Excludes the $92,782 impairment and other charges related to
COPI as contained in the Company's historical 2001
consolidated statement of operations, as it's deemed
non-recurring;

o Includes the operating results for the eight Hotel/Resort
Properties after deducting the amount of the lessee rent
payments due under the respective leases;

o Eliminates hotel lessees' rent expense to the Company and
the Company's rental revenue from the hotel lessees;

o Reflects the consolidation of the operations of DMDC, TWLC,
other entities and COPI Colorado with the Company's historical
Statement of Operations, as a result of the Company's
retention of voting stock for DMDC, TWLC, and other entities
and the Company's retention of the 60% general partnership
interest in COPI Colorado;

o Eliminates the Company's historical equity in net income for
DMDC, TWLC, CRD and other entities;

o Eliminates intercompany interest expense on the loans from the
Company to DMDC and CRD;

o Reflects income tax benefit for the hotel business, calculated
as 40% of the net loss for the hotel lessees; and

o Reflects the additional shares issued to COPI shareholders,
valued at $5,000, using the Company's current share price of
$17.91.

100

SCHEDULE III

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(dollars in thousands)

101

SCHEDULE III

102

SCHEDULE III

(1) Depreciation of the real estate assets is calculated over the following
estimated useful lives using the straight-line method:

Building and improvements 5 to 40 years
Tenant improvements Terms of leases
Furniture, fixtures, and equipment 3 to 5 years

(2) During the year ended December 31, 2001, The Woodlands Office Equities - '95
Limited, owned by the Company and the Woodlands Commercial Properties
Company, L.P., sold three of The Woodlands Office Properties.

(3) On July 30, 2001, the Company entered into joint venture arrangements with
GE for these Office Properties. The gross amount at which land is carried
for Four Westlake Park includes $3,910 of land, which was not joint
ventured.

(4) Depreciation on behavioral healthcare properties held for sale ceased from
11/11/99 through 12/31/01 (the period over which these properties were held
for sale).

(5) These Office Properties were sold on September 18, 2001.

103

A summary of combined real estate investments and accumulated
depreciation is as follows:

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

PART III

Certain information Part III requires is omitted from the Report. The
Registrant will file a definitive proxy statement with the SEC pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information to be included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement which specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.

ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2002.

104

ITEM 11. EXECUTIVE COMPENSATION

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2002.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

Report of Independent Public Accountants

Crescent Real Estate Equities Company Consolidated Balance Sheets at
December 31, 2001 and 2000.

Crescent Real Estate Equities Company Consolidated Statements of
Operations for the years ended December 31, 2001, 2000 and 1999.

Crescent Real Estate Equities Company Consolidated Statements of
Shareholders' Equity for the years ended December 31, 2001, 2000 and
1999.

Crescent Real Estate Equities Company Consolidated Statements of Cash
Flows for the years ended December 31, 2001, 2000 and 1999.

Crescent Real Estate Equities Company Notes to Financial Statements.

(a)(2) Financial Statement Schedules

Schedule III - Crescent Real Estate Equities Company Consolidated Real
Estate Investments and Accumulated Depreciation at December 31, 2001.

All other schedules have been omitted either because they are not
applicable or because the required information has been disclosed in
the Financial Statements and related notes included in the consolidated
statements.

105

106

107

(b) Reports on Form 8-K

None

(c) Exhibits

See Item 14(a)(3) above.

108

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 13th day of
March, 2002.

CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)

By /s/ John C. Goff
---------------------------------------------
John C. Goff
Trust Manager and Chief Executive Officer

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.

109

EXHIBIT INDEX