CRESCENT REAL ESTATE EQUITIES CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED JUNE 30, 2002
COMMISSION FILE NO. 1-13038

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

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

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

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

Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of August 7, 2002.

Series A Preferred Shares, par value $.01 per share: 10,800,000
Series B Preferred Shares, par value $.01 per share: 3,400,000
Common Shares, par value $.01 per share: 103,787,698

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

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 report) and (2) has been subject to such filing
requirements for the past ninety (90) days.

YES X NO
--- ---

CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS

1

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

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

2

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.

3

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENT
OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)

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

4

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

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

5

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO 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 June 30,
2002 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 consolidated
subsidiaries of the Company that owned or had interest in real estate assets
(the "Properties") and the properties that each subsidiary owned or had an
interest in as of June 30, 2002.

Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties), Houston
Center (three office properties) and The
Park Shops at Houston Center. These
Properties are included in the Company's
Office Segment.

Joint Venture assets, consolidated - 301
Congress Avenue (50% interest) and The
Woodlands Office Properties (85.6% interest)
(six office properties). These Properties
are included in the Company's Office
Segment.

Joint Venture assets, unconsolidated - Bank
One Center (50% interest), Bank One Tower
(20% interest) and Four Westlake Park (20%
interest). These Properties are included in
the Company's Office Segment. Currently
under construction is the 5 Houston Center
office property (25% interest), which will
be included in the Company's Office Segment
when construction is complete.

Equity Investments - Mira Vista (94%
interest), The Highlands (11.6% interest),
Falcon Point (94% interest), Falcon Landing
(94% interest) and Spring Lakes (94%
interest). These Properties are included in
the Company's Residential Development
Segment.

6

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

Crescent TRS Holding Equity Investments - Desert Mountain
Corp. (93% interest) and The Woodlands (42.5%
interest). These Properties are included in
the Company's Residential Development Segment.

COPI Colorado, L.P. Equity Investments - Bear Paw Lodge (60%
interest), Eagle Ranch (60% interest), Main
Street Junction (30% interest), Main Street
Station (30% interest), Main Street Station
Vacation Club (30% interest), Riverbend (60%
interest), Three Peaks (Eagle's Nest) (30%
interest), Park Place at Riverfront (64%
interest), Park Tower at Riverfront (64%
interest), Promenade Lofts at Riverfront
(64% interest), Cresta (60% interest), Snow
Cloud (64% interest), One Vendue Range (62%
interest), Old Greenwood (71.2% interest)
and Northstar Mountain Properties (57%
interest). These Properties are included in
the Company's Residential Development
Segment.

Crescent Real Estate Wholly-owned assets - The Aberdeen, The
Funding I, L.P. Avallon I, II & III, Carter Burgess Plaza,
("Funding I") The Citadel, The Crescent Atrium, The
Crescent Office Towers, Regency Plaza One,
Waterside Commons and 125 E. John Carpenter
Freeway. These Properties are included in
the Company's Office Segment.

Crescent Real Estate Wholly owned assets - Albuquerque Plaza,
Funding II, L.P. Barton Oaks Plaza, Briargate Office and
("Funding II") Research Center, Las Colinas Plaza, Liberty
Plaza I & II, MacArthur Center I & II,
Ptarmigan Place, Stanford Corporate Center,
Two Renaissance Square and 12404 Park
Central. These Properties are included in
the Company's Office Segment. Also, the
Hyatt Regency Albuquerque and the Park Hyatt
Beaver Creek Resort & Spa, both of which are
included in the Company's Resort/Hotel
Segment

Crescent Real Estate Wholly-owned assets - Greenway Plaza Office
Funding III, IV and V, Properties (ten office properties), included
L.P. ("Funding III, IV in the Company's Office Segment, and
and V")(1) Renaissance Houston Hotel, included in the
Company's Resort/Hotel Segment.

Crescent Real Estate Wholly-owned assets - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Company's Resort/Hotel Segment.
("Funding VI")

Crescent Real Estate Wholly-owned assets - nine behavioral healthcare
Funding VII, L.P. properties, all of which are classified as Properties
("Funding VII") Held for Disposition.

Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower,
Funding VIII, L.P. Austin Centre, The Avallon V, Frost Bank Plaza,
("Funding VIII") Greenway I & IA (two office properties),
Greenway II, Palisades Central I,
Palisades Central II, Stemmons Place, Three
Westlake Park, Trammell Crow Center, 3333
Lee Parkway, 1800 West Loop South and 5050
Quorum. These Properties are included in the
Company's Office Segment. Also, Canyon Ranch
- Tucson, Omni Austin Hotel, Sonoma Mission
Inn & Spa and Ventana Inn & Spa, which are
included in the Company's Resort/Hotel
Segment.

Crescent Real Estate Wholly-owned assets - Chancellor Park, MCI Tower,
Funding IX, L.P. Miami Center, Reverchon Plaza, 44 Cook Street,
("Funding IX")(2) 55 Madison and 6225 N. 24th Street (3). These
Properties are included in the Company's Office
Segment. Also, the Denver Marriott City Center,
which is included in the Company's Resort/Hotel Segment.

Crescent Real Estate Wholly-owned assets - Fountain Place and
Funding X, L.P. Post Oak Central (three Office Properties), all of
("Funding X") which are included in the Company's Office Segment.

Crescent Spectrum Wholly-owned assets - Spectrum Center, included
Center, L.P.(4) in the Company's Office Segment.

- ----------

(1) Funding III owns nine of the ten 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 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.

(2) 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.

(3) This Office Property was sold subsequent to June 30, 2002.

(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.

7

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

See "Note 7. "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for a table that lists the Company's ownership in
significant unconsolidated subsidiaries, including joint ventures and equity
investments as of June 30, 2002.

See "Note 8. 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.

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, COPI's lessee interests in the eight Resort/Hotel
Properties leased to subsidiaries of COPI and substantially all of COPI's voting
common stock in three of the Company's Residential Development Corporations. See
"Note 16. COPI" for additional information related to the Company's agreement
with COPI.

As of June 30, 2002, Crescent SH IX, Inc. ("SH IX"), a subsidiary of
the General Partner, owned 14,468,623 common shares of beneficial interest in
Crescent Equities. See "Note 14. Shareholders' Equity - Share Repurchase
Program."

SEGMENTS

The assets and operations of the Company were divided among
four investment segments at June 30, 2002;

o the Office Segment;

o the Resort/Hotel Segment;

o the Residential Development Segment; and

o the Temperature-Controlled Logistics Segment.

The assets owned in whole or in part by the Company as of June
30, 2002 are classified within these investment segments as follows:

o OFFICE SEGMENT consisted of 64 wholly-owned office properties
(including three retail properties) and 10 office properties,
seven of which are consolidated and three of which are
unconsolidated, in which the Company has a joint venture
interest (collectively referred to as the "Office Properties")
located in 26 metropolitan submarkets in six states, with an
aggregate of approximately 28.3 million net rentable square
feet. Additionally, the Company is developing an office
property in Houston, Texas through an unconsolidated entity
that will be included in the Office Segment upon completion.

o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,771 rooms (collectively referred to as the
"Resort/Hotel Properties").

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests of 94% to 100% in five
residential development corporations (collectively referred to
as the "Residential Development Corporations"), which in turn,
through joint venture or partnership arrangements, owned in
whole or in part 22 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 real estate
investment trust, which, as of June 30, 2002, directly or
indirectly owned 89 temperature-controlled logistics
properties (collectively referred to as the

8

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

"Temperature-Controlled Logistics Properties") with an
aggregate of approximately 445.2 million cubic feet (17.7
million square feet) of warehouse space.

See "Note 6. Segment Reporting" for a table showing total revenues,
operating expenses, equity in net income (loss) of unconsolidated companies and
funds from operations for each of these investment segments for the three and
six months ended June 30, 2002 and 2001, and identifiable assets for each of
these investment segments at June 30, 2002 and December 31, 2001.

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 Quarterly Report on Form 10-Q, the
Resort/Hotel Properties, the Residential Development Properties and the
Temperature-Controlled Logistics Properties are considered three separate
reportable segments, as described above. However, for purposes of investor
communications, the Company classifies its luxury and destination fitness
resorts and spas and Residential Development Properties as a single group
referred to as the "Resort and Residential Development Sector" due to the
similar characteristics of targeted customers. This group does not contain the
four business-class hotel properties. Instead, for investor communications, the
four business-class hotel properties are classified with the
Temperature-Controlled Logistics Properties as the Company's "Investment
Sector."

BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") for interim
financial information, as well as in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the information and
footnotes required by GAAP for complete financial statements are not included.
In management's opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements are included. Operating results for interim periods
reflected do not necessarily indicate the results that may be expected for a
full fiscal year. You should read these financial statements in conjunction with
the financial statements and the accompanying notes included in the Company's
form 10-K, as amended, for the year ended December 31, 2001.

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

9

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

2. ADOPTION OF NEW ACCOUNTING STANDARDS:

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets" (effective January 1,
2002). SFAS No. 142 specifies that goodwill and certain other types of
intangible assets may no longer be amortized, but instead are subject to
periodic impairment testing. If an impairment charge is required, the charge is
reported as a change in accounting principle and is included in operating
results as a Cumulative Effect of a Change in Accounting Principle. SFAS No. 142
provides for a transitional period of up to 12 months. Any need for impairment
must be assessed within the first six months and the amount of impairment must
be determined within the next six months. Any additional impairment taken in
subsequent interim periods during 2002 related to the initial adoption of this
statement will require the first quarter financial statements to be restated.
During the three months ended March 31, 2002 the Company recognized a goodwill
impairment charge of approximately $9,200 due to the initial application of this
statement. This charge was due to an impairment (net of minority interests) of
the goodwill at the Temperature-Controlled Logistics Corporation. This charge
was reported as a change in accounting principle and was included in the
Company's consolidated statements of operations as a "Cumulative Effect of a
Change in Accounting Principle" for the three months ended March 31, 2002.
Subsequent to March 31, 2002 the Company determined that an additional
impairment charge of $1,300, net of minority interest and taxes, was required
for the goodwill at one of the Residential Development Corporations, bringing
the total impairment charge to be recognized for the six months ended June 30,
2002 to $10,500. In accordance with SFAS No. 142, the financial statements for
the quarter ended March 31, 2002 have been restated to include the additional
impairment charge of $1,300. Accordingly, the entire $10,500 impairment charge
against the goodwill of the Temperature-Controlled Logistics Corporation and one
of the Residential Development Corporations has been included in the Company's
consolidated statements of operations as a "Cumulative Effect of a Change in
Accounting Principle" for the six months ended June 30, 2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this statement did not materially affect the Company's
interim or annual financial statements; however, for the three and six months
ended June 30, 2002, financial statement presentation was modified to report the
results of operations, including any gains or losses recognized in accordance
with this statement, and the financial position of the Company's real estate
assets sold or classified as held for sale, as discontinued operations. As a
result, the Company has reclassified certain amounts in prior period financial
statements to conform with the new presentation requirements.

3. DISCONTINUED OPERATIONS:

On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." Accordingly, the results of
operations, including any gains or losses recognized in accordance with this
statement, are disclosed separately on the Company's consolidated statements of
operations for the three and six months ended June 30, 2002 and 2001 as
"Discontinued Operations - Income and Gain on Assets Sold and Held for Sale."
Similarly, the financial position of the Company's assets held for sale are
disclosed separately as "Properties Held for Disposition, Net" on the Company's
consolidated balance sheets at June 30, 2002, and December 31, 2001.
Accordingly, the 2001 financial statements have been restated to reflect the
adoption of SFAS No. 144.

OFFICE SEGMENT

On January 18, 2002, the Company completed the sale of the Cedar
Springs Plaza Office Property 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 the Cedar Springs Plaza Office Property were used primarily to
pay down the Company's line of credit. This Property was wholly-owned by the
Company and was included in the Company's Office Segment.

On May 29, 2002, the Woodlands Office Equities - '95 Limited ("WOE"),
owned by the Company and the Woodlands Commercial Properties Company, L.P. (the
"Woodlands CPC"), sold two Office Properties located within The Woodlands,
Texas. The sale generated net proceeds of approximately $3,600, of which the
Company's portion was approximately $3,200, and generated a net gain of
approximately $1,900, of which the Company's portion was

10

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

approximately $1,700. The proceeds received by the Company were used primarily
to pay down variable-rate debt. These two Properties were consolidated, joint
venture properties and were included in the Company's Office Segment.

As of June 30, 2002, the 6225 North 24th Street Office Property located
in Phoenix, Arizona was classified as held for sale. The carrying value of the
86,000 square foot Class A Office Property in the Camelback Corridor submarket
was approximately $7,457 at June 30, 2002. The Property was wholly-owned by the
Company and was included in the Company's Office Segment. See "Note 17.
Subsequent Events" for information regarding the subsequent sale of this
Property.

Also classified as held for sale as of June 30, 2002 was the Washington
Harbour Phase II Land located in the Georgetown submarket of Washington, D.C.
The 1.4 acre tract of land had previously been classified as Land Held for
Investment or Development. During the six months ended June 30, 2002, the
Company recognized an impairment charge of approximately $1,000 on this land.
After recognition of this impairment, the carrying value of the land at June 30,
2002, was approximately $14,975. The land is wholly-owned by the Company and is
included in the Company's Office Segment.

The following table indicates the revenue, rental operating expenses,
depreciation and amortization and net income (loss) for the six months ended
June 30, 2002 and 2001 and net carrying value at June 30, 2002 and 2001 of the
Office Properties sold during the six months ended June 30, 2002 and held for
sale as of June 30, 2002.

OFFICE SEGMENT

11

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

OTHER

As of June 30, 2002, the Company owned nine behavioral healthcare
properties, all of which were classified in the Company's financial statements
as "Properties Held for Disposition, Net." During the six months ended June 30,
2002, the Company recognized an impairment charge of approximately $600 on one
of the behavioral healthcare properties held for sale. This charge was
recognized in the Company's consolidated statements of operations as
"Discontinued Operations - Income and Gain on Assets Sold and Held for Sale."
The charge represents the difference between the carrying value of the property
and the estimated sales price less costs of sale. After recognition of this
impairment, the carrying value of the behavioral healthcare properties at June
30, 2002 was approximately $25,038. Depreciation expense has not been recognized
since the dates the behavioral healthcare properties were classified as held for
sale. The Company has entered into contracts or letters of intent to sell three
behavioral healthcare properties and is actively marketing for sale the
remaining six behavioral healthcare properties. The sales of these behavioral
healthcare properties are expected to close within the next year.

12

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

4. 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.

13

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares is not included in the computation of Diluted EPS for the three
and six months ended June 30, 2002 or 2001, since the effect of their conversion
would be antidilutive.

14

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

5. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS:

15

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

6. SEGMENT REPORTING:

For purposes of segment reporting as defined in SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
Company currently has four major investment segments based on property type: the
Office Segment; the Resort/Hotel Segment; the Residential Development Segment;
and the Temperature-Controlled Logistics Segment. Management utilizes this
segment structure for making operating decisions and assessing performance.

The Company uses funds from operations ("FFO") as the measure of
segment profit or loss. FFO, as used in this document, means:

o Net Income (Loss) - determined in conformity 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.

The National Association of Real Estate Investment Trusts ("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;

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; and

o 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.

16

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

Selected financial information related to each segment for the three
and six months ended June 30, 2002 and 2001, and identifiable assets for each of
the segments at June 30, 2002 and December 31, 2001 are presented below.

SELECTED FINANCIAL INFORMATION:

- ----------

Footnotes start on page 18.

17

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

SELECTED FINANCIAL INFORMATION:

- ----------

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

(2) 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.

18

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(3) Reconciliation of Funds From Operations to Net Income

- ----------

(a) These amounts primarily represent impairment of the Company's investment in
DBL Holdings, Inc., related to the Class C-1 Notes issued by Juniper CBO
1999-1 Ltd., a privately placed equity interest of a collateralized bond
obligation. (See "Note 7. Investments in Real Estate Mortgages and Equity
of Unconsolidated Companies" for further discussion).

SIGNIFICANT LESSEES

See "Note 7. 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.

19

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

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

The Company has investments of 20% to 50% in three unconsolidated joint
ventures that own three Office Properties. Additionally, the Company has an
investment of 25% in an unconsolidated joint venture that is constructing the 5
Houston Center Office Property. The Company does not have control of these
partnerships, and therefore, these investments are accounted for using the
equity method of accounting.

The Company has other unconsolidated equity investments with interests
ranging from 24% to 97.4%. The Company does not have control of these entities
due to ownership interests of 50% or less or the ownership of non-voting
interests only, and therefore, these investments are also accounted for using
the equity method of accounting.

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 joint ventures and equity investments.

- ----------

(1) The remaining 50.0% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.

(2) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Investment Management, Inc. The Company
recorded $611 in development, and leasing fees, related to this investment
during the six months ended June 30, 2002. The 5 Houston Center Office
Property is currently under construction.

(3) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership and Houston PT Four Westlake Office Limited Partnership is
owned by an affiliate of General Electric Pension Fund. The Company
recorded $321 in management and leasing fees for these Office Properties
during the six months ended June 30, 2002.

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

20

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

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

(6) 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 interests in substantially all of the voting stock in
three of the Company's Residential Development Corporations (Desert
Mountain Development Corporation ("DMDC"), The Woodlands Land Company, Inc.
("TWLC") and Crescent Resort Development, Inc. ("CRDI")), and in CRL
Investments, Inc. ("CRLI"). COPI transferred its 60% general partner
interest in COPI Colorado, L.P. which owns 10% of the voting stock in CRDI,
which increased the Company's ownership interest in CRDI from 90% to 96%.
As a result, the Company fully consolidated the operations of these
entities beginning on the date of the asset transfers. The Woodlands Land
Development Company, L.P. is an unconsolidated equity investment of TWLC.
Desert Mountain Commercial, L.L.C. and GDW, L.L.C. are unconsolidated
equity investments of DMDC (collectively, the "DM Subsidiaries"). East West
Resorts Development II, L.P., L.L.L.P., Blue River Land Company, L.L.C.,
Iron Horse Investments, L.L.C. and Manalapan Hotel Partners (collectively,
the "CRD Subsidiaries") are unconsolidated equity investments of CRDI.

(7) The remaining 57.5% interest in The Woodlands Land Development Company,
L.P., The Woodlands Commercial Properties Company (the "Woodlands CPC") and
The Woodlands Operating Company, L.P. are owned by an affiliate of
Morgan Stanley.

(8) Distributions are made to partners based on specified payout percentages.
During the six months ended June 30, 2002, the payout percentage to the
Company was 52.5%.

(9) The remaining 53.5% interest in Desert Mountain Commercial, L.L.C. is owned
by parties unrelated to the Company.

(10) Of the remaining 61.5% interest in East West Resorts Development II, L.P.,
L.L.L.P., 0.8% is indirectly owned by John Goff, Vice-Chairman of the Board
of Trust Managers and Chief Executive Officer of the Company, through his
20% ownership of COPI Colorado, L.P. and 60.7% is owned by parties
unrelated to the Company.

(11) Of the remaining 68.2% interest in Blue River Land Company, L.L.C., 0.7% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 67.5% is owned by parties unrelated to the Company.

(12) Of the remaining 72.9% interest in Iron Horse Investments, L.L.C., 0.6% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 72.3% is owned by parties unrelated to the Company.

(13) Of the remaining 76.0% interest in Manalapan Hotel Partners, 0.5% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 75.5% is owned by parties unrelated to the Company.

(14) The remaining 33.3% interest in GDW, L.L.C. is owned by a group of
individuals unrelated to the Company.

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

(16) 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 $380,
and approximately $63 in cash, or total consideration valued at
approximately $443. At June 30, 2002, Mr. Goff's book value in DBL was
approximately $402.

(17) The remaining 70% interest in CR License, L.L.C. is owned by a group of
individuals unrelated to the Company.

(18) The remaining 35% interest in Canyon Ranch Las Vegas is owned by a group of
individuals unrelated to the Company.

(19) The SunTX Fulcrum Fund, L.P. (the "Fund") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial capital
appreciation. The remaining 67% of the Fund is owned by a group of
individuals unrelated to the Company. If the Fund is able to raise the
maximum amount of proceeds from its current offerings, the Company's
ownership percentage will decline by the closing date of the Fund as
capital commitments from third parties are secured. If the Fund is able to
raise the maximum amount of proceeds from its current offerings, the
Company's projected ownership interest will be approximately 7.5% based on
the Fund Manager's expectations for the final Fund capitalization. The
Company accounts for its investment in the Fund under the cost method. The
current investment is $7,800.

SUMMARY FINANCIAL INFORMATION

The Company reports its share of income and losses based on its
ownership interest in its respective equity investments, adjusted for any
preference payments. As a result of the Company's transaction with COPI on
February 14, 2002, certain entities that were reported as unconsolidated
entities as of December 31, 2001 and for the six months ended June 30, 2001 are
consolidated in the June 30, 2002 financial statements. Additionally, certain
unconsolidated subsidiaries of the newly consolidated entities are now shown
separately as unconsolidated entities of the Company. The unconsolidated
entities that are included under the headings on the following tables are
summarized below.

Balance Sheets as of June 30, 2002:

o Other Residential Development Corporations - This includes DM
Subsidiaries, CRD Subsidiaries, MVDC and HADC. DM Subsidiaries
and CRD Subsidiaries are unconsolidated investments of DMDC and
CRDI, respectively;

o The Woodlands Land Development Company, L.P. ("TWLDC") - This is
an unconsolidated investment of TWLC;

o Temperature-Controlled Logistics ("TCL"); and

21

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

o Office - This includes Main Street Partners, L.P., Houston PT
Four Westlake Office Limited Partnership, Austin PT BK One Tower
Office Limited Partnership, Crescent 5 Houston Center, L.P., and
Woodlands CPC.

22

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

Balance Sheets as of December 31, 2001:

o Crescent Resort Development, Inc.- This entity was consolidated
beginning February 14, 2002 as a result of the COPI transaction.
Its unconsolidated investments, CRD Subsidiaries, are included
under "Other Residential Development Corporations" in the
following Balance Sheets as of June 30, 2002;

o The Woodlands Land Company, Inc. - This entity was consolidated
beginning February 14, 2002 as a result of the COPI transaction.
Its unconsolidated subsidiary is included under "The Woodlands
Land Development Company, L.P." in the following Balance Sheets
as of June 30, 2002;

o Other Residential Development Corporations - This includes DMDC,
MVDC and HADC. DMDC was consolidated beginning February 14, 2002
as a result of the COPI transaction;

o Temperature-Controlled Logistics; and

o Office - This includes Main Street Partners, L.P., Houston PT
Four Westlake Office Limited Partnership, Austin PT BK One Tower
Office Limited Partnership, Crescent 5 Houston Center, L.P. and
Woodlands CPC.

Summary Statement of Operations for the six months ended June 30, 2002:

o Other Residential Development Corporations - This includes the
operating results of DMDC and CRDI for the period January 1
through February 14, 2002; the operating results of CRD
Subsidiaries and DM Subsidiaries for the period February 15
through June 30, 2002; and the operating results of MVDC, HADC
for the six months ended June 30, 2002.

o The Woodlands Land Development Company, L.P. - This includes
TWLDC's operating results for the period February 15 through June
30, 2002 and TWLC's operating results for the period January 1
through February 14, 2002. TWLDC is an unconsolidated subsidiary
of TWLC;

o Temperature-Controlled Logistics - This includes the operating
results for TCL for the six months ended June 30, 2002; and

o Office - This includes the operating results for Main Street
Partners, L.P., Houston PT Four Westlake Office Limited
Partnership, Austin PT BK One Tower Office Limited Partnership,
Crescent 5 Houston Center, L.P. and Woodlands CPC for the six
months ended June 30, 2002.

Summary Statement of Operations for the six months ended June 30, 2001:

o Crescent Resort Development, Inc.- This includes the operating
results of CRDI for the six months ended June 30, 2001;

o The Woodlands Land Company, LP - This includes the operating
results of TWLC and TWLDC for the six months ended June 30, 2001;

o Other Residential Development Corporations - This includes the
operating results of DMDC, MVDC and HADC for the six months ended
June 30, 2001;

o Temperature-Controlled Logistics - This includes the operating
results for TCL for the six months ended June 30, 2001; and

o Office - This includes the operating results for Main Street
Partners and Woodlands CPC, for the six months ended June 30,
2001.

23

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

BALANCE SHEETS:

- ----------

24

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

- ----------

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

(2) Excludes the goodwill write-off for TCL, which is recorded on the
accompanying financial statements as a cumulative change in accounting
principle.

(3) Includes impairment of DBL-CBO of $5,200.

25

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

See "Note 8. Notes Payable and Borrowings under Fleet Facility" for the
unconsolidated debt analysis.

UNCONSOLIDATED PROPERTY DISPOSITIONS

During the six months ended June 30, 2002, the Woodlands Commercial
Properties Company, L.P., ("Woodlands CPC") sold two office properties located
within The Woodlands, Texas. The sales generated net proceeds, after the
repayment of debt, of approximately $8,900, of which the Company's portion was
approximately $4,700. The sales generated a net gain of approximately $11,700,
of which the Company's portion was approximately $6,000. The proceeds received
by the Company were used primarily for working capital purposes.

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

As of June 30, 2002, 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.

The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to a 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.

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 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 $146,000, the adjustment of the rental obligation for 2002 to
$150,000 (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 $5,000 to $9,500 (effective January 1,
2000) and the extension of the date on which deferred rent is required to be
paid to December 31, 2003.

In December 2001, the Temperature Controlled Logistics Corporation
waived its right to collect $39,800 (the Company's share of which was $15,900)
of the total $49,900 of deferred rent. The Temperature-Controlled Logistics
Corporation and the Company began to recognize rental income when earned and
collected during the year ended December 31, 2000 and continued this accounting
treatment for the year ended December 31, 2001; therefore, there was no
financial statement impact to the Temperature-Controlled Logistics Corporation
or to the Company related to the Temperature-Controlled Logistics Corporation's
decision in December 31, 2001 to waive collection of deferred rent.

AmeriCold Logistics deferred $9,300 of the total $68,900 of rent
payable for the six months ended June 30, 2002. The Company's share of the
deferred rent was $3,700. The Company recognizes rental income when earned and
collected and has not recognized the $3,700 of deferred rent in equity in net
income of the Temperature-Controlled Logistics Properties for the six months
ended June 30, 2002.

26

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

The following table shows the total, and the Company's portion of,
deferred rent and valuation allowance at December 31, 2001 and for the six
months ended June 30, 2002.

OTHER

DBL-CBO, Inc.

In March 1999, DBL-CBO, Inc., a wholly owned subsidiary of DBL
Holdings, Inc., acquired an aggregate of $6,000 in principal amount of Class C-1
Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Island limited liability
company. Juniper 1999-1 Class C-1 is the privately placed equity interest of a
collateralized bond obligation. During the six months ended June 30, 2002, the
Company recognized an impairment charge related to this investment of $5,200. As
a result of this impairment charge, at June 30, 2002 this investment was valued
at $0.

27

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

UNCONSOLIDATED DEBT ANALYSIS

The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of June 30, 2002 are shown below.

- ----------

(1) Consists of several notes. Maturity date is based on largest debt
instrument representing 94% of debt balance. All interest rates are
fixed.

(2) Consists of two notes: Senior Note - variable interest rate at LIBOR +
189 basis points with no LIBOR floor. Mezzanine Note - variable
interest rate at LIBOR + 890 basis points with a LIBOR floor of 3.0%.
Interest-rate cap agreement maximum LIBOR of 4.52% on both notes.

(3) The Company obtained a Letter of Credit to guarantee the repayment of
up to $4.3 million of principal of the Main Street Partners, L.P. loan.

(4) A full and unconditional guarantee of loan from Fleet for the
Construction of 5 Houston Center is held by the Company. At June 30,
2002 and December 31, 2001, $33.8 million and $4.9 million was
outstanding, respectively.

(5) On February 14, 2002, The Company executed an agreement with COPI to
transfer, in lieu of foreclosure, COPI's 5% interest in Woodlands Land
Development Company.

(6) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $145.0
million to a maximum LIBOR rate of 9.0%.

(7) To mitigate interest rate exposure, WLDC has entered into an interest
rate swap against $50.0 million notional amount to effectively fix the
interest rate at 5.28%. WLDC has also entered into an interest rate
swap against $50.0 million notional amount to effectively fix the
interest rate at 4.855%.

(8) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $33.8
million to a maximum LIBOR rate of 9.0%.

(9) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $19.5
million to a maximum LIBOR rate of 8.5%.

(10) The Company guarantees $3.0 million of this facility.

28

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

The following table shows, as of June 30, 2002, information about the
Company's share of unconsolidated fixed and variable-rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.

- ----------

(1) Based on contractual maturities.

Listed below are the Company's share of aggregate principal payments,
by year, required as of June 30, 2002 related to the Company's unconsolidated
debt. Scheduled principal installments and amounts due at maturity are
included.(1)

(1) These amounts do not represent the effect of two one-year extension options
on two of The Woodlands Fleet National Bank loans, totaling $99,200 that
have initial maturity dates of November, 2002 and October, 2003.

29

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8. NOTES PAYABLE AND BORROWINGS UNDER FLEET FACILITY:

The following is a summary of the Company's debt financing at June 30,
2002:

30

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

- ----------

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

(2) 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 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.

(3) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine note.
The notes are due May 2004 and bear interest at the 30-day LIBOR rate plus
a spread of (i) 164.7 basis points for the CMBS note (at June 30, 2002, the
interest rate was 5.15%), and (ii) 600 basis points for the Mezzanine note
(at June 30, 2002, the interest rate was 9.50%). The blended rate at June
30, 2002 for the two notes was 5.84%. The notes have three-year interest
only terms and two one-year extension options, and are secured by the
Office Properties owned by Funding X and the Company's interest in Spectrum
Center. The Fleet-Mezzanine note is also secured by the Company's interests
in Funding X and Crescent Spectrum Center, L.P. and the Company's interest
in their general partner.

(4) At the end of seven years (October 2006), the interest rate will also
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.

(5) 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 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.

(6) The outstanding principal balance of this loan at maturity will be
approximately $29,100.

(7) This facility is a $50,000 line of credit secured by certain DMDC land and
improvements ("vertical facility"), club facilities ("club loan"), and
notes receivable ("warehouse facility"). The line restricts the vertical
facility and club loan to a maximum outstanding amount of $40,000 and is
subject to certain borrowing base limitations and bears interest at Prime
(at June 30, 2002, the interest rate was 4.75%). The warehouse facility
bears interest at Prime plus 100 basis points (at June 30, 2002, the
interest rate was 5.75%) and is limited to $10,000. The blended rate at
June 30, 2002 for the vertical facility and club loan and the warehouse
facility was 5.04%.

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

31

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(9) 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 by making a final payment of
$6,135.

(10) For a description of the 2009 Notes, see "Debt Offering" section below.

(11) The $400,000 Fleet Facility is an unsecured revolving line of credit to
Funding VIII and guaranteed by the Operating Partnership. Availability
under the line of credit is subject to certain covenants including total
leverage based on trailing twelve months net operating income from the
Properties, debt service coverage, specific mix of office and hotel assets
and average occupancy of Office Properties. At June 30, 2002, the Company
has the capacity to borrow up to approximately $383,700.

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

The following table shows information about the Company's consolidated
fixed and variable-rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated pay-off dates.

- ----------

(1) Including the $527,000 of hedged variable-rate debt, the percentages for
fixed-rate debt and variable-rate debt are 92% and 8%, respectively.

(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 7.89%.

(3) Based on contractual maturities. The overall weighted average maturity is
4.1 years based on the Company's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of June 30, 2002 under indebtedness of the Company. 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, as noted above.

The Company has $201,167 of secured and unsecured debt due during 2002,
consisting primarily of the Cigna Note, the Mitchell Mortgage Note, unsecured
short-term borrowings and the 2002 Notes. Borrowings under the Company's
revolving line of credit are expected to be used to repay or repurchase from
time to time the remaining $97,906 of outstanding 2002 Notes due in September
2002. In addition, borrowings under the revolving line of credit are expected to
be used to repay the $63,500 CIGNA Note due in December 2002.

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 $5,000 generally will result in a default under the
Fleet Facility and the Fleet Fund I and II Term Loan after the notice and cure
periods for the other indebtedness have passed. As of June 30, 2002, 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

32

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

the six months ended June 30, 2002, there were no circumstances that required
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. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate are: 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 X Properties (CREF X
Holdings Management, LLC, CREF X Holdings, L. P., CRE Management X, LLC); and
Spectrum Center (Spectrum Center Partners, L.P., Spectrum Mortgage Associates,
L. P., CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management,
LLC).

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375,000
in senior, unsecured notes due 2009. The notes bear interest at an annual rate
of 9.25% and were issued at 100% of issue price. The notes are callable after
April 15, 2006. Interest will be payable in cash on April 15 and October 15 of
each year, beginning October 15, 2002. The Company has filed a registration
statement with the SEC to register a similar series of notes with the SEC and to
effect an exchange offer of the registered notes for the privately placed notes.
In addition, the Company has agreed to register certain of the notes for resale
by their holders. In the event that the exchange offer or resale registration is
not completed on or before October 15, 2002, the interest rate on the notes will
increase to 9.75% and increase to 10.25% after 90 days until the exchange offer
or resale registration is completed.

The net proceeds from the offering of notes were approximately
$366,500. Approximately $309,500 of the proceeds were used to pay down amounts
outstanding under the Fleet Facility, and the remaining proceeds were used to
pay down $5,000 of short-term indebtedness and redeem approximately $52,000 of
Class A Units in Funding IX from GMAC Commercial Mortgage Corporation. See "Note
13. Sale of Preferred Equity Interests in Subsidiary" for a description of the
Class A Units in Funding IX held by GMAC Commercial Mortgage Corporation.

9. 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 changes occur. 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.

10. 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 June 30, 2002, the Company had entered into
three cash flow hedge agreements, which are accounted for in conformity with
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."

33

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table shows information regarding the Company's cash flow
hedge agreements as of June 30, 2002, additional interest expense and unrealized
gains recorded for the six months ended June 30, 2002:

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 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 SFAS No. 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
conformity with SFAS Nos. 133 and 138.

Over the next twelve months, an estimated $18,000 to $19,000 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.

CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable-rate debt to
fixed-rate debt. As of June 30, 2002, CRDI had entered into three cash flow
hedge agreements, which are accounted for in conformity with SFAS Nos. 133 and
138.

The following table shows information regarding CRDI's cash flow hedge
agreements as of June 30, 2002 and additional capitalized interest recognized
for the six months ended June 30, 2002. Unlike the additional interest on the
Company's cash flow hedges which was expensed, the additional interest on CRDI's
cash flow hedges was capitalized, as it is related to debt incurred for projects
that are currently under development.

CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges, and instead
assumes that the hedges are highly effective.

34

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

11. INCOME TAXES:

The Company intends to maintain its qualification as a REIT under
Section 856 of the U.S. Internal Revenue Code of 1986, as amended (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 REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the Federal level or in
most of the states in which it operates. Additionally, in conjunction with the
Company's agreement with COPI, the Company consolidated certain taxable REIT
subsidiaries (the "TRS"), which are subject to federal and state income tax. The
Company's $3,900 total consolidated income tax benefit at June 30, 2002 includes
tax expense related to the operations of the TRS of $2,800, offset by a tax
benefit of $6,700. The $6,700 benefit results from the temporary difference
between the financial reporting basis and the respective tax basis of the hotel
leases acquired as part of the Company's agreement with COPI. This temporary
difference will be reversed over an estimated five-year period, which is the
remaining lease term of the hotel leases. Cash paid for income taxes totaled
approximately $11,000 for the six months ended June 30, 2002.

35

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Company's total net tax asset of approximately $37,700 includes
$20,900 of net deferred tax assets and a $16,800 net current tax asset at June
30, 2002. The tax effects of each type of temporary difference that give rise to
a significant portion of the $20,900 deferred tax asset are as follows:

Deferred recognition of DMDC club membership revenue $ 26,800
Recognition of development land cost of sales at DMDC
and TWLC (10,500)
Recognition of hotel lease cost 6,700
Other (2,100)
----------
Total deferred tax asset $ 20,900
==========

The Company recognizes deferred tax assets only to the extent that it
is more likely than not that they will be realized based on consideration of
available evidence, including tax planning strategies and other factors. As of
June 30, 2002, no valuation allowances have been recorded.

The $16,800 net current tax asset results primarily from
anticipated tax refunds related to recognition of a net operating loss carryback
and 2001 overpayments of $11,700 for DMDC and cash paid for income taxes of
$11,000, offset by $5,900 current taxes payable.

12. MINORITY INTEREST:

Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership. The
limited partners ownership share is evidenced by Operating Partnership units.
The Operating Partnership pays a regular quarterly distribution to the holders
of common and preferred Operating Partnership units. Income in the real estate
partnerships is allocated to minority interest based on weighted average
percentage ownership during the year.

Each Operating Partnership 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 six months ended June 30, 2002, there were 3,287 units
exchanged for 6,574 common shares of Crescent Equities.

Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a majority (50% or greater)
controlling interest in the real estate partnerships and thus, consolidates the
accounts into the Operating Partnership. Income in the real estate partnerships
is allocated to minority interest based on weighted average percentage ownership
during the year.

13. 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 June 30, 2002, 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.

Also during the year ended December 31, 2000, GMAC Commercial Mortgage
Corporation ("GMACCM") purchased $275,000 of non-voting, redeemable preferred
Class A Units in Funding IX (the "Class A Units"). The Class A Units are
redeemable at the option of the Company at the original purchase price. As of
December 31, 2000, approximately $56,600 of the Class A Units had been redeemed
from GMACCM by the Company. No redemptions occurred during the year ended
December 31, 2001. During the six months ended June 30, 2002, the Company
redeemed approximately $187,000 of the Class A Units, reducing to $31,400 the
amount of Class A Units held by

36

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

GMACCM. The Class A Units initially received a preferred variable-rate dividend
calculated at LIBOR plus 450 basis points. Beginning March 16, 2002, the
preferred variable-rate dividend increased to LIBOR plus 550 basis points, which
resulted in a dividend rate of approximately 7.34% per annum as of June 30,
2002.

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 "Note 14. Shareholders' Equity - Share Repurchase Program." This
intracompany loan is eliminated in consolidation. The loan from Funding IX to SH
IX matures March 15, 2003 and the Company intends to repay the loan of
approximately $285,000 at or prior to that time. The repayment proceeds received
by Funding IX from SH IX will be used to redeem Class A Units up to the
outstanding amount of Class A Units.

14. SHAREHOLDERS' EQUITY:

SHARE REPURCHASE PROGRAM

The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500,000
to $800,000 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"). As of June 30, 2002, the Company had
repurchased 20,256,423 common shares, at an aggregate cost of approximately
$386,615, resulting in an average repurchase price of $19.09 per common share.

The following table shows a summary of the Company's common share
repurchases by year, as of June 30, 2002.

- ----------

(1) Additionally, 14,530 of the Company's common shares were repurchased
outside of the Share Repurchase Program as part of an executive incentive
program.

As of June 30, 2002, SH IX, a wholly-owned subsidiary of the Company,
held 14,468,623 of the Company's repurchased common shares. 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 13. Sale of Preferred Equity
Interests in Subsidiary". These common shares are consolidated as treasury
shares in conformity with GAAP. The shares are to be 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. 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.

37

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

SERIES A PREFERRED OFFERING

On April 26, 2002, the Company completed an institutional placement
(the "April 2002 Series A Preferred Offering") of an additional 2,800,000 shares
of 6 3/4% Series A Convertible Cumulative Preferred Shares (the "Series A
Preferred Shares") at an $18.00 per share price and with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of
approximately $50,400. The Series A Preferred Shares are convertible at any
time, in whole or in part, at the option of the holders thereof into common
shares of the Company at a conversion price of $40.86 per common share
(equivalent to a conversion rate of .6119 common shares per Series A Preferred
Share), subject to adjustment in certain circumstances. The Series A Preferred
Shares have no stated maturity, are not subject to sinking fund or mandatory
redemption and may not be redeemed before February 18, 2003, except in order to
preserve the Company's status as a REIT. On or after February 13, 2003, the
Series A Preferred Shares may be redeemed, at the Company's option, by paying
$25.00 per share plus any accumulated accrued and unpaid distribution. Dividends
on the Series A Preferred Shares are cumulative from the date of original
issuance and are payable quarterly in arrears on the fifteenth of February, May,
August and November, commencing May 15, 2002. The annual fixed dividend is
$1.6875 per share.

Net proceeds to the Company from the April 2002 Series A Preferred
Offering after underwriting discounts and other offering costs of approximately
$2,240 were approximately $48,160. The Company used the net proceeds to redeem
Class A Units from GMACCM.

SERIES B PREFERRED OFFERING

On May 17, 2002, the Company completed an offering (the "May 2002
Series B Preferred Offering") of 3,000,000 shares of 9.50% Series B Cumulative
Redeemable Preferred Shares (the "Series B Preferred Shares") with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of
approximately $75,000. The Series B Preferred Shares have no stated maturity,
are not subject to sinking fund or mandatory redemption, are not convertible
into any other securities of the Company and may not be redeemed before May 17,
2007, except in order to preserve the Company's status as a REIT. On or after
May 17, 2007, the Series B Preferred Shares may be redeemed, at the Company's
option, by paying $25.00 per share plus any accumulated, accrued and unpaid
distributions. Dividends on the Series B Preferred Shares are cumulative from
the date of original issuance and are payable quarterly in arrears on the
fifteenth of February, May, August and November, commencing August 15, 2002. The
annual fixed dividend is $2.375 per share.

Net proceeds to the Company from the May 2002 Series B Preferred
Offering after underwriting discounts of approximately $2,363 and other offering
costs of approximately $350 were approximately $72,287. The Company used the net
proceeds to redeem Class A Units issued by its subsidiary, Funding IX, to
GMACCM.

On June 6, 2002, an additional 400,000 Series B Preferred Shares were
sold (the "June 2002 Series B Preferred Offering") resulting in gross proceeds
to the Company of approximately $10,000. Net proceeds to the Company after
underwriting discounts of approximately $315 and other offering costs of
approximately $50 were approximately $9,635. As with the May 2002 Series B
Preferred Offering, the Company used the net proceeds to redeem Class A Units
issued by its subsidiary, Funding IX, to GMACCM.

38

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

DISTRIBUTIONS

The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the six
months ended June 30, 2002.

- ----------

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

(2) As of June 30, 2002, the Company was holding 14,468,623 of its common
shares in SH IX. These distribution amounts include $5,426 for each of the
distributions paid, or to be paid, on February 15, 2002, and May 15, 2002,
and August 15, 2002, related to these common shares. These distributions
are eliminated in consolidation.

(3) See "Series A Preferred Offering" above for a description of issuance of
additional shares.

(4) See "Series B Preferred Offering" above for a description of this offering.

15. RELATED PARTY TRANSACTIONS:

DBL HOLDINGS, INC.

As of June 30, 2002, 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 MVDC and HADC. At June 30, 2002, Mr. Goff's
book value in DBL was approximately $402.

Since June 1999, the Company has contributed approximately $23,800 to
DBL, in the form of cash and loans. These funds were 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 day-to-day operations of G2 are managed jointly by
an affiliate of GMACCM and a division of GMSP headquartered in Greenwich,
Connecticut and overseen by Hugh Balloch, a principal of GMSP who is unrelated
to the Company. The ownership structure of the entity that ultimately controls
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 June 30, 2002,
DBL had an approximately $14,500 investment in G2 and had repaid in full the
loans from the Company.

In March 1999, DBL-CBO, Inc. acquired an aggregate of $6,000 in
principal amount of Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman
Island limited liability company. Juniper 1999-1 Class C-1 is the privately
placed equity interest of a collateralized bond obligation. During the six
months ended June 30, 2002, the Company recognized an impairment charge related
to this investment of $5,200. As a result of this impairment charge, at June 30,
2002 this investment was valued at $0.

39

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

COPI COLORADO, L. P.

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 which owns 10% of the
voting stock in CRDI. As a result, the Company increased its ownership interest
in CRDI from 90% to 96%. John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, owns a 2.0% voting interest in CRDI
with a cost basis of $410, and the remaining 2.0% voting interest is owned by a
third party.

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

As of June 30, 2002, the Company had approximately $36,600 of recourse
loans outstanding (including approximately $4,100 loaned during the six months
ended June 30, 2002) to certain employees and trust managers of the Company. The
loans were made pursuant to the Company's stock incentive plans and unit
incentive plans in accordance with agreements approved by the Board of Trust
Managers 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. According 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
representing $26,300 of the $36,600 total outstanding loans at June 30, 2002.

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 loans granted during the six
months ended June 30, 2002 were granted at the Applicable Federal Rate of 2.7%,
which reflects a below prevailing market interest rate; therefore, the Company
recorded $100 of compensation expense for the six months ended June 30, 2002. As
of June 30, 2002, approximately $200 of current interest was outstanding related
to these loans. No conditions exist at June 30, 2002 which would cause any of
the loans to be in default.

See "Note 17. Subsequent Events" for a description of amendments to the
terms of these loans subsequent to June 30, 2002.

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375,000
in senior, unsecured notes due 2009, $50,000 of which were purchased by Richard
E. Rainwater, Chairman of the Board of Trust Managers of the Company, and his
affiliates and family members (the "Rainwater Group"). The notes bear interest
at 9.25% and were issued at 100% of issue price. The Company has agreed to
register the notes issued to the Rainwater Group for resale. See "Note 8. Notes
Payable and Borrowings under Fleet Facility" for additional information
regarding the offering and the notes.

OTHER

On June 28, 2002, the Company purchased and is holding for sale, the
home of an executive officer of the Company for approximately $2,650 which
approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.

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 in a spin-off, effective June 12, 1997, to those persons who
were limited partners of the Operating Partnership or shareholders of the
Company on May 30, 1997.

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 party agreed to provide the other with
rights to participate in certain transactions. The Company was not permitted to
operate or lease these assets under the tax laws in effect and applicable to
REITs at that time. In connection with the formation and capitalization of 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 previously been operated or leased by COPI.

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

40

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Properties leased to subsidiaries of COPI, substantially all of COPI's voting
interests in three of the Company's Residential Development Corporations and
other assets. 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 conformity 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 has included these assets
in its Resort/Hotel Segment and its Residential Development Segment, and fully
consolidated the operations of the eight Resort/Hotel Properties and the three
Residential Development Corporations, beginning on the date of the transfers of
these assets.

The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. 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
between approximately $5,000 to $8,000. 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 $15,000 obligation
to Bank of America, together with any accrued interest. The Company expects to
form and capitalize a new entity ("Crescent Spinco"), to be owned by the
shareholders of the Company. Crescent Spinco then would purchase COPI's interest
in AmeriCold Logistics for between $15,000 and $15,500. Crescent Operating has
agreed that it will use the proceeds of the sale of the AmeriCold Logistics
interest to repay Bank of America in full.

COPI obtained the loan from Bank of America 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 of Trust Managers of the Company, and John C. Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, enter into a support agreement with COPI and Bank of America. Pursuant
to the support agreement, Mssrs. Rainwater and Goff agreed to make additional
equity investments in COPI if COPI defaulted on payment obligations under its
line of credit with Bank of America and if the net proceeds of an offering of
COPI securities were insufficient to allow COPI to repay Bank of America in
full. Effective December 31, 2001, the parties executed an amendment to the line
of credit providing that any defaults existing under the line of credit on or
before March 8, 2002 are temporarily cured unless and until a new default shall
occur.

Completion and effectiveness of the pre-packaged bankruptcy 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.

41

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

17. SUBSEQUENT EVENTS

OFFICE PROPERTY DISPOSITION

On August 1, 2002, the Company completed the sale of the 6225 North
24th Street Office Property in Phoenix, Arizona. The sale generated net proceeds
of approximately $9,000 and a net gain of approximately $1,300. The proceeds
from the sale of the 6225 North 24th Street Office Property were used to redeem
Class A Units from GMACCM. This Office Property was wholly-owned by the Company
and was included in the Company's Office Segment.

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

On July 29, 2002, the loans made pursuant to the Company's stock
incentive plans and unit incentive plans were amended to extend the remaining
terms of the loans until July 2012 and to stipulate that every three years the
interest rate on the loans will be adjusted to the AFR applicable at that time
for a three year loan. Additionally, the employees and trust managers have been
given the option, at any time, to fix the interest rate for each of the loans to
the AFR applicable at that time for a loan with a term equal to the remaining
term of the loan. The Company estimates that the one-time compensation expense
related to these amendments to the loans is approximately $1,800. Effective July
29, 2002, the Company will no longer make available to its employees and
directors loans pursuant to the Company's stock and unit incentive plans.

42

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in "Item 1. Financial
Statements" of this document and the more detailed information contained in the
Company's Form 10-K for the year ended December 31, 2001. In management's
opinion, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation of the unaudited interim financial
statements are included. Capitalized terms used but not otherwise defined in
this section, have the meanings given to them in the notes to the financial
statements in "Item 1. Financial Statements."

This Form 10-Q 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 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 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 Financing risks, such as the Company's ability to generate revenue
sufficient to service and repay existing or additional debt, increases in
debt service associated with increased debt and with variable-rate debt,
the ability to meet financial covenants and the ability to fund the share
repurchase program and the ability to consummate financings and
refinancings on favorable terms and within any applicable time frames;

o The inability of the Company to obtain the confirmation of a pre-packaged
bankruptcy plan of COPI binding all creditors and stockholders;

o The inability of the Company to complete the distribution to its
shareholders of the shares of a new entity to purchase the AmeriCold tenant
interest from COPI;

o Further or continued 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
the Company's tenant to pay all current and deferred rent due to the
Company);

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;

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.

43

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table shows the Company's financial data as a percentage
of total revenues for the three and six months ended June 30, 2002 and 2001 and
the variance in dollars between the three and six months ended June 30, 2002 and
2001. See "Note 6. Segment Reporting" included in "Item 1. Financial Statements"
for financial information about the investment segments.

44

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 TO THE THREE MONTHS ENDED
JUNE 30, 2001

Revenue

Total revenues increased $92.7 million, or 49.0%, to $281.9 million for
the quarter ended June 30, 2002, as compared to $189.2 million for the quarter
ended June 30, 2001. The components of the increase are:

o an increase in Residential Development Property Revenue of
$85.0 million due to the consolidation of three Residential
Development Corporations beginning on February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property revenue of $37.4 million
due to the consolidation of the operations of eight of the
Resort/Hotel Properties beginning on February 14, 2002, as a
result of the COPI transaction (previously the Company
recognized lease payments related to these Properties);
partially offset by

o a decrease in interest and other income of $15.8 million
primarily attributable to:

o the collection of $5.0 million from Charter
Behavioral Healthcare Systems, LLC ("CBHS") in 2001
on a working capital loan that was previously
expensed in conjunction with the recapitalization of
CBHS;

o gain recognized on marketable securities of $6.0
million; and

o development fee and lease commission revenue from
Five Houston Center Office Property of $1.7 million
received in the second quarter 2001; and

o a decrease in Office Property revenue of $13.9 million
primarily due to the disposition of five Office Properties in
2001 and the contribution of two Office Properties to joint
ventures in 2001.

Expense

Total expense increased $105.4 million, or 63.3%, to $271.8 million for
the three months ended June 30, 2002, as compared to $166.4 million for the
three months ended June 30, 2001. The primary components of this increase are:

o an increase in Residential Development Property expense of
$77.0 million due to the consolidation of three Residential
Development Corporations beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property expense of $42.2 million
due to the consolidation of the operations of eight of the
Resort/Hotel Properties beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recognized lease payments related to these Properties);
partially offset by

o a decrease due to the recognition in the second quarter of
2001 of $13.2 million due to the impairment charges relating
to the behavioral healthcare properties of $1.2 million and
the impairment of $12.0 million relating to the conversion of
the Company's preferred

45

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

interest in Metropolitan Partners, LLC into common shares of
Reckson Associates Realty Corp.; and

o a decrease in Office Property Operating expense of $4.0
million primarily due to the disposition of five Office
Properties in 2001 and the contribution of two Office
Properties to joint ventures in 2001.

Other Income and Expense

Other income decreased $4.5 million, or 39.8%, to $6.8 million for the
three months ended June 30, 2002, as compared to $11.3 million for the three
months ended June 30, 2001, as a result of:

o a decrease in equity in net income of unconsolidated companies
of $5.2 million, primarily due to the consolidation of three
Residential Development Corporations beginning February 14,
2002, as a result of the COPI transaction (previously the
Company recorded its interests in the Residential Development
Corporations under the equity method); partially offset by

o an increase due to the recognition in 2001 of a $0.7 million
loss on property sales.

Income Tax Expense

The Company recognized consolidated income tax expense of $0.4 million
for the three months ended June 30, 2002, primarily related to Resort/Hotel and
Residential Development operations. Because these operations were not
consolidated for the three months ended June 30, 2001, no consolidated income
tax expense was recognized for that period.

Discontinued Operations

The income from discontinued operations from assets sold and held for
sale increased $0.5 million, or 500.0%, to $0.6 million for the three months
ended June 30, 2002, compared to $0.1 million for the three months ended June
30, 2001. This increase is primarily due to:

o a gain on disposals of $1.7 million, net of minority interest,
primarily due to the sale of two consolidated Office
Properties in the Woodlands in the second quarter 2002;
partially offset by

o an impairment charge of $1.0 million in the second quarter
2002, related to the Washington Harbour II land held for sale,
representing the difference between the carrying value and the
estimated sales price less costs of the sale for this land.

Extraordinary Item

In May 2001, $10.8 million of deferred financing costs were written-off
due to the early extinguishment of the Company's credit facility with UBS. The
recognition of the write-off was treated as an Extraordinary Item for the three
months ended June 30, 2001. No such event or write-off occurred during the three
months ended June 30, 2002.

46

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SEGMENT ANALYSIS

Office Segment

The components of the decrease in Office Property revenues are as
follows:

o decreased revenue of $12.3 million due to the disposition of
five Office Properties in 2001 and the contribution of two
Office Properties to joint ventures in 2001; and

o decreased other revenue of $1.7 million primarily related to a
decrease in lease termination fees.

The primary components of the decrease in Office Property operating
expense are as follows:

o decreased expenses of $4.4 million due to the disposition of
five Office Properties in 2001 and the contribution of two
Office Properties to joint ventures in 2001; and

o decreased office property utility expense of $3.3 million due
to lower rates as a result of a one-year energy contract
effective beginning in first quarter of 2002 for certain Texas
Properties; partially offset by

o increased operating expenses of $3.7 million attributable to
security, insurance and the timing of repairs and maintenance.

Resort/Hotel Segment

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. The financial statements reflect the consolidation of
the operations for these eight Resort/Hotel Properties for the period February
14, 2002 through June 30, 2002. Revenues prior to February 14, 2002 represent
lease payments to the Company.

The decrease in Resort/Hotel Property net operating income is
primarily due to the consolidation of the operations of eight of the Resort
Hotel Properties in 2002 as compared to the recognition of lease payments from
these Properties in 2001. In addition net operating income decreased as a result
of the following:

o decreases in occupancy from 65% to 63% and revenue per
available room from $304 to $280 (7.9% decrease) at the luxury
and destination fitness resorts and spas.

47

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Residential Development Segment

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: TWLC, DMDC and CRDI. The Company fully consolidated the operations
of the three Residential Development Corporations beginning on the dates of the
asset transfers.

The primary components of the decrease in Residential Development
Property net operating income are:

o lower lot and commercial land sales of $5.0 million at the
Woodlands Land Company; and

o a change in presentation of capitalized interest of $2.6
million, due to consolidation of DMDC and CRDI; partially
offset by

o higher lot and unit sales of $6.9 million at CRDI and DMDC.

48

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Temperature-Controlled Logistics Segment

The decrease in equity in earnings of unconsolidated
Temperature-Controlled Logistics Properties is primarily due to the Company's
$2.5 million portion of deferred rent recorded in the second quarter of 2002
compared with the Company's $1.5 million portion of deferred rent recorded in
the second quarter of 2001, and $1.0 million related to the change in base rent
recognition from straight-line to seasonal for the year.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE
30, 2001

Revenues

Total revenues increased $147.2 million, or 40.1%, to $514.2 million
for the six months ended June 30, 2002, as compared to $367.0 million for the
six months ended June 30, 2001. The components of the increase are:

o an increase in Residential Development Property Revenue of
$133.1 million due to the consolidation of three Residential
Development Corporations beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property revenue of $59.9 million
due to the consolidation of the operations of eight of the
Resort/Hotel Properties beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recognized lease payments related to these Properties);
partially offset by

o a decrease in Office Property revenue of $23.2 million
primarily due to the disposition of five Office Properties in
2001 and the contribution of two Office Properties to joint
ventures in 2001; and

o a decrease in interest and other income of $22.6 million,
primarily due to:

o the collection of $6.8 million from CBHS in 2001 on a
working capital loan that was previously expensed in
conjunction with the recapitalization of CBHS;

o gain recognized on the sale of marketable securities
of $6.5 million in the second quarter of 2001;

o the recognition in 2001 of $2.8 million of interest
income on COPI notes;

o the recognition in 2001 of $1.8 million in lease
commission and development fee revenue for Five
Houston Center Office Property; and

o a decrease in interest income of $1.5 million in 2002
related to lower escrow balances due to plaza
renovations at an Office Property.

49

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Expense

Total expense increased $168.6 million, or 52.7%, to $488.6 million for
the six months ended June 30, 2002, as compared to $320.0 million for the six
months ended June 30, 2001. The primary components of this increase are:

o an increase in Residential Development Property expense of
$119.2 million due to the consolidation of three Residential
Development Corporations beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property expense of $66.1 million
due to the consolidation of the operations of eight of the
Resort/Hotel Properties beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recognized lease payments related to these Properties);
partially offset by

o a decrease due to the recognition in 2001 of $15.3 million
primarily due to impairment charges relating to behavioral
healthcare properties of $3.4 million and the impairment of
$12.0 million relating to the conversion of the Company's
preferred interest in Metropolitan Partners, LLC into common
shares of Reckson Associates Realty Corp.;

o a decrease in interest expense of $5.6 million primarily
attributable to a decrease in the weighted average interest
rate of 38 basis points (from 8.07% to 7.69%), or $4.5 million
of interest expense, due to the debt refinancing in May of
2001 and lower LIBOR rates, and a decrease of $2.6 million
attributable to a higher capitalized interest amount in 2002,
partially offset by an increase of $1.0 million due to a $21.0
million increase in the average debt balance, from $2,398
million to $2,419 million; and

o a decrease in Office Property operating expense of $4.4
million primarily due to the disposition of five Office
Properties in 2001 and the contribution of two Office
Properties to joint ventures in 2001.

Other Income and Expense

Other income decreased $11.7 million, or 41.9%, to $16.2 million for
the six months ended June 30, 2002, as compared to $27.9 million for the six
months ended June 30, 2001, primarily as a result of a decrease in equity in net
income of unconsolidated companies of $12.1 million, primarily due to the $5.2
million impairment of an investment in DBL Holdings, Inc., and the Company's
additional $2.1 million portion of Americold Logistics' deferral of rent payable
and the consolidation of three Residential Development Corporations beginning
February 14, 2002, as a result of the COPI transaction (previously the Company
recorded its investment in the Residential Development Corporations under the
equity method).

Income Tax Benefit

The Company's $3.9 million total consolidated income tax expense for
the six months ended June 30, 2002 includes tax expense related to the
operations of the Resort/Hotel and Residential Development Operations of $2.8
million, offset by a tax benefit of $6.7 million. The $6.7 million benefit
results from the temporary difference between the financial reporting basis and
the respective tax basis of the hotel leases acquired as part of the Company's
agreement with COPI. This temporary difference will be reversed over an
estimated five-year period, which is the remaining lease term of the hotel
leases.

50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Discontinued Operations

The income from discontinued operations from assets held for sale
increased $3.6 million, or 1,800%, to $3.8 million for the six months ended June
30, 2002, compared to $0.2 million for the six months ended June 30, 2001. This
increase is primarily due to:

o a gain on disposals of $6.2 million, net of minority interest,
attributable to the sales of the Cedar Springs Plaza Office
Property and two Office Properties in the Woodlands in 2002;
partially offset by

o an impairment charge of $1.0 million in 2002, related to land
held for development, now classified as held for sale. This
amount represents the difference between the carrying value
and the estimated sales price less costs of the sale for this
property.

Cumulative Effect of a Change in Accounting Principle

In conjunction with the implementation of SFAS No. 142, "Goodwill and
Other Intangible Assets," the Company reported a cumulative effect of a change
in accounting principle for the six months ended June 30, 2002, which resulted
in a charge of $10.5 million. This charge is due to an impairment (net of
minority interests and taxes) of the goodwill of the Temperature-Controlled
Logistics Corporation and Crescent Resort Development, Inc. No such impairment
charge was recognized for the six months ended June 30, 2001.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this statement did not materially affect the Company's
interim or annual financial statements; however, for the three and six months
ended June 30, 2002, financial statement presentation was modified to report the
results of operations, including any gains or losses recognized in accordance
with this statement, and the financial position of the Company's real estate
assets sold or classified as held for sale, as discontinued operations. As a
result, the Company has reclassified certain amounts in prior period financial
statements to conform with the new presentation requirements.

Extraordinary Item

In May 2001, $10.8 million of deferred financing costs were written off
due to the early extinguishment of the Company's credit facility with UBS. The
recognition of the write-off was treated as an Extraordinary Item for the six
months ended June 30, 2001. No such event or write-off occurred during the six
months ended June 30, 2002.

SEGMENT ANALYSIS

Office Segment

51

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The primary components of the decrease in Office Property revenue are
as follows:

o decreased revenue of $24.5 million due to the disposition of five Office
Properties in 2001 and the contribution of two Office Properties to joint
ventures in 2001; and

o decreased other revenue of $1.2 million primarily related to a decrease in
lease termination fees; partially offset by

o increased revenue of $2.5 million primarily as a result of increased
full-service weighted average rental rates attributable to renewals at the
Houston Center Office Property.

The primary components of the decrease in Office Property operating
expense are as follows:

o decreased expenses of $8.7 million due to the disposition of five Office
Properties in 2001 and the contribution of two Office Properties to joint
ventures in 2001; and

o decreased office property utility expense of $6.3 million due to lower
rates as a result of a one-year energy contract effective beginning in
first quarter of 2002 for certain Texas Properties; partially offset by

o increased operating expenses of $5.0 million attributable to security and
insurance and $5.3 million attributable to the timing of repairs and
maintenance and increased administrative expenses.

52

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Resort/Hotel Segment

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. The financial statements reflect the consolidation of
the operations for these eight Resort/Hotel Properties for the period February
14, 2002 through June 30, 2002. Revenues prior to February 14, 2002 represent
lease payments to the Company.

The decrease in Resort/Hotel Property is primarily due to the
consolidation of the operations of eight of the Resort/Hotel Properties in 2002
as compared to the recognition of lease payments from these Properties in 2001.
In addition, net operating income decreased as a result of the following:

o decreases in occupancy from 72% to 69% and decreases in revenue per
available room from $349 to $329 (5.7% decrease) at the luxury and
destination fitness resorts and spas; and

o decreases in occupancy from 72% to 70%, and revenue per available
room from $88 to $82 (6.8% decrease) at the business-class hotels.

Residential Development Segment

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: TWLC, DMDC and CRDI. The Company fully consolidated the operations
of the three Residential Development Corporations beginning on the dates of the
asset transfers.

53

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The primary components of the increase in Residential Development
Property net operating income are:

o higher lot and unit sales of $6.9 million at CRDI and Desert
Mountain and $0.7 million due to the gain recognized on the
disposition of two properties at the Woodlands; offset by
lower lot and commercial land sales at the Woodlands Land
Company; and

o change in presentation of capitalized interest of $3.9
million, due to the consolidation of DMDC and CRDI.

Temperature-Controlled Logistics Segment

This decrease in equity in earning of unconsolidated
Temperature-Controlled Logistics Properties is primarily due to the Company's
$3.7 million portion of the deferred rent in the first half of 2002 compared
with the Company's $1.5 million portion of deferred rent in the first half of
2001, and $1.0 million related to the change in base rent recognition from
straight-line to seasonal for the year.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Operating Activities

The Company's cash provided by operating activities of $103.7 million
is attributable to Property operations.

54

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Investing Activities

The Company's cash used in investing activities of $1.6 million is
primarily attributable to:

o $25.0 million of additional investment in unconsolidated
companies, consisting primarily of investments in the
upscale Residential Development Properties, particularly
related to CRDI's investment in the Tahoe Mountain Resorts
from January 1 through February 14, 2002;

o $18.0 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 $18.0 million for incremental and non-incremental revenue
generating tenant improvement and leasing costs for office
properties;

o $8.4 million for acquisition of rental properties; and

o $1.2 million for development of investment properties.

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

o $38.2 million in cash resulting from the Company's February
14, 2002 transaction with COPI;

o $20.4 million of net sales proceeds primarily attributable
to the disposition of the Cedar Springs Office Property and
Woodlands Office Equities-95 Limited's ("WOE") sale of two
Office Properties; and

o $8.3 million from return of investment in unconsolidated
Residential Development Properties and Office Properties.

Financing Activities

The Company's use of cash for financing activities of $70.8 million is
primarily attributable to:

o net payments under the Fleet Facility of $256.5 million;

o purchases from GMACCM of preferred interests in a subsidiary
of the Company of $187 million;

o a decrease in notes payable of $99.3 million;

o distributions to common shareholders and unitholders of
$88.7 million;

o common share repurchase of $28.5 million;

o $10.0 million of deferred financing costs for $375 million
senior, unsecured notes;

o distributions to preferred shareholders of $8.6 million; and

o net capital distributions to joint venture partners of $7.6
million, primarily due to distributions to joint venture
preferred equity partners.

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

o gross proceeds of $375.0 from issuance of senior, unsecured
notes;

o net proceeds of $81.9 from offering of Series B preferred
shares;

o net proceeds of $48.2 from offering of Series A preferred
shares; and

o borrowings under the Fleet Facility of $110 million.

55

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

LIQUIDITY REQUIREMENTS

As of June 30, 2002, the Company had unfunded capital expenditures of
approximately $42.1 million relating to capital investments. The table below
specifies the Company's total capital expenditures relating to these projects,
amounts funded as of June 30, 2002, amounts remaining to be funded, and
short-term and long-term capital requirements.

- ----------

(1) All amounts are approximate.

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

(3) Includes development at Old Greenwood and Northstar Mountain properties.

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

(5) 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 AmeriCold Logistics.

The Company expects to fund its short-term capital requirements of
approximately $34.9 million through a combination of cash, net cash flow from
operations, construction financing return of capital (investment) from the
Residential Development Corporations and borrowings under the Fleet Facility (up
to $247.4 million of availability as of June 30, 2002). The Company plans to
meet its maturing debt obligations during 2002 of approximately $201.2 million,
primarily through additional borrowings under the Fleet Facility.

The Company expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, regular debt
service requirements (including debt service relating to additional and
replacement debt), additional interest expense related to the cash flow hedge
agreements, recurring capital expenditures, non-recurring capital expenditures,
such as tenant improvement and leasing costs, distributions to shareholders and
unitholders, and additional expenses related to the COPI bankruptcy of
approximately $9.9 million, 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
the sale or joint venture of Properties and borrowings under the Fleet Facility.

The Company expects to redeem the remaining approximately $31.4 million
of Class A Units in Funding IX, as of June 30, 2002, with the proceeds from the
sale or joint venture of Properties. In August 2002, the Company redeemed
approximately $8.9 million of Class A Units with proceeds from the sale of 6225
North 24th Street Office Property. The Company also intends to repay the
intracompany loan of approximately $285.0 million from Funding IX to SH IX at or
prior to maturity on March 15, 2003.

56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The Company's long-term liquidity requirements as of June 30, 2002
consist primarily of debt maturities after December 31, 2002, which totaled
approximately $2.3 billion as of June 30, 2002. The Company also has $7.2
million of long-term capital requirements. 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 the sale or joint venture of Properties.

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 Fleet Facility, under which the Company
had up to $247.4 million of borrowing capacity as of June 30, 2002;

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

o Additional debt secured by existing underleveraged investment
properties;

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:

o The reduction in net operating income of the Properties supporting the
Fleet Facility to a level that would reduce the availability under the
line of credit.

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
June 30, 2002, the Company guaranteed or provided letters of credit related to
approximately $41.0 million of unconsolidated debt and had obligations to
potentially provide an additional $48.7 million in guarantees, primarily related
to construction loans. See "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" and "Debt Financing Arrangements" included in this
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for more information about the Company's unconsolidated
investments and the underlying debt related to these investments.

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 in a spin-off, effective June 12, 1997, to those persons who
were limited partners of the Operating Partnership or shareholders of the
Company on May 30, 1997.

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 party agreed to provide the other with
rights to participate in certain transactions. The Company was not permitted to
operate or lease these assets under the tax laws in effect and applicable to
REITs at that time. In connection with the formation and capitalization of COPI,
and the subsequent operations and

57

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 previously been operated or leased by COPI.

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, substantially all of
COPI's voting interests in three of the Company's Residential Development
Corporations and other assets. 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 conformity 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 has included these assets
in its Resort/Hotel Segment and its Residential Development Segment, and fully
consolidated the operations of the eight Resort/Hotel Properties and the three
Residential Development Corporations, beginning on the date of the transfers of
these assets.

The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. Under the Agreement, the Company
has agreed to 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 to $8.0 million. 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. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders of the Company. Crescent Spinco then would purchase COPI's
interest in AmeriCold Logistics for between $15.0 million and $15.5 million.
Crescent Operating has agreed that it will use the proceeds of the sale of the
AmeriCold Logistics interest to repay Bank of America in full.

COPI obtained the loan from Bank of America 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 of Trust Managers of the Company, and John C. Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, enter into a support agreement with COPI and Bank of America. Pursuant
to the support agreement, Mssrs. Rainwater and Goff agreed to make additional
equity investments in COPI if COPI defaulted on payment obligations under its
line of credit with Bank of America and if the net proceeds of an offering of
COPI securities were insufficient to allow COPI to repay Bank of America in
full. Effective December 31, 2001, the parties executed an amendment to the line
of credit providing that any defaults existing under the line of credit on or
before March 8, 2002 are temporarily cured unless and until a new default shall
occur.

58

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Completion and effectiveness of the pre-packaged bankruptcy 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.

SHARE REPURCHASE PROGRAM

The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500.0
million to $800.0 million 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"). As of June 30, 2002, the Company
had repurchased 20,256,423 common shares, at an aggregate cost of approximately
$386.6 million, resulting in an average repurchase price of $19.09 per common
share.

The following table shows a summary of the Company's common share
repurchases by year, as of June 30, 2002.

- ----------

(1) Additionally, 14,530 of the Company's common shares were repurchased
outside of the Share Repurchase Program as part of an executive incentive
program.

As of June 30, 2002, SH IX, a wholly-owned subsidiary of the Company,
held 14,468,623 of the Company's repurchased common shares. 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 "Equity Financing - Sale of Preferred
Equity Interests in Subsidiary" for a description of the Company's equity
financings. These common shares are consolidated as treasury shares in
conformity with GAAP. The shares are to be 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. 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.

PROPERTY DISPOSITIONS

Unconsolidated

During the six months ended June 30, 2002, the Woodlands CPC sold two
office properties located within The Woodlands, Texas. The sales generated net
proceeds, after the repayment of debt, of approximately $8.9 million, of which
the Company's portion was approximately $4.7 million. The sales generated a net
gain of approximately $11.7 million, of which the Company's portion was
approximately

59

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

$6.0 million. The proceeds received by the Company were used primarily to pay
down the existing line of credit.

Consolidated

Office Segment

On January 18, 2002, the Company completed the sale of the Cedar
Springs Plaza, a wholly owned Office Property in Dallas, Texas. The sale
generated net proceeds of approximately $12.0 million and a net gain of
approximately $4.5 million. The proceeds from the sale of the Cedar Springs
Plaza Office Property were used primarily to pay down the existing line of
credit. The operations for this Property, as well as the gain recognized on the
sale of this Property are included in "Discontinued Operations - Income and Gain
on Assets Sold or Held for Sale".

On May 29, 2002, WOE, owned by the Company and the Woodlands CPC, sold
two consolidated Office Properties located within The Woodlands, Texas. The sale
generated net proceeds of approximately $3.6 million of which the Company's
portion was approximately $3.2 million. The sale generated a net gain of
approximately $1.9 million, of which the Company's portion was approximately
$1.7 million. The proceeds received by the Company were used primarily to pay
down the existing line of credit. These two Properties were consolidated, joint
venture properties and were included in the Company's Office Segment.

As of June 30, 2002, Washington Harbour Phase II Land, located in the
Georgetown submarket of Washington, D.C., was considered held for sale. The
Company recognized an impairment charge of approximately $1.0 million on this
land. After recognition of this impairment, the carrying value of the land at
June 30, 2002 was approximately $15.0 million. The land is wholly owned by the
Company and is included in the Company's Office Segment.

On August 1, 2002, the Company completed the sale of the 6225 North
24th Street Office Property in Phoenix, Arizona. The sale generated net proceeds
of approximately $9.0 million and a net gain of approximately $1.3 million. The
proceeds from the sale of the 6225 North 24th Street Office Property were used
to redeem Class A Units from GMACCM. This Office Property was wholly-owned by
the Company and was included in the Company's Office Segment.

60

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The significant terms of the Company's primary debt financing
arrangement existing as of June 30, 2002 are shown below (dollars in thousands).

DEBT FINANCING ARRANGEMENTS

- ----------

(1) For more information regarding the terms of the Company's debt financing
arrangements, including the amounts payable at maturity for non-amortizing
loans, properties securing the Company's secured debt and the method of
calculation of the interest rate for the Company's variable-rate debt, see
"Note 8. Notes Payable and Borrowings under the Fleet Facility" included in
"Item 1. Financial Statements."

(2) This loan has two one-year extension options.

(3) This facility has a one-year extension option.

(4) This is an uncommitted facility.

(5) 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
7.89%.

61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table shows information about the Company's consolidated
fixed and variable-rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated pay-off dates.

- ----------

(1) Including the $527.0 million of hedged variable-rate debt, the percentages
for fixed-rate debt and variable-rate debt are 92% and 8%, respectively.

(2) Including the effect of hedge arrangements the overall weighted average
interest rate would have been 7.89%.

(3) Based on contractual maturities. The overall weighted average maturity is
4.1 years based on the Company's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of June 30, 2002 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.

(in thousands)

- ----------

(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, as noted above.

The Company has $201.2 million of secured and unsecured debt due during
2002, consisting primarily of the Cigna Note, the Mitchell Mortgage Note,
unsecured short-term borrowings and the 2002 Notes. Borrowings under the
Company's revolving line of credit are expected to be used to repay or
repurchase from time to time the remaining $97.9 million of outstanding 2002
Notes due in September 2002. In addition, borrowings under the revolving line of
credit are expected to be used to repay the $63.5 million CIGNA Note due in
December 2002.

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

62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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.

Some of the Company's debt restricts its activities, including its
ability to pledge assets, create liens, incur additional debt, enter into
transactions with affiliates and make some types of payments, issuances of
equity and distributions on equity.

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 Fund I and II Term Loan after the notice and
cure periods for the other indebtedness have passed. As of June 30, 2002, 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 six months ended June
30, 2002, there were no circumstances that required pre-payment penalties or
increased collateral related to the Company's existing debt.

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375.0
million in senior, unsecured notes due 2009. The notes bear interest at an
annual rate of 9.25% and were issued at 100% of issue price. The notes are
callable after April 15, 2006. Interest will be payable in cash on April 15 and
October 15 of each year, beginning October 15, 2002. The Company has filed a
registration statement with the SEC to register a similar series of notes with
the SEC and to effect an exchange offer of the registered notes for the
privately placed notes. In addition, the Company has agreed to register certain
of the notes for resale by their holders. In the event that the exchange offer
or resale registration is not completed on or before October 15, 2002, the
interest rate on the notes will increase to 9.75% and increase to 10.25% after
90 days until the exchange offer or resale registration is completed.

The net proceeds from the offering of notes were approximately $366.5
million. Approximately $309.5 million of the proceeds were used to pay down
amounts outstanding under the Fleet Facility, and the remaining proceeds were
used to pay down $5.0 million of short-term indebtedness and redeem
approximately $52.0 million of Class A Units in Funding IX from GMAC Commercial
Mortgage Corporation. See "Equity Financing - Sale of Preferred Equity Interests
in Subsidiary" for a description of the Class A Units in Funding IX held by GMAC
Commercial Mortgage Corporation.

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 June 30, 2002, the Company had entered into
three cash flow hedge agreements, which are accounted for in conformity with
SFAS No. 133, as amended by SFAS No. 138.

63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table shows information regarding the Company's cash flow
hedge agreements as of June 30, 2002, and additional interest expense and
unrealized gains for the six months ended June 30, 2002:

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 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 SFAS 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
conformity with SFAS Nos. 133 and 138.

Over the next twelve months, an estimated $18.0 million to $19.0
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.

Additionally, CRDI, a consolidated subsidiary of the Company, also uses
derivative financial instruments to convert a portion of its variable-rate debt
to fixed-rate debt. As of June 30, 2002, CRDI had entered into three cash flow
hedge agreements, which are accounted for in conformity with SFAS Nos. 133 and
138.

64

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table shows information regarding CRDI's cash flow hedge
agreements as of June 30, 2002 and additional capitalized interest for the six
months ended June 30, 2002. Unlike the additional interest on the Company's cash
flow hedges which was expensed, the additional interest on CRDI's cash flow
hedges was capitalized, as it is related to debt for projects that are currently
under development.

CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges, and instead
assumes the hedges are highly effective.

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.

EQUITY FINANCING

Series A Preferred Offering

On April 26, 2002, the Company completed an institutional placement
(the "April 2002 Series A Preferred Offering") of an additional 2,800,000 shares
of 6 3/4% Series A Convertible Cumulative Preferred Shares (the "Series A
Preferred Shares") at an $18.00 per share price and with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of
approximately $50.4 million. The Series A Preferred Shares are convertible at
any time, in whole or in part, at the option of the holders thereof into common
shares of the Company at a conversion price of $40.86 per common share
(equivalent to a conversion rate of 0.6119 common shares per Series A Preferred
Share), subject to adjustment in certain circumstances. The Series A Preferred
Shares have no stated maturity, are not subject to sinking fund or mandatory
redemption and may not be redeemed before February 18, 2003, except in order to
preserve the Company's status as a REIT. On or after February 13, 2003, the
Series A Preferred Shares may be redeemed, at the Company's option, by paying
$25.00 per share plus any accumulated accrued and unpaid distribution. Dividends
on the Series A Preferred Shares are cumulative from the date of original
issuance and are payable quarterly in arrears on the fifteenth of February, May,
August and November, commencing May 15, 2002. The annual fixed dividend is
$1.6875 per share.

Net proceeds to the Company from the April 2002 Series A Preferred
Offering after underwriting discounts and other offering costs of approximately
$2.2 million were approximately $48.2 million. The Company used the net proceeds
to redeem Class A Units from GMACCM.

Series B Preferred Offering

On May 17, 2002, the Company completed an offering (the "May 2002
Series B Preferred Offering") of 3,000,000 shares of 9.50% Series B Cumulative
Redeemable Preferred Shares (the "Series B Preferred Shares") with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of

65

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

approximately $75.0 million. The Series B Preferred Shares have no stated
maturity, are not subject to sinking fund or mandatory redemption, are not
convertible into any other securities of the Company and may not be redeemed
before May 17, 2007, except in order to preserve the Company's status as a REIT.
On or after May 17, 2007, the Series B Preferred Shares may be redeemed, at the
Company's option, by paying $25.00 per share plus any accumulated, accrued and
unpaid distributions. Dividends on the Series B Preferred Shares are cumulative
from the date of original issuance and are payable quarterly in arrears on the
fifteenth of February, May, August and November, commencing August 15, 2002. The
annual fixed dividend is $2.375 per share.

Net proceeds to the Company from the May 2002 Series B Preferred
Offering after underwriting discounts of approximately $2.4 million and other
offering costs of approximately $0.4 million were approximately $72.3 million.
The Company used the net proceeds to redeem Class A Units issued by its
subsidiary, Funding IX, to GMACCM.

On June 6, 2002, an additional 400,000 Series B Preferred Shares were
sold (the "June 2002 Series B Preferred Offering") resulting in gross proceeds
to the Company of approximately $10.0 million. Net proceeds to the Company after
underwriting discounts of approximately $0.3 million and other offering costs of
approximately $0.05 million were approximately $9.6 million. As with the May
2002 Series B Preferred Offering, the Company used the net proceeds to redeem
Class A Units issued by its subsidiary, Funding IX, to GMACCM.

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 June 30 2002, 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.

Also during the year ended December 31, 2000, GMAC Commercial Mortgage
Corporation (GMACCM") purchased $275 million of non-voting, redeemable preferred
Class A Units in Funding IX (the "Class A Units"). The Class A Units are
redeemable at the option of the Company at the original price. As of December
31, 2000, approximately $56.6 million of the Class A Units had been redeemed
from GMACCM by the Company. No redemptions occurred during the year ended
December 31, 2001. During the six months ended June 30, 2002, the Company
redeemed approximately $187 million of the Class A Units, reducing to $31.4
million the amount of Class A Units held by GMACCM. The Class A Units initially
received a preferred variable-rate dividend calculated at LIBOR plus 450 basis
points. Beginning March 16, 2002, the preferred variable-rate dividend increased
to LIBOR plus 550 basis points, which resulted in a dividend rate of
approximately 7.34% per annum as of June 30, 2002.

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 SH
IX, for the purchase of common shares of the Company. See "Share Repurchase
Program" above. This intracompany loan is eliminated in consolidation. The loan
from Funding IX to SH IX matures March 15, 2003 and the Company intends to repay
the loan of approximately $285.0 million at or prior to that time. The repayment
proceeds received by Funding IX from SH IX will be used to redeem Class A Units
up to the outstanding amount of Class A Units.

66

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 joint ventures and equity investments.

(1) Consists of several notes. Maturity date is based on largest debt
instrument representing 94% of debt balance. All interest rates are
fixed.

(2) Consists of two notes: Senior Note - variable interest rate at LIBOR +
189 basis points with no LIBOR floor. Mezzanine Note - variable
interest rate at LIBOR + 890 basis points with a LIBOR floor of 3.0%.
Interest-rate cap agreement maximum LIBOR of 4.52% on both notes.

(3) The Company obtained a Letter of Credit to guarantee the repayment of
up to $4.3 million of principal of the Main Street Partners, L.P. loan.

(4) A full and unconditional guarantee of loan from Fleet for the
Construction of 5 Houston Center is held by the Company. At June 30,
2002 and December 31, 2001, $33.8 million and $4.9 million was
outstanding, respectively.

(5) On February 14, 2002, The Company executed an agreement with COPI to
transfer, in lieu of foreclosure, COPI's 5% interest in Woodlands Land
Development Company.

(6) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $145.0
million to a maximum LIBOR rate of 9.0%.

(7) To mitigate interest rate exposure, WLDC has entered into an interest
rate swap against $50.0 million notional amount to effectively fix the
interest rate at 5.28%. WLDC has also entered into an interest rate
swap against $50.0 million notional amount to effectively fix the
interest rate at 4.855%.

(8) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $33.8
million to a maximum LIBOR rate of 9.0%.

(9) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $19.5
million to a maximum LIBOR rate of 8.5%.

(10) The Company guarantees $3.0 million of this facility.

69

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table shows, as of June 30, 2002, information about the
Company's share of unconsolidated fixed and variable-rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.

(in thousands)

(1) These amounts do not represent the effect of two one-year extension options
on two of The Woodlands Fleet National Bank loans, totaling $99.2 million
that have initial maturity dates of November, 2002 and October, 2003.

RELATED PARTY DISCLOSURES

DBL Holdings, Inc.

As of June 30, 2002, 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 MVDC and HADC. At June 30, 2002, Mr. Goff's
book value in DBL was approximately $.4 million.

Since June 1999, the Company has contributed approximately $23.8
million to DBL, in the form of cash and loans. These funds were 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

70

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 day-to-day operations of G2 are
managed jointly by an affiliate of GMACCM and a division of GMSP headquartered
in Greenwich, Connecticut and overseen by High Balloch, a principal of GMSP who
is unrelated to the Company. The ownership structure of the entity that
ultimately controls 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 June 30, 2002, DBL had an approximately $14.5 million investment in G2 and
had repaid in full the loans from the Company.

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. Juniper 1999-1 Class C-1 is the privately placed
equity interest of a collateralized bond obligation. During the six months ended
June 30, 2002, the Company recognized an impairment charge related to this
investment of $5.2 million. As a result of this impairment charge, at June 30,
2002 this investment was valued at $0.

COPI Colorado, L. P.

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 which owns 10% of the
voting stock in CRDI. As a result, the Company increased its ownership interest
in CRDI from 90% to 96%. John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, owns a 2.0% voting interest in CRDI
with a cost basis of $.4 million and the remaining 2.0% voting interest is owned
by a third party.

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

As of June 30, 2002, the Company had approximately $36.6 million of
loans outstanding (including approximately $4.1 million loaned during the six
months ended June 30, 2002) 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 agreements approved by the Board of Trust
Managers 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. According 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
representing $26.3 million of the $36.6 million total outstanding loans at June
30, 2002.

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 loans granted during the six
months ended June 30, 2002 were granted at the Applicable Federal Rate of 2.7%,
which reflects a below prevailing market interest rate; therefore, the Company
recorded $.1 million of compensation expense for the six months ended June 30,
2002. Approximately $.2 million of current interest was outstanding related to
these loans as of June 30, 2002. No conditions exist at June 30, 2002 which
would cause any of the loans to be in default.

On July 29, 2002, the loans made pursuant to the Company's stock
incentive plans and unit incentive plans were amended to extend the remaining
terms of the loans until July 2012 and to stipulate that every three years the
interest rate on the loans will be adjusted to the AFR applicable at that time
for a three year loan. Additionally, the employees and trust managers have been
given the option, at any time, to fix the interest rate for each of the loans to
the AFR applicable at that time for a loan with a term equal to the remaining
term of the loan. The Company estimates that the one-time compensation expense
related to these amendments to the loans is approximately $1.8 million.
Effective July 29, 2002, the Company will no longer make available to its
employees and directors loans pursuant to the Company's stock and unit incentive
plans.

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375,000
in senior, unsecured notes due 2009, $50,000 of which were purchased by Richard
E. Rainwater, Chairman of the Board of Trust Managers of the Company, and his
affiliates and family members (the "Rainwater Group"). The notes bear interest
at 9.25% and were issued at 100% of issue price. The Company has agreed to
register the notes issued to the Rainwater Group for resale. See "Debt
Offering" section above for additional information regarding the offering and
the notes.

71

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375.0
million in senior, unsecured notes due 2009, $50.0 million of which were
purchased by Richard E. Rainwater, Chairman of the Board of Trust Managers of
the Company, and his affiliates and family members (the "Rainwater Group"). The
notes bear interest at 9.25% and were issued at 100% of issue price. The Company
has agreed to register the notes issued to the Rainwater Group for resale. See
"Note 8. Notes Payable and Borrowings under Fleet Facility" for additional
information regarding the offering and the notes.

Other

On June 28, 2002, the Company purchased and is holding for sale, the
home of an executive officer of the Company for approximately $2.65 million
which approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.

72

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

CHANGE IN COMPANY'S CERTIFYING ACCOUNTANT

On June 24, 2002, the Company terminated the engagement of Arthur
Andersen LLP as the Company's independent public accountants. The Company has
engaged Ernst & Young LLP to serve as the Company's independent public
accountants for the fiscal year ending December 31, 2002. Ernst & Young LLP is
currently conducting a re-audit of the Company's financial statements for the
years ended December 31, 2001, 2000 and 1999.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
and contingencies as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate our
assumptions and estimates on an on-going basis. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgements and
estimates used in the preparation of our consolidated financial statements.

Net Investments in Real Estate

Real estate and leasehold improvements are classified as long-lived
assets to be held and used or held for sale. Properties to be held and used are
carried at cost, net of accumulated depreciation. Properties held for sale are
recorded at the lower cost or fair value less cost to sell. In accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the Properties are periodically evaluated on an individual basis to determine if
any value impairment has occurred. With regard to Properties to be held and
used, an impairment charge is recognized to the extent the sum of undiscounted
future operating cash flows is less than the carrying value of the Property. For
Properties held for sale an impairment charge is recognized when the fair value
of the Property less the estimated cost to sell is less than the carrying value
of the Property as of the date the Company has a commitment to sell the Property
or is actively marketing the Property for sale. See "Adoption of New Accounting
Standards" for a discussion of impairment losses recognized for the six months
ended June 30, 2002.

Depreciation on buildings and improvements is computed using the
straight-line method over the estimated useful life of the asset, as follows:

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

Depreciation is not computed on Land and Land held for Investment or
Development, nor is depreciation computed on Property held for sale subsequent
to the date the Property is classified as held for sale.

Expenditures for ordinary repairs and maintenance are charged to
operations as incurred. Significant renovations and improvements, which improve
or extend the useful life of the Property are capitalized and subject to the
depreciation guidelines discussed above. When a Property is sold, its cost and
related accumulated depreciation are removed from the books and any resulting
gain or loss reflected in net income for the appropriate period.

Developments in process are carried at cost, which includes land
acquisition cost, architectural fees, general contractor fees, construction
interest, internal costs related directly to the development and other costs
related directly to the construction of the Property. Depreciation expense is
not recognized until the property is placed in service, which occurs shortly
after the building receives a certificate of occupancy.

Derivative Financial Instruments

The Company uses derivative financial debt instruments to convert a
portion of its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate ratio. As of June 30, 2002, 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." SFAS No. 133, as
amended, by SFAS No. 138, "Accounting for Certain Hedging Activities,"
establishes accounting and reporting standards for derivative instruments.
Specifically, it requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and to measure
these instruments at fair value. Changes in fair value will effect either
shareholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes. Derivatives that do not
qualify as hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the particular nature of the hedge, changes
in fair value will either be offset against the change in fair value of the
hedged assets or liabilities through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.

The Company uses cash flow hedges to mitigate the variability of cash
flows by effectively converting or capping floating rate debt to a fixed rate
basis. On a monthly basis, the cash flow hedge is market 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 immediately reported in the Company's
earnings.

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, which offset each other, are charged to
earnings monthly.

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. The Company
recognizes income on leases on a straight-line basis over the term of the lease.
Certain leases provide for abated rent periods and/or scheduled rental rate
increases during the term of the lease. Accordingly, a receivable from tenants,
deferred rent receivable, is recorded for the excess of rental revenue
recognized on a straight-line basis over the rent that is contractually due from
the tenant under the terms of the lease.

Resort/Hotel Properties Prior to the February 14, 2002 transaction
with COPI, the Company had leased all of the Resort/Hotel Properties, except the
Omni Austin Hotel, to subsidiaries of COPI pursuant to eight separate leases.
The Omni Austin hotel had been leased under a separate lease to HCD Austin
Corporation. 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. Revenue from operations of the Resort/Hotel
Properties subsequent to the COPI transaction is recognized when the services
are provided.

Residential Development Properties Revenue from real estate sales is
recognized after closing has taken place, title has been transferred, sufficient
cash is received to demonstrate the buyer's commitment to pay for the property
and collection of the balance of the sales price, if any, is reasonably assured.
Substantially, all of the real estate sales through June 30, 2002 have been in
cash. The cost of real estate sold is determined using the relative sales value
method.

Revenue from real estate is recognized using the percentage of
completion method. Under the percentage of completion method, the percentage of
revenue applicable to costs incurred to date, as compared to the total estimated
development costs, is recognized in the period of sale. Deferred income related
to future development activity at June 30, 2002 is included in accrued
liabilities. If real estate is sold prior to completion of all related
infrastructure construction, and such uncompleted costs are not significant in
relation to total costs, the full accrual method is utilized whereby 100% of the
associated revenue is recognized and a commitment liability is established to
reflect the allocated estimated future costs to complete the development of such
real estate.

Club initiation fees and membership conversion fees are recorded, when
sold, as deferred revenue and recognized as membership fee revenue on a
straight-line basis over the number of months remaining until the estimated
turnover date, 2010. The partnership is required to sell the club assets to the
members no later than the turnover date. Upon formation of Desert Mountain
Properties, L.P., the partnership allocated a portion of the fair value of the
assets of Desert Mountain to the remaining club memberships and recorded the
amount as an intangible asset. Direct costs and an applicable portion of the
intangible associated with deferred membership revenue are also deferred and
recognized under the same method as the related revenue. These deferred club
initiation and membership conversion fees, net of the related deferred costs,
are presented on the balance sheets as deferred income. Membership fees included
in revenues are net of the related costs. Monthly club dues and transfer fees
are recorded as club revenue when earned.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets" (effective January 1,
2002). SFAS No. 142 specifies that goodwill and certain other types of
intangible assets may no longer be amortized, but instead are subject to
periodic impairment testing. If an impairment charge is required, the charge is
reported as a change in accounting principle and is included in operating
results as a Cumulative Effect of a Change in Accounting Principle. SFAS No. 142
provides for a transitional period of up to 12 months. Any need for impairment
must be assessed within the first six months and the amount of impairment must
be determined within the next six months. Any additional impairment taken in
subsequent interim periods during 2002 related to the initial adoption of this
statement will require the first quarter financial statements to be restated.
During the three months ended March 31, 2002 the Company recognized a goodwill
impairment charge of approximately $9.2 million due to the initial application
of this statement. This charge was due to an impairment (net of minority
interests) of the goodwill at the Temperature-Controlled Logistics Corporation.
This charge was reported as a change in accounting principle and was included in
the Company's consolidated statements of Operations as a "Cumulative Effect of a
Change in Accounting Principle" for the three months ended March 31, 2002.
Subsequent to March 31, 2002 the Company determined that an additional
impairment charge of $1.3 million was required for the goodwill of one of the
Residential Development Corporations, bringing to $10.5 million the total
impairment charge to be recognized for the six months ended June 30, 2002. In
accordance with SFAS No. 142, the financial statements for the quarter ended
March 31, 2002 were restated to include the additional impairment charge of $1.3
million. Accordingly, the entire $10.5 million impairment charge against the
goodwill of the Temperature-Controlled Logistics Corporation and one of the
Residential Development Corporations has been included in the Company's
consolidated statements of operations as a "Cumulative Effect of a Change in
Accounting Principle" for the six months ended June 30, 2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this statement did not materially affect the Company's
interim or annual financial statements; however, for the three and six months
ended June 30, 2002, financial statement presentation was modified to report the
results of operations including any gains or losses recognized in accordance
with this statement, and the financial position of the Company's real estate
assets sold or classified as held for sale, as discontinued operations. As a
result, the Company has reclassified certain amounts in prior period financial
statements to conform with the new presentation requirements.

REIT QUALIFICATION

The Company intends to maintain its qualification as a REIT under
Section 856 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.

73

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FUNDS FROM OPERATIONS

FFO, as used in this document, means:

o Net Income (Loss) - determined in conformity 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.

The National Association of Real Estate Investment Trusts ("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 six months ended June 30, 2002 and 2001 were $88.7 and $133.6 million,
respectively.

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 (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 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.

74

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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.

75

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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)

76

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SEGMENT INFORMATION

The following sections include information for each of the Company's
investment segments for the three and six months ended June 30, 2002.

OFFICE SEGMENT

Same-Store Analysis

The following table shows the same-store net operating income growth
for the three and six month periods ended June 30, 2002 and 2001, for the
approximately 25.7 million square feet of Office Property space owned as of June
30, 2002. This table excludes the following:

o Approximately 1.5 million square feet of space at Bank One Center, in
which the Company owns a 50% equity interest;

o Approximately 1.0 million square feet of space at Four Westlake Park
and Bank One Tower, in each of which the Company has a 20% equity
interest;

o Approximately 0.1 million square feet of space at Avallon IV, which was
completed during the year ended December 31, 2001; and

77

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Leasing

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

(2) Including free rent, scheduled rent increases taken into account under
GAAP and including adjustments for expenses payable by or reimbursable
from customers based on current expense levels.

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

Properties

As of June 30, 2002, the Company owned or had an interest in 74 Office
Properties located in 26 metropolitan submarkets in six states with an aggregate
of approximately 28.3 million net rentable square feet. The Office Properties
were, on a weighted average basis, 89%, occupied at June 30, 2002, and are
located approximately 41% in central business districts ("CBD") and
approximately 59% in suburban markets. The Company's Office Properties are
located primarily in the Dallas/Fort Worth and Houston, Texas metropolitan
areas. As of June 30, 2002, the Company's Office Properties in Dallas and
Houston represented an aggregate of approximately 74% of its office portfolio
based on total net rentable square feet (37% for Dallas and 37% for Houston).

In pursuit of management's objective to dispose of non-strategic and
non-core assets, one of the Company's fully consolidated Office Properties,
Cedar Springs Plaza in Dallas, Texas, was disposed of on January 18, 2002.

78

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table shows, as of June 30, 2002, certain information
about the Company's Office Properties.

79

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(1) Calculated based on base rent payable as of June 30, 2002, without
giving effect to free rent or scheduled rent increases that would be
taken into account under GAAP and including adjustments for expenses
payable by or reimbursable from customers.

(2) 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.

80

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(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) Leases have been executed at certain Office Properties but had not
commenced as of June 30, 2002. If such leases had commenced as of June
30, 2002, the percent leased for all Office Properties would have been
90%. The total percent leased for these Properties would have been as
follows: MacArthur Center I and II - 94%, Palisades Central II - 89%,
Carter Burgess Plaza - 99%, The Avallon - 100%, Ptarmigan Place - 100%,
44 Cook - 100%, Miami Center - 95%, Datran Center - 97% and Chancellor
Park - 81%.

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

(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) This Office Property was sold subsequent to June 30, 2002.

(10) 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.

(11) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties as
of June 30, 2002, giving effect to free rent and scheduled rent
increases that are taken into consideration under GAAP and also
including adjustments for expenses payable by or reimbursed from
customers is $22.96.

81

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table provides information, as of June 30, 2002, for the
Company's Office Properties by state, city and submarket.

82

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(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 market information is 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 Group (for the Austin CBD, Northwest and
Southwest submarkets), Turner Commercial Research (for the Colorado Springs
market), Grubb and Ellis Company (for the Phoenix Downtown/CBD and
Camelback Corridor submarkets), Building Interests, Inc. (for the
Albuquerque CBD submarket), RealData Information Systems, Inc. (for the
Miami CBD and South Dade/Kendall submarkets) and John Burnham & Company
(for the San Diego University Town Centre submarket). This table includes
market information as of March 31, 2002, except for the Dallas, Houston,
and Austin markets, for which market information is as of June 30, 2002.

(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) 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 full-service 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 as of June 30, 2002 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 customers,
divided by total net rentable square feet of Company Office Properties in
the submarket.

(6) Leases have been executed at certain Office Properties in these submarkets
but had not commenced as of June 30, 2002. If such leases had commenced as
of June 30, 2002, the percent leased for all Office Properties in the
Company's submarkets would have been 90%. The total percent leased for
these Class A Company submarkets would have been as follows: Dallas - (Las
Colinas) - 93%, (Richardson/ Plano) - 95%, Fort Worth - (CBD) - 99%, Austin
- (Northwest) - 100%, Denver - (Cherry Creek) - 99%, Miami - (CBD) - 95%,
Miami - (South Dade/Kendall) - 97%, San Diego - (University Town Center) -
81%.

(7) This information is not publicly available for the Denver submarkets as of
June 30, 2002.

(8) Includes weighted average amounts for the Denver submarket. These amounts
were calculated by management based on information from third-party
sources.

83

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(9) 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 are taken into consideration
under GAAP and also including adjustments for expenses payable by or
reimbursed from customers is $22.96.

(10) Includes the 6225 N. 24th Office Property sold August 1, 2002.

The following tables show schedules of lease expirations for leases in
place as of June 30, 2002, 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 customers
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 customers based on
current expense levels.

(2) Expirations by quarter are as follows: Q3: 1,495,459 sf; Q4: 706,453 sf.

(3) Expirations by quarter are as follows: Q1: 1,635,101 sf; Q2: 617,848 sf;
Q3: 670,329 sf; Q4: 700,386 sf.

Reconciliation of the Company's total Office Property net rentable area is
as follows:

(4)

84

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 customers based on
current expense levels.

(2) Expirations by quarter are as follows: Q3: 651,983 sf; Q4: 170,716 sf.

(3) Expirations by quarter are as follows: Q1: 825,044 sf; Q2: 234,769 sf; Q3:
106,148 sf; Q4: 202,755 sf.

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 customers based on
current expense levels

(2) Expirations by quarter are as follows: Q3: 569,303 sf; Q4: 447,884 sf.

(3) Expirations by quarter are as follows: Q1: 461,738 sf; Q2: 231,876 sf; Q3:
368,539 sf; Q4: 153,140 sf.

85

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 customers based on
current expense levels.

(2) Expirations by quarter are as follows: Q3: 52,907 sf; Q4: 17,804 sf.

(3) Expirations by quarter are as follows: Q1: 110,144 sf; Q2: 65,399 sf; Q3:
62,357 sf; Q4: 13,105 sf.

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 customers based on
current expense levels.

(2) Expirations by quarter are as follows: Q3: 60,985 sf; Q4: 17,809 sf.

(3) Expirations by quarter are as follows: Q1: 85,107 sf; Q2: 18,781 sf; Q3:
75,164 sf; Q4: 289,364 sf.

86

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Other 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) Expirations by quarter are as follows: Q3: 160,281 sf; Q4: 52,240 sf.

(3) Expirations by quarter are as follows: Q1: 153,428 sf; Q2: 67,203 sf; Q3:
58,121 sf; Q4 42,022 sf.

The following table shows, as of June 30, 2002, the principal businesses
conducted by the customers at the Company's Office Properties, based on
information supplied to the Company from the customers.

- ----------

(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.

87

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

HISTORICAL OFFICE PROPERTY CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING
COSTS

The following table sets forth non-incremental revenue generating and
incremental revenue generating tenant improvement and leasing costs and
recurring and non-recurring capital expenditures (excluding those expenditures
which are recoverable from tenants) for the six months ended June 30, 2002 and
the year ended December 31, 2001. Tenant improvement and leasing costs for
signed leases during a particular period do not necessarily equal the cash paid
for the tenant improvement and leasing costs during such period due to timing of
payments.

- ----------

(1) 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 improvement costs are recoverable from
tenants.

(2) Non-incremental revenue generating tenant improvements and leasing costs
exclude temporary leases and leases whose commencement dates are more than
12 months from the current quarter end. Incremental revenue generating
tenant improvements and leasing costs are related to signed leases that
have not contributed to office earnings in the preceding quarter.

(3) 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 (new, 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 $8.00 per square foot, or $1.20 to
$1.60 per square foot per year based on average five-year lease term, and,
on average for "replacement tenants," $12.00 to $14.00 per square foot, or
$2.40 to $2.80 per square foot per year based on an average five-year lease
term, and, on average for "new and expansion tenants," $16.00 to $20.00 per
square foot, or $3.20 to $4.00 per square foot per year based on an average
five-year lease term.

88

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESORT/HOTEL SEGMENT

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 fully consolidated the
operations of the eight Resort/Hotel Properties beginning on the date of the
asset transfers.

Same-Store Analysis

As of June 30, 2002, the Company owned nine Resort/Hotel Properties.
The following table shows same-store net operating income, weighted average
occupancy, average daily rate and revenue per available room/guest night for the
nine Resort/Hotel Properties for the three and six months ended June 30, 2002
and 2001.

Resorts

Business-Class Hotels

89

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Properties

The following table shows certain information for the six months ended
June 30, 2002, and 2001, 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. The Omni
Austin Hotel is 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 those Resort/Hotel
Properties.

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

RESIDENTIAL DEVELOPMENT SEGMENT

Operating Information

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, substantially all of COPI's voting interests in three of the
Residential Development Corporations: The Woodlands Land Company, Inc. ("TWLC"),
Desert Mountain Development Corporation ("DMDC") and Crescent Resort
Development, Inc. ("CRDI"). The Company fully consolidated the operations of the
three Residential Development Corporations beginning on the date of the asset
transfers. Management plans to reinvest capital returned from the Residential
Development Segment primarily into the Office Segment where the Company expects
to achieve favorable rates of return.

As of June 30, 2002, the Company owned or had economic interests in
five Residential Development Corporations. The Residential Development
Corporations in turn, through joint ventures or partnership arrangements,
currently own interests in 22 Residential Development Properties. The
Residential Development Corporations are responsible for the continued
development and the day-to-day operations of the Residential Development
Properties.

90

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 decreased by $15,000, or 19%, due to fewer
higher priced lots sold primarily from the Carlton Woods development in the
six months ended June 30, 2002, compared to the same period in 2001.

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 June 30, 2002, 230 lots had been sold at
prices ranging from $0.1 million to $2.2 million per lot, or an average
price of $348,000 per lot. Additional phases within Carlton Woods are
expected to be marketed to the public during the next two years.

o Future buildout of The Woodlands is estimated at approximately 12,570
residential lots and approximately 1,607 acres of commercial land, of which
approximately 1,671 residential lots and 980 acres are currently in
inventory.

91

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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

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

(1) Includes equity golf membership.

(1) Includes equity golf membership.

o Approved future buildout of Desert Mountain is estimated to be
approximately 210 to 434 residential lots, of which approximately 123 are
currently in inventory.

92

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Crescent Resort Development, Inc., Beaver Creek, Colorado:

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

o Average sales price per unit decreased $0.9 million, or 60%, due to lower
priced product mix sold in the six months ended June 30, 2002, as compared
to the same period in 2001.

93

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Properties

The following table shows certain information as of June 30, 2002,
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 June 30, 2002, is $225,000.

(6) Distributions are made to partners based on specified payout percentages.
During the six months ended June 30, 2002, the payout percentage to the
Company was 52.5%.

(7) As of June 30, 2002, 24 golf course lots were under contract at Eagle Ranch
representing $2.1 million in sales; two units were under contract at Main
Street Station representing $0.8 million in sales; two units were under
contract at Park Place at Riverfront representing $.7 million in sales; one
unit was under contract at Park Tower at Riverfront representing $0.8
million in sales; one unit was under contract at Cresta representing $1.8
million in sales; six units were under contract at Snow Cloud representing
$10.7 million in sales and 44 units were under contract at One Vendue Range
representing $52.4 million in sales.

94

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

Operating Information

As of June 30, 2002, 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.

The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to a 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.

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 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
is required to be paid to December 31, 2003.

In December 2001, the Temperature Controlled Logistics Corporation
waived its right to collect $39.8 million (the Company's share of which was
$15.9 million) of the total $49.9 million of deferred rent. The
Temperature-Controlled Logistics Corporation and the Company began to recognize
rental income when earned and collected during the year ended December 31, 2000
and continued this accounting treatment for the year ended December 31, 2001;
therefore, there was no financial statement impact to the Temperature-Controlled
Logistics Corporation or to the Company related to the Temperature-Controlled
Logistics Corporation's decision in December 31, 2001 to waive collection of
deferred rent.

AmeriCold Logistics deferred $9.3 million of the total $68.9 million of
rent payable for the six months ended June 30, 2002. The Company's share of the
deferred rent was $3.7 million. The Company recognizes rental income when earned
and collected and has not recognized the $3.7 million of deferred rent in equity
in net income of the Temperature-Controlled Logistics Properties for the six
months ended June 30, 2002.

95

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table shows the total, and the Company's portion of,
deferred rent and valuation allowance at December 31, 2001 and for the six
months ended June 30, 2002.

(in millions)

Properties

The following table shows the number and aggregate size of
Temperature-Controlled Logistics Properties by state as of June 30, 2002:

(1) As of June 30, 2002, 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 June 30, 2002, AmeriCold Logistics operated 100
temperature-controlled logistics properties with an aggregate of
approximately 524.6 million cubic feet (20.2 million square feet).

96

ITEM 3. 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, investing 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 $2.5 billion at June 30, 2002, of which
approximately $196.4 million, or approximately 7.95%, was unhedged variable-rate
debt. The weighted average interest rate on such variable-rate debt was 4.09% as
of June 30, 2002. A 10% (40.9 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 $0.8 million based on the unhedged
variable-rate debt outstanding as of June 30, 2002, as a result of the increased
interest expense associated with the change in rate. Conversely, a 10% (40.9
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 $0.8 million based on the unhedged variable-rate debt
outstanding as of June 30, 2002, as a result of the decreased interest expense
associated with the change in rate.

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. A description of these derivative financial
instruments is contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cash Flow Hedges" and is
incorporated by reference into this Item 3.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the six months ended June 30, 2002, Crescent Equities
issued an aggregate of 6,574 common shares to holders of Operating
Partnership units in exchange for 3,287 units. The issuances of common
shares were exempt from registration as private placements under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). Crescent Equities has registered the resale of such common
shares under the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

97

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

The annual meeting of shareholders of the Company was held on June 10,
2002.

Two proposals were submitted to a vote of shareholders as follows:

(1) The shareholders approved the election of the following
individuals as Trust Managers of the Company:

The terms of office of the following Trust Managers continued
after the meeting:

Richard E. Rainwater
Dennis H. Alberts
Anthony M. Frank
William F. Quinn
David M. Sherman
Terry N. Worrell

(2) The shareholders disapproved, with 37,152,055 negative votes,
34,377,538 affirmative votes, 780,791 abstentions and 20,060,212
broker non-votes, the proposal urging the Board of Trust Managers
to declassify the Board for purposes of elections of Trust
Managers.

ITEM 5. OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

The exhibits required by this item are set forth on the Exhibit Index
attached hereto.

(b) Reports on Form 8-K

Form 8-K dated March 28, 2002, filed April 1, 2002 for the
purpose of reporting, under Item 5 - Other Events, the Company's intent
to offer $375 million aggregate principal amount of senior notes due
2009.

Form 8-K dated April 10, 2002, filed April 16, 2002 for the
purpose of reporting, under Item 5 - Other Events, that the Company had
priced its private offering of $375 million in senior, unsecured notes
due 2009 at 9.25%, with an issue price of the notes of 100%.

Form 8-K dated April 22, 2002, filed April 25, 2002 for the
purpose of (i) reporting under Item 5 - Other Events, that the Company
had entered into (1) a placement agency agreement with Merrill Lynch &
Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated for the
placement of 2,800,000 6 3/4% Series A Convertible Cumulative Preferred
Shares (the "Series A Preferred Shares"), $.01 par value per share, at
a price of $18.00 per share, with Cohen & Steers Capital Management,
Inc. and (2) a purchase agreement with Cohen & Steers Capital
Management, Inc. for the purchase of such shares for an aggregate price
of $50,400,000, and (ii) filing under Item 7 - Financial Statements,
Pro Forma Financial Information and Exhibits, certain exhibits relating
to the offering of the Series A Preferred Shares pursuant to a
prospectus supplement dated April 22,

98

2002 to the prospectus dated April 22, 2002, which forms a part of the
Company's Registration Statement on Form S-3 (No. 333-38071), such
exhibits to be incorporated by reference into the Registration
Statement.

Form 8-K/A dated April 22, 2002, filed April 29, 2002 for the
purpose of filing under Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits, an additional exhibit relating to
the offering of the Series A Preferred Shares pursuant to a prospectus
supplement dated April 22, 2002 to the prospectus dated April 22, 2002,
which forms a part of the Company's Registration Statement on Form S-3
(No. 333-38071), such exhibit to be incorporated by reference into the
Registration Statement.

Form 8-K dated May 10, 2002, filed May 14, 2002 for the
purpose of (i) reporting under Item 5 - Other Events, that the Company
had entered into an underwriting agreement with Bear, Stearns & Co.
Inc., BB&T Capital Markets, a division of Scott & Stringfellow, Inc.,
and Stifel, Nicolaus & Company, Incorporated (together, the
"Underwriter"), pursuant to which the underwriter agreed to purchase up
to 3,450,000 9.50% Series B Cumulative Redeemable Preferred Shares (the
"Series B Preferred Shares"), $.01 par value per share, at a price of
$25.00 per share, less Underwriting discounts and commissions of $.7875
per share, and (ii) filing under Item 7 - Financial Statements, Pro
Forma Financial Information and Exhibits, certain exhibits relating to
the offering of the Series B Preferred Shares pursuant to a prospectus
supplement dated May 10, 2002 to the prospectus dated April 22, 2002,
which forms a part of the Company's Registration Statement on Form S-3
(No. 333-38071), such exhibits to be incorporated by reference into the
Registration Statement.

Form 8-K dated June 24, 2002, filed June 26, 2002 for the
purpose of reporting under Item 4 - Changes in Registrant's Certifying
Accountant, that the Company had ended the engagement of Arthur
Andersen LLP as the Company's independent public accountants, and had
engaged Ernst & Young LLP to serve as the Company's independent public
accountants for the fiscal year ending December 31, 2002.

99

SIGNATURES

Pursuant to the requirements 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.

CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)

By /s/ John C. Goff
-----------------------------------
John C. Goff
Date: August 14, 2002 Vice-Chairman of the Board
and Chief Executive Officer

By /s/ Jerry R. Crenshaw, Jr
-----------------------------------
Jerry R. Crenshaw, Jr.
Senior Vice President and
Chief Financial Officer
Date: August 14, 2002 (Principal Financial and
Accounting Officer)

100

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, John C. Goff, the Chief Executive Officer of Crescent Real
Estate Equities Company (the "Company"), has executed this certification in
connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (the
"Report"). The undersigned hereby certifies that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Date: August 14, 2002 /s/ John C. Goff
---------------- ------------------------------
John C. Goff
Chief Executive Officer

101

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Jerry R. Crenshaw, Jr., the Senior Vice President and Chief
Financial and Accounting Officer of Crescent Real Estate Equities Company (the
"Company"), has executed this certification in connection with the filing with
the Securities and Exchange Commission of the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2002 (the "Report"). The undersigned hereby
certifies that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Date: August 14, 2002 /s/ Jerry R. Crenshaw, Jr.
-------------------- -------------------------------------
Jerry R. Crenshaw, Jr.
Senior Vice President and
Chief Financial and
Accounting Officer

102

EXHIBIT LIST

103