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 SEPTEMBER 30, 2002
COMMISSION FILE NO. 1-13038

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

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

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

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

Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of November 8, 2002.

Common Shares, par value $.01 per share: 100,970,702
Series A Preferred Shares, liquidation preference of $25 per share: 10,800,000
Series B Preferred Shares, liquidation preference of $25 per share: 3,400,000

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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
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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 September
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 an interest in real estate assets (the "Properties") and the
Properties that each subsidiary owned or had an interest in as of September 30,
2002.

Operating Partnership Wholly-owned assets - The Avallon IV,
Chancellor Park, 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.
Sonoma Mission Inn (80.1%). This Property is
included in the Company's Hotel/Resort
Segment.

Equity Investments, unconsolidated - Bank One
Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20%
interest), Four Westlake Park (20% interest),
Miami Center (40% interest) and 5 Houston
Center (25%). These Properties are included
in the Company's Office Segment. 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.

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

COPI Colorado, L.P. Equity Investments, consolidated - 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), Tahoe
Mountain Resorts (57% - 71.2% 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 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 asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Company's Resort/Hotel
("Funding VI") Segment.

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

Crescent Real Estate Wholly-owned assets - The Addison, Addison
Funding VIII, L.P. Tower, Austin Centre, The Avallon V, Frost
("Funding VIII") Bank Plaza, Greenway I & IA (two office
properties), Greenway II, Johns Manville
Plaza, Palisades Central I, Palisades Central
II, Stemmons Place, Trammell Crow Center(3),
3333 Lee Parkway, 1800 West Loop South, 5050
Quorum, 44 Cook Street and 55 Madison. These
Properties are included in the Company's
Office Segment. Also, the Canyon Ranch -
Tucson, Omni Austin Hotel, and Ventana Inn &
Spa, which are included in the Company's
Resort/Hotel Segment.

Crescent Real Estate Wholly-owned assets - MCI Tower. This
Funding IX, L.P. Property is included in the Company's
("Funding IX") 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),
("Funding X") all of which are included in the Company's
Office Segment.

Crescent Spectrum Wholly-owned assets - Spectrum Center,
Center, L.P.(2) included 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) 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.

(3) The Company owns the principal economic interest in Trammell Crow
Center through its ownership of a 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 the building.

See "Note 10. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for a table that lists the Company's ownership in
significant unconsolidated joint ventures and equity investments as of September
30, 2002.

See "Note 11. Notes Payable and Borrowings under Credit 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 subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, COPI's voting common stock in three of the Company's Residential
Development Corporations. See "Note 19. COPI" for additional information related
to the Company's agreement with COPI.

7

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

SEGMENTS

The assets and operations of the Company were divided into four
investment segments at September 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
September 30, 2002 are classified by investment segment as follows:

o OFFICE SEGMENT consisted of 73 office properties, including three
retail properties (collectively referred to as the "Office
Properties"), located in 25 metropolitan submarkets in six
states, with an aggregate of approximately 28.5 million net
rentable square feet. Sixty-one of the Office Properties,
including the three retail properties, are wholly owned and 12
are owned through joint ventures, seven of which are consolidated
and five of which are unconsolidated. In addition, the Company
owns a 25% interest in the 5 Houston Center Office Property which
was completed in September 2002.

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"). Eight of the Resort/Hotel Properties are wholly
owned and one of the luxury and destination fitness resorts and
spas is owned through a joint venture that is consolidated.

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 21 upscale residential development properties
(collectively referred to as the "Residential Development
Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in a general partnership (the
"Temperature-Controlled Logistics Partnership"), which owns all
of the common stock, representing substantially all of the
economic interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a real estate
investment trust, which, as of September 30, 2002, directly or
indirectly owned 88 temperature-controlled logistics properties
(collectively referred to as the "Temperature-Controlled
Logistics Properties") with an aggregate of approximately 441.5
million cubic feet (17.5 million square feet) of warehouse space.

See "Note 9. 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
nine months ended September 30, 2002 and 2001, and identifiable assets for each
of these investment segments at September 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-

8

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

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 in the United States
("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.

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 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 nine months ended September 30, 2002
to $10,500 related to initial application of SFAS No.142. 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 $1,300. 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 nine months ended September 30, 2002.

In prior periods, the Company tested goodwill for impairment under the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets," under which an impairment loss is recognized when expected undiscounted
future cash flows are less than the carrying value of the assets. For the year
ended December 31, 2001, the expected future operating cash flows of the
Temperature-Controlled Logistics Corporation on an undiscounted basis exceeded
the carrying amounts of the properties and other long-lived assets, including
goodwill. Accordingly, no impairment was recognized under SFAS No. 121. However,
upon the adoption of SFAS No. 142 on January 1, 2002, the Temperature-Controlled
Logistics Corporation compared the fair value of the Temperature-Controlled
Logistics Properties based on discounted cash flows to the carrying value of the
Temperature-Controlled Logistics Properties and the related goodwill. Based on
this test, the fair value did not exceed the carrying value of the
Temperature-Controlled Logistics assets and, accordingly, the goodwill was
impaired.

9

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

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.
SFAS No. 144 requires that the results of operations, including any gains or
losses recognized, be disclosed separately on the Company's consolidated
statements of operations. The Company adopted SFAS No. 144 on January 1, 2002.
Subsequent to January 1, 2002, the Company sold five Office Properties. The
Company also sold three behavioral healthcare properties subsequent to January
1, 2002 and owned seven behavioral healthcare properties as of September 30,
2002, which were classified as held for sale. In accordance with SFAS No. 144,
the results of operations of these assets and any gain or loss on sale have been
presented as "Discontinued Operations - Income and Gain on Assets Sold and Held
for Sale" in the accompanying consolidated statements of operations. The
carrying value of the assets held for sale has been reflected as "Properties
Held for Disposition, net" in the accompanying consolidated balance sheet as of
September 30, 2002 and December 31, 2001. (See "Note 4. Discontinued
Operations"). The adoption of this statement did not materially affect the
Company's interim financial statements for the nine months ended September 30,
2002. The Company has reclassified certain amounts in prior period financial
statements to conform with the new presentation requirements.

3. ACQUISITION:

On August 29, 2002, the Company acquired Johns Manville Plaza, a
29-story, 675,000 square foot Class A office building located in Denver,
Colorado. The Company acquired the Office Property for approximately $91,200,
funded by a draw on the Company's credit facility. The Office Property is
wholly-owned by the Company and included in the Company's Office Segment.

4. DISCONTINUED OPERATIONS:

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 credit facility. 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 $2,100, of which the Company's portion was approximately $1,900.
The proceeds received by the Company were used primarily to pay down the
Company's credit facility. These two Properties were consolidated joint venture
properties and were 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 $8,800 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
preferred Class A Units in Funding IX from GMAC Commercial Mortgage Corporation
("GMACCM"). This Office Property was wholly-owned by the Company and was
included in the Company's Office Segment.

On September 20, 2002, the Company completed the sale of the Reverchon
Plaza Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $29,200 and a net gain of approximately $500. The proceeds from
the sale of the Reverchon Plaza Office Property were used to pay down the
Company's credit facility. This Office Property was wholly-owned by the Company
and was included in the Company's Office Segment.

The operations for these Office Properties, as well as the gains
recognized on the sales of these Office Properties, are included in
"Discontinued Operations - Income and Gain on Assets Sold and Held for Sale."

10

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

OTHER

As of September 30, 2002, the Company owned seven behavioral healthcare
properties, all of which were classified in the Company's financial statements
as "Properties Held for Disposition, Net." During the nine months ended
September 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
September 30, 2002 was approximately $20,997. Depreciation expense has not been
recognized since the dates the behavioral healthcare properties were classified
as held for sale. The Company is actively marketing for sale the remaining seven
behavioral healthcare properties. The sales of these behavioral healthcare
properties are expected to close within the next year. No rental revenues,
operating expenses or depreciation and amortization were recognized during the
nine months ended September 30, 2002 for the seven behavioral healthcare
properties classified as held for sale at September 30, 2002.

OFFICE SEGMENT

The following table indicates the rental revenue, operating expenses,
depreciation and amortization and net income for the nine months ended September
30, 2002 and 2001 for the Office Properties sold during the nine months ended
September 30, 2002.

OFFICE SEGMENT AND OTHER

The following table indicates the major classes of assets of the
Properties held for sale as of September 30, 2002 and December 31, 2001.

5. OTHER ASSET DISPOSITIONS:

Office Segment

On September 30, 2002, the Company completed the sale of the Washington
Harbour Phase II Land located in the Georgetown submarket of Washington, D.C.
The sale generated net proceeds of approximately $15,100 and a net loss of
approximately $900. The proceeds from the sale of the Washington Harbour Phase
II Land were used to pay down the Company's credit facility. This land was
wholly-owned by the Company and was included in the Company's Office Segment.

11

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

Resort/Hotel Segment

On September 30, 2002, the Company completed the sale of land adjacent
to the Company's Canyon Ranch - Tucson Resort/Hotel Property (the "Canyon-Ranch
- - Tucson Land") located in Tucson, Arizona to an affiliate of the management
company (unrelated to the Company) of the Company's Canyon Ranch Resort/Hotel
Properties. The sales price of the land was approximately $9,400, for which the
Company received $1,900 of net cash proceeds and a promissory note in the amount
of $7,520 with an interest rate of 6.50%, payable quarterly and maturing on
October 1, 2007, and a net gain of approximately $5,500 recorded in the "Gain on
Property Sales, net" caption of the Company's Consolidated Statements of
Operations for the three and nine months ended September 30, 2002. The net cash
proceeds from the sale of the Canyon-Ranch - Tucson Land were used to pay down
the Company's credit facility. This land was wholly-owned by the Company and was
included in the Company's Resort/Hotel Segment. The Company has committed to
fund a $3,200 construction loan to the purchaser which will be secured by 20
developed lots and a $640 letter of credit. The Company had not funded any of
the $3,200 commitment as of September 30, 2002.

6. JOINT VENTURES

Consolidated

Sonoma Mission Inn & Spa

On September 1, 2002, the Company entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts, Inc. ("FHR"),
pursuant to which the Company contributed a Resort/Hotel Property, the Sonoma
Mission Inn & Spa in Sonoma County, California and FHR purchased a 19.9% equity
interest in the limited liability company that owns the Resort/Hotel Property.
The Company continues to own the remaining 80.1% interest. The joint venture
generated approximately $8,000 in net cash proceeds to the Company that were
used to pay down the Company's credit facility. The Company has loaned $45,100
to the limited liability company that owns Sonoma Mission Inn & Spa at an
interest rate of LIBOR plus 300 basis points. The maturity date of the loan is
the earlier of the date on which the limited liability company obtains
third-party financing or one year. The limited liability company has the option
to extend the loan for two successive six-month periods by paying a fee. Under
the agreement with FHR, the Company will manage the limited liability company
that owns Sonoma Mission Inn & Spa and FHR will operate and manage the property
under the Fairmont brand. The joint venture transaction was accounted for as a
partial sale of this Resort/Hotel Property, resulting in an approximately $4,000
loss on the interest sold.

Unconsolidated

Three Westlake Park

On August 21, 2002, the Company entered into a joint venture
arrangement with an affiliate of General Electric Pension Fund ("GE") in
connection with which the Company contributed an Office Property, Three Westlake
Park in Houston, Texas and GE made a cash contribution. The joint venture is
structured such that GE holds an 80% equity interest in Three Westlake Park, a
415,000 square foot Office Property located in the Katy Freeway submarket of
Houston, and the Company continues to hold the remaining 20% equity interest in
the Office Property, which is accounted for under the equity method. The joint
venture generated approximately $47,100 in net cash proceeds to the Company,
including distributions to the Company resulting from the sale of its 80% equity
interest and $6,600 from the Company's portion of mortgage financing at the
joint venture level. None of the mortgage financing at the joint venture level
is guaranteed by the Company. The Company has no commitment to reinvest the cash
proceeds back into the joint venture. The joint venture was accounted for as a
partial sale of this Office Property, resulting in a gain of $17,000, net of
deferred gain of approximately $4,300. In addition, the Company manages and
leases the Office Property on a fee basis. During the nine months ended
September 30, 2002, the Company recognized $32 for these services.

12

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

Miami Center

On September 25, 2002, the Company entered into a joint venture
arrangement with an affiliate of a fund managed by JP Morgan Investment
Management, Inc. ("JPM") in connection with which JPM purchased a 60% interest
in Crescent Miami Center, L.L.C. with a cash contribution. Crescent Miami
Center, L.L.C. owns an Office Property, Miami Center in Miami, Florida. The
joint venture is structured such that JPM holds a 60% equity interest in Miami
Center, and the Company holds the remaining 40% equity interest in the Office
Property, which is accounted for under the equity method. The joint venture
generated approximately $117,000 in net cash proceeds to the Company, including
distributions to the Company resulting from the sale of its 60% equity interest
and $32,400 from the Company's portion of mortgage financing at the joint
venture level. None of the mortgage financing at the joint venture level is
guaranteed by the Company. The Company has a remaining commitment for deferred
maintenance items of approximately $700. The Company otherwise has no commitment
to reinvest the cash proceeds back into the joint venture. The joint venture was
accounted for as a partial sale of this Office Property, resulting in a gain of
approximately $4,600, net of deferred gain of approximately $3,500. The Company
will continue to manage Miami Center on a fee basis.

7. 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)

14

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 nine months ended September 30, 2002 or 2001, since the effect of their
conversion would be antidilutive.

8. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS:

15

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

9. 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 nine months ended September 30, 2002 and 2001, and identifiable assets for
each of the segments at September 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)

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

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

(2) Includes approximately $5,000 of net insurance proceeds
received in September 2002 as a result of an insurance claim
on one of the Company's Office Properties that had been
damaged as a result of a tornado.

(3) Includes interest and other income, behavioral healthcare
property income, preferred return paid to GMACCM, other
unconsolidated companies, less depreciation and amortization
of non-real estate assets and amortization of deferred
financing costs, corporate general and administrative expense,
interest expense and preferred dividends.

18

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

(4) 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 collaterized bond obligation. (See "Note
10. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for further discussion).

SIGNIFICANT LESSEES

See "Note 10. 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)

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

The Company has investments of 20% to 50% in six unconsolidated joint
ventures that own six Office Properties. 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.

The following is a summary of the Company's ownership in significant
unconsolidated 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 60% interest in Crescent Miami Center, L.L.C. is owned by
a fund advised by JP Morgan Investment Management, Inc. The Company will
continue to manage Miami Center on a fee basis.

(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Investment Management, Inc. The Company
recorded $1,142 in development, and leasing fees, related to this
investment during the nine months ended September 30, 2002. The 5 Houston
Center Office Property was completed on September 16, 2002.

(4) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Office Limited Partnership and
Houston PT Four Westlake Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund. The Company recorded $473 in
management and leasing fees for these Office Properties during the nine
months ended September 30, 2002.

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

(6) 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.

(7) On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to subsidiaries of the Company, pursuant to a
strict foreclosure, COPI's interests in 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

20

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

consolidated the operations of these entities beginning on the dates of the
asset transfers. The Woodlands Land Development Company, L.P. is an
unconsolidated equity investment of TWLC. Blue River Land Company, L.L.C.,
and Manalapan Hotel Partners, L.L.C., are unconsolidated equity investments
of CRDI. See "Note 20. Subsequent Event" for a description of the Company's
acquisition of the remaining 75% interest in the Manalapan Hotel Partners,
L.L.C.

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

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

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

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

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

(13) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of 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 $381,
and approximately $63 in cash, or total consideration valued at
approximately $444. At September 30, 2002, Mr. Goff's book value in DBL was
approximately $401.

(14) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of the Company's Resort/Hotel Properties.

(15) The remaining 35% interest in Canyon Ranch Las Vegas is owned by an
affiliate of the management company of two of the Company's Resort/Hotel
Properties.

(16) The SunTX Fulcrum Fund, L.P's (the "Fund") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial capital
appreciation. The remaining 66.7% of the Fund is owned by a group of
individuals unrelated to the Company. The Company's ownership percentage
will decline by the closing date of the Fund as capital commitments from
third parties are secured. The Company's projected ownership interest at
the closing of the Fund is approximately 7.5% based on the Fund manager's
expectations for the final Fund capitalization. The Company accounts for
its investment in the Fund under the cost method. The Company's investment
at September 30, 2002 was $7,800.

21

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

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 nine months ended September 30,
2001 are consolidated in the September 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 September 30, 2002:

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

o Other Residential Development Corporations - This includes the
Blue River Land Company, L.L.C, an unconsolidated investment of
CRDI, MVDC and HADC;

o Resort/Hotel - This includes Manalapan Hotel Partners, L.L.C., an
unconsolidated investment of CRDI;

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

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

Balance Sheets as of December 31, 2001:

o Crescent Resort Development, Inc.- This Residential Development
Corporation was consolidated beginning February 14, 2002 as a
result of the COPI transaction. Its unconsolidated investments,
the Blue River Land Company, L.L.C. and Manalapan Hotel Partners,
L.L.C., are included under "Other Residential Development
Corporations" in the following Balance Sheets as of September 30,
2002;

o The Woodlands Land Company, Inc. - This Residential Development
Corporation 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 September 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 TCL; 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 nine months ended September 30,
2002:

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

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 the Blue
River Land Company, L.L.C. for the period February 15 through
September 30, 2002; and the operating results of MVDC and HADC
for the nine months ended September 30, 2002;

o Resort/Hotel - This includes Manalapan Hotel Partners, L.L.C., an
unconsolidated investment of CRDI.

22

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

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

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

Summary Statement of Operations for the nine months ended September 30,
2001:

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

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

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

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

o Office - This includes the operating results for Main Street
Partners, 5 Houston Center, Four Westlake Plaza, Bank One Tower
and Woodlands CPC, for the nine months ended September 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)

SUMMARY STATEMENTS OF OPERATIONS:

- ----------

(1) This column includes information for Three Westlake Park, which was
contributed by the Company to a joint venture on August 21, 2002 and Miami
Center, which was contributed by the Company to a joint venture on
September 25, 2002. Therefore, net income for 2002 includes only 10 days of
August and the month of September for Three Westlake Park and only five
days of September for Miami Center.

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

(3) Excludes the goodwill write-off for Temperature-Controlled Logistics
Segment, which is recorded on the accompanying financial statements as a
cumulative change in accounting principle.

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

(5) This column includes information for Four Westlake and Bank One Tower,
which were contributed by the Company to a joint venture on July 30, 2001.
Therefore, net income for 2001 includes only the months of August and
September for these properties.

25

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

UNCONSOLIDATED PROPERTY DISPOSITIONS

During the nine months ended September 30, 2002, the Woodlands CPC sold
three office properties located within The Woodlands, Texas. The sales generated
net proceeds, after the repayment of debt, of approximately $10,100, of which
the Company's portion was approximately $5,300. The sales generated a net gain
of approximately $11,800, of which the Company's portion was approximately
$6,200. The proceeds received by the Company were primarily used to pay down the
Company's credit facility.

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

As of September 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 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 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, 2001 to waive collection of deferred rent.

AmeriCold Logistics deferred $20,600 of the total $102,400 of rent
payable for the nine months ended September 30, 2002. The Company's share of the
deferred rent was $8,200. The Company recognizes rental income when earned and
collected and has not recognized the $8,200 of deferred rent in equity in net
income of the Temperature-Controlled Logistics Properties for the nine months
ended September 30, 2002.

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

26

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

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 nine months ended September 30, 2002,
the Company recognized an impairment charge related to this investment of
$5,200. As a result of this impairment charge, at September 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 September 30, 2002 are shown below.

- ----------

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

(2) Senior Note - Note A: $83,995 at variable interest rate, LIBOR + 189 basis
points, $4,941 at variable interest rate, LIBOR + 250 basis points with a
LIBOR floor of 2.50% . Note B: $24,704 at variable interest rate, LIBOR +
650 basis points with a LIBOR floor of 2.50%. Mezzanine Note - $19,800 at
variable interest rate, LIBOR + 890 basis points with a LIBOR floor of
3.0%. Interest-rate cap agreement maximum LIBOR of 4.52% on all notes. All
notes are amortized on a 25-year amortization schedule.

(3) This facility has two one-year extension options.

(4) The Company obtained a letter of credit to guarantee the repayment of up to
$4,250 of principal of the Main Street Partners, L.P. loan.

(5) The Company has made a full and unconditional guarantee of loan from Fleet
up to $82,500 for the construction of 5 Houston Center. At September 30,
2002, $48,654 was outstanding.

(6) On February 14, 2002, the Company executed an agreement with COPI to
transfer, pursuant to a strict foreclosure, COPI's 5% interest in TWLC.
Therefore, as of February 14, 2002, TWLC is fully consolidated. This
schedule reflects TWLC's 42.5% interest in TWLDC.

(7) There was an interest rate cap agreement executed with this agreement which
limits interest rate exposure on the notional amount of $145,000 to a
maximum LIBOR rate of 9.0%.

28

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

(8) To mitigate interest rate exposure, TWLDC has entered into an interest rate
swap against the $50,000 notional amount to effectively fix the interest
rate at 5.28%. TWLDC has also entered into an interest rate swap against
$50,000 notional amount to effectively fix the interest rate at 4.855%.

(9) There was an interest rate cap agreement executed with this agreement which
limits interest rate exposure on the notional amount of $33,750 to a
maximum LIBOR rate of 9.0%.

(10) There was an interest rate cap agreement executed with this agreement which
limits interest rate exposure on the notional amount of $19,500 to a
maximum LIBOR rate of 8.5%.

(11) The Company guarantees $2,970 of this facility.

The following table shows, as of September 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. The overall weighted average maturity
would be 3.7 years assuming the Company's election of extension options on
its debt instruments.

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

- ----------

(1) These amounts do not represent the effect of two one-year extension options
on TWLDC's Fleet credit facility and one Fleet National Bank loan, totaling
$95,000, that have maturity dates of November 2002 and October 2003.

29

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

11. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:

The following is a summary of the Company's debt financing at September
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 September 30,
2002, the interest rate was 5.15%), and (ii) 600 basis points for the
Mezzanine note (at September 30, 2002, the interest rate was 9.50%). The
blended rate at September 30, 2002 for the two notes was 5.84%. Both notes
have a LIBOR floor of 3.50%. 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 September 30, 2002, the interest rate was 4.75%). The warehouse
facility bears interest at Prime plus 100 basis points (at September 30,
2002, the interest rate was 5.75%) and is limited to $10,000. The blended
rate at September 30, 2002 for the vertical facility and club loan and the
warehouse facility was 5.00%.

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

(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) It is the Company's intention to repay the note in full in November 2002.

31

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

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

(12) The notes were issued in an offering registered with the Securities and
Exchange Commission ("SEC").

(13) The $400,000 credit facility with Fleet 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 September
30, 2002, the maximum borrowing capacity under the credit facility was
approximately $400,000.

(14) The outstanding balance excludes letters of credit issued under the
Company's credit facility of $15,200 which reduces the Company's
maximum borrowing capacity.

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 $530,300 of hedged variable rate debt, the percentages for
fixed rate debt and variable rate debt are 91% and 9%, respectively.

(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 7.88%.

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

Listed below are the aggregate principal payments by year required as
of September 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 credit facility and two one-year extension options on the Deutsche Bank
- CMBS Loan, as noted above.

The Company has $185,655 of secured and unsecured debt maturing through
December 31, 2003, consisting primarily of the Cigna Note, and debt related to
the Residential Development Segment. Borrowings under the Company's credit
facility are expected to be used to repay the $63,500 Cigna Note maturing in
2002, and the $122,155 of debt maturing in 2002 and 2003 is primarily related to
the Residential Development Segment and will be repaid with cash from operations
of the Residential Development Segment.

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
credit facility and the Fleet Fund I and II Term Loan after the notice and cure
periods for the other indebtedness have passed. As of September 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

32

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

expiration of that period. During the nine months ended September 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)., Crescent Finance Company.

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375,000
in senior, unsecured notes due 2009. On October 15, 2002, the Company completed
an exchange offer pursuant to which it exchanged notes registered with the
Securities and Exchange Commission for $325,000 of the privately issued notes.
In addition, the Company registered for resale the remaining $50,000 of the
privately issued notes, which were issued to Richard E. Rainwater, the Chairman
of the Board of Trust Managers, and certain of his affiliates and family
members. 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 is
payable on April 15 and October 15 of each year, beginning October 15, 2002.

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 Company's credit facility, and the remaining proceeds were
used to pay down $5,000 of short-term indebtedness and redeem approximately
$52,000 of preferred Class A Units in Funding IX from GMACCM. See "Note 16. Sale
of Preferred Equity Interests in Subsidiary" for a description of the Class A
Units in Funding IX previously held by GMACCM.

12. 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 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.

33

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

13. 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 September 30, 2002, the Company had entered into six 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."

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

- ----------

(1) During the nine months ended September 30, 2002, the Company entered into
agreements for three additional cash flow hedges that will be issued in
2003, and will replace the three existing cash flow hedges.

The Company has designated its six 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 $19,000 to $20,700 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 September 30, 2002, CRDI had entered into three cash flow
hedge agreements, which are accounted for in conformity with SFAS Nos. 133 and
138.

34

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

The following table shows information regarding CRDI's cash flow hedge
agreements as of September 30, 2002 and additional capitalized interest
recognized for the nine months ended September 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.

14. 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 $6,600 total consolidated income tax benefit at September 30, 2002
includes tax expense related to the operations of the TRS of $100, 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 $10,200 for the nine months ended September 30, 2002.

The Company's total net tax asset of approximately $37,100 includes
$26,000 of net deferred tax assets and an $11,100 net current tax asset at
September 30, 2002. The tax effects of each type of temporary difference that
give rise to a significant portion of the $26,000 deferred tax asset are as
follows:

Deferred recognition of DMDC club membership revenue $ 31,900
Recognition of development land cost of sales at DMDC
and TWLC (10,500)
Recognition of hotel lease buyout 6,700
Other (2,100)
---------
Total deferred tax asset $ 26,000
=========

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
September 30, 2002, no valuation allowances have been recorded.

The $11,100 net current tax asset results primarily from anticipated
tax refunds related to recognition of a net operating loss carryback and 2001
overpayments of $6,600 for DMDC and cash paid for income taxes of $10,200.

35

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

15. 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 of the Company 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 nine months ended September 30, 2002, there
were 53,287 units exchanged for 106,574 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 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.

16. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY:

During the year ended December 31, 2000, the Company formed Funding IX
and contributed seven Office Property and two Resort/Hotel Properties to Funding
IX. As of September 30, 2002, Funding IX held one 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, GMACCM purchased $275,000
of non-voting, redeemable preferred Class A Units in Funding IX (the "Class A
Units"). The Class A Units were 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.

All of the Class A Units outstanding at December 31, 2001, were
redeemed by Funding IX during the nine months ended September 30, 2002. As a
result of the redemption, GMACCM ceased to be a partner of Funding IX or to have
any rights or obligations as a partner and the Company became the sole partner
of Funding IX. In connection with the final redemption of Class A Units,
Crescent SH IX, Inc. ("SH IX") transferred the 14,468,623 common shares of the
Company held by SH IX to the Company which holds these common shares as treasury
shares, and the intracompany loan between Funding IX and SH IX was repaid.

Following the redemption of all the outstanding Class A Units, Funding
IX distributed two of its Office Properties, 44 Cook Street and 55 Madison, and
all the equity interests in the limited liability companies that own two other
Office Properties, Miami Center and Chancellor Park, to the Operating
Partnership. The Operating Partnership then contributed 44 Cook Street and 55
Madison to another Operating Partnership subsidiary, Funding VIII, and entered
into a joint venture arrangement for Miami Center.

17. 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 September 30, 2002, the Company had
repurchased 20,256,423

36

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

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 September 30, 2002.

- ----------

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

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

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

(4) Amount represents distribution for a partial quarter for shares issued May
17, 2002.

38

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

18. RELATED PARTY TRANSACTIONS:

DBL HOLDINGS, INC.

As of September 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 $381, and
approximately $63 in cash, or total consideration valued at approximately $444
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 September 30, 2002, Mr.
Goff's book value in DBL was approximately $401.

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 September 30,
2002, DBL had an approximately $14,407 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 - I Class C - I is the privately
placed equity interest of a collateralized bond obligations. During the nine
months ended September 30, 2002, the Company recognized an impairment charge
related to this investment of $5,200. As a result of this impairment charge, at
September 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, pursuant to a strict
foreclosure, COPI's 60% general partner interest in COPI Colorado, L.P. which
owns 10% (representing all of the voting stock) of 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 20% general partner interest in COPI Colorado and, accordingly,
a 2.0% interest in CRDI, with a cost basis of $410. The remaining 20% general
partner interest in COPI Colorado, and 2.0% interest in CRDI, 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 September 30, 2002, the Company had approximately $37,768 of
recourse loans outstanding (including approximately $5,299 loaned during the
nine months ended September 30, 2002) to certain employees and trust managers of
the Company on a full recourse basis under the Company's stock 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 $26,273 of the $37,768 total outstanding loans at September 30,
2002. As of September 30, 2002, approximately

39

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

$300 of current interest was outstanding related to these loans. No conditions
exist at September 30, 2002 which would cause any of the loans to be in default.

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 Company granted loans through
July 29, 2002, with Applicable Federal Rates of 2.70% and 2.81%, which reflects
a below prevailing market interest rate, therefore, the Company recorded
compensation expense. 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 reflecting a below prevailing market interest
rate. 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 July 29, 2002 amendment resulted in $1,900 additional compensation
expense for the three and nine months ended September 30, 2002, recorded in the
"Corporate General and Administrative" caption of the Company's Consolidated
Statements of Operations. Effective July 29, 2002, the Company no longer offers
to its employees and trust managers 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
certain of 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
registered for resale the notes issued to the Rainwater Group. See "Note 11.
Notes Payable and Borrowings under Credit 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.

19. 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 entered into an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, 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
pre-packaged 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

40

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

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 dates 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 also agreed,
however, that it will issue common shares with a minimum dollar value of
approximately $2,200 to the COPI stockholders, even if it would cause the total
costs, claims and expenses that it pays to exceed $14,000. Currently, the
Company estimates that the value of the common shares that will be issued to the
COPI stockholders will be between approximately $2,200 and $5,400. 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 from
the estimated amounts, but will have a value of at least $2,200.

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 and unitholders of the Company. Crescent Spinco then would purchase
COPI's interest in AmeriCold Logistics for between $15,000 and $15,500. COPI 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, Messrs. 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
occurs.

Previously, the Company held a first lien security interest in COPI's
entire membership interest in AmeriCold Logistics. REIT rules prohibit the
Company from acquiring or owning the membership interest that COPI owns in
AmeriCold Logistics. Under the Agreement, the Company agreed to allow COPI to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to that of Bank of
America.

If the COPI bankruptcy plan is approved by the required vote of the
shares of COPI common stock and approved by the bankruptcy court, the holders of
COPI's common stock will receive the Company's common shares. As stockholders of
COPI, Mr. Rainwater and Mr. Goff will also receive the Company's common shares.

Pursuant to the COPI bankruptcy plan, the current and former directors
and officers of COPI and the current and former directors and officers of the
Company also have received a release from COPI of liability for any actions
taken prior to February 14, 2002, and, depending on various factors, will
receive certain liability releases from COPI and its stockholders.

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)

20. SUBSEQUENT EVENT:

RESORT/HOTEL SEGMENT

In October 2002 in a series of transactions, the Company acquired the
remaining 75% interest in Manalapan Hotel Partners, L.L.C., which owns the Ritz
Carlton Palm Beach in Florida. The Company acquired the additional interests in
this partnership for $6,500, which was funded under the Company's credit
facility. Subsequently, the Company entered into a joint venture arrangement
with Westbrook Real Estate Fund IV ("Westbrook"), pursuant to which Westbrook
purchased a 50% equity interest in Manalapan Hotel Partners, L.L.C. The Company
continues to hold the remaining 50% equity interest in the Ritz Carlton Palm
Beach. Simultaneously with admission of Westbrook into the partnership, the
Dresdner Bank AG loan of $65,220 was repaid with proceeds from a new, secured
financing agreement with Corus Bank for $56,000 and additional equity
contributions. The Corus Bank loan has an interest rate of LIBOR plus 400 basis
points with an initial three year term and containing two one-year extension
options. The Company has guaranteed $3,000 of the Corus Bank loan.

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, as amended. 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, which reflect the Company's results
of operations and financial condition. The words "anticipates," "believes,"
"expects," "intends," "future," "may," "will," "should," "plans," "estimates,"
"potential," or "continue," or the negative of these terms, or other similar
expressions, identify forward-looking statements.

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

CRESCENT REAL ESTATE EQUITIES COMPANY
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 nine months ended September 30, 2002 and
2001 and the variance in dollars between the three and nine months ended
September 30, 2002 and 2001. See "Note 9. Segment Reporting" included in "Item
1. Financial Statements" for financial information about the investment
segments.

44

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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

Revenue

Total revenues increased $75.1 million, or 43.3%, to $248.5 million for
the quarter ended September 30, 2002, as compared to $173.4 million for the
quarter ended September 30, 2001. The components of the increase are:

o an increase in Residential Development Property revenue of
$43.8 million due to the consolidation of three Residential
Development Corporations beginning on February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property revenue of $43.7 million
due to the consolidation of the operations of eight of the
Resort/Hotel Properties beginning on February 14, 2002, as a
result of the COPI transaction (previously the Company
recognized lease payments related to these Properties);
partially offset by

o a decrease in interest and other income of $7.9 million
primarily attributable to the $5.1 million of income and gain
on sale of marketable securities and other income recognized
in the third quarter of 2001; and

o a decrease in Office Property revenue of $4.5 million
primarily due to a decrease of $7.9 million from the
disposition of five Office Properties in 2001, the
contribution of two Office Properties to joint ventures in
2001 and the contribution of two Office Properties to joint
ventures in 2002, decreased expense recovery revenue of $1.6
million and decreased rental revenues of $0.8 million,
partially offset by net insurance proceeds of approximately
$5.0 million received in September 2002 as a result of an
insurance claim on one of the Company's Office Properties that
had been damaged as a result of a tornado and $1.3 million of
rental revenue from the Office Property acquired in the third
quarter of 2002.

Expense

Total expense increased $92.0 million, or 60.1%, to $245.0 million for
the three months ended September 30, 2002, as compared to $153.0 million for the
three months ended September 30, 2001. The primary components of this increase
are:

o an increase in Resort/Hotel Property expense of $44.6 million
due to the consolidation of the operations of eight of the
Resort/Hotel Properties beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recognized lease payments related to these Properties); and

o an increase in Residential Development Property expense of
$42.1 million due to the consolidation of three Residential
Development Corporations beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method);

o an increase in depreciation and amortization expense of $7.3
million primarily due to the consolidation of the operations
of three Residential Development Corporations beginning
February 14, 2002 as a result of the COPI transaction;
partially offset by

45

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

o a decrease due to the recognition in the third quarter of 2001
of $3.6 million due to impairment charges relating to the
behavioral healthcare properties; and

o a decrease in Office Property operating expense of $2.8
million primarily due to the disposition of five Office
Properties in 2001, the contribution of two Office Properties
to joint ventures in 2001 and the contribution of two Office
Properties to joint ventures in 2002.

Other Income and Expense

Other income increased $14.9 million, or 156.8%, to $24.4 million for
the three months ended September 30, 2002, as compared to $9.5 million for the
three months ended September 30, 2001, as a result of:

o an increase due to the recognition in the third quarter of
2002 of a $23.2 million gain on two properties that were
contributed to joint ventures and the sale of Canyon Ranch -
Tucson Land compared with the recognition of a $1.1 million
gain on property sales in the third quarter of 2001; partially
offset by

o a decrease in equity in net income of unconsolidated companies
of $7.2 million, primarily due to the consolidation of three
Residential Development Corporations beginning February 14,
2002, as a result of the COPI transaction (previously the
Company recorded its interests in the Residential Development
Corporations under the equity method).

Income Tax Benefit

The Company recognized consolidated income tax benefit of $2.7 million
for the three months ended September 30, 2002, primarily related to Resort/Hotel
and Residential Development operations. These operations were not consolidated
for the three months ended September 30, 2001, therefore, no consolidated income
tax expense was recognized for that period.

Discontinued Operations

The income from discontinued operations from assets sold and held for
sale increased $0.9 million, or 180%, to $1.4 million for the three months ended
September 30, 2002, compared to $0.5 million for the three months ended
September 30, 2001. This increase is primarily due to the gains on disposals,
net of minority interest, of two Office Properties sold during the three months
ended September 30, 2002.

46

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

SEGMENT ANALYSIS

Office Segment

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

o decreased revenue of $7.9 million due to the disposition of
five Office Properties in 2001, the contribution of two Office
Properties to joint ventures in 2001 and the contribution of
two Office Properties to joint ventures in 2002;

o decreased recovery revenue of $1.6 million primarily due to
lease turnover; and

o decreased rental revenues of $0.8 million; partially offset by

o net insurance proceeds of $5.0 million received in September
2002 as a result of an insurance claim on one of the Company's
Office Properties that had been damaged as a result of a
tornado; and

o $1.3 million of rental revenue from the Office Property
acquired in the third quarter in 2002.

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

o decreased expenses of $3.1 million due to the disposition of
five Office Properties in 2001, the contribution of two Office
Properties to joint ventures in 2001 and the contribution of
two Office Properties to joint ventures in 2002;

o decreased office property utility expense of $2.4 million due
to lower rates as a result of a one-year energy contract
effective beginning in the first quarter of 2002 for certain
Texas Properties; and

o decreased real estate taxes of $1.6 million; partially offset
by

o increased operating expenses of $4.4 million attributable to
$2.1 million of security and insurance expense primarily
related to the events of September 11, 2001 and administration
expense of $2.3 million including legal fees, bad debt expense
and payroll costs.

Resort/Hotel Segment

On February 14, 2002, 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 September 30, 2002. Revenues prior to February 14, 2002
represent lease payments to the Company.

47

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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.

Residential Development Segment

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, pursuant to a
strict 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 components of the decrease in Residential Development Property net
operating income are:

o lower lot sales of $2.2 million at TWLC;

o lower gain recognized on disposition of properties of $1.7
million at TWLC

o a change in presentation of capitalized interest of $2.4
million, due to consolidation of DMDC and CRDI in 2002;
partially offset by

o higher unit sales and other operating revenues of $1.7 million
at CRDI; and

o higher average price per lot of $1.1 million at DMDC.

Temperature-Controlled Logistics Segment

The decrease in equity in earnings of unconsolidated
Temperature-Controlled Logistics Properties is primarily due to the Company's
$4.5 million portion of deferred rent recorded in the third quarter of 2002
compared with the Company's $3.5 million portion of deferred rent recorded in
the third quarter of 2001.

48

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001

Revenues

Total revenues increased $223.0 million, or 41.5%, to $760.2 million
for the nine months ended September 30, 2002, as compared to $537.2 million for
the nine months ended September 30, 2001. The components of the increase are:

o an increase in Residential Development Property revenue of
$176.9 million due to the consolidation of three Residential
Development Corporations beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property revenue of $103.7 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 interest and other income of $30.6 million,
primarily due to:

o the collection of $6.5 million from Charter
Behavioral Health Systems in 2001 on a working
capital loan that was previously expensed in
conjunction with the recapitalization of CBHS;

o the income on marketable securities and the gain
recognized on the sale of marketable securities
aggregating $11.9 million in the first nine months of
2001;

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

o the recognition in 2001 of $2.3 million in lease
commission and development fee revenue for the 5
Houston Center Office Property which was under
construction;

o a decrease in interest income of $1.8 million in 2002
related to lower escrow balances for a plaza
renovation at an Office Property that has been
completed; and

o a decrease in interest income of $2.6 million on cash
and certain notes receivable as a result of reduced
interest rates.

o a decrease in Office Property revenue of $27.0 million
primarily due to the disposition of five Office Properties in
2001, the contribution of two Office Properties to joint
ventures in 2001 and the contribution of two Office Properties
to joint ventures in 2002 ($29.7 million), and decreased lease
termination fees of $2.5 million, partially offset by net
insurance proceeds of approximately $5.0 million received in
September 2002 as a result of an insurance claim on one of the
Company's Office Properties that had been damaged as a result
of a tornado.

49

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Expenses

Total expense increased $260.6 million, or 55.3%, to $731.5 million for
the nine months ended September 30, 2002, as compared to $470.9 million for the
nine months ended September 30, 2001. The primary components of this increase
are:

o an increase in Residential Development Property expense of
$161.3 million due to the consolidation of three Residential
Development Corporations beginning February 14, 2002, as a
result of the COPI transaction (previously the Company
recorded its share of earnings under the equity method); and

o an increase in Resort/Hotel Property expense of $110.7 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); and

o an increase in depreciation and amortization expense of $16.0
million primarily due to the consolidation of the operations
of three Residential Development Corporation beginning
February 14, 2002 as a result of the COPI transaction;
partially offset by

o a decrease due to the recognition in 2001 of $18.9 million in
impairment charges primarily relating to behavioral healthcare
properties of $7.0 million and the impairment of $11.9 million
relating to the conversion of the Company's preferred interest
in Metropolitan Partners, LLC into common shares of Reckson
Associates Realty Corp.;

o a decrease in Office Property operating expense of $7.2
million primarily due to a decrease of $11.0 million from the
disposition of five Office Properties in 2001, the
contribution of two Office Properties to joint ventures in
2001 and the contribution of two Office Properties to joint
ventures in 2002, partially offset by increases in repairs and
maintenance of $3.6 million due to timing of expenses; and

o a decrease in interest expense of $3.3 million primarily
attributable to capitalizing $5.7 million of interest expense
in 2002, a decrease in the weighted average interest rate of
19 basis points (from 7.93% to 7.74%), or $4.2 million of
interest expense, due to the debt refinancing in May of 2001
and lower LIBOR rates, partially offset by an increase of $6.6
million due to a $70.6 million increase in the average debt
balance, from $2,293 million to $2,408 million.

Other Income and Expense

Other income increased $2.2 million, or 5.9%, to $39.6 million for the
nine months ended September 30, 2002, as compared to $37.5 million for the nine
months ended September 30, 2001, primarily as a result of:

o an increase in gain on property sales, net of $21.5 million,
primarily due to a gain of $17.0 million on the partial sale
of the Three Westlake Office Property, a gain of $5.5 million
on the sale of Canyon Ranch - Tucson Land and a gain of $4.6
million on the partial sale of Miami Center, net of a loss of
$4.9 million on the partial sale of Sonoma Mission Inn & Spa
and the sale of Washington Harbour Land; partially offset by

o a decrease in equity in net income of unconsolidated companies
of $19.3 million, primarily due to the $5.2 million impairment
of an investment in DBL Holdings, Inc. during 2002, and the
Company's additional $3.1 million portion of Americold
Logistics' deferral of rent payable, $2.9 million due to the
change in the base rent recognition method for the
Temperature-Controlled Logistics Segment from straight-line to
cash basis and $4.8 million due to the consolidation of three
Residential Development Corporations beginning February 14,
2002, as a result of the COPI transaction, (previously the
Company recorded its investment in the Residential Development
Corporations under the equity method).

50

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Income Tax Benefit

The Company's $6.6 million total consolidated income tax benefit for
the nine months ended September 30, 2002 includes tax expense related to the
operations of the Resort/Hotel and Residential Development Operations of $0.1
million, offset by a tax benefit of $6.7 million. The $6.7 million benefit
results from the temporary difference between the financial reporting basis and
the respective tax basis of the hotel leases acquired as part of 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.

Discontinued Operations

The income from discontinued operations from assets held for sale
increased $4.7 million, or 276.5%, to $6.4 million for the nine months ended
September 30, 2002, compared to $1.7 million for the nine months ended September
30, 2001. This increase is primarily due to:

o a gain on dispositions of $6.9 million, net of minority
interest, attributable to the sales of the five Office
Properties in 2002; partially offset by

o an impairment charge of $0.6 million in 2002, related to a
behavioral healthcare property. This amount represents the
difference between the carrying value and the estimated sales
price less costs of the sale for this property; and

o a decline in operating income of $1.8 million for the five
Office Properties sold in 2002 that contributed a full year
of operating income in 2001 and a partial year of operating
income in 2002.

Cumulative Effect of a Change in Accounting Principle

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

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 nine
months ended September 30, 2001. No such event or write-off occurred during the
nine months ended September 30, 2002.

SEGMENT ANALYSIS

Office Segment

51

CRESCENT REAL ESTATE EQUITIES COMPANY
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 $29.7 million due to the disposition of
five Office Properties in 2001, the contribution of two Office
Properties to joint ventures in 2001 and the contribution of
two Office Properties to joint ventures in 2002; and

o decreased lease termination fees of $2.5 million; partially
offset by

o net insurance proceeds of $5.0 million received in September
2002 as a result of an insurance claim on one of the Company's
Office Properties that had been damaged as a result of a
tornado.

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

o decreased expenses of $11.0 million due to the disposition of
five Office Properties in 2001, the contribution of two Office
Properties to joint ventures in 2001 and the contribution of
two Office Properties to joint ventures in 2002; and

o decreased Office Property utility expense of $8.5 million due
to lower rates as a result of a one-year energy contract
effective beginning in first quarter of 2002 for certain Texas
Properties; partially offset by

o increased operating expenses of $6.7 million attributable to
security and insurance expense primarily related to the events
of September 11, 2001 and $5.6 million primarily attributable
to the timing of repairs and maintenance and increased
administrative expenses, including legal fees, bad debt
expense, and payroll costs.

Resort/Hotel Segment

On February 14, 2002, 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 September 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 beginning 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 71% and decreases in revenue per
available room/guest night from $331 to $319 (3.6% decrease) at the
luxury and destination fitness resorts and spas; and

o decreases in occupancy from 72% to 71%, and revenue per available room
from $85 to $81 (4.7% decrease) at the business-class hotels.

52

CRESCENT REAL ESTATE EQUITIES COMPANY
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, pursuant to a
strict 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 a decrease of $5.2 million resulting from a change in
presentation of capitalized interest due to the consolidation
of DMDC and CRDI in 2002; and

o a decrease of $1.4 million resulting from the cumulative
effect of a change in accounting principle due to net goodwill
impairment at CRDI resulting from the adoption of SFAS No. 142
on January 1, 2002; partially offset by

o higher lot and unit sales of $8.8 million at CRDI and DMDC and
$4.3 million due to the gain recognized on the disposition of
two properties at The Woodlands; offset by lower lot sales of
$8.1 million at TWLC and MVDC.

53

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Temperature-Controlled Logistics Segment

This decrease in equity in earnings of unconsolidated
Temperature-Controlled Logistics Properties is primarily due to the Company's
$8.2 million portion of the deferred rent for the nine months of 2002 compared
with the Company's $5.1 million portion of deferred rent for the first nine
months of 2001, and $2.9 million related to the change in base rent recognition
from straight-line to cash basis for the year, partially offset by a decrease in
interest expense of $0.8 million.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Operating Activities

The Company's cash provided by operating activities of $152.7 million
is attributable to Property operations.

Investing Activities

The Company's cash provided by investing activities of $106.0 million
is attributable to:

o $164.1 million of proceeds from joint venture partners;

o $76.6 million of net sales proceeds primarily attributable to
the sale of five Office Properties, the sale of three
behavioral healthcare properties, and the sale of two other
assets;

o $11.7 million from return of investment in unconsolidated
Residential Development Properties and Office Properties;

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

o $12.7 million decrease in restricted cash.

The cash provided by investing activities is partially offset by:

o $97.4 million primarily for acquisition of one Office
Property;

o $36.6 million for incremental and non-incremental revenue
generating tenant improvement and leasing costs for Office
Properties;

54

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

o $28.4 million of additional investment in unconsolidated
companies, consisting primarily of investments in the upscale
Residential Development Properties, particularly related to
CRDI's investment in the Tahoe Mountain Resorts from January 1
through February 14, 2002;

o $25.3 million for property improvements for rental properties,
primarily attributable to non-recoverable building
improvements for the Office Properties and replacement of
furniture, fixtures and equipment for the Resort/Hotel
Properties;

o $7.8 million increase in notes receivable due to a $7.5
million promissory note received in the sale of the Canyon
Ranch - Tucson Land; and

o $1.7 million for development of investment properties.

Financing Activities

The Company's use of cash in financing activities of $212.4 million is
primarily attributable to:

o net payments under the Company's credit facility of $476.0
million;

o redemptions from GMACCM of preferred interests in a subsidiary
of the Company of $218.4 million;

o a decrease in notes payable of $171.5 million;

o distributions to common shareholders and unitholders of $132.5
million;

o residential development properties notes payments of $84.9
million;

o common share repurchase of $28.5 million;

o distributions to preferred shareholders of $15.2 million;

o $8.9 million of deferred financing costs for $375 million
senior, unsecured notes; and

o net capital distributions to joint venture partners of $8.5
million, primarily due to distributions to joint venture
preferred equity partners.

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

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

o borrowings under the credit facility of $372.0 million;

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

o residential development properties notes borrowings of $54.7
million; and

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

55

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

LIQUIDITY REQUIREMENTS

As of September 30, 2002, the Company had unfunded capital expenditures
of approximately $40.9 million relating to capital investments. The table below
specifies the Company's total capital expenditures relating to these projects,
amounts funded as of September 30, 2002, amounts remaining to be funded, and
short-term and long-term capital requirements.

- ----------

(1) All amounts are approximate.

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

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

(4) The Company expects to form and capitalize a separate entity to be
owned by the Company's shareholders and unitholders, and to cause the
new entity to commit to acquire COPI's entire membership interest in
AmeriCold Logistics.

(5) The Company committed to a construction loan to the purchaser of the
land which will be secured by 20 developed lots and a $0.6 million
letter of credit

The Company expects to fund its short-term capital requirements of
approximately $32.1 million through a combination of cash, net cash flow from
operations, construction financing, return of capital (investment) from the
Residential Development Corporations and borrowings under the Company's credit
facility. The Company plans to meet its maturing debt obligations through
December 31, 2003 of approximately $185.7 million, primarily through additional
borrowings under the Company's credit facility and cash from operations of the
Residential Development Segment.

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 unfunded expenses related to the COPI bankruptcy of
approximately $3.2 million to $6.4 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 borrowings
under the Company's credit facility.

The Company's long-term liquidity requirements as of September 30, 2002
consist primarily of debt maturities after December 31, 2003, which totaled
approximately $2.2 billion as of September 30, 2002. The Company also has $8.8
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.

56

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 Company's credit facility, under which the
Company had up to $205.8 million of borrowing capacity as of September
30, 2002;

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

o Additional debt secured by existing underleveraged 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
Company's credit facility to a level that would further 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
September 30, 2002, the Company guaranteed or provided letters of credit related
to approximately $55.9 million of unconsolidated debt and had obligations to
potentially provide an additional $33.8 million in unconsolidated debt
guarantees, primarily related to construction loans. The Company also guaranteed
$15.2 million in letters of credit under its credit facility at September 30,
2002. See "Investments in Real Estate Mortgages and Equity of Unconsolidated
Companies" and "Unconsolidated Debt Analysis" 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 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 entered into an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI, and, pursuant to a
strict foreclosure, 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

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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 dates 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
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 also agreed,
however, that it will issue common shares with a minimum dollar value of
approximately $2.2 million to the COPI stockholders, even if it would cause the
total costs, claims and expenses that is pays to exceed $14.0 million.
Currently, the Company estimates that the value of the common shares that will
be issued to the COPI stockholders. will be between approximately $2.2 million
and $5.4 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 from the estimated amounts, but will have a value of at
least $2.2 million.

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 accrued interest. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders and unitholders 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, Messrs. 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.

Previously, the Company held a first lien security interest in COPI's
entire membership interest in AmeriCold Logistics. REIT rules prohibit the
Company from acquiring or owning the membership interest that COPI owns in
AmeriCold Logistics. Under the Agreement, the Company agreed to allow COPI to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to that of Bank of
America.

If the COPI bankruptcy plan is approved by the required vote of the
shares of COPI common stock and approved by the bankruptcy court, the holders of
COPI's common stock will receive the Company's common shares. As stockholders of
COPI, Mr. Rainwater and Mr. Goff will also receive the Company's common shares.

Pursuant to the COPI bankruptcy plan, the current and former directors
and officers of COPI and the current and former directors and officers of the
Company also have received a release from COPI of liability for any actions
taken prior to February 14, 2002, and, depending on various factors, will
receive liability releases from COPI and its stockholders.

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.

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CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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
million to $800 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 September 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 September 30, 2002.

- ----------

(1) Additionally, 15,230 of the Company's common shares were repurchased
outside of the Share Repurchase Program as part of an executive incentive
program, and the Company contributed 11,354 treasury shares to the
Company's scholarship fund during the three months ended September 30,
2002.

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.

OFFICE PROPERTY ACQUISITION

On August 29, 2002, the Company acquired Johns Manville Plaza, a
29-story, 675,000 square foot class A office building located in Denver,
Colorado. The Company acquired the Office Property for approximately $91.2
million, funded by a draw on the Company's credit facility. The Office Property
is wholly-owned by the Company and included in the Company's Office Segment.

OFFICE PROPERTY DISPOSITIONS

Unconsolidated

During the nine months ended September 30, 2002, the Woodlands CPC sold
three office properties located within The Woodlands, Texas. The sales generated
net proceeds, after the repayment of debt, of approximately $10.1 million, of
which the Company's portion was approximately $5.3 million. The sales generated
a net gain of approximately $11.8 million, of which the Company's portion was
approximately $6.2 million. The proceeds received by the Company were used
primarily to pay down the Company's credit facility.

Consolidated

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 $12.0 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 Company's credit facility. This property was
wholly-owned by the Company and was included in the Company's Office Segment.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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On May 29, 2002, WOE, owned by the Company and the Woodlands CPC, sold
two Office Properties located within The Woodlands, Texas. The sale generated
net proceeds of approximately $3.6 million, of which the Company's portion was
approximately $3.2 million. The sale generated a net gain of approximately $2.1
million, of which the Company's portion was approximately $1.9 million. The
proceeds received by the Company were used primarily to pay down the Company's
credit facility. These two Properties were consolidated joint venture properties
and were 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 $8.8 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 preferred Class A Units in Funding IX from GMACCM. This Office
Property was wholly-owned by the Company and was included in the Company's
Office Segment.

On September 20, 2002, the Company completed the sale of the Reverchon
Plaza Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $29.2 million and a net gain of approximately $0.5 million. The
proceeds from the sale of the Reverchon Plaza Office Property were used to pay
down the Company's credit facility. This Office Property was wholly-owned by the
Company and was included in the Company's Office Segment.

The operations for these Office Properties, as well as the gains
recognized on the sales of these Office Properties, are included in
"Discontinued Operations - Income and Gain on Assets Sold and Held for Sale."

OTHER ASSET DISPOSITIONS

On September 30, 2002, the Company completed the sale of the Washington
Harbour Phase II Land located in the Georgetown submarket of Washington, D.C.
The sale generated net proceeds of approximately $15.1 million and a net loss of
approximately $0.9 million. The proceeds from the sale of the Washington Harbour
Phase II Land were used to pay down the Company's credit facility. This land was
wholly-owned by the Company and was included in the Company's Office Segment.

On September 30, 2002, the Company completed the sale of the Canyon
Ranch - Tucson Land located in Tucson, Arizona to an affiliate of the management
company (unrelated to the Company) of the Company's Canyon Ranch Resort/Hotel
Property. The sales price of the land was approximately $9.4 million, for which
the Company received $1.9 million of net cash proceeds and a promissory note in
the amount of $7.5 million with an interest rate of 6.50%, payable quarterly and
maturing on October 1, 2007, and a net gain of approximately $5.5 million
recorded in the "Gain on Property Sales, net" caption of the Company's
Consolidated Statements of Operations for the three and nine months ended
September 30, 2002. The net cash proceeds from the sale of the Canyon Ranch -
Tucson Land were used to pay down the Company's credit facility. This land was
wholly-owned by the Company and was included in the Company's Resort/Hotel
Segment. The Company has committed to fund a $3.2 million construction loan to
the purchaser which will be secured by 20 developed lots and a $0.6 million
letter of credit. The Company had not funded any of the $3.2 million commitment
as of September 30, 2002.

JOINT VENTURES

RESORT/HOTEL SEGMENT

Consolidated

Sonoma Mission Inn & Spa

On September 1, 2002, the Company entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts, Inc. ("FHR"),
pursuant to which the Company contributed a Resort/Hotel Property, the Sonoma
Mission Inn & Spa in Sonoma County, California and FHR purchased a 19.9% equity
interest in the limited liability company that owns the Resort/Hotel Property.
The Company continues to own the remaining 80.1% interest. The joint venture
generated approximately $8.0 million in net cash proceeds to the Company that
were used to pay down the Company's credit facility. The Company has loaned
$45.1 million to the limited liability company that owns Sonoma Mission Inn &
Spa at an interest rate of LIBOR plus 300 basis points. The

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CRESCENT REAL ESTATE EQUITIES COMPANY
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maturity date of the loan is the earlier of the date on which the limited
liability company obtains third-party financing or one year. The limited
liability company has the option to extend the loan for two successive six-month
periods by paying a fee. Under the agreement with FHR, the Company will manage
the limited liability company that owns Sonoma Mission Inn & Spa and FHR will
operate and manage the property under the Fairmont brand. The joint venture
transaction was accounted for as a partial sale of this Resort/Hotel Property,
resulting in an approximately $4.0 million loss on the interest sold.

In October 2002 in a series of transactions, the Company acquired the
remaining 75% interest in Manalapan Hotel Partners, L.L.C., which owns the Ritz
Carlton Palm Beach in Florida. The Company acquired the additional interests in
this partnership for $6.5 million, which was funded under the Company's credit
facility. Subsequently, the Company entered into a joint venture arrangement
with Westbrook Real Estate Fund IV ("Westbrook"), pursuant to which Westbrook
purchased a 50% equity interest in Manalapan Hotel Partners, L.L.C. The Company
continues to hold the remaining 50% equity interest in the Ritz Carlton Palm
Beach. Simultaneously with admission of Westbrook into the partnership, the
Dresdner Bank AG loan of $65.2 million was repaid with proceeds from a new,
secured financing agreement with Corus Bank for $56 million and additional
equity contributions. The Corus Bank loan has an interest rate of LIBOR plus 400
basis points with an initial three year term and containing two one-year
extension options. The Company has guaranteed $3 million of the Corus Bank loan.

OFFICE SEGMENT

Unconsolidated

Three Westlake Park

On August 21, 2002, the Company entered into a joint venture
arrangement with an affiliate of General Electric Pension Fund, ("GE") in
connection with which the Company contributed an Office Property, Three Westlake
Park in Houston, Texas and GE made a cash contribution. The joint venture is
structured such that GE holds an 80% equity interest in Three Westlake Park, a
415,000 square foot Office Property located in the Katy Freeway submarket of
Houston, and the Company continues to hold the remaining 20% equity interest in
the Office Property which is accounted for under the equity method. The joint
venture generated approximately $47.1 million in net cash proceeds to the
Company, including distributions to the Company resulting from the sale of its
80% equity interest and $6.6 million from the Company's portion of mortgage
financing at the joint venture level. None of the mortgage financing at the
joint venture level is guaranteed by the Company. The Company has no commitment
to reinvest the cash proceeds back into the joint venture. The joint venture was
accounted for as a partial sale of this Office Property, resulting in a gain of
$17.0 million, net of deferred gain of approximately $4.3 million. In addition,
the Company manages and leases the Office Property on a fee basis. During the
nine months ended September 30, 2002, the Company recognized $0.03 million for
these services.

Miami Center

On September 25, 2002, the Company entered into a joint venture
arrangement with an affiliate of a fund managed by JP Morgan Investment
Management, Inc. ("JPM") in connection with which JPM purchased a 60% interest
in Crescent Miami Center, L.L.C. with a cash contribution. Crescent Miami
Center, L.L.C. owns an Office Property, Miami Center in Miami, Florida. The
joint venture is structured such that JPM holds a 60% equity interest in Miami
Center, and the Company holds the remaining 40% equity interest in the Office
Property, which is accounted for under the equity method. The joint venture
generated approximately $117.0 million in net cash proceeds to the Company,
including distributions of the Company resulting from the sale of its 60% equity
interest and $32.4 million from the Company's portion of mortgage financing at
the joint venture level. None of the mortgage financing at the joint venture
level is guaranteed by the Company. The Company has a remaining commitment for
deferred maintenance items of approximately $0.7 million. The Company otherwise
has no commitment to reinvest the cash proceeds back into the joint venture. The
joint venture was accounted for as a partial sale of this Office Property and
resulted in a gain of approximately $4.6 million, net of deferred gain of
approximately $3.5 million. The Company will continue to manage Miami Center on
a fee basis.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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OPERATIONS

DEBT FINANCING ARRANGEMENTS

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

- ----------

(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 11. Notes Payable and Borrowings under
the Credit 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 outstanding balance excludes Letters of Credit issued under the
facility of $15.2 million.

(6) 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 7.88%.

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CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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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 $530.3 million of hedged variable rate debt, the
percentages for fixed-rate debt and variable rate debt are 91% and 9%
respectively.

(2) Including the effect of hedge arrangements the overall weighted average
interest rate would have been 7.88%.

(3) Based on contractual maturities. The overall weighted average maturity
is 4.0 years based on the Company's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of September 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 credit facility and two one-year
extension options on the Deutsche Bank - CMBS Loan, as noted
above.

The Company has $185.7 million of secured and unsecured debt maturing
through December 31, 2003, consisting primarily of the Cigna Note, and debt
related to the Residential Development Segment. Borrowings under the Company's
credit facility are expected to be used to repay the $63.5 million Cigna Note
maturing in 2002, and the $122.2 million of debt maturing in 2002 and 2003 is
primarily related to the Residential Development Segment and will be repaid with
cash from operations of the Residential Development Segment.

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

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 credit facility is calculated using the method described
above, including certain pro forma adjustments.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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OPERATIONS

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 Credit facility and the Fleet Fund I and II Term Loan after the notice and
cure periods for the other indebtedness have passed. As of September 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 nine months ended
September 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. On October 15, 2002, the Company
completed an exchange offer pursuant to which it exchanged notes registered with
the Securities and Exchange Commission for $325.0 million of the privately
issued notes. In addition, the Company registered for resale the remaining $50.0
million of privately issued notes, which were issued to Richard E. Rainwater,
the Chairman of the Board of Trust Managers, and certain of his affiliates and
family members. 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 is payable on April 15 and October 15 of each year, beginning October
15, 2002.

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 Company's credit 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 GMACCM.
See "Equity Financing - Sale of Preferred Equity Interests in Subsidiary" for a
description of the Class A Units in Funding IX previously held by GMACCM.

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 September 30, 2002, the Company had entered into six 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 Hedging
Activities - an Amendment of FASB Statement No. 133."

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CRESCENT REAL ESTATE EQUITIES COMPANY
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 September 30, 2002, and additional interest expense and
unrealized gains for the nine months ended September 30, 2002:

- ----------

(1) During the nine months ended September 30, 2002, the Company
entered into agreements for three additional cash flow hedges
that will be issued in 2003, and will replace the three
existing cash flow hedges.

The Company has designated its six 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 $19.0 million to $20.7
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.

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 September 30, 2002, CRDI had entered into three cash flow
hedge agreements, which are accounted for in conformity with SFAS Nos. 133 and
138.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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 September 30, 2002 and additional capitalized interest for the
nine months ended September 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 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 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 issued by its subsidiary, Funding IX, to GMACCM.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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OPERATIONS

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 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 $75.0
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 and other offering costs of approximately
$2.8 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 and other offering costs of approximately $0.4 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 September 30 2002, Funding IX held one Office Property 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, GMACCM purchased $275.0
million of Class A Units in Funding IX. The Class A Units were redeemable at the
option of the Company at the original purchase 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.

All of the Class A Units outstanding at December 31, 2001, were
redeemed by Funding IX during the nine months ended September 30, 2002. As a
result of the redemption, GMACCM ceased to be a partner of Funding IX or to have
any rights or obligations as a partner and the Company became the sole partner
of Funding IX. In connection with the final redemption of Class A Units, SH IX
transferred the 14,468,623 common shares of the Company held by SH IX to the
Company which holds these common shares as treasury shares, and the intracompany
loan between Funding IX and SH IX was repaid.

Following the redemption of all the outstanding Class A Units, Funding
IX distributed two of its Office Properties, 44 Cook Street and 55 Madison, and
all the equity interests in the limited liability companies that own two other
Office Properties, Miami Center and Chancellor Park, to the Operating
Partnership. The Operating Partnership then contributed 44 Cook Street and 55
Madison to another Operating Partnership subsidiary, Funding VIII and entered
into a joint venture arrangement for Miami Center.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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. All interest rates are fixed.

(2) Senior Note - Note A: $84.0 million at variable interest rate, LIBOR +
189 basis points, $4.9 million at variable interest rate; LIBOR + 250
basis points with a LIBOR floor of 2.50%. Note B: $24.7 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Mezzanine Note - $19.8 million at variable interest rate, LIBOR
+ 890 basis points with a LIBOR floor of 3.0%. Interest-rate cap
agreement maximum LIBOR of 4.52% on all notes. All notes are amortized
on a 25-year amortization schedule.

(3) This facility has two one-year extension options.

(4) 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.

(5) The Company has made a full and unconditional guarantee of loan from
Fleet up to $82.5 million for the construction of 5 Houston Center. At
September 30, 2002, $48.7 million was outstanding.

(6) On February 14, 2002, the Company executed an agreement with COPI to
transfer, pursuant to a strict foreclosure, COPI's 5% interest in TWLC.
Therefore, as of February 14, 2002, TWLC is fully consolidated. This
schedule reflects TWLC's 42.5% interest in TWLDC.

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CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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

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

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

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

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

The following table shows, as of September 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) Based on contractual maturities. The overall weighted maturity would be
3.7 years assuming the Company's election of extension options on its
debt instruments.

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

(in thousands)

- ----------

(1) These amounts do not represent the effect of two one-year extension
options on WLDC's Fleet credit facility and one Fleet National Bank
loan, totaling $95,000 that have initial maturity dates of November
2002 and October 2003.

RELATED PARTY DISCLOSURES

DBL Holdings, Inc.

As of September 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 $0.4
million, and approximately $0.06 million in cash, or total consideration valued
at approximately $0.4 million for his interest in DBL.

DBL has two wholly owned subsidiaries, DBL-ABC, Inc. and DBL-CBO, Inc.,
the assets of which are described in the following paragraphs, and DBL directly
holds 66% of the voting stock in MVDC and HADC. At September 30, 2002, Mr.
Goff's book value in DBL was approximately $0.4 million.

71

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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
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 September 30, 2002, DBL had an approximately $14.4 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 nine months
ended September 30, 2002, the Company recognized an impairment charge related to
this investment of $5.2 million. As a result of this impairment charge, at
September 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, pursuant to a strict
foreclosure, COPI's 60% general partner interest in COPI Colorado, L.P. which
owns 10% (representing all of the voting stock) of 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 20% general partner interest in COPI Colorado and, accordingly,
a 2.0% interest in CRDI, with a cost basis of $0.4 million. The remaining 20%
general partner interest in COPI Colorado, and 2.0% interest in CRDI, 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 September 30, 2002, the Company had approximately $37.8 million
of recourse loans outstanding (including approximately $5.3 million loaned
during the nine months ended September 30, 2002) to certain employees and trust
managers of the Company on a full recourse basis under the Company's stock
incentive 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 $37.8 million total outstanding loans at
September 30, 2002. As of September 30, 2002, approximately $0.3 million of
current interest was outstanding related to these loans. No conditions exist at
September 30, 2002 which would cause any of the loans to be in default.

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 Company granted loans through
July 29, 2002, with Applicable Federal Rate of 2.70% and 2.81%, which reflects a
below prevailing market interest rate, therefore, the Company recorded
compensation expense. 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 reflecting a below prevailing market interest
rate. 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 July 29, 2002 amendment resulted in 1.9 million additional
compensation expense for the three and nine months ended September 30, 2002,
recorded in the "Corporate General and Administrative" caption of the Company's
Consolidated Statements of Operations. Effective July 29, 2002, the Company no
longer offers to its employees and trust managers loans pursuant to the
Company's stock and unit incentive plans.

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CRESCENT REAL ESTATE EQUITIES COMPANY
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 certain of 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 registered for resale the notes issued to the Rainwater
Group. See "Debt Offering" section above 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 $2.7 million which
approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.

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 has
completed a re-audit of the Company's financial statements as of December 31,
2001 and 2000 for the years ended December 31, 2001, 2000 and 1999.

CRITICAL ACCOUNTING POLICIES

The Company's 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 the
Company 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. The Company evaluates its assumptions and estimates on an
on-going basis. The Company bases its 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. The Company believes the following critical
accounting policies affects the more significant judgments 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 of 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 nine months ended September 30, 2002.

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CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 September 30, 2002, the Company has entered into six
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 affect 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.

Stock Option and Unit Plans

The Company applies APB No. 25 in accounting for options granted
pursuant to the 1994 Crescent Real Estate Equities, Inc. Stock Incentive Plan,
the 1995 Crescent Real Estate Equities, Inc. Stock Incentive Plan and the 1996
Crescent Real Estate Equities Limited Partnership Unit Incentive Plan
(collectively, the "Plans"). Accordingly, no compensation costs are recognized
for the Plans. All options granted subsequent to December 31, 2002, will be
accounted for under SFAS No. 123.

74

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 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.
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 September 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 assets 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.

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.

75

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 impairment
charge of $1.3 million, 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 nine months ended September 30, 2002
to $10.5 million related to initial application of SFAS No. 142. 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 nine months ended September 30, 2002.

In prior periods, the Company tested goodwill for impairment under the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets," under which an impairment loss is recognized when expected undiscounted
future cash flows are less than the carrying value of the assets. For the year
ended December 31, 2001, the expected future operating cash flows of the
Temperature-Controlled Logistics Corporation on an undiscounted basis exceeded
the carrying amounts of the properties and other long-lived assets, including
goodwill. Accordingly, no impairment was recognized under SFAS No. 121. However,
upon the adoption of SFAS No. 142, on January 1, 2002, the
Temperature-Controlled Logistics Corporation compared the fair value of the
Temperature-Controlled Logistics Properties based on discounted cash flows to
the carrying value of the Temperature-Controlled Logistics Properties and the
related goodwill. Based on this test, the fair value did not exceed the carrying
value of the Temperature-Controlled Logistics assets and, accordingly, the
goodwill was impaired.

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.
SFAS No. 144 requires that the results of operations, including any gains or
losses recognized, be disclosed separately on the Company's consolidated
statements of operations. The Company adopted SFAS No. 144 on January 1, 2002.
Subsequent to January 1, 2002, the Company sold five Office Properties. The
Company also sold three behavioral healthcare properties subsequent to January
1, 2002 and owned seven behavioral healthcare properties as of September 30,
2002, which were classified as held for sale. In accordance with SFAS No. 144,
the results of operations of these assets and any gain or loss on sale have been
presented as "Discontinued Operations - Income and Gain on Assets Sold and Held
for Sale" in the accompanying consolidated statements of operations. The
carrying value of the assets held for sale have been reflected as "Properties
Held for Disposition, net" in the accompanying consolidated balance sheet as of
September 30, 2002 and December 31, 2001. The adoption of this statement did not
materially affect the Company's interim financial statements for the nine months
ended September 30, 2002. The Company has reclassified certain amounts in prior
period financial statements to conform with the new presentation requirements.

76

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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.

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 nine months ended September 30, 2002 and 2001 were $132.7 million and $200.6
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.

77

CRESCENT REAL ESTATE EQUITIES COMPANY
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.

78

CRESCENT REAL ESTATE EQUITIES COMPANY
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)

79

CRESCENT REAL ESTATE EQUITIES COMPANY
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 nine months ended September 30, 2002.

OFFICE SEGMENT

Same-Store Analysis

The following table shows the same-store net operating income growth
for the three and nine month periods ended September 30, 2002 and 2001, for the
approximately 24.1 million square feet of Office Property space owned as of
September 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 1.5 million square feet of space at Four Westlake Park,
Bank One Tower and Three Westlake Park, in each of which the Company
has a 20% equity interest;

o Approximately 0.8 million square feet of space at Miami Center, which
the Company has 40% equity interest;

o Approximately 0.6 million square feet of space at Five Houston Center
that was completed on September 16, 2002, which the Company has a 25%
equity interest;

o Approximately 0.7 million square feet of space at Johns Manville Plaza
which the Company acquired on August 29, 2002; and

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

(1) Excludes lease termination fees.

80

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Leasing

THREE MONTHS ENDED SEPTEMBER 30, 2002

NINE MONTHS ENDED SEPTEMBER 30, 2002

- ----------

(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. The Company discloses
100% of the rental rate related to each tenant regardless of the
Company's ownership in the building.

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

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

Properties

As of September 30, 2002, the Company owned or had an interest in 73
Office Properties located in 25 metropolitan submarkets in six states with an
aggregate of approximately 28.5 million net rentable square feet. The Office
Properties were, on a weighted average basis, 89% occupied at September 30,
2002, and are located approximately 43% in central business districts ("CBD")
and approximately 57% in suburban markets. The Company's Office Properties are
located primarily in the Dallas and Houston, Texas metropolitan areas. As of
September 30, 2002, the Company's Office Properties in Dallas and Houston
represented an aggregate of approximately 73% of its office portfolio based on
total net rentable square feet (36% for Dallas and 37% for Houston). In
addition, the Company owns a 25% interest in the 5 Houston Center office
property which was completed in September 2002.

In pursuit of managements objective to dispose of non-strategic and
non-core assets, five of the Company's fully consolidated Office Properties were
disposed during the nine months ended September 30, 2002.

81

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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

82

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

- ----------

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

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

(3) The Company owns the principal economic interest in Trammell Crow
Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the
building) and two mortgage notes encumbering the leasehold interests in
the land and building.

(4) The Company owns the principal economic interest in Spectrum Center
through an interest in Crescent Spectrum Center, L.P. which owns both
the mortgage notes secured by Spectrum Center and the ground lessor's
interest in the land underlying the office building.

(5) Leases have been executed at certain Office Properties but had not
commenced as of September 30, 2002. If such leases had commenced as of
September 30, 2002, the percent leased for all Office Properties would
have been 91%. The total percent leased for these Properties would have
been as follows: Carter Burgess Plaza - 98%, Three Westlake - 100%,
1800 West Loop - 73%, The Avallon - 100%, and MCI Tower - 60%.

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

(7) 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.

83

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

(8) Excludes the 5 Houston Center Office Property, which was placed in
service on September 16, 2002. This Office Property will be included
when it becomes stabilized. At September 30 , 2002, it was 34% leased.
If executed leases at September 30, 2002 had commenced, it would have
been 88% leased.

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

(10) Johns Manville Plaza was acquired by The Company on August 29, 2002.

(11) The Company has a 40% member interest in the limited liability company
that owns Miami Center.

(12) 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.

(13) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties as
of September 30, 2002, giving effect to free rent and scheduled rent
increases that are taken into consideration under GAAP and also
including adjustments for expenses payable by or reimbursed from
customers is $22.71.

84

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following tables show schedules of lease expirations for leases in
place as of September 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

TOTAL OFFICE PROPERTIES

- ----------

(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled
rent increases that would be taken into account under GAAP and
including adjustments for expenses payable by or reimbursable from
tenants based on current expense levels.

(2) Expirations by quarter are as follows: Q4: 1,667,335 sf.

(3) As of September 30, 2002 leases have been signed for 746,219 net
rentable square feet (representing approximately 45% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2002.

(4) Expirations by quarter are as follows: Q1: 1,124,696 sf Q2: 986,832 sf
Q3: 701,764 sf Q4: 766,628 sf.

(5) As of September 30, 2002 leases have been signed for 1,388,127 net
rentable square feet (representing approximately 39% of expiring square
footage and rent leases and leasing of previously vacant space)
commencing in 2003.

(6) Reconciliation of Occupied Square Footage to Total Office NRA:

85

CRESCENT REAL ESTATE EQUITIES COMPANY
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
tenants based on current expense levels.

(2) Expirations by quarter are as follows: Q4 508,984 sf.

(3) As of September 30, 2002 leases have been signed for 189,931 net
rentable square feet (representing approximately 37% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2002.

(4) Expirations by quarter are as follows: Q1: 592,840 sf Q2: 405,184 sf
Q3: 136,951 sf Q4: 209,506 sf.

(5) As of September 30, 2002 leases have been signed for 492,560 net
rentable square feet (representing approximately 37% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2003.

86

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

HOUSTON OFFICE PROPERTIES

(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled
rent increases that would be taken into account under GAAP and
including adjustments for expenses payable by or reimbursable from
tenants based on current expense levels.

(2) Expirations by quarter are as follows: Q4: 829,555 sf.

(3) As of September 30, 2002 leases have been signed for 360,784 net
rentable square feet (representing approximately 43% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2002.

(4) Expirations by quarter are as follows: Q1: 178,720 sf Q2: 443,970 sf
Q3: 372,719 sf Q4: 171,050 sf.

(5) As of September 30, 2002 leases have been signed for 766,894 net
rentable square feet (representing approximately 66% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2003.

87

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

DENVER OFFICE PROPERTIES

(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled
rent increases that would be taken into account under GAAP and
including adjustments for expenses payable by or reimbursable from
tenants based on current expense levels.

(2) Expirations by quarter are as follows: Q4: 98,070 sf.

(3) As of September 30, 2002 leases have been signed for 93,768 net
rentable square feet (representing approximately 96% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2002.

(4) Expirations by quarter are as follows: Q1: 76,494 sf Q2: 25,845 sf Q3:
57,113 Q4: 284,103 sf.

(5) As of September 30, 2002 leases have been signed for 37,031 net
rentable square feet (representing approximately 8% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2003.

88

CRESCENT REAL ESTATE EQUITIES COMPANY
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
tenants based on current expense levels.

(2) Expirations by quarter are as follows: Q4: 53,797 sf.

(3) As of September 30, 2002 leases have been signed for 5,057 net rentable
square feet (representing approximately 9% of expiring square footage
and including renewed leases and leasing of previously vacant space)
commencing in 2002.

(4) Expirations by quarter are as follows: Q1: 93,914 sf Q2: 59,276 sf Q3:
76,759 sf Q4: 19,511 sf.

(5) As of September 30, 2002 leases have been signed for 31,762 net
rentable square feet (representing approximately 13% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2003.

89

CRESCENT REAL ESTATE EQUITIES COMPANY
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: Q4: 176,929 sf.

(3) As of September 30, 2002 leases have been signed for 96,679 net
rentable square feet (representing approximately 55% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2002.

(4) Expirations by quarter are as follows: Q1: 182,728 sf Q2: 52,557 sf Q3:
58,222 sf Q4: 82,458 sf.

(5) As of September 30, 2002 leases have been signed for 59,880 net
rentable square feet (representing approximately 16% of expiring square
footage and including renewed leases and leasing of previously vacant
space) commencing in 2003.

The following table shows, as of September 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.

90

CRESCENT REAL ESTATE EQUITIES COMPANY
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 capital expenditures (excluding those
expenditures which are recoverable from tenants) and tenant improvement and
leasing costs for the nine months ended September 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) Enhancements/Additions to building infrastructure.

(3) Represents 100% of committed Tenant Improvements and Leasing Costs
related to each tenant without regard to the Company's ownership in the
building.

(4) 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.

(5) Incremental Revenue Generating Tenant Improvements and Leasing Costs
are comprised of signed leases on Office Property square footage that
has not contributed to Office Property in the preceding two quarters.

(6) 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.

91

CRESCENT REAL ESTATE EQUITIES COMPANY
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 September 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 nine months ended
September 30, 2002 and 2001.

Resorts

Business-Class Hotels

92

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Properties

The following table shows certain information for the nine months ended
September 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, pursuant to a
strict 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.

As of September 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 21 Residential Development Properties. The
Residential Development Corporations are responsible for the continued
development and the day-to-day operations of the Residential Development
Properties.

93

CRESCENT REAL ESTATE EQUITIES COMPANY
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 $8,000, or 10%, due to fewer
higher priced lots sold primarily from the Carlton Woods development in the
nine months ended September 30, 2002, compared to the same period 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 September 30, 2002, 233 lots had been sold at
prices ranging from $0.1 million to $2.2 million per lot, or an average
price of $348,000 per lot. Additional phases within Carlton Woods are
expected to be marketed to the public during the next two years.

o Future buildout of The Woodlands is estimated at approximately 12,264
residential lots and approximately 1,599 acres of commercial land, of which
approximately 1,482 residential lots and 972 acres are currently in
inventory.

94

CRESCENT REAL ESTATE EQUITIES COMPANY
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 205 residential lots, of which approximately 120 are
currently in inventory.

95

CRESCENT REAL ESTATE EQUITIES COMPANY
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 56%, due to lower
priced product mix sold in the nine months ended September 30, 2002, as compared
to the same period in 2001.

96

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Properties

The following table shows certain information as of September 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 close 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 September 30, 2002, is $0.2
million.

(6) As of September 30, 2002, 65 golf course lots were under contract at
Eagle Ranch representing $4.6 million in sales; one unit was under
contract at Park Place at Riverfront representing $0.2 million in
sales; three units were under contract at Park Tower at Riverfront
representing $2.4 million in sales; two units were under contract at
Promenade Lofts representing $0.8 million in sales; one unit was under
contract at Cresta representing $2.6 million in sales; four lots were
under contract at Three Peaks representing $1.2 million in sales and 45
units were under contract at One Vendue Range representing $53.9
million in sales.

(7) This project is in the early stages of development, and this
information is not available as of September 30, 2002.

97

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

Operating Information

As of September 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 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 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 $20.6 million of the total $102.4 million
of rent payable for the nine months ended September 30, 2002. The Company's
share of the deferred rent was $8.2 million. The Company recognizes rental
income when earned and collected and has not recognized the $8.2 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the nine months ended September 30, 2002.

98

CRESCENT REAL ESTATE EQUITIES COMPANY
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 nine
months ended September 30, 2002.

(in millions)

Properties

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

- ----------

(1) As of September 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 88 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 September 30, 2002, AmeriCold Logistics operated 101
temperature-controlled logistics properties with an aggregate of
approximately 537.9 million cubic feet (20.6 million square feet).

99

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 $2.4 billion at September 30, 2002, of which
approximately $225.8 million, or approximately 9.4%, was unhedged variable rate
debt. The weighted average interest rate on such variable rate debt was 4.00% as
of September 30, 2002. A 10% (40.0 basis point) increase in the weighted average
interest rate on such variable rate debt would result in an annual decrease in
net income and cash flows of approximately $0.9 million based on the unhedged
variable rate debt outstanding as of September 30, 2002, as a result of the
increased interest expense associated with the change in rate. Conversely, a 10%
(40.0 basis point) decrease in the weighted average interest rate on such
unhedged variable rate debt would result in an annual increase in net income and
cash flows of approximately $0.9 million based on the unhedged variable rate
debt outstanding as of September 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.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports under the Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and its Chief Financial and Accounting
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and its Chief
Financial and Accounting Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and its Chief Financial and
Accounting Officer concluded that the Company's disclosure controls and
procedures were effective.

100

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date the Company completed its evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the nine months ended September 30, 2002, Crescent
Equities issued an aggregate of 106,574 common shares to holders of
Operating Partnership units in exchange for 53,287 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.

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

Not Applicable

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

Not Applicable

101

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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: November 14, 2002 Vice-Chairman of the Board and Chief
Executive Officer

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

102

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

CERTIFICATIONS

I, John C. Goff, the Chief Executive Officer of Crescent Real Estate
Equities Company, hereby certify that:

1. I have reviewed this quarterly report on Form 10-Q of Crescent
Real Estate Equities Company;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of trust managers (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 14, 2002

/s/ John C. Goff
--------------------------------
Name: John C. Goff
Title: Chief Executive Officer

103

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 September 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: November 14, 2002 /s/ John C. Goff
--------------------------------------
John C. Goff
Chief Executive Officer

104

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

CERTIFICATIONS

I, Jerry R. Crenshaw, Jr., the Executive Vice President and Chief
Financial and Accounting Officer of Crescent Real Estate Equities Company,
hereby certify that:

1. I have reviewed this quarterly report on Form 10-Q of Crescent
Real Estate Equities Company;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of trust managers (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 14, 2002

/s/ Jerry R. Crenshaw, Jr.
-----------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief
Financial and Accounting Officer

105

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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 Executive 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 September 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: November 14, 2002 /s/ Jerry R. Crenshaw, Jr.
---------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief
Financial and Accounting Officer

106

CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Exhibit List

107