CRESCENT REAL ESTATE EQUITIES CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-13038

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

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
----- -----

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES X NO
----- -----

As of June 30, 2002, the aggregate market value of the 94,886,691 common shares
held by non-affiliates of the registrant was approximately $1.8 billion.

Number of Common Shares outstanding as of March 21, 2003: 99,240,398
-----------
Number of Series A Preferred Shares outstanding as of March 21, 2003: 10,800,000
Number of Series B Preferred Shares outstanding as of March 21, 2003 3,400,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2003 Annual Meeting of Shareholders to be held in
June 2003 are incorporated by reference into Part III.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

THE COMPANY

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

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

The direct and indirect subsidiaries of Crescent Equities at December
31, 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.

At December 31, 2002, the assets and operations of the Company were
divided into four investment segments as follows:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of December 31, 2002:

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 29.5 million
net rentable square feet.

o RESORT/HOTEL SEGMENT consisted of six luxury and destination
fitness resorts and spas with a total of 1,306 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,771 rooms (collectively referred to as the
"Resort/Hotel Properties").

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests ranging from 94% to 100%
in five residential development corporations (collectively
referred to as the "Residential Development Corporations"),
which in turn, through partnership arrangements, owned in
whole or in part 22 upscale residential development properties
(collectively referred to as the "Residential Development
Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland
Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% interest in the Vornado

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Crescent Carthage and KC Quarry, L.L.C. The
Temperature-Controlled Logistics Partnership owns all of the
common stock, representing substantially all of the economic
interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a REIT. As of
December 31, 2002, the Temperature-Controlled Logistic
Corporation 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. As
of December 31, 2002, Vornado Crescent Carthage and KC Quarry
L.L.C. owned two quarries and the related land.

See Note 3, "Segment Reporting," included in Item 8, "Financial
Statements and Supplementary Data," 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 years ended
December 31, 2002, 2001 and 2000 and identifiable assets for each of these
investment segments at December 31, 2002 and 2001.

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

See Note 9, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," included in Item 8, "Financial Statements and
Supplementary Data," for a table that lists the Company's ownership in
significant unconsolidated joint ventures and equity investments as of December
31, 2002, including seven Office Properties, one Resort/Hotel Property, two
Residential Development Corporations. See Note 8, "Temperature-Controlled
Logistics Segment," included in Item 8 "Financial Statements and Supplemental
Data," for information regarding the Company's ownership interest in the
Temperature-Controlled Logistics Properties.

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

BUSINESS OBJECTIVES AND STRATEGIES

BUSINESS OBJECTIVES

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

OPERATING STRATEGIES

The Company seeks to enhance its operating performance by
distinguishing itself as the leader in its core investment segments through
asset quality, customer service and economics of scale with dominant market
share.

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The Company's operating strategies include:

o operating the Office Properties as long-term investments;

o providing exceptional customer service;

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

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

INVESTING STRATEGIES

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

The Company's investment strategies include:

o capitalizing on strategic acquisition opportunities in
conjunction with joint venture capital, primarily within the
Company's Office Segment;

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

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

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

FINANCING STRATEGIES

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

The Company's financing strategies include:

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

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

o minimizing the Company's exposure to market changes in
interest rates through fixed rate debt and interest rate swaps
as appropriate; and

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

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EMPLOYEES

As of March 21, 2003, the Company had approximately 671 employees. None
of these employees are covered by collective bargaining agreements. The Company
considers its employee relations to be good.

TAX STATUS

The Company has elected to be taxed as a REIT under Sections 856
through 860 of the U.S. Internal Revenue Code of 1986, as amended (the "Code")
and operates in a manner intended to enable it to continue to qualify as a REIT.
As a REIT, the Company generally will not be subject to corporate federal income
tax on net income that it currently distributes to its shareholders, provided
that the Company satisfies certain organizational and operational requirements
including the requirement to distribute at least 90% of its REIT taxable income
to its shareholders each year. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. The Company is subject to certain state and local taxes.

The Company has elected to treat certain of its corporate subsidiaries
as taxable REIT subsidiaries (each, a "TRS"). In general, a TRS of the Company
may perform additional services for tenants of the Company and generally may
engage in any real estate or non-real estate business (except for the operation
or management of health care facilities or lodging facilities or the provision
to any person, under a franchise, license or otherwise, of rights to any brand
name under which any lodging facility or health care facility is operated). A
TRS is subject to corporate federal income tax.

ENVIRONMENTAL MATTERS

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

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

o Resource Conservation & Recovery Act;

o Clean Water Act;

o Clean Air Act;

o Toxic Substances Control Act; and,

o Occupational Safety & Health Act.

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

Compliance by the Company with existing environmental, health and
safety laws has not had a material adverse effect on the Company's financial
condition and results of operations, and management does not believe it will
have such an impact in the future. In addition, the Company has not incurred,
and does not expect to incur any material costs or liabilities due to
environmental contamination at Properties it currently owns or has owned in the
past. However, the Company cannot predict the impact of new or changed laws or
regulations on its current Properties or on properties that it may acquire in
the

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future. The Company has no current plans for substantial capital expenditures
with respect to compliance with environmental, health and safety laws.

INDUSTRY SEGMENTS

OFFICE SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 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 29.5 million net rentable square feet. The Company,
as lessor, has retained substantially all of the risks and benefits of ownership
of the Office Properties and accounts for the leases of its 66 Consolidated
Office Properties as operating leases. Additionally, the Company provides
management and leasing services for the majority of its Office Properties.

See Item 2, "Properties," for more information about the Company's
Office Properties. See Note 1, "Organization and Basis of Presentation," of Item
8, "Financial Statements and Supplementary Data," for a table that lists the
principal subsidiaries of the Company and the Properties owned by such
subsidiaries. See Note 9, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," of Item 8, "Financial Statements and Supplementary
Data," for a table that lists the Company's ownership in the seven Office
Properties in which the Company owned an interest through unconsolidated joint
ventures.

2002 TRANSACTIONS

JOINT VENTURES

Three Westlake Park

On August 21, 2002, the Company entered into a joint venture
arrangement with an affiliate of General Electric Pension Fund (the affiliate is
referred to as "GE") in connection with which the Company contributed an Office
Property, Three Westlake Park in Houston, Texas. 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 feet Office Property located in the Katy
Freeway submarket of Houston. The Company continues to hold the remaining 20%
equity interest in the Office Property. The joint venture generated
approximately $47.1 million in net cash proceeds 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.

Miami Center

On September 25, 2002, the Company entered into a joint venture
arrangement with an affiliate of a fund managed by JPMorgan Fleming Asset
Management (the affiliate is referred to as "JPM Fund I") in connection with
which JPM Fund I 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
Fund I holds a 60% equity interest in Miami Center, a 782,000 square foot Office
Property located in Miami, Florida. The Company holds the remaining 40% equity
interest in the Office Property. The joint venture generated approximately
$111.0 million in net cash proceeds to 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.

Five Post Oak Park

On December 20, 2002, the Company entered into a joint venture
arrangement, Five Post Oak Park, L.P., with GE. The joint venture purchased Five
Post Oak Park located in the Galleria area of Houston, Texas, for $64.8 million.
The Property is a 567,000 square foot Class A office building. GE owns a 70%
interest, and the Company owns a 30% interest, in the joint venture. The initial

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cash equity contribution to the joint venture was $19.8 million, of which the
Company's portion was $5.9 million. The Company's equity contribution and an
additional working capital contribution of $0.3 million were funded through a
draw under the Company's credit facility. The remainder of the purchase price of
the Property was funded by a secured loan to the joint venture in the amount of
$45.0 million.

ACQUISITIONS

Johns Manville Plaza

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.

Undeveloped Land

On November 26, 2002, the Company purchased Duddlesten Ventures-I,
Ltd.'s 20% interest in the Crescent Duddlesten Hotel Partnership for $11.1
million, funded by a draw on the Company's credit facility, and increasing the
Company's ownership percentage from 80% to 100%. This partnership owned 3.79
acres of undeveloped land in downtown Houston, and therefore the Company
recorded the $11.1 million as an increase to land.

DEVELOPMENT

5 Houston Center

On September 16, 2002, 5 Houston Center, a 27-story, Class A Office
Property consisting of 577,000 net rentable square feet located adjacent to the
Company's Houston Center mixed-use Office Property complex, was completed. The
Company has a 25% equity interest in this Property, with the remaining 75% owned
by a pension fund advised by JPMorgan Fleming Asset Management (the fund is
referred to as "JPM Fund II"). The building was financed with a construction
loan, which the Company fully guarantees, that can be drawn to a maximum of
$82.5 million. Approximately $63.0 million was outstanding under the
construction loan at December 31, 2002. The guaranteed amount reduces upon the
achievement of specified conditions.

DISPOSITIONS

Office Properties

During the year ended December 31, 2002, the Company disposed of seven
of its fully consolidated Office Properties. The sale of the seven Office
Properties generated approximately $68.6 million of net proceeds to the Company,
including cash payment on a note receivable of $10.6 million received on
February 19, 2003. On January 18, 2002, the Company completed the sale of the
Cedar Springs Plaza Office Property in Dallas, Texas. On May 29, 2002, the
Woodlands Office Equities - '95 Limited ("WOE") completed the sale of two Office
Properties located within The Woodlands, Texas. On August 1, 2002, the Company
completed the sale of the 6225 North 24th Street Office Property in Phoenix,
Arizona. On September 20, 2002 the Company completed the sale of the Reverchon
Plaza Office Property in Dallas, Texas. On December 31, 2002, WOE completed the
sale of two Office Properties located within The Woodlands, Texas.

Undeveloped Land

During the year ended December 31, 2002, the Company completed the sale
of approximately 10 acres of undeveloped land generating net proceeds of
approximately $53.4 million. On September 30, 2002, the Company completed the
sale of approximately 1.4 acres of undeveloped land, located in the Georgetown
submarket of Washington, D.C. On December 31, 2002, the Company completed the
sale of approximately 5.46 acres of undeveloped land near the Houston Convention
Center in downtown Houston. On December 31, 2002, the Company completed the sale
of approximately 3.12 acres of undeveloped land located in the Greenway Plaza
office complex of Houston, Texas.

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MARKET INFORMATION

The Office Property portfolio reflects the Company's strategy of
investing in first-class assets within markets that have significant potential
for long-term rental growth. Within its selected submarkets, the Company has
focused on premier locations that management believes are able to attract and
retain the highest quality tenants and command premium rents. Consistent with
its long-term investment strategies, the Company has sought transactions where
it was able to acquire properties that have strong economic returns based on
in-place tenancy and also have a dominant position within the submarket due to
quality and/or location. Accordingly, management's long-term investment strategy
not only demands acceptable current cash flow return on invested capital, but
also considers long-term cash flow growth prospects. In selecting the Office
Properties, the Company analyzed demographic and economic data to focus on
markets expected to benefit from significant long-term employment growth as well
as corporate relocations.

The Company's Office Properties are located primarily in the Dallas and
Houston, Texas metropolitan areas, both of which are projected to benefit from
strong population and employment growth over the next ten years. As indicated in
the table entitled "Projected Population Growth and Employment Growth for all
Company Markets," these core Company markets are projected to outperform the
10-year averages for the United States. In addition, the Company considers these
markets "demand-driven" due to high levels of in-migration by corporations,
affordable housing costs, moderate cost of living, and the presence of centrally
located travel hubs, making all areas of the country easily accessible.

TEXAS

According to the Bureau of Labor Statistics, the 2002 job market
weakened in Texas. Approximately 23,000 jobs were lost in 2002. As of December
2002, the Texas unemployment rate was 6.5%, compared to the national
unemployment rate of 5.8%.

DALLAS

According to the Bureau of Labor Statistics, the job market weakened
considerably in the Dallas area in 2002. Approximately 31,000 jobs were lost in
2002. As of December 31, 2002, the Dallas unemployment rate was 6.1%, compared
with the Texas unemployment rate of 6.5% and the national unemployment rate of
5.8%. As for Dallas' 2002 commercial office market, according to CoStar data,
citywide net economic absorption was approximately negative 2.8 million square
feet, including a negative 1.5 million square feet in Class A Office space. The
city's total net absorption, including space available for sublease, was
approximately a negative 4.4 million square feet for 2002, with Class A
representing a negative 2.7 million of the 4.4 million total.

HOUSTON

Houston's employment data held steady through much of 2002, despite
economic difficulties. Approximately 13,000 jobs were lost in 2002, an increase
of approximately 0.2% over 2001. As of December 2002, the Houston unemployment
rate was 5.4%, compared with the Texas unemployment rate of 6.5% and the
national unemployment rate of 5.8%. As for Houston's 2002 commercial office
market, according to CoStar data, citywide net economic absorption was
approximately negative 2.8 million square feet, including a negative 1.0 million
square feet in Class A office space. Houston's total net absorption, including
space available for sublease, was a negative approximately 4.8 million square
feet for 2002, with Class A Office space at a negative total net absorption of
2.6 million.

The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the markets in which the Company has
invested are projected to continue to exceed the national averages, as
illustrated in the following table.

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PROJECTED POPULATION GROWTH AND EMPLOYMENT GROWTH FOR ALL COMPANY MARKETS

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

The Office Segment does not depend on a single tenant or a few major
tenants, the loss of which would have a material adverse effect on the Company's
financial condition or results of operations. Based on rental revenues from
office leases in effect as of December 31, 2002, no single tenant accounted for
more than 5% of the Company's total Office Segment rental revenues for 2002. The
Company's top five customers accounted for approximately 13% of the Company's
total Office Segment rental revenues for the year ended December 31, 2002.

The Company applies a well-defined leasing strategy in order to capture
the potential rental growth in the Company's portfolio of Office Properties as
occupancy and rental rates increase within the markets and the submarkets in
which the Company has invested. The Company's strategy is based, in part, on
identifying and focusing on investments in submarkets in which in-place weighted
average full-service rental rates (representing base rent after giving effect to
free rent and scheduled rent increases that would be taken into account under
generally accepted accounting principles ("GAAP") and including adjustments for
expenses payable by or reimbursed from tenants) are significantly less than
weighted average full-service replacement cost rental rates (the rate management
estimates to be necessary to provide a return to a developer of a comparable,
multi-tenant building sufficient to justify construction of new buildings) in
that submarket. In calculating replacement cost rental rates, management relies
on available third-party data and its own estimates of construction costs
(including materials and labor in a particular market) and assumes replacement
cost rental rates are achieved at a 95% occupancy level. The Company believes
that the difference between the two rates is a useful measure of the additional
revenue that the Company may be able to obtain from a property, because the
difference should represent the amount by which rental rates would be required
to increase in order to justify construction of new properties. For the
Company's Office Properties, the in-place weighted average full-service rental
rate for the year ended December 31, 2002 was $22.60 per square foot, compared
to an estimated weighted average full-service replacement cost rental rate of
$30.31 per square foot, or a 25% discount to replacement cost.

COMPETITION

The Company's Office Properties, primarily Class A properties located
within the southwest, individually compete against a wide range of property
owners and developers, including property management companies and other REITs,
that offer space in similar classes of office properties (for example, Class A
and Class B properties.) A number of these owners and developers may own more
than one property. The number and type of competing properties in a particular
market or submarket could have a material effect on the Company's ability to
lease space and maintain or increase occupancy or rents in its existing Office
Properties. Management believes, however, that the quality services and
individualized attention that the Company offers its customers, together with
its active preventive maintenance program and superior building locations within
markets, enhance the Company's ability to attract and retain customers for its
Office Properties. In addition, as of December 31, 2002, on a weighted average
basis, the Company owned approximately 16% of the Class A office space in the 25
submarkets in which the Company owned Class A office properties, and 16% of the
Class B office space in the two submarkets in which the Company owned Class B
office properties. Management believes that ownership of a significant

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percentage of office space in a particular market reduces property operating
expenses, enhances the Company's ability to attract and retain customers and
potentially results in increases in Company net income.

RESORT/HOTEL SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2002, the Company owned or had an interest in ten
Resort/Hotel Properties. The Company holds two of the Resort/Hotel Properties,
the Sonoma Mission Inn & Spa and the Ritz Carlton Palm Beach, through joint
venture arrangements, pursuant to which the Company owns an 80.1% interest in
the limited liability company that owns the Sonoma Mission Inn & Spa and a 50%
interest in the limited liability company that owns the Ritz Carlton Palm Beach.

Nine of the Resort/Hotel Properties are leased to taxable REIT
subsidiaries that the Company owns or in which it has an interest. The Omni
Austin Hotel is leased to HCD Austin Corporation, an unrelated third party.

Third party operators manage nine of the Resort/Hotel Properties.
Ventana Inn and Spa is managed by Sonoma Management Company, or "Sonoma
Management," an entity in which the Company owned a 9.9% interest as of December
31, 2002. On March 14, 2003, the Company sold its 10% interest to the 90% owner
of Sonoma Management. In addition, five of the Resort/Hotel Properties that are
managed by third party operators also are subject to a Master Asset Management
and Administrative Services Agreement with Sonoma Management, pursuant to which
Sonoma Management receives asset management and incentive fees, payment of which
the Company guarantees.

2002 TRANSACTIONS

COPI TRANSACTION
Resort/Hotel Lease Transfers

Prior to February 14, 2002, the Company had leased eight of its
Resort/Hotel Properties to subsidiaries of COPI pursuant to eight separate
leases. 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.

CR License, LLC and CRL Investments, Inc.

Prior to February 14, 2002, the Company had a 28.5% interest in CR
License, LLC, the entity that owns the right to the future use of the "Canyon
Ranch" name. The Company also had a 95% economic interest, representing all of
the non-voting stock, in CRL Investments Inc., which owns a 65% economic
interest in the Canyon Ranch Spa Club in the Venetian Hotel in Las Vegas,
Nevada.

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of a
strict foreclosure, COPI's 1.5% interest in CR License, LLC and 5.0% interest,
representing all of the voting stock, in CRL Investments, Inc. As of December
31, 2002, the Company had a 30% interest in CR License, LLC and a 100% interest
in CRL Investments, Inc., a taxable REIT subsidiary.

JOINT VENTURES

Sonoma Mission Inn & Spa

On September 1, 2002, the Company entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts, Inc. (the subsidiary
is referred to as "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 for $8.0 million. The Company continues to hold
the remaining 80.1% equity interest. The Company loaned $45.1 million to the
joint venture. FHR has a commitment to fund $10.0 million of future renovations

11

at Sonoma Mission Inn & Spa through a mezzanine loan. The Company manages the
limited liability company that owns the Sonoma Mission Inn & Spa and FHR
operates and manages the property for the tenant under the Fairmont brand. The
joint venture leases Sonoma Mission Inn & Spa to a taxable REIT subsidiary in
which the Company also holds an 80.1% equity interest.

Manalapan Hotel Partners

In October 2002, in a series of transactions, the Company acquired the
remaining 75% interest in Manalapan Hotel Partners, L.L.C. ("Manalapan"), which
owns the Ritz Carlton Palm Beach, a 270 room hotel located in Palm Beach,
Florida. The Company acquired the additional interest in Manalapan for $6.5
million. Subsequently, the Company entered into a joint venture arrangement with
WB Palm Beach Investors, L.L.C. ("Westbrook"), pursuant to which Westbrook
purchased a 50% equity interest in Manalapan. The Company holds the remaining
50% equity interest. Simultaneously with the admission of Westbrook into
Manalapan, the secured loan of $65.2 million was repaid with proceeds from a new
secured loan of $56.0 million with Corus Bank and additional equity
contributions from Westbrook and the Company. Westbrook's total equity
contribution into Manalapan was $13.6 million. The Company and Westbrook each
obtained a letter of credit to guarantee repayment of up to $3.0 million of the
Corus Bank loan. Manalapan leases the Ritz Carlton Palm Beach to its
wholly-owned taxable REIT subsidiary.

DISPOSITIONS

Undeveloped Land

On September 30, 2002, the Company completed the sale of 30 acres of
land adjacent to the Company's Canyon Ranch - Tucson Resort/Hotel Property
located in Tucson, Arizona to an affiliate of the third party management company
of the Company's Canyon Ranch Resort/Hotel Properties. The sales price of the
land was approximately $9.4 million, for which the Company received $1.9 million
of cash proceeds and a promissory note in the amount of $7.5 million. 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 December 31, 2002.

MARKET INFORMATION

Lodging demand is highly dependent upon the global economy and volume
of business travel. Prior to 2001, the hospitality industry enjoyed record
profits. However, the uncertainty surrounding the weak global economy which
continued throughout 2002 and the costs and fear resulting from the events of
September 11, 2001 resulted in weak performance for much of 2002. This is
evidenced by declines in both business and leisure travel in the United States.

COMPETITION

Most of the Company's upscale business class Resort/Hotel Properties in
Denver, Albuquerque, Austin and Houston are business and convention center
hotels that compete against other business and convention center hotels. The
Company believes that its luxury and destination fitness resorts and spas are
unique properties that have no significant direct competitors due either to
their high replacement cost or unique concept and location. However, the luxury
and destination fitness resorts and spas do compete against business-class
hotels or middle-market resorts in their geographic areas, as well as against
luxury resorts nationwide and around the world.

12

RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2002, the Company owned real estate mortgages and
voting and non-voting common stock representing interests of 94% to 100% in five
Residential Development Corporations, which in turn, through joint ventures or
partnership arrangements, owned in whole or in part 22 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties.

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. These three Residential Development Corporations, The
Woodlands Land Company, Inc. ("TWLC"), Desert Mountain Development Corporation
("DMDC") and Crescent Resort Development, Inc. ("CRDI"), owned interests in 16
Residential Development Properties.

As of December 31, 2002, the Company owned 97.44% of DBL Holdings, Inc.
("DBL"). On January 3, 2003, the Company purchased the remaining 2.56% interest,
representing all of the voting stock, in DBL from John Goff, Vice-Chairman of
the Board of Trust Managers and Chief Executive Officer of the Company. DBL owns
66.7% of the voting stock in two of the Company's Residential Development
Corporations, Houston Area Development ("HADC") and Mira Vista Development
Corporation ("MVDC"). These two Residential Development Corporations own
interests in six Residential Development Properties.

On December 31, 2002, CRDI, a consolidated subsidiary of the Company,
completed the sale of its 50% interest in two Colorado transportation companies,
East West Resort Transportation I ("EWRT I") and East West Resort Transportation
II ("EWRT II"), to an affiliate of CRDI business partners for $7.0 million,
consisting of $1.4 million in cash and a $5.6 million note receivable.

MARKET INFORMATION

Residential development demand is highly dependent upon the national
economy, mortgage interest rates, and home sales. A slowing economy which
continued through 2002, combined with the events of September 11, 2001,
contributed to the reduction in lot absorption, primarily at Desert Mountain and
at The Woodlands. However, the increase in commercial lands sales at The
Woodlands partially offset the lower number of lot sales. Desert Mountain's lot
absorption is also impacted by a change in product mix as higher priced lots are
being completed during the latter phases of the development. The economic
downturn impacted CRDI Properties less than Desert Mountain and The Woodlands
during 2002 because most of CRDI's units were under contract at the end of 2001
with planned closing in 2002.

COMPETITION

The Company's Residential Development Properties compete against a
variety of other housing alternatives in each of their respective areas. These
alternatives include other planned developments, pre-existing single-family
homes, condominiums, townhouses and non-owner occupied housing, such as luxury
apartments. Management believes that The Woodlands, Desert Mountain and the
properties owned by CRDI, representing the Company's most significant
investments in Residential Development Properties, contain certain features that
provide competitive advantages to these developments.

The Woodlands is an approximately 27,000-acre master-planned
residential and commercial community north of Houston, Texas with over 70,000
residents. It is unique among developments in the Houston area because it
functions as a self-contained community. Amenities contained in the development,
which are not contained within most other local developments, include a shopping
mall, retail centers, office buildings, a hospital, a community college, places
of worship, a conference center, 85 parks, 117 holes of golf, including a
Tournament Players Course and signature courses by Jack Nicklaus, Arnold Palmer,
and Gary Player, two man-made lakes and a performing arts pavilion. There are
over 1,000 employers in The Woodlands employing approximately 31,000 people. In
2002, over 3,400 jobs were created. TWLC estimates future build-out at
approximately 12,187 residential lots and approximately 1,473 acres of
commercial

13

land, of which approximately 1,437 residential lots and 1,107 acres are
currently in inventory. The Woodlands competes with other master planned
communities in the surrounding Houston market.

Desert Mountain, a luxury residential and recreational private
community in Scottsdale, Arizona, offers five 18-hole Jack Nicklaus signature
golf courses and tennis courts. During 2002, DMDC began the development of a
sixth golf course which is expected to be completed in 2003. Management believes
Desert Mountain has few direct competitors due in part to the superior
environmental attributes and the types of amenities that it offers. One source
of direct competition is the resale market of existing lots and homes within
Desert Mountain. However, management believes their current inventory is
superior to the inventory available on the resale market with the higher priced
product being completed during the latter phases of the development.

CRDI invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Management believes that the Properties owned by CRDI do not have any
direct competitors because the projects and project locations are unique and
land availability is limited in most of these locations.

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 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 AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See Note 23,
"COPI," in Item 8 "Financial Statements and Supplemental Data," for information
on the proposed acquisition of COPI's 40% interest in AmeriCold Logistics by a
new entity to be owned by the Company's shareholders.

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
a maximum of $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. On March 7, 2003 the
Temperature-Controlled Logistics Corporation and AmeriCold Logistics further
amended the leases to extend the date on which deferred rent is required to be
paid to December 31, 2004.

AmeriCold Logistics deferred $32.2 million of the total $143.9 million
of rent payable for the year ended December 31, 2002, of which the Company's
share was $12.9 million. AmeriCold Logistics also deferred $25.5 million and
$19.0 million of rent for the years ended December 31, 2001 and 2000,
respectively, of which the Company's share was $10.2 million and $7.5 million,
respectively. In December 2001, Temperature-Controlled Logistics Corporation
waived its right to collect $39.8 million of deferred rent, the Company's share
of which was $15.9 million.

Vornado Crescent Carthage and KC Quarry, L.L.C.

On December 30, 2002, the Company contributed $11.2 million of notes
receivable, relating to loans to AmeriCold Logistics, to purchase a 56% equity
interest in Vornado Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). Vornado
Realty Trust L.P. ("Vornado") contributed $8.8 million of cash to purchase a 44%
equity interest. The assets of VCQ include two quarries and the related land,
acquired by VCQ from AmeriCold Logistics, LLC ("AmeriCold Logistics"), the
tenant of the Company's Temperature-Controlled Logistics Properties, for a
purchase price of $20.0 million. On December 31, 2002, VCQ purchased $5.7
million

14

of trade receivables from AmeriCold Logistics at a 2% discount. The Company
contributed approximately $3.1 million to VCQ for the purchase of the
receivables.

BUSINESS AND INDUSTRY INFORMATION

AmeriCold Logistics provides frozen food manufacturers with
refrigerated warehousing and transportation management services. The
Temperature-Controlled Logistics Properties consist of production, distribution
and public facilities. Production facilities differ from distribution facilities
in that they typically serve one or a small number of customers located nearby.
These customers store large quantities of processed or partially processed
products in the facility until they are further processed or shipped to the next
stage of production or distribution. Distribution facilities primarily serve
customers who store a wide variety of finished products to support shipment to
end-users, such as food retailers and food service companies, in a specific
geographic market. Public facilities generally serve the needs of local and
regional customers under short-term agreements. Food manufacturers and
processors use public facilities to store capacity overflow from their
production facilities or warehouses.

AmeriCold Logistics' transportation management services include freight
routing, dispatching, freight rate negotiation, backhaul coordination, freight
bill auditing, network flow management, order consolidation and distribution
channel assessment. AmeriCold Logistics' temperature-controlled logistics
expertise and access to both the frozen food warehouses and distribution
channels enable the customers of AmeriCold Logistics to respond quickly and
efficiently to time-sensitive orders from distributors and retailers.

AmeriCold Logistics' customers consist primarily of national, regional
and local frozen food manufacturers, distributors, retailers and food service
organizations. A breakdown of AmeriCold Logistics' largest customers includes:

Consolidation among retail and food service channels has limited the
ability of manufacturers to pass along cost increases by raising prices. Because
of this, manufacturers have been forced in the recent past to focus more
intensely on supply chain cost (such as inventory management, transportation and
distribution) reduction initiatives in an effort to improve operating
performance.

15

COMPETITION

AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in North America and has approximately twice the cubic feet of
the second largest operator. AmeriCold Logistics operated an aggregate of
approximately 28% of total cubic feet of public refrigerated warehouse space as
of December 31, 2002. No other person or entity operated more than 14% of total
public refrigerated warehouse space as of December 31, 2002. As a result,
AmeriCold Logistics does not have any competitors of comparable size. AmeriCold
Logistics operates in an environment in which competition is national, regional
and local in nature and in which the range of service, temperature-controlled
logistics facilities, customer mix, service performance and price are the
principal competitive factors.

16

ITEM 2. PROPERTIES

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

OFFICE PROPERTIES

As of December 31, 2002, the Company owned or had an interest in 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 29.5 million net rentable square feet. The
Company's Office Properties are located primarily in the Dallas and Houston,
Texas, metropolitan areas. As of December 31, 2002, the Company's Office
Properties in Dallas and Houston represented an aggregate of approximately 74%
of its office portfolio based on total net rentable square feet (35% for Dallas
and 39% for Houston).

In pursuit of management's objective to dispose of non-strategic and
non-core assets, the Company disposed of seven of its fully consolidated Office
Properties during 2002. On January 18, 2002, the Company completed the sale of
the Cedar Springs Plaza Office Property in Dallas, Texas. On May 29, 2002, the
Woodlands Office Equities - '95 Limited ("WOE") completed the sale of two Office
Properties located within The Woodlands, Texas. On August 1, 2002, the Company
completed the sale of the 6225 North 24th Street Office Property in Phoenix,
Arizona. On September 20, 2002, the Company sold the Reverchon Plaza Office
Property in Dallas, Texas, and on December 31, 2002, WOE completed the sale of
an additional two Office Properties located within The Woodlands, Texas.

In pursuit of management's long-term investment strategy to capitalize
on strategic acquisition opportunities, the Company acquired Johns Manville
Plaza, an Office Property located in Denver, Colorado on August 29, 2002.

17

OFFICE PROPERTIES TABLES(1)

The following table shows, as of December 31, 2002, certain information
about the Company's Office Properties. In the table, "CBD" means central
business district. Based on rental revenues from office leases in effect as of
December 31, 2002, no single tenant accounted for more than 5% of the Company's
total Office Segment rental revenues for 2002. Excluded from this table until
stabilized are two office properties, Five Post Oak Park which was acquired
December 20, 2002, and the 5 Houston Center development which was placed into
service September 16, 2002. Stabilization is deemed to occur upon the earlier of
(a) achieving 93% occupancy or (b) one year following the date placed in-service
or the acquisition date.

- ----------

(1) Office Property Table data is presented at 100% without giving effect
to Crescent's actual ownership percentage in joint ventured properties.

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

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

(4) Leases have been executed at certain Office Properties but had not
commenced as of December 31, 2002. If such leases had commenced as of
December 31, 2002, the percent leased for all Office Properties would
have been 90%. The total percent leased for these Properties would have
been as follows: Bank One Center - 89%, 125 E. John Carpenter Freeway -
63%, Greenway Plaza - 95%, The Avallon - 100%, Barton Oaks Plaza One -
93%, and MCI Tower - 61%.

(5) 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.

(6) 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.

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

(8) The Company has a 75% limited partner interest and an approximate 11%
indirect general partner interest in the partnership owning the four
Office Properties that comprise The Woodlands Office Properties.

(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 on August 29, 2002.

(11) The Company has a 40.0% 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) Property statistics exclude 5 Houston Center (which was developed and
then placed into service on September 16, 2002) and Five Post Oak Park
(which was acquired on December 20, 2002). These office properties will
be included in statistics once stabilized. Stabilization is deemed to
occur upon the earlier of (a) achieving 93% occupancy or (b) one year
following the date placed into service or the acquisition date.

(14) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties as
of December 31, 2002, giving effect to free rent and scheduled rent
increases that are taken into consideration under GAAP and also
including adjustments for expenses paid by or reimbursed from customers
is $22.60.

19

The following table provides information, as of December 31, 2002, for
the Company's Office Properties by state, city and submarket.

20

CLASS B OFFICE PROPERTIES

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

(2) Market information is for Class A office space under the caption "Class
A Office Properties" and market information is for Class B office space
under the caption "Class B Office Properties." Sources are CoStar Group
(for the Dallas CBD, Uptown/Turtle Creek, Far North Dallas, Las
Colinas, Richardson/Plano, Stemmons Freeway, LBJ Freeway, Fort Worth
CBD, Houston Richmond-Buffalo Speedway, Houston CBD, West
Loop/Galleria, Katy Freeway, Austin CBD, Northwest and Southwest
submarkets), The Woodlands Operating Company, L.P. (for The Woodlands
submarket), Turner Commercial Research (for the Colorado Springs
market), Grubb and Ellis Company (for the Phoenix Downtown/CBD)
Building Interests, Inc. (for the Albuquerque CBD submarket), RealData
Information Systems, Inc. (for the Miami CBD and South Dade/Kendall
submarkets) and John Burnham & Company (for the San Diego University
Town Centre submarket). This table includes market information as of
December 31, 2002 for Dallas, Houston, Austin, and Denver submarkets.
Market information for all other submarkets is as of September 30,
2002.

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

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

(5) Calculated based on base rent payable as of December 31, 2002 for
Company Office Properties in the submarket, without giving effect to
free rent or scheduled rent increases that would be taken into account
under GAAP and including adjustments for expenses payable by or
reimbursed from customers, divided by total net rentable square feet of
Company Office Properties in the submarket.

(6) Leases have been executed at certain Office Properties in these
submarkets but had not commenced as of December 31, 2002. If such
leases had commenced as of December 31, 2002, the percent leased for
all Office Properties in the Company's submarkets would have been 90%.
The total percent leased for these Class A and Class B Company
submarkets would have been as follows: Las Colinas - 80%, Houston Class
A (Richmond - Buffalo Speedway) - 95%, Austin - (Northwest) - 100%,
Austin - (Southwest) - 93%, and Houston Class B (Richmond - Buffalo
Speedway) - 93%.

(7) Includes Johns Manville Plaza which was acquired by the Company on
August 29, 2002.

(8) Property statistics exclude 5 Houston Center (which was developed and
then placed into service on September 16, 2002) and Five Post Oak Park
(which was acquired on December 20, 2002). These office properties will
be included in statistics once stabilized. Stabilization is deemed to
occur upon the earlier of (a) achieving 93% occupancy or (b) one year
following the date placed in-service or acquisition date.

(9) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties,
giving effect to free rent and scheduled rent increases that are taken
into consideration under GAAP and also including adjustments for
expenses payable by or reimbursed from customers is $22.60.

21

The following table shows, as of December 31, 2002, the principal
business conducted by the tenants at the Company's Office Properties, based on
information supplied to the Company from the tenants.

- ----------

(1) Includes legal, accounting, engineering, architectural and advertising
services.

(2) Includes oil and gas and utility companies.

(3) Includes banking, title and insurance and investment services.

(4) Includes construction, real estate and other industries.

22

AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES

The following tables show schedules of lease expirations for leases in
place as of December 31, 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 2003.

TOTAL OFFICE PROPERTIES(1)

- ----------

(1) Lease expiration data is presented at 100% without giving effect to the
Company's actual ownership percentage in joint ventured properties.
In-place leases with signed renewals are shown to expire at the end of
the renewed term.

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

(3) Expirations by quarter are as follows: Q1: 1,083,062 square feet Q2:
475,174 square feet Q3: 682,595 square feet Q4: 711,992 square feet.

(4) As of December 31, 2002, new leases have been signed for and will
commence during 2003 on 691,230 net rentable square feet (representing
approximately 23% of square footage expiring during 2003).

(5) Expirations by quarter are as follows: Q1: 1,352,712 square feet Q2:
578,211 square feet Q3: 856,623 square feet Q4: 677,211 square feet.

(6) Reconciliation of Occupied Square Feet to Net Rentable Area.

23

DALLAS OFFICE PROPERTIES(1)

(1) Lease expiration data is presented at 100% without giving effect to the
Company's actual ownership percentage in joint ventured properties.
In-place leases with signed renewals are shown to expire at the end of
the renewed term.

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

(3) Expirations by quarter are as follows: Q1: 433,294 square feet Q2:
136,949 square feet Q3: 385,016 square feet Q4: 191,909 square feet.

(4) As of December 31, 2002, new leases have been signed for and will
commence during 2003 on 176,757 net rentable square feet (representing
approximately 15% of square footage expiring during 2003).

(5) Expirations by quarter are as follows: Q1: 227,147 square feet Q2:
186,916 square feet Q3: 356,762 square feet Q4: 367,051 square feet.

HOUSTON OFFICE PROPERTIES(1)

- ----------

(1) Lease expiration data is presented at 100% without giving effect to the
Company's actual ownership percentage in joint ventured properties.
In-place leases with signed renewals are shown to expire at the end of
the renewed term.

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

(3) Expirations by quarter are as follows: Q1: 317,650 square feet Q2:
174,051 square feet Q3: 147,867 square feet Q4: 168,479 square feet.

(4) As of December 31, 2002, new leases have been signed for and will
commence during 2003 on 340,894 net rentable square feet (representing
approximately 42% of square footage expiring during 2003).

(5) Expirations by quarter are as follows: Q1: 826,094 square feet Q2:
241,654 square feet Q3: 190,445 square feet Q4: 212,107 square feet.

24

AUSTIN OFFICE PROPERTIES (1)

- ----------

(1) Lease expiration data is presented at 100% without giving effect to the
Company's actual ownership percentage in joint ventured properties.
In-place leases with signed renewals are shown to expire at the end of
the renewed term.

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

(3) Expirations by quarter are as follows: Q1: 65,844 square feet Q2:
109,778 square feet Q3: 64,051 square feet Q4: 19,511 square feet.

(4) As of December 31, 2002, new leases have been signed for and will
commence during 2003 on 30,003 net rentable square feet (representing
approximately 12% of square footage expiring during 2003).

(5) Expirations by quarter are as follows: Q1: 83,448 square feet Q2:
12,528 square feet Q3: 249,405 square feet Q4: 13,688 square feet.

DENVER OFFICE PROPERTIES (1)

- ----------

(1) Lease expiration data is presented at 100% without giving effect to the
Company's actual ownership percentage in joint ventured properties.
In-place leases with signed renewals are shown to expire at the end of
the renewal term.

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

(3) Expirations by quarter are as follows: Q1: 70,566 square feet Q2:
26,635 square feet Q3: 42,462 square feet Q4: 262,996 square feet.

(4) As of December 31, 2002, new leases have been signed for and will
commence during 2003 on 84,675 net rentable square feet (representing
approximately 21% of square footage expiring during 2003).

(5) Expirations by quarter are as follows: Q1: 171,003 square feet Q2:
51,637 square feet Q3: 12,413 square feet Q4: 18,704 square feet.

25

OTHER OFFICE PROPERTIES (1)

- ----------

(1) Lease expiration data is presented at 100% without giving effect to the
Company's actual ownership percentage in joint ventured properties.
In-place leases with signed renewals are shown to expire at the end of
the renewed term.

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

(3) Expirations by quarter are as follows: Q1: 195,708 square feet Q2:
27,761 square feet Q3: 43,199 square feet Q4: 69,097 square feet.

(4) As of December 31, 2002, new leases have been signed for and will
commence during 2003 on 58,901 net rentable square feet (representing
approximately 18% of square footage expiring during 2003).

(5) Expirations by quarter are as follows: Q1: 45,020 square feet Q2:
85,476 square feet Q3: 47,598 square feet Q4: 65,661 square feet.

26

RESORT/HOTEL PROPERTIES

The following table shows certain information for the years ended
December 31, 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 and the Ritz Carlton Palm
Beach, 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 , pursant to which
COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's lessee interests in those Resort/Hotel Properties.
As a result, subsidiaries of the Company became the lessees of the
eight Resort/Hotel properties.

(2) On September 1, 2002, the Company entered into a joint venture
agreement with Fairmont pursuant to which Fairmont acquired a 19.9%
interest in the limited liability company that owns the Sonoma Mission
Inn & Spa.

(3) Prior to October 21, 2002, the Company held a 25% interest in the
limited liability company that owns the Ritz Carlton Palm Beach. In
October 2002, through a series of transactions, the Company acquired
the remaining 75% interest. Subsequent to those transactions, the
Company entered into a joint venture agreement with Westbrook pursuant
to which Westbrook acquired a 50% interest in the limited liability
company that owns the resort. The Company accounts for this interest as
an unconsolidated investment.

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

(5) Resort/Hotel Property Table is presented at 100% without giving effect
to the Company's actual ownership percentage in Resort/Hotel
Properties.

27

RESIDENTIAL DEVELOPMENT PROPERTIES

The following table shows certain information as of December 31, 2002,
relating to the Residential Development Properties.

- ----------

(1) As of December 31, 2002, the Company had a 100% ownership interest in
Desert Mountain Development Corporation, The Woodlands Land Company,
Inc., and Crescent Resort Development Inc. as a result of COPI's
transfer to subsidiaries of the Company, pursuant to a strict
foreclosure of COPI's ownership interests, representing all of the
voting stock in Desert Mountain Development Corporation, The Woodlands
Land Company, Inc. and Crescent Resort Development, Inc., as of
February 14, 2002. As of December 31, 2002, the Company also had a 94%
ownership interest, representing all of the non-voting common stock, in
Mira Vista Development Corp. and Houston Area Development Corp.

(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); SF
(Single-Family Homes) and TS (Timeshare Equivalent Units).

(3) Based on lots/units closed during the Company's ownership period.

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

(5) Includes golf membership, which as of December 31, 2002 is $225,000.

(6) As of December 31, 2002, 0.9 equivalent units were under contract at
Main Street Station Vacation Club representing $1.4 million in sales;
six units at Creekside were under contract representing $1.9 million in
sales and 28 units were under contract at One Vendue Range representing
$33.7 million in sales.

(7) This project is in the early stages of development, and this
information is not available as of December 31, 2002.

(8) Distributions are made to Partners based on specified payout
percentages. During the year ended December 31, 2002, the payout
percentage and economic interest was 52.5%.

28

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

The following table shows the number and aggregate size of
Temperature-Controlled Logistics Corporation Properties by state as of December
31, 2002:

- ----------

(1) As of December 31, 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) As of December 31, 2002, AmeriCold Logistics operated 101
temperature-controlled logistics properties with an aggregate of
approximately 541.4 million cubic feet (20.7 million square feet) of
warehouse space.

ITEM 3. LEGAL PROCEEDINGS

Not Applicable.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 2002.

29

PART II

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

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

- ----------

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

As of March 21, 2003, there were approximately 912 holders of record of
the Company's common shares.

DISTRIBUTION POLICY

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

o the general condition of the United States economy;

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

o the ability of tenants to meet their rent obligations;

o the operating and interest expenses of the Company;

o consumer preferences relating to the Resort/Hotel Properties
and the Residential Development Properties;

o cash flows from unconsolidated entities;

o capital expenditure requirements;

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

o the adequacy of cash reserves.

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

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

Under the Code, REITs are subject to numerous organizational and
operational requirements, including the requirement to distribute at least 90%
of REIT taxable income each year. Pursuant to this requirement, the Company was
required to distribute $52.6 million and $111.7 million for 2002 and 2001,
respectively. Actual distributions by the Company were $176.4 million and $245.1
million for 2002 and 2001, respectively.

30

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

Following is the income tax status of distributions paid during the
years ended December 31, 2002 and 2001 to common shareholders:

During 2002, many of the Company's significant capital transactions
resulted in net capital gain income for income tax purposes. The Company has
distributed to its shareholders the net capital gain income as a capital gain
dividend.

Distributions on the 10,800,000 Series A Convertible Cumulative
Preferred Shares issued by the Company in February 1998 and April 2002 are
payable at the rate of $1.6875 per annum per Series A Convertible Cumulative
Preferred Share, prior to distributions on the common shares.

Distributions on the 3,400,000 Series B Cumulative Redeemable Preferred
Shares issued by the Company in May and June 2002 are payable at the rate of
$2.3750 per annum per Series B Cumulative Redeemable Preferred Share, prior to
distributions on the common shares.

Following is the income tax status of distributions paid during the
years ended December 31, 2002 and 2001 to preferred shareholders:

ISSUANCES OF UNREGISTERED SECURITIES

During the quarter ended December 31, 2002, Crescent Equities issued an
aggregate of 131,584 common shares to holders of Operating Partnership units in
exchange for 65,792 units. The issuances of the common shares were exempt from
registration as private placements under Section 4(2) of the Securities Act.
Crescent Equities has registered the resale of such common shares under the
Securities Act.

31

ITEM 6. SELECTED FINANCIAL DATA

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

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

- -----------------------------------------------------------
(1) Funds from Operations ("FFO"), as used in this document, is based on the
definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts, effective January 1, 2000, and means net
income (loss) (determined in accordance with GAAP), excluding gains (losses)
from sales of depreciable operating property, excluding extraordinary items
(as defined by GAAP), plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. FFO is a non-GAAP measure and should not be considered an
alternative to GAAP measures, including net income and cash generated from
operating activities. For a more detailed definition and description of FFO
and comparisons to GAAP measures, see "Funds from Operations" included in
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

33

FORWARD-LOOKING STATEMENTS

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

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

Although the Company believes that the expectations reflected in such
forwardlooking 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 continue to be adversely
affected by changes in real estate conditions (including changes in
vacancy rates in a particular market, or market decreases in rental
rates, increased competition from other properties or a general
downturn in the economy);

o Adverse changes in the financial condition of existing tenants;

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

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 AmeriCold Logistics to pay all current and deferred rent
due;

o The Company's inability 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 COPI's interest
in AmeriCold Logistics;

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

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;

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

34

RESULTS OF OPERATIONS

The following table shows the Company's financial data as a percentage
of total revenues for the three years ended December 31, 2002, 2001 and 2000 and
the variance in dollars between the years ended December 31, 2002 and 2001 and
the years ended December 31, 2001 and 2000.

35

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED
DECEMBER 31, 2001

REVENUES

Total revenues increased $334.0 million, or 48.9%, to $1.0 billion for
the year ended December 31, 2002, as compared to $682.5 million for the year
ended December 31, 2001. The components of the increase in total revenues are
discussed below.

o Residential Development revenues increased $231.7 million due to the
consolidation of the operations of three Residential Development
Corporations for the period February 14, 2002 through December 31, 2002
as a result of the COPI transaction (previously the Company recorded
its share of earnings under the equity method).

o Resort/Hotel Property revenues increased $157.4 million due to the
consolidation of the operations of eight of the Resort/Hotel Properties
for the period February 14, 2002 through December 31, 2002 as a result
of the COPI transaction (previously the Company recognized lease
payments related to these Properties).

o Office Property revenues decreased $30.6 million, or 5.1%, to $568.5
million, attributable to:

o a decrease of $37.2 million resulting from the disposition of
five Office Properties in 2001 and the contribution of two
Office Properties to joint ventures in each of 2002 and 2001;

o a decrease of $11.2 million from the 66 consolidated Office
Properties that the Company owned or had an interest in,
primarily due to a decline in the weighted average
full-service rental rates, reflecting decreases in both rental
revenue and operating expense recoveries, to decreased
occupancy and a decrease in net parking revenues;

o a decrease of $3.6 million related to non-recurring revenue
received in 2001; partially offset by

o an increase of $7.9 million in net lease termination fees to
$16.6 million in 2002 (fees are net of deferred rent
receivables write-off);

o an increase of $5.9 million from Johns Manville Plaza Office
Property acquired in August 2002 and the Avallon IV Office
Property completed in June 2001; and

o a net increase of $7.6 million related to 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
third party fee and reimbursement of costs related to
providing third party management services of $2.6 million.

o Interest and Other Income decreased $24.5 million, or 65.3%, to $13.1
million , primarily attributable to:

o a net $11.4 million decrease in income and gains resulting
from sales of marketable securities aggregating $11.9 million
in 2001 versus $0.5 million in 2002;

o a decrease of $6.5 million due to partial payment received in
2001 from Charter Behavioral Health Systems ("CBHS") on a
working capital loan and interest that was previously expensed
in conjunction with the recapitalization of CBHS;

o a decrease of $8.6 million due to recognition in 2001 of
interest income on COPI notes of $2.8 million, and lower
interest income on cash balances and note receivable of $5.8
million due to repayment of certain notes and reduced
interest rates;

o a decrease in interest income of $1.9 million in 2002 related
to lower escrow balances for plaza renovations at an Office
Property that were completed in 2001; partially offset by

o an increase of $4.5 million due to a litigation settlement
received in 2002.

36

EXPENSES

Expenses increased by $287.2 million, or 40.2%, to $1.0 billion for the
year ended December 31, 2002, as compared to $713.8 million for the year ended
December 31, 2001. The components of the increase in expenses are discussed
below.

o Residential Development Property expense increased $211.8 million due
to the consolidation of the operations of three Residential Development
Corporations for the period February 14, 2002 through December 31, 2002
as a result of the COPI transaction.

o Resort/Hotel Property expense increased $158.0 million due to the
consolidation of the operations of eight of the Resort/Hotel Properties
for the period February 14, 2002 through December 31, 2002 as a result
of the COPI transaction.

o Depreciation expense increased $20.6 million, or 16.8%, to $143.3
million in 2002 due to the consolidation of the operations of the three
Residential Development Corporations beginning February 14, 2002 as a
result of the COPI transaction.

o Other expenses increased $11.4 million, primarily attributable to:

o an increase of $3.8 million due to legal expenses of $2.6
million associated with litigation in which the Company
received a settlement and of $1.2 million legal expenses
associated with litigation on undeveloped land;

o an increase of $1.9 million due to compensation expense
related to stock option note term extensions;

o an increase of $1.8 million due to write-off of costs
associated with acquisitions no longer being actively
pursued;

o an increase of $1.2 million accrual for a penalty paid by
the Company for non-construction of a convention hotel in
downtown Houston Convention Center; and

o an increase of $2.6 million due to the impairment of
long-term marketable securities.

o Corporate general and administrative expenses increased $3.6 million,
or 14.9%, to $27.8 million , primarily due to expenses related to an
officers' incentive compensation plan in 2002.

o Impairment and other charges decreased $92.8 million due to impairment
charges related to COPI in 2001, consisting of the $74.8 million
reduction in net assets, primarily as a result of the write-down of
debt and rental obligations of COPI to the estimated collateral value
of assets to be received and the estimated $18.0 million of COPI
bankruptcy costs to be funded by the Company.

o Impairment and other charges related to real estate assets decreased
$13.1 million, or 51.8%, to $12.2 million attributable to:

o a decrease of $8.4 million due to the recognition in 2001 of
an impairment charge related to the behavioral healthcare
properties;

o a decrease of $11.9 million due to the recognition in 2001
of an impairment charge related to the conversion of the
Company's preferred interest in Metropolitan Partners,
L.L.C. ("Metropolitan") into common stock of Reckson
Associates Realty Corporation ("Reckson");

o a decrease of $5.0 million due to the recognition in 2001 of
an impairment charge related to the Company's investment in
a fund which primarily holds real estate investments and
marketable securities; partially offset by

o an increase of $12.2 million resulting from the impairment
in 2002 of the Company's investment in Canyon Ranch Las
Vegas Spa of $9.6 million and investment in Manalapan
Partners, L.L.C. of $2.6 million.

o Office Property expenses decreased $10.0 million, or 3.9%, to $247.0
million, primarily attributable to:

o a decrease of $13.4 million due to the disposition of five
Office Properties in 2001, and the contribution of two Office
Properties to joint ventures in each of 2002 and 2001;

o a decrease in Office Property utility expense of $12.3 million
due to lower rates as a result of a one-year energy contract
effective beginning in first quarter 2002 for certain Texas
properties;

o a decrease of $1.8 million in property taxes for the 66
consolidated Office Properties that the Company owned or had
an interest in; partially offset by

37

o an increase of $17.5 million from the 66 consolidated Office
Properties that the Company owned or had an interest in, due
to:

-- an increase of $7.9 million in administrative
costs, security, repairs and maintenance;

-- an increase of $4.7 million in insurance costs;

-- an increase of $3.3 million in expenses related to
development and third party management/leasing
fees; and

-- an increase of $1.6 million due to the acquisition
of Johns Manville Plaza Office Property in 2002.

OTHER INCOME

Other Income increased $36.9 million, or 66.4%, to $92.5 million for
the year ended December 31, 2002 as compared to $55.6 million the year ended
December 31, 2001. The primary components of the increase in Other Income are
discussed below.

o Equity in net income of unconsolidated companies increased $2.4
million, or 4.7%, to $53.6 million primarily attributable to:

o an increase of $17.3 million in Office equity in net
income, primarily attributable to the gain from the sale of
the Woodlands Mall partnership in which the Company had a
52.5% economic interest; partially offset by

o a decrease of $9.6 million in other unconsolidated
companies due to a $5.2 million impairment for DBL-Juniper
notes in 2002, lower earnings of $2.6 million from
Metropolitan Partners due to conversion of the Company's
preferred member interest into common stock of Reckson in
May 2001 and lower earnings for DBL and losses for The
Woodlands Operating Company, Inc. aggregating $1.8 million;
and

o a decrease of $4.1 million in Temperature-Controlled
Logistics equity in net income, primarily as a result
of the Company's $2.7 million portion of AmeriCold
Logistics' deferral of rent payable and the Company's $1.4
million portion of the loss on a sale of a Temperature-
Controlled Logistics Property.

o Gain on property sales increased $34.6 million, or 786.4%,to $39.0
million. The primary components of the increase in gain on property
sales are:

o an increase of $21.6 million resulting from the gains on the
partial sales of two Office Properties contributed to joint
ventures in 2002;

o an increase of $16.2 million resulting from the gains on the
sale of approximately 10 acres of undeveloped land located in
Houston, Texas and Washington, D.C. in 2002;

o an increase of $5.4 million resulting from the gain on the
sale of Canyon Ranch-Tucson land in 2002; partially offset by

o a decrease of $3.3 million resulting from the loss on the
partial sale of one Resort/Hotel Property contributed to a
joint venture in 2002;

o a decrease of $2.9 million resulting from the gains on the
partial sales of two Office Properties contributed to joint
ventures in 2001; and

o a decrease of $1.6 million resulting from the gain on the
sales of seven behavioral healthcare properties in 2001.

DISCONTINUED OPERATIONS

Income from discontinued operations from assets sold and held for sale
increased $5.7 million, or 203.6%, to $8.5 million for the year ended December
31, 2002. The primary components of the increase in income from discontinued
operations are:

o an increase of $11.8 million on dispositions attributable to the gains,
net of minority interest, on the sales of seven Office Properties and
EWRT I and EWRT II in 2002;

o an increase of $0.4 million in net income for EWRT I and EWRT II, which
were unconsolidated subsidiaries in 2001; partially offset by

o a decrease of $3.2 million due to an impairment charge in 2002 related
to two of the seven behavioral healthcare properties held for sale;
which represents the difference between the carrying value and the
estimated sales price less costs of the sale for these properties;

o a decrease of $2.2 million in net income for the seven Office
Properties sold in 2002, which contributed a full year of net income in
2001 and a partial year of net operating income in 2002; and

38

o a decrease of $1.3 million due to the write-off of goodwill at EWRT I
and EWRT II at the time of the sale of these companies in 2002.

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

REVENUES

Total revenues decreased $21.8 million, or 3.1%, to $682.5 million for
the year ended December 31, 2001, as compared to $704.0 million for the year
ended December 31, 2000. The primary components of the decrease in total
revenues are discussed below.

The decrease in Resort/Hotel Property revenues of $26.4 million, or
36.6%, to $45.7 million for the year ended December 31, 2001, as compared to the
year ended December 31, 2000, is attributable to:

o decreased revenues from the upscale business-class hotels of $8.1
million, due to the disposition of the Four Seasons Hotel Houston in
November 2000;

o decreased revenues of $6.3 million due to a decrease in rental income
attributed to the softening of the economy and the events of September
11, 2001; and

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

The increase in Office Property revenues of $7.4 million, or 1.3%, for
the year ended December 31, 2001, as compared to the year ended December 31,
2000, is attributable to:

o increased revenues of $34.4 million from the 65 consolidated Office
Properties that the Company owned or had an interest in as of December
31, 2001, excluding the four Office Properties held for sale at
December 31, 2001, primarily as a result of increased full-service
weighted average rental rates (reflecting increases in both rental
revenue and operating expense recoveries) and increased occupancy; and

o increased other income of $4.2 million, primarily due to parking
revenue; partially offset by

o decreased revenues of $27.3 million due to the disposition of 11 Office
Properties and four retail properties during 2000, and the disposition
of five Office Properties and the contribution to joint ventures of
two Office Properties during 2001; and

o decreased lease termination fees (net of the write-off of deferred rent
receivables) of $3.9 million, from $12.0 million for the year ended
December 31, 2000, to $8.0 million for the year ended December 31,
2001.

EXPENSES

Total expenses increased $95.0 million, or 15.4%, to $713.8 million for
the year ended December 31, 2001, as compared to $618.7 million for the year
ended December 31, 2000. The primary components of the increase in total
expenses are discussed below.

The increase in Office Property operating expenses of $13.6 million, or
5.6%, for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, is attributable to:

o increased expenses of $24.4 million from the 65 consolidated Office
Properties that the Company owned or had an interest in as of December
31, 2001, excluding the four Office Properties held for sale at
December 31, 2001, primarily as a result of increased operating
expenses for utilities of $7.8 million, property taxes of $3.6 million
and other increased operating expenses such as insurance, security, and
technology initiatives of $13.3 million during the year ended December
31, 2001, as compared to the same period in 2000; partially offset by

o decreased expenses of $11.1 million due to the disposition of 11 Office
Properties and four retail properties during 2000, and the disposition
of five Office Properties and the contribution to joint ventures of two
Office Properties during 2001.

The decrease in interest expense of $20.8 million, or 10.2%, to $182.4
million for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, is primarily attributable to a decrease in the weighted
average interest rate of 0.61%, or $14.0

39

million of interest expense, combined with a decrease in the average debt
balance of $104.0 million, or $8.0 million of interest expense.

The increase in impairment and other charges related to real estate
assets of $7.5 million is due to:

o the conversion of the Company's preferred member interest in
Metropolitan into common stock of Reckson, which resulted in an
impairment charge of $11.9 million; partially offset by

o a decrease in the impairment loss of $3.5 million, from $8.5
million in 2000 to $5.0 million in 2001, recognized on the Company's
investment in a fund which primarily holds real estate investments and
marketable securities; and

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

The increase in impairment and other charges related to COPI of $92.8
million is due to the reduction in net assets of $74.8 million, primarily
attributable to the write-down of debt and rental obligations of COPI to the
estimated underlying collateral value of assets to be received from COPI, and
estimated COPI bankruptcy costs to be funded by the Company of $18.0 million.

OTHER INCOME

Other income decreased $157.6 million, or 73.9%, to $55.7 million for
the year ended December 31, 2001, as compared to $213.2 million for the year
ended December 31, 2000. This decrease is due to:

The decrease in equity in net income of unconsolidated companies of
$24.5 million, or 32.4%, to $51.2 million for the year ended December 31, 2001,
as compared to the same period in 2000, is primarily attributable to the
following:

o a decrease in equity in net income of unconsolidated Residential
Development Properties of $12.5 million, or 24%, primarily attributable
to lower lot sales at Desert Mountain during the year ended December
31, 2001, resulting in a decrease of $16.3 million, partially offset by
higher unit sales at CRDI, resulting in an increase of $4.5 million;

o a decrease in equity in net income of the Temperature-Controlled
Logistics Properties of $6.3 million, or 85%, due to the lease
restructuring in 2001 and an increase in deferred rent of $9.2 million;
and

o a decrease in equity in net income of other unconsolidated Properties
of $8.6 million, or 75.0%, primarily attributable to lower earnings of
$3.8 million from Metropolitan due to the conversion of the Company's
preferred member interest into common stock of Reckson in May 2001, the
$1.0 million write-off of the Company's investment in a retail
distribution company and lower earnings from DBL Holdings, Inc. ("DBL")
of $1.7 million, due to an approximately $12.2 million return of
investment received in March 2001; partially offset by

o an increase in equity in net income of the unconsolidated Office
Properties of $2.9 million, or 94.0%, primarily attributable to lower
interest expense at one unconsolidated office property.

The net decrease in gain on property sales of $133.1 million for the
year ended December 31, 2001, as compared to the same period in 2000, is
attributable to a decrease in net gains recognized primarily on Office,
Resort/Hotel and behavioral healthcare property sales for the year ended
December 31, 2001, as compared with the same period in 2000.

DISCONTINUED OPERATIONS

The income from discontinued operations from assets sold and held for
sale decreased $1.0 million, or 24.7%, to $2.8 million for the year ended
December 31, 2001, compared to $3.8 million for the year ended December 31,
2000. This decrease is primarily due to a decrease in net operating income of
one Office Property held for sale of approximately $1.3 million, partially
offset by the increase in net operating income of three of the Office Properties
held for sale of approximately $0.4 million.

EXTRAORDINARY ITEMS

The increase in extraordinary items of $6.9 million, or 176.9%, is
attributable to the write-off of deferred financing costs related to the early
extinguishment of the UBS Facility in May 2001 of $10.8 million, compared with
the write-off of deferred financing costs related to the early extinguishment of
the Bank Boston Facility in February 2000 of $3.9 million.

40

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $78.4 million and $36.3 million at
December 31, 2002 and 2001, respectively. This 115% increase is attributable to
$336.1 million provided by operating and investing activities, partially offset
by $294.0 million used in financing activities.

CASH FLOWS

OPERATING ACTIVITIES

The Company's cash provided by operating activities of $252.4 million
is attributable to Property operations.

INVESTING ACTIVITIES

The Company's cash provided by investing activities of $83.7 million is
attributable to:

o $164.1 million of proceeds from joint venture partners;

o $121.4 million of net sales proceeds, primarily attributable to the
sale of seven Office Properties and approximately 10 acres of
undeveloped land in Houston and Washington D.C.;

o $16.5 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 $19.1 million decrease in restricted cash, due primarily to escrow
reimbursements for a hotel capital project and the release of funds to
complete an acquisition of a real estate asset.

The cash provided by investing activities is partially offset by:

o $120.2 million for the acquisition of Office Properties;

o $49.2 million for incremental and non-incremental revenue generating
tenant improvement and leasing costs for Office Properties;

o $47.5 million of additional investment in unconsolidated companies,
consisting primarily of investments in the Residential Development
Properties;

o $34.0 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;

41

o $22.1 million increase in notes receivable including a $7.5 million
promissory note related to the sale of the Canyon Ranch - Tucson land
and a $12.3 million short-term seller financing note related to the WOE
sale of two Office Properties in the Woodlands; and

o $2.5 million for development of investment properties.

FINANCING ACTIVITIES

The Company's use of cash in financing activities of $294.0 million is
primarily attributable to:

o net payments under the Company's credit facility of $552.0 million;

o a decrease in notes payable of $185.5 million, of which $150.0 million
related to retirement of the Company's 2002 public notes;

o Residential Development Property note payments of $118.7 million;

o $9.2 million of deferred financing costs, of which approximately $8.5
million related to the issuance of $375.0 million of senior, unsecured
notes;

o common share repurchase of $28.5 million;

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

o distributions to common shareholders and unitholders of $176.4 million;

o distributions to preferred shareholders of $21.7 million; and

o net capital distributions to joint venture partners of $10.8 million,
primarily due to distributions to joint venture preferred equity
partners.

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

o borrowings under the credit facility of $433.0 million;

o gross proceeds from notes payable of $380.0 million, primarily due to
$375.0 million of senior, unsecured notes;

o Residential Development Property borrowings of $83.4 million;

o net proceeds of $48.2 million from issuance of Series A preferred
shares;

o net proceeds of $81.9 million from issuance of Series B preferred
shares; and

o net proceeds from the exercise of options of $0.6 million.

42

LIQUIDITY REQUIREMENTS

As of December 31, 2002, the Company had unfunded capital expenditures
of approximately $95.7 million relating to capital investments that are not in
the ordinary course of operations of the Company's business segments. The table
below specifies the Company's requirements for capital expenditures, amounts
funded as of December 31, 2002, and amounts remaining to be funded (future
fundings classified between 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) 5 Houston Center and Five Post Oak Park are deemed unstabilized as of
December 31, 2002. Stabilization is deemed to occur upon the earlier of
(a) achieving 93% occupancy or (b) one year following the date placed
in-service or acquired. The capital expenditures reflect the Company's
ownership percentage in the Property, 25%, for 5 Houston Center and 30%
for Five Post Oak Park.

(4) In connection with the joint venture arrangement with JPM Fund I, the
Company committed to fund deferred maintenance items for Miami Center.

(5) Enhancements and additions to building infrastructure.

(6) Represents capital expenditures for infrastructure and amenities. The
Tahoe Mountain Properties & Club project costs exclude costs for
projects in which the Company anticipates sales to occur in 2003.

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

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

(9) 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.

The Company expects to fund its short-term capital requirements of
approximately $87.3 million through a combination of cash, construction
financing, net cash flow from operations, and borrowings under the Company's
credit facility. The Company plans to meet its maturing debt obligations through
December 31, 2003 of approximately $125.5 million, primarily through refinancing
of the $63.5 million Cigna Note, cash from operations and return of capital from
the Residential Development Segment, construction loan refinancings and
additional borrowings under the Company's credit facility.

The Company expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, debt service
requirements, non-incremental revenue generating capital expenditures and
incremental revenue generating capital expenditures, (such as property
improvements, tenant improvement and leasing costs),

43

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 December 31, 2002
consist primarily of debt maturities after December 31, 2003, which totaled
approximately $2.3 billion. The Company also has $8.4 million of long-term
capital expenditure 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 and return of
capital from the Residential Development Segment.

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 $220.8 million of borrowing capacity as of December
31, 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 reduce the availability
under the credit facility;

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.

44

In addition to the Company's liquidity requirements, the Company
guaranteed or provided letters of credit for unconsolidated debt of
approximately $85.4 million and had obligations to potentially provide an
additional $19.5 million in unconsolidated debt guarantees, primarily related to
construction loans. Listed below are the Company's guarantees which were in
place as of December 31, 2002:

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

(1) See "Debt Financing Arrangements" in this Item 7 for a description of
the terms of this debt.

(2) The Company provides a full guarantee of principal up to $82.5 million
for the construction loan on 5 Houston Center which was completed in
2002. The guarantee amount reduces to $41.3 million upon achievement of
specified conditions, including specific tenants occupying space and
obtaining a certificate of occupancy; further reduction to $20.6
million upon achievement of 90% occupancy and 1.3x debt service
coverage.

(3) The Company provided a $15.2 million Letter of Credit to support the
payment of interest & principal of the Eagle Ranch Metropolitan
District Revenue Development Bond and Limited Tax Bonds.

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

(5) The Company obtained a $3.0 million Letter of Credit to guarantee
repayment of up to $3.0 million of principal in relation to the
Manalapan Hotel Partners, L.L.C. joint venture debt with Corus Bank.

REIT QUALIFICATION

The Company intends to maintain its qualification as a REIT under
Section 856 of the U.S. Internal Revenue Code of 1986, as amended and operates
in a manner intended to enable it to continue to qualify as a REIT. As a REIT,
the Company generally will not be subject to corporate federal income tax on
income that it currently distributes to its shareholders, provided that the
Company satisfies certain organizational and operational requirements of the
Code, including the requirement to distribute at least 90% of its REIT taxable
income to its shareholders.

EQUITY AND DEBT FINANCING

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 and are not subject to sinking fund or mandatory redemption. On
or after February 18, 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 distributions. 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.

45

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.

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 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.

SHELF REGISTRATION STATEMENT

On October 29, 1997, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the SEC relating to the future
offering of up to an aggregate of $1.5 billion of common shares, preferred
shares and warrants exercisable for common shares. Management believes the Shelf
Registration Statement will provide the Company with more efficient and
immediate access to capital markets when considered appropriate. As of December
31, 2002, approximately $647.3 million was available under the Shelf
Registration Statement for the issuance of securities.

SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY

As of December 31, 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.

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. Also, during the year ended December 31, 2000, GMACCM purchased
$275.0 million of non-voting redeemable Class A units in Funding IX (the "Class
A Units"). The Class A Units in Funding IX were redeemable at the Company's
option at the original price. As of December 31, 2000, the Company had redeemed
approximately $56.6 million of the Class A units in Funding IX from GMACCM.

All of the Class A Units outstanding at December 31, 2000 were redeemed
by Funding IX during the year ended December 31, 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"), a wholly-owned subsidiary of the Company, 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.

46

EMPLOYEE STOCK PURCHASE PLAN

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

Effective January 1, 2003, the Company adopted the expense recognition
provisions of SFAS No. 123 on a prospective basis. See Note 2, "Summary of
Significant Accounting Policies," for more information on this accounting
pronouncement. Unlike the accounting treatment under APB No. 25, under SFAS No.
123, the Company will be required to record the stock purchase discount provided
to employees as compensation expense in the Company's Consolidated Statements of
Operations.

The 1,000,000 common shares that may be issued pursuant to the purchase
of common shares under the ESPP represent less than 1.0% of the Company's
outstanding common shares at December 31, 2002.

47

DEBT FINANCING ARRANGEMENTS

The significant terms of the Company's primary debt financing
arrangements existing as of December 31, 2002, are shown below:

48

(1) The outstanding principal balance of this note at maturity will be
approximately $224.1 million. This note is secured by the Greenway
Plaza Office Properties.

(2) The note has a seven-year period during which interest only is payable
(through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity. In August 2007, the
interest rate will increase, and the Company is required to remit, in
addition to the monthly debt service payment, excess property cash
flow, as defined, to be applied first against principal until the note
is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at
such time (August 2007) by making a final payment of approximately
$221.7 million. LaSalle Note I is secured by Properties owned by
Crescent Real Estate Funding I, L.P. ("Funding I") (See Note 1,
"Organization and Basis of Presentation," included in Item 8,
"Financial Statements and Supplementary Data").

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

(4) The note has a seven-year period during which only interest is payable
(through March 2003), followed by principal amortization based on a
25-year amortization schedule through maturity. In March 2006, the
interest rate will increase, and the Company is required to remit, in
addition to the monthly debt service payment, excess property cash
flow, as defined, to be applied first against principal until the note
is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at
such time (March 2006) by making a final payment of approximately
$154.5 million. LaSalle Note II is secured by Properties owned by
Crescent Real Estate Funding II, L.P. ("Funding II") (See Note 1,
"Organization and Basis of Presentation," included in Item 8,
"Financial Statements and Supplementary Data").

(5) The note requires payments of interest only during its term. The CIGNA
Note is secured by the MCI Tower and Denver Marriott City Center
Resort/Hotel Property.

(6) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by the 301 Congress Avenue Office
Property.

(7) Under the terms of the note, principal and interest are payable based
on a 25-year amortization schedule. Nomura Funding VI Note is secured
by Canyon Ranch-Lenox, the Property owned by Crescent Real Estate
Funding VI, L.P. ("Funding VI") (see Note 1, "Organization and Basis of
Presentation," included in Item 8, "Financial Statements and
Supplementary Data"). In July 2010, the interest rate due under the
note will change to a 10-year Treasury yield plus 500 basis points or,
if the Company so elects, it may repay the note without penalty at that
date. It is the intent of the Company to pay the note at that time with
a final principal payment of $6.1 million.

(8) The note requires payments of interest only during its term. The
Mitchell Mortgage Note is secured by one of The Woodlands Office
Properties.

(9) The Metropolitan Life Note V requires monthly principal and interest
payments based on a 25-year amortization schedule through maturity, at
which time the outstanding principal balance is due and payable. The
note is secured by the Datran Center Office Property.

(10) The note has an initial five year interest only term and then principal
and interest, based on a 25-year amortization schedule. The outstanding
principal balance on this note at maturity will be approximately $8.2
million. This note is secured by the Avallon IV Office Property.

(11) The notes are unsecured and require payments of interest only during
their terms. The indenture requires the Company to maintain compliance
with a number of customary financial and other covenants on an ongoing
basis, including leverage ratios, debt service coverage ratios, maximum
secured debt as a percentage of total assets, and maintenance of
unencumbered assets. Additionally, as long as the 2009 Notes are not
rated investment grade, there are restrictions on the Company's ability
to make certain payments and investments. The notes were issued in an
offering registered with the SEC.

(12) For the method of calculation of the interest rate for the Company's
variable rate debt, see Note 11, "Notes Payable and Borrowings under
the Fleet Facility," included in Item 8, "Financial Statements and
Supplementary Data."

(13) For a description of the Fleet Fund I and II Term Loan and the Fleet
Facility, see Note 11, "Notes Payable and Borrowings under the Fleet
Facility," included in Item 8, "Financial Statements and Supplementary
Data." The note requires payments of interest only and bears interest
at LIBOR plus 325 basis points (at December 31, 2002, the interest rate
was 4.69%). The Fleet Term Loan note is secured by the Company's equity
interest in the properties owned by Funding I and Funding II. The Term
Loan requires the Company maintain compliance with a number of
customary financial and other covenants on an ongoing basis, including
leverage ratios, debt service coverage ratios, limitations on
additional secured and total indebtedness, limitations on
distributions, and a minimum net worth requirement, and with respect
solely to Funding I and Funding II Properties, adjusted net operating
income to actual debt service and adjusted net operating income to pro
forma debt service.

(14) This note requires payment of interest only during its term. The
Deutsche Bank - CMBS Loan has been broken into two notes. Each of the
notes bears interest at the 30-day LIBOR rate plus, in the case of the
$185.0 million Senior Notes, a spread of 164.7 basis points (at
December 31, 2002, the interest rate was 5.15%), and, in the case of
the $35.0 million Mezzanine Note, for the $185.0 Senior Note and a
spread of 600 basis points (at December 31, 2002, the interest rate was
9.50%). The blended rate at December 31, 2002, was 5.84%. The notes
have three-year interest only terms and two one-year extension options
and are secured by the Crescent Real Estate Funding X, L.P. ("Funding
X") Office Properties and Spectrum Center, L. P. (See Note 1,
"Organization and Basis of Presentation," included in Item 8,
"Financial Statements and Supplementary Data").

(15) The JP Morgan Loan Sales Facility is an uncommitted $50.0 million
unsecured credit facility. The Company maintains sufficient
availability under the Fleet Facility to repay this loan at any time
due to the lack of obligation by the lender to fund the loan.

(16) The overall weighted average interest rate does not include the effect
of the Company's cash flow hedge agreements. Including the effect of
these agreements, the overall weighted average interest rate would have
been 7.89%.

(17) For a description of the Fleet Facility, see Note 11, "Notes Payable
and Borrowings Under the Fleet Facility," included in Item 8,
"Financial Statements and Supplementary Data." The note requires
payments of interest only during the first four years with a one-year
extension option. The note bears interest at LIBOR plus 187.5 basis
points (at December 31, 2002, the interest rate was 3.36%). The Fleet
Facility requires the Company to maintain compliance with a number of
customary financial and other covenants on an ongoing basis, including
leverage ratios, debt service coverage ratios, limitations on
additional secured and total indebtedness, limitations on
distributions, a minimum net worth requirement, and with respect solely
to Funding VIII Properties adjusted net operating income to actual debt
service, adjusted net operating income to pro forma debt service, total
indebtedness to total asset value, office assets as a percentage of
total assets, and minimum leasing requirements.

The Company is generally obligated by its debt agreements to comply
with financial covenants, affirmative covenants and negative covenants,
or some combination of these types of covenants. The significant
financial covenants relating to the Company's debt are summarized in
the notes to the preceding table. The affirmative covenants to which
the Company is subject under its debt agreements include, among others,
provisions requiring the Company to comply with all laws relating to
operation of any Properties securing the debt, maintain those
Properties in good repair and working order, maintain adequate
insurance, and provide timely financial information. The negative
covenants under the Company's debt agreements generally restrict the
Company's ability to transfer or pledge assets or incur additional debt
at a subsidiary level, limit the Company's ability to engage in
transactions with affiliates, and place conditions on the Company's or
a subsidiary's ability to make distributions. The Company's debt
facilities generally prohibit loan pre-payment for an initial period,
allow pre-payment with a penalty during a following specified period
and allow pre-payment without penalty after the expiration of that
period. During the year ended December 31, 2002, there were no
circumstances that required the Company to pay penalties or increase
collateral related to the Company's existing debt.

Any uncured or unwaived events of default under 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 December 31, 2002, no event of default had occurred, and
the Company was in compliance with all of its financial covenants
related to its outstanding debt.

49

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 $509.3 million of hedged variable rate debt, the
percentages for fixed rate debt and variable rate debt are 90% and 10%
respectively.

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

(3) Based on contractual maturities. The overall weighted average maturity
is 3.9 years based on the Company's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of December 31, 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 $125.5 million of secured debt maturing in 2003,
consisting primarily of the Cigna Note and debt related to the Residential
Development Segment. The Company plans to meet its maturing debt obligations
through December 31, 2003 of approximately $125.5 million, primarily through
refinancing of the $63.5 million Cigna Note, cash from operations and return of
capital from the Residential Development Segment, construction loan refinancings
and additional borrowings under the Company's credit facility.

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; variable or fixed);

o the effect of additional debt on existing covenant 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.

50

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.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company's objective in using derivatives is to add stability to
interest expense and to manage its exposure to interest rate movements or other
identified risks. Derivative financial instruments are used to convert a portion
of the Company's variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. To accomplish this objective, the Company primarily
uses interest rate swaps as part of its cash flow hedging strategy. Interest
rate swaps designated as cash flow hedges involve the payment of fixed rate
amounts in exchange for variable rate payments over the life of the agreements
without exchange of the underlying principal amount. During 2002, such
derivatives were used to hedge the variable cash flows associated with existing
variable rate debt.

As of December 31, 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."

51

The following table shows information regarding the Company's cash flow
hedge agreements in place as of December 31, 2002, and additional interest
expense and unrealized gains (losses) recorded in Other Comprehensive Income
("OCI") for the year ended December 31, 2002.

(1) During the year ended December 31, 2002, the Company entered into
agreements for three additional cash flow hedges that will be issued in
2003, and will replace two of 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 re-prices 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 12 months, an estimated $17.7 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 December 31, 2002, CRDI had entered into three cash flow hedge
agreements, which are accounted for in conformity with SFAS Nos. 133 and 138.

52

The following table shows information regarding CRDI's cash flow hedge
agreements in place and additional capitalized interest at December 31, 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. Also presented are the unrealized gains in Other Comprehensive
Income for the year ended December 31, 2002.

CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges.

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 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.

53

2002 TRANSACTIONS

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.

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

IMPAIRMENT AND OTHER ADJUSTMENTS RELATED TO COPI

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

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

On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, 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 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 limited liability companies 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.

54

The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. Under the Agreement, the Company
has agreed to provide approximately $14.0 million to COPI in the form of cash
and common shares of the Company to fund costs, claims and expenses relating to
the bankruptcy and related transactions, and to provide for the distribution of
the Company's common shares to the COPI stockholders. The Company 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 it 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 any accrued interest. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders of the Company. Crescent Spinco then would purchase COPI's
interest in AmeriCold Logistics for between $15.0 million and $15.5 million.
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.

On March 6, 2003, the stockholders of COPI approved a proposed
pre-packaged bankruptcy plan for COPI. On March 10, 2003, COPI filed the plan
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Texas.

If the COPI bankruptcy plan is approved by the bankruptcy court, the
holders of COPI 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 Agreement, the current and former directors and
officers of COPI and the current and former trust managers 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 under the COPI
bankruptcy plan.

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

ACQUISITIONS

OFFICE SEGMENT

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 and included in the Company's Office Segment.

55

On November 26, 2002, the Company purchased Duddlesten Ventures-I,
Ltd.'s 20% interest in the Crescent Duddlesten Hotel Partnership for $11.1
million, funded by a draw on the Company's credit facility, and increasing the
Company's ownership percentage from 80% to 100%. This partnership owned 3.79
acres of undeveloped land in downtown Houston, and therefore the Company
recorded the $11.1 million as an increase to land. See "Dispositions -- Office
Segment - Undeveloped Land - Consolidated" in this Item 7 for information
regarding the December 31, 2002 sale of approximately 2.32 acres of this
undeveloped land near the Houston Convention Center. The remaining 1.47 acres in
downtown Houston are wholly-owned and included in the Company's Office Segment.

DISPOSITIONS

The gains and losses for consolidated asset dispositions during the
years ended December 31, 2001 and December 31, 2000 listed within this Note did
not meet criteria which would require reporting under SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". Accordingly, the related
gains and losses from these consolidated asset dispositions are included in the
Company's Consolidated Statements of Operations as "Gain on Property Sales,
Net."

The gains and losses for all unconsolidated asset dispositions result
in an increase or decrease in the "equity in net income" (loss of unconsolidated
companies), which is reflected in the Company's Consolidated Statement of
Operations.

OFFICE SEGMENT - 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.

On May 29, 2002, the Woodlands Office Equities - '95 Limited ("WOE"),
owned 75% by the Company and 25% by 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 $3.6 million,
of which the Company's portion was approximately $3.2 million, and generated a
net gain of approximately $2.1 million, of which the Company's portion was
approximately $1.9 million. The proceeds from the sale were used primarily to
pay down the Company's credit facility. These two properties were consolidated
joint venture properties.

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 were used to redeem preferred Class A Units in Funding IX
from GMACCM. This property was wholly-owned.

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 property was wholly-owned.

On December 31, 2002, WOE completed the sale of two Office Properties
located within The Woodlands, Texas. WOE received net proceeds of approximately
$5.5 million and a $13.9 million short-term note receivable. The Company's share
of the net proceeds and note receivable was $4.8 million and $10.6 million,
respectively. The interest rate on the note was 7.5% and all principal and
accrued interest was paid on February 19, 2003. WOE recorded a net gain of
approximately $4.1 million, of which the Company's share was approximately $3.6
million. The net proceeds were used primarily to pay down the Company's credit
facility. These two properties were consolidated joint venture properties.

OFFICE SEGMENT - UNCONSOLIDATED

During the year ended December 31, 2002, the Woodlands CPC sold three
office properties and its 50% interest in one industrial property located within
The Woodlands, Texas. The sales generated net proceeds, after the repayment of
debt, of approximately $12.1 million, of which the Company's portion was
approximately $6.4 million. The sales generated a net gain of approximately
$13.5 million, of which the Company's portion was approximately $7.1 million.
The proceeds were used primarily to pay down the Company's credit facility.

56

On December 19, 2002, the Woodlands CPC sold its 50% interest in the
Woodlands Mall partnership located in The Woodlands, Texas. The sale generated
net proceeds of approximately $38.4 million, of which the Company's 52.5%
interest was approximately $20.2 million. The net gain on the sale of the
property was approximately $33.6 million, of which the Company's portion was
approximately $17.7 million. The proceeds were used primarily to pay down the
Company's credit facility.

OFFICE SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Company completed the sale of approximately
1.4 acres of undeveloped 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 land were
used to pay down the Company's credit facility. This land was wholly-owned by
the Company.

On December 31, 2002, the Company completed the sale of approximately
5.46 acres of undeveloped land near the Houston Convention Center. The sale
generated net proceeds of $33.1 million and a net gain of approximately $15.1
million. Under the terms of the purchase and sale contract, the purchaser has
options to purchase two additional parcels of undeveloped land from the Company.
The first parcel is comprised of approximately 3.47 acres and has a purchase
option closing deadline of June 2005. Under the terms of the contract, the
Company will lease this parcel to the purchaser from December 2002 through June
2005. The purchase option closing deadline for the second parcel of
approximately 1.59 acres is June 2007. The proceeds were used to pay down the
Company's credit facility. This land was wholly-owned by the Company.

On December 31, 2002, the Company completed the sale of approximately
3.12 acres of undeveloped land located in the Greenway Plaza office complex of
Houston, Texas for net proceeds of $5.2 million and a net gain of approximately
$2.0 million. The proceeds were used to pay down the Company's credit facility.
This land was wholly-owned by the Company.

RESORT/HOTEL SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Company completed the sale of 30 acres of
land adjacent to the Company's Canyon Ranch - Tucson Resort/Hotel Property,
located in Tucson, Arizona, to an affiliate of the third party management
company of the Company's Canyon Ranch Resort/Hotel Properties. The sales price
of the land was approximately $9.4 million, for which the Company received $1.9
million of cash proceeds and a promissory note in the amount of $7.5 million
with an interest rate at 6.5%, payable quarterly and maturing on October 1,
2007. The Company recognized a net gain of approximately $5.5 million. The net
cash proceeds from the sale of the land were used to pay down the Company's
credit facility. This land was wholly-owned by the Company. 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 December 31, 2002.

RESIDENTIAL DEVELOPMENT SEGMENT - CONSOLIDATED

On December 31, 2002, CRDI, a consolidated subsidiary of the Company,
completed the sale of its 50% interest in two Colorado transportation companies,
East West Resort Transportation I ("EWRT I") and East West Resort Transportation
II ("EWRT II"), to an affiliate of CRDI business partners for $7.0 million,
consisting of $1.4 million in cash and a $5.6 million note receivable. The note
bears interest at 7.0%, with interest only payable semi-annually on April 30 and
October 31 each year through April 30, 2005. Thereafter, interest and principal
are amortized over five years and will be payable quarterly beginning August 1,
2005, with a balloon payment of the outstanding balance due on May 1, 2008. The
Company recognized a $1.4 million gain, after tax, related to the sale of these
companies.

JOINT VENTURES

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 (the affiliate is
referred to as "GE") in connection with which the Company contributed an Office
Property, Three Westlake Park in Houston, Texas. GE made a cash contribution.
The joint venture is structured such that GE holds an 80%

57

equity interest in Three Westlake Park, 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, 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. The proceeds were
used to pay down the Company's credit facility. The Company manages and leases
the Office Property on a fee basis.

Miami Center

On September 25, 2002, the Company entered into a joint venture
arrangement with an affiliate of a fund managed by JPMorgan Fleming Asset
Management (the affiliate is referred to as "JPM Fund I"), in connection with
which JPM Fund I purchased a 60% interest in Crescent Miami Center, L.L.C. with
a cash contribution. Crescent Miami Center, L.L.C. owns a 782,000 square foot
Office Property, Miami Center, located in Miami, Florida. The joint venture is
structured such that JPM Fund I 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 $111.0 million in net cash proceeds to 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 no
commitment to reinvest the cash proceeds into the joint venture. The joint
venture was accounted for as a partial sale of this Office Property, resulting
in a gain of approximately $4.6 million, net of deferred gain of approximately
$3.5 million. The proceeds were used to pay down the Company's credit facility.
The Company manages the Office Property on a fee basis.

Five Post Oak Park

On December 20, 2002, the Company entered into a joint venture
arrangement, Five Post Oak Park, L.P., with GE. The joint venture purchased Five
Post Oak Park located in the Galleria area of Houston, Texas, for $64.8 million.
The Property is a 567,000 square foot Class A office building. GE owns a 70%
interest, and the Company owns a 30% interest in the joint venture. The initial
cash equity contribution to the joint venture was $19.8 million, of which the
Company's portion was $5.9 million. The Company's equity contribution and an
additional working capital contribution of $0.3 million were funded through a
draw under the Company's credit facility. The remainder of the purchase price of
the property was funded by a secured loan to the joint venture in the amount of
$45.0 million. None of the mortgage financing at the joint venture level is
guaranteed by the Company. The Company manages and leases the Office Property on
a fee basis.

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. (the subsidiary
is referred to as "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 hold the remaining
80.1% equity 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 loaned $45.1 million to the joint venture at an interest
rate of LIBOR plus 300 basis points. The maturity date of the loan is the
earlier of the date on which third-party financing is obtained, or one year. The
joint venture has the option to extend the Company's $45.1 million loan for two
successive six-month periods by paying a fee. The Company manages the limited
liability company that owns the Sonoma Mission Inn & Spa, and FHR operates and
manages the Property for the tenant under the Fairmont brand. FHR has a
commitment to fund $10.0 million of future renovations at Sonoma Mission Inn &
Spa through a mezzanine loan. The joint venture transaction was accounted for as
a partial sale of this Resort/Hotel Property, resulting in a loss to the Company
of approximately $4.0 million on the interest sold. The

58

joint venture leases Sonoma Mission Inn & Spa to a taxable REIT subsidiary
in which the Company also holds an 80.1% equity interest.

RESORT/HOTEL SEGMENT - UNCONSOLIDATED

Manalapan Hotel Partners

In October 2002, in a series of transactions, the Company acquired the
remaining 75% economic interest in Manalapan Hotel Partners, L.L.C.
("Manalapan"), which owns the Ritz Carlton Palm Beach in Florida. The Company
acquired the additional interests in Manalapan for $6.5 million, which was
funded by a draw on the Company's credit facility. Subsequently, the Company
entered into a joint venture arrangement with WB Palm Beach Investors, L.L.C.
("Westbrook"), pursuant to which Westbrook purchased a 50% equity interest in
Manalapan. The Company holds the remaining 50% equity interest. The Company
recognized an impairment on these transactions of approximately $2.6 million
reflected in "Impairments and other charges related to real estate assets" to
reflect fair value of the Company's 50% equity investment. Simultaneously with
the admission of Westbrook into Manalapan, the secured loan of $65.2 million was
repaid with proceeds from a new secured loan of $56.0 million from Corus Bank
and additional equity contributions from Westbrook and the Company. Westbrook's
total equity contribution into Manalapan was $13.6 million. The Corus Bank loan
carries an interest rate of LIBOR plus 400 basis points with an initial
three-year term and two one-year extension options. The Company and Westbrook
each obtained a letter of credit to guarantee up to $3.0 million of the Corus
Bank loan. The Company does not control the joint venture , and therefore, this
property is reflected as an unconsolidated investment in the Resort/Hotel
Segment. Manalapan leases the Ritz Carlton Palm Beach to its wholly-owned
taxable REIT subsidiary.

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

Vornado Crescent Carthage and KC Quarry, L.L.C.

On December 30, 2002, the Company contributed $11.2 million of notes
receivable, relating to loans to AmeriCold Logistics, to purchase a 56% equity
interest in Vornado Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). Vornado
Realty Trust L.P. ("Vornado") contributed $8.8 million of cash to purchase a 44%
equity interest. The assets of VCQ include two quarries and the related land,
acquired by VCQ from AmeriCold Logistics, LLC ("AmeriCold Logistics"), the
tenant of the Company's Temperature-Controlled Logistics Properties, for a
purchase price of $20.0 million. The purchase price was determined to be fair
market value based on an independent appraisal. The Company's $11.2 million
contribution consisted of three notes receivable from AmeriCold Logistics plus
accrued interest, one for $2.0 million, one for $3.5 million, and one originally
for $6.5 million including principal and interest, but which was paid down to
approximately $5.5 million prior to transaction date. On December 31, 2002, VCQ
purchased $5.7 million of trade receivables from AmeriCold Logistics at a 2%
discount. The Company contributed approximately $3.1 million to VCQ for the
purchase of the receivables. The Company accounts for this investment as an
unconsolidated equity investment because the Company does not control the joint
ventures.

BEHAVIORAL HEALTHCARE PROPERTIES

As of December 31, 1999, the behavioral healthcare segment consisted of
88 behavioral healthcare properties in 24 states, all of which were leased to
Charter Behavioral Health Systems L.L.C. ("CBHS") and its subsidiaries under a
triple-net master lease.

This table presents the dispositions of behavioral healthcare
properties by year including the number of properties sold, net proceeds
received, gains on sales and impairments recognized.

- ----------
(1) The impairment charges represent the difference between the carrying values
and the estimated sales prices less the costs of the sales for all
properties held for sale during the respective year.

59

As of December 31, 2002, the Company owned seven behavioral healthcare
properties. After recognition of the $3.2 million impairment, the carrying value
of the behavioral healthcare properties at December 31, 2002 was approximately
$18.4 million. Depreciation 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 sale of these behavioral healthcare properties are expected to
close within the next year.

SHARE REPURCHASE PROGRAM

The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500.0
million to $800.0 million the amount of outstanding common shares that can be
repurchased from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program"). As of December 31, 2002, the
Company had repurchased 20,256,423 common shares under the Share Repurchase
Program, at an aggregate cost of approximately $386.9 million, resulting in an
average repurchase price of $19.10 per common share. All repurchased shares were
recorded as treasury shares.

The following table shows a summary of the Company's common share
repurchases by year, as of December 31, 2002.

- ----------
(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
pension fund advised by JP Morgan Investment Management, Inc.

(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.

(4) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Park Office Limited Partnership and
Houston PT Four Westlake Park Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund.

(5) The remaining 70% interest in Crescent Five Post Oak Park, L.P. is owned by
an affiliate of General Electric Pension Fund.

(6) The remaining 6.0% interest in Mira Vista Development Corp. ("MVDC"), which
represents 100% of the voting stock, was owned 4.0% by DBL Holdings, Inc.
("DBL") and 2.0% by a third party. On January 3, 2003, the Company
purchased the remaining economic interest representing all of the voting
stock, in DBL. As a result, the Company will consolidate the operations of
MVDC beginning on January 3, 2003. See Note 26, "Subsequent Events," for
additional information regarding the Company's purchase of the DBL
interest.

(7) The remaining 6.0% interest in Houston Area Development Corp. ("HADC"),
which represents 100% of the voting stock, was owned 4.0% by DBL and 2.0%
by a third party. On January 3, 2003, the Company purchased the remaining
economic interest, representing all of the voting stock in DBL. As a
result, the Company will consolidate the operations of HADC beginning on
January 3, 2003. See Note 26, "Subsequent Events," for additional
information regarding the Company's purchase of the DBL interest.

(8) 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 DMDC, TWLC and CRDI, and in
CRL Investments, Inc. ("CRLI"). As a result, the Company fully consolidated
the operations of these entities beginning on the date of the asset
transfers. The Woodlands Land Development Company, L.P. is an
unconsolidated equity investment of TWLC. Blue River Land Company, L.L.C.
is an unconsolidated equity investment of CRDI.

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

(10) Distributions are made to partners based on specified payout percentages.
During the year ended December 31, 2002, the payout percentage to the
Company was 52.5%.

(11) The remaining 66.8% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Company.

(12) Prior to October 2002, Manalapan was an unconsolidated investment of the
Company in which CRDI held a 25% equity interest. In October 2002, in a
series of transactions, the Company acquired the remaining 75% interest in
Manalapan. Subsequent to that transaction, the Company entered into a joint
venture agreement with Westbrook pursuant to which Westbrook purchased a
50% equity interest in Manalapan. As a result of these transactions,
Manalapan is an unconsolidated investment of the Company.

(13) The remaining 60% interest in the Vorando Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.

(14) The remaining 44% in Vorando Crescent Carthage and KC Quarry, L.L.C.
Partnership is owned by Vorando Realty Trust, L.P.

(15) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, obtained the remaining 2.6% economic interest in
DBL (including 100% of the voting interest in DBL) in exchange for his
voting interests in MVDC and HADC, originally valued at approximately $0.4

61

million, and approximately $0.01 million in cash, or total consideration
valued at approximately $0.4 million. At December 31, 2002, Mr. Goff's book
value in DBL was approximately $0.4 million. On January 3, 2003, the
Company purchased the remaining economic interest representing all of the
voting stock in DBL See Note 26, "Subsequent Events," for additional
information regarding the Company's purchase of the DBL interest.

(16) 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.

(17) 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.

(18) 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 70.5% 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 December 31, 2002 was $7.8 million.

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

62

UNCONSOLIDATED DEBT ANALYSIS

The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of December 31, 2002 are shown below.

- ----------
(1) The Temperature-Controlled Logistics Corporation expects to repay this note
on the Optional Prepayment Date of April 11, 2008. The overall weighted
average maturity would be 4.21 years based on this date.

(2) Senior Note - Note A: $83.6 million at variable interest rate, LIBOR + 189,
$4.9 million at variable interest rate, LIBOR + 250 basis points with a
LIBOR floor of 2.50%. Note B: $24.6 million at variable interest rate,
LIBOR + 650 basis points with a LIBOR floor of 2.50%. Mezzanine Note -
$19.7 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 amortized based on a 25-year 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 provides a full and unconditional guarantee of this loan for
the construction of 5 Houston Center. At December 31, 2002, $63.0 million
was outstanding.

(6) Woodlands CPC and WLDC entered into an interest rate swap which limits
interest rate exposure on the $50.0 million notional amount effectively
fixing the interest rate at 2.355%.

(7) Woodlands CPC and WLDC entered into an Interest Rate Cap Agreement which
limits interest rate exposure on the notional amount of $33.8 million to a
maximum LIBOR rate of 9.0%.

(8) On February 14, 2002, the Company executed an agreement with COPI to
transfer, pursuant to a strict foreclosure, COPI's 5% interest in Woodlands
Land Co. ("TWLC") Therefore, as of February 14, TWLC is fully consolidated.
This schedule reflects its 42.5% interest in WLDC debt.

(9) Woodlands CPC entered into an Interest Rate Cap Agreement limits interest
rate exposure on the notional amount of $19.5 million to a maximum LIBOR
rate of 8.5%.

(10) The Company obtained a Letter of Credit to guarantee up to $3.0 million of
this facility.

63

64

The following table shows, as of December 31, 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 4.21 years assuming the election of extension options on debt
instruments and expected repayment of a note on the optional prepayment
date.

Listed below is the Company's share of aggregate principal payments, by
year, required as of December 31, 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 extension options.

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

As of December 31, 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 AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See "2002
Transactions - COPI in this Item 7 for information on the proposed acquisition
of COPI's 40% interest in AmeriCold Logistics by a new entity to be owned by the
Company's shareholders.

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
a maximum of $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 the first quarter of 2000, AmeriCold Logistics started to experience
a slowing in revenue growth from the previous year, primarily due to customers
focusing more on inventory management in an effort to improve operating
performance. Starting in 2000 and continuing throughout 2001 and 2002,
consolidation among retail and food service channels significantly

65

limited the ability of manufacturers to pass along cost increases by raising
prices. As a result, manufacturers focused on supply chain cost reduction
initiative in an effort to improve operating performance. In the second and
third quarters of 2000, AmeriCold Logistics deferred a portion of its rent
payments in accordance with the terms of the leases of the
Temperature-Controlled Logistics Properties. For the three months ended June 30,
2000, the Temperature-Controlled Logistics Corporation recorded a valuation
allowance for a portion of the rent that had been deferred during that period.
For the three months ended September 30, 2000, the Temperature-Controlled
Logistics Corporation recorded a valuation allowance for 100% of the rent that
had been deferred during the quarter and has continued to record a valuation
allowance for 100% of the deferred rent thereafter. These valuation allowances
resulted in a decrease in the equity in net income of the Company in the
Temperature-Controlled Logistics Corporation. The Temperature-Controlled
Logistics Corporation had not recorded a valuation allowance with respect to
rent deferred by AmeriCold Logistics prior to the three months ended June 30,
2000, because the financial condition of AmeriCold Logistics prior to that time
did not indicate the inability of AmeriCold Logistics ultimately to make the
full rent payments. As a result of continuing net losses and the increased
amount of deferred rent, the Temperature-Controlled Logistics Corporation
determined that the collection of additional deferred rent was doubtful.

In December 2001, the Temperature-Controlled Logistics Corporation
waived its right to collect $39.8 million of deferred rent, the Company's share
of which was $15.9 million. 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
years ended December 31, 2001 and 2002; 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 $32.2 million of the total $143.9 million
of rent payable for the year ended December 31, 2002, of which the Company's
share of deferred rent was $12.9 million.

The following table shows the total and the Company's portion of
deferred rent, valuation allowance and waived rent for the years ended December
31, 2002 and 2001:

IMPAIRMENTS OF UNCONSOLIDATED INVESTMENTS

CR License, LLC and CRL Investments, Inc.

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 1.5% interest in CR License, L.L.C. and 5.0%
interest, representing all of the voting stock, in CRL Investments, Inc. As of
December 31, 2002, the Company had a 30% interest in CR License, LLC, the entity
which owns the right to the future use of the "Canyon Ranch" name. In addition,
as of December 31, 2002, the Company had a 100% interest in CRL Investments,
Inc., which owns an approximately 65% economic interest in the Canyon Ranch Spa
Club in the Venetian Hotel in Las Vegas, Nevada ("Canyon Ranch Las Vegas"). The
Company evaluated its investment in Canyon Ranch Las Vegas and determined that
an impairment charge was warranted. Accordingly, a $9.6 million impairment
charge was recognized and reflected in the Company's Consolidated Statements of
Operations in "Impairment and Other Charges related to Real Estate Assets."

66

Metropolitan Partners, LLC

On May 24, 2001, the Company converted its $85.0 million preferred
member interest in Metropolitan Partners, LLC ("Metropolitan") and $1.9 million
deferred acquisition costs, into approximately $75.0 million of common stock of
Reckson Associates Realty Corp. ("Reckson"), resulting in an impairment charge
of approximately $11.9 million reflected in "Impairments and Other Charges
Related to Real Estate Assets" in the Company's Consolidated Statements of
Operations. The Company subsequently sold the Reckson common stock on August 17,
2001 for approximately $78.6 million, resulting in a gain of approximately $3.6
million. The proceeds were used to pay down the Company's credit facility.

Other

During the years ended December 31, 2001 and 2000, the Company
recognized impairment losses of $5.0 million and $8.5 million, respectively,
which were included in "Impairment and Other Charges Related to Real Estate
Assets" related to the Company's investment in a fund that primarily held real
estate investments and marketable securities.

67

RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC. ("DBL")

As of December 31, 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 Mr. 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 $0.01 million in cash for his interest in DBL. On
January 3, 2003 the Company purchased the remaining 2.56% economic interest
representing 100% of the voting stock in DBL from Mr. Goff. Total consideration
paid for Mr. Goff's interest was $0.4 million. The Board of Trust Managers of
the Company, including all of the independent trust managers, approved the
transaction, based in part on an appraisal of the assets of DBL by an
independent appraisal firm. As a result of this transaction, DBL is wholly-owned
by the Company and will be consolidated.

DBL has a wholly-owned subsidiary, DBL-ABC, Inc., the assets of which
are described in the following paragraph. DBL directly holds 66% of the voting
stock in MVDC and HADC. At December 31, 2002, Mr. Goff's interest in DBL was
approximately $0.5 million.

Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2 Opportunity Fund, L.P. ("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, L.P. ("GMSP") and
GMACCM. The ownership structure of GMSP consists of an approximately 86% limited
partnership interest owned directly and indirectly by Richard Rainwater,
Chairman of the Board of Trust Managers of the Company, and an approximately 14%
general partnership interest, of which 6% is owned by Darla Moore, who is
married to Mr. Rainwater, and approximately 6% is owned by Mr. Goff. The
remaining approximately 2% general partnership interest is owned by parties
unrelated to the Company. At December 31, 2002, DBL has an approximately $14.1
million investment in G2.

In March 1999, DBL-CBO, Inc., a wholly-owned subsidiary of DBL,
acquired an aggregate of $6.0 million in principal amount of Class C-1 Notes
issued by Juniper CBO 1999-1 Ltd., a Cayman Islands limited liability company.
Juniper 1999 - 1 Class C - 1 is the privately placed equity interest of a
collateralized bond obligation. For the year ended December 31, 2002, the
Company recognized a charge related to this investment of $5.2 million reflected
in "Equity and net income (loss) of unconsolidated companies, and Other." As a
result of this impairment charge, at December 31, 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. ("COPI
Colorado"), the partnership that owned a 10% interest, representing all of the
voting stock, in CRDI. John Goff, Vice Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, owned a 20% interest in COPI
Colorado and the remaining 20% interest was owned by a third party. As a
result of this transaction, the Company indirectly owned a 96% interest in CRDI.
John Goff owned a 2% interest in CRDI and the remaining 2% interest was owned by
the third party. The Company fully consolidated the operations of CRDI as of the
date of the asset transfer.

On December 30, 2002, the Company purchased the 40% interest in COPI
Colorado from Mr. Goff and the third party, bringing the Company's ownership in
COPI Colorado to 100%. The purchase price of the 40% interest in COPI Colorado
was $5.6 million, of which $2.8 million was paid to Mr. Goff. The Board of Trust
Managers of the Company, including all of the independent trust managers,
approved the transaction, based in part on an appraisal of the assets of COPI
Colorado by an independent appraisal firm. Subsequent to the transaction, the
Company dissolved COPI Colorado and contributed its assets, all the voting stock
of CRDI, to Crescent TRS Holdings Corp.

68

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

As of December 31, 2002, the Company had approximately $37.8 million of
loans outstanding (including approximately $5.3 million loaned during the year
ended December 31, 2002) to certain employees and trust managers of the Company
on a recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company pursuant to the exercise of vested stock and unit options. Pursuant
to the loan agreements, these loans may be repaid in full or in part at any time
without premium or penalty. John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company, had a loan representing
$26.3 million of the $37.8 million total outstanding loans at December 31, 2002.
Approximately $0.2 million of interest was outstanding related to these loans
as of December 31, 2002. No conditions exist at December 31, 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) ("AFR") are determined and published by the IRS based
upon average market yields of specified maturities. On November 1, 2001,
existing loans were amended to reduce the interest rates for their remaining
terms to the Applicable Federal Rates. As a result, the interest rates on loans
with remaining terms of three years or less at November 1, 2001 were reduced to
approximately 2.7% per year and the interest rates on loans with remaining terms
greater than three years as of November 1, 2001 were reduced to approximately
4.07% per year. These amended interest rates reflected below prevailing market
interest rates and, in accordance with GAAP, the Company recorded $750,000 of
compensation expense for the year ended December 31, 2001.

The Company granted additional loans during 2002 through July 29, 2002,
with AFR of 2.70% to 2.81%, which reflects below prevailing market interest
rates and, in accordance with GAAP, the Company recorded compensation expense.
On July 29, 2002, the loans made pursuant to the Company's stock 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
of additional compensation expense for the year ended December 31, 2002,
recorded in "Other Expenses" in the Company's Consolidated Statements of
Operations. Effective July 29, 2002, the Company ceased offering to its
employees and Trust Managers the option to obtain loans pursuant to the
Company's stock and unit incentive plans.

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375.0
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 "Equity and Debt Financing - Debt Financing Arrangements - Debt
Offering" for additional information.

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.

69

SHARE AND UNIT EXCHANGE BY CHAIRMAN

During 2002, the Company and the Operating Partnership agreed that it
was in the best interest of the Company and its shareholders and of the
Operating Partnership and its partners to permit Richard E. Rainwater, Chairman
of the Board of Trust Managers of the Company, to exchange a portion of his
common shares for units of the Operating Partnership so that additional
purchases of common shares by the Company or Mr. Rainwater, or both, would not
cause Mr. Rainwater to violate REIT equity ownership concentration rules and the
Company's limitations on share ownership as set forth in its Declaration of
Trust.

On October 15, 2002, November 14, 2002 and November 20, 2002, Mr.
Rainwater contributed 3,050,000, 700,800 and 1,055,000, respectively, of his
common shares to the Operating Partnership in exchange for 1,525,000, 350,400
and 527,500 units, respectively. Each of the units issued to Mr. Rainwater may
be exchanged for two common shares. The Operating Partnership immediately
contributed the common shares that it received from Mr. Rainwater, in the
aggregate amount of 4,805,000 common shares, to the Company and, as required by
the limited partnership agreement of the Operating Partnership, redeemed a
portion of the Company's limited partner interest in the Operating Partnership
equal in value to the value of the common shares that the Operating Partnership
contributed to the Company. In accordance with the terms of the Operating
Partnership limited partnership agreement, the shares and the interest were
valued at the closing price of the Company's common shares on the New York Stock
Exchange on the date immediately preceding the date of the contributions. The
closing price of the common shares was $14.62 on October 14, 2002, $14.94 on
November 13, 2002 and $15.38 on November 19, 2002. As a result of these
transactions, minority interest increased by $71.3 million and shareholders'
equity decreased by $71.3 million.

On November 20, 2002, the Company received approximately $0.3 million
from Mr. Rainwater as a result of short swing profits realized by Mr. Rainwater
on the sale of 300,000 of the Company's common shares between September 24, 2002
and November 18, 2002. The profit amount was computed pursuant to Section 16(b)
of the Securities Exchange Act of 1934, and was recorded by the Company as a
credit to additional paid in capital.

As of December 31, 2002, Mr. Rainwater owned 4,679,302 common shares of
the Company and 5,728,501 units of the Operating Partnership.

SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires 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
ongoing basis. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities where that information is available
from other sources. Certain estimates are particularly sensitive due to their
significance to the financial statements. Actual results may differ
significantly from management's estimates. The Company believes that the most
significant accounting policies that involves the use estimates and assumptions
as to future uncertainties and, therefore, may result in actual amounts that
differ from estimates are the following:

o Valuation for impairment of the Company's assets and investments.

o Relative Fair Value Method/Cost of Sales (Residential Development
entities).

o Capitalization of Interest (Residential Development entities), and

o Allowance for doubtful accounts.

IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement No 144, the Company records assets held for sale at
the lower of carrying value or sales price less costs to sell. For assets
classified, as held and used, these assets are tested for recoverability when
events or changes in circumstances indicate that the estimated carrying amount
may not be recoverable. An impairment loss is recognized when expected
undiscounted future cash flows from a Property is less than the carrying value
of the Property. The Company's estimates of cash flows of the Properties
requires the Company to make assumptions related to future rental rates,
occupancies, operating expenses, the ability of the Company's tenants to perform
pursuant to their lease obligations and

70

proceeds to be generated from the eventual sale of the Company's Properties.
Any changes in estimated future cash flows due to changes in the Company's plans
or views of market and economic conditions could result in recognition of
additional impairment losses.

If events or circumstances indicate that the fair value of an
investment accounted for using the equity or cost method has declined below its
carrying value and the Company considers the decline to be "other than
temporary," the investment is written down to fair value and an impairment loss
is recognized. The evaluation of impairment for an investment would be based on
a number of factors, including financial condition and operating results for the
investment, inability to remain in compliance with provisions of any related
debt agreements, and recognition of impairments by other investors. Impairment
recognition would negatively impact the recorded value of our investment and
reduce net income.

RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Company
recognizes earnings from the sale of Residential Development Properties when a
third-party buyer had made an adequate cash down payment and has attained the
attributes of ownership. The cost of residential property sold is defined based
on the type of product being purchased. The cost of sales for residential lots
is generally determined as a specific percentage of the sales revenues
recognized for each Residential Development project. The percentages are based
on total estimated Residential Development costs and sales revenue for each
project. These estimates are revised annually and are based on the then-current
development strategy and operating assumptions utilizing internally developed
projections for product type, revenue and related development costs. The cost of
sale for residential units (such as townhomes and condominiums) is determined
using the relative sales value method. If the residential unit has been sold
prior to the completion of infrastructure cost, and those uncompleted costs are
not significant in relation to total costs; the full accrual method is utilized.
Under this method, 100% of the revenue is recognized and a commitment liability
is established to reflect the allocated estimated future costs to complete the
residential unit. If the Company's estimates of costs or the percentage of
completion is incorrect; it could result in either an increase or decrease in
cost of sales expense or revenue recognized and therefore, an increase or
decrease in net income.

CAPITALIZATION OF INTEREST. The Company commences capitalization of
interest when development activities and expenditures begin and ceases to
capitalize upon "completion," which is defined as the time when the asset is
ready for its intended use. The Company uses judgment in determining the time
period over which to capitalize such interest and these assumptions have a
direct impact on net income because capitalized costs are not subtracted in
calculating net income. If the time period is extended, more interest is
capitalized, thereby increasing net income.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable
balance is reduced by an allowance for amounts that may become uncollectible in
the future. The Company's receivable balance is composed primarily of rents and
operating cost recoveries due from its tenants. The Company also maintains an
allowance for deferred rent receivables which arise from the straight-lining of
rents. The allowance for doubtful accounts is reviewed at least quarterly for
adequacy by reviewing such factors as the credit quality of the Company's
tenants, any delinquency in payment, historical trends and current economic
conditions. If the assumptions regarding the collectibility of accounts
receivable prove incorrect, the Company could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.

ADOPTION OF NEW ACCOUNTING STANDARDS

SFAS NO. 141. In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 141, "Business Combinations," which provides that all
business combinations in the scope of the Statement are to be accounted for
under the purchase method. SFAS No. 141 requires companies to account for the
value of in-place operating leases as favorable or unfavorable relative to
market prices and the costs of acquiring such leases separately from the value
of the real estate for all acquisitions subsequent to July 1, 2001. These
intangibles are to be amortized over the related contractual lease terms as a
reduction of revenues.

SFAS NO. 142. In June 2001, the FASB issued SFAS No. 142 which was
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

71

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. The Company tests for impairment at least annually,
or more frequently if events or changes in circumstances indicate that the asset
might be impaired.

Prior to the adoption of SFAS No. 142, 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. 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 Sheets as of December 31, 2002 and
December 31, 2001.

Upon the adoption of SFAS No. 142, the Temperature-Controlled Logistics
Corporation compared the fair value of TCL Properties based on discounted cash
flows to the carrying value of TCL Properties and the related goodwill. Based on
this test, the fair value did not exceed the carrying value and the second step
of the impairment test was performed to measure the impairment loss. The second
step compared the implied fair value of goodwill with the carrying amounts of
goodwill which exceeded the fair value on January 1, 2002. As a result, the
Company recognized a goodwill impairment charge of approximately $9.2 million,
net of minority interest, due to the initial application of this Statement. This
charge was reported as a change in accounting principle and is included in the
Company's consolidated statements of operations as a "Cumulative Effect of a
Change in Accounting Principle" for the year ended December 31, 2002.

The Company also determined that a goodwill impairment charge of $1.3
million, net of minority interest and taxes, was required for one of the
Residential Development Corporations which was classified as held for sale.
Accordingly, the $1.3 million impairment charge for the year ended December 31,
2002 is reflected as "Discontinued Operations - Income and Gain on Assets Sold
and Held for Sale" in the accompanying Consolidated Statements of Operations.

SFAS NO. 144. 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, of assets sold or held for
sale including any gains or losses recognized, be disclosed separately in the
Company's Consolidated Statements of Operations. The Company adopted SFAS No.
144 on January 1, 2002. During 2002, the Company sold seven Office Properties,
two CRDI transportation companies and three behavioral healthcare properties.
Seven remaining behavioral healthcare properties remain classified as "held for
sale" at December 31, 2002. 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 Sheets as of December 31, 2002 and
December 31, 2001.

SFAS NO. 145. In April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 requires the reporting of gains and losses
from early extinguishment of debt be included in the determination of net income
unless criteria in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations" are met which allows for extraordinary item
classification. The provisions of this Statement related to the rescission of
Statement No. 4 are to be applied in fiscal years beginning after May 15, 2002,
with early application encouraged. The Company plans to implement the Statement
for fiscal 2003 and expects no impact beyond the classification of costs related
to early extinguishments of debt, which are shown in the Company's 2001 and 2000
Consolidated Statements of Operations as an extraordinary item.

SFAS NO. 146. In June 2002 the FASB issued Statement No. 146,
"Accounting for Exit or Disposal Activities," which is effective for exit or
disposal activities that are initiated after December 31, 2002. SFAS No. 146
addresses significant issues regarding the recognition, measurement and
reporting of costs that are associated with exit and

72

disposal activities, including restructuring activities. The scope of SFAS No.
146 includes costs related to terminating a contract that is not a capital
lease, and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred compensation contract. The
Statement specifies that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. It also specifies that a liability is incurred when
the definition of a liability in FASB Concepts Statement No. 6 "Elements of
Financial Statements" is met. Upon adoption, the Company will assess the impact
of this Statement, if any, on the Company's liquidity, financial position, and
results of operations. The Company does not anticipate a material impact, if
any, of the liability-recognition provision of this Interpretation on the
Company's liquidity, financial position, or results of operations.

SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation" effective for fiscal years ending
after December 15, 2002, to amend the transition and disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". In addition to the
prospective transition method of accounting for Stock-Based Employee
Compensation using the fair value method provided in SFAS No. 123, SFAS No. 148
permits two additional transition methods, both of which avoid the ramp-up
effect arising from prospective application of the fair value based method. The
Retroactive Restatement Method requires companies to restate all periods
presented to reflect the Stock-Based Employee Compensation under the fair value
method for all employee awards granted, modified, or settled in fiscal years
beginning after December 15, 1994. The Modified Prospective Method requires
companies to recognize Stock-Based Employee Compensation from the beginning of
the fiscal year in which the recognition provisions are first applied as if the
fair value based method in SFAS No. 123 had been used to account for employee
awards granted, modified, or settled in fiscal years beginning after December
15, 1994. Also, in the absence of a single accounting method for Stock-Based
Employee Compensation, SFAS No. 148 expands disclosure requirements from those
existing in SFAS No. 123, and includes disclosure of whether, when, and how an
entity adopts the preferable, fair value based method of accounting.

Effective January 1, 2003, the Company will adopt the fair value
expense recognition provisions of SFAS No. 123 on a prospective basis as
permitted. The Company will utilize Black-Scholes option-pricing model and
recognize this value as an expense over the period in which the options vest.
Under this standard, recognition of expense for stock options is applied to all
options granted after the beginning of the year of adoption. Prior to January 1,
2003, the Company followed the intrinsic method set forth in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no stock or unit based
compensation expense was recognized for the years ended December 31, 2002, 2001
or 2000. The 2003 expense will relate only to stock options granted in 2003.

FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
elaborates on the disclosures to be made by guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued and liability-recognition requirements for the guarantors of certain
types of debt. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. See
Note 15, "Commitments and Contingencies - Guarantees," for disclosure of the
Company's guarantees as of December 31, 2002. The Company is assessing the
impact this Interpretation on its liquidity, financial position, and results of
operations, but does not believe the impact will be significant.

FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which calls for new disclosures and liability-recognition requirements for the
guarantors of certain types of debt. The Interpretation requires a guarantor to
determine whether or which of their guarantees are covered under the
Interpretation, and whether those guarantees will be subject only to the
disclosure requirements and others to both the disclosure and recognition
requirements. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Implementation requirements of FIN 45 necessitate identification of guarantees
in a company's arrangements entered into prior to December 31, 2002 in order to
comply with the disclosure requirements, which are effective for financial
statements of interim or annual periods ending after December 15, 2002. Initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002.

73

The Company is assessing the impact, if any, of this Interpretation on its
liquidity, financial position, and results of operations, but does not believe
the impact will be significant.

FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to existing VIEs in
the first fiscal year or interim period beginning after June 15, 2003. VIEs are
generally a legal structure used for business purposes that either do not have
equity investors with voting rights, or have equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The objective of the new guidance is to improve reporting by addressing when a
company should include in its financial statements the assets, liabilities and
activities of another entity such as a VIE. FIN 46 requires a VIE to be
consolidated by a company if the company is subject to a majority of the risk of
loss from the VIE's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about VIEs that the
company is not required to consolidate but in which it has a significant
variable interest. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the VIE was
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the variable interest entity; and, (b) the
enterprise's maximum exposure to loss as a result of its involvement with the
VIE. FIN 46 may be applied prospectively with a cumulative effect adjustment as
of the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative-effect adjustment
as of the beginning of the first year restated. The Company is assessing the
impact, if any, of this Interpretation on its liquidity, financial position, and
results of operations, but does not believe the impact will be significant.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
("OBSA"). On January 27, 2003, the SEC published its final rules and amendments
about disclosures of Off-Balance Sheet Arrangements (each an "OBSA"). OBSA
includes "all material off-balance sheet transactions, arrangements, obligations
(including contingent obligations), and other relationships of the issuer with
unconsolidated entities or other persons, that may have a material current or
future effect on financial condition, changes in financial condition, results of
operations, liquidity, capital expenditures, capital resources, or significant
components of revenues or expenses." The disclosure threshold adopted for
determining the need for this disclosure is the "reasonably likely" standard,
which is consistent with the threshold used throughout the remainder of Item 7,
"Management Discussion and Analysis of Financial Condition and Results of
Operations,"("MD&A"). Accordingly, in determining whether or not an OBSA "may
have a material current or future effect," the Company must assess whether the
OBSA is "reasonably likely" to have a material current or future effect. The
disclosures required by the amendments conform to the disclosures required by
Section 401(a) of the Sarbanes-Oxley Act and require an explanation of a
company's off-balance sheet arrangements in a separately captioned subsection of
the MD&A. Companies subject to these rules also must comply with the OBSA
disclosure requirements in registration statements, annual reports and proxy or
information statements that are required to include financial statements for
their fiscal years ending on or after June 15, 2003. The amendments also require
an overview of certain known contractual obligations in a tabular format. This
disclosure specifies four categories of contractual obligations to be included
in the table: long-term debt; capital leases; operating leases; and other
long-term liabilities. The proposal to include contingent liabilities and
commitments was not retained in the final rule and amendments. The tabular
disclosure must be included in the registrant's registration statements, annual
reports and proxy or information statements that are required to include
financial statements for their fiscal years ending on or after December 15,
2003.

CONDITIONS FOR NON-GAAP DISCLOSURES. On January 22, 2003, the SEC
published its final rules on disclosures of non-GAAP financial measures, as
required by Section 401(b) of the Sarbanes-Oxley Act. These disclosures relate
to new rules and amendments regarding public companies' disclosure or release of
certain financial information that is derived on the basis of methodologies
other than in accordance with Generally Accepted Accounting Principles ("GAAP").
One of the new disclosure regulations, Regulation G, requires public companies
that disclose or release these non-GAAP financial measures to include a
presentation of the most comparable GAAP financial measure and a reconciliation
of the disclosed non-GAAP financial measure to the most comparable GAAP
financial measure. Regulation G will apply to public disclosures made on or
after March 28, 2003. In addition, annual or quarterly reports for fiscal
periods ending after March 28, 2003 must comply with the new conditions and
restrictions in Item 10 of Regulation S-K. Further, registrants are required to
furnish within five business days using Form 8-K earnings releases or similar
announcements made after March

74

28, 2003 for completed fiscal periods. The SEC is expected to reconsider the
five-day deadline when it adopts final rules for accelerated Form 8-K reporting.
With respect to the disclosure in SEC filings of non-GAAP measures that exclude
"non-recurring, infrequent or unusual" items, the final rules will prohibit
excluding an item if the excluded item is reasonably likely to recur within two
years or a similar item occurred within the prior two years. The Company
reconciles non-GAAP measures presented to its net income.

REGULATION BTR. On January 16, 2003 the SEC adopted rules to clarify
the application and prevent evasion of Section 306(a) of the Sarbanes-Oxley Act
of 2002. Section 306(a) prohibits the directors and executive officers of a
company from, directly or indirectly, purchasing, selling or otherwise acquiring
or transferring any equity security of the company during a pension plan
blackout period that prevents plan participants or beneficiaries from engaging
in equity securities transactions, if the equity security was acquired in
connection with the director or executive officer's service or employment as a
director or executive officer. In addition, the rules would specify the content
and timing of the notice that companies must provide to their directors and
executive officers and to the SEC about a blackout period.

CODE OF ETHICS AND AUDIT COMMITTEE FINANCIAL EXPERTS - SECTIONS 406
AND 407. On January 15, 2003, the SEC voted to adopt two final rules to
implement Sections 406 and 407 of the Sarbanes-Oxley Act regarding disclosures
about a public company's code of ethics and audit committee financial expert.
Public companies will be required to provide the new disclosures in annual
reports for fiscal years ending on or after July 15, 2003. The final rules
require companies to disclose whether they have a code of ethics that applies to
senior officers of the company, and to disclose whether the audit committee
includes a person meeting the definition of an audit committee financial expert.
If the audit committee does include an audit committee financial expert, that
person must be named. Companies will also be required to report within five
business days any changes in their code of ethics, or any waivers, affecting the
specified officers. A U.S. company will be required to provide these disclosures
either in a Form 8-K or on its website.

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 years ended December 31, 2002, 2001 and 2000 were $176.4 million, $245.1
million and $281.2 million, respectively. The Company reported FFO of $238.2
million, $177.1 million and $326.9 million for the years ended December 31,
2002, 2001 and 2000, respectively. Excluding the impairment and other charges of
$92.8 million related to the COPI transaction, the Company would have reported
FFO of $269.9 million for the year ended December 31, 2001.

75

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.

76

STATEMENTS OF FUNDS FROM OPERATIONS
(in thousands)

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

(2) 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 and other expenses.

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

77

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

(in thousands)
- --------------------------------------------------------------------------------

78

SUPPLEMENTAL SEGMENT INFORMATION

The following sections include supplemental information for each of the
Company's four investment segments as of and for the year ended December 31,
2002.

OFFICE SEGMENT

As of December 31, 2002, the Company owned or had an interest in 73
Office Properties.

The following table shows the same-store net operating income for the
approximately 20.2 million square feet of Office Property space, representing 64
wholly-owned properties at December 31, 2002. The remaining Office Properties in
which the Company had an interest were seven unconsolidated office joint venture
properties with approximately 4.9 million square feet of space as follows: 1.5
million square feet of Office Property space at Bank One Center, in which the
Company owns a 50% equity interest; approximately 0.8 million square feet of
space at Miami Center in which the Company owns a 40% equity interest;
approximately 0.6 million square feet of Office Property at Five Post Oak Park
in which the Company owns a 30% equity interest; an aggregate of 1.4 million
square feet of Office Property space at Three Westlake Park, Four Westlake Park
and Bank One Tower in which the Company owns a 20% equity interest; and
approximately 0.6 million square feet of Office Property at 5 Houston Center in
which the Company owns a 25% equity interest and for which construction was
completed in 2002. These seven joint venture properties, the wholly-owned Johns
Manville Plaza Office Property acquired August 29, 2002 and the Avallon IV
Office Property developed in 2001, are excluded from the table below.

- ----------
For 2003, the Company projects same-store net operating income for its
Office Properties to decline between 4.0% and 5.0% over 2002, based on an
average occupancy range of 88% to 89%.

The following table shows renewed leases or re-leased activity and the
percentage change in leasing rates for signed leases compared to expiring leases
for Office Properties owned as of December 31, 2002.

- ----------

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

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

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

(4) Funds From Operations ("FFO"), as used in this document, is based on the
definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts, effective January 1, 2000, means net income
(loss), determined in accordance with GAAP, excluding gains (losses) from
sales of depreciable operating property, excluding extraordinary items, as
defined by GAAP, plus depreciation and amortization of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures.
FFO is a non-GAAP measure and should not be considered an alternative to
GAAP measures, including net income and

79

cash generated from operating activities. For a more detailed definition
and description of FFO and comparisons to GAAP measures, see "Funds from
Operations" in this Item 7.

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 years ended December 31, 2002, 2001, and 2000. 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.

80

- ----------
(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.

(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 $10.00 per square foot, or $1.20 to
$2.00 per square foot per year based on average five-year lease term, and,
on average for "replacement tenants," $12.00 to $16.00 per square foot, or
$2.40 to $3.20 per square foot per year based on an average five-year lease
term, and, on average for "new and expansion tenants," $16.00 to $22.00 per
square foot, or $3.20 to $4.40 per square foot per year based on an average
five-year lease term.

RESORT/HOTEL SEGMENT

As of December 31, 2002, the Company owned, or had an interest in ten
Resort/Hotel Properties.

The following table shows same store weighted average occupancy,
average daily rate and revenue per available room/guest for nine Resort/Hotel
Properties for the years ended December 31, 2002 and 2001. The Ritz Carlton Palm
Beach, in which the Company has a 50% interest, is accounted for as an
unconsolidated investment and has been excluded from this table.

The following table shows same store weighted average occupancy,
average daily rate and revenue per available room/guest for the nine
Resort/Hotel Properties for the years ended December 31, 2002 and 2001. The Ritz
Carlton Palm Beach, in which the Company has a 50% interest, is accounted for as
an unconsolidated investment and has been excluded from this table.

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RESIDENTIAL DEVELOPMENT SEGMENT

As of December 31, 2002, the Company owned real estate mortgages and
voting and non-voting common stock representing interests of 94% to 100% in five
Residential Development Corporations, which in turn, through joint ventures or
partnership arrangements, owned in whole or in part 22 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties.

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. These three Residential Development Corporations, The
Woodlands Land Company, Inc. ("WLC"), Desert Mountain Development Corporation
("DMDC") and Crescent Resort Development, Inc. ("CRDI") owned an interest in 16
Residential Development Properties.

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 the number of residential lot sales and an
average price per lot and the number of commercial land sales at an average
price per acre:

- ----------
o Lot sales decreased 27.9% and average sales price per lot decreased by
$5,000 or 6.9% due primarily to the continuing economic slowdown which
began in the third quarter of 2001.

o Carlton Woods is The Woodlands' upscale residential development. It is a
gated community consisting of 491 lots located around a Jack Nicklaus
signature golf course. As of December 31, 2002, 234 lots have been sold at
prices ranging from $100,000 to $2.2 million per lot, or an average price
of $300,000 per lot. Additional phases within Carlton Woods are expected to
be marketed to the public over the next year.

o Future build out of The Woodlands is estimated at approximately 12,187
residential lots and approximately 1,473 acres of commercial land, of which
approximately 1,437 residential lots and 1,107 commercial acres are
currently in inventory.

o TWLC projects residential lot sales at The Woodlands to range between 1,400
lots and 1,550 lots at an average sales price per lot ranging between
$70,000 and $75,000 for 2003.

82

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

The following table shows the number of residential lot sales and at an
average price per lot:

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

o Average sales price per lot increased by $42,000, or 6.1%, due primarily to
higher priced residential lots being completed during the latter phases of
development for the year ended December 31, 2002, as compared to the same
period in 2001. The number of lot sales decreased primarily as a result of
the economy in 2002, combined with the residual effects of September 11,
2001.

o Approved future build out is estimated at approximately 200 residential
lots, of which approximately 99 are currently in inventory.

o As a result of product mix with more higher priced lots being completed
than earlier in the development stage, and a decline in the economy, DMDC
projects residential lot sales in 2003 to range between 60 and 70 at an
average sales price per lot ranging between $800,000 and $850,000.

Crescent Resort Development, Inc. ("CRDI"), (formerly Crescent
Development Management Corp.), Colorado and California:

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

o Average sales price per lot decreased by $6,000, or 8.2%, and average sales
price per unit decreased by $291,000, or 28.6% due to lower priced product
mix sold in the year ended December 31, 2002, compared to the same period
in 2001.

o For 2003, CRDI projects that residential lot sales will range between 400
lots and 450 lots at an average sales price per lot ranging between
$170,000 and $180,000. In addition, CRDI expects between 60 and 70
residential unit sales, townhomes and condominiums to be sold at an average
sales price per unit ranging between $1.2 million and $1.3 million.

83

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's use of financial instruments, such as debt instruments,
subject the Company to market risk which may affect the Company's future
earnings and cash flows as well as the fair value of its assets. Market risk
generally refers to the risk of loss from changes in interest rates and market
prices. The Company manages its market risk by attempting to match anticipated
inflow of cash from its operating, 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 December 31, 2002, of which
approximately $228.9 million, or approximately 10%, was unhedged variable rate
debt. The weighted average interest rate on such variable rate debt was 4.2% as
of December 31, 2002. A 10% (42.0 basis point) increase in the weighted average
interest rate on such variable rate debt would result in an annual decrease in
net income and cash flows of approximately $1.0 million based on the unhedged
variable rate debt outstanding as of December 31, 2002, as a result of the
increased interest expense associated with the change in rate. Conversely, a 10%
(42.0 basis point) decrease in the weighted average interest rate on such
unhedged variable rate debt would result in an annual increase in net income and
cash flows of approximately $1.0 million based on the unhedged variable rate
debt outstanding as of December 31, 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 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Equity and Debt Financing - Derivative
Instruments and Hedging Activities."

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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED FINANCIAL STATEMENTS

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

85

REPORT OF INDEPENDENT AUDITORS

Board of Trust Managers and Shareholders
Crescent Real Estate Equities Company and subsidiaries

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Company and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Crescent Real Estate Equities Company and subsidiaries at December 31, 2002 and
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," as of January 1, 2002. As a
result, the accompanying consolidated financial statements for 2001 and 2000,
referred to above, have been restated to conform to the presentation adopted in
2002 in accordance with accounting principles generally accepted in the United
States.

Ernst & Young LLP
Dallas, Texas

February 22, 2003, except for paragraph two of
Note 26, as to which the date is March 10, 2003

86

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

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

87

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
consolidated financial statements.

88

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

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

89

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

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

90

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

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

91

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

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

92

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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 real estate investment trust, and all of its direct
and indirect subsidiaries.

The direct and indirect subsidiaries of Crescent Equities at December
31, 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 and the real estate
assets that each subsidiary owned or had an interest in as of December 31, 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 (three retail
properties). 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) (four office
properties). These five properties are included in
the Company's Office Segment. Sonoma Mission Inn
(80.1% interest). This property is included in the
Company's Resort/Hotel 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), 5 Houston Center (25% interest)
and Five Post Oak Park (30% interest). These
properties are included in the Company's Office
Segment. Ritz Carlton Palm Beach (50% interest).
This property is included in the Company's
Hotel/Resort 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. The temperature-controlled logistics
properties (40% interest in 88 properties). These
properties are included in the Company's
Temperature-Controlled Logistics Segment.

Crescent Real Estate Funding Wholly-owned assets - The Aberdeen, The Avallon
I, L.P. ("Funding I") I, II & III, Carter Burgess Plaza, 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 Funding Wholly-owned assets - Albuquerque Plaza, Barton
II, L.P. ("Funding II") Oaks Plaza, Briargate Office and 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 in
L.P. ("Funding III, IV the Company's Office Segment, and Renaissance
and V")(1) 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 Segment.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Crescent Real Estate Funding Wholly-owned assets - The Addison, Addison Tower,
VIII, L.P. ("Funding VIII") Austin Centre, The Avallon V, Frost Bank Plaza,
Greenway I & IA (two office properties), Greenway
II, Johns Manville Plaza, Palisades Central I,
Palisades Central II, Stemmons Place, Trammell
Crow Center(2), 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 Funding Wholly-owned assets - MCI Tower. This Property is
IX, L.P. ("Funding IX") included in the Company's Office Segment. Also,
the Denver Marriott City Center, which is included
in the Company's Resort/Hotel Segment.

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

Crescent Spectrum Center, Wholly-owned assets - Spectrum Center, included in
L.P.(3) the Company's Office Segment.

Desert Mountain Development Equity Investments, consolidated - Desert
Corporation ("DMDC") Mountain Properties, L.P. (93% interest).

The Woodlands Land Company Equity Investments, unconsolidated - Woodlands
("TWLC") Land Development Company, L.P. (42.5%
interest).(4)

Crescent Resort Development Equity Investments, consolidated - Bear Paw Lodge
Inc. ("CRDI") (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), Creekside 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.

Crescent TRS Holdings Corp. Equity Investments, unconsolidated - two quarries
(56% interest). These properties are included in
the Company's Temperature-Controlled Logistics
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) 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 the building.

(3) 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.

(4) Distributions are made to Partners based on specified payout
percentages. During the year ended December 31, 2002, the Company's
payout percentage and economic interest was 52.5%.

See Note 9, "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 December
31, 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

95

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

voting common stock in three of the Company's Residential Development
Corporations. See Note 23, "COPI," for additional information related to the
Company's agreement with COPI.

SEGMENTS

The assets and operations of the Company were divided into four
investment segments at December 31, 2002, as follows:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of December 31, 2002:

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 29.5 million
net rentable square feet. Sixty-one of the Office Properties
are wholly-owned and 12 are owned through joint ventures, five
of which are consolidated and seven of which are
unconsolidated.

o RESORT/HOTEL SEGMENT consisted of six luxury and destination
fitness resorts and spas with a total of 1,306 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, one of the luxury and destination
fitness resorts and spas is owned through a joint venture that
is consolidated, and one of the luxury and destination fitness
resorts and spas is owned through a joint venture that is
unconsolidated.

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 partnership arrangements, owned in whole or in part 22
upscale residential development properties (collectively
referred to as the "Residential Development Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland
Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% interest in the Vornado Crescent
Carthage and KC Quarry L.L.C. The Temperature-Controlled
Logistics Partnership 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. As of December
31, 2002, the Temperature-Controlled Logistics Corporation
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. As of December 31,
2002, the Vornado Crescent Carthage and KC Quarry, L.L.C. own
two quarries and the related land.

See Note 3, "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 years ended
December 31, 2002, 2001 and 2000, and identifiable assets for each of these
investment segments at December 31, 2002 and 2001.

For purposes of segment reporting as defined in Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information," and this Annual Report on

96

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

BASIS OF PRESENTATION

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

Certain amounts in prior period financial statements have been
reclassified to conform to current year presentation. See Note 2, "Summary of
Significant Accounting Policies - Adoption of New Accounting Standards," for a
description of the significant reclassified items.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ADOPTION OF NEW ACCOUNTING STANDARDS

SFAS NO. 141. In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 141, "Business Combinations," which provides that all
business combinations in the scope of the Statement are to be accounted for
under the purchase method. SFAS No. 141 requires companies to account for the
value of in-place operating leases as favorable or unfavorable relative to
market prices and to account for the costs of acquiring such leases separately
from the value of the real estate for all acquisitions. These intangibles are to
be amortized over the related contractual lease terms as an increase to or
reduction of revenues. During 2002, in accordance with the guidance of SFAS No.
141, the Company valued in-place leases of the Property at the date of its
acquisition of the Property. As a result of the Johns Manville Plaza acquisition
on August 20, 2002, the Company recorded $7.5 million of the purchase price as
Net Intangible Leases. This amount is included in Other Assets in the
accompanying Consolidated Balance Sheets. In addition, the Company has
recognized $0.3 million in related property revenues as amortization of the Net
Intangible Leases.

SFAS NO. 142. In June 2001, the FASB issued SFAS No. 142, which was
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. The Company tests for impairment at least annually,
or more frequently if events or changes in circumstances indicate that the asset
might be impaired.

Prior to the adoption of SFAS No. 142, 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 from the properties 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 Properties
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.

97

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon the adoption of SFAS No. 142, the Temperature-Controlled Logistics
Corporation compared the fair value of Temperature-Controlled Logistics
Properties based on discounted cash flows to the carrying value of
Temperature-Controlled Logistics Properties and the related goodwill. Based on
this test, the fair value did not exceed its carrying value, and the second step
of the impairment test was performed to measure the impairment loss. The second
step compared the implied fair value of goodwill with the carrying amounts of
goodwill which exceeded the fair value on January 1, 2002. As a result, the
Company recognized a goodwill impairment charge of approximately $9.2 million,
net of minority interest, due to the initial application of this Statement. This
charge was reported as a change in accounting principle and is included in the
Company's Consolidated Statements of Operations as a "Cumulative Effect of a
Change in Accounting Principle" for the year ended December 31, 2002.

The Company also determined that a goodwill impairment charge of $1.3
million, net of minority interest and taxes, was required for one of the
Residential Development Corporations which was sold in 2002. Accordingly, the
$1.3 million impairment charge for the year ended December 31, 2002 is reflected
as "Discontinued Operations - Income and Gain on Assets Sold and Held for Sale"
in the accompanying Consolidated Statements of Operations.

SFAS NO. 144. 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 in the Company's Consolidated
Statements of Operations. The SFAS also extends the reporting requirements of
discontinued operations to include components of an entity that have either been
disposed of or are classified as held for sale. The Company adopted SFAS No. 144
on January 1, 2002. The Company's adoption of SFAS No. 144 resulted in the
presentation of the net operating results of properties sold or held for sale
during the year ended December 31, 2002, as "Discontinued Operations - Income
and Gain on Assets Sold and Held for Sale" in the accompanying Consolidated
Statements of Operations. As of December 31, 2002, seven behavioral healthcare
properties remain classified as "Properties held for disposition, net." See Note
5, "Discontinued Operations." The Company has reclassified certain amounts in
prior period Consolidated Financial Statements to conform to the new
presentation requirements.

SFAS NO. 145. On April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 requires the reporting of gains and losses
from early extinguishment of debt be included in the determination of net income
unless criteria in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations," which allows for extraordinary item classification, are
met. The provisions of this Statement related to the rescission of Statement No.
4 are to be applied in fiscal years beginning after May 15, 2002. The Company
plans to implement the Statement for fiscal 2003 and expects no impact beyond
the classification of costs related to early extinguishments of debt, which are
shown in the Company's 2001 Consolidated Statements of Operations as an
extraordinary item.

SFAS NO. 146. In June 2002, the FASB issued Statement No. 146,
"Accounting for Exit or Disposal Activities," which is effective for exit or
disposal activities that are initiated after December 31, 2002. SFAS No. 146
addresses significant issues regarding the recognition, measurement and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities. The scope of SFAS No. 146 includes costs
related to terminating a contract that is not a capital lease, and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred compensation contract. The Statement specifies that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. It
also specifies that a liability is incurred when the definition of a liability
in FASB Concepts Statement No. 6 "Elements of Financial Statements" is met. Upon
adoption, the Company does not anticipate a material impact, if any, of the
liability-recognition provision of this statement on the Company's liquidity,
financial position, or results of operations.

SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation" effective for fiscal years ending
after December 15, 2002, to amend the transition and

98

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". In addition to the prospective transition method of accounting
for Stock-Based Employee Compensation using the fair value method provided in
SFAS No. 123, SFAS No. 148 permits two additional transition methods, both of
which avoid the ramp-up effect arising from prospective application of the fair
value method. The Retroactive Restatement Method requires companies to restate
all periods presented to reflect the Stock-Based Employee Compensation under the
fair value method for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. The Modified Prospective Method
requires companies to recognize Stock-Based Employee Compensation from the
beginning of the fiscal year in which the recognition provisions are first
applied as if the fair value method in SFAS No. 123 had been used to account for
employee awards granted, modified, or settled in fiscal years beginning after
December 15, 1994. Also, in the absence of a single accounting method for
Stock-Based Employee Compensation, SFAS No. 148 expands disclosure requirements
from those existing in SFAS No. 123, and requires disclosure of whether, when,
and how an entity adopted the preferable, fair value method of accounting.

Effective January 1, 2003, the Company will adopt the fair value
expense recognition provisions of SFAS No. 123 on a prospective basis as
permitted. The Company will utilize the Black-Scholes option-pricing model and
recognize this value as an expense over the period in which the options vest.
Under this standard, recognition of expense for stock options is applied to all
options granted after the beginning of the year of adoption. Prior to January 1,
2003, the Company followed the intrinsic method set forth in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no stock or unit based
compensation expense was recognized for the years ended December 31, 2002, 2001
or 2000. The 2003 expense will relate only to stock options granted in 2003. Had
compensation cost for the Plans been determined based on the fair value at the
grant dates for awards under the Plans, consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued and liability-recognition requirements for a guarantor of certain
types of debt. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. See
Note 15, "Commitments, Contingencies and Litigation- Guarantees," for disclosure
of the Company's guarantees as of December 31, 2002. The Company is assessing
the impact of this Interpretation on its liquidity, financial position, and
results of operations, but does not believe the impact will be significant.

FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to existing VIEs in
the first fiscal year or interim period beginning after June 15, 2003. VIEs are
generally a legal structure used for business enterprises that either do not
have equity investors with voting rights, or have equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The objective of the new guidance is to improve reporting by addressing when a
company should include in its financial statements the assets, liabilities and
activities of another entity such as a VIE. FIN 46 requires a VIE to be
consolidated by a company if the company is subject to a majority of the risk of
loss from the VIE's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about VIEs that the
company is not required to consolidate but in which it has a significant
variable interest. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the VIE was
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the variable interest entity; and, (b) the
enterprise's maximum exposure to loss as a result of its involvement with the
VIE. FIN 46 may be applied prospectively with a cumulative effect adjustment as
of the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative-effect adjustment
as of the beginning of the first year restated. The Company is assessing the
impact, if any, of this Interpretation on its liquidity, financial position, and
results of operations, but does not believe the impact will be significant.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

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

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

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

CONCENTRATION OF REAL ESTATE INVESTMENTS. The Company's Office
Properties are located primarily in the Dallas and Houston, Texas, metropolitan
areas. As of December 31, 2002, the Company's Office Properties in Dallas and
Houston represented an aggregate of approximately 74% of its office portfolio
based on total net rentable square feet. As a result of this geographic
concentration, the operations of the Company could be adversely affected by a
recession or general economic downturn in the areas where these Properties are
located.

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

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable are reduced by
an allowance for amounts that may become uncollectible in the future. The
Company's accounts receivable balance consists of rents and operating cost
recoveries due from customers. The Company also maintains an allowance for
deferred rent receivables which arise from the straight-lining of rents. The
allowance for doubtful accounts is reviewed at least quarterly for adequacy by
reviewing such factors as the credit quality of our customers, any delinquency
in payment, historical trends and current economic conditions. If our
assumptions regarding the collectibility of accounts receivable prove incorrect,
the Company could experience write-offs in excess of our allowance for doubtful
accounts, which would result in a decrease in its earnings.

INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED
COMPANIES. Investments in unconsolidated joint ventures and companies are
accounted for under the equity method because the Company does not control these
entities. These investments are recorded initially at cost and subsequently
adjusted for equity in earnings and cash contributions and distributions. The
Company also recognizes an impairment loss on an investment by investment basis
when the fair value experiences a non-temporary decline below the carrying
value. See Note 9, "Investment in Real Estate Mortgages and Equity of
Unconsolidated Companies."

OTHER ASSETS. Other assets consist principally of leasing costs,
deferred financing costs, intangible assets and marketable securities. Leasing
costs are amortized on a straight-line basis during the terms of the respective
leases, and unamortized leasing costs are written off upon early termination of
lease agreements. Deferred financing costs are amortized on a straight-line
basis (when it approximates the effective interest method) over the terms of the
respective loans. The effective interest method is used to amortize deferred

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

financing costs on loans where the straight-line basis does not approximate the
effective interest method, over the terms of the respective loans.

Intangible assets, which include memberships, trademarks, and net
intangible leases are amortized and reviewed annually for impairment. Upon the
formation of Desert Mountain Properties, L.P., the partnership allocated a
portion of the fair value of its assets of Desert Mountain to the remaining club
memberships and recorded the amount as an intangible asset.

Marketable securities are considered available-for-sale and are
marked to market value on a monthly basis. The corresponding unrealized gains
and losses are included in accumulated other comprehensive income. When a
decline in the fair value of marketable securities is determined to be other
than temporary, the cost basis is written down to fair value and the amount of
the write-down is included in earnings for the applicable period. A decline in
the fair value of a marketable security is deemed non-temporary if its cost
basis has exceeded its fair value for a period of six to nine months.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
and other liabilities are reasonable estimates of their fair values. The fair
value of the Company's notes payable is most sensitive to fluctuations in
interest rates. Since the Company's $0.7 billion in variable rate debt changes
with these changes in interest rates, it also approximates the fair market value
of the underlying debt. The Company reduces the variability in future cash
flows by maintaining a sizable portion of its debt with fixed payment
characteristics. Although the cash flow to the Company does not change, the fair
value of the $1.6 billion in fixed rate debt, based upon current interest rates
for similar debt instruments with similar payment terms and maturities, would be
approximately $1.8 billion as of December 31, 2002. Disclosure about fair value
of financial instruments is based on pertinent information available to
management as of December 31, 2002.

DERIVATIVE FINANCIAL INSTRUMENTS. SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company's objective in using derivatives is to add
stability to interest expense and to manage its exposure to interest rate
movements or other identified risks. Derivative financial instruments are used
to convert a portion of the Company's variable rate debt to fixed rate debt and
to manage its fixed to variable rate debt ratio.

To accomplish this objective, the Company primarily uses interest
rate swaps as part of its cash flow hedging strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of fixed rate amounts in
exchange for variable rate payments over the life of the agreements without
exchange of the underlying principal amount. During 2002, such derivatives were
used to hedge the variable cash flows associated with existing variable rate
debt.

The Company measures its derivative instruments and hedging
activities at fair value and records them as an asset or liability, depending on
the Company's rights or obligations under the applicable derivative contract.
For derivatives designated as fair value hedges, the changes in the fair value
of both the derivative instrument and the hedged items are recorded in earnings.
Derivatives used to hedge the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow
hedges. For derivatives designated as cash flow hedges, the effective portions
of changes in fair value of the derivative are reported in other comprehensive
income and are subsequently reclassified into earnings when the hedged item
affects earnings. Changes in fair value of derivative instruments not designated
as hedges and ineffective portions of hedges are recognized in earnings in the
affected period. The Company assesses the effectiveness of each hedging
relationship by comparing the changes in fair value or cash flows of the
derivative hedging instrument with the changes in fair value or cash flows of
the designated hedged item or transaction.

As of December 31, 2002, no derivatives were designated as fair value
hedges or hedges of net investments in foreign operations. The Company does not
use derivatives for trading or speculative purposes. In connection with the debt
refinancing in May 2001, the Company entered into a LIBOR interest rate cap, and

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

simultaneously sold a LIBOR interest rate cap with the same terms. These
instruments do not qualify as hedges and changes to their respective fair values
are charged to earnings monthly.

At December 31, 2002, derivatives with a negative fair value of $24.2
million were included in "Accounts payable, accrued expenses and other
liabilities." The change in net unrealized gains of $5.1 million in 2002 for
derivatives designated as cash flow hedges is separately disclosed in the
Consolidated Statements of Changes in Shareholders' Equity and comprehensive
income.

Amounts reported in other comprehensive income related to derivatives
will be reclassified to interest expense as interest payments are made on the
Company's variable rate debt. The change in net unrealized gains/losses on cash
flow hedges reflects a reclassification of $24.4 million of net unrealized gains
or losses from other comprehensive income to interest expense during 2002.
During 2003, the Company estimates that an additional $17.7 million of
unrealized losses will be reclassified to interest expense.

REVENUE RECOGNITION - OFFICE PROPERTIES. The Company, as a lessor,
has retained substantially all of the risks and benefits of ownership of the
Office Properties and accounts for its leases as operating leases. Income on
leases, which includes scheduled increases in rental rates during the lease term
and/or abated rent payments for various periods following the tenant's lease
commencement date, is recognized on a straight-line basis. Deferred rent
receivable represents the excess of rental revenue recognized on a straight-line
basis over cash received pursuant to the applicable lease provisions. Office
Property leases generally provide for the reimbursement of annual increases in
operating expenses above base year operating expenses ("excess operating
expenses"), payable to the Company in equal installments throughout the year
based on estimated increases. Any differences between the estimated increase
amounts are adjusted at year end based upon actual expenses incurred.

REVENUE RECOGNITION - RESORT/HOTEL PROPERTIES. 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
previously leased to COPI. See Note 23, "COPI." For all of the Resort/Hotel
Properties, except the Omni Austin Hotel, the period February 14, 2002 to
December 31, 2002, the Company recognized revenues from room sales and guest
nights and revenues from guest services whenever rooms were occupied and
services had been rendered. Lease revenue is recognized for the Omni Austin
Hotel.

Prior to the enactment of the REIT Modernization Act, the Company's
status as a REIT for federal income tax purposes prohibited it from operating
the Resort/Hotel Properties. During 2001 and 2000, the Company leased all of the
Resort/Hotel Properties, except the Omni Austin Hotel, to subsidiaries of
Crescent Operating, Inc. ("COPI") pursuant to eight separate leases. The Omni
Austin Hotel had been leased under a separate lease to HCD Austin Corporation.
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.

REVENUE RECOGNITION - RESIDENTIAL DEVELOPMENT PROPERTIES. Revenue
from real estate sales is recognized after the closing of the sale transaction
has taken place, title has been transferred, sufficient cash is received to
demonstrate the buyer's commitment to pay for the property, and collection of
the balance of the sales price, if any, is reasonably assured. Substantially all
of the real estate sales for 2002 have been cash transactions. The cost of real
estate sold is determined using the relative sales value method. 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. Under this method, 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.

102

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If completion costs are significant in relation to total costs, the
percentage of completion method is utilized to recognize revenue. Under this
method, the percentage of revenue applicable to costs incurred to date, compared
to total estimated development costs, is recognized in the period of sale.
Deferred revenue related to future development activity is included in "Accounts
payable, accrued expenses, and other liabilities."

Club membership initiation fees and membership conversion fees are
recorded as deferred revenue when sold and recognized as membership fee revenue
on a straight-line basis over the number of months remaining until the turnover
date of club assets to the members. These deferred revenues for club membership
initiation and membership conversion fees, net of related deferred expenses, are
presented in the Company's Consolidated Balance Sheets in Accounts Payable,
accrued expenses, and other liabilities. Monthly club dues and transfer fees are
recorded as Residential Development Property revenue when earned.

CAPITALIZED INTEREST. The Company capitalizes interest as a part of
the historical cost of acquiring certain assets that qualify for capitalization
under SFAS No. 34, "Capitalization of Interest Cost." The Company's assets that
qualify for accounting treatment under this pronouncement must require a period
of time to prepare for their intended use, such as the Company's land
development project assets that are intended for sale or lease and constructed
as discrete projects. In accordance with the authoritative guidance, the
interest cost capitalized by the Company is the interest cost recognized on
borrowings and other obligations. The amount capitalized is an allocation of the
interest cost incurred during the period required to complete the asset. The
interest rate for capitalization purposes is based on the rates on the Company's
outstanding borrowings.

INCOME TAXES. The Company has elected to be taxed as a REIT under
Sections 856 through 860 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code") and operates in a manner intended to enable it to continue to
qualify as a REIT. As a REIT, the Company generally will not be subject to
corporate federal income tax on net income that it currently distributes to its
shareholders, provided that the Company satisfies certain organizational and
operational requirements including the requirement to distribute at least 90% of
its REIT taxable income to its shareholders each year. Accordingly, the Company
does not believe it will be liable for federal income taxes on its REIT taxable
income or in most of the states in which it operates.

The Company has elected to treat certain of its corporate
subsidiaries as taxable REIT subsidiaries ("TRS"). In general, a TRS of the
Company may perform additional services for tenants of the Company and generally
may engage in any real estate or non-real estate business (except for the
operation or management of health care facilities or lodging facilities or the
provision to any person, under a franchise, license or otherwise, of rights to
any brand name under which any lodging facility or health care facility is
operated). A TRS is subject to corporate federal income tax, state and local
taxes.

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

EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share", ("EPS")
specifies the computation, presentation and disclosure requirements for earnings
per share.

Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company presents both basic and diluted earnings per share.

103

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a reconciliation for the years ended
December 31, 2002, 2001 and 2000 of basic and diluted earnings per share from
"Income before discontinued operations, extraordinary item and cumulative effect
of a change in accounting principle" to "Net income (loss) available to common
shareholders." The table also includes weighted average shares on a basic and
diluted basis.

104

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This table presents supplemental cash flows disclosures for the years
ended December 31, 2002, 2001 and 2000.

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS

105

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

o excluding extraordinary items (as defined by GAAP);

o including depreciation and amortization of real estate assets;
and

o after adjusting for unconsolidated partnerships and joint
ventures.

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

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

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

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

The Company's measure of FFO may not be comparable to similarly titled
measures of other REITs if those REITs apply the definition of FFO in a
different manner than the Company.

Selected financial information related to each segment for the years
ended December 31, 2002, 2001 and 2000, and identifiable assets for each of the
segments at December 31, 2002 and 2001, are presented below:

SELECTED FINANCIAL INFORMATION:

106

- -------------------
(1) For purposes of this Note, Corporate and Other include
corporate interest and other income, general and
administrative, interest expense, depreciation and
amortization, amortization of deferred financing costs,
preferred return paid to GMAC Commercial Mortgage Corporation
("GMACCM"), preferred dividends, other unconsolidated
companies, impairment and other charges and other expenses.

(2) Includes approximately $5.0 million 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, and includes lease
termination fees (net of the write-off of deferred rent
receivables) of approximately $16.6 million, $8.0 million and
$12.0 million, for the years ended December 31, 2002, 2001 and
2000, respectively.

(3) 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, DMDC, TWLC and CRDI. As
a result, the Company fully consolidated the operations and
assets of these entities beginning on that date.

(4) The following table reconciles Funds from Operations to Net
Income (Loss).

107

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECONCILIATION OF FUNDS FROM OPERATIONS

4. ACQUISITIONS

OFFICE SEGMENT

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 and included in the Company's Office Segment.

On November 26, 2002, the Company purchased Duddlesten Ventures-I,
Ltd.'s 20% interest in the Crescent Duddlesten Hotel Partnership for $11.1
million, funded by a draw on the Company's credit facility, and increasing the
Company's ownership percentage from 80% to 100%. This partnership owned 3.79
acres of undeveloped land in downtown Houston, and therefore the Company
recorded the $11.1 million as an increase to land. See Note 6, "Other
Dispositions," for information regarding the December 31, 2002 sale of
approximately 2.32 acres of this undeveloped land near the Houston Convention
Center. The remaining 1.47 acres in downtown Houston are wholly-owned and
included in the Company's Office Segment.

5. DISCONTINUED OPERATIONS

In August 2001, the FASB issued SFAS No. 144 which requires that the
results of operations of assets sold or held for sale, including any gains or
losses recognized, be disclosed separately in the Company's Consolidated
Statements of Operations. The Company adopted SFAS No. 144 on January 1, 2002.
During 2002, the Company sold seven Office Properties, two CRDI transportation
companies and three behavioral healthcare properties. Seven remaining behavioral
healthcare properties are classified as held for sale at December 31, 2002. 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 Sheets as of December 31, 2002 and December 31, 2001.

108

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASSETS SOLD

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 $12.0 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.

On May 29, 2002, the Woodlands Office Equities - '95 Limited ("WOE"),
owned 75% by the Company and 25% by 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 $3.6 million,
of which the Company's portion was approximately $3.2 million, and generated a
net gain of approximately $2.1 million, of which the Company's portion was
approximately $1.9 million. The proceeds from the sale were used primarily to
pay down the Company's credit facility. These two properties were consolidated
joint venture properties.

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 were used to redeem preferred Class A Units in Funding IX
from GMACCM. This property was wholly-owned.

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 property was wholly-owned.

On December 31, 2002, WOE completed the sale of two Office Properties
located within The Woodlands, Texas. WOE received net proceeds of approximately
$5.5 million and a $13.9 million short-term note receivable. The Company's share
of the net proceeds and note receivable was $4.8 million and $10.6 million,
respectively. The interest rate on the note was 7.5% and all principal and
accrued interest was paid on February 19, 2003. WOE recorded a net gain of
approximately $4.1 million, of which the Company's share was approximately $3.6
million. The net proceeds were used primarily to pay down the Company's credit
facility. These two properties were consolidated joint venture properties.

RESIDENTIAL DEVELOPMENT SEGMENT

On December 31, 2002, CRDI, a consolidated subsidiary of the Company,
completed the sale of its 50% interest in two Colorado transportation companies,
East West Resort Transportation I ("EWRT I") and East West Resort Transportation
II ("EWRT II"), to an affiliate of CRDI business partners for $7.0 million,
consisting of $1.4 million in cash and a $5.6 million note receivable. The note
bears interest at 7.0%, with interest only payable semi-annually on April 30 and
October 31 each year through April 30, 2005. Thereafter, interest and principal
are amortized over five years and will be payable quarterly beginning August 1,
2005, with a balloon payment of the outstanding balance due on May 1, 2008. The
Company recognized a $1.4 million gain, after tax, related to the sale of these
companies.

109

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables indicate the rental revenue, operating expenses,
depreciation and amortization and net income for the years ended December 31,
2002, 2001 and 2000 and gain recognized on the sale for the Office Properties
sold during the year ended December 31, 2002, and the revenue, operating
expenses and net income and gain recognized on the sale of EWRT I and EWRT II
during the year ended December 31, 2002:

- ----------------------
(1) Net income for 2002 only includes the period for which the disposition
Properties were held during the year.

(2) These companies were consolidated subsidiaries of CRDI, which was an
unconsolidated subsidiary of the Company during 2001 and 2000;
therefore, these companies are not reflected in discontinued operations
for these periods.

ASSETS HELD FOR SALE

As of December 31, 2002, the Company owned seven behavioral
healthcare properties, all of which were classified in the Company's
Consolidated Balance Sheets as "Properties Held for Disposition, net." During
the year ended December 31, 2002, the Company recognized an impairment charge of
approximately $3.2 million on two 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 properties and the estimated sales price less costs of sale. After
recognition of this impairment, the carrying value of the behavioral healthcare
properties at December 31, 2002 was approximately $18.4 million, which is
reflected in the table below. 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 for the year ended December 31,
2002 for the seven behavioral healthcare properties classified as held for sale
at December 31, 2002.

110

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

6. OTHER DISPOSITIONS

The gains and losses for consolidated asset dispositions during the
years ended December 31, 2001 and December 31, 2000 listed below this Note did
not meet criteria which would require reporting under SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Accordingly, the related
gains and losses from these consolidated asset dispositions are included in the
Company's Consolidated Statements of Operations as "Gain on Property Sales,
Net."

The gains and losses for all unconsolidated asset dispositions result
in an increase or decrease in the "Equity in net income (loss) of unconsolidated
companies," which is reflected in the Company's Consolidated Statements of
Operations.

OFFICE SEGMENT - CONSOLIDATED

On September 18, 2001, the Company completed the sale of the two
Washington Harbour Office Properties. The sale generated net proceeds of
approximately $153.0 million and a net loss of approximately $9.9 million. The
proceeds from the sale of the Washington Harbour Office Properties were used
primarily to pay down the Company's credit facility and repurchase approximately
4.3 million of the Company's common shares. These properties were wholly-owned.

On September 28, 2001, WOE sold two Office Properties located within
The Woodlands, Texas. The sale generated net proceeds of approximately $11.3
million, of which the Company's portion was approximately $9.9 million. The sale
generated a net gain of approximately $3.4 million, of which the Company's
portion was approximately $3.0 million. The proceeds from the sale were used
primarily to pay down the Company's credit facility. These two properties were
consolidated joint venture properties.

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

During the year ended December 31, 2000, the Company completed the
sale of 11 wholly-owned Office Properties. The sale of the 11 Office Properties
generated approximately $268.2 million of net proceeds. The proceeds were used
primarily to pay down variable-rate debt. The Company recognized a net gain of
approximately $35.8 million related to the sale of the 11 Office Properties
during the year ended December 31, 2000. This net gain includes a loss of
approximately $5.0 million recognized during the year ended December 31, 2000 on
one of the 11 Office Properties sold. The loss represented the difference
between the carrying value of the Office Property and the sale price less costs
of the sale.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2000, the Woodlands Retail
Equities - '96 Limited, owned 75% by the Company and 25% by the Woodlands CPC,
completed the sale of its retail portfolio, consisting of the Company's four
retail properties located in The Woodlands, Texas. The sale generated
approximately $38.4 million of net proceeds, of which the Company's portion was
approximately $32.9 million. The sale generated a net gain of approximately $9.0
million, of which the Company's portion was approximately $7.7 million. The
proceeds from the sale were used primarily to pay down the Company's credit
facility. These four properties were consolidated joint venture properties.

OFFICE SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Company completed the sale of
approximately 1.4 acres of undeveloped 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 land were used to pay down the Company's credit facility. This land was
wholly-owned by the Company.

On December 31, 2002, the Company completed the sale of approximately
5.46 acres of undeveloped land near the Houston Convention Center. The sale
generated net proceeds of $33.1 million and a net gain of approximately $15.1
million. Under the terms of the purchase and sale contract, the purchaser has
options to purchase two additional parcels of undeveloped land from the Company.
The first parcel is comprised of approximately 3.47 acres and has a purchase
option closing deadline of June 2005. Under the terms of the contract, the
Company will lease this parcel to the purchaser from December 2002 through June
2005. The purchase option closing deadline for the second parcel of
approximately 1.59 acres is June 2007. The proceeds were used to pay down the
Company's credit facility. This land was wholly-owned by the Company.

On December 31, 2002, the Company completed the sale of approximately
3.12 acres of undeveloped land located in the Greenway Plaza office complex of
Houston, Texas for net proceeds of $5.2 million and a net gain of approximately
$2.0 million. The proceeds were used to pay down the Company's credit facility.
This land was wholly-owned by the Company.

OFFICE SEGMENT - UNCONSOLIDATED

During the year ended December 31, 2002, the Woodlands CPC sold three
office properties and its 50% interest in one industrial property located within
The Woodlands, Texas. The sales generated net proceeds, after the repayment of
debt, of approximately $12.1 million, of which the Company's portion was
approximately $6.4 million. The sales generated a net gain of approximately
$13.5 million, of which the Company's portion was approximately $7.1 million.
The proceeds were used primarily to pay down the Company's credit facility.

On December 19, 2002, the Woodlands CPC sold its 50% interest in the
Woodlands Mall partnership located in The Woodlands, Texas. The sale generated
net proceeds of approximately $38.4 million, of which the Company's 52.5%
interest was approximately $20.2 million. The net gain on the sale of the
property was approximately $33.6 million, of which the Company's portion was
approximately $17.7 million. The proceeds were used primarily to pay down the
Company's credit facility.

During the year ended December 31, 2001, the Woodlands CPC sold one
office/venture tech property located within the Woodlands, Texas. The sale
generated net proceeds, after the repayment of debt, of approximately $2.7
million, of which the Company's portion was approximately $1.3 million. The sale
generated a gain of approximately $3.5 million, of which the Company's portion
was approximately $1.7 million. The funds were used primarily to pay down the
Company's credit facility.

During the year ended December 31, 2001, the Woodlands Land
Development Company, L.P. sold two office properties and one retail property
located within the Woodlands, Texas. The sales generated net proceeds, after the
repayment of debt, of approximately $41.8 million, of which the Company's
portion was approximately

112

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$19.7 million. The sale generated a gain of $13.3 million, of which the
Company's portion was $3.8 million. The proceeds were used primarily to pay down
the Company's credit facility.

During the year ended December 31, 2000, the Woodlands CPC sold four
office/venture tech properties located within The Woodlands, Texas. The sales
generated net proceeds of approximately $51.8 million, of which the Company's
portion was approximately $22.0 million. The sales generated a net gain of
approximately $11.8 million, of which the Company's portion was approximately
$5.0 million. The proceeds received by the Company were used primarily to pay
down the Company's credit facility.

RESORT/HOTEL SEGMENT - CONSOLIDATED

On November 3, 2000, the Company sold the Four Seasons Hotel -
Houston for approximately $105.0 million. The sale generated net proceeds of
approximately $85.3 million and a net gain of approximately $28.7 million.
Approximately $56.6 million of the proceeds were used to redeem from GMACCM,
preferred Class A Units in Funding IX, through which the Company owned the
Property. This property was wholly-owned by the Company.

RESORT/HOTEL SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Company completed the sale of 30 acres of
land adjacent to the Company's Canyon Ranch - Tucson Resort/Hotel Property,
located in Tucson, Arizona, to an affiliate of the third party management
company of the Company's Canyon Ranch Resort/Hotel Properties. The sales price
of the land was approximately $9.4 million, for which the Company received $1.9
million of cash proceeds and a promissory note in the amount of $7.5 million
with an interest rate at 6.5%, payable quarterly and maturing on October 1,
2007. The Company recognized a net gain of approximately $5.5 million. The net
cash proceeds from the sale of the land were used to pay down the Company's
credit facility. This land was wholly-owned by the Company. 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 December 31, 2002.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. JOINT VENTURES

The Company entered into the following consolidated and
unconsolidated joint venture arrangements during the years ended 2002 and 2001:

OFFICE SEGMENT

UNCONSOLIDATED - 2002 TRANSACTIONS

Three Westlake Park

On August 21, 2002, the Company entered into a joint venture
arrangement with an affiliate of General Electric Pension Fund (the affiliate is
referred to as "GE") in connection with which the Company contributed an Office
Property, Three Westlake Park in Houston, Texas. GE made a cash contribution.
The joint venture is structured such that GE holds an 80% equity interest in
Three Westlake Park, 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, 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. The proceeds were used to pay down the Company's
credit facility. The Company manages and leases the Office Property on a fee
basis.

Miami Center

On September 25, 2002, the Company entered into a joint venture
arrangement with an affiliate of a fund managed by JPMorgan Fleming Asset
Management (the affiliate is referred to as "JPM Fund I"), in connection with
which JPM Fund I purchased a 60% interest in Crescent Miami Center, L.L.C. with
a cash contribution. Crescent Miami Center, L.L.C. owns a 782,000 square foot
Office Property, Miami Center, located in Miami, Florida. The joint venture is
structured such that JPM Fund I 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 $111.0 million in net cash proceeds to 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 no
commitment to reinvest the cash proceeds into the joint venture. The joint
venture was accounted for as a partial sale of this Office Property, resulting
in a gain of approximately $4.6 million, net of deferred gain of approximately
$3.5 million. The proceeds were used to pay down the Company's credit facility.
The Company manages the Office Property on a fee basis.

Five Post Oak Park

On December 20, 2002, the Company entered into a joint venture
arrangement, Five Post Oak Park, L.P., with GE. The joint venture purchased Five
Post Oak Park located in the Galleria area of Houston, Texas, for $64.8 million.
The Property is a 567,000 square foot Class A office building. GE owns a 70%
interest, and the Company owns a 30% interest, in the joint venture. The initial
cash equity contribution to the joint venture was $19.8 million, of which the
Company's portion was $5.9 million. The Company's equity contribution and an
additional working capital contribution of $0.3 million were funded through a
draw under the Company's credit facility. The remainder of the purchase price of
the Property was funded by a secured loan to the joint venture in the amount of
$45.0 million. None of the mortgage financing at the joint venture level is
guaranteed by the Company. The Company manages and leases the Office Property on
a fee basis.

UNCONSOLIDATED - 2001 TRANSACTIONS

Four Westlake Park and Bank One Tower

On July 30, 2001, the Company entered into two joint venture
arrangements with GE in which the Company contributed two Office Properties,
Four Westlake Park in Houston, Texas and Bank One Tower in Austin, Texas and GE
made cash contributions. GE holds an 80% equity interest in each of the Office
Properties and the Company holds the

114

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

remaining 20% equity interest. The transactions generated approximately $120.0
million in net cash proceeds to the Company resulting from the sale of its 80%
equity interest and from mortgage financing at the joint venture level. None of
the mortgage financing at the joint venture level is guaranteed by the Company.
The Company has no commitment to reinvest the cash proceeds back into the joint
ventures. The joint ventures were accounted for as partial sales of these Office
Properties, resulting in a gain of approximately $7.6 million, net of a deferred
gain of approximately $1.9 million. The proceeds were used to pay down the
Company's credit facility. The Company manages and leases these Office
Properties on a fee basis.

5 Houston Center

On June 4, 2001, the Company entered into a joint venture arrangement
with a pension fund advised by JPMorgan Fleming Asset Management (the fund is
referred to as "JPM Fund II") to construct the 5 Houston Center Office Property
within the Company's mixed-use Office Property complex in Houston, Texas. The
joint venture is structured such that the fund holds a 75% equity interest, and
the Company holds a 25% equity interest, in the Property. The Company
contributed approximately $8.5 million of land and $12.3 million of development
costs to the joint venture and received a distribution of $14.8 million of net
proceeds, resulting in a net equity position of $6.0 million for the Company. No
gain or loss was recognized by the Company on this transaction. The development
was completed on September 16, 2002. The building was financed through a
construction loan, which the Company fully guarantees, that can be drawn to a
maximum of $82.5 million. Approximately $63.0 million was outstanding under the
construction loan at December 31, 2002. The guaranteed amount reduces upon the
achievement of specified conditions. The Company manages and leases the Office
Property on a fee basis.

RESORT/HOTEL SEGMENT

UNCONSOLIDATED - 2002 TRANSACTION

Manalapan Hotel Partners

In October 2002, in a series of transactions, the Company acquired
the remaining 75% economic interest in Manalapan Hotel Partners, L.L.C.
("Manalapan"), which owns the Ritz Carlton Palm Beach in Florida. The Company
acquired the additional interests in Manalapan for $6.5 million, which was
funded by a draw on the Company's credit facility. Subsequently, the Company
entered into a joint venture arrangement with WB Palm Beach Investors, L.L.C.
("Westbrook"), pursuant to which Westbrook purchased a 50% equity interest in
Manalapan. The Company holds the remaining 50% equity interest. The Company
recognized an impairment on these transactions of approximately $2.6 million
reflected in "Impairments and other charges related to real estate assets" to
reflect fair value of the Company's 50% equity investment. Simultaneously with
the admission of Westbrook into Manalapan, the secured loan of $65.2 million was
repaid with proceeds from a new secured loan of $56.0 million from Corus Bank
and additional equity contributions from Westbrook and the Company. Westbrook's
total equity contribution into Manalapan was $13.6 million. The Corus Bank loan
carries an interest rate of LIBOR plus 400 basis points with an initial
three-year term and two one-year extension options. The Company and Westbrook
each obtained a letter of credit to guarantee up to $3.0 million of the Corus
Bank loan. The Company does not control the joint venture , and therefore, this
property is reflected as an unconsolidated investment in the Resort/Hotel
Segment. Manalapan leases the Ritz Carlton Palm Beach to its wholly-owned
taxable REIT subsidiary.

CONSOLIDATED - 2002 TRANSACTION

Sonoma Mission Inn & Spa

On September 1, 2002, the Company entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts, Inc. (the subsidiary
is referred to as "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 hold the remaining
80.1% equity 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 loaned $45.1 million to the joint venture at an interest
rate of LIBOR plus 300 basis points. The maturity date of the loan is the
earlier of the date on which third-party financing is

115

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

obtained, or one year. The joint venture has the option to extend the Company's
$45.1 million loan for two successive six-month periods by paying a fee. The
Company manages the limited liability company that owns the Sonoma Mission Inn &
Spa, and FHR operates and manages the Property for the tenant under the Fairmont
brand. FHR has a commitment to fund $10.0 million of future renovations at
Sonoma Mission Inn & Spa through a mezzanine loan. The joint venture transaction
was accounted for as a partial sale of this Resort/Hotel Property, resulting in
a loss to the Company of approximately $4.0 million on the interest sold. The
joint venture leases Sonoma Mission Inn & Spa to a taxable REIT subsidiary in
which the Company also holds an 80.1% equity interest.

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

UNCONSOLIDATED - 2002 TRANSACTION

Vornado Crescent Carthage and KC Quarry, L.L.C.

On December 30, 2002, the Company contributed $11.2 million of notes
receivable to purchase a 56% equity interest in Vornado Crescent Carthage and KC
Quarry, L.L.C. ("VCQ"). Vornado Realty Trust L.P. ("Vornado") contributed $8.8
million of cash to purchase a 44% equity interest. The assets of VCQ include two
quarries and the related land, acquired by VCQ from AmeriCold Logistics LLC
("AmeriCold Logistics"), the tenant of the Company's Temperature-Controlled
Logistics Properties, for a purchase price of $20.0 million. The purchase price
was determined to be fair market value based on an independent appraisal. The
Company's $11.2 million contribution consisted of three notes receivable from
AmeriCold Logistics plus accrued interest, one for $2.0 million, one for $3.5
million, and one originally for $6.5 million including principal and interest,
but which was paid down to approximately $5.5 million prior to transaction date.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables from
AmeriCold Logistics at a 2% discount. The Company contributed approximately $3.1
million to VCQ for the purchase of the receivables. The Company accounts for
this investment as an unconsolidated equity investment because the Company does
not control the joint ventures.

8. TEMPERATURE-CONTROLLED LOGISTICS

As of December 31, 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 AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See Note 23,
"COPI," for information on the proposed acquisition of COPI's 40% interest in
AmeriCold Logistics by a new entity to be owned by the Company's shareholders.

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
a maximum of $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 the first quarter of 2000, AmeriCold Logistics started to
experience a slowing in revenue growth from the previous year, primarily due to
customers focusing more on inventory management in an effort to improve
operating performance. Starting in 2000 and continuing throughout 2001 and 2002,
consolidation among retail and food service channels significantly limited the
ability of manufacturers to pass along cost increases by raising prices. As a
result, manufacturers focused on supply chain cost reduction initiative in an
effort to improve operating performance. In the second and third quarters of
2000, AmeriCold Logistics deferred a portion of its rent payments in accordance
with the terms of the leases of the Temperature-Controlled Logistics Properties.
For the three months ended June 30, 2000, the

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Temperature-Controlled Logistics Corporation recorded a valuation allowance for
a portion of the rent that had been deferred during that period. For the three
months ended September 30, 2000, the Temperature-Controlled Logistics
Corporation recorded a valuation allowance for 100% of the rent that had been
deferred during the quarter and has continued to record a valuation allowance
for 100% of the deferred rent thereafter. These valuation allowances resulted in
a decrease in the equity in net income of the Company in the
Temperature-Controlled Logistics Corporation. The Temperature-Controlled
Logistics Corporation had not recorded a valuation allowance with respect to
rent deferred by AmeriCold Logistics prior to the three months ended June 30,
2000, because the financial condition of AmeriCold Logistics prior to that time
did not indicate the inability of AmeriCold Logistics ultimately to make the
full rent payments. As a result of continuing net losses and the increased
amount of deferred rent, the Temperature-Controlled Logistics Corporation
determined that the collection of additional deferred rent was doubtful.

In December 2001, the Temperature-Controlled Logistics Corporation
waived its right to collect $39.8 million of deferred rent, the Company's share
of which was $15.9 million. 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
years ended December 31, 2001 and 2002; 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 $32.2 million of the total $143.9
million of rent payable for the year ended December 31, 2002, of which the
Company's share of deferred rent was $12.9 million.

The following table shows the total and the Company's portion of
deferred rent, valuation allowance and waived rent for the years ended December
31, 2002 and 2001:

As of December 31, 2002, the Company also held a 56% interest in
Vornado Crescent Carthage and KC Quarry, L.L.C. See Note 9, "Joint Ventures -
Temperature-Controlled Logistics Segment," for additional information regarding
this investment.

9. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES

The Company has investments of 20% to 50% in seven unconsolidated joint
ventures that own seven Office Properties. The Company does not have control of
these joint ventures, and therefore, these investments are accounted for using
the equity method of accounting.

The Company has other unconsolidated equity investments with interests
ranging from 30% to 97.4%. The Company does not have control of these
investments due to ownership interests of 50% or less or the ownership of
non-voting interests only, and therefore, these investments also are accounted
for using the equity method of accounting.

117

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments as of December 31, 2002.

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

(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 pension fund advised by JP Morgan Investment Management, Inc.

(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.

(4) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Park Office Limited Partnership
and Houston PT Four Westlake Park Office Limited Partnership is owned
by an affiliate of General Electric Pension Fund.

(5) The remaining 70% interest in Crescent Five Post Oak Park, L.P. is
owned by an affiliate of General Electric Pension Fund.

(6) The remaining 6.0% interest in Mira Vista Development Corp. ("MVDC"),
which represents 100% of the voting stock, was owned 4.0% by DBL
Holdings, Inc. ("DBL") and 2.0% by a third party. On January 3, 2003,
the Company purchased the remaining economic interest representing all
of the voting stock, in DBL. As a result, the Company will consolidate
the operations of MVDC beginning on January 3, 2003. See Note 26,
"Subsequent Events," for additional information regarding the Company's
purchase of the DBL interest.

(7) The remaining 6.0% interest in Houston Area Development Corp. ("HADC"),
which represents 100% of the voting stock, was owned 4.0% by DBL and
2.0% by a third party. On January 3, 2003, the Company purchased the
remaining economic interest, representing all of the voting stock in
DBL. As a result, the Company will consolidate the operations of HADC
beginning on January 3, 2003. See Note 26, "Subsequent Events," for
additional information regarding the Company's purchase of the DBL
interest.

(8) 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 DMDC,
TWLC and CRDI and in CRL Investments, Inc. ("CRLI"). As a result, the
Company fully consolidated the operations of these entities beginning
on the date of the asset transfers. The Woodlands Land Development
Company, L.P. is an unconsolidated equity investment of TWLC. Blue
River Land Company, L.L.C. is an unconsolidated equity investment of
CRDI.

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

(10) Distributions are made to partners based on specified payout
percentages. During the year ended December 31, 2002, the payout
percentage to the Company was 52.5%.

(11) The remaining 66.8% interest in Blue River Land Company, L.L.C. is
owned by parties unrelated to the Company.

(12) Prior to October 2002, Manalapan was an unconsolidated investment of
the Company in which CRDI held a 25% equity interest. In October 2002,
in a series of transactions, the Company acquired the remaining 75%
interest in Manalapan. Subsequent to that transaction, the Company
entered into a joint venture agreement with Westbrook pursuant to which
Westbrook purchased a 50% equity interest in Manalapan. As a result of
these transactions, Manalapan is an unconsolidated investment of the
Company.

(13) The remaining 60% interest in the Vorando Crescent Portland Partnership
is owned by Vornado Realty Trust, L.P.

(14) The remaining 44% in Vorando Crescent Carthage and KC Quarry, L.L.C.
Partnership is owned by Vorando Realty Trust, L.P.

118

(15) John Goff, Vice-Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company, obtained the remaining 2.6% economic
interest in DBL (including 100% of the voting interest in DBL) in
exchange for his voting interests in MVDC and HADC, originally valued
at approximately $0.4 million, and approximately $0.01 million in cash,
or total consideration valued at approximately $0.4 million. At
December 31, 2002, Mr. Goff's book value in DBL was approximately $0.4
million. On January 3, 2003, the Company purchased the remaining
economic interest, representing all of the voting stock, in DBL. See
Note 26, "Subsequent Events," for additional information regarding the
Company's purchase of the DBL interest.

(16) 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.

(17) 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.

(18) 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 70.5% 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 December 31, 2002
was $7.8 million.

IMPAIRMENTS OF UNCONSOLIDATED INVESTMENTS

CR LICENSE, L.L.C. AND CRL INVESTMENTS, INC.

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 1.5% interest in CR License, L.L.C. and 5.0%
interest, representing all of the voting stock, in CRL Investments, Inc. As of
December 31, 2002, the Company had a 30% interest in CR License, L.L.C., the
entity which owns the right to the future use of the "Canyon Ranch" name. In
addition, as of December 31, 2002, the Company had a 100% interest in CRL
Investments, Inc., which owns an approximately 65% economic interest in the
Canyon Ranch Spa Club in the Venetian Hotel in Las Vegas, Nevada ("Canyon Ranch
Las Vegas"). The Company evaluated its investment in Canyon Ranch Las Vegas and
determined that an impairment charge was warranted. Accordingly, a $9.6 million
impairment charge was recognized and reflected in the Company's Consolidated
Statements of Operations in "Impairment and Other Charges related to Real Estate
Assets."

DBL-CBO, INC.

In 1999, DBL-CBO, Inc., a wholly-owned subsidiary of DBL Holdings,
Inc., acquired an aggregate of $6.0 million in principal amount of Class C-1
Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Islands limited liability
company. Juniper 1999-1 Class C-1 is the privately-placed equity interest of a
collateralized bond obligation. During the year ended December 31, 2002, the
Company recognized a charge related to this investment of $5.2 million reflected
in "Equity in net income (loss) of unconsolidated companies, other" in the
Company's Consolidated Statements of Operations. As a result of this impairment
charge, at December 31, 2002 this investment was valued at $0.

METROPOLITAN PARTNERS, LLC

On May 24, 2001, the Company converted its $85.0 million preferred
member interest in Metropolitan Partners, LLC ("Metropolitan") into
approximately $75.0 million of common stock of Reckson Associates Realty Corp.
("Reckson"), resulting in an impairment charge, including deferred acquisition
costs of $1.9 million, of approximately $11.9 million reflected in "Impairments
and Other Charges Related to Real Estate Assets" in the Company's Consolidated
Statements of Operations. The Company subsequently sold the Reckson common stock
on August 17, 2001 for approximately $78.6 million, resulting in a gain of
approximately $3.6 million. The proceeds were used to pay down the Company's
credit facility.

OTHER

During the years ended December 31, 2001 and 2000, the Company
recognized impairment losses of $5.0 million and $8.5 million, respectively,
which were included in "Impairment and Other Charges Related to Real Estate
Assets" related to the Company's investment in a fund that primarily held real
estate investments and marketable securities.

119

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 years ended December 31, 2001 and
2000 are consolidated in the December 31, 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 December 31, 2002:

o The Woodlands Land Development Company, L.P. - 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;

o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;

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

o Other - This includes DBL Holdings, Inc., CR License, L.L.C., Woodlands
Operating Company, L.P., Canyon Ranch Las Vegas, and SunTX Fulcrum
Fund, L.P.

Balance Sheets as of December 31, 2001:

o The Woodlands Land Company, Inc. - This Residential Development
Corporation was consolidated beginning February 14, 2002 as a result of
the COPI transaction. TWLC and its unconsolidated subsidiary, WLDC, are
included under TWLC in the following Balance Sheet;

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, are included under CRDI in the
following Balance Sheet;

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

o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership; and

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

Summary Statement of Operations for the year ended December 31, 2002:

o The Woodlands Land Development Company, L.P. - This includes WLDC's
operating results for the period February 15 through December 31, 2002
and TWLC operating results for the period January 1 through February
14, 2002. WLDC 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 December 31, 2002,
and the operating results of MVDC and HADC for the year ended December
31, 2002;

o Resort/Hotel - This includes the Company's 50% interest in Manalapan
from October 22, 2002 through December 31, 2002. Prior to October 22,
2002, CRDI held a 25% interest in Manalapan, which is included in
"Other Residential Development Corporations;"

o Temperature-Controlled Logistics - This includes the operating results
for the Temperature-Controlled Logistics Partnership and VCQ. VCQ
results are included for one day only due to purchase on December 30,
2002;

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

o Office - This includes the operating results for Main Street Partners,
L.P., Houston PT Three Westlake Park Office Limited Partnership,
Houston PT Four Westlake Park Office Limited Partnership, Austin PT BK
One Tower Office Limited Partnership, Crescent 5 Houston Center, L.P.,
Crescent Miami Center L.L.C., Crescent Five Post Oak Park, L.P. and
Woodlands CPC; and

o Other - This includes DBL Holdings, Inc., CR License, L.L.C., Woodlands
Operating Company, L.P., Canyon Ranch Las Vegas, and SunTX Fulcrum
Fund, L.P.

Summary Statement of Operations for the year ended December 31, 2001:

o Crescent Resort Development, Inc.- This includes the operating results
of CRDI;

o The Woodlands Land Company, Inc. - This includes the operating results
of TWLC and WLDC;

o Other Residential Development Corporations - This includes the
operating results of DMDC, MVDC and HADC;

o Temperature-Controlled Logistics - This includes the operating results
for the Temperature-Controlled Logistics Partnership; and

o Office - This includes the operating results for Main Street Partners,
5 Houston Center, Houston PT Four Westlake Park Office Limited
Partnership, Austin PT Bank One Tower Office Limited Partnership and
Woodlands CPC.

Summary Statement of Operations for the year ended December 31, 2000:

o Desert Mountain Development Corporation - This includes the operating
results of DMDC;

o Crescent Resort Development, Inc.- This includes the operating results
of CRDI;

o The Woodlands Land Company, Inc. - This includes the operating results
of TWLC and WLDC;

o Other Residential Development Corporations - This includes the
operating results of MVDC and HADC;

o Temperature-Controlled Logistics - This includes the operating results
for the Temperature-Controlled Logistics Partnership; and

o Office - This includes the operating results for Main Street Partners,
5 Houston Center and Woodlands CPC.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BALANCE SHEETS:

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, Miami
Center, which was contributed by the Company to a joint venture on
September 25, 2002, and Five Post Oak Park, which was acquired by the
Company in a joint venture transaction on December 20, 2002.
Information is included from the date of contribution of Three Westlake
Park and Miami Center and acquisition of Five Post Oak Park.

(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 in the accompanying financial statements as
a cumulative effect of a change in accounting principle.

(4) Includes impairment of DBL-CBO of $5.2 million.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BALANCE SHEETS:

SUMMARY STATEMENT OF OPERATIONS:

- ----------
(1) This column includes information for Four Westlake Park and Bank One
Tower, which were contributed by the Company to joint ventures on July
30, 2001. Information for both of the properties is included from the
date of contribution.

(2) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:

- ----------
(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).

124

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of December 31, 2002 are shown below.

- ----------

(1) The Temperature-Controlled Logistics Corporation expects to repay this
note on the Optional Prepayment Date of April 11, 2008. The overall
weighted average maturity would be 4.21 years based on this date.

(2) Senior Note - Note A: $83.6 million at variable interest rate, LIBOR +
189, $4.9 million at variable interest rate, LIBOR + 250 basis points
with a LIBOR floor of 2.50%. Note B: $24.6 million at variable interest
rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%. Mezzanine
Note - $19.7 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 based on a 25-year
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 provides a full and unconditional guarantee of this loan
for the construction of 5 Houston Center. At December 31, 2002, $63.0
million was outstanding.

(6) Woodlands CPC and WLDC entered into an interest rate swap which limits
interest rate exposure on the $50.0 million notional amount effectively
fixing the interest rate at 2.355%.

(7) Woodlands CPC and WLDC entered into an Interest Rate Cap Agreement
which limits interest rate exposure on the notional amount of $33.8
million to a maximum LIBOR rate of 9.0%.

(8) 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, TWLC is fully consolidated. This
schedule reflects its 42.5% interest in WLDC debt.

(9) Woodlands CPC entered into an Interest Rate Cap Agreement limits
interest rate exposure on the notional amount of $19.5 million to a
maximum LIBOR rate of 8.5%.

(10) The Company obtained a Letter of Credit to guarantee up to $3.0 million
of this facility.

125

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows, as of December 31, 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 4.21 years assuming the election of extension options on debt
instruments and expected repayment of a note on the optional prepayment
date.

Listed below is the Company's share of aggregate principal payments, by
year, required as of December 31, 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 extension options.

10. OTHER ASSETS, NET

126

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

The following is a summary of the Company's debt financing at December
31, 2002 and 2001:

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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(1) The outstanding balance of this note at maturity will be approximately
$224.1 million.

(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 $221.7
million.

(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
December 31, 2002, the interest rate was 5.147%), and (ii) 600 basis
points for the Mezzanine note (at December 31, 2002, the interest rate
was 9.5%). The blended rate at December 31, 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. The
Fleet-Mezzanine note is 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 $177.8 million.

(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 $154.5 million.

(6) The extension was entered into to allow additional time to complete an
extension of the loan and the amendment of the loan terms.

(7) The outstanding principal balance of this loan at maturity will be
approximately $36.1 million.

(8) This facility is a $50.0 million 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
$40.0 million and is subject to certain borrowing base limitations and
bears interest at Prime (at December 31, 2002, the interest rate was
4.25%). The warehouse facility bears interest at Prime plus 100 basis
points (at December 31, 2002, the interest rate was 5.25%) and is
limited to $10.0 million. The blended rate at December 31, 2002 for the
vertical facility and club loan and the warehouse facility was 4.46%.

128

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(9) The outstanding principal balance of this loan at maturity will be
approximately $8.2 million.

(10) 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 approximately $6.1 million.

(11) The Company repaid this note in full in November 2002.

(12) For a description of 2009 Notes see "Debt Offering" section below.

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

(14) The balance of this debt was repaid on its due date with funds from the
Company's credit facility.

(15) The $400.0 million 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,
and specific mix of office and hotel assets and average occupancy of
Office Properties. At December 31, 2002, the maximum borrowing capacity
under the credit facility was approximately $400.0 million. The
outstanding balance excludes letters of credit issued under the
Company's credit facility of $15.2 million which reduce the Company's
maximum borrowing capacity.

(16) At December 31, 2001, short-term borrowings include the unsecured JP
Morgan Loan Sales Facility, a $50.0 million credit facility, and the
$50.0 million unsecured Fleet Bridge Loan. The lender under the JP
Morgan Loan Sales Facility is not required to fund draws under the loan
unless certain conditions not within the control of the Company are
met. As a result, the Company maintains sufficient availability under
the Credit Facility to repay the JP Morgan Loan Sales Facility at any
time. At December 31, 2002, the Company's $50.0 million unsecured
credit facility with JP Morgan is available, but there is no
outstanding balance.

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 payoff dates.

- ----------

(1) Including the $509.3 million of hedged variable rate debt, the
percentages for fixed rate debt and variable rate debt are 90% and 10%,
respectively.

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

(3) Based on contractual maturities. The overall weighted average maturity
is 3.89 years based on the Company's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of December 31, 2002 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.

- ----------

(1) These amounts do not reflect 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 plans to meet its maturing debt obligations through
December 31, 2003 of approximately $125.5 million, primarily through refinancing
of the $63.5 million Cigna Note, cash from operations and return of capital from
the Residential Development Segment, construction loan refinancings and
additional borrowings under the Company's credit facility.

Any uncured or unwaived events of default under 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

129

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 December 31, 2002, no event of
default had occurred, and the Company was in compliance with all of its debt
service coverage ratios and other covenants related to its outstanding debt.
The Company's debt facilities generally prohibit loan pre-payment for an
initial period, allow pre-payment with a penalty during a following specified
period and allow pre-payment without penalty after the expiration of that
period. During the year ended December 31, 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);
Spectrum Center (Spectrum Center Partners, L.P., Spectrum Mortgage Associates,
L. P., CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management,
LLC), and Crescent Finance Company.

DEBT REFINANCING AND FLEET FACILITY

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

New Debt Resulting from Refinancing:

- ----------

(1) The $400.0 million Fleet Facility is an unsecured revolving line of
credit.

(2) One-year extension option.

(3) Two one-year extension options.

130

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Repaid or Modified and Replaced by Refinancing:

- ----------

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

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375.0
million in senior, unsecured notes due in 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 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 $366.5
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 preferred Class A Units in Funding IX from
GMACCM. See Note 19, "Sale of Preferred Equity Interests in Subsidiary," for a
description of the Class A Units in Funding IX previously held by GMACCM.

131

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 struck at 7.16% for a
notional amount of $220.0 million, and simultaneously sold a LIBOR interest rate
cap with the same terms. Since these instruments do not reduce the Company's net
interest rate risk exposure, they do not qualify as hedges and changes to their
respective fair values are charged to earnings as the 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.

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 December 31, 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."

132

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows information regarding the Company's cash flow
hedge agreements in place as of December 31, 2002, and additional interest
expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI") for the year ended December 31, 2002.

- ----------

(1) For the year ended December 31, 2002, the Company entered into
agreements for three additional cash flow hedges that will be issued in
2003, and will replace two of 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 re-prices 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 12 months, an estimated $17.7 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. During 2002, CRDI had entered into three cash flow hedge agreements,
which are accounted for in conformity with SFAS Nos. 133 and 138.

133

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows information regarding CRDI's cash flow hedge
agreements during 2002 and additional capitalized interest thereon as of that
date. 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. Also presented are the unrealized gains in Other
Comprehensive Income for the year ended December 31, 2002.

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. RENTALS UNDER OPERATING LEASES

As of December 31, 2002, the Company received rental income from the
lessees of 66 consolidated Office Properties and one Resort/Hotel Property under
operating leases.

On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which the Company acquired, in lieu of foreclosure, COPI's lessee
interests in the eight Resort/Hotel Properties previously leased to COPI.
Therefore, the Company stopped recognizing rental income from operating leases
for these Resort/Hotel Properties on February 14, 2002. The lease of the one
Resort/Hotel Property for which the Company continues to recognize rental income
under an operating lease provides for percentage rent. For the years ended
December 31, 2002, 2001 and 2000, the percentage rent amounts for the one
Resort/Hotel Property were $4.7 million, $4.9 million and $6.0 million,
respectively.

In general, Office Property leases provide for the payment of fixed
base rents and the reimbursement by the tenant to the Company of annual
increases in operating expenses in excess of base year operating expenses. The
excess operating expense amounts totaled $89.6 million, $98.8 million and $91.7
million, for the years ended December 31, 2002, 2001 and 2000, respectively.
These excess operating expenses are generally payable in equal installments
throughout the year, based on estimated increases, with any differences adjusted
at year end based upon actual expenses.

For non-cancelable operating leases for wholly-owned and joint venture
consolidated Office Properties owned as of December 31, 2002, future minimum
rentals (base rents) during the next five years and thereafter (excluding tenant
reimbursements of operating expenses for Office Properties) are as follows:

See Note 2, "Summary of Significant Accounting Policies," for
discussion of revenue recognition.

134

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. COMMITMENTS, CONTINGENCIES AND LITIGATION

COMMITMENTS

Lease Commitments

The Company has 13 wholly-owned Properties located on land that is
subject to long-term ground leases, which expire between 2015 and 2080. The
Company also leases parking spaces in a parking garage adjacent to one of its
Properties pursuant to a lease expiring in 2021. Lease expense associated with
these leases during each of the three years ended December 31, 2002, 2001, and
2000 was $2.7 million, $2.8 million and $2.9 million, respectively. Future
minimum lease payments due under such leases as of December 31, 2002, are as
follows:

Guarantee Commitments

The Financial Standards Accounting Board ("FASB"), issued
Interpretation 45 requiring a guarantor to disclose its guarantees. See also
Note 2, "Summary of Significant Accounting Policies - FASB Interpretation 45."
The Company's guarantees in place as of December 31, 2002 are listed in the
table below. No triggering events or conditions are anticipated to occur that
would require payment under the guarantees and the Company's collateral
supporting the loans which are guaranteed is sufficient to cover the maximum
potential amount of future payments and therefore, would not require the Company
to provide additional collateral to support the guarantees.

- ----------

(1) See Note 9, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Unconsolidated Debt Analysis," for a
description of the terms of this debt.

(2) The Company provides a full guarantee of principal up to $82.5 million
for the construction loan on 5 Houston Center, which was completed in
2002. The guarantee amount reduces to $41.3 million upon achievement of
specified conditions, including specified tenants occupying space and
obtaining a certificate of occupancy; further reduction to $20.6
million upon achievement of 90% occupancy and 1.3x debt service
coverage.

(3) The Company provides a $15.2 million Letter of Credit to support the
payment of interest and principal of the Eagle Ranch Metropolitan
District Revenue Development Bonds and Limited Tax Bonds.

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

(5) The Company provides a $3.0 million Letter of Credit to guarantee
repayment of up to $3.0 million of principal of the Manalapan Hotel
Partners, L.L.C. joint venture debt with Corus Bank.

135

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COPI COMMITMENTS

See Note 23, "COPI," for a description of the Company's commitments
related to the agreement with COPI, executed on February 14, 2002.

CONTINGENCIES

Environmental Matters

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

LITIGATION

The Company is involved from time to time in various claims and legal
actions in the ordinary course of business. Management does not believe that the
impact of such matters will have a material adverse effect on the Company's
financial position or results of operations when resolved.

During the year ended December 31, 2002, the Company received a $4.5
million litigation settlement fee, which is recorded in "Other Income" on the
Company's Consolidated Statements of Operations. In connection with the same
litigation, the Company incurred $2.6 million of legal fees, which is included
in "Other Expenses."

16. STOCK AND UNIT BASED COMPENSATION

Stock Option Plans

Crescent Equities has two stock incentive plans, the 1995 Stock
Incentive Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994
Plan"). Due to the approval of the 1995 Plan, additional options and restricted
shares will no longer be granted under the 1994 Plan. Under the 1994 Plan,
Crescent Equities had granted, net of forfeitures, 2,509,800 options which are
fully vested and no restricted shares. The maximum number of options and/or
restricted shares that Crescent Equities was able to initially grant at
inception under the 1995 Plan was 2,850,000 shares. The maximum aggregate number
of shares available for grant under the 1995 Plan increases automatically on
January 1 of each year by an amount equal to 8.5% of the increase in the number
of common shares and units outstanding since January 1 of the preceding year,
subject to certain adjustment provisions. As of January 1, 2002, the number of
shares Crescent Equities may issue under the 1995 Plan is 9,677,794. Under the
1995 Plan, Crescent Equities had issued shares on the exercise of options and
restricted shares (net of forfeitures) of 1,939,816 and 323,718 respectively,
through December 31, 2002. In addition, under the 1995 Plan Crescent Equities
had granted, net of forfeitures, unexercised options to purchase 7,393,584
shares as of February 14, 2003. Under both Plans, options are granted at a price
not less than the market value of the shares on the date of grant and expire ten
years from the date of grant. The options that have been granted under the 1995
Plan vest over five years, with the exception of 500,000 options that vest over
two years, 250,000 options that vest over three and a half years and 60,000
options that vest six months from the initial date of grant.

136

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTIONS PLANS

A summary of the status of Crescent Equities' 1994 and 1995 Plans as of
December 31, 2002, 2001 and 2000 and changes during the years then ended is
presented in the table below.

137

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about the options
outstanding and exercisable at December 31, 2002.

Effective February 19, 2002, John Goff, Vice-Chairman of the Board of
Trust Managers and Chief Executive Officer of the Company, was granted the right
to earn 300,000 restricted shares under the 1995 Plan. These shares vest at
100,000 shares per year on February 19, 2005, February 19, 2006 and February 19,
2007.

Unit Plans

The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not
trust managers, officers or 10% shareholders of the Company. An aggregate of
100,000 common shares are reserved for issuance upon the exchange of 50,000
units available for issuance to employees and advisors under the 1995 Unit Plan.
As of December 31, 2002, an aggregate of 7,012 units had been distributed under
the 1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of
options. There was no activity in the 1995 Unit Plan in 2002, 2001 or 2000. The
1996 Unit Plan provides for the grant of options to acquire up to 2,000,000
units. Through December 31, 2002, the Operating Partnership had granted, net of
forfeitures, options to acquire 2,000,000 units. Forfeited options are available
for grant. The unit options granted under the 1996 Unit Plan were priced at fair
market value on the date of grant, generally vest over seven years, and expire
ten years from the date of grant. Pursuant to the terms of the unit options
granted under the 1996 Unit Plan, because the fair market value of the Company's
common shares equaled or exceeded $25.00 for each of ten consecutive trading
days, the vesting of an aggregate of 500,000 units was accelerated and such
units became immediately exercisable in 1996. In addition, 100,000 unit options
vest 50% after three years and 50% after five years. Under the 1996 Unit Plan,
each unit that may be purchased is exchangeable, as a result of shareholder
approval in June 1997, for two common shares or, at the option of the Company,
an equivalent amount of cash.

A summary of the status of the Company's 1996 Unit Plan as of December
31, 2002, 2001 and 2000, and changes during the years then ended is presented in
the table below (assumes each unit is exchanged for two common shares).

1996 UNIT INCENTIVE OPTION PLAN

138

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNIT OPTIONS GRANTED UNDER OPERATING PARTNERSHIP AGREEMENT

On March 5, 2001, the Operating Partnership granted options to acquire
150,000 units to Dennis H. Alberts, in connection with his employment as the
Chief Operating Officer of the General Partner and the Company. The 300,000
common share equivalents were priced at $21.84 per share, which equals the fair
market value of the Company's common shares at the date of grant. The unit
options vest over five years.

On February 19, 2002, the Operating Partnership granted options to
acquire 2,528,571 units to Executive Officers of the Company, as part of an
overall long-term compensation plan. The 5,057,142 common shares equivalents
were priced at $17.51 per share, which equals the fair market value of the
Company's common shares at the date of grant. The unit options vest over five
years.

STOCK OPTION AND UNIT PLANS

On January 1, 2003, the Company will adopt the expense recognition
provisions of SFAS No. 123, "Accounting for Stock Based Compensation." The
Company will value stock and unit options issued using the Black-Scholes
option-pricing model and recognize this value as an expense over the period in
which the options vest. Under this standard, recognition of expense for stock
options is applied to all options granted after the beginning of the year of
adoption.

Prior to January 1, 2003, the Company followed the intrinsic method set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees."
Accordingly, no stock or unit based compensation expense was recognized for the
years ended December 31, 2002, 2001 or 2000. The adoption of SFAS No. 123 is
prospective and the 2003 expense will relate only to stock options granted in
2003. Had compensation cost for the Plans been determined based on the fair
value at the grant dates for awards under the Plans, consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:

At December 31, 2002, 2001 and 2000, the weighted average fair value of
options granted was $1.40, $1.83 and $2.46, respectively. The fair value of each
option is estimated at the date of grant using the Black-Scholes option-pricing
model using the following expected weighted average assumptions in the
calculation.

139

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. MINORITY INTEREST

Minority interest in the Operating Partnership represents the
proportionate share of the equity in the Operating Partnership of limited
partners other than the Company. The ownership share of limited partners other
than the Company is evidenced by Operating Partnership units. The Operating
Partnership pays a regular quarterly distribution to the holders of Operating
Partnership units.

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 year ended December 31, 2002, there were
119,079 units exchanged for 238,158 common shares of Crescent Equities.

Richard E. Rainwater, Chairman of the Board of Trust Managers of the
Company, contributed an aggregate of 4,805,800 common shares to the Operating
Partnership in exchange for an aggregate of 2,402,900 units. See Note 21,
"Related Party Transactions - Share and Unit Exchange by Chairman," for
additional information on this transaction. As a result of these transactions,
minority interest increased by $71.3 million and shareholders' equity decreased
by $71.3 million in the Company's Consolidated Financial Statements.

Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Company holds a controlling interest in the real estate
partnerships and consolidates the real estate partnerships into the financial
statements of the Company. Income in the real estate partnerships is allocated
to minority interest based on weighted average percentage ownership during the
year.

The following table summarizes the minority interest liability as of
December 31, 2002 and 2001:

(1) Not consolidated in 2001.

The following table summarizes the minority interests' share of net
income for the years ended December 31, 2002, 2001 and 2000:

(1) Not consolidated in 2001 or 2000.

140

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. SHAREHOLDERS' EQUITY

EMPLOYEE STOCK PURCHASE PLAN

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

Effective January 1, 2003, the Company adopted the expense recognition
provisions of SFAS No. 123 on a prospective basis. See Note 2, "Summary of
Significant Accounting Policies," for more information on this accounting
pronouncement. Unlike the accounting treatment under APB No. 25, under SFAS No.
123, the Company will be required to record the stock purchase discount provided
to employees as compensation expense in the Company's Consolidated Statements of
Operations.

The 1,000,000 common shares that may be issued pursuant to the purchase
of common shares under the ESPP represent less than 1.0% of the Company's
outstanding common shares at December 31, 2002.

SHARE REPURCHASE PROGRAM

The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500.0
million to $800.0 million the amount of outstanding common shares that can be
repurchased from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program"). As of December 31, 2002, the
Company had repurchased 20,256,423 common shares, under the share repurchase
program at an aggregate cost of approximately $386.9 million, resulting in an
average repurchase price of $19.10 per common share. All repurchased shares were
recorded as treasury shares.

The following table shows a summary of the Company's common share
repurchases by year, as of December 31:

- ----------
(1) Additionally, 17,890 of the Company's common shares were repurchased
outside of the Share Repurchase Program as part of an executive incentive
program.

(2) The Company contributed 11,354 common shares to the Company's scholarship
fund during the year ended December 31, 2002. These shares were issued out
of Treasury Shares.

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.

141

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 and
are not subject to sinking fund or mandatory redemption. On or after February
18, 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. See
Note 19, "Sale of Preferred Equity Interests in Subsidiary," for a description
of the Class A Units.

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 Series B Cumulative
Redeemable Preferred Shares (the "Series B Preferred Shares") with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of
approximately $75.0 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 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.

SHARE REPURCHASE AGREEMENT

On November 19, 1999, the Company entered into an agreement (the "Share
Repurchase Agreement") with UBS to purchase a portion of its common shares from
UBS. The Company had the option to settle the Share Repurchase Agreement in cash
or common shares. During the year ended December 31, 2000, the Company purchased
5,809,180 common shares from UBS at an average cost of $17.62 per common share
for an aggregate of approximately $102.3 million under the Share Repurchase
Agreement with UBS.

The Share Repurchase Agreement was accounted for under EITF 96-13 and
was considered an equity instrument similar to a preferred stock instrument with
a cumulative fixed dividend, the forward accretion component or guaranteed
return to UBS was accounted for like a preferred dividend. Additionally, the
common shares actually issued and outstanding were considered in both the basic
and diluted weighted-average shares calculations. The diluted EPS calculation
also included any contingently issuable common shares.

142

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has no further obligation under the Share Repurchase
Agreement. The purchases were funded primarily through the sale of Class A Units
in Funding IX. See Note 19, "Sale of Preferred Equity Interest in Subsidiary."

DISTRIBUTIONS

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

The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders for the year ended
December 31, 2002 (dollars in thousands, except per share amounts).

(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.

The distributions to common shareholders and unitholders paid during
the years ended December 31, 2002, 2001 and 2000, were $192.7 million, $274.4
million, and $298.5 million, respectively. These distributions represented an
annualized distribution of $1.50, $2.025 and $2.20 per common share and
equivalent unit for the years ended December 31, 2002, 2001, 2000, respectively.
As of December 31, 2001 and 2000, the Company was holding 14,468,623 of its
common shares in its wholly-owned subsidiary, Crescent SH IX, Inc. The
distribution amounts above include $16.3 million, $29.3 million and $17.3
million of distributions for the years ended December 31, 2002, 2001 and 2000,
respectively, which were paid for common shares held by the Company, and which
were eliminated in consolidation.

Distributions to Series A Preferred shareholders for the year ended
December 31, 2002 were $17.0 million, and distributions to Series A Preferred
shareholders for the years ended December 31, 2001 and 2000 were $13.5 million
for each year. The distributions per Series A Preferred share were $1.6875 per
preferred share annualized for each of the three years.

Distributions to Series B Preferred shareholders for the year ended
December 31, 2002 were $4.1 million, or $2.3750 per share annualized.

143

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMON SHARES

Following is the income tax status of distributions paid on common
shares for the years ended December 31, 2002 and 2001:

During 2002, many of the Company's significant capital transactions
resulted in net capital gain income for income tax purposes. The Company has
distributed to its shareholders the net capital gain income as a capital gain
dividend.

PREFERRED SHARES

Following is the income tax status of distributions paid for the years
ended December 31, 2002 and 2001 to preferred shareholders:

19. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY

As of December 31, 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.

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. Also, during the year ended December 31, 2000, GMACCM purchased
$275.0 million of non-voting redeemable Class A units in Funding IX (the "Class
A Units"). The Class A Units in Funding IX were redeemable at the Company's
option at the original price. As of December 31, 2000, the Company had redeemed
approximately $56.6 million of the Class A units in Funding IX from GMACCM.

All of the Class A Units outstanding at December 31, 2000 were redeemed
by Funding IX during the year ended December 31, 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"), a wholly-owned subsidiary of the Company, 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.

144

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. INCOME TAXES

TAXABLE CONSOLIDATED ENTITIES

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. During 2002, the taxable consolidated entities were comprised of the
taxable REIT subsidiaries of the Company.

Significant components of the Company's deferred tax liabilities and
assets are as follows:

In addition to the Net Deferred Tax Assets of approximately $29.5
million at December 31, 2002, the Company has a current tax receivable of $10.2
million comprising the total income tax asset - current and deferred, net on the
Company's Consolidated Balance Sheets.

SFAS No. 109, "Accounting for Income Taxes," requires a valuation
allowance to reduce the deferred tax assets reported if, based on the weight of
the evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined that a $6.9
million valuation allowance at December 31, 2002 is necessary to reduce the
deferred tax assets to the amount that will more likely than not be realized.
The $6.9 million Valuation Allowance for Deferred Tax Assets, includes a
valuation allowance of approximately $3.1 million for the CRL Investments, Inc.
net operating loss carried over into the Company as a result of the COPI
transaction, resulting in a net $3.8 million increase in valuation allowance at
December 31, 2002. The Company has available net operating loss carryforwards of
approximately $6.6 million arising from the operation of the consolidated
taxable REIT subsidiaries. The Company did not record a deferred tax benefit or
expense during the years ended December 31, 2001 and 2000.

145

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated loss subject to tax was $22.0 million for the year ended
December 31, 2002. The reconciliation of (i) income tax attributable to
consolidated loss subject to tax computed at the U.S. statutory rate to (ii)
income tax benefit is shown below:

Income tax payments made by the Company and its taxable REIT
subsidiaries for 2002, were $2.8 million, which reflects the current tax
provision for 2002. The Company's deferred tax benefit for 2002 was $7.7
million.

21. RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC. ("DBL")

As of December 31, 2002, the Company owned 97.44% of DBL, with the
remaining 2.56% economic interest in DBL (representing 100% of the voting
interest in DBL) held by Mr. 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 $0.1 million in cash for his
interest in DBL. See Note 26, "Subsequent Events," for a description of the
purchase of Mr. Goff's interest in DBL by the Company.

DBL has a wholly-owned subsidiary, DBL-ABC, Inc., the assets of which
are described in the following paragraph. DBL directly holds 66% of the voting
stock in MVDC and HADC. At December 31, 2002, Mr. Goff's interest in DBL was
approximately $0.5 million.

Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2 Opportunity Fund, L.P. ("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, L.P. ("GMSP") and
GMACCM. The ownership structure of GMSP consists of an approximately 86% limited
partnership interest owned directly and indirectly by Richard Rainwater,
Chairman of the Board of Trust Managers of the Company, and an approximately 14%
general partnership interest, of which approximately 6% is owned by Darla Moore,
who is married to Mr. Rainwater, and approximately 6% is owned by Mr. Goff. The
remaining approximately 2% general partnership interest is owned by parties
unrelated to the Company. At December 31, 2002, DBL has an approximately $14.1
million investment in G2.

In March 1999, DBL-CBO, Inc., a wholly-owned subsidiary of DBL,
acquired an aggregate of $6.0 million in principal amount of Class C-1 Notes
issued by Juniper CBO 1999-1 Ltd., a Cayman Islands limited liability company.
Juniper 1999 - 1 Class C - 1 is the privately placed equity interest of a
collateralized bond obligation. For the year ended December 31, 2002, the
Company recognized a charge related to this investment of $5.2 million reflected
in "Equity and net income (loss) of unconsolidated companies, and Other." As a
result of this impairment charge, at December 31, 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. ("COPI
Colorado"), the partnership that owned a 10% interest, representing all of the
voting stock, in CRDI. John Goff, Vice Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, owned a 20% interest in COPI
Colorado,, and the remaining 20% interest was owned by a third party. As a
result of this transaction, the Company indirectly owned a 96% interest in CRDI.
John Goff owned a 2% interest in CRDI and the remaining 2% interest was owned by
the third party. The Company fully consolidated the operations of CRDI as of the
date of the asset transfer.

146

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 30, 2002, the Company purchased the 40% interest in COPI
Colorado from Mr. Goff and the third party, bringing the Company's ownership in
COPI Colorado to 100%. The purchase price of the 40% interest in COPI Colorado
was $5.6 million, of which $2.8 million was paid to Mr. Goff. The Board of Trust
Managers of the Company, including all of the independent trust managers,
approved the transaction, based in part on an appraisal of the assets of COPI
Colorado by an independent appraisal firm. Subsequent to the transaction, the
Company dissolved COPI Colorado and contributed its assets, all the voting stock
of CRDI, to Crescent TRS Holdings Corp.

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

As of December 31, 2002, the Company had approximately $37.8 million of
loans outstanding (including approximately $5.3 million loaned during the year
ended December 31, 2002) to certain employees and trust managers of the Company
on a recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company pursuant to the exercise of vested stock and unit options. Pursuant
to the loan agreements, these loans may be repaid in full or in part at any time
without premium or penalty. John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company, had a loan representing
$26.3 million of the $37.8 million total outstanding loans at December 31, 2002.
Approximately $0.19 million of interest was outstanding related to these loans
as of December 31, 2002. No conditions exist at December 31, 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) ("AFR") are determined and published by the IRS based
upon average market yields of specified maturities. On November 1, 2001,
existing loans were amended to reduce the interest rates for their remaining
terms to the Applicable Federal Rates. As a result, the interest rates on loans
with remaining terms of three years or less at November 1, 2001 were reduced to
approximately 2.7% per year and the interest rates on loans with remaining terms
greater than three years as of November 1, 2001 were reduced to approximately
4.07% per year. These amended interest rates reflected below prevailing market
interest rates and, in accordance with GAAP, the Company recorded $750,000 of
compensation expense for the year ended December 31, 2001.

The Company granted additional loans during 2002 through July 29, 2002,
with AFR of 2.70% to 2.81%, which reflects a below prevailing market interest
rates and, in accordance with GAAP, the Company recorded compensation expense.
On July 29, 2002, the loans made pursuant to the Company's stock 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
of additional compensation expense for the year ended December 31, 2002,
recorded in "Other Expenses" in the Company's Consolidated Statements of
Operations. Effective July 29, 2002, the Company ceased offering to its
employees and Trust Managers the option to obtain loans pursuant to the
Company's stock and unit incentive plans.

DEBT OFFERING

On April 15, 2002, the Company completed a private offering of $375.0
million in senior, unsecured notes due in 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 Note 11, "Notes Payable and Borrowings under Credit Facility," for
additional information regarding the offering and the notes.

147

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

SHARE AND UNIT EXCHANGE BY CHAIRMAN

During 2002, the Company and the Operating Partnership agreed that it
was in the best interest of the Company and its shareholders and of the
Operating Partnership and its partners to permit Richard E. Rainwater, Chairman
of the Board of Trust Managers of the Company, to exchange a portion of his
common shares for units of the Operating Partnership so that additional
purchases of common shares by the Company or Mr. Rainwater, or both, would not
cause Mr. Rainwater to violate REIT equity ownership concentration rules and the
Company's limitations on share ownership as set forth in its Declaration of
Trust.

On October 15, 2002, November 14, 2002 and November 20, 2002, Mr.
Rainwater contributed 3,050,000, 700,800 and 1,055,000, respectively, of his
common shares to the Operating Partnership in exchange for 1,525,000, 350,400
and 527,500 units, respectively. Each of the units issued to Mr. Rainwater may
be exchanged for two common shares. The Operating Partnership immediately
contributed the common shares that it received from Mr. Rainwater, in the
aggregate amount of 4,805,000 common shares, to the Company and, as required by
the limited partnership agreement of the Operating Partnership, redeemed a
portion of the Company's limited partner interest in the Operating Partnership
equal in value to the value of the common shares that the Operating Partnership
contributed to the Company. In accordance with the terms of the Operating
Partnership limited partnership agreement, the shares and the interest were
valued at the closing price of the Company's common shares on the New York Stock
Exchange on the date immediately preceding the date of the contributions. The
closing price of the common shares was $14.62 on October 14, 2002, $14.94 on
November 13, 2002 and $15.38 on November 19, 2002. As a result of these
transactions, minority interest increased by $71.3 million and shareholders'
equity decreased by $71.3 million.

On November 20, 2002, the Company received approximately $0.3 million
from Mr. Rainwater as a result of short swing profits realized by Mr. Rainwater
on the sale of 300,000 of the Company's common shares between September 24, 2002
and November 18, 2002. The profit amount was computed pursuant to Section 16(b)
of the Securities Exchange Act of 1934, and was recorded by the Company as a
credit to additional paid-in capital.

148

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

23. 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

149

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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

Also on June 28, 2001, the Company entered into an agreement to make a
$10.0 million investment in Crescent Machinery Company ("Crescent Machinery"), a
wholly-owned subsidiary of COPI. This investment, together with capital from a
third party investment firm, was expected to put Crescent Machinery on solid
financial footing.

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

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

IMPAIRMENT AND OTHER ADJUSTMENTS RELATED TO COPI

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

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

On January 22, 2002, the Company terminated the purchase agreement
pursuant to which the Company would have acquired the lessee interests in the
eight Resort/Hotel Properties leased to subsidiaries of COPI, the voting
interests held by subsidiaries of COPI in three of the Residential Development
Corporations and other assets. On February 4, 2002, the Company terminated the
agreement relating to its planned investment in Crescent Machinery.

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

150

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 12, 2002, the Company delivered default notices to COPI
relating to approximately $49.0 million of unpaid rent and approximately $76.2
million of principal and accrued interest due to the Company under certain
secured loans.

On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, 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 $23.6 million and its debt obligations were reduced
by $40.1 million. These amounts include $18.3 million of value attributed to the
lessee interests transferred by COPI to the Company; however, in conformity with
GAAP, the Company assigned no value to these interests for financial reporting
purposes.

The Company holds the lessee interests in the eight Resort/Hotel
Properties and the voting interests in the three Residential Development
Corporations through three newly organized limited liability companies 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.

The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. Under the Agreement, the Company
has agreed to provide approximately $14.0 million to COPI in the form of cash
and common shares of the Company to fund costs, claims and expenses relating to
the bankruptcy and related transactions, and to provide for the distribution of
the Company's common shares to the COPI stockholders. The Company 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 it 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 any accrued interest. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders of the Company. Crescent Spinco then would purchase COPI's
interest in AmeriCold Logistics for between $15.0 million and $15.5 million.
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.

151

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If the COPI bankruptcy plan is approved by the required vote of the
shares of COPI common stock and approved by 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 Agreement, the current and former directors and
officers of COPI and the current and former trust managers 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 under the COPI
bankruptcy plan.

Completion and effectiveness of the pre-packaged bankruptcy plan 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
confirmation of the plan by the bankruptcy court. A special meeting of the
stockholders of COPI to vote on the proposal to approve the pre-packaged
bankruptcy plan of COPI is scheduled for March 6, 2003. See Note 26, "Subsequent
Events," for information on the COPI stockholder meeting of March 6, 2003.

152

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

153

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

24. BEHAVIORAL HEALTHCARE PROPERTIES

As of December 31, 1999, the behavioral healthcare segment consisted of
88 behavioral healthcare properties in 24 states, all of which were leased to
Charter Behavioral Health Systems LLC ("CBHS") and its subsidiaries under a
triple-net master lease.

On February 16, 2000, CBHS and all of its subsidiaries that were
subject to the master lease with the Company filed voluntary Chapter 11
bankruptcy petitions in the United States Bankruptcy Court for the District of
Delaware.

During the year ended December 31, 2000, payment and treatment of rent
for the behavioral healthcare properties was subject to a rent stipulation
agreed to by certain of the parties involved in the CBHS bankruptcy proceeding.
The Company received approximately $15.4 million in rent and interest from CBHS
during the year ended December 31, 2000, which is included in Interest and Other
Income.

The Company received approximately $6.0 million in repayment of working
capital loan from CBHS during the year ended December 31, 2001, which was
previously written off and is included in Interest and Other Income.

This table presents the dispositions of behavioral healthcare
properties by year including the number of properties sold, net proceeds
received, gains on sales and impairments recognized.

- ----------

(1) The impairment charges represent the differences between the carrying
values and the estimated sales prices less the costs of the sales for
all properties held for sale during the respective year. See Note 5,
"Discontinued Operations - Assets Held for Sale," for discussion of
carrying value and the number of properties remaining to be sold.

Depreciation has not been recognized since the dates the behavioral
healthcare properties were classified as held for sale.

25. BROADBAND

In 2000, the Company made an equity investment in Broadband Office,
Inc. ("Broadband"), a facilities-based provider of broadband data, video and
voice communication services delivered over fiber optic networks, and related
entities. In May 2001, Broadband filed for Chapter 11 bankruptcy protection. The
Company's investment in Broadband was approximately $7.2 million. Yipes
Communications Group, Inc. ("Yipes"), another telecom provider, received
approval from the federal bankruptcy court to acquire certain rights formerly
owned by Broadband. In addition, Yipes executed agreements with nine major real
estate entities, including the Company, to assume telecom licensing agreements,
in modified formats. As part of this transaction, the Company acquired ownership
of certain telecom assets previously owned by Broadband and located within
office properties in consideration for conveyance of its equity interest in
Broadband to Yipes. These telecom assets were independently appraised and valued
in excess of the Company's equity interest in Broadband. As a result, the
Company reclassified its investment in Broadband of approximately $7.2 million
from Other Assets to Building Improvements during the year ended December 31,
2001. Therefore, Broadband's bankruptcy did not have a material effect on the
Company's results of operations for the years ended December 31, 2002 and 2001
or its financial position as of December 31, 2002 and 2001.

154

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

26. SUBSEQUENT EVENTS

On January 3, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL Holdings, Inc. from John
Goff, Vice-Chairman of the Company's Board of Trust Managers. Total
consideration paid for Mr. Goff's interest was $0.4 million. The Board of Trust
Managers of the Company, including all of the independent trust managers,
approved the transaction, based in part on an appraisal of the assets of DBL by
an independent appraisal firm. As a result of this transaction, DBL is
wholly-owned by the Company and will be consolidated. In addition, because DBL
owns a majority of the voting stock in MVDC and HADC, the Company will
consolidate these two Residential Development Corporations in the Residential
Development Segment.

On March 6, 2003, the stockholders of COPI approved a proposed
pre-packaged bankruptcy plan for COPI. On March 10, 2003, COPI filed the plan
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Texas.

155

SCHEDULE III

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(dollars in thousands)

156

157

- ----------

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

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

(2) This Office Property was sold on August 1, 2002.

(3) During the year ended December 31, 2002, The Woodlands Office Equities -
'95 Limited, owned by the Company and the Woodlands Commercial Properties
Company, L.P., sold four of The Woodlands Office Properties.

(4) On September 1, 2002, the Company entered into a joint venture arrangement
with a subsidiary of Fairmont Hotels and Resorts, Inc. for this
Resort/Hotel Property.

(5) On September 30, 2002, the Company sold 30 acres of undeveloped land
adjacent to Canyon Ranch - Tuscon.

(6) On August 21, 2002, the Company entered into joint venture arrangements
with GE for this Office Property.

(7) On September 25, 2002, the Company entered into joint venture arrangements
with JPM for this Office Property.

(8) Depreciation on behavioral healthcare properties held for sale ceased from
11/11/99 through 12/31/02 (the period over which these properties were held
for sale).

(9) This Office Property was sold on January 18, 2002.

(10) This Office Property was sold on September 20, 2002.

(11) The Washington Harbour land was sold on September 30, 2002.

(12) This property was acquired on August 29, 2002.

(13) This amount includes 5.46 acres of undeveloped land near the Houston Center
Hotel, which was sold on December 31, 2002, and 3.12 acres of undeveloped
land located in the Greenway Plaza Office complex, which was sold on
December 31, 2002.

(14) Land and cost capitalized subsequent to acquisition includes property under
development and is net of residential development cost of sales.

158

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

159

COMBINING FINANCIAL STATEMENTS

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Year ended December 31, 2002

160

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Financial Statements

Year ended December 31, 2002

CONTENTS

Report of Independent Auditors.........................................................................161

Audited Combining Financial Statements

Combining Balance Sheet................................................................................162
Combining Statement of Earnings (Loss) and Comprehensive Income (Loss).................................163
Combining Statement of Changes in Partners' Equity (Deficit)...........................................164
Combining Statement of Cash Flows......................................................................165
Notes to Combining Financial Statements................................................................169

161

Report of Independent Auditors

To the Executive Committee
The Woodlands Land Development Company, L.P.
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

We have audited the accompanying individual and combined balance sheets of The
Woodlands Land Development Company, L.P., The Woodlands Commercial Properties
Company, L.P., and The Woodlands Operating Company, L.P. (Texas limited
partnerships), (collectively the "Companies") as of December 31, 2002, and the
individual and combined statements of earnings (loss) and comprehensive income
(loss), changes in partners' equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
Companies as of December 31, 2002, and the individual and combined results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

January 31, 2003

162

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Balance Sheet

December 31, 2002
(Dollars in Thousands)

See accompanying notes.

163

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statement of Earnings (Loss) and Comprehensive Income (Loss)

For the Year Ended December 31, 2002
(Dollars in Thousands)

See accompanying notes.

164

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statement of Changes in Partners' Equity (Deficit)

For the Year Ended December 31, 2002
(Dollars in Thousands)

See accompanying notes.

165

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statement of Cash Flows

For the Year Ended December 31, 2002
(Dollars in Thousands)

166

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statement of Cash Flows (continued)

For the Year Ended December 31, 2002
(Dollars in Thousands)

See accompanying notes.

167

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements

December 31, 2002

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONTROL

The Woodlands Land Development Company, L.P. ("Woodlands Development"), The
Woodlands Commercial Properties Company, L.P. ("Woodlands Commercial"), and The
Woodlands Operating Company, L.P. ("Woodlands Operating"), Texas limited
partnerships, (together "the CMS Partnerships"), are owned by entities
controlled by Crescent Real Estate Equities Limited Partnership ("Crescent") and
Morgan Stanley Real Estate Fund II, L.P. ("Morgan Stanley"). Woodlands
Development and Woodlands Commercial are successors to The Woodlands
Corporation. Prior to July 31, 1997, The Woodlands Corporation was a wholly
owned subsidiary of Mitchell Energy & Development Corp. On July 31, 1997, The
Woodlands Corporation was acquired by Crescent and Morgan Stanley and merged
into Woodlands Commercial, a Texas limited partnership. Woodlands Commercial was
then divided into two partnerships: Woodlands Commercial and Woodlands
Development. Woodlands Operating purchased certain assets from Woodlands
Commercial. Woodlands Operating and its subsidiary, WECCR General Partnership
("WECCR GP"), manage assets owned by Woodlands Commercial and Woodlands
Development. In July 2000, Woodlands Development and Woodlands Commercial
established Woodlands VTO 2000 Land, LP ("VTO Land"), a subsidiary of Woodlands
Development, and Woodlands VTO 2000 Commercial, LP ("VTO Commercial"), a
subsidiary of Woodlands Commercial, to own and operate certain commercial
properties in The Woodlands. These subsidiaries purchased certain commercial
properties owned by Woodlands Development and Woodlands Commercial. In June
2001, Woodlands Development established a subsidiary, The Woodlands Hotel, LP
("the Hotel") to construct and operate a hotel in The Woodlands.

PRINCIPLES OF COMBINATION

The combining financial statements include the accounts of the CMS Partnerships
and are combined due to common ownership in certain cases and management. All
significant transactions and accounts between the CMS Partnerships are
eliminated in combination. The CMS Partnerships follow the equity method of
accounting for their investments in 20% to 50% owned entities.

168

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BUSINESS

The CMS Partnerships' real estate activities are concentrated in The Woodlands,
a planned community located north of Houston, Texas. Consequently, these
operations and the associated credit risks may be affected, either positively or
negatively, by changes in economic conditions in this geographical area.
Activities associated with The Woodlands include residential and commercial land
sales and the construction, operation, and management of office and industrial
buildings, apartments, retail shopping centers, golf courses, and two conference
and hotel facilities.

REAL ESTATE

Costs associated with the acquisition and development of real estate, including
holding costs consisting principally of interest and ad valorem taxes, are
capitalized as incurred. Capitalization of such holding costs is limited to
properties for which active development continues. Capitalization ceases upon
completion of a property or cessation of development activities. Where
practicable, capitalized costs are specifically assigned to individual assets;
otherwise, costs are allocated based on estimated values of the affected assets.

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. For the year ended
December 31, 2002 there were no impairments recognized.

REVENUE RECOGNITION

Staff Accounting Bulletin No. 101 ("SAB 101") provides interpretive guidance on
the proper revenue recognition, presentation, and disclosure in financial
statements. The CMS Partnerships have reviewed their revenue recognition
policies and determined that they are in compliance with accounting principles
generally accepted in the United States and the related interpretive guidance
set forth in SAB 101.

169

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LAND SALES

Earnings from sales of real estate are recognized when a third-party buyer has
made an adequate cash down payment and has attained the attributes of ownership.
Notes received in connection with land sales are discounted when the stated
purchase prices are significantly different from those that would have resulted
from similar cash transactions. The cost of land sold is generally determined as
a specific percentage of the sales revenues recognized for each land development
project. The percentages are based on total estimated development costs and
sales revenues for each project. These estimates are revised annually and are
based on the then-current development strategy and operating assumptions
utilizing internally developed projections for product type, revenue, and
related development cost.

SALES OF COMMERCIAL PROPERTIES

Sales of commercial properties are accounted for under the accrual method when
certain criteria are met. Gains or losses are recognized when a significant down
payment has been made, the earnings process is complete, and the collection of
any remaining receivables is reasonably assured.

LEASE REVENUE

Commercial properties are leased to third-party tenants generally involving
multi-year terms. These leases are accounted for as operating leases.

DEPRECIATION

Depreciation of operating assets is provided on the straight-line method over
the estimated useful lives of the assets. Useful lives range predominantly from
15 to 40 years for land improvements and buildings, 3 to 20 years for leasehold
improvements, and 3 to 10 years for furniture, fixtures and equipment. Property
and equipment are carried at cost less accumulated depreciation. Costs incurred
for computer software developed for internal use are capitalized for application
development activities.

170

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED FINANCING COSTS

Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related debt.

INCOME TAXES

Woodlands Development, Woodlands Commercial, and Woodlands Operating are not
income tax-paying entities and all income and expenses are reported by the
partners for tax reporting purposes. No provision for Federal income taxes is
included in the accompanying combining financial statements for these entities.
WECCR GP, a wholly owned subsidiary of Woodlands Operating, elected to be
treated as an association taxable as a corporation effective March 1, 2002.

The tax returns, the qualification of the CMS Partnerships for tax purposes, and
the amount of distributable partnership income or loss are subject to
examination by Federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.

INVENTORY

Inventory is carried at the lower of cost or market and consists primarily of
golf-related clothing and equipment sold at golf course pro shops in The
Woodlands. Cost is determined based on a first-in-first-out method.

STATEMENTS OF CASH FLOWS

Short-term investments with maturities of three months or less when purchased
are considered to be cash equivalents. Debt borrowings and repayments with
initial terms of three months or less are reported net. For the year ended
December 31, 2002, Woodlands Development paid interest totaling $17,386,000 and
Woodlands Commercial paid interest totaling $3,441,000.

171

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for recognition and measurement of the impairment of
long-lived assets to be held and used and measurement of the long-lived assets
to be disposed of by sale, but broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. The CMS Partnerships adopted SFAS No. 144 on January 1,
2002. This adoption did not have a material impact on their results of
operations or financial position.

In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of the Indebtedness of Others. This Interpretation
requires a guarantor to recognize, at the inception of a guarantee issued or
modified after December 31, 2002, a liability for the fair value of the
obligation undertaken for issuing the guarantee. The CMS Partnerships believe
that this Interpretation will not have a material impact on their results of
operations or financial position.

172

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

2. NOTES AND CONTRACTS RECEIVABLE

Notes receivable are carried at cost, net of discounts. At December 31, 2002,
Woodlands Development held notes and contracts receivable totaling $29,048,000,
including amounts related to utility district receivables totaling $27,904,000.
During 2002, Woodlands Development sold $13,885,000 of its utility district
receivables to a financial institution under a factoring agreement, and recorded
a retained interest related to these receivables of $1,305,000, which is
included in the utility district receivables. The retained interest was
calculated using a discount rate of 5% and assumes the receivables are collected
within 3 years. Woodlands Development recorded a loss of $600,000 on these
factorings. Utility district receivables, the collection of which is dependent
on the ability of utility districts in The Woodlands to sell bonds, have a
market interest rate of approximately 4.8% at December 31, 2002. Other notes
receivable totaling $1,144,000 bear interest at an average rate of 7.9%.
Maturities for 2003 through 2007 are $204,000, $186,000, $321,000, $217,000, and
$216,000.

At December 31, 2002, Woodlands Commercial held notes receivable totaling
$366,000. The notes receivable have stated interest rates between prime plus .5%
and prime plus 1.5%, with an average effective yield of approximately 5.4% at
December 31, 2002. Contractual maturities are $116,000 in 2003 and $250,000
subsequently.

3. REAL ESTATE

The following is a summary of real estate at December 31, 2002 (in thousands):

173

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

3. REAL ESTATE (CONTINUED)

LAND

The principal land development is The Woodlands, a mixed-use, master-planned
community located north of Houston, Texas. Residential land is divided into
eight villages in various stages of development. Each village has or is planned
to contain a variety of housing, neighborhood retail centers, schools, parks,
and other amenities. Woodlands Development controls the development of the
residential communities and produces finished lots for sale to qualified
builders. Housing is constructed in a wide range of pricing and product styles.

Commercial land is divided into distinct centers that serve or are planned to
serve as locations for office buildings, retail and entertainment facilities,
industrial and warehouse facilities, research and technology facilities, and
college and training facilities. Woodlands Development produces finished sites
for third parties or for its own building development activities.

COMMERCIAL PROPERTIES

Commercial and industrial properties owned or leased by the CMS Partnerships are
leased to third-party tenants. At December 31, 2002, the net book value of
assets under operating leases totaled $23,722,000 for Woodlands Development and
$10,657,000 for Woodlands Commercial. Other commercial properties, which include
a hotel and a golf course clubhouse, are under development at December 31, 2002.
Lease terms range predominantly from 1 to 10 years with an average remaining
term of 4 years. Minimum future lease revenues from noncancelable operating
leases and subleases exclude contingent rentals that may be received under
certain lease agreements. Tenant rents include rent for noncancelable operating
leases, cancelable leases and month-to-month rents and are included in other
revenue. For the year ended December 31, 2002, tenant rents totaled $2,616,000
for Woodlands Development. Tenant rents totaled $15,564,000 for Woodlands
Commercial. Contingent rents include pass-throughs of incremental operating
costs. For the year ended December 31, 2002, contingent rents totaled $185,000
for Woodlands Development. Contingent rents totaled $2,311,000 for Woodlands
Commercial. Minimum future lease rentals for 2003 through 2007 and thereafter
total $2,804,000, $2,776,000, $2,842,000, $2,372,000, $2,030,000, and $2,578,000
for Woodlands Development. Minimum future lease rentals for 2003 to 2007 and
thereafter total $5,249,000, $4,826,000, $1,674,000, $1,145,000, $739,000, and
$133,000 for Woodlands Commercial.

174

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

3. REAL ESTATE (CONTINUED)

During 2002, Woodlands Commercial sold commercial properties for $37,000,000 and
recognized as other revenue a gain of $11,507,000 on the sales.

PROPERTIES HELD FOR SALE

In December 2002, a subsidiary of Woodlands Commercial acquired the limited
partner interests in two partnerships for which Woodlands Commercial is the
general partner. The carrying value of the underlying properties, $8,882,000, is
classified as properties held-for-sale on the combining balance sheet. Woodlands
Commercial intends to sell these properties in 2003.

4. EQUITY INVESTMENTS

During 2002, Woodlands Development and Woodlands Commercial's principal
partnership and corporation interests included the following:

Other partnerships own various commercial properties, all of which are located
in The Woodlands. Woodlands Operating provides various management and leasing
services to these affiliated entities on the same terms and conditions as
unrelated third parties. Woodlands Development and Woodlands Commercial's net
investment in each of these entities is included in the real estate caption on
the combining balance sheet and their share

175

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

4. EQUITY INVESTMENTS (CONTINUED)

of these entities' pretax earnings is included in other revenues on the
combining statement of earnings (loss) and comprehensive income (loss). A
summary of their net investment as of December 31, 2002 and their share of
pre-tax earnings for the year then ended follows (in thousands):

176

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

4. EQUITY INVESTMENTS (CONTINUED)

Summarized financial statement information for partnerships and a corporation in
which Woodlands Development and Woodlands Commercial have an equity ownership
interest at December 31, 2002, and for the year then ended, follows (in
thousands):

Woodlands Commercial has guaranteed mortgage debt of its unconsolidated
affiliates totaling $14,733,000 at December 31, 2002. These guarantees reduce in
varying amounts through 2017 and would require payments only in the event of
default on payment by the respective debtors. Woodlands Commercial believes that
the likelihood is remote that payments will be required under these guarantees.

In December 2002, Woodlands Commercial sold its interest in The Woodlands Mall
Associates for $43,400,000 and recognized as revenue a profit of $33,628,000 on
the sale.

177

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

5. DEBT

A summary of the CMS Partnerships' outstanding debt at December 31, 2002 follows
(in thousands):

BANK CREDIT AGREEMENT

In November 2002, Woodlands Development and Woodlands Commercial renegotiated
their existing bank credit agreement. The new $400 million bank credit agreement
has a three-year term expiring in November 2005 with two one-year extension
options provided to the borrowers. The interest rate, based on the London
Interbank Offered Rate plus a margin, was approximately 4.4% at December 31,
2002. Interest is paid monthly. Commitment fees, based on .25% of the unused
commitment, totaled $126,000 for the year ended December 31, 2002. The credit
agreement contains certain restrictions which, among other things, require the
maintenance of specified financial ratios, restrict indebtedness and sale, lease
or transfer of certain assets, and limit the right of Woodlands Development and
Woodlands Commercial to merge with other companies and make distributions to
their partners. At December 31, 2002, Woodlands Development and Woodlands
Commercial were in compliance with their debt covenants. Certain assets of
Woodlands Development and Woodlands Commercial, including cash, receivables,
commercial properties, and equity investments in joint ventures and
partnerships, secure the credit agreement. Mandatory debt maturities for 2003 to
2005 are $20,000,000, $22,500,000, and $242,500,000. Payments may be made by
Woodlands Development or Woodlands Commercial or both at their option. In
addition to stipulated principal payments, principal payments are also required
based on distributions to Crescent and Morgan Stanley and certain covenant
tests. Prepayments can also be made at the discretion of Woodlands Development
and Woodlands Commercial. Prepayments on the term loan are subject to a
prepayment penalty of up to 2%.

178

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

5. DEBT (CONTINUED)

At December 31, 2002, Woodlands Development and Woodlands Commercial had an
interest rate swap agreement with a commercial bank to reduce the impact of
increases in interest rates on their bank credit agreement. The interest swap
agreement effectively limits their interest rate exposure on the notional amount
of $50,000,000 to 2.355%. The interest swap agreement expires February 1, 2003.
Woodlands Development and Woodlands Commercial are exposed to credit loss in the
event of nonperformance by the other parties. However, management does not
anticipate nonperformance by the other parties.

SUBSIDIARIES' CREDIT AGREEMENTS

VTO Land and VTO Commercial entered into a credit agreement that has a
three-year term expiring in October 2003 with two one-year extension options.
The interest rate, based on the London Interbank Offered Rate plus a margin, was
approximately 3.4% at December 31, 2002. Interest is paid monthly. At December
31, 2002, the outstanding balance was $6,944,000 for VTO Land, and $3,385,000
for VTO Commercial. The credit agreement contains certain restrictions which,
among other things, require the maintenance of specified financial ratios and
restrict indebtedness and leasing. At December 31, 2002, VTO Land and VTO
Commercial were in compliance with their debt covenants. Certain assets of the
subsidiaries secure the agreement. Debt maturities for 2003 are $10,329,000. VTO
Land, VTO Commercial, or both may make payments at their option.

At December 31, 2002, VTO Land and VTO Commercial had an interest rate cap
agreement with a commercial bank to reduce the impact of increases in interest
rates on their credit agreement. The interest cap agreement effectively limits
their interest rate exposure on a notional amount to a maximum LIBOR rate of 9%.
The notional amount is $33,750,000. The interest cap agreement matures at the
same time as the credit agreement. VTO Land and VTO Commercial are exposed to
credit loss in the event of nonperformance by the other party with respect to
the interest cap agreement. However, management does not anticipate
nonperformance by the other party.

179

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

5. DEBT (CONTINUED)

The Woodlands Hotel, L.P., a subsidiary of Woodlands Development, had a
$39,000,000 credit agreement to finance the construction of a hotel. This
agreement matures in December 2005. At December 31, 2002, the outstanding
balance was $32,494,000. The interest rate, based on the London Interbank
Offered Rate plus a margin, was approximately 4.1% at December 31, 2002.
Interest is paid monthly. No principal payments are due until 2005. The credit
agreement contains certain restrictions which, among other things, require the
maintenance of specified financial ratios and restrict indebtedness and leasing.
At December 31, 2002, The Woodlands Hotel, L.P. was in compliance with its debt
covenants. Certain assets of the subsidiary secure the agreement.

DERIVATIVES

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133, establish accounting and
reporting standards for derivative instruments and hedging activities.
Derivative instruments are recorded on the balance sheet at fair value by
"marking-to-market" all derivatives at period-end. Changes in fair value are
recorded as an increase or decrease in partners' equity through either
comprehensive income or net earnings, depending on the facts and circumstances
with respect to the derivatives and their documentation. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document and assess the effectiveness of transactions that receive
hedge accounting. To the extent that changes in market values are initially
recorded in other comprehensive income, such changes reverse out and are
recorded in net earnings in the same period in which the hedged item affects
earnings. During 2002, the CMS Partnerships recorded a $119,000 loss in net
earnings and a $392,000 gain in other comprehensive income related to hedges.

DEBT RELATED TO PROPERTIES HELD-FOR-SALE

The debt consists of two mortgages related to the properties held for sale
discussed in Note 3. The mortgages have an average interest rate of 6.8%. Debt
maturities for 2003 through 2007 and thereafter total $192,000, $207,000,
$220,000, $237,000, $253,000, and $6,892,000. The mortgages are secured by two
apartment properties.

180

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

5. DEBT (CONTINUED)

MORTGAGES PAYABLE

The mortgages payable have an average interest rate of 5.9%. Debt maturities for
2003 through 2007 and thereafter total $656,000, $727,000, $2,239,000, $713,000,
$4,265,000, and $6,509,000. Mortgages payable are all secured by certain tracts
of land.

6. NOTES PAYABLE TO PARTNERS

Woodlands Development has notes payable to its partners totaling $25,000,000.
The notes bear interest at 15%. Interest is payable quarterly. All outstanding
balances are due in 2007. These notes are subordinate to the bank credit
agreement and mortgages payable described above.

7. COMMITMENTS AND CONTINGENCIES

CONTINGENT LIABILITIES

At December 31, 2002, the CMS Partnerships had contingent liabilities totaling
approximately $20,428,000 consisting of letters of credit and guarantees. The
letters of credit act as a guarantee of payment to third parties in accordance
with specified terms and conditions. The guarantees consist primarily of loan
guarantees and would require payment only in the event of default by the
debtors.

LEASES

The CMS Partnerships have various noncancellable facilities and equipment lease
agreements which provide for aggregate future payments of approximately
$29,702,000, most of which is due from Woodlands Commercial. Lease terms extend
to 2009 and have an average remaining term of six years. Minimum rentals for the
years subsequent to December 31, 2002 total approximately $255,000 annually for
2003 to 2005 for Woodlands Development. Minimum rentals for 2003 to 2007 and
thereafter for Woodlands Commercial total approximately $4,100,000, $3,922,000,
$4,163,000, $4,623,000, $4,085,000, and $4,748,000. Minimum rentals for 2003 to
2007 and thereafter for Woodlands

181

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Operating total approximately $635,000, $459,000, $463,000, $460,000, $460,000,
and $819,000. Rental expense for operating leases for the year ended December
31, 2002 follows (in thousands):

Woodlands Development $ 277
Woodlands Commercial 3,864
WECCR GP 279
Woodlands Operating 779
-----------
$ 5,199
===========

LEGAL ACTIONS

The CMS Partnerships are a party to claims and legal actions arising in the
ordinary course of their business and to recurring examinations by the Internal
Revenue Service and other regulatory agencies. Management believes, after
consultation with outside counsel, that adequate financial statement accruals
have been provided for all known litigation contingencies where losses are
deemed probable. Based on the status of other cases, the CMS Partnerships are
unable to determine a range of such possible additional losses, if any, that
might be incurred. The CMS Partnerships believe it is not probable that the
ultimate resolution of these actions will have a material adverse effect on
their financial position.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Woodlands Operating has deferred compensation arrangements for a select group of
management employees that provides the opportunity to defer a portion of their
cash compensation. Woodlands Operating's obligations under this plan are
unsecured general obligations to pay in the future the value of the deferred
compensation adjusted to reflect the performance of their investments, whether
positive or negative, of selected measurement options, chosen by each
participant, during the deferral period. Woodlands Operating has established
trust accounts on behalf of the participating employees totaling $1,822,000 that
are included in other assets at December 31, 2002.

182

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

INCENTIVE PLANS

Woodlands Operating instituted an incentive compensation plan for certain
employees in 2001. The plan is unfunded and while certain payments are made
currently, a portion of these payments is deferred and will be paid based on a
vesting period of up to three years. For the year ended December 31, 2002,
expenses recognized under the plan totaled $2,834,000 for Woodlands Development,
$776,000 for Woodlands Commercial, and $273,000 for Woodlands Operating.

8. RELATED PARTY TRANSACTIONS

Woodlands Operating provides services to Woodlands Development and Woodlands
Commercial under management and advisory services agreements. These agreements
are automatically renewed annually. Woodlands Development and Woodlands
Commercial pay Woodlands Operating an advisory fee equal to cost plus 3%. In
addition, they reimburse Woodlands Operating for all costs and expenses incurred
on their behalf. For the year ended December 31, 2002, Woodlands Operating
recorded revenues of $13,337,000 for services provided to Woodlands Development,
and $4,795,000 for services provided to Woodlands Commercial.

WECCR GP leases The Woodlands Conference Center and Country Club (the
"Facilities") from Woodlands Commercial. The Facilities are operated by WECCR GP
and consist of a 416-room hotel, conference center, country clubs, and golf and
tennis facilities. The lease agreement has an eight-year term ending July 31,
2005. WECCR GP operates the Facilities and pays Woodlands Commercial a base rent
of $750,000 per month and a quarterly percentage rent based on the gross
receipts of the Facilities. For the year ended December 31, 2002, rent under the
lease agreement totaled $14,315,000. In 2002, WECCR GP contracted with an
affiliate of Morgan Stanley to manage the Facilities for a management fee equal
to 2.5% of cash receipts, as defined in the agreement. During 2002, the
management fee totaled $1,089,000.

183

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

8. RELATED PARTY TRANSACTIONS (CONTINUED)

In 1999, Woodlands Development purchased approximately 1,000 acres of land in
The Woodlands from Woodlands Commercial for $33,090,000, the then-current fair
market value which approximated the carrying cost. The transaction consisted of
cash and a $26,000,000 note. The remaining balance was repaid in 2002. For the
year ended December 31, 2002, interest totaled $80,000. Interest is eliminated
in the accompanying combining financial statements.

9. PARTNERS' EQUITY

Crescent's ownership interests in the CMS Partnerships are through The Woodlands
Land Company, Inc., Crescent Real Estate Equities Limited Partnership, CresWood
Development, L.L.C., and WOCOI Investment Company. Morgan Stanley's ownership
interests are through MS/TWC Joint Venture and MS TWC, Inc. The partners'
percentage interests are summarized below:

184

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

9. PARTNERS' EQUITY (CONTINUED)

The partnership agreements for each of the partnerships provide, among other
things, the following:

(i) Woodlands Development, Woodlands Commercial, and Woodlands Operating
are each governed by an Executive Committee composed of equal
representation from their respective general partners.

(ii) Net income and losses from operations are currently allocated based on
the payout percentages discussed below. A reclass of approximately
$730,000 has been made for Woodlands Operating to the 2002 income
allocation between the Morgan Stanley Crescent Partners to reflect the
achievement in 2001 of the payout percentages discussed below.

(iii) Distributions are made to partners based on specified payout
percentages and include cumulative preferred returns to Morgan
Stanley's affiliates. The payout percentage to Morgan Stanley's
affiliates is 57.5% until the affiliates receive distributions equal
to their capital contributions and a 12% cumulative preferred return
compounded quarterly. Then, the payout percentage to Morgan Stanley's
affiliates is 50.5% until the affiliates receive distributions equal
to their capital contributions and an 18% cumulative preferred return
compounded quarterly. Thereafter, the payout percentage to Morgan
Stanley's affiliates is 47.5%. During 2001, Morgan Stanley's
affiliates received sufficient cumulative distributions to exceed
their capital contributions plus cumulative returns of 18%.
Accordingly, Morgan Stanley's affiliates are currently receiving a
payout percentage of 47.5% and Crescent's affiliates are receiving
52.5%.

(iv) The CMS Partnerships will continue to exist until December 31, 2040
unless terminated earlier due to specified events.

185

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

9. PARTNERS' EQUITY (CONTINUED)

(v) No additional partners may be admitted to the CMS Partnerships unless
specific conditions in the partnership agreements are met. Partnership
interests may be transferred to affiliates of Crescent or Morgan
Stanley. Crescent has the right of first refusal to buy the
partnership interests of the Morgan Stanley affiliates at the same
terms and conditions offered to a third-party purchaser, or sell its
affiliates' interests to the same third-party purchaser.

(vi) Crescent and Morgan Stanley have the right to offer to purchase the
other partner's affiliates' partnership interests in the event of
failure to make specified capital contributions or a specified default
by the other. Specified defaults include bankruptcy, breach of
partnership covenants, transfer of partnership interests except as
permitted by the partnership agreements, and fraud or gross
negligence.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of Woodlands Development's and Woodlands Commercial's
financial instruments as of December 31, 2002 approximated their carrying
amounts with the exception of the notes payable to partners for Woodlands
Development, which had an estimated fair value of $33 million and debt for
Woodlands Commercial which had an estimated fair value of $69 million.

Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could be
made for similar maturities to borrowers with comparable credit ratings. Fair
values of fixed-rate, long-term debt were based on current interest rates
offered to the CMS Partnerships for debt with similar remaining maturities. For
floating-rate debt obligations, carrying amounts and fair values were assumed to
be equal because of the nature of these obligations. The carrying amounts of the
CMS Partnerships' other financial instruments approximate their fair values.

186

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

11. EMPLOYEE SAVINGS PLAN

Woodlands Operating has a 401(k) defined contribution plan that is available to
all full-time employees who meet specified service requirements. The plan is
administered by a third party. Contributions to the plan are based on a match of
employee contributions up to a specified limit. For the year ended December 31,
2002, Woodlands Operating contributions totaled approximately $700,000.

12. INCOME TAXES

Effective March 1, 2002, WECCR GP elected to be classified as an association
taxable as a corporation for federal tax income purposes. Accordingly, federal
income tax has been provided. For state purposes, WECCR GP is a partnership.
Accordingly, no state tax has been provided for WECCR GP. WECCR GP had no
foreign operations.

Income tax benefit for the year ended December 31, 2002 is (in thousands):

Current federal income tax benefit $ --
Deferred federal income tax benefit (4,371)
---------------
Total federal income tax benefit (4,371)
Valuation allowance 4,371
---------------
Total tax benefit $ --
===============

The income tax benefit reflected in the consolidated statement of loss differs
from the amounts computed by applying the federal statutory rate of 35% to loss
before income taxes and extraordinary items as follows (in thousands):

Federal tax benefit at U.S. statutory rate $ (629)
Woodlands Operating income not subject to tax (496)
WECCR GP partnership income not subject to tax (167)
Meals and entertainment 22
Change in tax status (3,101)
Change in valuation allowance 4,371
---------------
$ --
===============

187

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combining Financial Statements (continued)

12. INCOME TAXES (CONTINUED)

Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of WECCR GP's assets and liabilities
and for operating loss carryforwards. Valuation allowance is recognized on
deferred tax assets if it is believed some or all of the deferred tax asset will
not be realized. Significant components of WECCR GP's net deferred tax asset are
as follows (in thousands):

Deferred tax assets:
Deferred revenue $ 3,441
Net operating loss 792
Other 206
---------------
4,439
---------------

Deferred tax liabilities:
Other 68
---------------

Net deferred tax asset 4,371
Valuation allowance (4,371)
---------------
Net deferred taxes $ --
===============

The net operating loss can be carried forward for twenty years, or until 2022.

188

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.

UNAUDITED COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 2001 and 2000

189

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

190

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

191

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

192

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

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THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
NOTES TO COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONTROL. The Woodlands Land Development Company, L.P. ("Woodlands
Development"), The Woodlands Commercial Properties Company, L.P. ("Woodlands
Commercial"), and The Woodlands Operating Company, L.P. ("Woodlands Operating"),
Texas limited partnerships, (together "the CMS Partnerships") are owned by
entities controlled by Crescent Real Estate Equities Limited Partnership or
Crescent Operating, Inc. (together "Crescent") and Morgan Stanley Real Estate
Fund II, L.P. ("Morgan Stanley"). Woodlands Development and Woodlands Commercial
are successors to The Woodlands Corporation. Prior to July 31, 1997, The
Woodlands Corporation was a wholly owned subsidiary of Mitchell Energy &
Development Corp. On July 31, 1997 The Woodlands Corporation was acquired by
Crescent and Morgan Stanley and merged into Woodlands Commercial, a Texas
limited partnership. Woodlands Commercial was then divided into two
partnerships: Woodlands Commercial and Woodlands Development. Woodlands
Operating and its subsidiary, WECCR General Partnership ("WECCR GP"), purchased
certain assets from Woodlands Commercial. Woodlands Operating and WECCR GP
manage assets owned by Woodlands Commercial and Woodlands Development as
described in Note 8. In July 2000, Woodlands Development and Woodlands
Commercial established Woodlands VTO 2000 Land, LP ("VTO Land"), a subsidiary of
Woodlands Development, and Woodlands VTO 2000 Commercial, LP ("VTO Commercial"),
a subsidiary of Woodlands Commercial, to own and operate certain commercial
properties in The Woodlands. These subsidiaries purchased certain commercial
properties owned by Woodlands Development and Woodlands Commercial. In June
2001, Woodlands Development established a subsidiary, The Woodlands Hotel, LP
("the Hotel") to construct and operate a hotel in The Woodlands.

PRINCIPLES OF COMBINATION. The combining financial statements include the
accounts of the CMS Partnerships and are combined due to common ownership in
certain cases and management. All significant transactions and accounts between
the CMS Partnerships are eliminated in combination. The CMS Partnerships follow
the equity method of accounting for their investments in 20% to 50% owned
entities.

BUSINESS. The CMS Partnerships' real estate activities are concentrated in
The Woodlands, a planned community located north of Houston, Texas.
Consequently, these operations and the associated credit risks may be affected,
either positively or negatively, by changes in economic conditions in this
geographical area. Activities associated with The Woodlands include residential
and commercial land sales and the construction and management of office and
industrial buildings, apartments, retail shopping centers, golf courses and a
conference center and two hotels.

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REAL ESTATE. Costs associated with the acquisition and development of real
estate, including holding costs consisting principally of interest and ad
valorem taxes, are capitalized as incurred. Capitalization of such holding costs
is limited to properties for which active development continues. Capitalization
ceases upon completion of a property or cessation of development activities.
Where practicable, capitalized costs are specifically assigned to individual
assets; otherwise, costs are allocated based on estimated values of the affected
assets.

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. For the years ended
December 31, 2001 and 2000, there were no impairments recognized.

REVENUE RECOGNITION. Staff Accounting Bulletin No. 101 ("SAB 101") provides
interpretive guidance on the proper revenue recognition, presentation and
disclosure in financial statements. The CMS Partnerships have reviewed their
revenue recognition policies and determined that they are in compliance with
generally accepted accounting principles and the related interpretive guidance
set forth in SAB 101.

LAND SALES. Earnings from sales of real estate are recognized when a
third-party buyer has made an adequate cash down payment and has attained the
attributes of ownership. Notes received in connection with land sales are
discounted when the stated purchase prices are significantly different from
those that would have resulted from similar cash transactions. The cost of land
sold is generally determined as a specific percentage of the sales revenues
recognized for each land development project. The percentages are based on total
estimated development costs and sales revenues for each project. These estimates
are revised annually and are based on the then-current development strategy and
operating assumptions utilizing internally developed projections for product
type, revenue and related development cost.

SALES OF COMMERCIAL PROPERTIES. Sales of commercial properties are
accounted for under the accrual method when certain criteria are met. Gains or
losses are recognized when a significant down payment has been made, the
earnings process is complete, and the collection of any remaining receivables is
reasonably assured. Gains or losses are recognized as other revenue in the
combining statement of earnings and comprehensive income.

LEASE REVENUE. Commercial properties are leased to third-party tenants
generally involving multi-year terms. These leases are accounted for as
operating leases. See Note 3 for further discussion.

DEPRECIATION. Depreciation of operating assets is provided on the
straight-line method over the estimated useful lives of the assets. Useful lives
range from 15 to 50 years for land improvements and buildings, 3 to 20 years for
leasehold improvements and 3 to 10 years for furniture, fixtures and equipment.
Property and equipment are carried at cost less accumulated depreciation. Upon

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retirement or disposal an asset, the cost is removed from the property account
and the accumulated depreciation is removed from accumulated depreciation. Costs
incurred for computer software developed for internal use are capitalized for
application development activities.

DEFERRED FINANCING COSTS. Costs incurred to obtain debt financing are
deferred and amortized over the estimated term of the related debt.

INCOME TAXES. No provision for Federal income taxes is included in the
accompanying combining financial statements since the CMS Partnerships are not
tax-paying entities and all income and expenses are reported by the partners for
tax reporting purposes.

The tax returns, the qualification of the CMS Partnerships for tax purposes
and the amount of distributable partnership income or loss are subject to
examination by Federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.

STATEMENTS OF CASH FLOWS. Short-term investments with original maturities
of three months or less are considered to be cash equivalents. Debt borrowings
and repayments with initial terms of three months or less are reported net. For
the years ended December 31, 2001 and 2000, Woodlands Development paid interest
totaling $24,045,000 and $30,018,000. Woodlands Commercial paid interest
totaling $7,936,000 and $13,460,000. These amounts are related to debt described
in Notes 5, 6 and 8.

USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS. In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets." which supercedes SFAS No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of." It
also supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and used and
measurement of the long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The CMS
Partnerships will adopt SFAS No. 144 on January 1, 2002 and believe that this
adoption will not have a material impact on their results of operations or
financial position.

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STATEMENT PRESENTATION. Certain reclassifications were made to amounts
previously reported to conform to current year presentation.

(2) NOTES AND CONTRACTS RECEIVABLE

Notes receivable are carried at cost, net of discounts. At December 31,
2001 and 2000, Woodlands Development held notes and contracts receivable
totaling $25,698,000 and $30,471,000, including utility district receivables
totaling $24,394,000 and $30,471,000. Utility district receivables, the
collection of which is dependent on the ability of utility districts in The
Woodlands to sell bonds, have a market interest rate of approximately 5.0% at
December 31, 2001. During 2001 and 2000, Woodlands Development sold $24,050,000
and $27,200,000 of its utility district receivables to a financial institution
under a factoring agreement. The difference between the proceeds and carrying
value of the receivables was an immaterial amount and was recorded as an
addition to land cost.

At December 31, 2001 and 2000, Woodlands Commercial held notes receivable
totaling $170,000 and $377,000. The notes receivable have stated interest rates
between 5.25% and 7.5%, with an average effective yield of approximately 5.25%
at December 31, 2001. Contractual maturities are $170,000 in 2003.

In December 2000, Woodlands Development sold certain notes receivable
totaling $5,560,000 to a financial institution. Woodlands Development has
guaranteed repayment of the notes. For this transaction, no gain or loss was
recognized since the proceeds approximated the carrying value of the notes.

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(3) REAL ESTATE

The following is a summary of real estate at December 31, 2001 and 2000 (in
thousands):

LAND. The principal land development is The Woodlands, a mixed-use,
master-planned community located north of Houston, Texas. Residential land is
divided into seven villages in various stages of development. Each village has
or is planned to contain a variety of housing, neighborhood retail centers,
schools, parks and other amenities. Woodlands Development controls the
development of the residential communities and produces finished lots for sale
to qualified builders. Housing is constructed in a wide range of pricing and
product styles.

Commercial land is divided into distinct centers that serve or are planned
to serve as locations for office buildings, retail and entertainment facilities,
industrial and warehouse facilities, research and technology facilities, and
college and training facilities. Woodlands Development produces finished sites
for third parties or for its own building development activities.

COMMERCIAL PROPERTIES. Commercial, industrial and retail properties owned
or leased by the CMS Partnerships are leased to third-party tenants. At December
31, 2001, the net book value of assets under operating leases totaled
$24,207,000 for Woodlands Development and $45,660,000 for Woodlands Commercial.
Other commercial properties, which include a hotel, hotel expansion and a golf
course, are under development at December 31, 2001. Lease terms range from one
to eleven years with an average term of five years. Minimum future lease
revenues from noncancellable operating leases and subleases exclude contingent
rentals that may be received under certain lease agreements. Tenant rents
include rent for noncancellable operating leases, cancelable leases and

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month-to-month rents and are included in other revenue. For the years ended
December 31, 2001 and 2000, tenant rents totaled $6,319,000 and $2,589,000 for
Woodlands Development. Tenant rents totaled $12,404,000 and $27,132,000 for
Woodlands Commercial. Contingent rents include pass-throughs of incremental
operating costs and rents based on a percentage of tenants' sales offset by
certain leasing costs. For the years ended December 31, 2001 and 2000,
contingent rents totaled $873,000 and $63,000 for Woodlands Development.
Contingent rents totaled $2,377,000 and $2,479,000 for the Woodlands Commercial.
Minimum future lease rentals for the years subsequent to December 31, 2001 total
$2,482,000, $2,610,000, $2,576,000, $2,633,000, $2,162,000 and $4,490,000
thereafter for Woodlands Development. Minimum future lease rentals total
$10,926,000, $10,743,000, $8,861,000, $4,599,000, $4,013,000 and $7,469,000
thereafter for Woodlands Commercial.

Woodlands Commercial has two commercial properties held for sale that are
expected to be sold during 2002. These properties have a net book value of
$22,316,000 at December 31, 2001, which is less than their fair value less costs
to sell. During 2001, Woodlands Development and Woodlands Commercial sold
commercial properties for $57,700,000 and $7,900,000 and recognized as other
revenue gains on the sales of $10,662,000 and $3,465,000. During 2000, Woodlands
Commercial sold commercial properties for $61,846,000 and recognized as other
revenue a $15,579,000 gain on the sales.

(4) EQUITY INVESTMENTS

During 2001 and 2000, Woodlands Development and Woodlands Commercial's
principal partnership and corporation interests included the following:

Other partnerships own various commercial properties, all of which are
located in The Woodlands. Woodlands Operating provides various management and
leasing services to these affiliated entities on the same terms and conditions
as unrelated third parties. Woodlands Development and Woodlands Commercial's net
investment in each of these entities is included in the real estate caption on
the combining balance sheets and their share of these entities' pretax earnings
is included in other revenues on the combining statements of earnings and
comprehensive income. A summary of their net investment as of December 31, 2001
and 2000 and their share of pre-tax earnings for the years ended December 31,
2001 and 2000 follows (in thousands):

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In June 2001, Woodlands Development sold its interest in Sterling Ridge
Retail 2000 for $10,718,000 and recognized as other revenue a gain of
$2,639,000. During 2001 Woodlands Office Equities -'95 sold three commercial
properties for $16,882,000. Woodlands Commercial recognized as other revenue its
share of the gains totaling $1,276,000.

In January 2000, Woodlands Commercial sold its 25% partnership interest in
Woodlands Retail Equities -'96 Limited for approximately $10,300,000 and
recognized as other revenue a gain of approximately $3,800,000.

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Summarized financial statement information for partnerships and a
corporation in which Woodlands Development and Woodlands Commercial have an
ownership interest at December 31, 2001 and 2000 and for the years ended
December 31, 2001 and 2000 follows (in thousands):

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Woodlands Development and Woodlands Commercial's investment in their
unconsolidated affiliates exceeds their equity in their net assets. This excess
is being amortized over a 25-year period. For the years ended December 31, 2001
and 2000, amortization of this excess totaled $54,000 each year for Woodlands
Development and $500,000 each year for Woodlands Commercial.

(5) DEBT

A summary of the CMS Partnerships' outstanding debt at December 31, 2001
and 2000 follows (in thousands):

BANK CREDIT AGREEMENT. In November 1999, Woodlands Development and
Woodlands Commercial replaced their existing bank credit agreement and
construction loan agreement with a new facility, consisting of a $300,000,000
term loan and a $100,000,000 revolving loan. The new bank credit agreement has a
three-year term expiring in November 2002 with two one-year extension options
provided to the borrowers. Management expects to exercise the first one-year
extension option or explore other options. The interest rate, based on the
London Interbank Offered Rate plus a margin, is approximately 5.1% at December
31, 2001. Interest is paid monthly. Commitment fees, based on .25% of the unused
commitment, totaled $164,000 and $57,000 for the years ended December 31, 2001
and 2000. The credit agreement contains certain restrictions which, among other
things, require the maintenance of specified financial ratios, restrict
indebtedness and sale, lease or transfer of certain assets, and limit the right
of Woodlands Development and Woodlands Commercial to merge with other companies
and make distributions to their partners. At December 31, 2001, Woodlands
Development and Woodlands Commercial were in compliance with their debt
covenants. Certain assets of Woodlands Development and Woodlands Commercial,
including cash, receivables, commercial properties and equity investments in
joint ventures and partnerships, secure the credit agreement. Mandatory debt
maturities, assuming the extension option is not exercised, are $261,890,000 in
2002. Payments may be made by Woodlands Development or Woodlands Commercial or
both at their option. In addition to stipulated principal payments, principal
payments are also required based on distributions to Crescent and Morgan Stanley
and certain covenant tests. Prepayments can also be made at the discretion of
Woodlands Development and Woodlands Commercial. Prepayments on the term loan are
subject to a prepayment penalty of up to 1%.

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Woodlands Development and Woodlands Commercial entered into an interest
rate cap agreement with a commercial bank to reduce the impact of increases in
interest rates on their bank credit agreement. The interest rate cap agreement
effectively limits their interest rate exposure on the notional amount of
$121,000,000 to a maximum LIBOR rate of 9%. The interest rate cap agreement
expires at the same time as the bank credit agreement. Woodlands Development and
Woodlands Commercial also entered into an interest rate swap agreement with a
commercial bank. Interest on the notional amount of $50,000,000 is paid based on
a fixed LIBOR rate of 2.78%. This agreement expires in October 2002. Woodlands
Development and Woodlands Commercial are exposed to credit loss in the event of
nonperformance by the other parties. However, management does not anticipate
nonperformance by the other parties.

SUBSIDIARIES' CREDIT AGREEMENTS. VTO Land and VTO Commercial entered into a
credit agreement that has a three-year term expiring in October 2003 with two
one-year extension options. The interest rate, based on the London Interbank
Offered Rate plus a margin, is approximately 4.1% at December 31, 2001. Interest
is paid monthly. At December 31, 2001 and 2000, the outstanding balance was
$7,077,000 and $31,727,000 for VTO Land, and $30,887,000 and $35,773,000 for VTO
Commercial. The credit agreement contains certain restrictions which, among
other things, require the maintenance of specified financial ratios and restrict
indebtedness and leasing. At December 31, 2001, VTO Land and VTO Commercial were
in compliance with their debt covenants. Certain assets of the subsidiaries
secure the agreement. Debt maturities for the two years subsequent to December
31, 2001 are $1,043,000 and $36,921,000. VTO Land, VTO Commercial, or both may
make payments at their option.

VTO Land and VTO Commercial entered into an interest rate cap agreement
with a commercial bank to reduce the impact of increases in interest rates on
their credit agreement. The interest rate cap agreement effectively limits their
interest rate exposure on a notional amount to a maximum LIBOR rate of 9%. The
notional amount is $33,750,000. The interest rate cap agreement matures at the
same time as the credit agreement. VTO Land and VTO Commercial are exposed to
credit loss in the event of nonperformance by the other party with respect to
the interest cap agreement. However, management does not anticipate
nonperformance by the other party.

In June 2001, The Woodlands Hotel, L.P., a subsidiary of Woodlands
Development, entered into a $39,000,000 credit agreement to finance the
construction of a hotel. This agreement matures in December 2005. At December
31, 2001 the outstanding balance was $5,611,000. The interest rate, based on the
London Interbank Offered Rate plus a margin, is approximately 4.9% at December
31, 2001. Interest is paid monthly. No principal payments are due until 2005.
The credit agreement contains certain restrictions which, among other things,
require the maintenance of specified financial ratios and restrict indebtedness
and leasing. At December 31, 2001, The Woodlands Hotel, L.P. was in compliance
with its debt covenants. Certain assets of the subsidiary secure the agreement.

DERIVATIVES. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" establish accounting and reporting standards for derivative

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instruments and hedging activities. Derivative instruments are recorded on the
balance sheet at fair value by "marking-to-market" all derivatives at
period-end. Changes in fair value are recorded as an increase or decrease in
partners' equity through either comprehensive income or net earnings, depending
on the facts and circumstances with respect to the derivatives and their
documentation. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document and assess the
effectiveness of transactions that receive hedge accounting. To the extent that
changes in market values are initially recorded in other comprehensive income,
such changes reverse out and are recorded in net earnings in the same period in
which the hedged item affects earnings. On January 1, 2001 the adoption of these
standards resulted in a reduction of derivative instruments of $744,000. Of this
amount, $352,000 is reported in net earnings as a cumulative effect of a change
in accounting principle and $392,000 is reported in other comprehensive loss.

MORTGAGES PAYABLE. The mortgages payable have debt maturities for the years
subsequent to December 31, 2001 totaling $731,000, $793,000, $3,250,000,
$2,345,000, $4,201,000 and $101,000 thereafter. Mortgages payable are secured by
certain tracts of land.

(6) NOTES PAYABLE TO PARTNERS

Woodlands Development has notes payable to its partners totaling
$25,000,000. The notes bear interest at 15%. Interest is payable quarterly. All
outstanding balances are due in 2007. These notes are subordinate to the bank
credit agreement and mortgages payable described above.

(7) COMMITMENTS AND CONTINGENCIES

CONTINGENT LIABILITIES. At December 31, 2001 and 2000, the CMS Partnerships
had contingent liabilities totaling approximately $13,600,000 and $11,500,000,
consisting of letters of credit and commitments to complete certain improvements
in The Woodlands. Under the terms of a land sales agreement, Woodlands
Development has committed to construct, or cause to be constructed, certain
improvements in The Woodlands and is contingently liable for up to $2,100,000 in
liquidating damages if the improvements are not complete by certain dates.

204

LEASES. The CMS Partnerships have various noncancellable facilities and
equipment lease agreements which provide for aggregate future payments of
approximately $36,600,000, most of which is due from Woodlands Commercial. Lease
terms extend to 2009 and have an average remaining term of seven years. Minimum
rentals for the years subsequent to December 31, 2001 total approximately
$5,247,000, $5,156,000, $4,791,000, $4,901,000, $5,102,000 and $11,411,000
thereafter. Rental expense for operating leases for the years ended December 31,
2001 and 2000 follows (in thousands):

LEGAL ACTIONS. The 221st Judicial District Court of Montgomery County,
Texas entered a judgment against Woodlands Development in October 1999 awarding
a total of $1,433,000 in damages to the plaintiffs. In addition to these
damages, the judgment also awarded attorneys' fees and postjudgment interest.
Woodlands Development appealed the ruling. In May 2001, the Ninth District Court
of Appeals reversed, reformed and affirmed, in part, the lower court's judgement
and awarded a total of $127,220 that was paid in full by Woodlands Development
to the plaintiffs in August 2001.

The CMS Partnerships are also a party to other claims and legal actions
arising in the ordinary course of their business and to recurring examinations
by the Internal Revenue Service and other regulatory agencies.

Management believes, after consultation with outside counsel, that adequate
financial statement accruals have been provided for all known litigation
contingencies where losses are deemed probable. Based on the status of the
cases, the CMS Partnerships are unable to determine a range of such possible
additional losses, if any, that might be incurred. The CMS Partnerships believe
it is not probable that the ultimate resolution of these actions will have a
material adverse effect on their financial position.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Woodlands Operating has deferred
compensation arrangements for a select group of management employees that
provides the opportunity to defer a portion of their cash compensation.
Woodlands Operating's obligations under this plan are unsecured general
obligations to pay in the future the value of the deferred compensation adjusted
to reflect the performance of their investments, whether positive or negative,
of selected measurement options, chosen by each participant, during the deferral
period. Woodlands Operating has established trust accounts on behalf of the
participating employees that are included in other assets.

INCENTIVE PLANS. Woodlands Operating instituted an incentive compensation
plan for certain employees effective January 1, 1998. In 2001, final payments
were made to employees and this plan was terminated. Effective in 2001 a new
incentive compensation plan was initiated. The plan is unfunded and while
certain payments are made currently, a portion of these payments is deferred and

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will be paid based on a vesting period of three years. For the years ended
December 31, 2001 and 2000, the CMS Partnerships recognized expenses of
$3,674,000 and $2,744,000 under these plans.

(8) RELATED PARTY TRANSACTIONS

Woodlands Operating provides services to Woodlands Development and
Woodlands Commercial under management and advisory services agreements. These
agreements are automatically renewed annually. Woodlands Development and
Woodlands Commercial pay Woodlands Operating an advisory fee equal to cost plus
3%. In addition, they reimburse Woodlands Operating for all costs and expenses
incurred on their behalf. For the years ended December 31, 2001 and 2000,
Woodlands Operating recorded revenues of $12,795,000 and $12,606,000 for
services provided to Woodlands Development, and $5,129,000 and $6,398,000 for
services provided to Woodlands Commercial.

WECCR GP leases The Woodlands Conference Center, Resort and Country Club
("the Facilities") from Woodlands Commercial. This agreement has an eight-year
term ending July 31, 2005. WECCR GP operates the Facilities and pays Woodlands
Commercial a base rent of $750,000 per month and a quarterly percentage rent
based on the gross receipts of the Facilities. For the years ended December 31,
2001 and 2000, rent under the lease agreement totaled $13,604,000 and
$14,349,000.

In July 1999, Woodlands Development purchased approximately 1,000 acres of
land in The Woodlands from Woodlands Commercial for $33,090,000, the then
current fair market value which approximated the carrying cost. No gain or loss
was recognized from the transaction. The transaction consisted of cash and a
$26,000,000 note. The note bears interest at 8.5% and matures in August 2009.
For the years ended December 31, 2001 and 2000, interest totaled $931,000 and
$1,616,000. Interest is eliminated in the accompanying combining financial
statements. Principal and interest payments are due quarterly and additional
principal payments are due when a portion of the land is conveyed to a third
party or built upon. The note is unsecured and subordinate to the bank credit
agreement described in Note 5.

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(9) PARTNERS' EQUITY

Crescent's ownership interests in the CMS Partnerships are through The
Woodlands Land Company, Inc., Crescent Real Estate Equities Limited Partnership,
CresWood Development, L.L.C., and WOCOI Investment Company. Morgan Stanley's
ownership interests are through MS/TWC Joint Venture and MS TWC, Inc. The
partners' percentage interests are summarized below:

The partnership agreements for each of the partnerships provide, among
other things, the following:

(i) Woodlands Development, Woodlands Commercial and Woodlands Operating
are each governed by an Executive Committee composed of equal representation
from their respective general partners.

(ii) Net income and losses from operations are currently allocated so
that partners' capital accounts stand in the ratio of the percentage interest
listed above.

(iii) Distributions are made to partners based on specified payout
percentages and include cumulative preferred returns to Morgan Stanley's
affiliates. The payout percentage to Morgan Stanley's affiliates is 57.5% until
the affiliates receive distributions equal to their capital contributions and a
12% cumulative preferred return compounded quarterly. Then, the payout
percentage to Morgan Stanley's affiliates is 50.5% until the affiliates receive
distributions equal to their capital contributions and an 18% cumulative
preferred return compounded quarterly. Thereafter, the payout percentage to
Morgan Stanley's affiliates is 47.5%. During 2001, Morgan Stanley's affiliates
received sufficient cumulative distributions to exceed their capital
contributions plus cumulative returns of 18%. Accordingly, Morgan Stanley's
affiliates are currently receiving a payout percentage of 47.5% and Crescent's
affiliates are receiving 52.5%.

(iv) The CMS Partnerships will continue to exist until December 31,
2040 unless terminated earlier due to specified events.

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(v) No additional partners may be admitted to the CMS Partnerships
unless specific conditions in the partnership agreements are met. Partnership
interests may be transferred to affiliates of Crescent or Morgan Stanley.
Crescent has the right of first refusal to buy the partnership interests of the
Morgan Stanley affiliates at the same terms and conditions offered to a third
party purchaser, or sell its affiliates' interests to the same third party
purchaser.

(vi) Crescent and Morgan Stanley have the right to offer to purchase
the other partner's affiliates' partnership interests in the event of failure to
make specified capital contributions or a specified default by the other.
Specified defaults include bankruptcy, breach of partnership covenants, transfer
of partnership interests except as permitted by the partnership agreements, and
fraud or gross negligence.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the CMS Partnerships'
financial instruments as of December 31, 2001 and 2000 follows (in thousands):

Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could be
made for similar maturities to borrowers with comparable credit ratings. Fair
values of fixed-rate, long-term debt were based on current interest rates
offered to the CMS Partnerships for debt with similar remaining maturities. For
floating-rate debt obligations, carrying amounts and fair values were assumed to
be equal because of the nature of these obligations. The carrying amounts of the
CMS Partnerships' other financial instruments approximate their fair values.

(11) EMPLOYEE SAVINGS PLAN

Woodlands Operating has a 401(k) defined contribution plan that is
available to all full-time employees who meet specified service requirements.
The plan is administered by a third party. Contributions to the plan are based
on a match of employee contributions up to a specified limit. For

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the years ended December 31, 2001 and 2000, Woodlands Operating contributions
totaled $707,000 and $634,000.

(12) SUBSEQUENT EVENT

On February 14, 2002, Crescent Real Estate Equities Company ("CREEC") and
Crescent Operating, Inc. ("COPI") entered into an agreement that provides for
the transfer of certain assets of COPI to CREEC in satisfaction of indebtedness
and lease obligations and for the filing of a prepackaged bankruptcy plan by
COPI. Pursuant to the agreement, COPI transferred its interest in The Woodlands
Land Company, Inc. to CREEC on February 14, 2002, and will also transfer its
interest in WOCOI Investment Company to CREEC. Management does not believe that
the transfer of COPI's assets to CREEC or the planned bankruptcy filing by COPI
will have a material adverse impact on the financial position or results of
operations of the CMS Partnerships, individually or on a combined basis.

209

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

Not applicable.

PART III

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

ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2003.

210

ITEM 11. EXECUTIVE COMPENSATION

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2003.

ITEM 14. 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.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

Report of Independent Auditors

Crescent Real Estate Equities Company Consolidated Balance Sheets at
December 31, 2002 and 2001.

Crescent Real Estate Equities Company Consolidated Statements of
Operations for the years ended December 31, 2002, 2001 and 2000.

Crescent Real Estate Equities Company Consolidated Statements of
Shareholders' Equity for the years ended December 31, 2002, 2001 and
2000.

211

Crescent Real Estate Equities Company Consolidated Statements of Cash
Flows for the years ended December 31, 2002, 2001 and 2000.

Crescent Real Estate Equities Company Notes to Consolidated Financial
Statements.

Financial Statement Schedules

Schedule III - Crescent Real Estate Equities Company Consolidated Real
Estate Investments and Accumulated Depreciation at December 31, 2002.

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

Financial Statements of Subsidiaries Not Consolidated and
Fifty-Percent-or-Less Owned Persons

(a)(2) Financial Statement Schedules and Financial Statements of Subsidiaries
Not Consolidated and Fifty-Percent-or- Less-Owned Persons

The Woodlands Land Development Company, L.P. , The Woodlands Commercial
Properties Company, L.P., and The Woodlands Operating Company, L.P.

Report of Independent Auditors................................................... 161

Combining Balance Sheet at December 31, 2002..................................... 162

Combining Statement of Earnings and Comprehensive Income
for the year ended December 31, 2002............................................. 163

Combining Statement of Changes in Partners' Equity (Deficit)
for the year ended December 31, 2002............................................. 164

Combining Statement of Cash Flows for the year ended December 31, 2000........... 165

Notes to Consolidated Financial Statements....................................... 167

The Woodlands Land Development Company, L.P., The Woodlands Commercial
Properties Company, L.P., and The Woodlands Operating Company, L.P.

Unaudited Combining Balance Sheets at December 31, 2001 and
2000 ............................................................................ 187

Unaudited Combining Statement of Earnings and Comprehensive Income for
the years ended December 31, 2001 and 2000 ...................................... 188

Unaudited Combining Statement of Changes in Partners' Equity (Deficit) for
the years ended December 31, 2001 and 2000 ...................................... 189

Unaudited Combining Statement of Cash Flows for the years ended
December 31, 2001 and 2000 ...................................................... 190

Notes to Combined Financial Statements (unaudited)............................... 191

The financial statement schedules and financial statements listed in
this Item 15(a)(2) are contained in Item 8, Financial Statements and
Supplementary Data.

212

(a) (3) Exhibits

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

(b) Reports on Form 8-K

None.

(c) Exhibits

See Item 15(a)(3) above.

(d) Financial Statement Schedules and Financial Statements of Subsidiaries
Not Consolidated and Fifty-Percent-or-Less- Owned Persons

See Item 15(a)(2) above.

213

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27 day of
March, 2003.

CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)

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

SIGNATURES

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

214

CERTIFICATIONS

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

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

2. Based on my knowledge, this annual 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
annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 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 annual
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
annual report (the "Evaluation Date"); and

c) presented in this annual 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 annual 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: March 27, 2003

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

215

CERTIFICATIONS

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

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

2. Based on my knowledge, this annual 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
annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual
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
annual report (the "Evaluation Date"); and

c) presented in this annual 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 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 annual 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: March 27, 2003

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

216

INDEX TO EXHIBITS

217

218

219

10.25 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Jane B. Page, dated as of
February 19, 2002 (filed as Exhibit No. 10.10 to the 1Q 2002
10-Q and incorporated herein by reference)

10.26 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and John L. Zogg, Jr., dated as
of February 19, 2002 (filed as Exhibit No. 10.11 to the 1Q
2002 10-Q and incorporated herein by reference)

10.27 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Dennis H. Alberts, dated as
of March 5, 2001 (filed as Exhibit No. 10.12 to the 1Q 2002
10-Q and incorporated herein by reference)

21.01 List of Subsidiaries (filed herewith)

23.01 Consent of Ernst & Young LLP (filed herewith)

23.02 Consent of Ernst & Young LLP (filed herewith)

99.01 Certifications of Chief Executive Officer and Chief Financial
and Accounting Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

220