CRESCENT REAL ESTATE EQUITIES LTD PARTNERSHIP - 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 NUMBERS 333-42293
333-89194-01

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP

CRESCENT FINANCE COMPANY *
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(Exact name of registrant as specified in its charter)

DELAWARE 75-2531304
DELAWARE 42-1536518
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)

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

Registrant's telephone number, including area code (817) 321-2100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such 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 2,306,464 units of
limited partnership interest held by non-affiliates of the registrant was
approximately $86.3 million, based on the closing price on the New York Stock
Exchange of $18.70 for common shares of beneficial interest of Crescent Real
Estate Equities Company. Each unit is exchangeable for two common shares.

DOCUMENTS INCORPORATED BY REFERENCE

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

* Crescent Finance Company meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and therefore is filing this form with the
reduced disclosure format.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

THE COMPANY

Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company"), through the Company's ownership of all of the
outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation
("the General Partner"), which owns an approximately 1% general partner interest
in the Operating Partnership. In addition, the Company owns an approximately 84%
limited partner interest in the Operating Partnership, with the remaining
approximately 15% limited partner interest held by other limited partners.

All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of December
31, 2002, the Company's approximately 84% limited partner interest has been
treated as equivalent, for purposes of this report, to 49,021,210 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,878,342 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 584,844 units.

The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.

Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.

At December 31, 2002, the assets and operations of the Operating
Partnership 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 Operating Partnership 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").

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o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership'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 Operating
Partnership'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 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 Operating Partnership 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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership's
"Investment Sector."

BUSINESS OBJECTIVES AND STRATEGIES

BUSINESS OBJECTIVES

The Operating Partnership's primary business objective is to provide
its shareholders with an attractive yet predictable growth in cash flow and
underlying asset value. Additionally, the Operating Partnership is focused on
increasing funds from operations and cash available for distribution, while
optimizing the corresponding growth rates. The Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership's premier
Class A Office Properties and luxury and destination fitness resorts
and spas.

INVESTING STRATEGIES

The Operating Partnership 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 Operating
Partnership's long-term investment strategy of acquiring properties at a
significant discount to replacement cost in an environment in which the
Operating Partnership 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 Operating Partnership's investment strategies include:

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

o selectively developing the Operating Partnership'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 Operating Partnership in
the five Residential Development Corporations and reinvesting
returned capital from the Residential Development Segment primarily
into the Office Segment where the Operating Partnership 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 Operating Partnership employs a disciplined set of financing
strategies to fund its operating and investing activities.

The Operating Partnership'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 Operating Partnership's lending group;

o minimizing the Operating Partnership'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 Operating Partnership had approximately 671
employees. None of these employees are covered by collective bargaining
agreements. The Operating Partnership considers its employee relations to be
good.

ENVIRONMENTAL MATTERS

The Operating Partnership 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 Operating
Partnership 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 Operating Partnership with existing environmental,
health and safety laws has not had a material adverse effect on the Operating
Partnership's financial condition and results of operations, and management does
not believe it will have such an impact in the future. In addition, the
Operating Partnership 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 Operating Partnership
cannot predict the impact of new or changed laws or regulations on its current
Properties or on properties that it may acquire in the future. The Operating
Partnership 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 Operating Partnership 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 Operating Partnership, 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 Operating Partnership provides management and leasing services
for the majority of its Office Properties.

See Item 2, "Properties," for more information about the Operating
Partnership'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 Operating Partnership and the
Properties owned by such subsidiaries. See Note 9, "Investments

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in Real Estate Mortgages and Equity of Unconsolidated Companies," of Item 8,
"Financial Statements and Supplementary Data," for a table that lists the
Operating Partnership's ownership in the seven Office Properties in which the
Operating Partnership owned an interest through unconsolidated joint ventures.

2002 TRANSACTIONS

JOINT VENTURES

Three Westlake Park

On August 21, 2002, the Operating Partnership 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 Operating
Partnership 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 Operating
Partnership 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 Operating Partnership, resulting from the sale of its 80% equity
interest and $6.6 million from the Operating Partnership's portion of mortgage
financing at the joint venture level.

Miami Center

On September 25, 2002, the Operating Partnership 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 Operating Partnership holds the
remaining 40% equity interest in the Office Property. The joint venture
generated approximately $111.0 million in net cash proceeds to the Operating
Partnership, resulting from the sale of its 60% equity interest and $32.4
million from the Operating Partnership's portion of mortgage financing at the
joint venture level.

Five Post Oak Park

On December 20, 2002, the Operating Partnership 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 Operating Partnership owns a 30% interest, in the
joint venture. The initial cash equity contribution to the joint venture was
$19.8 million, of which the Operating Partnership's portion was $5.9 million.
The Operating Partnership's equity contribution and an additional working
capital contribution of $0.3 million were funded through a draw under the
Operating Partnership'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 Operating Partnership acquired Johns Manville
Plaza, a 29-story, 675,000 square foot Class A office building located in
Denver, Colorado. The Operating Partnership acquired the Office Property for
approximately $91.2 million, funded by a draw on the Operating Partnership's
credit facility.

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Undeveloped Land

On November 26, 2002, the Operating Partnership purchased Duddlesten
Ventures-I, Ltd.'s 20% interest in the Crescent Duddlesten Hotel Partnership for
$11.1 million, funded by a draw on the Operating Partnership's credit facility,
and increasing the Operating Partnership's ownership percentage from 80% to
100%. This partnership owned 3.79 acres of undeveloped land in downtown Houston,
and therefore the Operating Partnership 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
Operating Partnership's Houston Center mixed-use Office Property complex, was
completed. The Operating Partnership 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 Operating Partnership 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 Operating Partnership
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 Operating Partnership, including cash payment on a note receivable of $10.6
million received on February 19, 2003. On January 18, 2002, the Operating
Partnership 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 Operating Partnership completed the
sale of the 6225 North 24th Street Office Property in Phoenix, Arizona. On
September 20, 2002 the Operating Partnership 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 Operating Partnership
completed the sale of approximately 10 acres of undeveloped land generating net
proceeds of approximately $53.4 million. On September 30, 2002, the Operating
Partnership 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 Operating Partnership completed the sale of approximately 5.46 acres of
undeveloped land near the Houston Convention Center in downtown Houston. On
December 31, 2002, the Operating Partnership completed the sale of approximately
3.12 acres of undeveloped land located in the Greenway Plaza office complex of
Houston, Texas.

MARKET INFORMATION

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

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The Operating Partnership'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 Operating Partnership Markets," these core Operating Partnership
markets are projected to outperform the 10-year averages for the United States.
In addition, the Operating Partnership 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 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 Operating
Partnership has invested are projected to continue to exceed the national
averages, as illustrated in the following table.

PROJECTED POPULATION GROWTH AND EMPLOYMENT GROWTH FOR ALL
OPERATING PARTNERSHIP MARKETS

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

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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 Operating
Partnership'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 Operating Partnership's total Office Segment
rental revenues for 2002. The Operating Partnership's top five customers
accounted for approximately 13% of the Operating Partnership's total Office
Segment rental revenues for the year ended December 31, 2002.

The Operating Partnership applies a well-defined leasing strategy in
order to capture the potential rental growth in the Operating Partnership's
portfolio of Office Properties as occupancy and rental rates increase within the
markets and the submarkets in which the Operating Partnership has invested. The
Operating Partnership'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 Operating
Partnership believes that the difference between the two rates is a useful
measure of the additional revenue that the Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 REITs (other than the Company), 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 Operating Partnership'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 Operating Partnership offers its customers, together with its
active preventive maintenance program and superior building locations within
markets, enhance the Operating Partnership's ability to attract and retain
customers for its Office Properties. In addition, as of December 31, 2002, on a
weighted average basis, the Operating Partnership owned approximately 16% of the
Class A office space in the 25 submarkets in which the Operating Partnership
owned Class A office properties, and 16% of the Class B office space in the two
submarkets in which the Operating Partnership owned Class B office properties.
Management believes that ownership of a significant percentage of office space
in a particular market reduces property operating expenses, enhances the
Operating Partnership's ability to attract and retain customers and potentially
results in increases in Operating Partnership net income.

RESORT/HOTEL SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2002, the Operating Partnership owned or had an
interest in ten Resort/Hotel Properties. The Operating Partnership 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 Operating
Partnership owns an 80.1% interest in the limited

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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 Operating Partnership 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 Operating Partnership owned a 9.9% interest
as of December 31, 2002. On March 14, 2003, the Operating Partnership 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 Operating Partnership guarantees.

2002 TRANSACTIONS

COPI TRANSACTION

Resort/Hotel Lease Transfers

Prior to February 14, 2002, the Operating Partnership had leased eight
of its Resort/Hotel Properties to subsidiaries of COPI pursuant to eight
separate leases. On February 14, 2002, the Operating Partnership executed an
agreement with COPI, pursuant to which COPI transferred to subsidiaries of the
Operating Partnership, 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership
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
Operating Partnership continues to hold the remaining 80.1% equity interest. The
Operating Partnership loaned $45.1 million to the joint venture. FHR has a
commitment to fund $10.0 million of future renovations at Sonoma Mission Inn &
Spa through a mezzanine loan. The Operating Partnership 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
Operating Partnership also holds an 80.1% equity interest.

11

Manalapan Hotel Partners

In October 2002, in a series of transactions, the Operating Partnership
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 Operating Partnership acquired the additional
interest in Manalapan for $6.5 million. Subsequently, the Operating Partnership
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 Operating Partnership holds the remaining 50% equity interest.
Manalapan secured a $56.0 million loan with Corus Bank. 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 Operating
Partnership. Westbrook's total equity contribution into Manalapan was $13.6
million. The Operating Partnership 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 Operating Partnership completed the sale of
30 acres of land adjacent to the Operating Partnership's Canyon Ranch - Tucson
Resort/Hotel Property located in Tucson, Arizona to an affiliate of the third
party management company of the Operating Partnership's Canyon Ranch
Resort/Hotel Properties. The sales price of the land was approximately $9.4
million, for which the Operating Partnership 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 Operating Partnership and was included in the Operating
Partnership's Resort/Hotel Segment. The Operating Partnership 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 Operating Partnership
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 Operating Partnership'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 Operating Partnership 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.

RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2002, the Operating Partnership 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 Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, pursuant to a strict foreclosure, COPI's voting interests in three
of the

12

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 Operating Partnership owned 97.44% of DBL
Holdings, Inc. ("DBL"). On January 3, 2003, the Operating Partnership 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 and sole director and Chief Executive Officer of the
General Partner. DBL owns 66.7% of the voting stock in two of the Operating
Partnership'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 Operating
Partnership, 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 TWLC. However, the increase in commercial lands sales at TWLC 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 TWLC during 2002 because most of CRDI's
units were under contract at the end of 2001 with planned closing in 2002.

COMPETITION

The Operating Partnership'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 TWLC, Desert Mountain and
the properties owned by CRDI, representing the Operating Partnership'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. The Woodlands estimates future build-out at
approximately 12,187 residential lots and approximately 1,473 acres of
commercial 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, Desert Mountain 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.

13

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 Operating Partnership 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 Operating Partnership 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 Operating
Partnership'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 Operating Partnership'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 Operating Partnership's share of which was $15.9 million.

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

On December 30, 2002, the Operating Partnership 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 Operating Partnership's
Temperature-Controlled Logistics Properties, for a purchase price of $20.0
million. On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Operating Partnership 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

14

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

OFFICE PROPERTIES

As of December 31, 2002, the Operating Partnership 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 Operating Partnership's Office Properties
are located primarily in the Dallas and Houston, Texas, metropolitan areas. As
of December 31, 2002, the Operating Partnership'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 Operating Partnership disposed of seven of its fully
consolidated Office Properties during 2002. On January 18, 2002, the Operating
Partnership 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 Operating Partnership completed the
sale of the 6225 North 24th Street Office Property in Phoenix, Arizona. On
September 20, 2002 the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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
Operating Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership has a 40.0% member interest in the limited
liability company that owns Miami Center.

(12) The Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 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 Operating Partnership's Office
Properties, based on information supplied to the Operating Partnership 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 Operating Partnership'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
Operating Partnership'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.

SQUARE FEET
-----------

Occupied Square Footage, per above 24,334,234

Add: Occupied but Non-Revenue Generating Square Footage 354,562

Add: Vacant Square Footage 3,627,060
-----------
Total Office Portfolio Net Rentable Area 28,315,856
===========

23

DALLAS OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership'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
Operating Partnership'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
Operating Partnership'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
Operating Partnership'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
Operating Partnership'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 Operating Partnership'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 Operating Partnership 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 Operating Partnership executed an agreement with COPI , pursuant
to which COPI transferred to subsidiaries of the Operating Partnership, in
lieu of foreclosure, COPI's lessee interests in those Resort/Hotel
Properties. As a result, subsidiaries of the Operating Partnership became
the lessees of the eight Resort/Hotel properties.

(2) On September 1, 2002, the Operating Partnership 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 Operating Partnership 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 Operating Partnership
acquired the remaining 75% interest. Subsequent to those transactions, the
Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership 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 Operating Partnership, 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership's fiscal year ended December 31, 2002.

29

PART II

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

MARKET INFORMATION AND DISTRIBUTIONS

The actual results of operations of the Operating Partnership 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 Operating Partnership;

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 Operating
Partnership; and

o the adequacy of cash reserves.

There is no established public trading market for the Registrant's
limited partner interests, including the associated units for limited partners
other than the Company and the General Partner ("Units"). The following table
sets forth the cash distributions paid per Unit during each quarter of fiscal
years 2002 and 2001. As of March 21, 2003, there were 36 record holders of
Units.

(1) Beginning with the third quarter of 2001, the Operating Partnership
reduced its quarterly distribution from $1.10 per Unit, or an annualized
distribution of 4.40 per Unit, to $0.75 per Unit, or an annualized
distribution of $3.00 per Unit.

Distributions are not taxable to the partners, but the partners'
allocable share of taxable income is taxable.

Distributions on the 10,800,000 Series A Convertible Cumulative
Preferred Units issued by the Operating Partnership in February 1998 and April
2002 are payable at the rate of $1.6875 per annum per Series A Convertible
Cumulative Preferred Unit, prior to distributions on the units.

30

Distributions on the 3,400,000 Series B Cumulative Redeemable Preferred
Units issued by the Operating Partnership in May and June 2002 are payable at
the rate of $2.3750 per annum per Series B Cumulative Redeemable Preferred Unit,
prior to distributions on the units.

ISSUANCES OF UNREGISTERED SECURITIES

During the quarter ended December 31, 2002, the Operating Partnership
issued an aggregate of 2,402,900 units to Richard E. Rainwater, Chairman of the
Board of Trust Managers of the Company, in exchange for his contribution to the
Operating Partnership of 4,805,800 common shares of the Company. The issuances
of units were exempt from registration as private placements under Section 4(2)
of the Securities Act.

31

ITEM 6. SELECTED FINANCIAL DATA

The following table includes certain financial information for the
Operating Partnership 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 LIMITED PARTNERSHIP
CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT UNIT 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 Operating Partnership.
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 Operating Partnership believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Operating Partnership's actual results could differ materially
from those described in the forward-looking statements.

The following factors might cause such a difference:

o The Operating Partnership'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 markets
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 Operating Partnership's ability to fund the
share repurchase program, increases in debt service associated with
increased debt and with variable-rate debt, and the Operating
Partnership'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 Operating Partnership's inability to obtain the confirmation of a
pre-packaged bankruptcy plan of COPI binding all creditors and
stockholders;

o The inability of the Operating Partnership 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 Operating
Partnership'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 Operating Partnership's ability to find acquisition and development
opportunities which meet the Operating Partnership's investment
strategy; and,

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

Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Operating Partnership 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 Operating Partnership'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 $318.1 million, or 44.7%, to $1.0 billion for
the year ended December 31, 2002, as compared to $711.8 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 Operating
Partnership 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 Operating Partnership
recognized lease payments related to these Properties); partially
offset by

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 Operating Partnership 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
$16.7 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 Operating Partnership'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 $40.4 million, or 60.4%, to $26.6
million; primarily attributable to:

o a decrease in interest income of $15.8 million as a result of the
repayment in full in August 2002 of a loan that was originated in
March 2000 from the Operating Partnership to Crescent SH IX, Inc.
("SH IX") in connection with the repurchase of 14,468,623 common
shares of the Company;

o a net $11.4 million decrease of 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 ($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 compared to the prior year 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 the
following:

o $3.8 million due to legal expenses of $2.6 million in which the
Operating Partnership received a settlement of $1.2 million
associated with the related sale of undeveloped land;

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

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

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

o $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 and estimated $18.0 million of COPI
bankruptcy costs to be funded by the Operating Partnership.

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

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

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

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

o $12.2 million impairments in 2002 resulting from the impairment
of the Operating Partnership'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;

37

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

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

o $7.9 million in administrative costs, security, repairs and
maintenance;

o $4.7 million in insurance costs;

o $3.3 million in expenses related to development and third
party management/leasing fees; and

o $1.6 million increase 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 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 $17.3 million increase in Office equity in net income, primarily
attributable to the gain from the sale of the Woodlands Mall
partnership in which the Operating Partnership had a 52.5%
economic interest; partially offset by

o 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 Operating Partnership's preferred member
interest into common stock of Reckson in May 2001 and lower
earnings for DBL and losses for Woodlands Operating Company, Inc.
aggregating $1.8 million;

o $4.1 million decrease in Temperature-Controlled Logistics equity
in net income, primarily as a result of the Operating
Partnership's $2.7 million portion of AmeriCold Logistics'
deferral of rent payable and the Operating Partnership'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, 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 $6.9 million, to $9.7 million for the year ended December 31, 2002.
The primary components of the increase in income from discontinued operations
are:

o an increase of $13.2 million on dispositions attributable to the gains
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

38

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 operating income in 2002; and

o a decrease of $1.3 million due to the write-off of goodwill at EWRT I
and EWRT II, which were sold in 2002.

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

REVENUES

Total revenues decreased $13.6 million, or 1.9%, to $711.8 million for
the year ended December 31, 2001, as compared to $725.3 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%, for the year ended December 31, 2001, as compared to the year
ended December 31, 2000, is attributable to the following:

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 the following:

o increased revenues of $34.4 million from 65 Office Properties that the
Operating Partnership 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, compared to the
disposition of five Office Properties and the joint ventures of two
Office Properties during 2001; and

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

The increase in interest and other income of $5.4 million, or 8.8%, is
primarily due to increased interest income of $8.0 million, as a result of
interest earned on a loan which originated in March 2000 from the Operating
Partnership to SH IX in connection with the repurchase of 14,468,623 common
shares of the Company.

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 the following:

o increased expenses of $24.4 million from the 65 consolidated Office
Properties that the Operating Partnership owned or had an interest in
as of December 31, 2001, excluding the four Office Properties held for
sale at

39

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, compared to the
disposition of five Office Properties and the joint ventures of two
Office Properties during 2001.

The decrease in interest expense of $20.8 million, or 10.2%, for the
year ended December 31, 2001, as compared to the same period in 2000, is
primarily attributable to a decrease in the weighted average interest rate of
0.61%, or $14.0 million of interest expense, combined with a decrease in the
average debt balance of $104.0 million, or $8.0 million of interest expense.

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

o the conversion of the Operating Partnership's preferred member interest
in Metropolitan Partners, LLC ("Metropolitan") into common stock of
Reckson Associates Realty Corp. ("Reckson"), which resulted in an
impairment charge of $11.9 million; 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 a fund which primarily
holds real estate investments and marketable securities, in which the
Operating Partnership has an interest; 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 Operating Partnership 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 following:

The decrease in equity in net income of unconsolidated companies of
$24.5 million, or 32.4%, for the year ended December 31, 2001, as compared to
the same period in 2000, is primarily attributable to 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 Operating
Partnership's preferred member interest into common stock of Reckson in
May 2001, the $1.0 million write-off of the Operating Partnership's
investment in a retail distribution company and lower earnings from DBL
Holdings, Inc. ("DBL") of $1.7 million, due to an approximate $12.2
million return of investment received in March 2001; partially offset
by

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

The net decrease in gain on property sales of $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.

40

DISCONTINUED OPERATIONS

The income from discontinued operations from assets sold and held for
sale decreased $1.4 million, or 33.3%, to $2.8 million for the year ended
December 31, 2001, compared to $4.2 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 decrease in extraordinary items of $7.8 million, or 177.2%, is
attributable to the write-off of deferred financing costs related to the early
extinguishment of the UBS Facility in May 2001 of $12.2 million, compared with
the write-off of deferred financing costs related to the early extinguishment of
the Bank Boston Facility in February 2000 of $4.4 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $75.4 million and $31.6 million at
December 31, 2002 and 2001, respectively. This 139% increase is attributable to
$352.7 million provided by operating and investing activities, partially offset
by $308.9 million used in financing activities.

CASH FLOWS

OPERATING ACTIVITIES

The Operating Partnership's cash provided by operating activities of
$266.1 million is attributable to Property operations.

INVESTING ACTIVITIES

The Operating Partnership's cash provided by investing activities of
$86.6 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 Operating Partnership's
February 14, 2002 transaction with COPI; and

41

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;

o $19.3 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 Operating Partnership's use of cash in financing activities of
$308.9 million is primarily attributable to:

o net payments under the Operating Partnership'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 Operating Partnership'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 redemptions of preferred interests in a subsidiary of the
Operating Partnership of $218.4 million;

o distributions to unitholders of $221.6 million;

o distributions to preferred unitholders 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 units;

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

o capital contributions of $2.4 million from the Company; and

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

42

LIQUIDITY REQUIREMENTS

As of December 31, 2002, the Operating Partnership had unfunded capital
expenditures of approximately $95.7 million relating to capital investments that
are not in the ordinary course of operations of the Operating Partnership's
business segments. The table below specifies the Operating Partnership's
requirements for capital expenditures and its 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 Operating Partnership'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 Operating
Partnership'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
Operating Partnership 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 Operating Partnership anticipates sales to occur in 2003.

(7) The Operating Partnership 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 Operating Partnership's investment in a
private equity fund.

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

The Operating Partnership 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
Operating Partnership's credit facility. The Operating Partnership 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 Operating
Partnership's credit facility.

The Operating Partnership 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), 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

43

the extent that the Operating Partnership's cash flow from operating activities
is not sufficient to finance such short-term liquidity requirements, the
Operating Partnership expects to finance such requirements with borrowings under
the Operating Partnership's credit facility.

The Operating Partnership'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 Operating Partnership also has
$8.4 million of long-term capital expenditure requirements. The Operating
Partnership 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.

Equity and debt financing alternatives currently available to the
Operating Partnership to satisfy its liquidity requirements and commitments for
material capital expenditures include:

o Additional proceeds from the Operating Partnership's credit facility,
under which the Operating Partnership 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 Operating Partnership's ability
to utilize these financing alternatives:

o The reduction in net operating income of the Properties supporting the
Operating Partnership's credit facility to a level that would reduce
the availability under the line of credit facility;

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

o Restrictions on the Operating Partnership'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 Operating Partnership may be unable to service additional or
replacement debt due to increases in interest rates or a decline in the
Operating Partnership's operating performance.

44

In addition to the Operating Partnership's liquidity requirements, the
Operating Partnership 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
Operating Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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.

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. In connection with the
April 2002 Series A Preferred Offering, the Operating Partnership issued
additional Series A Preferred Units to the Company in exchange for the
contribution of the net proceeds, after underwriting discounts and other
offering costs of approximately $2.2 million, of approximately $48.2 million.
The net proceeds from the April 2002 Series A Preferred offering were used by
the Operating Partnership 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 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

45

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. In connection with the May 2002 Series B Preferred Offering, the
Operating Partnership issued Series B Preferred Units to the Company in exchange
for the contribution of the net proceeds, after underwriting discounts and other
offering costs of approximately $2.8 million, of approximately $72.3 million.
The net proceeds from the May 2002 Series B Preferred Offering were used by the
Operating Partnership 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
(the "June 2002 Series B Preferred Offering"). In connection with the June 2002
Series B Preferred Offering, the Operating Partnership issued additional Series
B Preferred Units to the Company in exchange for the contribution of the net
proceeds, after underwriting discounts and other offering costs of approximately
$0.4 million, of approximately $9.6 million. The net proceeds from the June 2002
Series B Preferred Offering were used by the Operating Partnership 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 AND INTRACOMPANY LOAN

As of December 31, 2002, Funding IX held one Office Property and one
Resort/Hotel Property. The Operating Partnership 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 Operating Partnership
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
Operating Partnership's option at the original price. As of December 31, 2000,
the Operating Partnership 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 Operating Partnership 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, 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

IMPACT ON FINANCIAL STATEMENTS OF INTRACOMPANY LOAN

As of December 31, 2001, Funding IX had loaned a total of $281,107 from
the net proceeds from the sale of the Class A Units and a portion of the net
proceeds of the sale of one of the properties held by Funding IX to SH IX. SH IX
repaid the note in full in August 2002.

The operations, assets and liabilities of Funding IX and SH IX are
consolidated with those of the Company in the Company's consolidated financial
statements. The operations, assets and liabilities of Funding IX (but not those
of SH IX) are consolidated with those of the Operating Partnership in the
consolidated financial statements of the Operating Partnership. As a result, the
note and the payments on the note by SH IX to Funding IX are eliminated in the
Company's financial statements but are not eliminated in the financial
statements of the Operating Partnership. These items, therefore, are included in
the Operating Partnership's financial statements in "Notes Receivable, Net" as
of December 31, 2002 and 2001 and in "Interest and Other Income" for the years
ended December 31, 2002, 2001 and 2000.

The following table compares the current financial statements of the
Operating Partnership prepared in accordance with GAAP and the adjusted
Operating Partnership financial statements, adjusted for the elimination of the
intracompany loan and associated interest income. This table provides certain
components of the financial statements that would be affected by the elimination
of the intracompany loan, accrued interest related to the loan and associated
interest income.

47

(1) The weighted average units used to calculate basic and diluted earnings
per unit in accordance with GAAP include the common shares of the
Company held in SH IX of 9,632,535 (4,816,268 equivalent units),
14,468,623 (7,234,312 equivalent units) and 8,184 578 (4,092,289
equivalent units) for the years ended December 31, 2002, 2001 and 2000,
respectively. The adjusted basic and diluted earnings per unit after
the elimination of the intracompany loan exclude the common shares of
the Company held in SH IX.

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 Operating Partnership 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 Operating
Partnership'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. The issuance of common shares by
the Company will increase the Company's limited partner interest, which will
result in a decrease in net income per unit.

48

DEBT FINANCING ARRANGEMENTS

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

49

(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 Operating Partnership 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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership 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
Operating Partnership'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 Operating Partnership so
elects, it may repay the note without penalty at that date. It is the
intent of the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership's
equity interest in the properties owned by Funding I and Funding II. The
Term Loan requires the Operating Partnership 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,
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 and bear interest at the
30-day LIBOR rate plus a spread of 164.7 basis points (at December 31,
2002, the interest rate was 5.15%) for the $185.0 Senior Note and a spread
of 600 basis points (at December 31, 2002, the interest rate was 9.50%) for
the $35.0 Mezzanine note. 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 Operating Partnership 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 Operating Partnership'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 Operating
Partnership 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, and a minimum net worth
requirement. 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.

50

The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these type of covenants. The significant
financial covenants relating to the Operating Partnership's debt are summarized
in the notes to the preceding table. The affirmative covenants to which the
Operating Partnership is subject under its debt agreements include, among
others, provisions requiring the Operating Partnership 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 Operating
Partnership's debt agreements generally restrict the Operating Partnership's
ability to transfer or pledge assets or incur additional debt at a subsidiary
level limit, the Operating Partnership's ability to engage in transactions with
affiliates and place conditions on the Operating Partnership's or a subsidiary's
ability to make distributions. The Operating Partnership'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 Operating Partnership to pay
penalties or increase collateral to the Operating Partnership's existing debt.

Any uncured or unwaived events of default under the Operating
Partnership's loans can trigger an acceleration of payment on the loan in
default. In addition, a default by the Operating Partnership 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
Operating Partnership was in compliance with all of its financial covenants
related to its outstanding debt.

The following table shows information about the Operating Partnership's
consolidated fixed and variable rate debt and does not take into account any
extension options, hedging arrangements or the Operating Partnership'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 Operating Partnership's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of December 31, 2002 under indebtedness of the Operating Partnership. 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.

51

The Operating Partnership 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 Operating Partnership 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 Operating
Partnership's credit facility.

The Operating Partnership'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.

DEBT OFFERING

On April 15, 2002, the Operating Partnership and Crescent Finance
Company completed a private offering of $375.0 million in senior, unsecured
notes due 2009. On October 15, 2002, the Operating Partnership and Crescent
Finance Company completed an exchange offer pursuant to which they exchanged
notes registered with the Securities and Exchange Commission for $325.0 million
of the privately issued notes. In addition, the Operating Partnership and
Crescent Finance 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership's variable rate debt to fixed
rate debt and to manage its fixed to variable rate debt ratio. To accomplish
this objective, the Operating Partnership 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 Operating Partnership 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."

52

The following table shows information regarding the Operating
Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership, 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.

53

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 Operating Partnership'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 Operating Partnership 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
Operating Partnership'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.

54

2002 TRANSACTIONS

COPI

In April 1997, the Operating Partnership 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 Operating Partnership and to perform the intercompany agreement
between COPI and the Operating Partnership, pursuant to which each party agreed
to provide the other with rights to participate in certain transactions. The
Operating Partnership 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 Operating Partnership 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 Operating Partnership, through its subsidiaries, to
operate or lease certain of its investments that had previously been operated or
leased by COPI.

The Operating Partnership 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 Operating Partnership executed an agreement
(the "Agreement") with COPI, pursuant to which COPI transferred to subsidiaries
of the Operating Partnership, 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 Operating Partnership's Residential Development Corporations and other
assets. The Operating Partnership 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 Operating Partnership 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 Operating Partnership; however, in conformity with
GAAP, the Operating Partnership assigned no value to these interests for
financial reporting purposes.

The Operating Partnership 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 Operating
Partnership. The Operating Partnership 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.

55

The Agreement provides that COPI and the Operating Partnership 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 Operating Partnership 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 Operating Partnership also agreed, however, that the Company will issue
common shares of the Company 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 Operating
Partnership 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 Operating Partnership 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
Operating Partnership expects to form and capitalize a new entity ("Crescent
Spinco"), to be owned by the shareholders of the Company and unitholders of the
Operating Partnership. 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 Operating Partnership. 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 and sole director and Chief Executive Officer of the
General Partner, 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 Operating Partnership held a first lien security
interest in COPI's entire membership interest in AmeriCold Logistics. REIT rules
prohibit the Operating Partnership from acquiring or owning the membership
interest that COPI owns in AmeriCold Logistics. Under the Agreement, the
Operating Partnership 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 Operating Partnership acquired Johns Manville
Plaza, a 29-story, 675,000 square foot Class A office building located in
Denver, Colorado. The Operating Partnership acquired the Office Property for
approximately

56

$91.2 million, funded by a draw on the Operating Partnership's credit facility.
The Office Property is wholly-owned and included in the Operating Partnership's
Office Segment.

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

OFFICE SEGMENT - CONSOLIDATED

On January 18, 2002, the Operating Partnership 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 Operating Partnership's credit facility.
This property was wholly-owned.

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

On August 1, 2002, the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership's share
was approximately $3.6 million. The net proceeds were used primarily to pay down
the Operating Partnership's credit facility. These two properties were
consolidated joint venture properties.

57

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 Operating Partnership's
portion was approximately $6.4 million. The sales generated a net gain of
approximately $13.5 million, of which the Operating Partnership's portion was
approximately $7.1 million. The proceeds were used primarily to pay down the
Operating Partnership'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 Operating
Partnership'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 Operating
Partnership's portion was approximately $17.7 million. The proceeds were used
primarily to pay down the Operating Partnership's credit facility.

OFFICE SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Operating Partnership 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 Operating Partnership's credit facility.
This land was wholly-owned by the Operating Partnership.

On December 31, 2002, the Operating Partnership 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
Operating Partnership. 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 Operating Partnership 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 Operating Partnership's credit facility. This land was
wholly-owned by the Operating Partnership.

On December 31, 2002, the Operating Partnership 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 Operating
Partnership's credit facility. This land was wholly-owned by the Operating
Partnership.

RESORT/HOTEL SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Operating Partnership completed the sale of
30 acres of land adjacent to the Operating Partnership's Canyon Ranch - Tucson
Resort/Hotel Property, located in Tucson, Arizona, to an affiliate of the third
party management company of the Operating Partnership's Canyon Ranch
Resort/Hotel Properties. The sales price of the land was approximately $9.4
million, for which the Operating Partnership 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 Operating
Partnership 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 Operating
Partnership's credit facility. This land was wholly-owned by the Operating
Partnership. The Operating Partnership 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 Operating Partnership 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 Operating
Partnership, 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 Operating Partnership recognized a
$1.4 million gain, after tax, related to the sale of these companies.

58

JOINT VENTURES

OFFICE SEGMENT - UNCONSOLIDATED

Three Westlake Park

On August 21, 2002, the Operating Partnership 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 Operating
Partnership 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 Operating
Partnership 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 Operating
Partnership, resulting from the sale of its 80% equity interest and $6.6 million
from the Operating Partnership's portion of mortgage financing at the joint
venture level. None of the mortgage financing at the joint venture level is
guaranteed by the Operating Partnership. The Operating Partnership 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 Operating Partnership's credit facility.
The Operating Partnership manages and leases the Office Property on a fee basis.

Miami Center

On September 25, 2002, the Operating Partnership 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 Operating Partnership 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
Operating Partnership, resulting from the sale of its 60% equity interest and
$32.4 million from the Operating Partnership's portion of mortgage financing at
the joint venture level. None of the mortgage financing at the joint venture
level is guaranteed by the Operating Partnership. The Operating Partnership 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 Operating Partnership's
credit facility. The Operating Partnership manages the Office Property on a fee
basis.

Five Post Oak Park

On December 20, 2002, the Operating Partnership 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 Operating Partnership owns a 30% interest in the
joint venture. The initial cash equity contribution to the joint venture was
$19.8 million, of which the Operating Partnership's portion was $5.9 million.
The Operating Partnership's equity contribution and an additional working
capital contribution of $0.3 million were funded through a draw under the
Operating Partnership'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 Operating Partnership. The Operating Partnership manages and
leases the Office Property on a fee basis.

RESORT/HOTEL SEGMENT - CONSOLIDATED

Sonoma Mission Inn & Spa

On September 1, 2002, the Operating Partnership 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 Operating Partnership
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 Operating Partnership
continues to hold the remaining 80.1% equity interest. The joint venture
generated approximately $8.0 million in net cash proceeds to the Operating
Partnership that were used to pay down the Operating Partnership's credit
facility. The Operating

59

Partnership 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 Operating Partnership's $45.1 million loan for two
successive six-month periods by paying a fee. The Operating Partnership 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
Operating Partnership 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 Operating Partnership also holds an 80.1% equity interest.

RESORT/HOTEL SEGMENT - UNCONSOLIDATED

Manalapan Hotel Partners

In October 2002, in a series of transactions, the Operating Partnership
acquired the remaining 75% economic interest in Manalapan Hotel Partners, L.L.C.
("Manalapan"), which owns the Ritz Carlton Palm Beach in Florida. The Operating
Partnership acquired the additional interests in Manalapan for $6.5 million,
which was funded by a draw on the Operating Partnership's credit facility.
Subsequently, the Operating Partnership 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 Operating Partnership holds
the remaining 50% equity interest. The Operating Partnership 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 Operating Partnership'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 Operating
Partnership. 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
Operating Partnership and Westbrook each obtained a letter of credit to
guarantee up to $3.0 million of the Corus Bank loan. The Operating Partnership
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 Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership contributed approximately $3.1 million to
VCQ for the purchase of the receivables. The Operating Partnership accounts for
this investment as an unconsolidated equity investment because the Operating
Partnership 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. and its subsidiaries under a triple-net
master lease.

60

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.

As of December 31, 2002, the Operating Partnership owned seven
behavioral healthcare properties. After recognition of a $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 sales. The Operating Partnership 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. The repurchase of common
shares by the Company will increase the Company's limited partner interest,
which will result in a decrease in net income per unit.

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

- ----------
(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 shares to the Company's scholarship fund
during the year ended December 31, 2002. These shares were issued out of
Treasury Shares.

The Operating Partnership 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 Operating
Partnership. 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.

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UNCONSOLIDATED INVESTMENTS

INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES

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

The Operating Partnership has other unconsolidated equity investments
with interests ranging from 30% to 97.4%. The Operating Partnership 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.

62

The following is a summary of the Operating Partnership'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 Operating Partnership purchased the remaining economic interest,
representing all of the voting stock, in DBL. As a result, the
Operating Partnership will consolidate the operations of MVDC
beginning on January 3, 2003. See Note 26, "Subsequent Events," for
additional information regarding the Operating Partnership'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 Operating
Partnership purchased the remaining economic interest, representing
all of the voting stock in DBL. As a result, the Operating Partnership
will consolidate the operations of HADC beginning on January 3, 2003.
See Note 26, "Subsequent Events," for additional information regarding
the Operating Partnership's purchase of the DBL interest.

(8) On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of the
Operating Partnership, pursuant to a strict foreclosure, COPI's
interests in the voting stock in three of the Operating Partnership's
Residential Development Corporations DMDC, TWLC, CRDI and in CRL
Investments, Inc. ("CRLI"). As a result, the Operating Partnership
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 Operating Partnership was 52.5%.

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

(12) Prior to October 2002, Manalapan was an unconsolidated investment of
the Operating Partnership in which CRDI held a 25% equity interest. In
October 2002, in a series of transactions, the Operating Partnership
acquired the remaining 75% interest in Manalapan. Subsequent to that
transaction, the Operating Partnership 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 Operating
Partnership.

(13) The remaining 60% interest in the Vornado Crescent Portland
Partnership is owned by Vornado Realty Trust, L.P. (14) The remaining
44% in Vornado Crescent Carthage and KC Quarry, L.L.C. Partnership is
owned by Vornado Realty Trust, L.P.

63

(15) John Goff, Vice-Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company and sole director and Chief Executive
Officer of the General Partner, 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 Operating Partnership purchased the
remaining economic interest representing all of the voting stock in
DBL See Note 26, "Subsequent Events," for additional information
regarding the Operating Partnership'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 Operating
Partnership'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 Operating
Partnership'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 Operating Partnership. The
Operating Partnership's ownership percentage will decline by the
closing date of the Fund as capital commitments from third parties are
secured. The Operating Partnership'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
Operating Partnership accounts for its investment in the Fund under
the cost method. The Operating Partnership's investment at December
31, 2002 was $10.4 million.

64

UNCONSOLIDATED DEBT ANALYSIS

The significant terms of the Operating Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Parntership 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 Operating Partnership obtained a Letter of Credit to guarantee up to
$3.0 million of this facility.

65

The following table shows, as of December 31, 2002, information about
the Operating Partnership'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 Operating Partnership's share of aggregate
principal payments, by year, required as of December 31, 2002 related to the
Operating Partnership'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 Operating Partnership 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 Operating Partnership 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,

66

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 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
Operating Partnership 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 Operating
Partnership's share of which was $15.9 million. The Temperature-Controlled
Logistics Corporation and the Operating Partnership 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 Operating Partnership
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 Operating
Partnership's share of deferred rent was $12.9 million.

The following table shows the total and the Operating Partnership'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 Operating Partnership also held a 56%
interest in VCQ. See "Joint Ventures - Temperature - Controlled Logistics
Segment" in this Item 7 for additional information regarding this investment.

IMPAIRMENTS OF UNCONSOLIDATED INVESTMENTS

CR License, L.L.C. and CRL Investments, Inc.

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, 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 Operating Partnership 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
Operating Partnership 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 Operating
Partnership 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 Operating Partnership's Consolidated
Statements of Operations in "Impairment and Other Charges related to Real Estate
Assets."

67

Metropolitan Partners, LLC

On May 24, 2001, the Operating Partnership 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 Operating Partnership's
Consolidated Statements of Operations. The Operating Partnership 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 Operating Partnership's credit facility.

Other

During the years ended December 31, 2001 and 2000, the Operating
Partnership 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 Operating Partnership's investment in a fund
that primarily held real estate investments and marketable securities.

68

RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC. ("DBL")

As of December 31, 2002, the Operating Partnership 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 and sole director and Chief
Executive Officer of the General Partner. 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership. 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
Operating Partnership recognized a charge related to this investment of $5.2
million reflected in "Equity and net income (loss) of unconsolidated companies,
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 Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to the Operating Partnership,
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 and sole
director and Chief Executive Officer of the General Partner, 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 Operating Partnership 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 Operating Partnership
fully consolidated the operations of CRDI as of the date of the asset transfer.

On December 30, 2002, the Operating Partnership purchased the 40%
interest in COPI Colorado from Mr. Goff and the third party, bringing the
Operating Partnership'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 Operating Partnership dissolved COPI Colorado
and contributed its assets, all the voting stock of CRDI, to Crescent TRS
Holdings Corp.

69

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

As of December 31, 2002, the Operating Partnership 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 and sole
director and Chief Executive Officer of the General Partner, 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 Operating Partnership recorded
$750,000 of compensation expense for the year ended December 31, 2001.

The Operating Partnership 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 Operating Partnership
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 Operating Partnership's Consolidated Statements of Operations. Effective
July 29, 2002, the Operating Partnership 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 Operating Partnership and Crescent Finance
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 Operating Partnership and
Crescent Finance 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 Operating Partnership purchased, and is holding
for sale, the home of an executive officer of the Operating Partnership 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 Operating
Partnership.

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

70

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, the Company's percentage interest in the Operating Partnership
decreased.

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 a contribution by the Company to
the Operating Partnership.

SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

The Operating Partnership's discussion and analysis of financial
condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Operating Partnership 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 Operating Partnership evaluates its
assumptions and estimates on an ongoing basis. The Operating Partnership 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
Operating Partnership believes that the most significant accounting policies
involve the use of 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 Operating Partnership's assets and
investments

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

o Capitalization of Interest (Residential Development entities)

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 Operating Partnership 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 Operating Partnership's estimates of cash flows of the
Properties requires the

71

Operating Partnership to make assumptions related to future rental rates,
occupancies, operating expenses, the ability of the Operating Partnership's
tenants to perform pursuant to their lease obligations and proceeds to be
generated from the eventual sale of the Properties. Any changes in estimated
future cash flows due to changes in the Operating Partnership'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 Operating Partnership 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 Operating
Partnership 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 land development project. The percentages are based
on total estimated development costs and sales revenue for each Residential
Development 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 Operating Partnership'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 Operating Partnership commences
capitalization of interest when development activities and expenditures begin
and ceases to capitalize interest upon "completion," which is defined as the
time when the asset is ready for its intended use. The Operating Partnership
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 Operating Partnership's accounts
receivable balance is reduced by an allowance for amounts that may become
uncollectible in the future. The Operating Partnership's receivable balance is
composed primarily of rents and operating cost recoveries due from its tenants.
The Operating Partnership 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 Operating Partnership's tenants, any
delinquency in payment, historical trends and current economic conditions. If
our assumptions regarding the collectibility of accounts receivable prove
incorrect, the Operating Partnership could experience write-offs in excess of
the 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.

72

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 Operating Partnership 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 Operating Partnership 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
Operating Partnership recognized a goodwill impairment charge of approximately
$10.3 million due to the initial application of this Statement. This charge was
reported as a change in accounting principle and is included in the Operating
Partnership's consolidated statements of operations as a "Cumulative Effect of a
Change in Accounting Principle" for the year ended December 31, 2002.

The Operating Partnership also determined that a goodwill impairment
charge of $1.4 million, net of taxes, was required for one of the Residential
Development Corporations which was classified as held for sale. Accordingly, the
$1.4 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
Operating Partnership's Consolidated Statements of Operations. The Operating
Partnership adopted SFAS No. 144 on January 1, 2002. During 2002, the Operating
Partnership 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 Operating Partnership plans to implement
the Statement for fiscal 2003 and expects no impact beyond the classification of
costs related to early extinguishments of debt,

73

which are shown in the Operating Partnership'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 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 Operating Partnership will assess the impact of this Statement, if
any, on the Operating Partnership's liquidity, financial position, and results
of operations. The Operating Partnership does not anticipate a material impact,
if any, of the liability-recognition provision of this Interpretation on the
Operating Partnership'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 Operating Partnership will adopt the
fair value expense recognition provisions of SFAS No. 123 on a prospective basis
as permitted. The Operating Partnership 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 Operating Partnership 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"),
which 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 Operating Partnership's guarantees as of December 31,
2002. The Operating Partnership 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 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

74

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. The Operating Partnership 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 Operating Partnership 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 Operating Partnership 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

75

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 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 Operating
Partnership 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 Operating Partnership
considers FFO an appropriate measure of performance for an operating partnership
of 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 Operating Partnership's
operating performance, or to cash flow from operating activities
determined in accordance with GAAP as a measure of either liquidity or
the Operating Partnership's ability to make distributions.

76

The Operating Partnership 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 $221.6
million, $352.9 million and $299.9 million, respectively. The Operating
Partnership reported FFO of $251.6 million, $206.4 million and $348.2 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 Operating Partnership would have reported FFO of $299.2 million
for the year ended December 31, 2001.

An increase or decrease in FFO does not necessarily result in an
increase or decrease in aggregate distributions because the Company's Board of
Trust Managers is not required to increase distributions on a quarterly basis
unless necessary for the Company to maintain REIT status. However, the Company
must distribute 90% of its REIT taxable income (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 Operating Partnership believes that to facilitate a
clear understanding of the consolidated historical operating results of the
Operating Partnership, FFO should be considered in conjunction with the
Operating Partnership's net income and cash flows reported in the consolidated
financial statements and notes to the financial statements. However, the
Operating Partnership's measure of FFO may not be comparable to similarly titled
measures of operating partnerships of REITs (other than the Company) because
these REITs may apply the definition of FFO in a different manner than the
Operating Partnership.

77

STATEMENTS OF FUNDS FROM OPERATIONS
(in thousands)

- ---------------------------
(1) 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.

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

78

The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:

RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
(in thousands)

79

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Operating Partnership's use of financial instruments, such as debt
instruments, subject the Operating Partnership to market risk which may affect
the Operating Partnership'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 Operating Partnership 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 unitholders, investments, capital
expenditures and other cash requirements. The Operating Partnership 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 Operating Partnership'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 Operating Partnership's interest rate risk is most sensitive to
fluctuations in interest rates on its short-term variable rate debt. The
Operating Partnership 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 Operating Partnership 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."

80

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED FINANCIAL STATEMENTS

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

81

REPORT OF INDEPENDENT AUDITORS

To the Sole Director of Crescent Real Estate Equities Ltd.:

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Limited Partnership 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 Limited Partnership'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 Limited Partnership 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, Crescent Real
Estate Equities Limited Partnership 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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)

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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)

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

84

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)

85

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)

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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company"), through the Company's ownership of all of the
outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation
("the General Partner"), which owns an approximately 1% general partner interest
in the Operating Partnership. In addition, the Company owns an approximately 84%
limited partner interest in the Operating Partnership, with the remaining
approximately 15% limited partner interest held by other limited partners.

All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of December
31, 2002, the Company's approximately 84% limited partner interest has been
treated as equivalent, for purposes of this report, to 49,021,210 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,878,342 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 584,844 units.

The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.

Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.

The following table shows, by consolidated entity, the real estate
assets that the Operating Partnership 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 Operating
Partnership'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 Operating Partnership's Office Segment. Sonoma
Mission Inn (80.1% interest). This property is
included in the Operating Partnership'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
Operating Partnership's Office Segment. Ritz Carlton
Palm Beach (50% interest). This property is included
in the Operating Partnership'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
Operating Partnership's Residential Development
Segment. The temperature-controlled logistics
properties (40% interest in 88 properties). These
properties are included in the Operating
Partnership's Temperature-Controlled Logistics
Segment.

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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Crescent Real Estate Wholly-owned assets - Albuquerque Plaza, Barton Oaks
Funding II, L.P. Plaza, Briargate Office and Research Center, Las
("Funding II") 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
Operating Partnership's Office Segment. Also, the
Hyatt Regency Albuquerque and the Park Hyatt Beaver
Creek Resort & Spa, both of which are included in
the Operating Partnership's Resort/Hotel Segment.

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

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

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

Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower,
Funding VIII, L.P. Austin Centre, The Avallon V, Frost Bank Plaza,
("Funding VIII") Greenway I & IA (two office properties), Greenway
II, 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 Operating
Partnership's Office Segment. Also, the Canyon Ranch
- Tucson, Omni Austin Hotel, and Ventana Inn & Spa,
which are included in the Operating Partnership's
Resort/Hotel Segment.

Crescent Real Estate Wholly-owned assets - MCI Tower. This Property is
Funding IX, L.P. included in the Operating Partnership's Office
("Funding IX") Segment. Also, the Denver Marriott City Center,
which is included in the Operating Partnership's
Resort/Hotel Segment.

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

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

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

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

Crescent Resort Equity Investments, consolidated - Bear Paw Lodge
Development 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 Operating Partnership's Residential
Development Segment.

Crescent TRS Holdings Equity Investments, unconsolidated - two quarries
Corp. (56% interest). These properties are included in the
Operating Partnership'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 Operating Partnership 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 Operating Partnership's
payout percentage and economic interest was 52.5%.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

See Note 9, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," for a table that lists the Operating Partnership'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 Operating Partnership, all of which
are consolidated in the Operating Partnership's financial statements and were
formed primarily for the purpose of obtaining secured debt or joint venture
financing.

On February 14, 2002, the Operating Partnership executed an agreement
with Crescent Operating, Inc. ("COPI"), pursuant to which COPI transferred to
subsidiaries of the Operating Partnership, in lieu of foreclosure, COPI's lessee
interests in the eight Resort/Hotel Properties leased to subsidiaries of COPI
and, pursuant to a strict foreclosure, COPI's voting common stock in three of
the Operating Partnership's Residential Development Corporations. See Note 23,
"COPI," for additional information related to the Operating Partnership's
agreement with COPI.

SEGMENTS

The assets and operations of the Operating Partnership 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 Operating Partnership 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 Operating
Partnership'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
Operating Partnership'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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. owns 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 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 Operating Partnership 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 Operating Partnership's
"Investment Sector."

BASIS OF PRESENTATION

The accompanying consolidated financial statements of the Operating
Partnership include all direct and indirect subsidiary entities. The equity
interest in those direct and indirect subsidiaries the Operating Partnership
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 Operating Partnership 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 Operating Partnership 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
Operating Partnership 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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating Partnership 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 Operating Partnership 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.

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
Operating Partnership recognized a goodwill impairment charge of approximately
$10.3 million, due to the initial application of this Statement. This charge was
reported as a change in accounting principle and is included in the Operating
Partnership's Consolidated Statements of Operations as a "Cumulative Effect of a
Change in Accounting Principle" for the year ended December 31, 2002.

The Operating Partnership also determined that a goodwill impairment
charge of $1.4 million, net of minority interest and taxes, was required for one
of the Residential Development Corporations which was sold in 2002. Accordingly,
the $1.4 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 Operating Partnership'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 Operating
Partnership adopted SFAS No. 144 on January 1, 2002. The Operating Partnership'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 Operating Partnership 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 Operating
Partnership 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 Operating Partnership's 2001 Consolidated
Statements of Operations as an extraordinary item.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating Partnership does not anticipate a material impact, if
any, of the liability-recognition provision of this statement on the Operating
Partnership'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 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 Operating Partnership will adopt the
fair value expense recognition provisions of SFAS No. 123 on a prospective basis
as permitted. The Operating Partnership 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 Operating Partnership 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 expense 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 Operating Partnership's net
income and earnings per unit would have been reduced to the following pro forma
amounts:

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating Partnership's guarantees as of December 31, 2002. The Operating
Partnership 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 Operating Partnership 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.

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:

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 Operating
Partnership does not expect to recover its carrying costs on a Property, the
Operating Partnership reduces its carrying costs to fair value, and for
Properties held for disposition, the Operating Partnership 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 Operating Partnership's
Office Properties are located primarily in the Dallas and Houston, Texas,
metropolitan areas. As of December 31, 2002, the Operating

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Partnership'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
Operating Partnership could be adversely affected by a recession or general
economic downturn in the areas where these Properties are located.

CASH AND CASH EQUIVALENTS. The Operating Partnership 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 Operating
Partnership's accounts receivable balance consists of rents and operating cost
recoveries due from customers. The Operating Partnership 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 Operating Partnership could experience write-offs in excess of
the 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 Operating Partnership 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 Operating Partnership 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
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 Operating Partnership's notes payable is most sensitive to
fluctuations in interest rates. Since the Operating Partnership's $0.7 billion
in variable rate debt changes with these changes in interest

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

rates, it also approximates the fair market value of the underlying debt. The
Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership's variable rate debt to
fixed rate debt and to manage its fixed to variable rate debt ratio.

To accomplish this objective, the Operating Partnership 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 Operating Partnership measures its derivative instruments and
hedging activities at fair value and records them as an asset or liability,
depending on the Operating Partnership'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
Operating Partnership 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 Operating
Partnership does not use derivatives for trading or speculative purposes. In
connection with the debt refinancing in May 2001, the Operating Partnership
entered into a LIBOR interest rate cap, and simultaneously sold a LIBOR interest
rate cap with the same terms. These instruments do not qualify as hedges and
changes to their respective fair values are charged to earnings monthly.

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
Operating Partnership'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 Operating Partnership estimates that an
additional $17.7 million of unrealized losses will be reclassified to interest
expense.

REVENUE RECOGNITION - OFFICE PROPERTIES. The Operating Partnership, 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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating
Partnership 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 Operating Partnership executed an agreement with Crescent Operating, Inc.
4("COPI"), pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, 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 Operating Partnership recognized
revenues for 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 Operating Partnership
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.

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 Operating Partnership'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 Operating Partnership 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
Operating Partnership'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 Operating Partnership'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 Operating
Partnership is the interest cost recognized on borrowings

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating
Partnership's outstanding borrowings.

INCOME TAXES. No provision has been made for federal or state income
taxes, except for the taxable REIT subsidiaries of the Company, because each
partner's proportionate share of income or loss from the Operating Partnership
will be passed through on such partner's tax return.

The Operating Partnership has elected to treat certain of its corporate
subsidiaries as taxable REIT subsidiaries ("TRS") of the Company. In general, a
TRS of the Company may perform additional services for tenants of the Operating
Partnership 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 Operating Partnership presents both basic and diluted earnings per
share.

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
partners." The table also includes weighted average shares on a basic and
diluted basis.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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
Operating Partnership 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 Operating Partnership 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 Operating
Partnership 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
Operating Partnership's operating performance, or to cash flow
from operating activities determined in accordance with GAAP
as a measure of either liquidity or the Operating
Partnership's ability to make distributions.

The Operating Partnership's measure of FFO may not be comparable to
similarly titled measures of operating partnerships of REITs (other than the
Company) 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:

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) For purposes of this Note, Corporate and Other include
interest and other income, corporate 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 Operating Partnership'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 Operating Partnership executed an
agreement with COPI, pursuant to which COPI transferred to
subsidiaries of the Operating Partnership, pursuant to a
strict foreclosure, COPI's interests in the voting stock in
three of the Operating Partnership's Residential Development
Corporations, DMDC, TWLC and CRDI. As a result, the Operating
Partnership 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).

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECONCILIATION OF FUNDS FROM OPERATIONS

4. ACQUISITIONS

OFFICE SEGMENT

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

On November 26, 2002, the Operating Partnership purchased Duddlesten
Ventures-I, Ltd.'s 20% interest in the Crescent Duddlesten Hotel Partnership for
$11.1 million, funded by a draw on the Operating Partnership's credit facility,
and increasing the Operating Partnership's ownership percentage from 80% to
100%. This partnership owned 3.79 acres of undeveloped land in downtown Houston,
and therefore the Operating Partnership 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 Operating Partnership'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 Operating Partnership's
Consolidated Statements of Operations. The Operating Partnership adopted SFAS
No. 144 on January 1, 2002. During 2002, the Operating Partnership 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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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ASSETS SOLD

OFFICE SEGMENT

On January 18, 2002, the Operating Partnership 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 Operating Partnership's credit facility.
This property was wholly-owned.

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

On August 1, 2002, the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership's share
was approximately $3.6 million. The net proceeds were used primarily to pay down
the Operating Partnership's credit facility. These two properties were
consolidated joint venture properties.

RESIDENTIAL DEVELOPMENT SEGMENT

On December 31, 2002, CRDI, a consolidated subsidiary of the Operating
Partnership, 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 Operating Partnership recognized a
$1.4 million gain, after tax, related to the sale of these companies.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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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 Operating Partnership
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 Operating Partnership owned seven
behavioral healthcare properties, all of which were classified in the Operating
Partnership's Consolidated Balance Sheets as "Properties Held for Disposition,
net." During the year ended December 31, 2002, the Operating Partnership
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 Operating Partnership'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 Operating
Partnership 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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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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 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
Operating Partnership'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 Operating Partnership's Consolidated
Statement of Operations.

OFFICE SEGMENT - CONSOLIDATED

On September 18, 2001, the Operating Partnership 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 Operating Partnership's credit facility and repurchase
approximately 4.3 million of the Operating Partnership'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 Operating Partnership's portion was approximately $9.9
million. The sale generated a net gain of approximately $3.4 million, of which
the Operating Partnership's portion was approximately $3.0 million. The proceeds
from the sale were used primarily to pay down the Operating Partnership'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 Operating Partnership's portion was approximately $1.8 million. The
sale generated a net gain of approximately $1.7 million, of which the Operating
Partnership's portion was approximately $1.5 million. The proceeds received by
the Operating Partnership were used primarily to pay down the Operating
Partnership's credit facility. This property was a consolidated joint venture
property.

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

OFFICE SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Operating Partnership 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 Operating Partnership's credit facility.
This land was wholly-owned by the Operating Partnership.

On December 31, 2002, the Operating Partnership 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
Operating Partnership. 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 Operating Partnership 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 Operating Partnership's credit facility. This land was
wholly-owned by the Operating Partnership.

On December 31, 2002, the Operating Partnership 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 Operating
Partnership's credit facility. This land was wholly-owned by the Operating
Partnership.

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 Operating Partnership's
portion was approximately $6.4 million. The sales generated a net gain of
approximately $13.5 million, of which the Operating Partnership's portion was
approximately $7.1 million. The proceeds were used primarily to pay down the
Operating Partnership'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 Operating
Partnership'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 Operating
Partnership's portion was approximately $17.7 million. The proceeds were used
primarily to pay down the Operating Partnership'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 Operating Partnership's portion was approximately $1.3
million. The sale generated a gain of approximately $3.5 million, of which the
Operating Partnership's portion was approximately $1.7 million. The funds were
used primarily to pay down the Operating Partnership's credit facility.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating Partnership's
portion was approximately $19.7 million. The sale generated a gain of $13.3
million, of which the Operating Partnership's portion was $3.8 million. The
proceeds were used primarily to pay down the Operating Partnership'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 $46.5 million, of which the Operating
Partnership's portion was approximately $19.8 million. The sales generated a net
gain of approximately $11.9 million, of which the Operating Partnership's
portion was approximately $5.0 million. The proceeds received by the Operating
Partnership were used primarily to pay down the Operating Partnership's credit
facility.

RESORT/HOTEL SEGMENT - CONSOLIDATED

On November 3, 2000, the Operating Partnership 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 Operating
Partnership owned the Property. This property was wholly-owned by the Operating
Partnership.

RESORT/HOTEL SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Operating Partnership completed the sale of
30 acres of land adjacent to the Operating Partnership's Canyon Ranch - Tucson
Resort/Hotel Property, located in Tucson, Arizona, to an affiliate of the third
party management company of the Operating Partnership's Canyon Ranch
Resort/Hotel Properties. The sales price of the land was approximately $9.4
million, for which the Operating Partnership 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 Operating
Partnership 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 Operating
Partnership's credit facility. This land was wholly-owned by the Operating
Partnership. The Operating Partnership 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 Operating Partnership had not funded
any of the $3.2 million commitment as of December 31, 2002.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. JOINT VENTURES

The Operating Partnership 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 Operating Partnership 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 Operating
Partnership 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 Operating
Partnership 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 Operating
Partnership, resulting from the sale of its 80% equity interest and $6.6 million
from the Operating Partnership's portion of mortgage financing at the joint
venture level. None of the mortgage financing at the joint venture level is
guaranteed by the Operating Partnership. The Operating Partnership 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 Operating Partnership's credit facility.
The Operating Partnership manages and leases the Office Property on a fee basis.

Miami Center

On September 25, 2002, the Operating Partnership 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 Operating Partnership 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
Operating Partnership, resulting from the sale of its 60% equity interest and
$32.4 million from the Operating Partnership's portion of mortgage financing at
the joint venture level. None of the mortgage financing at the joint venture
level is guaranteed by the Operating Partnership. The Operating Partnership 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 Operating Partnership's
credit facility. The Operating Partnership manages the Office Property on a fee
basis.

Five Post Oak Park

On December 20, 2002, the Operating Partnership 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 Operating Partnership owns a 30% interest, in the
joint venture. The initial cash equity contribution to the joint venture was
$19.8 million, of which the Operating Partnership's portion was $5.9 million.
The Operating Partnership's equity contribution and an additional working
capital contribution of $0.3 million were funded through a draw under the
Operating Partnership'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 Operating Partnership. The Operating Partnership 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 Operating Partnership entered into two joint
venture arrangements with GE in which the Operating Partnership contributed two
Office Properties, Four Westlake Park in Houston, Texas and Bank One Tower in

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Austin, Texas and GE made cash contributions. GE holds an 80% equity interest in
each of the Office Properties and the Operating Partnership holds the remaining
20% equity interest. The transactions generated approximately $120.0 million in
net cash proceeds to the Operating Partnership 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
Operating Partnership. The Operating Partnership 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 Operating Partnership's credit
facility. The Operating Partnership manages and leases these Office Properties
on a fee basis.

5 Houston Center

On June 4, 2001, the Operating Partnership 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 Operating Partnership'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 Operating Partnership holds a 25% equity
interest, in the Property. The Operating Partnership 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 Operating Partnership. No gain or loss
was recognized by the Operating Partnership on this transaction. The development
was completed on September 16, 2002. The building was financed through a
construction loan, which the Operating Partnership 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 Operating Partnership 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 Operating Partnership
acquired the remaining 75% economic interest in Manalapan Hotel Partners, L.L.C.
("Manalapan"), which owns the Ritz Carlton Palm Beach in Florida. The Operating
Partnership acquired the additional interests in Manalapan for $6.5 million,
which was funded by a draw on the Operating Partnership's credit facility.
Subsequently, the Operating Partnership 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 Operating Partnership holds
the remaining 50% equity interest. The Operating Partnership 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 Operating Partnership'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 Operating
Partnership. 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
Operating Partnership and Westbrook each obtained a letter of credit to
guarantee up to $3.0 million of the Corus Bank loan. The Operating Partnership
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 Operating Partnership 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 Operating Partnership

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating Partnership
continues to hold the remaining 80.1% equity interest. The joint venture
generated approximately $8.0 million in net cash proceeds to the Operating
Partnership that were used to pay down the Operating Partnership's credit
facility. The Operating Partnership 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 Operating Partnership's
$45.1 million loan for two successive six-month periods by paying a fee. The
Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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
Operating Partnership'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 Operating Partnership'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 Operating Partnership contributed approximately
$3.1 million to VCQ for the purchase of the receivables. The Operating
Partnership accounts for this investment as an unconsolidated equity investment
because the Operating Partnership does not control the joint ventures.

8. TEMPERATURE-CONTROLLED LOGISTICS

As of December 31, 2002, the Operating Partnership 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 Operating Partnership 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 Operating
Partnership'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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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
Operating Partnership 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 Operating
Partnership's share of which was $15.9 million. The Temperature-Controlled
Logistics Corporation and the Operating Partnership 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 Operating Partnership
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 Operating
Partnership's share of deferred rent was $12.9 million.

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

The Operating Partnership has other unconsolidated equity investments
with interests ranging from 30% to 97.4%. The Operating Partnership does not
have control of these investments due to ownership interests of 50% or less or
the

110

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ownership of non-voting interests only, and therefore, these investments
also are accounted for using the equity method of accounting.

The following is a summary of the Operating Partnership'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 Operating
Partnership purchased the remaining economic interest, in DBL. As a result,
the Operating Partnership will consolidate the operations of MVDC beginning
on January 3, 2003. See Note 26, "Subsequent Events," for additional
information regarding the Operating Partnership'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 Operating Partnership purchased
the remaining economic interest, representing all of the voting stock in
DBL. As a result, the Operating Partnership will consolidate the operations
of HADC beginning on January 3, 2003. See Note 26, "Subsequent Events," for
additional information regarding the Operating Partnership's purchase of
the DBL interest.

(8) On February 14, 2002, the Operating Partnership executed an agreement with
COPI, pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, pursuant to a strict foreclosure, COPI's interests in the
voting stock in three of the Operating Partnership's Residential
Development Corporations DMDC, TWLC and CRDI, and in CRL Investments, Inc.
("CRLI"). As a result, the Operating Partnership 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
Operating Partnership was 52.5%.

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

(12) Prior to October 2002, Manalapan was an unconsolidated investment of the
Operating Partnership in which CRDI held a 25% equity interest. In October
2002, in a series of transactions, the Operating Partnership acquired the
remaining 75% interest in Manalapan. Subsequent to that

111

transaction, the Operating Partnership 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 Operating Partnership.

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

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

(15) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company and sole director and Chief Executive Officer of the
General Partner, 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
Operating Partnership purchased the remaining economic interest,
representing all of the voting stock, in DBL. See Note 26, "Subsequent
Events," for additional information regarding the Operating Partnership'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 Operating Partnership'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 Operating Partnership'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 Operating Partnership. The Operating
Partnership's ownership percentage will decline by the closing date of the
Fund as capital commitments from third parties are secured. The Operating
Partnership'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 Operating Partnership accounts for its investment
in the Fund under the cost method. The Operating Partnership's investment
at December 31, 2002 was $10.4 million.

IMPAIRMENTS OF UNCONSOLIDATED INVESTMENTS

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

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, 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 Operating Partnership 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
Operating Partnership 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 Operating
Partnership 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 Operating Partnership'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
Operating Partnership recognized a charge related to this investment of $5.2
million reflected in "Equity in net income (loss) of unconsolidated companies,
other" in the Operating Partnership'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 Operating Partnership converted its $85.0 million
preferred member interest in Metropolitan Partners, LLC ("Metropolitan"),
including deferred acquisition costs of $1.9 million, 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 Operating
Partnership's Consolidated Statements of Operations. The Operating Partnership
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 Operating Partnership's credit facility.

OTHER

During the years ended December 31, 2001 and 2000, the Operating
Partnership 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 Operating Partnership's investment in a fund
that primarily held real estate investments and marketable securities.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY FINANCIAL INFORMATION

The Operating Partnership 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 Operating Partnership'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 Operating
Partnership. 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's 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 Operating Partnership'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 LIMITED PARTNERSHIP
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 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 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:

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

(1) This column includes information for Three Westlake Park, which was
contributed by the Operating Partnership to a joint venture on August 21,
2002, Miami Center, which was contributed by the Operating Partnership to a
joint venture on September 25, 2002, and Five Post Oak Park, which was
acquired by the Operating Partnership 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 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENT OF OPERATIONS:

(1) This column includes information for Four Westlake Park and Bank One Tower,
which were contributed by the Operating Partnership 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 LIMITED PARTNERSHIP
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).

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

The significant terms of the Operating Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership obtained a Letter of Credit to guarantee up to
$3.0 million of this facility.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows, as of December 31, 2002, information about
the Operating Partnership'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 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 Operating Partnership's share of aggregate
principal payments, by year, required as of December 31, 2002 related to the
Operating Partnership'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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

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

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- ---------

(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 Operating
Partnership 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 Operating Partnership'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
Operating Partnership's interests in Funding X and Crescent Spectrum
Center, L.P. and the Operating Partnership'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 Operating
Partnership'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 Operating
Partnership 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 Operating Partnership'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

121

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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%.

(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 Operating Partnership so
elects, it may repay the note without penalty at that date by making a
final payment of approximately $6.1 million.

(11) The Operating Partnership 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
Operating Partnership'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 Operating Partnership's credit facility of $15.2
million which reduce the Operating Partnership'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 Operating Partnership are met. As
a result, the Operating Partnership maintains sufficient availability under
the Credit Facility to repay the JP Morgan Loan Sales Facility at any time.
At December 31, 2002, the Operating Partnership'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 Operating Partnership's
consolidated fixed and variable rate debt and does not take into account any
extension options, hedging arrangements or the Operating Partnership'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
3.9 years based on the Operating Partnership's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of December 31, 2002 under indebtedness of the Operating Partnership. 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 Operating Partnership 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

122

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

return of capital from the Residential Development Segment, construction loan
refinancings and additional borrowings under the Operating Partnership's credit
facility.

Any uncured or unwaived events of default under the Operating
Partnership's loans can trigger an acceleration of payment on the loan in
default. In addition, a default by the Operating Partnership 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, the Operating Partnership was in
compliance with all of its debt service coverage ratios and other covenants
related to its outstanding debt. The Operating Partnership'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 Operating Partnership's existing debt.

In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Operating Partnership
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 Operating Partnership (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 Operating Partnership wrote off $10.8 million
of deferred financing costs related to the early extinguishment of the UBS
Facility, which is included in the Operating Partnership'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.

123

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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 Operating Partnership and Crescent Finance
Company completed a private offering of $375.0 million in senior, unsecured
notes due in 2009. On October 15, 2002, the Operating Partnership and Crescent
Finance Company completed an exchange offer pursuant to which they exchanged
notes registered with the Securities and Exchange Commission for $325.0 million
of the privately issued notes. In addition, the Operating Partnership and
Crescent Finance 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 of the Company, 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 Operating Partnership'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.

124

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. INTEREST RATE CAPS

In connection with the closing of the Deutsche Bank - CMBS Loan in May
2001, the Operating Partnership 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
Operating Partnership'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 Operating Partnership 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 Operating
Partnership had entered into six cash flow hedge agreements which are accounted
for in conformity with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133."

The following table shows information regarding the Operating
Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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.

125

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Operating Partnership, 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.

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 Operating Partnership'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 Operating Partnership received rental
income from the lessees of 66 consolidated Office Properties and one
Resort/Hotel Property under operating leases.

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which the Operating Partnership acquired, in lieu of
foreclosure, COPI's lessee interests in the eight Resort/Hotel Properties
previously leased to COPI. Therefore, the Operating Partnership 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 Operating Partnership 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 Operating Partnership 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.

126

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. COMMITMENTS, CONTINGENCIES AND LITIGATION

COMMITMENTS

Lease Commitments

The Operating Partnership has 13 wholly-owned Properties located on
land that is subject to long-term ground leases, which expire between 2015 and
2080. The Operating Partnership 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 Operating
Partnership'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 Operating Partnership'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
Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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.

127

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COPI COMMITMENTS

See Note 23, "COPI," for a description of the Operating Partnership'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 Operating Partnership.

LITIGATION

The Operating Partnership 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 Operating Partnership's financial position or results of operations when
resolved.

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

16. STOCK AND UNIT BASED COMPENSATION

Stock Option Plans

The Company 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, the Company 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
the Company 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 the Company may issue
under the 1995 Plan is 9,677,794. Under the 1995 Plan, the Company 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, the Company 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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTIONS PLANS

A summary of the status of the Company's 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.

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 and sole director and
Chief Executive Officer of the General Partner, 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 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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 will 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 will vest over
five years.

STOCK OPTION AND UNIT PLANS

On January 1, 2003, the Operating Partnership will adopt the expense
recognition provisions of SFAS No. 123, "Accounting for Stock Based
Compensation." The Operating Partnership will value 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 Operating Partnership 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 Operating Partnership's net income and
earnings per unit would have been reduced to the following pro forma amounts:

At December 31, 2002, 2001 and 2000, the weighted average fair value of
common share and common share equivalent 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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. MINORITY INTEREST

Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and consolidates the real estate partnerships into
the financial statements of the Operating Partnership. 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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. PARTNERS' CAPITAL

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, the Company's 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 the Company.

During 2002, 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,
the Company's percentage interest in the Operating Partnership decreased.

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 Operating Partnership 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 Operating Partnership will be required to record the
stock purchase discount provided to employees as compensation expense in the
Operating Partnership'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. The issuance of common shares by
the Company will increase the Company's limited partner interest, which will
result in a decrease in net income per unit.

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. The repurchase of common
shares by the Company will decrease the Company's limited partner interest,
which will result in an increase in net income per unit.

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.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Operating Partnership 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 Operating
Partnership. 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.

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 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. In connection with the
April 2002 Series A Preferred Offering, the Operating Partnership issued
additional Series A Preferred Units to the Company in exchange for the
contribution of the net proceeds, after underwriting discounts and other
offering costs of approximately $2.2 million, of approximately $48.2 million.
The net proceeds from the April 2002 Series A Preferred offering were used by
the Operating Partnership to redeem Class A Units issued by its subsidiary,
Funding IX, to GMACCM. See Note 19, "Sale of Preferred Equity Interests in
Subsidiary and Intracompany Loan," 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.

In connection with the May 2002 Series B Preferred Offering, the
Operating Partnership issued Series B Preferred Units to the Company in exchange
for the contribution of the net proceeds, after underwriting discounts and other
offering costs of approximately $2.8 million, of approximately $72.3 million.
The net proceeds from the May 2002 Series B Preferred Offering were used by the
Operating Partnership 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
(the "June 2002 Series B Preferred Offering"). In connection with the June 2002
Series B Preferred Offering,

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Operating Partnership issued additional Series B Preferred Units to the
Company in exchange for the contribution of the net proceeds, after underwriting
discounts and other offering costs of approximately $0.4 million, of
approximately $9.6 million. The net proceeds from the June 2002 Series B
Preferred Offering were used the by the Operating Partnership 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 purchase of the common shares by the Company decreased
the Company's limited partner interest, which resulted in an increase in net
income per unit.

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.

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
and Intracompany Loan."

DISTRIBUTIONS

Beginning with the third quarter of 2001, the Operating Partnership,
due to its revised cash flow expectations in the uncertain economic environment
and measuring its payout ratios to those of the Operating Partnership's peer
group, reduced its quarterly distribution from $1.10 per unit, or an annualized
distribution of $4.40 per unit, to $0.75 per unit, or an annualized distribution
of $3.00 per unit.

The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders for the year ended December 31, 2002
(dollars in thousands, except per unit amounts).

- ---------
(1) See "Series A Preferred Offering" above for a description of the issuance
of additional preferred units.

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

(3) Amount represents distribution for a partial quarter.

134

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The distributions to 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
$3.00, $4.05 and $4.40 per 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. ("SH IX"). 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 on the limited partner
interest of the Company that was redeemed by the Operating Partnership in
connection with the repurchase by the Company, during 2002, of the common shares
held by SH IX.

Distributions to Series A Preferred unitholders for the year ended
December 31, 2002 were $17.0 million, and distributions to Series A Preferred
unitholders for the years ended December 31, 2001 and 2000 were $13.5 million
for each year. The distributions per Series A Preferred unit were $1.6875 per
preferred share annualized for each of the three years.

Distributions to Series B Preferred unitholders for the year ended
December 31, 2002 were $4.1 million, or $2.3750 per share annualized.

19. SALE OF PREFERRED EQUITY INTEREST IN SUBSIDIARY AND INTRACOMPANY LOAN

As of December 31, 2002, Funding IX held one Office Property and one
Resort/Hotel Property. The Operating Partnership 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 Operating Partnership
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
Operating Partnership's option at the original price. As of December 31, 2000,
the Operating Partnership 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 Operating Partnership became the sole partner
of Funding IX. In connection with the final redemption of Class A Units, 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, 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.

IMPACT ON FINANCIAL STATEMENTS OF INTRACOMPANY LOAN

As of December 31, 2001, Funding IX had loaned a total of $281,107 from
the net proceeds from the sale of the Class A Units and a portion of the net
proceeds of the sale of one of the properties held by Funding IX to SH IX. SH IX
repaid the note in full in August 2002.

The operations, assets and liabilities of Funding IX and SH IX are
consolidated with those of the Company in the Company's consolidated financial
statements. The operations, assets and liabilities of Funding IX (but not those
of SH IX) are consolidated with those of the Operating Partnership in the
consolidated financial statements of the Operating Partnership. As a result, the
note and the payments on the note by SH IX to Funding IX are eliminated in the
Company's financial statements but are not eliminated in the financial

135

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

statements of the Operating Partnership. These items, therefore, are included in
the Operating Partnership's financial statements in "Notes Receivable, Net" as
of December 31, 2002 and 2001 and in "Interest and Other Income" for the years
ended December 31, 2002, 2001 and 2000.

The following table compares the current financial statements of the
Operating Partnership prepared in accordance with GAAP and the adjusted
Operating Partnership financial statements, adjusted for the elimination of the
intracompany loan and associated interest income. This table provides certain
components of the financial statements that would be affected by the elimination
of the intracompany loan, accrued interest related to the loan and associated
interest income.

(1) The weighted average units used to calculate basic and diluted earnings per
unit in accordance with GAAP include the common shares of the Company held
in SH IX of 9,632,535 (4,816,268 equivalent units), 14,468,623 (7,234,312
equivalent units) and 8,184 578 (4,092,289 equivalent units) during the
years ended December 31, 2002, 2001 and 2000, respectively. The adjusted
basic and diluted earnings per unit after the elimination of the
intracompany loan exclude the common shares of the Company held in SH IX.

136

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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 Operating Partnership.

Significant components of the Operating Partnership'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 Operating Partnership has a current tax
receivable of $10.2 million comprising the total income tax asset - current and
deferred, net on the Operating Partnership'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 Operating Partnership as a result of
the COPI transaction, resulting in a net $3.8 million increase in valuation
allowance at December 31, 2002. The Operating Partnership has available net
operating loss carryforwards of approximately $6.6 million arising from the
operation of the consolidated taxable REIT subsidiaries. The Operating
Partnership did not record a deferred tax benefit or expense during the years
ended December 31, 2001 and 2000.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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 Operating Partnership and its taxable
REIT subsidiaries for 2002, were $2.8 million, which reflects the current tax
provision for 2002. The Operating Partnership's deferred tax benefit for 2002
was $7.7 million.

21. RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC. ("DBL")

As of December 31, 2002, the Operating Partnership 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 and sole director and
Chief Executive Officer of the General Partner. 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 Operating Partnership.

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 Operating Partnership 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, LP ("G2"). G2 was
formed for the purpose of investing in commercial mortgage backed securities and
other commercial real estate investments and is managed and controlled by an
entity that is owned equally by Goff-Moore Strategic Partners, LP ("GMSP") and
GMACCM. The ownership structure of GMSP consists of 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 2% general partnership interest is owned by parties unrelated to the
Company. At December 31, 2002, DBL had 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
Operating Partnership recognized a charge related to this investment of $5.2
million reflected as "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.

138

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COPI COLORADO, L. P.

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to the Operating Partnership,
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 and sole
director and Chief Executive Officer of the General Partner, 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 Operating Partnership 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 Operating Partnership
fully consolidated the operations of CRDI as of the date of the asset transfer.

On December 30, 2002, the Operating Partnership purchased the 40%
interest in COPI Colorado from Mr. Goff and the third party, bringing the
Operating Partnership'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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 and sole director and Chief Executive Officer of the General Partner,
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 Operating Partnership recorded
$750,000 of compensation expense for the year ended December 31, 2001.

The Operating Partnership 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 Operating Partnership
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 Operating Partnership's Consolidated Statements of Operations. Effective
July 29, 2002, the Operating Partnership ceased offering to its employees and
Trust Managers the option to obtain loans pursuant to the Company's stock and
unit incentive plans.

139

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEBT OFFERING

On April 15, 2002, the Operating Partnership and Crescent Finance
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 Operating
Partnership and Crescent Finance Company registered for resale the notes issued
to the Rainwater Group. See Note 11, "Notes Payable and Borrowings under Credit
Facility," for additional information regarding the offering and the notes.

OTHER

On June 28, 2002, the Operating Partnership purchased, and is holding
for sale, the home of an executive officer of the Operating Partnership 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 Operating
Partnership.

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, the Company's percentage interest in the Operating Partnership
decreased.

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 a contribution by the Company to
the Operating Partnership.

140

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

23. COPI

In April 1997, the Operating Partnership 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 Operating Partnership and to perform the intercompany agreement
between COPI and the Operating Partnership, 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

141

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

time. In connection with the formation and capitalization of COPI, and the
subsequent operations and investments of COPI since 1997, the Operating
Partnership 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 Operating Partnership, through its subsidiaries, to
operate or lease certain of its investments that had previously been operated or
leased by COPI.

COPI and the Operating Partnership entered into an asset and stock
purchase agreement on June 28, 2001, in which the Operating Partnership 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 Operating Partnership's Residential Development Corporations and other
assets in exchange for $78.4 million. In connection with that agreement, the
Operating Partnership 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 Operating Partnership 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 Operating Partnership determined that a
significant additional investment would have been necessary to adequately
capitalize Crescent Machinery and satisfy concerns of Crescent Machinery's
lenders.

The Operating Partnership 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 Operating Partnership terminated the purchase
agreement pursuant to which the Operating Partnership 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
Operating Partnership terminated the agreement relating to its planned
investment in Crescent Machinery.

142

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On February 12, 2002, the Operating Partnership 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
Operating Partnership under certain secured loans.

On February 14, 2002, the Operating Partnership executed an agreement
(the "Agreement") with COPI, pursuant to which COPI transferred to subsidiaries
of the Operating Partnership, 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
Operating Partnership's Residential Development Corporations and other assets.
The Operating Partnership 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 Operating Partnership 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 Operating Partnership; however, in conformity with
GAAP, the Operating Partnership assigned no value to these interests for
financial reporting purposes.

The Operating Partnership 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
Operating Partnership. The Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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
Operating Partnership expects to form and capitalize a new entity ("Crescent
Spinco"), to be owned by the shareholders of the Company and unitholders of the
Operating Partnership. 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 Operating Partnership. 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 and sole director and Chief Executive Officer of the
General Partner, 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.

143

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Previously, the Operating Partnership 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 Operating Partnership
agreed to allow COPI to grant Bank of America a first priority security interest
in the membership interest and to subordinate its own security interest to that
of Bank of America.

If the COPI bankruptcy plan is approved by the required vote of the
shares of COPI common stock and approved by 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.

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 Operating Partnership 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 by certain of the parties involved in the CBHS bankruptcy proceeding. The
Operating Partnership 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 Operating Partnership 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.

144

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

25. BROADBAND

In 2000, the Operating Partnership 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 Operating Partnership'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 Operating
Partnership, to assume telecom licensing agreements, in modified formats. As
part of this transaction, the Operating Partnership 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 Operating Partnership's equity interest in Broadband. As a result, the
Operating Partnership 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 Operating Partnership's results of operations for the years ended
December 31, 2002 and 2001 or its financial position as of December 31, 2002 and
2001.

26. SUBSEQUENT EVENTS

On January 3, 2003, the Operating Partnership 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 and
sole director and Chief Executive Officer of the General Partner. 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 Operating Partnership and will be consolidated. In addition,
because DBL owns a majority of the voting stock in MVDC and HADC, the Operating
Partnership 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.

145

SCHEDULE III

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(dollars in thousands)

146

SCHEDULE III

147

SCHEDULE III

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

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

(2) 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.

148

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

149

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

150

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.........................................................................152

Audited Combining Financial Statements

Combining Balance Sheet................................................................................153
Combining Statement of Earnings (Loss) and Comprehensive Income (Loss).................................154
Combining Statement of Changes in Partners' Equity (Deficit)...........................................155
Combining Statement of Cash Flows......................................................................156
Notes to Combining Financial Statements................................................................158

151

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

152

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.

153

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.

154

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.

155

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)

156

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.

157

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.

158

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.

159

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.

160

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.

161

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.

162

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):

163

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.

164

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

165

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):

166

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.

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 (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%.

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)

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.

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)

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.

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)

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

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)

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.

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)

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.

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)

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:

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)

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.

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)

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.

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)

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
---------------
$ --
===============

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)

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.

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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

179

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.

180

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.

181

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.

182

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.

183

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

185

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.

186

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.

187

(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

188

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):

189

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.

190

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):

191

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%.

192

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

193

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.

194

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

195

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.

196

(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.

197

(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

198

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.

199

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
Company 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.

200

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 Operating Partnership and Crescent Finance Company maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in their respective 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 Operating Partnership and Crescent Finance Company's
management, including their Chief Executive Officers and Chief Financial and
Accounting Officers, 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 of the
Operating Partnership and Crescent Finance Company 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 Operating
Partnership and Crescent Finance Company carried out evaluations, under the
supervision and with the participation of the Operating Partnership and Crescent
Finance Company's management, including their Chief Executive Officers and Chief
Financial and Accounting Officers, of the effectiveness of the design and
operation of the Operating Partnership and Crescent Finance Company's disclosure
controls and procedures. Based on the foregoing, the Operating Partnership and
Crescent Finance Company's Chief Executive Officers and Chief Financial and
Accounting Officers concluded that the Operating Partnership and Crescent
Finance 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 Limited Partnership Consolidated Balance
Sheets at December 31, 2002 and 2001.

Crescent Real Estate Equities Limited Partnership Consolidated
Statements of Operations for the years ended December 31, 2002, 2001
and 2000.

201

Crescent Real Estate Equities Limited Partnership Consolidated
Statements of Partners' Capital for the years ended December 31,
2002, 2001 and 2000.

Crescent Real Estate Equities Limited Partnership Consolidated
Statements of Cash Flows for the years ended December 31, 2002, 2001
and 2000.

Crescent Real Estate Equities Limited Partnership Notes to Consolidated
Financial Statements.

Financial Statement Schedules

Schedule III - Crescent Real Estate Equities Limited Partnership
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 Statement Schedules and 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.............................................................. 152

Combining Balance Sheet at December 31, 2002................................................ 153

Combining Statement of Earnings and Comprehensive Income
for the year ended December 31, 2002........................................................ 154

Combining Statement of Changes in Partners' Equity (Deficit)
for the year ended December 31, 2002........................................................ 155

Combining Statement of Cash Flows for the year ended December 31, 2002...................... 156

Notes to Combining Financial Statements..................................................... 158

202

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 ................................ 180

Unaudited Combining Statements of Earnings and Comprehensive Income for the years ended
December 31, 2001 and 2000 ....................................................................... 181

Unaudited Combining Statements of Changes in Partners' Equity (Deficit) for the year ended
December 31, 2001 and 2000 ...................................................................... 182

Unaudited Combining Statements of Cash Flows for the year ended December 31, 2001 and 2000 ...... 183

Unaudited Notes to Combining Financial Statements (unaudited).................................... 184

The financial statement schedules and financial statements listed in
this Item 15(a)(2) are contained in Item 8, Financial Statements and
Supplementary Data.

203

(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.

204

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 27th day of
March, 2003.

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
(Registrant)

By: Crescent Real Estate Equities, Ltd.
Its General Partner

By: /s/ John C. Goff
-----------------------------------------
John C. Goff
Sole Director 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.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS

FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY
REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE EXCHANGE ACT

No annual report to security holders covering the Registrant's last fiscal
year or proxy statement, form of proxy or other proxy soliciting material with
respect to any annual or other meeting of security holders has been sent to
security holders or is to be furnished to security holders subsequent to the
filing of this annual report on Form 10-K.

205

CERTIFICATIONS

I, John C. Goff, the Chief Executive Officer of Crescent Real Estate
Equities Ltd., the general partner of Crescent Real Estate Equities Limited
Partnership, and the Chief Executive Officer of Crescent Finance Company,
hereby certify that:

1. I have reviewed this annual report on Form 10-K of Crescent Real
Estate Equities Limited Partnership and Crescent Finance 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 registrants as of, and for,
the periods presented in this annual report;

4. The registrants' 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 registrants and have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrants, including their 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 registrants'
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 registrants' other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants' auditors
and the audit committee of the registrants' boards of directors
(or persons performing the equivalent functions):

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

6. The registrants' 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

CERTIFICATIONS

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

1. I have reviewed this annual report on Form 10-K of Crescent Real
Estate Equities Limited Partnership and Crescent Finance 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 registrants as of, and for,
the periods presented in this annual report;

4. The registrants' 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 registrants and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrants, including their 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 registrants'
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 registrants' other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrants' boards of directors
(or persons performing the equivalent functions):

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

6. The registrants' 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

INDEX TO EXHIBITS