CRESCENT REAL ESTATE EQUITIES CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR QUARTER ENDED JUNE 30, 2003
COMMISSION FILE NO. 1-13038

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

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

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

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

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

YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).

YES [X] NO [ ]

Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of August 4, 2003.

Series A Convertible Cumulative Preferred Shares, par value $0.01 per share: 10,800,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share: 3,400,000
Common Shares, par value $0.01 per share: 99,247,894

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

PART I

ITEM 1. FINANCIAL STATEMENTS

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

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

3

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)

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

4

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

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

5

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

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

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

The direct and indirect subsidiaries of Crescent Equities at June 30,
2003 included:

o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP

The "Operating Partnership."

o CRESCENT REAL ESTATE EQUITIES, LTD.

The "General Partner" of the Operating Partnership.

o SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE GENERAL
PARTNER

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

The following table shows the consolidated subsidiaries of the Company
that owned or had an interest in real estate assets and the real estate assets
that each subsidiary owned or had an interest in as of June 30, 2003.

Operating Partnership Wholly-owned assets - The Avallon IV, Chancellor Park, Datran Center (two office
properties), Houston Center (three office properties and the Houston Center Shops)(1).
These properties are included in the Company's Office Segment.

Joint Venture assets, consolidated - 301 Congress Avenue (50% interest) and The
Woodlands Office Properties (85.6% interest) (four office properties). These five
properties are included in the Company's Office Segment.
Sonoma Mission Inn & Spa (80.1% interest), included in the Company's Resort/Hotel
Segment.

Equity Investments, unconsolidated - Bank One Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20% interest), Four Westlake Park (20% interest), Miami
Center (40% interest), 5 Houston Center (25% interest) and Five Post Oak Park (30%
interest). These properties are included in the Company's Office Segment. Ritz Carlton
Palm Beach (50% interest), included in the Company's Resort/Hotel Segment. The
temperature-controlled logistics properties (40% interest in 88 properties). These
properties are included in the Company's Temperature-Controlled Logistics Segment.

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

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

Crescent Real Estate Wholly-owned assets - Greenway Plaza Office Properties (ten office properties). These
Funding III, IV and V, properties are included in the Company's Office Segment. Renaissance Houston Hotel is
L.P. ("Funding III, IV included in the Company's Resort/Hotel Segment.
and V")(2)

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

Crescent Real Estate Wholly-owned assets - Five behavioral healthcare properties.
Funding VII, L.P.
("Funding VII")

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Crescent 707 17th Wholly-owned assets - 707 17th Street, included in the Company's Office Segment, and
Street, L.L.C. The Denver Marriott City Center, included in the Company's Resort/Hotel Segment.

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

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

Mira Vista Development Equity Investments, consolidated - Mira Vista (98% interest), included in the Company's
Corp. ("MVDC") Residential Development Segment.

Houston Area Development Equity Investments, consolidated - Falcon Point (98% interest), Falcon Landing (98%
Corp. ("HADC") interest) and Spring Lakes (98% interest). These properties are included in the
Company's Residential Development Segment.

Desert Mountain Equity Investments, consolidated - Desert Mountain (93% interest), included in the
Development Corporation Company's Residential Development Segment.
("DMDC")

The Woodlands Land Equity Investments, unconsolidated - The Woodlands (42.5% interest)(5), included in the
Company ("TWLC") Company's Residential Development Segment.

Crescent Resort Equity Investments, consolidated - Eagle Ranch (60% interest), Main Street Junction
Development Inc. ("CRDI") (30% interest), Main Street Station (30% interest), Main Street Station Vacation Club
(30% interest), Riverbend (60% 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), Horizon Pass Lodge (64% interest), One Vendue Range (62% interest), Old
Greenwood (71.2% interest), Tahoe Mountain Resorts (57% - 71.2% interest). These
properties are included in the Company's Residential Development Segment.

Equity Investment, unconsolidated - Blue River Land Company, L.L.C. - Three Peaks (30%
interest), included in the Company's Residential Development Segment.

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

- ---------
(1) During the second quarter of 2003, The Park Shops was renamed the
Houston Center Shops.

(2) 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.

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

(4) In May 2003, Crescent Spectrum Center, L.P. exercised its option to
acquire the Spectrum Center property in exchange for the mortgage on
the property.

(5) Distributions are made to partners based on specified payout
percentages. During the six months ended June 30, 2003, the Company's
payout percentage and economic interest were 52.5%.

See Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," for a table that lists the Company's ownership in
significant unconsolidated joint ventures and equity investments as of June 30,
2003.

See Note 8, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENTS

The assets and operations of the Company were divided into four
investment segments at June 30, 2003, as follows:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of June 30, 2003:

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. 61 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 is owned through a joint
venture that is consolidated, and one is owned through a joint
venture that is unconsolidated.

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests of 98% 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 23
upscale residential development properties, 21 of which are
consolidated and two of which are unconsolidated (collectively
referred to as the "Residential Development Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland
Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% interest in the Vornado Crescent
Carthage and KC Quarry L.L.C. The Temperature-Controlled
Logistics Partnership owns all of the common stock,
representing substantially all of the economic interest, of
AmeriCold Corporation (the "Temperature-Controlled Logistics
Corporation"), a REIT. As of June 30, 2003, the
Temperature-Controlled Logistics Corporation directly or
indirectly owned 88 temperature-controlled logistics
properties (collectively referred to as the
"Temperature-Controlled Logistics Properties") with an
aggregate of approximately 441.5 million cubic feet (17.5
million square feet) of warehouse space. As of June 30, 2003,
the Vornado Crescent Carthage and KC Quarry, L.L.C. owned two
quarries and the related land. The Company accounts for its
interests in the Temperature-Controlled Logistics Partnership
and in the Vornado Crescent Carthage and KC Quarry L.L.C. as
unconsolidated equity investments.

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 three and
six months ended June 30, 2003 and 2002, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interests for each
of these investment segments at June 30, 2003 and December 31, 2002.

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

9

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
("GAAP") for interim financial information, as well as in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
information and footnotes required by GAAP for complete financial statements are
not included. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements are included. Operating results for
interim periods reflected do not necessarily indicate the results that may be
expected for a full fiscal year. You should read these financial statements in
conjunction with the financial statements and the accompanying notes included in
the Company's Form 10-K for the year ended December 31, 2002.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This section should be read in conjunction with the more detailed
information regarding the Company's significant accounting policies contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

ADOPTION OF NEW ACCOUNTING STANDARDS

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

SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," 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 Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. During the six months
ended June 30, 2003, the Company granted stock options and recognized
compensation expense that was not significant to its results of operations. With
respect to the Company's stock options which were granted prior to 2003, the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB No. 25"). Under APB No.
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's common shares at the date of grant over the exercise
price of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. During the six months ended June 30,
2003, no compensation cost was recognized for grants of stock options made prior
to 2003 under the Company stock option plans because the Company's policy is to
grant stock options with an exercise price equal to the quoted closing market
price of the Company's common shares on the grant date. Had compensation cost
for the Plans been determined based on the

10

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

fair value at the grant dates for awards under the Plans consistent with SFAS
No. 123, the Company's net (loss) income and (loss) earnings per share would
have been reduced to the following pro forma amounts:

SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact, if any, on the Company's
financial condition or its results of operations.

SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. The provisions of this Statement are to be applied to financial
instruments entered into or modified after May 31, 2003 and to existing
instruments as of the beginning of the first interim financial reporting period
after June 15, 2003. The adoption of this statement is not expected to have a
material impact, if any, on the Company's financial condition or its results of
operations.

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 10, "Commitments and Contingencies," for disclosure of the Company's
guarantees at June 30, 2003. The Company adopted FIN 45 effective January 1,
2003.

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

11

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the VIE was established. These disclosure
requirements are as follows: (a) the nature, purpose, size, and activities of
the variable interest entity; and, (b) the enterprise's maximum exposure to loss
as a result of its involvement with the VIE. FIN 46 may be applied prospectively
with a cumulative effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative effect adjustment as of the beginning of the first year
restated. The Company is assessing the impact of this Interpretation, if any, on
its existing entities and does not believe the impact will be significant on its
liquidity, financial position, and results of operations. The Company did not
create any VIEs subsequent to January 31, 2003.

SIGNIFICANT ACCOUNTING POLICIES

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

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

The following tables present reconciliations for the three and six
months ended June 30, 2003 and 2002 of basic and diluted earnings per share from
"Income before discontinued operations and cumulative effect of a change in
accounting principle" to "Net (loss) income available to common shareholders."
The table also includes weighted average shares on a basic and diluted basis.

12

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This table presents supplemental cash flows disclosures for the six
months ended June 30, 2003 and 2002.

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS

3. SEGMENT REPORTING

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

The Company uses funds from operations ("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") 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 of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO an
appropriate measure of performance for an equity REIT and for its investment
segments. However, FFO should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the Company's operating
performance.

14

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Selected financial information related to each segment for the three
and six months ended June 30, 2003 and 2002, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at June 30, 2003 and December 31, 2002, are presented
below:

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- ----------
See footnotes to the following table.

- ----------

(1) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $0.9 million and $0.6 million for the
three months ended June 30, 2003 and 2002, respectively and $2.9
million and $1.7 million for the six months ended June 30, 2003 and
2002, respectively.

(2) For purposes of this Note, Corporate and Other include income from
investment land sales, net, corporate interest and other income,
general and administrative, interest expense, depreciation and
amortization, amortization of deferred financing costs, preferred
return paid to GMAC Commercial Mortgage Corporation ("GMACCM") for
2002, preferred dividends, other unconsolidated companies, impairment
and other charges and other expenses.

(3) Total assets by segment is inclusive of investments in real estate
mortgages and equity of unconsolidated companies, net of unconsolidated
debt.

(4) Inclusive of Corporate bonds and credit facility.

(5) The following table presents a reconciliation of Consolidated Funds
from Operations to Net Income (Loss).

16

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS

4. 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, and any gains or losses
recognized on assets sold and held for sale, be disclosed separately in the
Company's Consolidated Statements of Operations. The Company adopted SFAS No.
144 on January 1, 2002. In accordance with SFAS No. 144, the results of
operations of the assets sold or held for sale have been presented as
"Discontinued operations - income (loss) on assets sold and held for sale," and
gain or loss and impairments in the assets sold or held for sale have been
presented as "Discontinued operations - (loss) gain on assets sold and held for
sale" in the accompanying Consolidated Statements of Operations for the three
and six months ended June 30, 2003 and 2002. The impairment charges represent
the difference between the carrying value of assets sold or held for sale and
the actual or estimated sales price, less costs of sale. 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 June 30, 2003 and
December 31, 2002.

ASSETS HELD FOR SALE

OFFICE SEGMENT

As of June 30, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale. During
the six months ended June 30, 2003, the Company recognized an approximately
$12.7 million impairment charge, net of minority interests, on the 1800 West
Loop South Office Property.

As of June 30, 2003, the Company determined that the North Dallas
Athletic Club, a building adjacent to the Stanford Corporate Centre Office
Property in the Far North Dallas submarket in Dallas, Texas was no longer held
for sale due to the Company's negotiations to contract a new operator. The
Property has been reclassified from "Properties held for disposition, net" to
"Building and improvements," "Furniture, fixtures and equipment" and
"Accumulated depreciation" in the accompanying Consolidated Balance Sheets with
a book value of $0.6 million, net of accumulated depreciation of $0.8 million.
The impairment charge of $1.0 million, net of minority interest, recorded during
the first quarter of 2003, has been reclassified from "Discontinued operations -
(loss) gain on assets sold and held for sale" to "Impairment and other charges
related to real estate assets" in the accompanying Consolidated Statement of
Operations.

17

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BEHAVIORAL HEALTHCARE PROPERTIES

On February 27, 2003, the Company sold a behavioral healthcare property
for $2.0 million, consisting of $1.3 million in cash and a $0.7 million note
receivable. The Company recognized a loss on the sale of this property of
approximately $0.3 million. A $2.3 million impairment charge, net of minority
interest, had been recognized during 2002 related to this property.

On May 2, 2003, the Company sold one additional behavioral healthcare
property for $2.1 million. The Company recognized a loss on the sale of this
property of approximately $0.1 million. A $0.7 million impairment charge, net of
minority interest, was recognized during the first quarter of 2003 related to
this property.

The Company also recognized a $0.8 million impairment charge, net of
minority interest, during the second quarter of 2003 on a behavioral healthcare
property held for sale and under contract for sale at June 30, 2003. This
property was sold on July 10, 2003.

As of June 30, 2003, the Company owned five behavioral healthcare
properties.

SUMMARY OF ASSETS HELD FOR SALE

The following table indicates the major classes of assets of the
Properties held for sale.

- ---------

(1) Includes the 1800 West Loop South Office Property and five behavioral
healthcare properties.

The following table presents rental revenue, operating expenses,
depreciation and amortization, net income and impairments for the six months
ended June 30, 2003 and 2002 for Properties held for sale as of June 30, 2003.

FOR THE SIX MONTHS ENDED JUNE 30,

- ---------

(1) Includes the 1800 West Loop South Office Property.

(2) Includes impairments of 1800 West Loop South and two behavioral healthcare
properties, before minority interests of $2.6 million.

5. OTHER ASSET DISPOSITIONS

INVESTMENT LAND DISPOSITIONS

On April 24, 2003, the Company completed the sale of approximately
one-half acre of undeveloped land located in Dallas, Texas. The sale generated
net proceeds and a net gain of approximately $0.3 million. This land was
wholly-owned by the Company.

On May 15, 2003, the Company completed the sale of approximately 24.8
acres of undeveloped land located in Coppell, Texas. The sale generated net
proceeds of $3.0 million and a net gain of approximately $1.1 million. This land
was wholly-owned by the Company.

18

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2003, the Company sold approximately 3.5 acres of
undeveloped land located in Houston, Texas. Subsequent to the end of the second
quarter, the sale agreement was modified. Under the terms of the modified sale
agreement, the Company generated proceeds of $2.1 million, net of closing costs,
and a note receivable in the amount of $11.8 million, with annual installments
of principal and interest payments beginning June 27, 2004 through maturity on
June 27, 2010. The principal payment amounts are calculated based upon a 20-year
amortization and the interest rate is 4% for the first two years and thereafter
the prime rate, as defined in the note, through maturity. Based on the terms of
the modified sale agreement, the Company will fully recognize a net gain of
approximately $8.9 million in the third quarter of 2003. This land was
wholly-owned by the Company.

6. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

As of June 30, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of warehouse
space.

The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
Crescent Operating, Inc. ("COPI"). The Company has no economic interest in
AmeriCold Logistics. See Note 15, "COPI," for information on the proposed
acquisition of COPI's 40% interest in AmeriCold Logistics by a new entity to be
owned by the Company's shareholders.

AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (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 amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.

AmeriCold Logistics deferred $18.5 million of the total $76.4 million
of rent payable for the six months ended June 30, 2003. The Company's share of
the deferred rent was $7.4 million. The Company recognizes rental income from
the Temperature-Controlled Logistics Properties when earned and collected and
has not recognized the $7.4 million of deferred rent in equity in net income of
the Temperature-Controlled Logistics Properties for the six months ended June
30, 2003. As of June 30, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $59.1 million and $52.8 million, respectively, of which the Company's
portions were $23.6 million and $21.1 million, respectively.

VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.

As of June 30, 2003, the Company held a 56% interest in Vornado
Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). The assets of VCQ include two
quarries and the related land. The Company accounts for this investment as an
unconsolidated equity investment because the Company does not control the joint
venture.

On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.

On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. The
receivables were collected during the three months ended June 30, 2003.

On May 22, 2003, VCQ distributed cash of $3.2 million to the Company.

19

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The Company, through ownership interests of 50% or less, or ownership
of non-voting interests only, has other unconsolidated investments which it does
not control; these investments are accounted for using the equity method of
accounting.

The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments as of June 30, 2003.

- ---------

(1) The remaining 50% 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
an affiliate of a fund managed by JP Morgan Fleming Asset Management,
Inc.

(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned
by a pension fund advised by JP Morgan Fleming Asset Management, Inc.

(4) The remaining 80% interest in each of 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 Trust.

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

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

(7) Distributions are made to partners based on specified payout
percentages. During the six months ended June 30, 2003, the payout
percentage to the Company was 52.5%.

(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned
by parties unrelated to the Company.

(9) The remaining 50% interest in Manalapan Hotel Partners, L.L.C.
("Manalapan") is owned by WB Palm Beach Investors, L.L.C.

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

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

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

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

20

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) The SunTx Fulcrum Fund, L.P.'s ("SunTx") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 71.9% of SunTx is owned by a group
of individuals unrelated to the Company. The Company's ownership
percentage will decline by the closing date of SunTx as capital
commitments from third parties are secured. The Company's projected
ownership interest at the closing of SunTx is approximately 7.5% based
on SunTx manager's expectations for the final SunTx capitalization. The
Company accounts for its investment in SunTx under the cost method. The
Company's investment at June 30, 2003 was $6.3 million.

(15) G2 Opportunity Fund, L.P. ("G2") was formed for the purpose of
investing in commercial mortgage backed securities and other commercial
real estate investments. Goff-Moore Strategic Partners, L.P. ("GMSP")
and GMACCM each own 21.875% of G2, with the remaining 43.75% owned by
parties unrelated to the Company. See Note 14, "Related Party
Transactions," for information regarding the ownership interests of
trust managers and officers of the Company in GMSP.

SUMMARY FINANCIAL INFORMATION

The Company reports its share of income and losses based on its
ownership interest in its respective equity investments, adjusted for any
preference payments. As a result of the Company's transaction with COPI on
February 14, 2002, certain entities that were reported as unconsolidated
entities in 2002 prior to February 14, 2002 are consolidated in the June 30,
2003 financial statements. Additionally, certain unconsolidated subsidiaries of
the newly consolidated entities are now shown separately as unconsolidated
entities of the Company. As a result of the Company's January 2, 2003 purchase
of the remaining 2.56% economic interest, representing 100% of the voting stock,
in DBL Holdings, Inc. ("DBL"), DBL is consolidated in the June 30, 2003
financial statements. Because DBL owns a majority of the voting stock of MVDC
and HADC, these two Residential Development Corporations are consolidated in the
June 30, 2003 financial statements.

The unconsolidated entities that are included under the headings on the
following tables are summarized below.

Balance Sheets as of June 30, 2003:

o WLDC;

o Other Residential Development - This includes the
Blue River Land Company, L.L.C.;

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 CR License, L.L.C., The
Woodlands Operating Company, L.P., Canyon Ranch Las
Vegas, L.L.C., SunTx and G2.

Balance Sheets as of December 31, 2002:

o WLDC;

o Other Residential Development - This includes the
Blue River Land Company, L.L.C., 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, CR License, L.L.C., The
Woodlands Operating Company, L.P., Canyon Ranch Las
Vegas, L.L.C. and SunTx.

Summary Statements of Operations for the six months ended June 30,
2003:

o WLDC;

o Other Residential Development - This includes the
operating results for Blue River Land Company,
L.L.C.;

o Resort/Hotel - This includes the operating results
for Manalapan;

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

21

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

o Other - This includes the operating results for CR
License, L.L.C., The Woodlands Operating Company,
L.P., Canyon Ranch Las Vegas, L.L.C., SunTx and G2.

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

o WLDC - This includes WLDC's operating results for the
period February 15 through June 30, 2002 and TWLC's
operating results for the period January 1 through
February 14, 2002;

o Other Residential Development - This includes the
operating results for DMDC and CRDI for the period
January 1 through February 14, 2002, the operating
results of Blue River Land Company, L.L.C. and
Manalapan for the period February 15 through June 30,
2002, and the operating results of MVDC and HADC;

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

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

o Other - This includes the operating results for DBL,
CR License, L.L.C., The Woodlands Operating Company,
Canyon Ranch Las Vegas, L.L.C. and SunTx.

22

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(2) Excludes the goodwill write-off for the Temperature-Controlled
Logistics Properties, which was recorded as a cumulative change in
accounting principle in the accompanying financial statements.

23

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of June 30, 2003 are shown below.

- ---------
(1) URS Real Estate, L.P. and Americold Real Estate, L.P., subsidiaries of
the Temperature-Controlled Logistics Corporation, expect to repay the
notes on the Optional Prepayment Date of April 11, 2008.

(2) Senior Note - Note A: $82.9 million at variable interest rate, LIBOR +
189 basis points, $4.9 million at variable interest rate, LIBOR + 250
basis points with a LIBOR floor of 2.50%. Note B: $24.4 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Mezzanine Note - $19.5 million at variable interest rate, LIBOR
+ 890 basis points with a LIBOR floor of 3.0%. Interest-rate cap
agreement maximum LIBOR of 4.52% on all notes. All notes amortized
based on a 25-year schedule.

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

(4) The Company and its joint venture partner each obtained a letter of
credit to guarantee the repayment of up to $4.3 million of the Main
Street Partners, L.P. loan.

(5) The Company provides a full guarantee 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 a 1.3x debt service coverage.

(6) Woodlands CPC and WLDC entered into two $50 million interest rate swap
agreements which limit interest rate exposure to a LIBOR rate of
1.735%. The swaps are effective August 4, 2003.

(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) WLDC entered into an interest rate cap agreement which limits interest
rate exposure on the notional amount of $19.5 million to a maximum
LIBOR rate of 8.5%.

(9) The variable rate loan has an interest rate of LIBOR + 300 basis
points. A fully consolidated entity of CRDI, of which CRDI owns 88.3%,
provides a guarantee of up to 70% of the outstanding balance of up to a
$9.0 million loan to Blue River Land Company, L.L.C. There was
approximately $7.7 million outstanding at June 30, 2003 and the amount
guaranteed was $5.4 million.

(10) The Company and its joint venture partner each obtained a letter of
credit to guarantee repayment of up to $3.0 million of this facility.

24

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows, as of June 30, 2003, information about the
Company's share of unconsolidated fixed and variable rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.

- ---------

(1) Based on contractual maturities. The overall weighted average maturity
would be 4.0 years assuming the election of extension options on debt
instruments and expected repayment of the Goldman Sachs notes on the
optional prepayment date.

Listed below is the Company's share of aggregate principal payments, by
year, required as of June 30, 2003, related to the Company's unconsolidated
debt. Scheduled principal installments and amounts due at maturity are included.

- ---------
(1) These amounts do not reflect the effect of extension options.

(2) Based on contractual maturities.

25

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

The following is a summary of the Company's debt financing at
June 30, 2003:

Secured Debt

26

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Secured Debt

- ---------

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

(2) In August 2007, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment,
excess property cash flow, as defined, to be applied first against
principal and thereafter against accrued excess interest, as defined.
It is the Company's intention to repay the note in full at such time
(August 2007) by making a final payment of approximately $221.7
million.

(3) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine
note. The notes are due May 2004 and bear interest at the 30-day LIBOR
rate plus a spread of (i) 164.7 basis points for the CMBS note (at June
30, 2003, the interest rate was 5.147%), and (ii) 600 basis points for
the Mezzanine note (at June 30, 2003, the interest rate was 9.5%). The
blended rate at June 30, 2003 for the two notes was 5.84%. Both notes
have a LIBOR floor of 3.5%. The notes have three-year interest only
terms and two one-year extension options. The Fleet-Mezzanine note is
secured by the Company's interests in Funding X and Crescent Spectrum
Center, L.P. and the Company's interest in their general partner.

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

(5) In March 2006, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment,
excess property cash flow, as defined, to be applied first against
principal and thereafter, against accrued excess interest, as defined.
It is the Company's intention to repay the note in full at such time
(March 2006) by making a final payment of approximately $154.5 million.

(6) During the first quarter of 2003, the Company paid the $63.5 million
Cigna Note, bearing interest at 7.47%, which matured in March 2003, in
full with a draw under the Company's credit facility.

(7) This facility is a $51.8 million line of credit secured by certain DMDC
land and improvements ("vertical facility"), club facilities ("club
loan"), notes receivable ("warehouse facility") and additional land
("short-term 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 June 30, 2003, the interest rate was 4.00%). The warehouse
facility bears interest at prime plus 100 basis points (at June 30,
2003, the interest rate was 5.00%) and is limited to $10.0 million. The
short-term facility bears interest at prime plus 50 basis points (at
June 30, 2003, the interest rate was 4.50%) and is limited to $1.8
million. The blended rate at June 30, 2003 for the vertical facility
and club loan, the warehouse facility and the short-term facility was
4.21%.

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

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

(10) In July 2010, the interest rate due under the note will change to a
10-year Treasury yield plus 500 basis points or, if the Company so
elects, it may repay the note without penalty at that date by making a
final payment of approximately $6.1 million.

(11) The Company's joint venture partner, which owns a 19.9% interest in the
Sonoma Mission Inn & Spa, has a commitment to fund $10.0 million of
future renovations at the Sonoma Mission Inn & Spa through a mezzanine
loan. The Net Operating Income Hurdle Date, as defined in the loan
agreement, is the date as of which the Sonoma Mission Inn & Spa has
achieved an aggregate Adjusted Net Operating Income, as defined in the
loan agreement, of $12 million for a period of 12 consecutive calendar
months.

27

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America for a loan with an initial notional amount of $0.8
million, increasing monthly to up to $28.3 million in September 2004,
based on the amount of the loan. Under the Agreement, in the event the
prime rate, as defined in the agreement, exceeds 4.1%, Bank of America
will reimburse the interest paid in excess of such rate.

(13) The Notes were issued in offerings registered with the Securities and
Exchange Commission.

(14) 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 limitations on total leverage, fixed charge
ratio, debt service coverage, minimum tangible net worth, and specific
mix of office and hotel assets and average occupancy of Office
Properties. At June 30, 2003, the maximum borrowing capacity under the
credit facility was $372.3 million. The outstanding balance excludes
letters of credit issued under the Company's credit facility of $15.2
million which reduce the Company's maximum borrowing capacity.

(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 lack of obligation by the lender to fund the loan.

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

- ---------
(1) Balance excludes hedges. The percentages for fixed rate debt and
variable rate debt, including the $508.3 million of hedged variable
rate debt, are 87% and 13%, respectively.

(2) Including the effect of hedge arrangements, the overall weighted
average interest rate would have been 7.19%.

(3) Based on contractual maturities. The overall weighted average maturity
is 3.5 years based on the Company's expected payoff dates.

Listed below are the aggregate principal payments by year required as
of June 30, 2003 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.

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

The Company has $21.7 million of secured debt maturing through December
31, 2003, consisting primarily of debt related to the Residential Development
Segment. The Company plans to meet these maturing debt obligations, primarily
through cash from operations, construction loan refinancings, and additional
borrowings under the Company's credit facility.

Any uncured or unwaived events of default under the Company's loans can
trigger an acceleration of payment on the loan in default. In addition, an event
of default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in an event of
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 June
30, 2003, no event of default had occurred, and the Company was in compliance
with all of its covenants related to its outstanding debt. The Company's debt
facilities generally prohibit loan prepayment for an initial period, allow
prepayment with a penalty during a following specified period and allow
prepayment without penalty after the expiration of that period. During the six
months ended June 30, 2003, there were no circumstances that required prepayment
penalties or increased collateral related to the Company's existing debt.

28

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate are: Funding I and Funding
II Properties (CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent
Funding Interest, LLC, CRE Management I Corp., CRE Management II Corp.); Funding
III Properties (CRE Management III Corp.); Funding IV Properties (CRE Management
IV Corp.); Funding V Properties (CRE Management V Corp.); Funding VI Properties
(CRE Management VI Corp.); Funding VIII Properties (CRE Management VIII, LLC);
707 17th Street Property (CRE Management IX, LLC); Funding X Properties (CREF X
Holdings Management, LLC, CREF X Holdings, L.P., CRE Management X, LLC);
Spectrum Center (Spectrum Mortgage Associates, L.P., CSC Holdings Management,
LLC, Crescent SC Holdings, L.P., CSC Management, LLC), and Crescent Finance
Company.

9. CASH FLOW HEDGES

The Company uses derivative financial instruments to convert a portion
of its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of June 30, 2003, the Company had entered into five cash
flow hedge agreements which are accounted for in conformity with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133."

The following table shows information regarding the Company's cash flow
hedge agreements during the six months ended June 30, 2003, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").

- ---------

(1) During 2002, the Company entered into agreements for three cash flow
hedges, two of which were effective in the first quarter of 2003, and
one of which will be effective in the third quarter of 2003. These
three cash flow hedges replace the Company's cash flow hedges with
maturity dates of September 2, 2003 and February 3, 2003.

(2) In June 2003, the Company terminated its $200 million interest rate
swap with Salomon Brothers prior to its September 2, 2003 stated
maturity by prepaying the interest that would have been due at
maturity. The remaining unrealized gains in OCI and the prepaid
interest amounts will be amortized through the September 2, 2003
maturity date.

The Company has designated its five cash flow hedge agreements as cash
flow hedges of LIBOR-based monthly interest payments on a designated pool of
variable rate LIBOR indexed debt that re-prices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in DIG Issue E8.
The DIG is a task force designed to assist the FASB in answering questions that
companies have resulting from implementation of SFAS No. 133 and SFAS No. 138.
The Company uses the change in variable cash flows method as described in DIG
Issue G7 for prospective testing as well as for the actual recording of
ineffectiveness, if any. Under this method, the Company will compare the changes
in the floating rate portion of each cash flow hedge to the floating rate of the
hedged items. The cash flow hedges have been and are expected to remain highly
effective. Changes in the fair value of these highly effective hedging
instruments are recorded in OCI. The effective portion that has been deferred in
OCI 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.

29

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable rate debt to fixed
rate debt. As of June 30, 2003, CRDI had two cash flow hedge agreements in place
which are accounted for in conformity with SFAS Nos. 133 and 138.

The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest thereon as of June 30, 2003.
Unlike the additional interest on the Company's cash flow hedges, which was
expensed, the additional interest on CRDI's cash flow hedges was capitalized, as
it is related to debt incurred for projects that are currently under
development. Also presented are the unrealized gains in OCI for the six months
ended June 30, 2003.

- ---------

(1) See Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Unconsolidated Debt Analysis," for a
description of the terms of this debt.

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

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

(4) A fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides
a guarantee of 70% of the outstanding balance of up to a $9.0 million
loan to Blue River Land Company, L.L.C. There was approximately $7.7
million outstanding at June 30, 2003 and the amount guaranteed was $5.4
million.

(5) The Company and its joint venture partner each provide a $4.3 million
letter of credit to guarantee repayment of up to $8.5 million of the
loan to Main Street Partners, L.P.

(6) The Company and its joint venture partner each provide a $3.0 million
letter of credit to guarantee repayment of up to $6.0 million of the
Manalapan debt with Corus Bank.

OTHER COMMITMENTS

A consolidated subsidiary of the Company, CRDI, has a purchase
commitment of $12.1 million related to a purchase agreement for a tract of land
in Eagle County, Colorado. The amount will be paid at closing of the
transaction, which is anticipated to occur in the third quarter of 2003.

See Note 15, "COPI," for a description of the Company's commitments
related to the agreement with COPI, executed on February 14, 2002.

CONTINGENCIES

ENVIRONMENTAL MATTERS

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

LITIGATION

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

31

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. MINORITY INTEREST

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

Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the six months ended June 30, 2003, there were 3,940 units
exchanged for 7,880 common shares of the Company.

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

The following table summarizes the minority interest liability as of
June 30, 2003 and December 31, 2002:

The following table summarizes the minority interests' share of net
income (loss) for the six months ended June 30, 2003 and 2002:

32

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SHAREHOLDERS' EQUITY

DISTRIBUTIONS

The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the six
months ended June 30, 2003 (dollars in thousands, except per share amounts).

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

13. 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. For the six months ended June 30, 2003, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Company.

The Company intends to maintain its qualification as a REIT under
Section 856 of the U.S. Internal Revenue Code of 1986, as amended (the "Code").
As a REIT, the Company generally will not be subject to federal corporate income
taxes as long as it satisfies certain technical requirements of the Code,
including the requirement to distribute 90% of REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the federal level or in
most of the states in which it operates. The Company consolidates certain
taxable REIT subsidiaries, which are subject to federal and state income tax.
For the six months ended June 30, 2003 and 2002, the Company's federal income
tax benefit was $5.6 million and $4.0 million, respectively. The Company's $5.6
million income tax benefit at June 30, 2003 consists primarily of $3.4 million
for the Residential Development Segment and $2.1 million for the Resort/Hotel
Segment.

The Company's total net tax asset of approximately $50.3 million at
June 30, 2003 includes $33.1 million of net deferred tax assets. 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. There was no change in the valuation allowance during the six months
ended June 30, 2003.

33

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC. ("DBL")

Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2. 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 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 John Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company. The remaining approximately 2% general partnership
interest is owned by parties unrelated to the Company. At June 30, 2003, DBL had
an approximately $13.4 million investment in G2.

On January 2, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL from Mr. Goff. Total
consideration paid for Mr. Goff's interest was $0.4 million. The Board of Trust
Managers of the Company, including all the independent trust managers, approved
the transaction based in part on an appraisal of the assets of DBL by an
independent appraisal firm. As a result of this transaction, DBL is wholly-owned
by the Company and is consolidated in the Residential Development Segment as of
and for the six months ended June 30, 2003. Also, because DBL owns a majority of
the voting stock in MVDC and HADC, the Company consolidated these two
Residential Development Corporations as of and for the six months ended June 30,
2003.

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

As of June 30, 2003, the Company had approximately $37.8 million of
loans outstanding 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 Trust Managers
and the Executive Compensation Committee of the Company. The proceeds of these
loans were used by the employees and the trust managers to acquire common shares
of the Company pursuant to the exercise of vested stock and unit options.
Pursuant to the loan agreements, these loans may be repaid in full or in part at
any time without premium or penalty. Mr. Goff had a loan representing $26.3
million of the $37.8 million total outstanding loans at June 30, 2003.
Approximately $0.3 million of interest was outstanding related to these loans as
of June 30, 2003. No conditions exist at June 30, 2003 which would cause any of
the loans to be in default. Effective July 29, 2002, the Company ceased offering
to its employees and trust managers the option to obtain loans pursuant to the
Company's stock and unit incentive plans.

OTHER

On June 28, 2002, the Company purchased, and is holding for sale, the
home of an executive officer of the Company for approximately $2.7 million,
which approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.

15. COPI

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

COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each party agreed to provide the other with
rights to participate in certain transactions. The Company was not permitted to
operate or lease these assets under the tax laws in effect and applicable to
REITs at that time. In connection with the formation and capitalization of COPI,
and the subsequent operations and investments of COPI since 1997, the Company
made loans to COPI under a line of credit and various term loans.

34

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, all of COPI's voting interests in three of the Company's
Residential Development Corporations and other assets. The Company agreed to
assist and provide funding to COPI for the implementation of a pre-packaged
bankruptcy of COPI. In connection with the transfer, COPI's rent and debt
obligations to the Company were reduced.

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

The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. Under the Agreement, the Company
has agreed to provide approximately $14.0 million to COPI in the form of cash
and common shares of the Company to fund costs, claims and expenses relating to
the bankruptcy and related transactions, and to provide for the distribution of
the Company's common shares to the COPI stockholders. The Company also agreed,
however, that it will issue common shares with a minimum dollar value of
approximately $2.2 million to the COPI stockholders, even if it would cause the
total costs, claims and expenses that it pays to exceed $14.0 million.
Currently, the Company estimates that the value of the common shares that will
be issued to the COPI stockholders will be between approximately $2.2 million
and $4.0 million. The actual value of the common shares issued to the COPI
stockholders will not be determined until the confirmation of COPI's bankruptcy
plan and could vary from the estimated amounts, but will have a value of at
least $2.2 million.

In addition, the Company has agreed to use commercially reasonable
efforts to assist COPI in arranging COPI's repayment of its $15.0 million
obligation to Bank of America, together with any accrued interest. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders of the Company. Crescent Spinco then would purchase COPI's
interest in AmeriCold Logistics for between $15.0 million and $15.5 million.
COPI has agreed that it will use the proceeds of the sale of the AmeriCold
Logistics interest to repay Bank of America in full.

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

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

On March 6, 2003, the stockholders of COPI approved the 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 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.

35

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 approval of the
plan by certain of COPI's creditors and the confirmation of the plan by the
bankruptcy court.

36

ITEM 2. 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

Forward-Looking Statements............................................................ 38

Results of Operations

Three and six months ended June 30, 2003 and 2002................................ 39

Liquidity and Capital Resources

Cash Flows for the six months ended June 30, 2003................................ 45

Debt Financing........................................................................ 50

Recent Developments................................................................... 53

Unconsolidated Investments............................................................ 54

Significant Accounting Policies....................................................... 56

Funds from Operations................................................................. 60

37

FORWARD-LOOKING STATEMENTS

You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Company's Form 10-K for the year ended December 31, 2002. In management's
opinion, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation of the unaudited interim financial
statements are included. Capitalized terms used but not otherwise defined in
this section have the meanings given to them in the notes to the consolidated
financial statements in Item 1, "Financial Statements."

This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipates,"
"believes," "expects," "intends," "future," "may," "will," "should," "plans,"
"estimates," "potential," or "continue," or the negative of these terms, or
other similar expressions, identify forward-looking statements.

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

The following factors might cause such a difference:

o The Company's ability, at its Office Properties, to timely lease
unoccupied square footage and timely re-lease occupied square footage
upon expiration on favorable terms, which may continue to be adversely
affected by existing real estate conditions (including changes in
vacancy rates in a particular market or markets, decreases in rental
rates, increased competition from other properties or by 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, increases in debt
service associated with increased debt and with variable rate debt, the
ability to meet financial covenants, the Company's ability to fund the
share repurchase program and the Company's ability to consummate
financings and refinancings on favorable terms and within any
applicable time frames;

o The ability of the Company to implement planned operating expense and
capital expenditure reductions within anticipated time frames;

o The ability of the Company to consummate anticipated office
acquisitions and investment land and other dispositions on favorable
terms and within anticipated 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 the tenant to pay all current and deferred rent due);

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

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

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

o Other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission.

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

38

RESULTS OF OPERATIONS

The following table shows the Company's financial data as a percentage
of total revenue for the three and six months ended June 30, 2003 and 2002, and
the variance in dollars between the three and six months ended June 30, 2003 and
2002.

39

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 TO THE THREE MONTHS ENDED
JUNE 30, 2002

PROPERTY REVENUES

Total property revenues decreased $42.2 million, or 15.3%, to $233.2
million for the three months ended June 30, 2003, as compared to $275.4 million
for the three months ended June 30, 2002. The primary components of the decrease
in total property revenues are discussed below.

o Office Property revenues decreased $11.0 million, or 8.0%, to $127.3
million, due to:

o a decrease of $8.2 million resulting from the contribution of two
Office Properties to joint ventures in the third quarter of 2002;
and

o a decrease of $7.6 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held for
sale) that the Company owned or had an interest in, primarily due
to a decline in occupancy resulting in decreases in both rental
revenue and operating expense recoveries, and a decrease in
antenna revenue and other revenue; partially offset by

o an increase of $3.3 million from the Johns Manville Office
Property acquired in August 2002; and

o an increase of $1.3 million resulting from third party management
services provided to joint ventures and related direct expense
reimbursements.

o Residential Development revenues decreased $29.3 million, or 35.1%, to
$54.2 million, primarily due to:

o a decrease of $20.2 million primarily due to the sale of 16 fewer
units and 138 fewer lots at CRDI;

o a decrease of $14.1 million primarily due to the sale of 14 fewer
lots at Desert Mountain; partially offset by

o an increase of $4.2 million due to consolidation of MVDC and HADC
in 2003.

PROPERTY EXPENSES

Total property expenses decreased $24.5 million, or 13.8%, to $152.9
million for the three months ended June 30, 2003, as compared to $177.4 million
for the three months ended June 30, 2002. The primary components of the decrease
in total property expenses are discussed below.

o Office Property expenses increased $1.5 million, or 2.5%, to $62.5
million, primarily due to:

o an increase of $2.3 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held for
sale) that the Company owned or had an interest in, due to:

o $4.2 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; and

o $0.6 million increase in bad debt expense; partially
offset by

o $1.3 million decrease in building repairs and maintenance
expense; and

o $1.2 million decrease in property taxes and other taxes
and assessments;

o an increase of $1.3 million due to the acquisition of the Johns
Manville Office Property in August 2002; and

o an increase of $0.9 million attributable to the cost of providing
third party management services to joint venture properties,
which are recouped by increased third party fee income and direct
expense reimbursements; partially offset by

o a decrease of $3.4 million due to the contribution of two Office
Properties to joint ventures in 2002.

o Residential Development Property expenses decreased $26.5 million, or
35.6%, to $47.8 million, primarily due to:

o a decrease of $18.4 million primarily due to a reduction in cost
of sales related to the sale of 16 fewer units and 138 fewer lots
at CRDI;

o a decrease of $12.6 million primarily due to a reduction in cost
of sales related to the sale of 14 fewer lots at Desert Mountain;
partially offset by

o an increase of $2.5 million primarily due to increased cost of
sales from the consolidation of MVDC and HADC.

40

OTHER INCOME/EXPENSE

Total other expenses decreased $0.5 million, or 0.7%, to $80.7 million
for the three months ended June 30, 2003, as compared to $81.3 million for the
three months ended June 30, 2002. The primary components of the decrease in
total other expenses are discussed below.

OTHER INCOME

Other income decreased $1.2 million, or 14.0%, to $7.4 million for the
three months ended June 30, 2003, as compared to $8.6 million for the three
months ended June 30, 2002. The primary components of the decrease in other
income are discussed below.

o Equity in net income of unconsolidated companies decreased $2.1
million, or 32.1%, to $4.6 million, primarily due to:

o a decrease of $4.6 million in Residential Development Property
equity in net income due to a reduction in lot and acreage sales
at the Woodlands Land Development Company, L.P. and consolidation
of MVDC and HADC in 2003; partially offset by

o an increase of $1.4 million in Resort/Hotel Property equity in
net income, primarily due to a series of transactions in October
2002 in which the Company increased its equity interest in the
entity that owns the Ritz Carlton Palm Beach Hotel from 25% to
50% and the Company's $1.1 million portion of a payment received
from the operator of the Resort/Hotel Property pursuant to the
terms of the operating agreement because the Property did not
achieve the specified net operating income level for 2002;

o an increase of $0.7 million in other unconsolidated companies due
primarily to losses recognized for the three months ended June
30, 2002; and

o an increase of $0.4 million in Office Property equity in net
income.

o Interest and other income decreased $0.7 million, or 35.7%, to $1.2
million due to the payoff of two notes receivable, with an aggregate
principal balance of $19.9 million, in 2002.

o Income from investment land sales, net increased $1.6 million, due to
net income from the sales of two parcels of undeveloped land, located
in Dallas, Texas and Coppell, Texas, in 2003.

OTHER EXPENSES

Other expenses decreased $1.7 million, or 2.0%, to $88.1 million for
the three months ended June 30, 2003, as compared to $89.9 million for the three
months ended June 30, 2002. The primary components of the decrease in other
expenses are discussed below.

o Interest expense decreased $3.4 million, or 7.3%, to $43.1 million due
to a decrease of $17.8 million in the weighted average debt balance and
a decrease of 0.74% in the weighted average interest rate.

o Depreciation and amortization expense increased $1.5 million, or 4.4%,
to $36.0 million, primarily due to an increase of $1.7 million in
Residential Development Property and Resort/Hotel Property depreciation
and amortization expense.

DISCONTINUED OPERATIONS

Income from discontinued operations on assets sold and held for sale
decreased $1.3 million, or 121.9%, to a loss of $0.2 million, primarily due to:

o a decrease of $1.6 million due to the gain on the sale of two
office properties in 2002; and

o a decrease of $0.8 million, due to the impairment of a behavioral
healthcare property in 2003; partially offset by

o an increase of $1.2 million due to net operating loss in 2002
from six office properties and two transportation companies sold
during 2002.

41

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 TO THE SIX MONTHS ENDED JUNE
30, 2002

The following comparison of the results of operations for the six
months ended June 30, 2003 and the six months ended June 30, 2002 reflects the
consolidation of eight of the Resort/Hotel Properties and three of the
Residential Development Properties commencing on February 14, 2002, as a result
of the COPI transaction. Prior to February 14, 2002, the results of operations
of the Resort/Hotel Properties were reflected in the Company's consolidated
financial statements as lease payments and as equity in net income for the
Residential Development Properties. Because the results of operations of these
Properties are consolidated for the full period in 2003, as compared to a
partial period in 2002, the Company's financial statements do not provide a
direct comparison of the results of operations of the Resort/Hotel Properties or
the Residential Development Properties for the full periods in 2003 and 2002.
Additional information on the results of operations of the Resort/Hotel
Properties or the Residential Development Properties for the full periods in
both 2003 and 2002 is provided below under the captions "Resort/Hotel
Properties" and "Residential Development Properties."

PROPERTY REVENUES

Total property revenues decreased $35.6 million, or 7.2%, to $461.0
million for the six months ended June 30, 2003, as compared to $496.6 million
for the six months ended June 30, 2002. The components of the decrease in total
property revenues are discussed below.

o Office Property revenues decreased $21.9 million, or 7.9%, to $256.1
million, due to:

o a decrease of $17.0 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held for
sale) that the Company owned or had an interest in, primarily due
to a decline in occupancy resulting in decreases in both rental
revenue and operating expense recoveries, and a decrease in
antenna revenue and other revenue;

o a decrease of $16.0 million resulting from the contribution of
two Office Properties to joint ventures in the third quarter of
2002; and

o a decrease of $0.1 million in other revenues; partially offset by

o an increase of $6.7 million from the Johns Manville Office
Property acquired in August 2002;

o an increase of $2.3 million attributable to third party
management services and related direct expense reimbursements;

o an increase of $1.2 million in net lease termination fees to $3.0
million in 2003; and

o an increase of $1.0 million attributable to non-recurring revenue
received in 2003.

o Resort/Hotel Property revenues increased $23.3 million, or 25.3%, to
$115.4 million, primarily due to the consolidation of the operations of
eight of the Resort/Hotel Properties for the full period in 2003 as
compared to a partial period in 2002 as a result of the COPI
transaction (prior to February 14, 2002 the Company recognized lease
payments related to these properties).

o Residential Development revenues decreased $37.0 million, or 29.2%, to
$89.6 million, primarily due to a reduction in lot and unit sales at
Desert Mountain and CRDI.

PROPERTY EXPENSES

Total property expenses decreased $7.8 million, or 2.6%, to $296.6
million for the six months ended June 30, 2003, as compared to $304.4 million
for the six months ended June 30, 2002. The components of the decrease in total
property expenses are discussed below.

o Office Property expenses decreased $1.2 million, or 1.0%, to $123.4
million, primarily due to:

o a decrease of $6.7 million due to the contribution of two Office
Properties to joint ventures in 2002; and

o a decrease of $0.7 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held for
sale) that the Company owned or had an interest in, due to:

o $3.0 million decrease in property taxes;

o $2.2 million decrease in building repairs and maintenance
expense; and

o $0.8 million decrease in management fee expenses;
partially offset by

o $5.3 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; partially offset by

o an increase of $2.6 million due to the acquisition of the Johns
Manville Office Property in August 2002;

42

o an increase of $2.0 million attributable to the cost of providing
third party management services to joint venture properties,
which are recouped by increased third party fee income and direct
expense reimbursements;

o an increase of $0.9 million in taxes/assessments related to
various land parcels; and

o an increase of $0.4 million of other expenses.

o Resort/Hotel Property expense increased $26.3 million, or 39.8%, to
$92.4 million, primarily due to the consolidation of the operations of
eight of the Resort/Hotel Properties for a full period in 2003 as
compared to a partial period in 2002 as a result of the COPI
transaction on February 14, 2002.

o Residential Development Property expenses decreased $32.9 million, or
29.0%, to $80.8 million, primarily due to a reduction in lot and unit
sales and related costs at Desert Mountain and CRDI.

OTHER INCOME/EXPENSE

Total other expenses increased $14.1 million, or 9.2%, to $167.4
million for the six months ended June 30, 2003, as compared to $153.3 million
for the six months ended June 30, 2002. The primary components of the increase
in total other expenses are discussed below.

OTHER INCOME

Other income decreased $7.6 million, or 36.7%, to $12.8 million for the
six months ended June 30, 2003, as compared to $20.2 million for the six months
ended June 30, 2002. The primary components of the decrease in other income are
discussed below.

o Equity in net income of unconsolidated companies decreased $8.1
million, or 49.1%, to $8.2 million, primarily due to:

o a decrease of $16.2 million in Residential Development Property
equity in net income due to the consolidation of the operations
of three of the Residential Development Corporations for the full
period in 2003 as compared to a partial period in 2002 as a
result of the COPI transaction on February 14, 2002; partially
offset by

o an increase of $3.7 million in other unconsolidated companies due
primarily to losses recognized in the six months ended June 30,
2002;

o an increase of $2.1 million in Resort/Hotel Property equity in
net income, primarily due to a series of transactions in October
2002 in which the Company increased its equity interest in the
entity that owns the Ritz Carlton Palm Beach Hotel from 25% to
50% and the Company's $1.1 million portion of a payment received
from the operator of the Resort/Hotel Property pursuant to the
terms of the operating agreement because the Property did not
achieve the specified net operating income level for 2002;

o an increase of $1.8 million in Temperature-Controlled Logistics
Property equity in net income, primarily due to an increase in
other income, partially offset by a decrease in interest expense
resulting from a decrease of $3.0 million in the overall debt
balance and a decrease in administrative expenses; and

o an increase of $0.5 million in Office Property equity in net
income.

o Interest and other income decreased $1.2 million, or 29.9%, to $2.9
million due to the payoff of two notes receivable, with an aggregate
principal balance of $19.9 million, in 2002.

o Income from investment land sales, net increased $1.7 million, due to
net income from the sales of two parcels of undeveloped land, located
in Dallas, Texas and Coppell, Texas, in 2003.

43

OTHER EXPENSES

Other expenses increased $6.5 million, or 3.8%, to $180.2 million for
the six months ended June 30, 2003, as compared to $173.5 million for the three
months ended June 30, 2002. The primary components of the increase in other
expenses are discussed below.

o Depreciation expense increased $7.6 million, or 11.3%, to $74.7
million, due to;

o an increase of $4.9 million in Residential Development Property
and Resort/Hotel Property depreciation expense.

o an increase of $2.7 million in Office Property depreciation
expense, primarily attributable to:

o an increase of $4.6 million due to the write-off of tenant
improvements and lease commissions due to early
termination of leases; and

o an increase of $1.0 million from Johns Manville Office
Property acquired in August 2002; partially offset by

o a decrease of $3.0 million associated with the
contribution of two Office Properties to joint ventures in
2002.

o Corporate, general and administrative expenses increased $0.9 million,
or 7.5%, to $12.6 million, primarily due to increased legal expenses,
shareholder services, and consulting costs related to compliance with
the Sarbanes-Oxley Act.

o Other expenses increased $0.3 million due to a loss resulting from
the sale of marketable securities in 2003.

o Interest expense decreased $2.4 million, or 2.7%, to $86.3 million
primarily due to a decrease of 0.38%, from 7.69% to 7.31%, in the
weighted average interest rate.

DISCONTINUED OPERATIONS

Income from discontinued operations on assets sold and held for sale
decreased $18.5 million, or 409.0%, to a loss of $14.0 million, primarily due
to:

o a decrease of approximately $12.7 million due to the impairment
in 2003 of the 1800 West Loop South Office Property;

o a decrease of $5.4 million due to the gain on the sale of three
office properties in 2002; and

o a decrease of approximately $1.5 million due to the impairment in
2003 of two of the behavioral healthcare properties; partially
offset by

o an increase of $1.1 million due to the impairment in 2002 of two
transportation companies sold in 2002.

RESORT/HOTEL PROPERTIES

The following provides a comparison of the results of operations of the
Resort/Hotel Properties for the six months ended June 30, 2003 and 2002.

44

The net operating income for the Resort/Hotel Properties decreased $3.0
million, or 11.5%, to $22.9 million, primarily due to an increase of $2.9
million in Resort/Hotel Property operating expenses, primarily consisting of
insurance and workers' compensation expenses.

RESIDENTIAL DEVELOPMENT PROPERTIES

The following provides a comparison of the results of operations of the
Residential Development Properties for the six months ended June 30, 2003 and
2002.

Net income for the Residential Development Properties decreased $13.7
million, or 62.1%, to $8.3 million, primarily due to:

o a decrease of approximately $7.8 million due to lower lot, unit and
acreage sales at Desert Mountain, CRDI and The Woodlands in 2003;

o a decrease of approximately $6.0 million as a result of gains
recognized on the disposition of two properties at The Woodlands in
2002; and

o a decrease of $1.1 million due to the sale of two transportation
companies in December 2002 by CRDI; partially offset by

o an increase of $1.4 million due to a goodwill impairment at CRDI in
2002 resulting from the adoption of Statement of Financial Accounting
Standards No. 142.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

OPERATING ACTIVITIES

The Company's cash provided by operating activities of $38.5 million is
attributable to Property operations.

45

INVESTING ACTIVITIES

The Company's cash used in investing activities of $15.0 million is
primarily attributable to:

o $28.6 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;

o $15.2 million for Residential Development Property investments;

o $11.3 million for property improvements for rental properties,
primarily attributable to non-recoverable building improvements
for the Office Properties and replacement of furniture, fixtures
and equipment for the Resort/Hotel Properties;

o $3.3 million of additional investment in unconsolidated
companies, consisting primarily of investments in the
Residential Development Properties, Temperature-Controlled
Logistics Properties, and SunTx, a private equity fund;

o $2.7 million resulting from an increase in restricted cash, due
primarily to an increase in escrow deposits for capital
expenditures at the Company's Office Properties;

o $2.0 million for the acquisition of rental properties; and

o $1.1 million for development of investment properties.

The cash used in investing activities is partially offset by:

o $20.5 million resulting from a decrease in notes receivable,
primarily due to payment on a short-term seller financing note
attributable to the sale of two Office Properties in The
Woodlands and collections on developer financing notes at the
Residential Development Properties related to lot and unit sales
in 2002;

o $11.4 million in cash resulting from the consolidation of
entities;

o $6.4 million of proceeds from property sales;

o $5.4 million from return of investments in SunTx;

o $3.2 million from return of investments in
Temperature-Controlled Logistics Properties; and

o $2.3 million from return of investments in Office Properties.

FINANCING ACTIVITIES

The Company's cash used in financing activities of $30.0 million is
attributable to:

o $99.0 million of payments under the Company's credit facility,
primarily from proceeds from the new Cigna note;

o $92.4 million of payments under other borrowings, partially
resulting from the payoff of the Cigna Note;

o $87.7 million of distributions to common shareholders and
unitholders;

o $47.8 million of Residential Development Property note payments;

o $13.2 million of distributions to preferred shareholders;

o $7.8 million of net capital distributions to joint venture
partners;

o $1.9 million of debt financing costs; and

o $0.9 million for common shares purchased under a compensation
plan.

The cash used in financing activities is partially offset by:

o $187.0 million of proceeds from borrowings under the Company's
credit facility, a portion of which were used to pay off the
Cigna Note and for investment in Residential Development
Properties and tenant improvements, leasehold commissions and
property improvements for the Office Segment;

o $92.4 million of proceeds from other borrowings, primarily as a
result of the new Cigna note; and

o $41.3 million of proceeds from borrowings for construction costs
for infrastructure development on Residential Development
Properties.

46

LIQUIDITY REQUIREMENTS

DEBT FINANCING SUMMARY

The following tables show summary information about the Company's debt,
including its share of unconsolidated debt, as of June 30, 2003. Additional
information about the significant terms of the Company's debt financing
arrangements, its unconsolidated debt, and the Company's guarantees of
unconsolidated debt, is contained in Note 8, "Notes Payable and Borrowings under
Credit Facility," Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," and Note 10, "Commitments and Contingencies" of Item
1, "Financial Statements."

- ----------

(1) Balance excludes hedges. The percentages for fixed rate debt and
variable rate debt, including the $508.3 million of hedged variable
rate debt, are 87% and 13%, respectively.

(2) Balance excludes hedges. The percentages for total consolidated and
unconsolidated fixed rate debt and variable rate debt, including the
$508.3 million of hedged variable rate debt, are 81% and 19%,
respectively.

47

CAPITAL EXPENDITURES

As of June 30, 2003, the Company had unfunded capital expenditures of
approximately $79.5 million relating to capital investments that are not in the
ordinary course of operations of the Company's business segments. The table
below specifies the Company's requirements for capital expenditures and its
amounts funded as of June 30, 2003, and amounts remaining to be funded (future
fundings classified between short-term and long-term capital requirements):

- ----------

(1) All amounts are approximate.

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

(3) The capital expenditures reflect the Company's ownership percentage in each
Property, 25% for 5 Houston Center Office Property and 30% for Five Post
Oak Park Office Property.

(4) Located within the Houston Center Office Property complex.

(5) Represents capital expenditures for infrastructure and amenities. The Tahoe
Mountain Properties and Club project costs exclude costs for projects in
which the Company anticipates sales to occur over the next 18 months.

(6) The Company has a purchase commitment of $12.1 million related to a
purchase agreement for a tract of land in Eagle County, Colorado. The
guaranteed amount of $12.1 million will be paid by the Company at closing
of the transaction, which is anticipated to occur in the third quarter of
2003.

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

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

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

In addition, the Company has entered into a contract to acquire an
office property for approximately $52 million, consisting of $14 million in cash
and assumption of a $38 million loan. The acquisition is anticipated to close in
the third quarter of 2003 and is subject to customary closing conditions.

LIQUIDITY OUTLOOK

The Company expects to fund its short-term capital requirements of
approximately $69.2 million through a combination of cash, construction
financing, net cash flow from operations, and borrowings under the Company's
credit facility or the JP Morgan Facility. The Company plans to meet its
maturing debt obligations, through June 30, 2004, of approximately $540.5
million, primarily through refinancing of the Credit Facility, refinancing or
electing the extension option on the Deutsche Bank-CMBS loan, and refinancing of
the Northwestern Life Note.

The Company expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, debt service
requirements, non-revenue enhancing capital expenditures and revenue enhancing
capital expenditures (such as property improvements, tenant improvements and
leasing costs), distributions to shareholders and unitholders, and unfunded
expenses related to the COPI bankruptcy, primarily through cash flow provided by
operating activities and return of capital from the Residential Development
Segment. To the extent that the Company's cash flow from operating activities
and return of capital from the Residential Development Segment are not
sufficient to finance such short-term liquidity requirements, the Company
expects to finance such requirements with borrowings under the Company's credit
facility, the JP Morgan Facility, or new debt facilities, and proceeds from the
sale or joint venture of Properties.

48

The Company's long-term liquidity requirements as of June 30, 2003
consist primarily of debt maturities after June 30, 2004, which totaled
approximately $1.9 billion. The Company also has $10.3 million of long-term
capital expenditure requirements. The Company expects to meet these long-term
liquidity requirements primarily through long-term secured and unsecured
borrowings and other debt and equity financing alternatives as well as cash
proceeds received from the sale or joint venture of Properties and return of
capital investment from the Residential Development Segment.

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

o Additional proceeds from the Company's Credit Facility under which the
Company has up to $105.1 million of borrowing capacity available as of
June 30, 2003;

o Additional proceeds from the refinancing of the Company's Credit
Facility and other existing secured and unsecured debt;

o Additional debt secured by existing underleveraged properties;

o Issuance of additional unsecured debt;

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

o Proceeds from joint ventures and Property sales.

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

o The reduction in net operating income of the Properties supporting the
Company's Credit Facility to a level that would reduce the availability
under the Credit Facility;

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

o Restrictions on the Company's debt instruments or outstanding equity
may prohibit it from incurring debt or issuing equity on terms
available under then-prevailing market conditions or at all; and

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

The Company's portion of unconsolidated debt maturing through June 30,
2004 is $47.6 million. The Company's portion of unconsolidated debt maturing
after June 30, 2004 is $516.5 million. Unconsolidated debt is the liability of
the unconsolidated entity, is typically secured by that entity's property, and
is non-recourse to the Company except where a guarantee exists.

49

DEBT FINANCING

DEBT FINANCING ARRANGEMENTS

The significant terms of the Company's primary debt financing
arrangements existing as of June 30, 2003, are shown below:

- ----------

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

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

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

(4) The outstanding balance excludes letters of credit issued under the credit
facility of $15.2 million.

(5) This is an uncommitted facility.

(6) The overall weighted average interest rate does not include the effect of
the Company's cash flow hedge agreements. Including the effect of these
agreements, the overall weighted average interest rate would have been
7.19%.

50

In April 2003, the Company received modifications to certain
definitions relating to financial and other covenants in the $400 million Fleet
Revolving Credit Facility and $275 million Fleet Fund I and II Term Loan. The
modifications do not alter the Company's borrowing capacity, scheduled principle
payments, interest rates, or maturity dates.

As of June 30, 2003, no event of default had occurred, and the Company
was in compliance with all of its financial covenants related to its outstanding
debt.

Failure to comply with covenants under the credit facility or other
debt instruments could result in an event of default under one or more of the
Company's debt instruments. Any uncured or unwaived events of default under the
Company's loans can trigger an increase in interest rates or an acceleration of
payment on the loan in default and could cause the credit facility to become
unavailable to the Company. In addition, an event of default by the Company or
any of its subsidiaries with respect to any indebtedness in excess of $5.0
million generally will result in an event of 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. Any uncured or unwaived event of default could
have an adverse effect on the Company's business, financial condition, or
liquidity.

The Company's debt facilities generally prohibit loan prepayment for an
initial period, allow prepayment with a penalty during a following specified
period and allow prepayment without penalty after the expiration of that period.
During the six months ended June 30, 2003, there were no circumstances that
required prepayment penalties or increased collateral related to the Company's
existing debt.

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

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

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

o the effect of additional debt on existing covenant ratios;

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

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

UNCONSOLIDATED DEBT ARRANGEMENTS

As of June 30, 2003, the total debt of the unconsolidated joint
ventures and equity investments in which the company has ownership interests was
$1.4 billion, of which the Company's share was $564.1 million. The Company had
guaranteed $78.1 million of this debt as of June 30, 2003. Additional
information relating to the Company's unconsolidated debt financing arrangements
is contained in Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," of Item 1, "Financial Statements."

GUARANTEE COMMITMENTS

The Company's guarantees in place as of June 30, 2003 are listed in the
table below. For the guarantees on indebtedness, no triggering events or
conditions are anticipated to occur that would require payment under the
guarantees and management believes the assets associated with the loans that are
guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Company to provide additional
collateral to support the guarantees.

- ----------

(1) See Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Unconsolidated Debt Analysis," in Item 1,
"Financial Statements," for a description of the terms of this debt.

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

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

(4) A fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides a
guarantee of 70% of the outstanding balance of up to a $9.0 million loan to
Blue River Land Company, L.L.C. There was approximately $7.7 million
outstanding at June 30, 2003 and the amount guaranteed was $5.4 million.

51

(5) The Company and its joint venture partner each provide a $4.3 million letter
of credit to guarantee repayment of up to $8.5 million of the loan to Main
Street Partners, L.P.

(6) The Company and its joint venture partner each provide a $3.0 million letter
of credit to guarantee repayment of up to $6.0 million of the Manalapan debt
with Corus Bank.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company's objective in using derivatives is to add stability to
interest expense and to manage its exposure to interest rate movements or other
identified risks. Derivative financial instruments are used to convert a portion
of the Company's variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. To accomplish this objective, the Company primarily
uses interest rate swaps as part of its cash flow hedging strategy. Interest
rate swaps designated as cash flow hedges involve the payment of fixed rate
amounts in exchange for variable rate payments over the life of the agreements
without exchange of the underlying principal amount. For the six months ended
June 30, 2003, such derivatives were used to hedge the variable cash flows
associated with existing variable rate debt.

The following table shows information regarding the Company's cash flow
hedge agreements during the six months ended June 30, 2003, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").

- ----------

(1) During 2002, the Company entered into agreements for three cash flow
hedges, two of which were effective in the first quarter of 2003, and one
of which will be effective in the third quarter of 2003. These three cash
flow hedges replace the Company's cash flow hedges with maturity dates of
September 2, 2003 and February 3, 2003.

(2) In June 2003, the Company terminated its $200 million interest rate swap
with Salomon Brothers prior to its September 2, 2003 stated maturity by
prepaying the interest that would have been due at maturity. The remaining
unrealized gains in OCI and the prepaid interest amounts will be amortized
through the September 2, 2003 maturity date.

CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable rate debt to fixed
rate debt.

The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest thereon as of June 30, 2003.
Unlike the additional interest on the Company's cash flow hedges, which was
expensed, the additional interest on CRDI's cash flow hedges was capitalized, as
it is related to debt incurred for projects that are currently under
development. Also presented are the unrealized gains in OCI for the six months
ended June 30, 2003.

In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America for a loan with an initial notional amount of $0.8 million,
increasing monthly to up to $28.3 million in September 2004, based on the amount
of the loan. Under the agreement, in the event the prime rate, as defined in the
agreement, exceeds 4.1%, Bank of America will reimburse the interest paid in
excess of such rate.

52

RECENT DEVELOPMENTS

ASSETS HELD FOR SALE

OFFICE SEGMENT

As of June 30, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale. During
the six months ended June 30, 2003, the Company recognized an approximately
$12.7 million impairment charge, net of minority interests, on the 1800 West
Loop South Office Property.

BEHAVIORAL HEALTHCARE PROPERTIES

On February 27, 2003, the Company sold a behavioral healthcare property
for $2.0 million, consisting of $1.3 million in cash and a $0.7 million note
receivable. The Company recognized a loss on the sale of this property of
approximately $0.3 million. A $2.3 million impairment charge, net of minority
interest, had been recognized during 2002 related to this property.

On May 2, 2003, the Company sold one additional behavioral healthcare
property for $2.1 million. The Company recognized a loss on the sale of this
property of approximately $0.1 million. A $0.7 million impairment charge, net of
minority interest, was recognized during the first quarter of 2003 related to
this property.

The Company also recognized a $0.8 million impairment charge, net of
minority interest, during the second quarter of 2003 on a behavioral healthcare
property held for sale and under contract for sale at June 30, 2003. This
property was sold on July 10, 2003.

As of June 30, 2003, the Company owned five behavioral healthcare
properties.

INVESTMENT LAND DISPOSITIONS

On April 24, 2003, the Company completed the sale of approximately
one-half acre of undeveloped land located in Dallas, Texas. The sale generated
net proceeds and a net gain of approximately $0.3 million. This land was
wholly-owned by the Company.

On May 15, 2003, the Company completed the sale of approximately 24.8
acres of undeveloped land located in Coppell, Texas. The sale generated net
proceeds of $3.0 million and a net gain of approximately $1.1 million. This land
was wholly-owned by the Company.

As of June 30, 2003, the Company sold approximately 3.5 acres of
undeveloped land located in Houston, Texas. Subsequent to the end of the second
quarter, the sale agreement was modified. Under the terms of the modified sale
agreement, the Company generated proceeds of $2.1 million, net of closing costs,
and a note receivable in the amount of $11.8 million, with annual installments
of principal and interest payments beginning June 27, 2004 through maturity on
June 27, 2010. The principal payment amounts are calculated based upon a 20-year
amortization and the interest rate is 4% for the first two years and thereafter
the prime rate, as defined in the note, through maturity. Based on the terms of
the modified sale agreement, the Company will fully recognize a net gain of
approximately $8.9 million in the third quarter of 2003. This land was
wholly-owned by the Company.

53

RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC.

Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2. 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 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 John Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company. The remaining approximately 2% general partnership
interest is owned by parties unrelated to the Company. At June 30, 2003, DBL had
an approximately $13.4 million investment in G2.

On January 2, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL from Mr. Goff. Total
consideration paid for Mr. Goff's interest was $0.4 million. The Board of Trust
Managers of the Company, including all the independent trust managers, approved
the transaction based in part on an appraisal of the assets of DBL by an
independent appraisal firm. As a result of this transaction, DBL is wholly-owned
by the Company and is consolidated in the Residential Development Segment as of
and for the six months ended June 30, 2003. Also, because DBL owns a majority of
the voting stock in MVDC and HADC, the Company has consolidated these two
Residential Development Corporations as of and for the six months ended June 30,
2003.

UNCONSOLIDATED INVESTMENTS

INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES

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

The Company, through ownership interests of 50% or less, or ownership
of non-voting interests only, has other unconsolidated investments which it does
not control; these investments are accounted for using the equity method of
accounting.

54

The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments as of June 30, 2003.

- ----------

(1) The remaining 50% 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 an
affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.

(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Fleming Asset Management, Inc.

(4) The remaining 80% interest in each of 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 Trust.

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

(6) The remaining 57.5% interest in each of the WLDC, Woodlands CPC and The
Woodlands Operating Company, L.P. is owned by an affiliate of Morgan
Stanley.

(7) Distributions are made to partners based on specified payout percentages.
During the six months ended June 30, 2003, the payout percentage to the
Company was 52.5%.

(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Company.

(9) The remaining 50% interest in Manalapan is owned by WB Palm Beach
Investors, L.L.C.

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

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

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

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

(14) The SunTx Fulcrum Fund, L.P.'s ("SunTx") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial capital
appreciation. The remaining 71.9% of SunTx is owned by a group of
individuals unrelated to the Company. The Company's ownership percentage
will decline by the closing date of SunTx as capital commitments from third
parties are secured. The Company's projected ownership interest at the
closing of SunTx is approximately 7.5% based on SunTx manager's
expectations for the final SunTx capitalization. The Company accounts for
its investment in SunTx under the cost method. The Company's investment at
June 30, 2003 was $6.3 million.

(15) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. GMSP and GMACCM
each own 21.875% of G2, with the remaining 43.75% owned by parties
unrelated to the Company. See Note 14, "Related Party Transactions," in
Item 1, "Financial Statements," for information regarding the ownership
interests of trust managers and officers of the Company in GMSP.

55

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

As of June 30, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of warehouse
space.

The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See Note 15,
"COPI," of Item 1, "Financial Statements," 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 a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (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 amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.

AmeriCold Logistics deferred $18.5 million of the total $76.4 million
of rent payable for the six months ended June 30, 2003. The Company's share of
the deferred rent was $7.4 million. The Company recognizes rental income from
the Temperature-Controlled Logistics Properties when earned and collected and
has not recognized the $7.4 million of deferred rent in equity in net income of
the Temperature-Controlled Logistics Properties for the six months ended June
30, 2003. As of June 30, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $59.1 million and $52.8 million, respectively, of which the Company's
portions were $23.6 million and $21.1 million, respectively.

VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.

As of June 30, 2003, the Company held a 56% interest in VCQ. The assets
of VCQ include two quarries and the related land. The Company accounts for this
investment as an unconsolidated equity investment because the Company does not
control the joint venture.

On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.

On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. The
receivables were collected during the three months ended June 30, 2003.

On May 22, 2003, VCQ distributed cash of $3.2 million to the Company.

SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, and contingencies as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company evaluates its assumptions and estimates on an
ongoing basis. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities where that information is available
from other sources. Certain estimates are particularly sensitive due to their

56

significance to the financial statements. Actual results may differ
significantly from management's estimates. The Company believes that the most
significant accounting policies that involve the use estimates and assumptions
as to future uncertainties and, therefore, may result in actual amounts that
differ from estimates are the following:

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

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

o Capitalization of Interest (Residential Development entities), and

o Allowance for doubtful accounts.

IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company records assets held for sale at the lower of
carrying value or sales price less costs to sell. For assets classified as held
and used, these assets are tested for recoverability when events or changes in
circumstances indicate that the estimated carrying amount may not be
recoverable. An impairment loss is recognized when expected undiscounted future
cash flows from a Property are less than the carrying value of the Property. The
Company's estimates of cash flows of the Properties require the Company to make
assumptions related to future rental rates, occupancies, operating expenses, the
ability of the Company's tenants to perform pursuant to their lease obligations
and proceeds to be generated from the eventual sale of the Company's Properties.
Any changes in estimated future cash flows due to changes in the Company's plans
or views of market and economic conditions could result in recognition of
additional impairment losses.

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

RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Company
recognizes earnings from the sale of Residential Development Properties when a
third-party buyer has made an adequate cash down payment and has attained the
attributes of ownership. The cost of residential property sold is defined based
on the type of product being purchased. The cost of sales for residential lots
is generally determined as a specific percentage of the sales revenues
recognized for each Residential Development project. The percentages are based
on total estimated 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 Company's estimates of costs or the
percentage of completion is incorrect, it could result in either an increase or
decrease in cost of sales expense or revenue recognized and therefore, an
increase or decrease in net income.

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

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

57

ADOPTION OF NEW ACCOUNTING STANDARDS

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," which allows for extraordinary item classification, are
met. The provisions of this Statement related to the rescission of Statement No.
4 are to be applied in fiscal years beginning after May 15, 2002. The Company
adopted this Statement for fiscal 2003 and expects no impact in 2003 beyond the
classification of costs related to early extinguishments of debt, which were
shown in the Company's 2001 Consolidated Statements of Operations as an
extraordinary item.

SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," 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 Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. During the six months
ended June 30, 2003, the Company granted stock options and recognized
compensation expense that was not significant to its results of operations. With
respect to the Company's stock options which were granted prior to 2003, the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB No. 25"). Under APB No.
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's common shares at the date of grant over the exercise
price of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. During the six months ended June 30,
2003, no compensation cost was recognized for grants of stock options made prior
to 2003 under the Company stock option plans because the Company's policy is to
grant stock options with an exercise price equal to the quoted closing market
price of the Company's common shares on the grant date. Had compensation cost
for the Plans been determined based on the fair value at the grant dates for
awards under the Plans consistent with SFAS No. 123, the Company's net (loss)
income and (loss) earnings per share would have been reduced to the following
pro forma amounts:

58

SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact, if any, on the Company's
financial condition or its results of operations.

SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. The provisions of this Statement are to be applied to financial
instruments entered into or modified after May 31, 2003 and to existing
instruments as of the beginning of the first interim financial reporting period
after June 15, 2003. The adoption of this statement is not expected to have a
material impact, if any, on the Company's financial condition or its results of
operations.

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 10, "Commitments and Contingencies" in Item 1, "Financial Statements," for
disclosure of the Company's guarantees at June 30, 2003. The Company adopted FIN
45 effective January 1, 2003.

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

59

FUNDS FROM OPERATIONS

FFO, as used in this document, 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 of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO an
appropriate measure of performance for an equity REIT, and for its investment
segments. However, FFO should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the Company's operating
performance.

The Company has historically distributed an amount less than FFO,
primarily due to reserves required for capital expenditures, including leasing
costs. The aggregate cash distributions paid to shareholders and unitholders for
the six months ended June 30, 2003 and 2002 were $87.7 million, and $99.5
million, respectively. The Company reported FFO of $77.9 million and $117.3
million for the six months ended June 30, 2003 and 2002, respectively.

An increase or decrease in FFO does not necessarily result in an
increase or decrease in aggregate distributions because the Company's Board of
Trust Managers is not required to increase distributions on a quarterly basis
unless necessary for the Company to maintain REIT status. However, the Company
must distribute 90% of its REIT taxable income (as defined in the Code).
Therefore, a significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis.

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

60

CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS

- ----------

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

(2) Includes interest and other income, behavioral healthcare property
income, preferred return paid to GMACCM in 2002, other unconsolidated
companies, less depreciation and amortization of non-real estate assets
and amortization of deferred financing costs and other expenses.

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

61

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes in the Company's market risk occurred from December
31, 2002 through June 30, 2003. Information regarding the Company's market risk
at December 31, 2002 is contained in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports under the Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and its Chief Financial and Accounting
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

As of June 30, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and its Chief Financial and Accounting Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the foregoing, the Company's Chief Executive
Officer and its Chief Financial and Accounting Officer concluded that the
Company's disclosure controls and procedures were effective.

During the three months ended June 30, 2003, there was no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

PART II

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2003, the Company issued an
aggregate of 1,284 common shares to holders of Operating Partnership units in
exchange for 642 units. The issuances of common shares were exempt from
registration as private placements under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). The Company has registered the resale
of such common shares under the Securities Act.

62

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

The annual meeting of shareholders of the Company was held on June 2,
2003.

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

(1) The shareholders approved the election of the following
individuals as trust managers of the Company:

The terms of office of the following trust managers continued
after the meeting:

John C. Goff
Dennis H. Alberts
Paul E. Rowsey, III
Robert W. Stallings
Terry N. Worrell

(2) The shareholders approved, with 86,076,154 affirmative votes,
1,672,702 negative votes and 128,639 abstentions, the proposal
to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending
December 31, 2003.

(3) The shareholders approved, with 49,344,466 affirmative votes,
18,486,845 negative votes, 649,795 abstentions and 19,396,388
broker non-votes, the proposal urging the Board of Trust
Managers to declassify the Board for the purpose of trust
manager elections.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

(b) Reports on Form 8-K

Form 8-K dated August 4, 2003, furnished August 5, 2003, as
amended August 6, 2003, for the purpose of reporting, under Item 12 -
Results of Operations and Financial Condition, the Company's 2003
second quarter earnings and related financial, operating and
statistical information.

63

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)

By /s/ John C. Goff
----------------------------------------
John C. Goff
Vice-Chairman of the Board and
Date: August 7, 2003 Chief Executive Officer

By /s/ Jerry R. Crenshaw, Jr.
----------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief
Financial Officer
(Principal Financial and
Date: August 7, 2003 Accounting Officer)

,

INDEX TO EXHIBITS