CRESCENT FINANCE CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO

COMMISSION FILE NUMBERS 333-42293
333-89194-01

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY *

-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 75-2531304
DELAWARE 42-1536518
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102

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(Address of principal executive offices) (Zip code)

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

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

YES [X] NO [ ]

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

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

YES [X] NO [ ]

As of June 30, 2003, the aggregate market value of the 2,242,714 units of
limited partnership interest held by non-affiliates of the registrant was
approximately $74.5 million, based on the closing price on the New York Stock
Exchange of $16.61 for common shares of beneficial interest of Crescent Real
Estate Equities Company. Each unit is exchangeable for two common shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Crescent Real Estate Equities Company's 2004 Annual Meeting of
Shareholders to be held in June 2004 are incorporated by reference into Part
III.

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

TABLE OF CONTENTS

PAGE

PART I.
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 15
Item 3. Legal Proceedings....................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders..................................... 24

PART II.

Item 5. Market for Registrant's Common Equity and Related Unitholder Matters.................... 25
Item 6. Selected Financial Data................................................................. 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 66
Item 8. Financial Statements and Supplementary Data............................................. 67
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................
Item 9A. Controls and Procedures................................................................. 200

PART III.

Item 10. Trust Managers and Executive Officers of the Registrant................................. 200
Item 11. Executive Compensation.................................................................. 200
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Unitholder Matters............................................... 201
Item 13. Certain Relationships and Related Transactions.......................................... 201
Item 14. Principal Accountant Fees and Services.................................................. 201

PART IV.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 201

2

PART I

ITEM 1. BUSINESS

THE COMPANY

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

All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of December
31, 2003, the Company's approximately 84% limited partner interest has been
treated as equivalent, for purposes of this report, to 49,052,048 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,873,347 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,105 units.

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

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

At December 31, 2003, the assets and operations of the Operating
Partnership were divided into four investment segments as follows:

- Office Segment;

- Resort/Hotel Segment;

- Residential Development Segment; and

- Temperature-Controlled Logistics Segment.

Within these segments, the Operating Partnership owned in whole or in
part the following real estate assets (the "Properties") as of December 31,
2003:

- OFFICE SEGMENT consisted of 72 office properties,
(collectively referred to as the "Office Properties"), located
in 27 metropolitan submarkets in seven states, with an
aggregate of approximately 30.0 million net rentable square
feet.

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

- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership's ownership of common stock representing interests
ranging from 98% to 100% in four 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 (collectively referred to as the
"Residential Development Properties").

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- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Operating Partnership's 40% interest in Vornado Crescent
Portland Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% non-controlling 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 Realty Corporation (the
"Temperature-Controlled Logistics Corporation"), a REIT. As of
December 31, 2003, the Temperature-Controlled Logistic
Corporation directly or indirectly owned 87
temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 440.7 million
cubic feet (17.5 million square feet) of warehouse space. As
of December 31, 2003, Vornado Crescent Carthage and KC Quarry
L.L.C. owned two quarries and the related land. The Operating
Partnership 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 entities.

See Note 3, "Segment Reporting," included in Item 8, "Financial
Statements and Supplementary Data," for a table showing selected financial
information for each of these investment segments for the years ended December
31, 2003, 2002, and 2001, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at December 31, 2003 and 2002.

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

See Note 9, "Investments in Unconsolidated Companies," included in Item
8, "Financial Statements and Supplementary Data," for a table that lists the
Operating Partnership's ownership in significant unconsolidated joint ventures
and investments as of December 31, 2003, including eight Office Properties and
two Residential Development Corporations. See Note 8, "Temperature-Controlled
Logistics," included in Item 8, "Financial Statements and Supplementary Data,"
for information regarding the Operating Partnership's ownership interest in the
Temperature-Controlled Logistics Properties.

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

BUSINESS OBJECTIVES AND STRATEGIES

BUSINESS OBJECTIVES

The Operating Partnership's primary business objective is to provide an
attractive return on equity to the Company's shareholders, through its focus on
increasing earnings, cash flow growth and predictability, along with continually
strengthening its balance sheet. The Operating Partnership also strives to
attract and retain the best talent available and to empower management through
the development and implementation of a cohesive set of operating, investing and
financing strategies that will align their interests with the interests of the
Company's shareholders.

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OPERATING STRATEGIES

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

The Operating Partnership's operating strategies include:

- operating the Office Properties as long-term investments;

- providing exceptional customer service;

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

- emphasizing brand recognition of the Operating Partnership's
premier Class A Office Properties and luxury and destination
fitness resorts and spas; and

- using the Operating Partnership's operating platform to
provide superior asset management services to partners and
third parties.

INVESTING STRATEGIES

The Operating Partnership focuses on investment opportunities primarily
within the Office Segment in markets considered "demand-driven," or to have high
levels of in-migration by corporations, affordable housing costs, moderate costs
of living, and other attributes creating an attractive business environment.
These investment opportunities are evaluated in light of the Operating
Partnership's long-term investment strategy of investing in assets within
markets that have significant potential for long-term growth. Investment
opportunities are expected to provide growth in earnings and cash flow after
applying management skills, renovation and expansion capital and strategic
vision.

The Operating Partnership's investment strategies include:

- capitalizing on strategic acquisition opportunities,
including acquisitions with joint venture capital resources,
primarily within the Operating Partnership's investment
segments;

- continually reviewing opportunities to dispose of assets based
on current and prospective market valuations;

- investing in securities and loans primarily to real estate
companies to maximize returns on excess capital; and

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

FINANCING STRATEGIES

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

The Operating Partnership's financing strategies include:

- funding operating expenses, debt service payments and
distributions to unitholders, primarily through cash flow from
operations, and return of capital from the Residential
Development Segment;

5

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

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

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

EMPLOYEES

As of March 3, 2004, the Operating Partnership had approximately 728
employees. None of these employees are covered by collective bargaining
agreements. The Operating Partnership considers its employee relations to be
good.

ENVIRONMENTAL MATTERS

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

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

- Resource Conservation & Recovery Act;

- Clean Water Act;

- Clean Air Act;

- Toxic Substances Control Act; and

- Occupational Safety & Health Act.

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

Compliance by the Operating Partnership with existing environmental,
health and safety laws has not had a material adverse effect on the Operating
Partnership's financial condition and results of operations, and management does
not believe it will have such an impact in the future. In addition, the
Operating Partnership has not incurred, and does not expect to incur any
material costs or liabilities due to environmental contamination at Properties
it currently owns or has owned in the past. However, the Operating Partnership
cannot predict the impact of new or changed laws or regulations on its current
Properties or on properties that it may acquire in the future. The Operating
Partnership has no current plans for substantial capital expenditures with
respect to compliance with environmental, health and safety laws.

6

INDUSTRY SEGMENTS

OFFICE SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership owned or had an
interest in 72 Office Properties located in 27 metropolitan submarkets in seven
states, with an aggregate of approximately 30.0 million net rentable square
feet. The Operating Partnership, as lessor, has retained substantially all of
the risks and benefits of ownership of the Office Properties and accounts for
the leases of its 64 consolidated Office Properties as operating leases.
Sixty-three of the Office Properties are wholly-owned and nine are owned through
joint ventures, one of which is consolidated and eight of which are
unconsolidated. Additionally, the Operating Partnership provides management and
leasing services for the majority of its Office Properties.

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

RECENT DEVELOPMENTS

During the year ended December 31, 2003, the Operating Partnership
acquired The BAC-Colonnade Building ("The Colonnade"), in Miami, Florida;
acquired two Office Properties and two retail parcels within Hughes Center in
Las Vegas, Nevada; entered into a joint venture which acquired an office
building, BriarLake Plaza, in Houston, Texas; disposed of the Las Colinas Plaza
retail property in Dallas, Texas; disposed of four Office Properties held
through Woodlands Office Equities - `95 Limited Partnership ("WOE"); and
disposed of its 52.5% economic interest in The Woodlands Commercial Properties
Company, L.P. (Woodlands CPC").

Subsequent to December 31, 2003, the Operating Partnership acquired an
additional five office properties and seven retail parcels within Hughes Center.

See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments," for additional
information regarding these transactions.

MARKET INFORMATION

The Office Property portfolio reflects the Operating Partnership's
strategy of investing in first-class ("Class A") assets within markets that have
significant potential for long-term rental growth. Within its selected
submarkets, the Operating Partnership has focused on premier locations that
management believes are able to attract and retain the highest quality tenants
and command premium rents. Consistent with its long-term investment strategies,
the Operating Partnership has sought transactions where it was able to acquire
properties that have strong economic returns based on in-place tenancy and also
have a dominant position within the submarket due to quality and/or location.
Accordingly, management's long-term investment strategy not only demands
acceptable current cash flow return on invested capital, but also considers
long-term cash flow growth prospects. The Operating Partnership applies a
well-defined leasing strategy in order to capture the potential rental growth in
the Operating Partnership's portfolio of Office Properties from occupancy gains
within the markets and the submarkets in which the Operating Partnership has
invested.

In selecting the Office Properties, the Operating Partnership analyzed
demographic and economic data to focus on markets expected to benefit from
significant long-term employment growth. The demographic conditions, economic
conditions and trends (population growth and employment growth) favoring the
markets in which the Operating Partnership has invested are projected to
continue to exceed the national averages, as illustrated in the following table.
In addition, the

7

Operating Partnership considers these markets "demand-driven" due to high levels
of in-migration by corporations, affordable housing costs, moderate cost of
living, and the presence of centrally located travel hubs, making all areas of
the country easily accessible.

PROJECTED POPULATION GROWTH AND EMPLOYMENT GROWTH FOR ALL OPERATING
PARTNERSHIP MARKETS

Population Employment
Growth Growth
Metropolitan Statistical Area 2004-2007 2004-2007
- -------------------------------------- ---------- ----------

Albuquerque, NM 6.3% 10.2%
Austin, TX 12.1 17.6
Colorado Springs, CO 6.1 12.2
Dallas, TX 8.3 11.3
Denver, CO 4.9 7.3
Fort Worth, TX 8.5 11.7
Houston, TX 7.3 9.3
Las Vegas, NV 14.7 15.4
Miami, FL 4.0 6.4
Phoenix, AZ 11.6 15.3
San Diego, CA 6.9 9.7
United States 3.5 5.8

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

TEXAS

As of December 2003, Texas' economy and employment were still weak, but
showed stronger performance and more positive direction than a year ago. During
the year ended December 2003, 45,100 jobs were created in Texas for a 0.5%
increase, according to the Texas Workforce Commission. Statistics from the U.S.
Bureau of Labor Statistics show that for the same period, national employment
was down approximately 62,000 jobs. As of December 2003, the Texas unemployment
rate was 5.8%, compared to the December 2002 level of 5.9% and the December 2003
national rate of 5.4%.

DALLAS

The rate of employment decline in Dallas decreased significantly in
2003. According to the Texas Workforce Commission, at the end of the year, the
Dallas Primary Metropolitan Statistical Area ("PMSA") total nonfarm employment
was down 6,500 jobs, or 0.3%, compared to a decline of 30,900 jobs, or 1.6%, in
2002. The unemployment rate was still weak at 6.0% as of December 2003, but
improved compared to the 6.4% rate at December 2002.

In 2003, Dallas' office market continued to soften, although by the end
of 2003, it was showing signs of stabilization. Net economic absorption
(excluding sublet space) totaled approximately negative 4.4 million square feet,
including negative 1.0 million square feet in Class A office space, according to
CoStar data. Physical net absorption including sublet space,was negative 2.7
million square feet, indicating positive movement in the sublet market. Class A
office physical net absorption, including sublet space, turned positive in 2003
at 130,000 square feet. Completions of new office space totaled only 1.1 million
square feet for the entire Dallas market; approximately half of this space is
Class A. Occupancy levels at December 2003 were 75.5% for all office space and
80.1% for Class A office space.

HOUSTON

According to the Texas Workforce Commission, Houston's employment was
flat to slightly down through most of the year, but ended 2003 with some job
growth, an additional 4,000 jobs, or 0.2%. In 2002, based on December data,
Houston lost 13,300 jobs, or 0.6%. As of December 2003, the Houston unemployment
rate was 5.9%, compared to 5.6% as of December 2002.

8

In 2003, Houston's office market softened slightly; by the end of 2003,
however, the market appeared close to stabilization. Net economic net absorption
(excluding sublet space) totaled approximately negative 1.1 million square feet,
including negative 345,000 square feet in Class A office space, according to
CoStar data. Physical net absorption including sublet space, was negative 1.4
million square feet. Class A office physical net absorption, including sublet
space, was negative 222,000 square feet in 2003. Houston office completions of
new office space totaled 2.1 million square feet, of which 1.7 million square
feet is Class A. Occupancy levels at December 2003 were 83.8% for all office
space and 85.5% for Class A office space.

AUSTIN

Austin's economy picked up momentum in 2003. Based on December 2003
data from the Texas Workforce Commission, employment in the metropolitan region
grew by 7,100 jobs, or 1.1%, compared to a decrease of 900 jobs in 2002 (0.1%)
and a decrease of 23,900 jobs in 2001 (3.5%). As of December 2003, Austin's
unemployment rate was 4.5%, compared to 5.0% as of December 2002.

In 2003, Austin's office market remained weak. By the end of 2003,
however, the market was close to stabilization. Net economic absorption
(excluding sublet space) totaled approximately negative 1.6 million square feet,
including negative 742,000 square feet in Class A office space, according to
CoStar data. Physical net absorption, including sublet space, in 2003 was
positive 185,000 square feet, indicating strong absorption of sublet space.
Class A office physical net absorption, including sublet space, was also
positive in 2003 at 791,000 square feet. Office completions of new office space
totaled 775,000 square feet. Occupancy levels at December 2003 were 81.6% for
all office space and 78.8% for Class A office space.

DENVER

In 2003, Denver's economy nearly stabilized after two years of job
losses, based on unemployment figures and month-to-month changes in nonfarm
employment. According to the U.S. Bureau of Labor Statistics, as of December
2003, the unemployment rate was 5.9%, unchanged from the prior year.

2003 was a difficult period for the Denver office market, but there
were some positive signs by the end of the year. Net economic absorption
(excluding sublet space) totaled approximately negative 1.9 million square feet,
but only 95,000 of this was Class A office space, according to CoStar data.
Physical net absorption, including sublet space, in 2003 was negative 1.2
million square feet. Class A office physical net absorption, including sublet
space, turned positive in 2003 at 430,000 square feet. Office completions of new
office space totaled only 883,000 square feet of which 540,000 square feet was
Class A. Occupancy levels at December 2003 were 82.8% for all office space and
82.1% for Class A office space.

MIAMI

Miami continues to enjoy economic recovery and expansion. According to
the U.S. Bureau of Labor Statistics, the metropolitan region suffered in 2001
and lost 16,600 jobs, or 1.6% based on December data. In 2002, Miami added 7,600
jobs or 0.7% and in 2003 the metro area gained 9,700 jobs, or 0.9%. As of
December 2003, the Miami unemployment rate was 6.1% compared to 7.0% as of
December 2002.

In 2003, the Miami office market still experienced some softness, but
showed positive conditions in the second half of the year. The 36 million square
foot market experienced very slight negative absorption of 60,000 square feet
for the year ended December 2003 but had improved fourth quarter absorption of
329,000 square feet, according to Real Data Information Systems, Inc. data.
Class A office physical net absorption, including sublet space, totaled 31,000
square feet in 2003, and 301,000 square feet in the fourth quarter according to
RealData Information Systems, Inc. Occupancy levels at December 2003 were 82.7%
for all office space and 81.8% for Class A office space.

LAS VEGAS

Las Vegas' economic expansion in 2003 was one of the strongest in the
U.S. and reflected increasing momentum. According to the U.S. Bureau of Labor
Statistics, the metropolitan region added 33,600 jobs, or 4.2% (based on
December 2003 nonfarm employment data from the Nevada Department of Employment,
Training & Rehabilitation). The increase is

9

nearly double that of the prior year (18,100 jobs, or 2.3%). As of December
2003, the Las Vegas unemployment rate was 4.4%, compared to 5.0% at December
2002, and to the national rate of 5.4%.

In 2003, the Las Vegas office market continued to reflect relatively
healthy market conditions. The 20 million square foot market absorbed 928,000
square feet, according to Grubb & Ellis data. Class A office physical net
absorption totaled 154,000 square feet in 2003. Occupancy levels as of December
2003, were 87.4% for all office space and 89.2% for Class A office space.

COMPETITION

The Operating Partnership's Office Properties, primarily Class A
properties located within the southwest, individually compete against a wide
range of property owners and developers, including property management companies
and other REITs, that offer space in similar classes of office properties (for
example, Class A and Class B properties.) A number of these owners and
developers may own more than one property. The number and type of competing
properties in a particular market or submarket could have a material effect on
the Operating Partnership's ability to lease space and maintain or increase
occupancy or rents in its existing Office Properties. Management believes,
however, that the quality services and individualized attention that the
Operating Partnership offers its tenants, together with its active preventive
maintenance program and superior building locations within markets, enhance the
Operating Partnership's ability to attract and retain tenants for its Office
Properties. In addition, as of December 31, 2003, on a weighted average basis,
the Operating Partnership owned approximately 16% of the Class A office space in
the 27 submarkets in which the Operating Partnership owned Class A office
properties, and 25.3% of the Class B office space in the one submarket in which
the Operating Partnership owned Class B office properties. Management believes
that ownership of a significant percentage of office space in a particular
market reduces property operating expenses, enhances the Operating Partnership's
ability to attract and retain tenants and potentially results in increases in
Operating Partnership net income.

DIVERSIFIED TENANT BASE

The Operating Partnership's top five tenants accounted for
approximately 11% of the Operating Partnership's total Office Segment rental
revenues for the year ended December 31, 2003. The loss of one or more of the
Operating Partnership's major tenants would have a temporary adverse effect on
the Operating Partnership's financial condition and results of operations until
the Operating Partnership is able to re-lease the space previously leased to
these tenants. Based on rental revenues from office leases in effect as of
December 31, 2003, no single tenant accounted for more than 5% of the Operating
Partnership's total Office Segment rental revenues for 2003.

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RESORT/HOTEL SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership owned or had an
interest in nine Resort/Hotel Properties. The Operating Partnership holds one of
the Resort/Hotel Properties, the Fairmont Sonoma Mission Inn & Spa, through a
joint venture arrangement, pursuant to which the Operating Partnership owns an
80.1% interest in the limited liability company that owns the Sonoma Mission Inn
& Spa. The remaining Resort/Hotel Properties are wholly-owned.

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

Third party operators manage eight of the Resort/Hotel Properties.
Ventana Inn and Spa is managed by Sonoma Management Company, or "Sonoma
Management," an entity in which the Operating Partnership held a 10% interest
until it sold its interest to the 90% owner in 2003. In addition, five of the
Resort/Hotel Properties that are managed by third party operators are subject to
a Master Asset Management and Administrative Services Agreement with Sonoma
Management, pursuant to which Sonoma Management receives asset management and
incentive fees from the Operating Partnership.

RECENT DEVELOPMENTS

On November 21, 2003, Manalapan Hotel Partners, L.L.C. ("Manalapan"),
owned 50% by the Operating Partnership and 50% by WB Palm Beach Investors,
L.L.C., sold the Ritz Carlton Palm Beach Resort/Hotel Property in Palm Beach,
Florida. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments," for additional
information regarding this transaction.

MARKET INFORMATION

Lodging demand is highly dependent upon the global economy and volume
of business travel. Immediately prior to September 11, 2001, the hospitality
industry enjoyed record profits. However, the weak global economy which
continued throughout 2002 and 2003, resulted in weak performance for 2002, and
much of 2003. Leisure travel recovered slightly in 2003, but business travel
remained weak. As a result, market conditions were flat in 2003. National hotel
occupancy in 2003 increased 0.3% over 2002. The average daily room rate declined
1.7%, and revenue per available room (a combination of occupancy and room rates
and the chief measure of hotel market performance) increased just 0.2% over
2002. For the "upper upscale" segment of the market (most comparable to the
Operating Partnership's portfolio), revenue per available room declined 1.2% in
2003 from the prior year.

COMPETITION

Most of the Operating Partnership's upscale business class Resort/Hotel
Properties in Denver, Albuquerque, Austin and Houston are business and
convention center hotels that compete against other business and convention
center hotels. The Operating Partnership believes that its luxury and
destination fitness resorts and spas are unique properties due to location,
which creates barriers for competition to enter, concept and high replacement
cost. However, the luxury and destination fitness resorts and spas do compete
against business-class hotels or middle-market resorts in their geographic
areas, as well as against luxury resorts nationwide and around the world.

11

RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership owned common stock
representing interests of 98% to 100% in four Residential Development
Corporations, which in turn, through joint ventures or partnership arrangements,
owned in whole or in part 23 Residential Development Properties. The Residential
Development Corporations are responsible for the continued development and the
day-to-day operations of the Residential Development Properties.

RECENT DEVELOPMENTS

On December 31, 2003, the Operating Partnership disposed of its
interest in The Woodlands Residential Development Property. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments," for additional information regarding this
transaction.

COMPETITION AND MARKET INFORMATION

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

Desert Mountain, a luxury residential and recreational private
community in Scottsdale, Arizona, offers six 18-hole Jack Nicklaus signature
golf courses with adjacent clubhouses. Management believes Desert Mountain has
few direct competitors due in part to the superior environmental attributes and
the amenity package that Desert Mountain offers to its members. Sources of
competition come from the resale market of existing lots and homes within Desert
Mountain and from smaller, less developed projects in the area. However,
management believes Desert Mountain's current inventory is superior to the
inventory available on the resale market and in nearby developments, as the
remaining lots are in the best locations within Desert Mountain. In addition to
the quality of the remaining lots, Desert Mountain's amenity package continues
to be unparalleled, and future residential golf development in the Scottsdale
area is limited due to the lack of water available for golf course use.

CRDI invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Management believes that the Properties owned by CRDI have limited
direct competitors because the projects' locations are unique, land availability
is limited, and development rights are restrictive in most of these locations.

Residential development demand is highly dependent upon the national
economy, mortgage interest rates, and home sales. A slowing economy, which
continued into the first half of 2003, contributed to flat or reduced lot and
acre absorption, and to reduced average sales prices, primarily at Desert
Mountain and at The Woodlands.

12

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

OWNERSHIP STRUCTURE

As of December 31, 2003, the Operating Partnership held a 40% interest
in the Temperature-Controlled Logistics Partnership, which owns all of the
common stock, representing substantially all of the economic interest, of the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 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 Operating Partnership has no economic
interest in AmeriCold Logistics. See Note 23, "COPI," in Item 8, "Financial
Statements and Supplementary Data," for information on the proposed acquisition
of COPI's 40% interest in AmeriCold Logistics by a new entity to be owned by the
Company's shareholders and the Operating Partnership's unitholders.

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 2, 2004, the
Temperature-Controlled Logistics Corporation and Americold Logistics amended the
leases to further extend the deferred rent period to December 31, 2005 from
December 31, 2004. The parties previously extended the deferred rent period to
December 31, 2004 from December 31, 2003, on March 7, 2003. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Unconsolidated
Investments" for additional information.

On February 23, 2004, Alec Covington, President and Chief Executive
Officer of AmeriCold Logistics, resigned effective March 31, 2004, to take an
opportunity in an unrelated industry. A search to identify a successor is
currently underway. Anthony Cossentino, Chief Financial Officer, will oversee
the AmeriCold business and Mike O'Connell, who has been with AmeriCold for over
ten years, has been promoted to be in charge of all operations and, until a
successor is in place, will report to Mr. Cossentino.

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

As of December 31, 2003, the Operating Partnership held a 56%
non-controlling interest in Vornado Crescent Carthage and KC Quarry, L.L.C.
("VCQ"). The assets of VCQ include two quarries and the related land.

RECENT DEVELOPMENTS

On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs, escrow
reserves and the repayment of approximately $12.9 million in existing mortgages.
On February 6, 2004, the Temperature-Controlled Logistics Corporation
distributed cash of approximately $90.0 million to the Operating Partnership.

BUSINESS AND INDUSTRY INFORMATION

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

13

customers under short-term agreements. Food manufacturers and processors use
public facilities to store capacity overflow from their production facilities or
warehouses.

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

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

PERCENTAGE OF
2003 REVENUE
-------------

H.J. Heinz Company 15 %
ConAgra Foods, Inc. 13
Philip Morris USA Inc. (Kraft) 8
Sara Lee Corp. 5
Tyson Foods, Inc. 4
General Mills, Inc. 4
McCain Foods, Inc. 4
Schwan Corp. 4
Nippon Suisan (Gorton's) 2
J.R. Simplot Company 2
Other 39
---
TOTAL 100 %
===

COMPETITION

AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in North America. As a result, AmeriCold Logistics does not have
any competitors of comparable size. AmeriCold Logistics operates in an
environment in which competition is national, regional and local in nature and
in which the range of service, temperature-controlled logistics facilities,
customer mix, service performance and price are the principal competitive
factors.

14

ITEM 2. PROPERTIES

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

OFFICE PROPERTIES

As of December 31, 2003, the Operating Partnership owned or had an
interest in 72 Office Properties, located in 27 metropolitan submarkets in seven
states with an aggregate of approximately 30.0 million net rentable square feet.
The Operating Partnership's Office Properties are located primarily in the
Dallas and Houston, Texas, metropolitan areas. As of December 31, 2003, the
Operating Partnership's Office Properties in Dallas and Houston represented an
aggregate of approximately 72% of its office portfolio based on total net
rentable square feet (33% for Dallas and 39% for Houston).

OFFICE PROPERTIES TABLE(1)

The following table shows, as of December 31, 2003, certain information
about the Operating Partnership's Office Properties. In the table, "CBD" means
central business district.

WEIGHTED
AVERAGE
FULL-SERVICE
RENTAL
NET RATE PER
RENTABLE ECONOMIC OCCUPIED
NO. OF YEAR AREA OCCUPANCY SQ. FT.
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) PERCENTAGE (2)
- -------------------------- ---------- --------- --------- --------- ----------- ------------

STABLIZED PROPERTIES
TEXAS
DALLAS
Bank One Center (3) 1 CBD 1987 1,530,957 81 % $ 22.60
The Crescent (4) 2 Uptown/Turtle Creek 1985 1,299,522 91 33.03
Fountain Place 1 CBD 1986 1,200,266 97 21.60
Trammell Crow Center (5) 1 CBD 1984 1,128,331 89 23.78
Stemmons Place 1 Stemmons Freeway 1983 634,381 82 17.56
Spectrum Center (6) 1 Quorum/Bent Tree (7) 1983 598,250 83 23.21
Waterside Commons 1 Las Colinas 1986 458,906 71 17.90
125 E. John Carpenter Freeway 1 Las Colinas 1982 446,031 75 (8) 21.35
The Aberdeen 1 Quorum/Bent Tree (7) 1986 320,629 100 19.43
MacArthur Center I & II 1 Las Colinas 1982/1986 298,161 84 22.23
Stanford Corporate Centre 1 Quorum/Bent Tree (7) 1985 275,372 87 21.83
12404 Park Central (9) 1 LBJ Freeway 1987 239,103 0 0
Palisades Central II 1 Richardson (10) 1985 237,731 83 19.97
3333 Lee Parkway 1 Uptown/Turtle Creek 1983 233,543 43 (8) 22.30
Liberty Plaza I & II (11) 1 Quorum/Bent Tree (7) 1981/1986 218,813 12 18.05
The Addison 1 Quorum/Bent Tree (7) 1981 215,016 99 23.46
Palisades Central I 1 Richardson (10) 1980 180,503 71 19.99
Greenway II 1 Richardson (10) 1985 154,329 100 16.26
Greenway I & IA 2 Richardson (10) 1983 146,704 19 14.47
Addison Tower 1 Quorum/Bent Tree (7) 1987 145,886 82 18.95
5050 Quorum 1 Quorum/Bent Tree (7) 1981 133,799 51 18.85
---------- ---------- --- ------------
Subtotal/Weighted Average 23 10,096,233 80 % $ 23.09
---------- ---------- --- ------------
FORT WORTH
Carter Burgess Plaza 1 CBD 1982 954,895 91 % $ 18.32
---------- ---------- --- ------------
HOUSTON
Greenway Plaza 10 Greenway Plaza (12) 1969-1982 4,348,052 87 % $ 20.67
Houston Center (13) 4 CBD 1974-1983 2,955,146 85 (8) 21.97
Post Oak Central 3 West Loop/Galleria 1974-1981 1,279,759 90 19.77
Five Houston Center (14) 1 CBD 2002 580,875 92 30.77
Five Post Oak Park (15) 1 West Loop/Galleria 1986 567,396 90 20.94
Four Westlake Park (16) 1 Katy Freeway West (17) 1992 561,065 100 22.83
Three Westlake Park (16) 1 Katy Freeway West (17) 1983 414,792 100 23.50
1800 West Loop South (18) 1 West Loop/Galleria 1982 399,777 69 20.06
---------- ---------- --- ------------
Subtotal/Weighted Average 22 11,106,862 88 % $ 21.69
---------- ---------- --- ------------
AUSTIN
Frost Bank Plaza 1 CBD 1984 433,024 78 % $ 22.39
301 Congress Avenue (19) 1 CBD 1986 418,338 59 25.50
Bank One Tower (16) 1 CBD 1974 389,503 94 24.34
Austin Centre 1 CBD 1986 343,664 69 22.57
The Avallon 3 Northwest 1993/1997 318,217 100 24.69
Barton Oaks Plaza One 1 Southwest 1986 98,955 94 24.72
---------- ---------- --- ------------
Subtotal/Weighted Average 8 2,001,701 80 % $ 23.96
---------- ---------- --- ------------

15

WEIGHTED
AVERAGE
FULL-SERVICE
RENTAL
NET RATE PER
RENTABLE ECONOMIC OCCUPIED
NO. OF YEAR AREA OCCUPANCY SQ. FT.
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) PERCENTAGE (2)
- -------------------------- ---------- --------- --------- ---------- ----------- ------------

COLORADO
DENVER
Johns Manville Plaza 1 CBD 1978 675,400 91 % $ 21.93
707 17th Street (20) 1 CBD 1982 550,805 59 (8) 23.05
Ptarmigan Place 1 Cherry Creek 1984 418,630 61 20.34
Regency Plaza One 1 Denver Technology Center 1985 309,862 89 21.67
55 Madison 1 Cherry Creek 1982 137,176 82 20.11
The Citadel 1 Cherry Creek 1987 130,652 95 25.09
44 Cook 1 Cherry Creek 1984 124,174 86 21.35
---- ---------- --- ---------
Subtotal/Weighted Average 7 2,346,699 77 % $ 21.93
---- ---------- --- ---------
COLORADO SPRINGS
Briargate Office and
Research Center 1 Colorado Springs 1988 260,046 79 % $ 18.55
---- ---------- --- ---------
FLORIDA
MIAMI
Miami Center (21) 1 CBD 1983 782,211 96 % $ 29.62
Datran Center 2 South Dade/Kendall 1986/1988 476,412 88 26.18
---- ---------- --- ---------
Subtotal/Weighted Average 3 1,258,623 93 % $ 28.39
---- ---------- --- ---------
ARIZONA
PHOENIX
Two Renaissance Square 1 Downtown/CBD 1990 476,373 88 % $ 26.08
---- ---------- --- ---------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza 1 CBD 1990 366,236 85 % $ 19.03
---- ---------- --- ---------
CALIFORNIA
SAN DIEGO
Chancellor Park (22) 1 University Town Centre 1988 195,733 75 % (8) $ 29.25
---- ---------- --- ---------
NEVADA
LAS VEGAS
Hughes Center (23) 2 Central East 1986/1999 209,147 88 % $ 28.86
---- ---------- --- ---------
STABILIZED TOTAL/WEIGHTED
AVERAGE 70 29,272,548 84 % (8) $ 22.63 (24)
==== ========== === ==========
PROPERTIES NOT STABILIZED
TEXAS
HOUSTON
BriarLake Plaza (25)(26) 1 Westchase 2000 502,410 89 % $ 26.44
---- ----------
FLORIDA
MIAMI
The BAC - Colonnade Building(25) 1 Coral Gables 1989 216,115 92 % $ 32.88
---- ----------
TOTAL PORTFOLIO 72 29,991,073
==== ==========

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

(2) Calculated in accordance with GAAP based on base rent payable as of
December 31, 2003, giving effect to free rent and scheduled rent increases
and including adjustments for expenses payable by or reimbursable from
customers.

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

(4) The Crescent Office Towers and The Crescent Atrium are now reflected
together as The Crescent.

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

(6) In May 2003, the Operating Partnership, through its subsidiaries, exercised
its option to acquire legal ownership of Spectrum Center in exchange for
the mortgage notes it previously held.

(7) Submarket name changed to Quorum/Bent Tree from Far North Dallas. Name
changed to better reflect the area of the submarket in which the building
is located.

(8) Leases have been executed at certain Office Properties but had not
commenced as of December 31, 2003. If such leases had commenced as of
December 31, 2003, the percent leased for all Office Properties would have
been 86%. Properties whose percent leased exceeds economic occupancy by 5
percentage points or more are as follows: 125 E. John Carpenter Freeway -
83%, 3333 Lee Parkway - 51%, Houston Center - 94%, 707 17th Street - 67%,
and Chancellor Park - 84%.

(9) 12404 Park Central is currently considered held for sale. A $3.4 million
impairment (before minority interest) was recorded in the fourth quarter of
2003 related to this Property.

(10) Submarket name changed to Richardson from Richardson/Plano. Name changed to
better reflect the area of the submarket in which the building is located.

16

(11) Liberty Plaza I & II is currently considered held for sale. A $4.3 million
impairment (before minority interest) was recorded in the fourth quarter of
2003 related to this Property.

(12) Submarket name changed to Greenway Plaza from Richmond-Buffalo Speedway.
Name changed to better reflect the area of the submarket in which the
building is located.

(13) Houston Center Shops is now reflected with Houston Center.

(14) Property statistics now include Five Houston Center which was deemed
stabilized in September 2003.

(15) Property statistics now include Five Post Oak Park which was deemed
stabilized in December 2003.

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

(17) Submarket name changed to Katy Freeway West from Katy Freeway. Name changed
to better reflect the area of the submarket in which the building is
located.

(18) 1800 West Loop South is currently considered held for sale. A $16.4 million
impairment (before minority interest) was recorded in 2003 related to this
Property.

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

(20) 707 17th Street was formerly known as MCI Tower.

(21) The Operating Partnership has a 40% member interest in the limited
liability company that owns Miami Center.

(22) In September 2003, the Operating Partnership acquired unencumbered fee
title to Chancellor Park, as a result of merging the previously held
mortgage note out of existence.

(23) Hughes Center consists of six wholly-owned office properties and one joint
ventured office property. The Operating Partnership acquired two
wholly-owned office properties as of December 31, 2003. In February 2004,
the Operating Partnership acquired (a) the remaining four wholly-owned
properties, and (b) a 67% partnership interest in the joint ventured
property. Hughes Center is collectively considered stabilized, with an
average occupancy of 93% upon acquisition.

(24) The weighted average full-service cash rental rate per square foot
calculated based on base rent payable for Operating Partnership Office
Properties as of December 31, 2003, without giving effect to free rent and
scheduled rent increases that are taken into consideration under GAAP but
including adjustments for expenses paid by or reimbursed from customers is
$22.57.

(25) Property statistics exclude BriarLake Plaza (which was acquired on October
8, 2003) and The BAC - Colonnade Building (which was acquired on August 26,
2003). These office properties will be included in portfolio statistics
once stabilized. Stabilization is deemed to occur upon the earlier of (a)
achieving 93% occupancy or (b) one year following the date placed
in-service or acquisition date.

(26) The Operating Partnership has a 30% member interest in the limited
liability company that owns BriarLake Plaza.

The following table shows, as of December 31, 2003, the principal
business conducted by the tenants at the Operating Partnership's Office
Properties, based on information supplied to the Operating Partnership from the
tenants. Based on rental revenues from office leases in effect as of December
31, 2003, no single tenant accounted for more than 5% of the Operating
Partnership's total Office Segment rental revenues for 2003.

Percent of
Leased Sq.
Industry Sector Ft.
- ------------------------- ------------

Professional Services (1) 29 %
Financial Services (2) 21
Energy(3) 20
Telecommunications 5
Technology 5
Manufacturing 4
Food Service 3
Government 3
Retail 3
Medical 2
Other (4) 5
---
TOTAL LEASED 100 %
===

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

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

(3) Includes oil and gas and utility companies.

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

17

AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES

The following tables show schedules of lease expirations for leases in
place as of December 31, 2003, for the Operating Partnership's total Office
Properties and for Dallas, Houston and Austin, Texas, Denver, Colorado, and
Miami, Florida, individually, for each of the 10 years beginning with 2004.

TOTAL OFFICE PROPERTIES(1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewal term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent and scheduled
rent increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 3,060,023 square feet (including
renewals of 2,337,470 square feet and new leases of 722,553 square feet)
have been signed and will commence during 2004. These signed leases
represent approximately 62% of gross square footage expiring during 2004.

(5) Expirations by quarter are as follows: Q1: 872,095 square feet Q2: 537,587
square feet Q3: 668,753 square feet Q4: 516,291 square feet.

(6) Expirations by quarter are as follows: Q1: 632,422 square feet Q2: 732,267
square feet Q3: 925,124 square feet Q4: 529,584 square feet.

(7) Reconciliation of Occupied Square Feet to Net Rentable Area:

DALLAS OFFICE PROPERTIES(1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent and scheduled
rent increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 868,696 square feet (including
renewals of 747,740 square feet and new leases of 120,956 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 64% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 180,107 square feet Q2 : 71,832
square feet Q3: 209,529 square feet Q4: 155,012 square feet.

(6) Expirations by quarter are as follows: Q1: 184,838 square feet Q2: 138,900
square feet Q3: 555,590 square feet Q4: 146,735 square feet.

HOUSTON OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 1,498,485 square feet (including
renewals of 1,102,168 square feet and new leases of 396,317 square feet)
have been signed and will commence during 2004. These signed leases
represent approximately 74% of gross square footage expiring during the
remainder of 2004.

(5) Expirations by quarter are as follows: Q1: 379,277 square feet Q2: 227,142
square feet Q3: 140,531 square feet Q4: 180,612 square feet.

(6) Expirations by quarter are as follows: Q1: 176,171 square feet Q2: 142,240
square feet Q3: 184,778 square feet Q4: 134,537 square feet.

AUSTIN OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 33,854 square feet (including
renewals of 12,896 square feet and new leases of 20,958 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 8% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 104,525 square feet Q2: 22,931
square feet Q3: 249,986 square feet Q4: 17,074 square feet.

(6) Expirations by quarter are as follows: Q1: 92,036 square feet Q2: 349,844
square feet Q3: 31,140 square feet Q4: 30,218 square feet.

DENVER OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewal), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 311,164 square feet (including
renewals of 226,871 square feet and new leases of 84,293 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 60% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 140,412 square feet Q2: 119,499
square feet Q3: 14,238 square feet Q4: 14,362 square feet.

(6) Expirations by quarter are as follows: Q1: 122,740 square feet Q2: 28,390
square feet Q3: 13,956 square feet Q4: 155,390 square feet.

MIAMI OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 84,507 square feet (including
renewals of 76,055 square feet and new leases of 8,452 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 38% of gross square footage expiring during the remainder of
2004.

(5) Expirations by quarter are as follows: Q1: 27,554 square feet Q2: 50,192
square feet Q3: 30,484 square feet Q4: 36,419 square feet.

(6) Expirations by quarter are as follows: Q1: 25,450 square feet Q2: 20,635
square feet Q3 61,644 square feet Q4: 36,458 square feet.

OTHER OFFICE PROPERTIES (1)

(1) Lease expiration data is presented at 100% without giving effect to the
Operating Partnership's actual ownership percentage in joint ventured
properties and excludes non-stabilized Office Properties. Includes
Ft. Worth, Colorado Springs, Phoenix, Albuquerque, San Diego, and Las Vegas.

(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.

(3) Calculated based on base rent payable under leases for net rentable square
feet expiring (after renewals), giving effect to free rent or scheduled rent
increases taken into account under GAAP and including adjustments for
expenses payable by or reimbursable from customers based on current expense
levels.

(4) As of December 31, 2003, leases totaling 263,317 square feet (including
renewals of 171,740 square feet and new leases of 91,577 square feet) have
been signed and will commence during 2004. These signed leases represent
approximately 67% of gross square footage expiring during 2004.

(5) Expirations by quarter are as follows: Q1: 40,220 square feet Q2: 45,991
square feet Q3: 23,985 square feet Q4: 112,812 square feet.

(6) Expirations by quarter are as follows: Q1: 31,187 square feet Q2: 52,258
square feet Q3: 78,016 square feet Q4: 26,246 square feet.

RESORT/HOTEL PROPERTIES(1)

The following table shows certain information for the years ended
December 31, 2003 and 2002, with respect to the Operating Partnership's
Resort/Hotel Properties. The information for the Resort/Hotel Properties is
based on available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox,
which measure their performance based on available guest nights.

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM/GUEST NIGHT
COMPLETED/ ------------------ ---------------- -----------------
RESORT/HOTEL PROPERTY LOCATION RENOVATED ROOMS 2003 2002 2003 2002 2003 2002
- --------------------- -------- --------- ----- ---- ---- ---- ---- ---- ----

UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613 73 % 75 % $128 $117 $ 93 $ 89
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 72 71 104 106 75 76

Omni Austin Hotel(2) Austin, TX 1986 375 75 70 113 116 84 81

Renaissance Houston Hotel Houston, TX 1975/2000 388 62 63 108 110 67 70
----- --- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,771 71 % 71 % $115 $113 $ 82 $ 80
===== === ==== ==== ==== ==== ====

LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort
and Spa Avon, CO 1989/2001 275 60 % 59 % $278 $280 $166 $166
Fairmont Sonoma Mission Inn &
Spa(3) Sonoma, CA 1927/1987/1997 228 61 61 245 264 150 162
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62 75 71 412 393 309 279
----- --- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 565 62 % 61 % $282 $288 $174 $177
===== === ==== ==== ==== ==== ====

GUEST
DESTINATION FITNESS RESORTS AND NIGHTS
SPAS:
Canyon Ranch-Tucson Tucson, AZ 1980 259 (4)
Canyon Ranch-Lenox Lenox, MA 1989 212 (4)
----- --- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 471 76 % 77 % $661 $641 $475 $471
===== === ==== ==== ==== ==== ====

LUXURY AND DESTINATION FITNESS RESORTS COMBINED 68 % 69 % $469 $464 $311 $310
=== ==== ==== ==== ==== ====

GRAND TOTAL/WEIGHTED AVERAGE FOR RESORT/HOTEL PROPERTIES 2,807 70 % 70 % $241 $238 $166 $164
===== === ==== ==== ==== ==== ====

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

(1) Resort/Hotel Property Table is presented at 100% without any adjustment to
give effect to the Operating Partnership's actual ownership in Resort/Hotel
Properties.

(2) The Omni Austin Hotel is leased to HCD Austin Corporation.

(3) The Operating Partnership has an 80.1% member interest in the limited
liability company that owns Fairmont Sonoma Mission Inn & Spa.

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

22

RESIDENTIAL DEVELOPMENT PROPERTIES

The following table shows certain information as of December 31, 2003,
relating to the Residential Development Properties.

TOTAL TOTAL
RESIDENTIAL RESIDENTIAL TOTAL LOTS/UNITS LOTS/UNITS
RESIDENTIAL DEVELOPMENT DEVELOPMENT LOTS/ DEVELOPED CLOSED
DEVELOPMENT PROPERTIES TYPE OF CORPORATION'S SUNITS SINCE SINCE
CORPORATION(1) (RDP) RDP(2) LOCATION OWNERSHIP % PLANNED INCEPTION INCEPTION
- -------------- --------------- ------- -------- ------------- ------- --------- ---------

Desert Mountain Desert Mountain SF Scottsdale, AZ 93.0% 2,436 2,396 2,304
----- ----- -----
Development
Corporation

Crescent Resort Eagle Ranch SF Eagle, CO 60.0% 1,323 651 643
Development, Main Street
Inc. (6) Junction CO Breckenridge, 30.0% 36 36 36
CO
Main Street
Station CO Breckenridge, 30.0% 82 82 81
CO
Main Street
Station
Vacation Club TS Breckenridge, 30.0% 42 42 27
CO
Riverbend SF Charlotte, NC 60.0% 650 335 335
Three Peaks
(Eagle's Nest) SF Silverthorne, 30.0% 391 253 191
CO
Park Place at
Riverfront CO Denver, CO 64.0% 70 70 68
Park Tower at
Riverfront CO Denver, CO 64.0% 61 61 60
Promenade Lofts
at Riverfront CO Denver, CO 64.0% 66 66 66
Creekside at
Riverfront CO Denver, CO 64.0% 40 40 26
Delgany Lofts CO Denver, CO 64.0% 44 - -
Cresta TH Edwards, CO 60.0% 25 25 22
Snow Cloud CO Avon, CO 64.0% 54 54 54
Horizon Pass Lodge CO Avon, CO 64.0% 31 - -
Horizon Pass
Townhomes TH Avon, CO 64.0% 9 - -
One Vendue Range CO Charleston, SC 62.0% 50 50 50
Old Greenwood SF/TS Truckee, CA 71.2% 249 103 76
Tahoe Mountain
Resorts SF/CO/TH/ Tahoe, CA 57% - 71.2% - (7) - (7) - (7)
TS
----- ----- -----
TOTAL CRESCENT RESORT DEVELOPMENT, INC. 3,223 1,868 1,735
----- ----- -----

Mira Vista Mira Vista SF Fort Worth, TX 100.0% 740 740 724
----- ----- -----
Development
Corp.

Houston Area Falcon Point SF Houston, TX 100.0% 510 491 468
Development Falcon Landing SF Houston, TX 100.0% 623 613 613
Corp. Spring Lakes SF Houston, TX 100.0% 520 416 369
----- ----- -----

TOTAL HOUSTON AREA DEVELOPMENT CORP. 1,653 1,520 1,450
----- ----- -----
TOTAL 8,052 6,524 6,213
===== ===== =====

AVERAGE
RESIDENTIAL CLOSED RANGE OF
RESIDENTIAL DEVELOPMENT SALE PRICE PROPOSED
DEVELOPMENT PROPERTIES PER LOT/ SALE PRICES
CORPORATION(1) (RDP) UNIT ($)(3) PER LOT/UNIT ($)(4)
- -------------- --------------- ----------- -------------------

Desert Mountain Desert Mountain 538,000 450,000 - 4,000,000(5)

Development
Corporation

Crescent Resort Eagle Ranch 81,000 50,000 - 150,000
Development, Main Street
Inc. (6) Junction 462,000 300,000 - 580,000

Main Street
Station 494,000 215,000 - 1,065,000

Main Street
Station
Vacation Club 1,188,000 380,000 - 4,600,000

Riverbend 31,000 25,000 - 38,000
Three Peaks
(Eagle's Nest) 258,000 135,000 - 425,000

Park Place at
Riverfront 431,000 195,000 - 1,445,000
Park Tower at
Riverfront 725,000 180,000 - 2,100,000
Promenade Lofts
at Riverfront 457,000 180,000 - 2,100,000
Creekside at
Riverfront 325,000 202,000 - 450,000
Delgany Lofts N/A 460,000 - 1,090,000
Cresta 1,963,000 1,230,000 - 3,434,000
Snow Cloud 1,732,000 840,000 - 4,545,000
Horizon Pass Lodge N/A 1,050,000 - 4,560,000
Horizon Pass
Townhomes N/A 2,803,000 - 3,950,000
One Vendue Range 1,217,000 450,000 - 3,100,000
Old Greenwood 300,000 179,000 - 745,000

Tahoe Mountain
Resorts N/A N/A N/A

TOTAL CRESCENT RESORT DEVELOPMENT, INC.

Mira Vista Mira Vista 99,000 50,000 - 265,000

Development
Corp.

Houston Area Falcon Point 39,000 28,000 - 52,000
Development Falcon Landing 21,000 25,000 - 25,000
Corp. Spring Lakes 33,000 35,000 - 50,000

TOTAL HOUSTON AREA DEVELOPMENT CORP.

TOTAL

(1) As of December 31, 2003, the Operating Partnership had a 100% ownership
interest in Desert Mountain Development Corporation and Crescent Resort
Development Inc. and a 98% ownership interest in Mira Vista Development
Corp. and Houston Area Development Corp.

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

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

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

(5) Includes golf membership, which as of December 31, 2003 is $0.2 million.

(6) Residential Development Corporation's ownership percentage represents the
profit percentage allocation after the Operating Partnership receives a
12-13% preferred return on its invested capital.

(7) This project is in the early stages of development, and this information is
not available as of December 31, 2003.

23

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

The following table shows the number and aggregate size of
Temperature-Controlled Logistics Properties by state as of December 31, 2003:

TOTAL CUBIC TOTAL TOTAL CUBIC TOTAL
NUMBER OF FOOTAGE SQUARE FEET NUMBER OF FOOTAGE SQUARE FEET
STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS) STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS)
- ----- ------------ ------------- ------------- ----- ------------- ------------- -------------

Alabama 4 10.7 0.4 Missouri 2 46.8 2.8
Arizona 1 2.9 0.1 Nebraska 2 4.4 0.2
Arkansas 6 33.1 1.0 New York 1 11.8 0.4
California 7 25.1 0.9 North Carolina 3 10.0 0.4
Colorado 1 2.8 0.1 Ohio 1 5.5 0.2
Florida 5 6.5 0.3 Oklahoma 2 2.1 0.1
Georgia 8 49.5 1.7 Oregon 6 40.4 1.7
Idaho 2 18.7 0.8 Pennsylvania 2 27.4 0.9
Illinois 2 11.6 0.4 South Carolina 1 1.6 0.1
Indiana 1 9.1 0.3 South Dakota 1 2.9 0.1
Iowa 2 12.5 0.5 Tennessee 3 10.6 0.4
Kansas 2 5.0 0.2 Texas 2 6.6 0.2
Kentucky 1 2.7 0.1 Utah 1 8.6 0.4
Maine 1 1.8 0.1 Virginia 2 8.7 0.3
Massachusetts 5 10.5 0.5 Washington 6 28.7 1.1
Mississippi 1 4.7 0.2 Wisconsin 3 17.4 0.6
-- ----- ----
TOTAL 87 (2) 440.7 (2) 17.5 (2)
== ===== ====

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

(1) As of December 31, 2003, the Operating Partnership held a 40% interest in
the Temperature-Controlled Logistics Partnership, which owns all of the
common stock, representing substantially all of the economic interest, of
the Temperature-Controlled Logistics Corporation, which directly or
indirectly owns the 87 Temperature-Controlled Logistics Properties. The
business operations associated with the Temperature-Controlled Logistics
Properties are owned by AmeriCold Logistics, in which the Operating
Partnership has no interest. The Temperature-Controlled Logistics
Corporation is entitled to receive lease payments from AmeriCold Logistics.

(2) As of December 31, 2003, AmeriCold Logistics operated 102
temperature-controlled logistics properties with an aggregate of
approximately 545.5 million cubic feet (20.8 million square feet) of
warehouse space.

ITEM 3. LEGAL PROCEEDINGS

The Operating Partnership is not currently subject to any material
legal proceeding nor, to its knowledge, is any material legal proceeding
contemplated against it.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the Operating Partnership's fiscal year ended December 31, 2003.

24

PART II

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

MARKET INFORMATION AND DISTRIBUTIONS

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

- the general condition of the United States economy;

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

- the ability of tenants to meet their rent obligations;

- the operating and interest expenses of the Operating
Partnership;

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

- cash flows from unconsolidated entities;

- capital expenditure requirements;

- federal, state and local taxes payable by the Operating
Partnership; and

- the adequacy of cash reserves.

There is no established public trading market for the Registrant's
limited partner interests, including the associated units for limited partners
other than the Company and the General Partner ("Units"). The following table
sets forth the cash distributions paid per Unit during each quarter of fiscal
years 2000 and 2001. As of March 3, 2004, there were 34 record holders of Units.

QUARTER ENDED: 2003 DISTRIBUTIONS 2002 DISTRIBUTIONS

March 31 $0.75 $0.75
June 30 $0.75 $0.75
September 30 $0.75 $0.75
December 31 $0.75 $0.75

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

Distributions on the 14,200,000 Series A Convertible Cumulative
Preferred Units issued by the Operating Partnership in February 1998, April
2002, and January 2004 are payable at the rate of $1.6875 per annum per Series A
Convertible Cumulative Preferred Unit, prior to distributions on the units.

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

25

ITEM 6. SELECTED FINANCIAL DATA

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

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

FOR YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
OPERATING DATA: 2003 2002 2001 2000 1999
------------ ------------ ----------- ------------ -----------

Total Property revenue $ 949,244 $ 1,002,478 $ 621,631 $ 662,863 $ 678,557
Income from Property Operations $ 328,995 $ 367,166 $ 373,647 $ 419,441 $ 421,409

Income (loss) from continuing operations before minority
interests and income taxes $ 72,025 $ 108,295 $ 33,297 $ 294,584 $ (2,384)
Basic earnings per common unit:
Net income (loss) available to partners before
discontinued operations and cumulative effect of a
change in accounting principle $ 0.33 $ 1.26 $ - $ 4.24 $ (0.09)
Net income (loss) available to partners - basic $ 0.07 $ 1.44 $ 0.15 $ 4.18 $ (0.09)
Diluted earnings per common unit:
Net income (loss) available to partners before
discontinued operations and cumulative effect of a
change in accounting principle $ 0.33 $ 1.24 $ - $ 4.21 $ (0.09)
Net income (loss) available to partners - diluted $ 0.07 $ 1.44 $ 0.15 $ 4.15 $ (0.09)
BALANCE SHEET DATA
(AT PERIOD END):
Total assets $ 4,310,771 $ 4,285,109 $ 4,422,826 $ 4,827,999 $ 4,951,420
Total debt 2,558,699 2,382,910 2,214,094 2,271,895 2,598,929
Total partners' capital $ 1,331,281 $ 1,485,207 $ 1,759,190 $ 2,116,394 $ 2,156,863
OTHER DATA:
Cash distribution declared per unit $ 3.00 $ 3.00 $ 3.70 $ 4.40 $ 4.40
Weighted average
Units outstanding - basic 58,317,273 63,577,892 67,814,802 67,859,823 67,977,021
Weighted average
Units outstanding - diluted 58,338,121 63,679,260 68,578,210 68,458,230 68,945,780
Cash flow provided by (used in):
Operating activities $ 121,599 $ 294,691 $ 235,863 $ 295,247 $ 335,829
Investing activities (32,619) 57,983 213,114 146,823 (204,345)
Financing activities (89,513) (308,900) (455,976) (475,529) (169,210)
Funds from Operations Available to Partners before
impairment charges related to real estate assets(1) $ 212,556 $ 251,646 $ 206,389 $ 348,189 $ 340,777
Impairment charges related to real estate assets (37,794) (16,894) (21,705) (9,349) (136,435)
Cumulative effect of a change in accounting principle -- (10,327) -- -- --
Funds from Operations Available to Partners after
------------ ------------ ----------- ------------ -----------
impairment charges related to real estate assets $ 174,762 $ 224,525 $ 184,684 $ 338,840 $ 204,342

- ------------------------------------------
(1) Funds from Operations ("FFO"), as used in this document, is based on the
definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts and means net income (loss) (determined in
accordance with GAAP), excluding gains (losses) from sales of depreciable
operating property, excluding extraordinary items (as defined by GAAP),
plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. The
Operating Partnership calculates FFO available to partners in the same
manner, except that net income (loss) is replaced with net income (loss)
available to partners. FFO is a non-GAAP measure and should not be
considered an alternative to net income determined in accordance with GAAP
as an indication of the Operating Partnership's operating performance. For
a more detailed definition and description of FFO and a reconciliation to
net income determined in accordance with GAAP, see "Funds from Operations
Available to Partners" included in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

26

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

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

Page
----

Forward-Looking Statements...................................................... 28

Results of Operations
Overview............................................................... 29
Years ended December 31, 2003 and 2002................................. 30
Years ended December 31, 2002 and 2001................................. 34

Liquidity and Capital Resources
Cash Flows for the year ended December 31, 2003........................ 39
Liquidity Requirements................................................. 41

Equity and Debt Financing....................................................... 44

Recent Developments............................................................. 50

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

Significant Accounting Policies................................................. 59

Funds from Operations Available to Partners..................................... 63

27

FORWARD-LOOKING STATEMENTS

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

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

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

The following factors might cause such a difference:

- The Operating Partnership's ability, at its Office Properties, to
timely lease unoccupied square footage and timely re-lease occupied
square footage upon expiration on favorable terms, which may continue
to be adversely affected by existing real estate conditions (including
vacancy rates in particular markets, decreased rental rates, and
competition from other properties) or by general economic downturns;

- Adverse changes in the financial condition of existing tenants;

- 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;

- Financing risks, such as the Operating Partnership's ability to
generate revenue sufficient to service and repay existing or
additional debt, increases in debt service associated with increased
debt and with variable rate debt, the Operating Partnership's ability
to meet financial and other covenants and the Operating Partnership's
ability to consummate financings and refinancings on favorable terms
and within any applicable time frames;

- The ability of the Operating Partnership to reinvest available funds
at anticipated returns and within anticipated time frames and the
ability of the Operating Partnership to consummate anticipated office
acquisitions and investment land and other dispositions on favorable
terms and within anticipated time frames;

- 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;

- The inability of the Operating Partnership to complete the
distribution to its unitholders and shareholders of the Company of the
shares of a new entity to purchase the AmeriCold tenant interest from
COPI;

- The concentration of a significant percentage of the Operating
Partnership's assets in Texas;

- 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

- Other risks detailed in the Company's current report on Form 8-K dated
March 10, 2004 and filed with the Securities and Exchange Commission
("SEC") on or about March 15, 2004, and from time to time in the
Operating Partnership's and the Company's other filings with the SEC.

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

28

RESULTS OF OPERATIONS

The following table shows the Operating Partnership's variance in
dollars between the years ended December 31, 2003 and 2002 and the years ended
December 31, 2002 and 2001.

TOTAL VARIANCE IN DOLLARS BETWEEN
THE YEARS ENDED DECEMBER 31,
---------------------------------
(IN MILLIONS)
2003 AND 2002 2002 AND 2001
------------- -------------

REVENUE:
Office Property $ (43.3) $ (37.1)
Resort/Hotel Property 22.5 157.4
Residential Development Property (32.4) 260.5
------------ ------------
TOTAL PROPERTY REVENUE $ (53.2) $ 380.8
------------ ------------
EXPENSE:
Office Property real estate taxes (7.5) (6.5)
Office Property operating expenses 4.4 (2.9)
Resort/Hotel Property expenses 24.7 158.0
Residential Development Property expense (36.6) 238.7
------------ ------------
TOTAL PROPERTY EXPENSE (15.0) 387.3
------------ ------------
INCOME FROM PROPERTY OPERATIONS $ (38.2) $ (6.5)
------------ ------------
OTHER INCOME (EXPENSE):
Income from sale of investment in
unconsolidated company, net 86.2 -
Income from investment land sales, net (9.6) 22.4
Gain on joint venture of properties, net (18.0) 10.6
Loss on property sales, net 0.8 2.6
Interest and other income (20.8) (40.4)
Corporate general and administrative (6.9) (3.3)
Interest expense 6.9 3.1
Amortization of deferred financing costs (0.7) (0.9)
Extinguishment of debt - 12.2
Depreciation and amortization (18.6) (20.6)
Impairment charges related to real 4.6 12.1
estate assets
Impairment and other charges related to COPI - 92.8
Other expenses 6.8 (11.4)
Equity in net income (loss) of
unconsolidated companies:
Office Properties (13.0) 17.3
Resort/Hotel Properties 5.9 (0.1)
Residential Development Properties (29.4) (1.2)
Temperature-Controlled Logistics Properties 5.1 (4.1)

Other 2.6 (9.6)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) $ 1.9 $ 81.5
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS
AND INCOME TAXES $ (36.3) $ 75.0
Minority interests 10.8 8.7
Income tax (expense) benefit (30.7) 4.4
------------ ------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $ (56.2) $ 88.1
Income (loss) from discontinued
operations (12.8) 4.2
Impairment charges related to real
estate assets from discontinued
operations (24.2) (4.7)
Gain on real estate from discontinued
operations 0.3 11.8
Cumulative effect of a change in
accounting principle 10.3 (10.3)
------------ ------------
NET INCOME (LOSS) $ (82.6) $ 89.1
Series A Preferred Unit distributions (1.5) (3.2)
Series B Preferred Unit distributions (3.0) (5.1)

------------ ------------
NET INCOME (LOSS) AVAILABLE TO PARTNERS $ (87.1) $ 80.8
============ ============

29

OVERVIEW

The Operating Partnership divides its assets and operations into
four investment segments: Office, Resort/Hotel, Residential Development and
Temperature-Controlled Logistics. The primary business of the Operating
Partnership is its Office Segment, which consisted of 72 Office Properties as of
December 31, 2003. The Office Properties are located primarily in Dallas and
Houston, with additional concentrations in Austin, Denver, Miami and Las Vegas.
The Resort/Hotel Segment consisted of nine Resort/Hotel Properties as of
December 31, 2003, including five luxury and destination fitness resorts and
spas and four business-class hotels. The Residential Development Segment, as of
December 31, 2003, consisted of four Residential Development Corporations that
owned in whole or in part 23 Residential Development Properties. The
Temperature- Controlled Logistics Segment, as of December 31, 2003, consisted of
the Company's unconsolidated 40% interest in 87 Temperature-Controlled Logistics
Properties.

OFFICE SEGMENT

The following table shows the performance factors used by management
to assess the operating performance of the Office Segment.

2003 2002
--------- --------

Economic Occupancy (at December 31) 84.0% 87.2%
Leased Occupancy(at December 31) 86.4% 89.7%
In-Place Weighted Average Full-Service Rental Rate (at December 31) $22.63 $22.60
Tenant Improvement and Leasing Costs per Sq. Ft. per Year $ 3.14 (1) $ 2.67 (1)
Same-Store NOI (Decline) (11.5%) (2) (3.4%) (2)
Same-Store Average Occupancy 84.3% 89.4%

- -----------------------------------------
(1) Average lease term for 2003 and 2002 were 7.8 years and 6.5 years,
respectively.

(2) Same-store NOI (net operating income) represents office property net income
excluding depreciation, amortization, interest expense, and non-recurring
items such as lease termination fees for Office Properties owned for the
entirety of the comparable periods.

In 2003, the weak economy continued to negatively impact the operating
performance of the Operating Partnership's Office Properties. Reduced demand for
office space resulting from unemployment levels over the last two year periods
has led to a continued decrease in occupancy and rental rates. In addition, the
Operating Partnership experienced escalating tenant improvement and leasing
costs granted in connection with leases executed in 2003 due to the competitive
leasing environment. The Operating Partnership expects that 2004 will be a year
of stabilization rather than meaningful growth, with projected average and year
end occupancy remaining relatively flat compared to 2003. Tenant improvement and
leasing costs in 2004 are expected to be in line with 2003. Same-store NOI is
expected to decline by 3% to 6% in 2004, which is a lower rate of decline than
that experienced in 2003.

RESORT/HOTEL SEGMENT

The following table shows the performance factors used by management
to assess the operating performance of the Resort/Hotel Segment.

FOR THE YEARS ENDED DECEMBER 31,
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
--------------------- ----------------------- -----------------------
2003 2002 2003 2002 2003 2002
-------- -------- --------- --------- -------- ---------

Upscale Business Class Hotels 71% 71% $115 $113 $ 82 $ 80
Luxury and Destination Fitness Resorts 68% 69% $469 $464 $311 $310

Total/Weighted Average for Resort/Hotel
Properties 70% 70% $241 $238 $166 $164

30

The operating performance of the Resort/Hotel Segment was flat in 2003
compared to 2002 as the travel industry stabilized following the decline in
2002. The Company anticipates modest increases in occupancy and room rates in
2004 as the economy and the travel industry continue to recover.

RESIDENTIAL DEVELOPMENT SEGMENT

The following tables show the performance factors used by management
to assess the operating performance of the Residential Development Segment.
Information is provided for the Desert Mountain Residential Development Property
and the CRDI Residential Development Properties, which represent the Company's
significant investments in this Segment as of December 31, 2003.

Desert Mountain

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2003 2002
-------- ---------

Residential Lot Sales 60 78
Average Sales Price per Lot (1) $653,000 $730,000

(1) Includes equity golf membership

Desert Mountain's operations were affected by the slower economy which
continued into 2003, contributing to reduced lot absorption and average sales
prices. Desert Mountain is in the latter stages of development and has primarily
its premier lots remaining in inventory. A slight decline in lot sales, combined
with higher average sales prices in 2004 compared to 2003, is expected to result
in increased results in 2004.

CRDI

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002
------------ ------------

Active Projects 18 15
Residential Lot Sales 246 309
Residential Unit Sales 90 269
Average Sales Price per Residential Lot $ 129,000 $ 67,000
Average Sales Price per Residential Unit $0.9 million $0.7 million
Average Sales Price per Residential Equivalent Timeshare Unit $1.4 million $1.2 million

CRDI, which invests primarily in mountain resort residential real
estate in Colorado and California and residential real estate in downtown
Denver, Colorado, is highly dependent upon the national economy and customer
demand. In 2003, CRDI experienced reduced lot and unit absorption which resulted
from the product mix available during the year, offset by increases in average
sales prices in lots and units over 2002. In 2004, management expects that CRDI
will be primarily affected by product mix available at its Residential
Development Properties as product inventory is created in 2004 for delivery in
2005.

SIGNIFICANT TRANSACTIONS

During the fourth quarter of 2003 and into the first quarter of 2004,
the Operating Partnership completed the following significant transactions:

- Disposition of the Operating Partnership's interests in The
Woodlands Land Development Company, L.P., through which the
Operating Partnership owned its interest in The Woodlands
Residential Development Property, in Woodlands Office
Equities - '95 Limited Partnership, through which the
Operating Partnership owned four office properties, in The
Woodlands Commercial Properties, L.P., and in The Woodlands
Operating Company, L.P;

- Acquisition of seven Office Properties and nine retail
parcels located in Hughes Center in Las Vegas, Nevada in
December 2003 and January 2004;

31

- Sale of an additional 3,400,000 of the Operating
Partnership's Series A Convertible Cumulative Preferred
Units at $21.98 per unit, resulting in proceeds to the
Operating Partnership, net of placement fees and dividends
payable, of approximately $71.0 million in January 2004; and

- Completion of a $254.4 million mortgage financing by the
Temperature-Controlled Logistics Corporation and the
resulting cash distribution of approximately $90.0 million
to the Operating Partnership in February 2004.

These transactions generated net cash proceeds to the Operating
Partnership in excess of $200 million. The Operating Partnership expects to
reinvest these cash proceeds primarily in long term investments in the second
and third quarters of 2004. Additionally, the Operating Partnership expects to
continue to market for sale its remaining non-income producing land valued in
excess of $100 million.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003, TO THE YEAR ENDED DECEMBER 31,
2002

The following comparison of the results of operations for the year
ended December 31, 2003, and for the year ended December 31, 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 Operating Partnership'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 Operating Partnership'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 and 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 $53.2 million, or 5.3%, to $949.2
million for the year ended December 31, 2003, as compared to $1,002.4 million
for the year ended December 31, 2002. The components of the decrease in total
revenues are discussed below.

- Office Property revenues decreased $43.3 million, or 8.0%, to $495.5
million, primarily due to:

- a decrease of $29.8 million from the 57 consolidated Office
Properties (excluding 2002 and 2003 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due a 4.9 percentage point decline in
occupancy (from 89.2% to 84.3%) resulting in decreases in both
rental revenue and operating expense recoveries and decreases in
net parking revenues;

- a decrease of $23.6 million resulting from the contribution of
two Office Properties to joint ventures in third quarter 2002;

- a decrease of $5.0 million related to net insurance proceeds
received in 2002 as a result of an insurance claim on one of the
Operating Partnership's Office Properties that had been damaged
as a result of a tornado;

- a decrease of $1.1 million in development revenue from the
construction of 5 Houston Center in 2002; partially offset by

- an increase of $11.5 million from the acquisition of Johns
Manville Plaza in August 2002, and The Colonnade in August 2003;

- an increase of $3.7 million resulting from third party management
services and related direct expense reimbursements; and

- an increase of $1.3 million resulting from deferred rent
recognition for a tenant in 2003.

- Resort/Hotel Property revenues increased $22.5 million, or 11.1%, to
$225.6 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 Operating Partnership
recognized lease payments related to these Properties).

32

- Residential Development Property revenues decreased $32.4 million, or
12.4%, to $228.2 million, primarily due to a reduction in lot and unit
sales at Desert Mountain and CRDI.

PROPERTY EXPENSES

Total property expenses decreased by $15.0 million, or 2.4%, to $620.3
million for the year ended December 31, 2003, as compared to $635.3 million for
the year ended December 31, 2002. The components of the decrease in expenses are
discussed below.

- Office Property expenses decreased $3.1 million, or 1.3%, to $235.4
million, primarily due to:

- a decrease of $10.9 million resulting from the contribution of
two Office Properties to joint ventures in 2002;

- a decrease of $1.6 million related to consulting fees incurred in
2002 on the 5 Houston Center Office Property development and a
reduction in nonrecurring legal fees for the Office Segment; and

- a decrease of $0.7 million in operating expenses from the 57
consolidated Office Properties (excluding 2002 and 2003
acquisitions and properties held for sale) that the Operating
Partnership owned or had an interest in, due to:

- $4.8 million decrease in property taxes and other taxes
and assessments;

- $2.9 million decrease in bad debt expense;

- $2.1 million decrease in building repairs and
maintenance;

- $1.2 million decrease in cleaning and security
expenses; partially offset by

- $10.5 million increase in utilities expense, primarily
attributable to a utility contract for the Texas Office
Properties entered into in February 2003 in which the
Operating Partnership paid a higher fixed contract
price for actual electricity consumed; partially offset
by

- an increase of $4.3 million from the acquisition of Johns
Manville Plaza in August 2002 and The Colonnade in August 2003;
and

- an increase of $3.1 million related 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.

- Resort/Hotel Property expense increased $24.7 million, or 15.6%, to
$182.7 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.

- Residential Development Property expense decreased $36.6 million, or
15.3%, to $202.2 million, primarily due to a reduction in lot and unit
sales and related costs at Desert Mountain and CRDI.

OTHER INCOME/EXPENSES

Total other income and expenses decreased $1.9 million, or 0.7%, to
$257.0 million for the year ended December 31, 2003, as compared to $258.9
million the year ended December 31, 2002. The primary components of the decrease
in total other income and expenses are discussed below.

OTHER INCOME

Other income increased $9.0 million, or 7.5%, to $129.8 million for
the year ended December 31, 2003, as compared to $120.8 million for the year
ended December 31, 2002. The primary components of the increase in other income
are discussed below.

- Income from sale of investment in unconsolidated company, net
increased $86.2 million due to the income received from the sale of
the Operating Partnership's interest in The Woodlands Land Development
Company, L.P. ("WLDC"), Woodlands CPC, and The Woodlands Operating
Company, L.P. in December 2003;

- Equity in net income of unconsolidated companies decreased $28.8
million, or 53.7%, to $24.8 million due to:

33

- a decrease of $29.4 million in Residential Development Properties
equity in net income, primarily due to the consolidation of the
operations of Desert Mountain and CRDI 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;

- a decrease of $13.0 million in Office Properties equity in net
income, primarily due to the gain in 2002 from the sale of The
Woodlands Mall partnership interest in which the Operating
Partnership had a 52.5% economic interest; partially offset by

- an increase of $5.9 million in Resort/Hotel Properties equity in
net income, primarily due to a gain on the sale of the Ritz
Carlton Hotel in November 2003, and a payment received in 2003
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 in 2002;

- an increase of $5.1 million in Temperature-Controlled Logistics
Properties equity in net income due to the loss on the sale of
one facility in 2002 and the gain on the sale of one facility in
2003, a decrease in interest expense, an increase in rental
income due to improved operations, an increase in other income
related to interest earned on deferred rent balance and reduced
general and administrative expenses; and

- an increase of $2.6 million in other unconsolidated companies
primarily due to:

- the consolidation of DBL Holdings, Inc. ("DBL") on January
2, 2003, which incurred a $5.2 million impairment in 2002
for Class C-1 Notes issued by Juniper CBO 1000-1 Ltd.,
partially offset by earnings from G2 Opportunity Fund, L.P.
("G2") in 2002;

- $1.2 million of equity in earnings from G2 in 2003;
partially offset by

- equity losses of $2.4 million in 2003 resulting from
operations at the Woodlands Conference Center and Country
Club in 2003.

- Gain on joint venture of properties, net decreased $18.0 million, or
99.4%, due primarily to a net gain of $17.7 million on the joint
venture of three properties in 2002.

- Income from investment land sales, net decreased $9.6 million, or
42.5%, due to the $22.6 million net income on the sale of three
parcels of land, located in Texas and Arizona in 2002, compared to
$13.0 million net income on sale of three parcels of land, located in
Texas in 2003.

- Interest and other income decreased $20.8 million, or 78.5%, to $5.7
million, primarily due to the payoff of two notes receivable, a gain
on the sale of marketable securities, and the repayment in full in
August 2002 of a loan that was originated in March 2000 from the
Operating Partnership to Crescent SH IX, Inc. ("SH IX"), a subsidiary
of the Company, in connection with the repurchase of 14,468,623 common
shares of the Company; partially offset by legal settlement fees, all
in 2002.

OTHER EXPENSES

Other expenses increased $7.1 million, or 1.9%, to $386.8 million for
the year ended December 31, 2003, as compared to $379.7 million the year ended
December 31, 2002. The primary components of the increase in other expenses are
discussed below.

- Depreciation expense increased $18.6 million, or 13.4%, to $157.2
million in 2003, primarily due to:

- $12.3 million increase in Office Property depreciation, due to:

- $15.9 million increase due to an increase in building
improvements, lease commissions and other leasing costs;

- an increase of $2.4 million from Johns Manville Office
Property acquired in August 2002; partially offset by

- a decrease of $6.0 million associated with the disposition
of seven Office Properties in 2002, contribution of two
Office Properties to joint ventures in 2002, and disposition
of five Office Properties in 2003; and

- $6.6 million increase in Residential Development Property and
Resort/Hotel Property.

- Corporate general and administrative expenses increased $6.9 million,
or 26.1%, to $33.3 million, primarily due to increased payroll and
benefits, shareholder services, consulting costs related to the
Sarbanes-Oxley Act of 2002, management information systems and
insurance expenses.

34

- Interest expense decreased $6.9 million, or 3.9%, to $172.1 million,
primarily due to a decrease of 0.69% in the weighted average interest
rate, partially offset by an increase of $73.4 million in the weighted
average debt balance.

- Other expenses decreased $6.8 million, or 59.6%, primarily due to
expenses incurred in 2002 of:

- $3.8 million due to legal expenses associated with matters
relating to the Office Segment;

- $1.9 million due to expense related to stock option note term
extensions; and

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

- Impairment and other charges related to real estate assets decreased
$4.6 million, or 34.8%, to $8.6 million and is attributable to:

- a decrease of $9.6 million due to the impairment of the
Canyon Ranch Las Vegas Spa in 2002;

- a decrease of $2.6 million due to the impairment of the
investment in the Manalapan in 2002;

- a decrease of $1.0 million due to the impairment on a parcel
of undeveloped land located adjacent to the Washington
Harbour Office Property; partially offset by

- an increase of $6.5 million due to the impairment associated
with the settlement of HBCLP, Inc.'s real estate note
obligation in 2003;

- an increase of $1.2 million due to the impairment of the
North Dallas Athletic Club 2003; and

- an increase of $0.9 million due to the impairment of an
executive home in 2003 which the Operating Partnership
acquired in June 2002 as part of the executive's relocation
agreement with the Operating Partnership.

INCOME TAX PROVISION

The $30.7 million increase in the income tax provision to $26.3
million for the year ended December 31, 2003, as compared to the income tax
benefit of $4.4 million for the year ended December 31, 2002, is primarily due
to the $34.7 million tax expense related to the gain on the sale of the
Operating Partnership's interests in WLDC and The Woodlands Operating Company,
L.P.

DISCONTINUED OPERATIONS

Income from discontinued operations from assets sold and held for sale
decreased $36.7 million, or 167.6%, to a loss of $14.8 million for the year
ended December 31, 2003. The primary components of the decrease in income from
discontinued operations are discussed below.

- a decrease of $16.4 million due to the impairment in 2003 on the 1800
West Loop South Office Property;

- a decrease of $12.8 million due to the reduction of net income
associated with properties held for sale in 2003 compared to 2002;

- a decrease of $7.9 million due to the impairment of two Office
Properties and six behavioral healthcare properties in 2003 compared
to three behavioral healthcare properties in 2002.

RESORT/HOTEL PROPERTIES

The following provides a comparison of the results of operations of
the Resort/Hotel Properties for the years ended December 31, 2003 and 2002.

FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(in thousands) 2003 2002 VARIANCE
- ------------------------------- -------------- -------------- -----------

Lease revenues $ 4,906 $ 11,353
Operating revenues 220,656 191,775
Operating expenses (182,648) (157,987)
-------------- -------------- ------------
Net Operating Income $ 42,914 $ 45,141 $ (2,227)
============== ============== ============

The net operating income for the Resort/Hotel Properties decreased
$2.2 million, or 4.9%, to $42.9 million, primarily due to an increase of $1.7
million in Resort/Hotel Property expenses, primarily consisting of insurance and
workers' compensation expenses. Resort net operating income as a percentage of
revenue decreased one percentage

35

point from 17% to 16%, and Business Class Hotel net operating income as a
percentage of revenue decreased one percentage point from 23% to 22%.

RESIDENTIAL DEVELOPMENT PROPERTIES

The following provides a comparison of the results of operations of
the Residential Development Properties for the years ended December 31, 2003 and
2002.

FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(in thousands) 2003 2002 VARIANCE
- ------------------------------- -------------- -------------- -----------

Operating revenues $ 228,214 $ 260,569
Operating expenses (202,162) (238,745)
Income from sale of investment in
unconsolidated company, net 88,727 -
Depreciation and amortization (11,573) (7,697)
Equity in net income of unconsolidated
companies 10,427 39,778
Income tax benefit (provision) (32,798) (7,218)
Minority interests (1,785) (5,154)
Discontinued operations - (507)
-------------- -------------- ------------
Net Income $ 79,050 $ 41,026 $ 38,024
============== ============== ============

Net income for the Residential Development Properties increased $38.0
million, or 92.7%, to $79.1 million, primarily due to:

- an increase of $54.1 million due to the income from sale, net of
taxes, of WLDC;

- an increase of $2.7 million due to a decrease in general and
administrative expenses and increase in club operations income at
Desert Mountain, CRDI and The Woodlands; partially offset by

- a decrease of approximately $11.6 million due to the sale of fewer
lots and product mix at Desert Mountain, and fewer acres and product
mix at The Woodlands in 2003;

- 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

- a decrease of $0.7 million due to the impairment on a retail site at
CRDI in 2003.

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

Cumulative effect of a change in accounting principle increased $10.3
million due to the adoption of SFAS No. 142 on January 1, 2002. As a result of
the initial application of this statement, the Operating Partnership recognized
a goodwill impairment charge related to the Temperature-Controlled Logistics
Properties of approximately $10.3 million. This charge was reported as a change
in accounting principle for the year ended December 31, 2002.

36

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

PROPERTY REVENUES

Total property revenues increased $380.8 million, or 61.3%, to
$1,002.4 million for the year ended December 31, 2002, as compared to $621.5
million for the year ended December 31, 2001. The components of the increase in
total revenues are discussed below.

- Residential Development revenues increased $260.5 million due to the
consolidation of the operations of Desert Mountain and CRDI for the
period February 14, 2002 through December 31, 2002, as a result of the
COPI transaction (previously the Operating Partnership recorded its
share of earnings under the equity method).

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

- Office Property revenues decreased $37.1 million, or 6.4%, to $538.8
million, attributable to:

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

- a decrease of $10.2 million from the 66 consolidated Office
Properties that the Operating Partnership owned or had an
interest in, primarily due to a decline in the weighted average
full-service rental rates, reflecting decreases in both rental
revenue and operating expense recoveries, decreased occupancy and
a decrease in net parking revenues;

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

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

- a net increase of $7.6 million related to net insurance proceeds
of $5.0 million received in September 2002 as a result of an
insurance claim on one of the Operating Partnership's Office
Properties that had been damaged as a result of a tornado and
third party fee and reimbursement of costs related to providing
third party management services of $2.6 million; and

- an increase of $0.6 million in net lease termination fees to $9.1
million in 2002 (fees are net of deferred rent receivables
write-off).

PROPERTY EXPENSES

Property expenses increased by $387.3 million, or 156.2%, to $635.3
million for the year ended December 31, 2002, as compared to $248.0 million for
the year ended December 31, 2001. The components of the increase in expenses are
discussed below.

- Residential Development Property expense increased $238.7 million due
to the consolidation of the operations of Desert Mountain and CRDI for
the period February 14, 2002 through December 31, 2002, as a result of
the COPI transaction.

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

- Office Property expenses decreased $9.4 million, or 3.8%, to $238.6
million, primarily attributable to:

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

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

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

37

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

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

- an increase of $4.7 million in insurance costs;

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

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

OTHER INCOME/EXPENSES

Total other income and expense decreased $81.5 million, or 23.9%, to
$258.9 million for the year ended December 31, 2002, as compared to $340.4
million for the year ended December 31, 2001. The primary components of the
decrease in total other income and expenses are discussed below.

OTHER INCOME

Other income decreased $5.1 million, or 4.1%, to $120.8 million for
the year ended December 31, 2002, as compared to $125.9 million the year ended
December 31, 2001. The components of the increase in other income are discussed
below.

- Income from investment land sales, net increased $22.4 million, to
$22.6 million. The primary components of the increase are:

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

- an increase of $5.4 million resulting from the gain on the sale
of Canyon Ranch-Tucson land in 2002.

- Gain on joint venture of properties, net increased $10.6 million, or
139.5%, to $18.2 million. The primary components of the increase are:

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

- a decrease of $7.6 million resulting from the gains on the
partial sales of two Office Properties contributed to joint
ventures in 2001; and

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

- Equity in net income of unconsolidated companies increased $2.3
million, or 4.5%, to $53.6 million primarily attributable to:

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

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

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

- Interest and other income decreased $40.4 million, or 60.4%, to $26.5
million, primarily attributable to:

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

38

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

- a decrease of $6.5 million due to partial payment received in
2001 from the former tenant of the behavioral healthcare
properties on a working capital loan and interest that was
previously expensed in conjunction with the recapitalization of
the tenant;

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

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

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

OTHER EXPENSES

Other expenses decreased $86.6 million, or 18.6%, to $379.7 million
for the year ended December 31, 2002, as compared to $466.3 million the year
ended December 31, 2001. The primary components of the decrease in other
expenses are discussed below.

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

- Impairment and other charges related to real estate assets decreased
$12.1 million, or 47.8%, to $13.2 million attributable to:

- a decrease of $11.9 million due to the recognition in 2001 of an
impairment charge related to the conversion of the Operating
Partnership's preferred interest in Metropolitan into common
stock of Reckson;

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

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

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

- an increase of $1.0 million resulting from the impairment of a
parcel of undeveloped land adjacent to the Washington Harbour
Office Property in 2002.

- Extinguishment of debt decreased $12.2 million, attributable to the
write-off of deferred financing costs related to the early
extinguishment of the UBS Facility in May 2001.

- Depreciation expense increased $20.6 million, or 17.5%, to $138.6
million in 2002 due to the consolidation of the operations of Desert
Mountain and CRDI beginning February 14, 2002, as a result of the COPI
transaction.

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

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

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

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

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

- an increase of $1.2 million accrual for a penalty paid by the
Operating Partnership for non-construction of a convention hotel
in downtown Houston.

39

- - Corporate general and administrative expenses increased $3.3 million, or
14.3%, to $26.4 million, primarily due to expenses related to an officers'
incentive compensation plan in 2002.

DISCONTINUED OPERATIONS

Income from discontinued operations from assets sold and held for sale
increased $11.3 million, or 107.6%, to $21.9 million for the year ended December
31, 2002. The primary components of the increase in income from discontinued
operations are discussed below.

- an increase of $11.4 million on dispositions attributable to the gains
on the sales of seven Office Properties and two transportation
companies in 2002; and

- an increase of $5.1 million in net income for the Office Properties
sold or held for sale in 2002; partially offset by

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

RESORT/HOTEL PROPERTIES

The following provides a comparison of the results of operations of
the Resort/Hotel Properties for the years ended December 31, 2002 and 2001.

FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
(in thousands) 2002 2001 VARIANCE
- ---------------------------------- -------------- -------------- ------------

Lease revenues $ 11,353 $ 45,748
Operating revenues 191,775 -
Operating expenses (157,987) -
-------------- -------------- ------------
Net Operating Income ("NOI") $ 45,141 $ 45,748 $ (607)
============== ============== ============

The net operating income for the Resort/Hotel Properties decreased $0.6
million to $45.1 million. Same-store NOI decreased $7.1 million, primarily due
to a decrease in average daily rate of $7, to $238, while occupancy remained
flat at 70%. On October 1, 2001, the Operating Partnership stopped recording
rent under the leases of the eight Resort/Hotel Properties leased to
subsidiaries of COPI offsetting the decline experienced in 2002.

RESIDENTIAL DEVELOPMENT PROPERTIES

The following provides a comparison of the results of operations of
the Residential Development Properties for the years ended December 31, 2002 and
2001.

FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
(in thousands) 2002 2001 VARIANCE
- ---------------------------------- -------------- -------------- ------------

Operating revenues $ 260,569 $ -
Operating expenses (238,745) -
Depreciation and amortization (7,697) -
Equity in net income of unconsolidated
companies 39,778 41,014
Income tax (provision) benefit (7,218) -
Minority interests (5,154) -
Discontinued operations (507) -
-------------- -------------- ------------
Net Income $ 41,026 $ 41,014 $ 12
============== ============== ============

Net income for the Residential Development Properties remained flat,
primarily due to:

- an increase of $4.5 million due to lower cost of sales due to product
mix offset by lower lot sales at Desert Mountain;

40

- an increase of $2.4 million due to higher lot and unit sales at CRDI;

- an increase of $0.6 million as a result of gains recognized on the
disposition of two properties in 2002, partially offset by the
disposition of two office properties and one retail property in 2001
at The Woodlands; and

- an increase of $0.4 million due to higher acreage sales partially
offset by lower lot sales at The Woodlands; partially offset by

- a decrease of $8.0 million due to the change in presentation of
capitalized interest due to consolidation of Desert Mountain and CRDI.

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

Cumulative effect of a change in accounting principle decreased $10.3
million due to the adoption of SFAS No. 142 on January 1, 2002. As a result of
the initial application of this statement, the Operating Partnership recognized
a goodwill impairment charge related to the Temperature-Controlled Logistics
Properties of approximately $10.3 million. This charge was reported as a change
in accounting principle for the year ended December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $74.9 million and $75.4 million at
December 31, 2003 and 2002, respectively. This 0.7% decrease is attributable to
$121.6 million provided by operating activities, partially offset by $122.1
million used in investing and financing activities.

CASH FLOWS

FOR THE YEAR ENDED
DECEMBER 31, 2003
------------------
(in millions)
- -------------

Cash provided by Operating Activities $ 121.6
Cash used in Investing Activities (32.6)
Cash used in Financing Activities (89.5)
-------------------
Decrease in Cash and Cash
Equivalents $ (0.5)
Cash and Cash Equivalents, Beginning of Period 75.4
-------------------
Cash and Cash Equivalents, End of Period $ 74.9
===================

OPERATING ACTIVITIES

The Operating Partnership's cash provided by operating activities of
$121.6 million is attributable to Property operations.

INVESTING ACTIVITIES

The Operating Partnership's cash used in investing activities of $32.6
million is attributable to:

- $100.3 million increase in restricted cash, due primarily to
increased escrow for the purchase of the remaining Hughes
Center Office Properties;

- $77.3 million for revenue enhancing and non-revenue
enhancing tenant improvement and leasing costs for Office
Properties;

- $44.7 million for acquisition of Office Properties,
primarily attributable to the Hughes Center acquisitions and
the acquisition of the Colonnade;

- $42.6 million for development of amenities at the
Residential Development Properties;

- $31.6 million for property improvements for rental
properties, primarily attributable to non-recoverable
building improvements for the Office Properties and
replacement of furniture, fixtures and equipment for the
Resort/Hotel Properties;

41

- $18.6 million of additional investment in unconsolidated
companies, consisting primarily of investments in the Office
Properties;

- $9.6 million for investment in government obligations in
connection with the partial defeasance of a loan; and

- $6.6 million for development of investment properties.

The cash used in investing activities is partially offset by:

- $178.7 million of proceeds from sale of investments in an
unconsolidated company and related property sales;

- $43.2 million of proceeds from property sales;

- $42.7 million from return of investment in unconsolidated
Resort/Hotel Properties, primarily from the sale of the Ritz
Carlton Palm Beach Resort/Hotel Property, Residential
Development Properties and Office Properties;

- $22.5 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; and

- $11.6 million due to the net cash impact of the
consolidation of MVDC, HADC and GDW, LLC.

FINANCING ACTIVITIES

The Operating Partnership's cash used in financing activities of $89.5
million is primarily attributable to:

- $245.5 million of payments under the Operating Partnership's
credit facility;

- $174.1 million of distributions to unitholders;

- $118.9 million of payments under other borrowings, partially
resulting from the payoff of the Cigna Note;

- $85.4 million of Residential Development Property note
payments;

- $26.3 million of distributions to preferred unitholders;

- $8.3 million of net capital distributions to joint venture
partners and the operating partner; and

- $9.3 million of deferred financing costs.

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

- $320.5 million of proceeds from borrowings under the
Operating Partnership's credit facility, a portion of which
were used to pay off the Cigna Note and for acquisition of
Office Properties, investment in the Residential Development
Properties, tenant improvements, leasehold commissions and
property improvements for the Office Segment;

- $178.0 million of proceeds from other borrowings, primarily
as a result of the new Cigna Note in May 2003 and the $75
million Fleet Term Loan in November 2003; and

- $79.8 million of proceeds from borrowings for construction
costs for infrastructure development on Residential
Development Properties.

42

LIQUIDITY REQUIREMENTS

As of December 31, 2003, the Operating Partnership had unfunded
capital expenditures of approximately $58.4 million relating to capital
investments that are not in the ordinary course of operations of the Operating
Partnership's business segments. The table below specifies the Operating
Partnership's requirements for capital expenditures and its amounts funded as of
December 31, 2003, and amounts remaining to be funded (future fundings
classified between short-term and long-term capital requirements):

AMOUNT CAPITAL EXPENDITURES
-------------------------
TOTAL FUNDED AS OF AMOUNT SHORT-TERM LONG-TERM
(IN MILLIONS) PROJECT DECEMBER 31, REMAINING (NEXT 12 (12+
PROJECT COST (1) 2003 TO FUND MONTHS)(2) MONTHS)(2)
- ---------------------------------- ---------- --------------- ------------- ------------- --------------

OFFICE SEGMENT
Acquired Properties(3) $ 0.9 $ (0.4) $ 0.5 $ 0.5 $ -
Houston Center Shops Retail 11.6 (7.3) 4.3 4.3 -
Redevelopment(4)

RESIDENTIAL DEVELOPMENT SEGMENT(5)
Tahoe Mountain Properties & Club(6) 47.5 (30.4) 17.1 17.1 -
Desert Mountain Golf Course and
Water Supply Pipeline 55.0 (50.1) 4.9 4.9 -

RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land -
Construction Loan(7) 2.4 - 2.4 1.2 1.2

Sonoma Mission Inn - Rooms remodel 10.0 (3.6) 6.4 6.4 -

OTHER
SunTx(8) 19.0 (11.7) 7.3 4.0 3.3
Spinco(9) 15.5 - 15.5 15.5 -
--------- -------------- ------------ ----------- --------------
TOTAL $ 161.9 $ (103.5) $ 58.4 $ 53.9 $ 4.5
========= ============= ============ =========== ==============

- ------------------------------------
(1) All amounts are approximate.

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

(3) The capital expenditures reflect the Operating Partnership's ownership
percentage of 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
Residential Development Segment excludes costs for projects in which the
Operating Partnership anticipates sales to occur over the next 18 months.

(6) As of December 31, 2003, the Operating Partnership had invested $30.4
million in Tahoe Mountain Club, which includes the acquisition of land and
development of a golf course and retail amenities. The Operating
Partnership has committed to invest an additional $17.1 million in 2004 for
the development of a swim and fitness facility, clubhouse, and completion
of the golf course.

(7) The Operating Partnership has a $2.4 million construction loan with the
purchaser of the land, which will be secured by 9 developed lots and a $0.4
million letter of credit. No advances had been made under the loan
agreement as of December 31, 2003, and $0.4 million was advanced in January
2004.

(8) This commitment is related to the Operating Partnership's investment in a
private equity fund. The commitment is based on cash contributions and
distributions and does not consider equity gains or losses.

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

In addition, the Operating Partnership has entered into a contract to
acquire an office property for approximately $54.8 million, consisting of $19.2
million in cash and a $35.6 million loan. The acquisition is anticipated to
close in the first quarter of 2004 and is subject to customary closing
conditions.

LIQUIDITY OUTLOOK

The Operating Partnership expects to fund its short-term capital
requirements of approximately $53.9 million through a combination of, net cash
flow from operations, and borrowings under the Operating Partnership's credit
facility or additional debt facilities. As of December 31, 2003, the Operating
Partnership had maturing debt obligations of $350.4 million through December 31,
2004 (see "Debt Financing Arrangements" in this Item 7 for additional
information on debt maturities). The Operating Partnership plans to meet these
maturing obligation through refinancing or electing the extension option on the
Deutsche Bank-CMBS loan, cash flow from operations of the Residential
Development Properties, and extending the maturity date of the Fleet Term Note.

The Operating Partnership expects to meet its other short-term
liquidity requirements, consisting of normal recurring operating expenses,
principal and interest payment 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. The
Operating Partnership expects to fund the remainder of these short-term
liquidity requirements with borrowings under the Operating Partnership's credit

43

facility, return of capital from Residential Development Properties, proceeds
from the sale or joint venture of Properties, and borrowings under additional
debt facilities.

The Operating Partnership's long-term liquidity requirements as of
December 31, 2003, consist primarily of debt maturities after December 31, 2004,
which totaled approximately $2.2 billion (see "Debt Financing Arrangements" in
this Item 7 for additional information on debt maturities). The Operating
Partnership also has $4.5 million of long-term capital expenditure requirements.
The Operating Partnership expects to meet these long-term liquidity requirements
primarily through refinancing maturing debt with long-term secured and unsecured
debt and through other debt and equity financing alternatives as well as cash
proceeds received from the sale or joint venture of Properties.

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

- Additional proceeds from the Operating Partnership's Credit Facility
under which the Operating Partnership had up to $132.6 million of
borrowing capacity available as of December 31, 2003 and $259.6
million at February 29, 2004;

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

- Additional debt secured by existing underleveraged properties;

- Issuance of additional unsecured debt; and

- Equity offerings including preferred and/or convertible securities.

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

- The reduction in the operating results of the Properties supporting
the Operating Partnership's Credit Facility to a level that would
reduce the availability under the Credit Facility;

- A reduction in the operating results of the Properties could limit the
Operating Partnership's ability to refinance existing secured and
unsecured debt, or extend maturity dates;

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

- Restrictions under the Operating Partnership'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

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

The Operating Partnership's portion of unconsolidated debt maturing
through December 31, 2004 is $75.8 million. The Operating Partnership's portion
of unconsolidated debt maturing after December 31, 2004 is $318.6 million.
Unconsolidated debt is the liability of the unconsolidated entity, is typically
secured by that entity's property, and is non-recourse to the Operating
Partnership except where a guarantee exists.

44

OFF-BALANCE SHEET ARRANGEMENTS - GUARANTEE COMMITMENTS

The Operating Partnership's guarantees in place as of December 31,
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 Operating
Partnership to provide additional collateral to support the guarantees. The
Operating Partnership has not recorded a liability associated with these
guarantees as they were entered into prior to the adoption of FIN 45.

GUARANTEED AMOUNT MAXIMUM GUARANTEED
(in thousands) OUTSTANDING AT AMOUNT AT DECEMBER
DEBTOR DECEMBER 31, 2003 31, 2003
- -------------- ----------------- ------------------

CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 7,856 $ 7,856
Blue River Land Company, L.L.C.(2) (3) 3,492 6,300
Main Street Partners, L.P. - Letter of Credit (2) (4) 4,250 4,250
---------------- -----------------
Total Guarantees $ 15,598 $ 18,406
================ =================

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

(1) The Operating Partnership provides a $7.9 million letter of credit to
support the payment of interest and principal of the Eagle Ranch
Metropolitan District Revenue Development Bonds.

(2) See "Unconsolidated Investments - Unconsolidated Debt Analysis," in this
Item 7, for a description of the terms of this debt.

(3) 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 $5.0 million
outstanding at December 31, 2003 and the amount guaranteed was $3.5
million.

(4) The Operating Partnership 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.

CONTRACTUAL OBLIGATIONS

The table below presents, as of December 31, 2003, the Operating
Partnership's future scheduled payments due under these contractual obligations.

PAYMENTS DUE BY PERIOD

(in millions) TOTAL 2004 2005/2006 2007/2008 THEREAFTER
- ------------------------------------------- ------------ ----------- ----------- ----------- --------------

Long-term debt(1) $ 3,803.1 $ 510.5 $ 885.8 $ 561.9 $ 1,844.9
Operating lease obligations (ground leases) 109.2 2.2 4.4 4.4 98.2
Purchase obligations:
Hughes Center Properties (2) 89.9 89.9 - - -
Hughes Center undeveloped land (3) 10.0 10.0 - - -
Capital expenditure obligations (4) 58.4 53.9 4.5 - -
------------- ------------ ------------ ----------- -------------
Total contractual obligations (5) $ 4,070.6 $ 666.5 $ 894.7 $ 566.3 $ 1,943.1
============= ============ ============ =========== =============

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

(1) Amounts include scheduled principal and interest payments for consolidated
debt.

(2) This amount was funded in escrow and is included in "Restricted cash" on
the Operating Partnership's Consolidated Balance Sheets at December 31,
2003, for the Hughes Center Acquisition. See "Recent Developments -
Acquisition of Hughes Center" in this Item 7 for further information on the
Hughes Center acquisition.

(3) On March 1, 2004, in accordance with the agreement to acquire the Hughes
Center Properties, the Operating Partnership completed the purchase of two
tracts of undeveloped land in Hughes Center from the Rouse Company for
$10.0 million. The purchase was funded by a $7.5 million loan from the
Rouse Company and a draw on the Operating Partnership's credit facility.

(4) For further detail of capital expenditure obligations, see table under
"Liquidity Requirements" in this Item 7.

(5) As part of its ongoing operations, the Operating Partnership executes
operating lease agreements which generally provide customers with leasehold
improvement allowances. Committed leasehold improvement allowances for
leases executed over the past three years have averaged approximately $50.0
million per year. Leasehold improvement amounts are not included in the
table above.

45

DIVERSIFIED TENANT BASE

The Operating Partnership's top five tenants accounted for
approximately 11% of the Operating Partnership's total Office Segment rental
revenues for the year ended December 31, 2003. The loss of one or more of the
Operating Partnership's major tenants would have a temporary adverse effect on
the Operating Partnership's financial condition and results of operations until
the Operating Partnership is able to re-lease the space previously leased to
those tenants. Based on rental revenues from office leases in effect as of
December 31, 2003, no single tenant accounted for more than 5% of the Operating
Partnership's total Office Segment rental revenues for 2003.

EQUITY AND DEBT FINANCING

EQUITY FINANCING

SERIES A PREFERRED OFFERING

On January 15, 2004, the Company completed an offering (the "January
2004 Series A Preferred Offering") of an additional 3,400,000 Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares") at a
$21.98 per share price and with a liquidation preference of $25.00 per share for
aggregate total offering proceeds of approximately $74.7 million. The Series A
Preferred Shares are convertible at any time, in whole or in part, at the option
of the holders, into common shares of the Company at a conversion price of
$40.86 per common share (equivalent to a conversion rate of 0.6119 common
shares per Series A Preferred Share), subject to adjustment in certain
circumstances. The Series A Preferred Shares have no stated maturity and are not
subject to sinking fund or mandatory redemption. At any time, the Series A
Preferred Shares may be redeemed, at the Company's option, by paying $25.00 per
share plus any accumulated accrued and unpaid distributions. Dividends on the
additional Series A Preferred Shares are cumulative from November 16, 2003, and
are payable quarterly in arrears on the fifteenth of February, May, August and
November, commencing February 16, 2004. The annual fixed dividend on the Series
A Preferred Shares is $1.6875 per share.

In connection with the January 2004 Series A Preferred Offering, the
Operating Partnership issued additional Series A Preferred Units to the Company
in exchange for the contribution of the net proceeds, after underwriting
discounts and other offering costs of approximately $3.7 million, of
approximately $71.0 million. The Operating Partnership used the net proceeds to
pay down the Operating Partnership's credit facility.

SHELF REGISTRATION STATEMENT

On October 29, 1997, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the SEC relating to the future
offering of up to an aggregate of $1.5 billion of common shares, preferred
shares and warrants exercisable for common shares. Management believes the Shelf
Registration Statement will provide the Operating Partnership with more
efficient and immediate access to capital markets when considered appropriate.
As of March 5, 2004, approximately $510.0 million was available under the Shelf
Registration Statement for the issuance of securities.

46

DEBT FINANCING ARRANGEMENTS

The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of December 31, 2003, are shown below:

BALANCE
OUTSTANDING AT INTEREST RATE AT
MAXIMUM DECEMBER 31, DECEMBER 31, MATURITY
DESCRIPTION (1) BORROWINGS 2003 2003 DATE
- ------------------------------------- ----------- --------------- ---------------- ----------
SECURED FIXED RATE DEBT: (dollars in thousands)

AEGON Partnership Note $ 260,101 $ 260,101 7.53 % July 2009
LaSalle Note I (2) 235,037 235,037 7.83 August 2027
JP Morgan Mortgage Note (3) 191,311 191,311 8.31 October 2016
LaSalle Note II(4) 159,560 159,560 7.79 March 2028
Cigna Note 70,000 70,000 5.22 June 2010
Bank of America Note (5) 38,000 38,000 5.53 May 2013
Metropolitan Life Note V 37,506 37,506 8.49 December 2005
Northwestern Life Note 26,000 26,000 4.94 November 2008
Northwestern Life II (6) 10,713 10,713 7.40 July 2007
Woodmen of the World Note 8,500 8,500 8.20 April 2009
Normura Funding VI Note (7) 7,853 7,853 10.07 July 2020
Construction, Acquisition and
other obligations for various CRDI
and MVDC projects 10,827 10,827 2.90 to 10.50 July 2004 to May 2008
---------- ---------- -------------
Subtotal/Weighted Average $1,055,408 $1,055,408 7.52 %
---------- ---------- -------------
UNSECURED FIXED RATE DEBT:

The 2009 Notes (8) $ 375,000 $ 375,000 9.25 % April 2009
The 2007 Notes (8) 250,000 250,000 7.50 September 2007
---------- ---------- -------------
Subtotal/Weighted Average $ 625,000 $ 625,000 8.55 %
---------- ---------- -------------
SECURED VARIABLE RATE DEBT:
Fleet Fund I and II Term Loan (9) $ 264,214 $ 264,214 4.63 % May 2005
Deutsche Bank - CMBS Loan (10) 220,000 220,000 5.84 May 2004
Fleet Term Loan (9) (11) 75,000 75,000 5.62 February 2004
National Bank of Arizona 51,825 40,588 4.00 to 5.00 Nov 04 to Dec 05
FHI Finance Loan 10,000 2,959 5.67 September 2009
Construction, Acquisition and
other obligations for various CRDI
and MVDC projects 82,942 36,530 4.00 to 5.00 Feb 2004 to Sep 2008
---------- ---------- -------------
Subtotal/Weighted Average $ 703,981 $ 639,291 5.04 %
---------- ---------- -------------

UNSECURED VARIABLE RATE DEBT:
Credit Facility (12) $ 379,504 $ 239,000 (13) 3.35 % May 2005
---------- ---------- -------------
Subtotal/Weighted Average $ 379,504 $ 239,000 3.35 %
---------- ---------- -------------
TOTAL/WEIGHTED AVERAGE $2,763,893 $2,558,699 6.78 %(14)
========== ========== =============
AVERAGE REMAINING TERM 6.8 years

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

(1) For more information regarding the terms of the Operating Partnership's
debt financing arrangements including the amounts payable at maturity,
properties securing the Operating Partnership's secured debt and the method
of calculation of the interest rate for the Operating Partnership's
variable rate debt, see Note 11, "Notes Payable and Borrowings under Credit
Facility," included in Item 8, "Financial Statements and Supplementary
Data."

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

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

(4) In January 2004, the Operating Partnership purchased $170.0 million of U.S.
Treasury and government sponsored agency securities and placed them into
a collateral account for the sole purpose of funding payments of principal
and interest on this loan. The securities have interest and maturities
that coincide with the scheduled debt service payments of the loan and
ultimate payment of principal in March 2006. See further information
provided in this "Debt Financing Arrangements" section of Item 7.

(5) The Operating Partnership assumed this note in connection with the
acquisition of the Colonnade. See "Recent Developments" in this Item 7 for
additional information regarding the acquisition of the Colonnade.

(6) The Operating Partnership assumed this loan in connection with the Hughes
Center acquisitions. The outstanding principal balance of this loan at
maturity will be approximately $8.7 million. The balance at December 31,
2003 includes approximately $1.1 million of premium which will be amortized
over the term of the loan. The effective interest rate, including the
premium, is 3.8%. See "Recent Developments" in this Item 7 for additional
information regarding the Hughes Center acquisitions.

(7) In July 2010, the interest rate will adjust based on current interest rates
at that time. It is the Operating Partnership's intention to repay the note
in full at such time (July 2010) by making a final payment of approximately
$6.1 million.

(8) To incur any additional debt, the indenture requires the Operating
Partnership to meet thresholds for a number of customary financial and
other covenants, including maximum leverage ratios, minimum debt service
coverage ratios, maximum secured debt as a percentage of total
undepreciated assets, and ongoing maintenance of unencumbered assets.
Additionally, as long as the 2009 Notes are not rated investment grade,
there are restrictions on the Operating Partnership's ability to make
certain payments, including distributions to unitholders and investments.

(9) The Fleet Fund I and II Term Loan requires the Operating Partnership to
maintain compliance with a number of customary financial and other
covenants on an ongoing basis, including leverage ratios, debt service
coverage ratios, limitations on additional secured and total indebtedness,
limitation on distributions, and a minimum net worth requirement, and with
respect solely to Funding I and Funding II Properties, adjusted net
operating income to actual debt service and adjusted net operating income
to pro forma debt service.

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

(11) In February 2004, the Operating Partnership exercised its option to extend
this loan until February 2007.

(12) The Credit Facility requires the Operating Partnership to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios, debt service coverage ratios,
limitations on additional secured and total indebtedness,

47

limitations on distributions, and a minimum net worth requirement, and with
respect solely to Funding VIII, adjusted net operating income to actual
debt service, adjusted net operating income to pro forma debt service,
office assets as a percentage of total assets, and minimum leasing
requirements. In addition, availability under the Credit Facility is
limited by total indebtedness to total asset value.

(13) The outstanding balance excludes letters of credit issued under the credit
facility of $7.9 million.

(14) The overall weighted average interest rate does not include the effect of
the Operating Partnership's cash flow hedge agreements. Including the
effect of these agreements, the overall weighted average interest rate
would have been 6.84%.

The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these types of covenants. The significant
financial covenants relating to the Operating Partnership's debt are summarized
in the notes to the preceding table. The affirmative covenants to which the
Operating Partnership is subject under its debt agreements include, among
others, provisions requiring the Operating Partnership to comply with all laws
relating to operation of any Properties securing the debt, maintain those
Properties in good repair and working order, maintain adequate insurance and
provide timely financial information. The negative covenants under the Operating
Partnership's debt agreements generally restrict the Operating Partnership's
ability to transfer or pledge assets or incur additional debt at a subsidiary
level, limit the Operating Partnership's ability to engage in transactions with
affiliates and place conditions on the Operating Partnership's or a subsidiary's
ability to make distributions.

Failure to comply with covenants generally will result in an event of
default under that debt instrument. Any uncured or unwaived events of default
under the Operating Partnership's loans can trigger an increase in interest
rates, an acceleration of payment on the loan in default, and for the Operating
Partnership's secured debt, foreclosure on the Property securing the debt, and
could cause the Credit Facility to become unavailable to the Operating
Partnership. In addition, an event of default by the Operating Partnership or
any of its subsidiaries with respect to any indebtedness in excess of $5.0
million generally will result in an event of default under the Credit Facility,
2007 Bonds, 2009 Bonds, the Fleet Fund I and II Term Loan and the Fleet Term
Loan after the notice and cure periods for the other indebtedness have passed.
As a result, any uncured or unwaived event of default could have an adverse
effect on the Operating Partnership's business, financial condition, or
liquidity.

The Operating Partnership'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 year ended December 31, 2003, there were
no circumstances that required prepayment penalties or increased collateral
related to the Operating Partnership's existing debt.

DEBT MODIFICATIONS

In April 2003, the Operating Partnership obtained modifications to
certain definitions relating to financial and other covenants in the Credit
Facility and $275.0 million Fleet Fund I and II Term Loan. The modifications did
not alter the Operating Partnership's borrowing capacity, scheduled principal
payments, interest rates, or maturity dates.

In October 2003, the Operating Partnership received approval from the
lending group for the Credit Facility and $275.0 million Fleet Funding I and II
Term Loan for less restrictive key financial and other covenants in each
facility. The Operating Partnership requested these modifications due to the
slowdown in the general business environment and its impact on the Operating
Partnership's core business cash flow. In exchange for approving the
modifications, the Operating Partnership agreed to an increase in the interest
rate spread over LIBOR by 25 basis points (approximately $1.6 million annual
interest expense based on maximum borrowings) for both the Credit Facility and
the Term Loan.

As of December 31, 2003, no event of default had occurred, and the
Operating Partnership was in compliance with all of its financial covenants
related to its outstanding debt.

48

ADDITIONAL DEBT FINANCING

In January 2004, the Operating Partnership entered into an agreement
with Bank of America Securities LLC ("Bank of America") and Deutsche Bank for an
additional $275.0 million secured loan. The loan has an initial two-year term
maturing in January 2006, with a one-year extension option and bears interest at
an initial annual rate of LIBOR plus 275 basis points. The rate decreased to
LIBOR plus 225 basis points upon closing of syndication of the loan in February
2004. The loan is secured by 10 of the 12 properties that were in Funding II at
December 31, 2003. The loan is subject to the same covenant requirements as the
credit facility. The net proceeds were used to reduce the outstanding principal
balance of the $275.0 million Fleet Fund I and II Term Loan by approximately
$104.2 million. The remaining proceeds were used to purchase U.S. Treasury and
government sponsored agency securities in an amount sufficient to defease the
remaining portion of LaSalle Note II.

DEFEASANCE OF LASALLE NOTE II

In December 2003, the Operating Partnership purchased $9.6 million of
U.S. Treasury and government sponsored agency securities and placed those
securities into a collateral account for the sole purpose of funding payments of
principal and interest payments on approximately $8.7 million of the LaSalle
Note II, in order to release the lien on the Las Colinas retail property, which
was held in Funding II and sold on December 15, 2003. The initial weighted
average yield on the securities was 2.10%. In January 2004, the Operating
Partnership purchased an additional $170.0 million of U.S. Treasury and
government sponsored agency securities with an initial weighted average yield of
1.76% and placed those securities into a collateral account for the sole purpose
of funding payments of principal and interest on the remainder of the LaSalle
Note II, in order to release the lien on the remaining properties securing the
loan. These marketable securities have interest and maturities that coincide
with the scheduled debt service payments of the senior notes and ultimate
payment of principal.

UNCONSOLIDATED DEBT ARRANGEMENTS

As of December 31, 2003, the total debt of the unconsolidated joint
ventures and investments in which the Operating Partnership had ownership
interests was $1.1 billion, of which the Operating Partnership's share was
$394.4 million. The Operating Partnership had guaranteed $7.7 million of this
debt as of December 31, 2003. Additional information relating to the Operating
Partnership's unconsolidated debt financing arrangements is contained in
"Unconsolidated Investments - Unconsolidated Debt Analysis," in this Item 7.

CONSOLIDATED AND UNCONSOLIDATED DEBT ARRANGEMENTS

The following tables show summary information about the Operating
Partnership's debt, including its pro rata share of unconsolidated debt, as of
December 31, 2003.

TOTAL SHARE OF
(in thousands) OPERATING UNCONSOLIDATED
PARTNERSHIP DEBT DEBT TOTAL(1)
- --------------------- --------------------- ----------------- ------------

Fixed Rate Debt $ 1,680,408 $326,608 $ 2,007,016
Variable Rate Debt 878,291 67,774 946,065
----------- -------- -----------
Total Debt $ 2,558,699 $394,382 $ 2,953,081
=========== ======== ===========

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

(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $542.5 million of hedged variable rate debt, are
86% and 14%, respectively.

49

Listed below are the aggregate required principal payments by year as
of December 31, 2003, excluding extension options. Scheduled principal
installments and amounts due at maturity are included. The table assumes no
prepayment of principal will occur.

UNSECURED TOTAL
DEBT OPERATING SHARE OF
SECURED UNSECURED LINE OF PARTNERSHIP UNCONSOLIDATED
(in thousands) DEBT DEBT CREDIT DEBT DEBT TOTAL
- -------------- --------------- --------------- --------------- ----------------- ---------------- ------------

2004 $ 350,385 $ - $ - $ 350,385 $ 75,830 $ 426,215
2005 359,922 - 239,000 598,922 9,916 608,838
2006 20,985 - - 20,985 23,816 44,801
2007 35,895 250,000 - 285,895 46,715 332,610
2008 48,356 - - 48,356 43,007 91,363
Thereafter 879,156 375,000 - 1,254,156 195,098 1,449,254
--------------- --------------- --------------- ----------------- ---------------- ------------
$ 1,694,699 $ 625,000 $ 239,000 $ 2,558,699 $ 394,382 $ 2,953,081
=============== =============== =============== ================= ================ ============

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

- short term and long term capital needs;

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

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

- the effect of additional debt on existing covenants;

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

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

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

As of December 31, 2003, the Operating Partnership had entered into
four cash flow hedge agreements, which are accounted for in conformity with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended.

50

The following table shows information regarding the Operating
Partnership's cash flow hedge agreements for the year ended December 31, 2003,
and additional interest expense and unrealized gains (losses) recorded in
Accumulated Other Comprehensive Income ("OCI") for the year ended December 31,
2003.

UNREALIZED
ISSUE NOTIONAL MATURITY REFERENCE FAIR ADDITIONAL GAINS (LOSSES)
DATE AMOUNT DATE RATE MARKET VALUE INTEREST EXPENSE IN OCI
- -------------- ---------- -------- --------- ---------------- -------------------- ------------------

(in thousands)
- --------------
9/1/99 $ 200,000 9/2/03 6.183% $ - $ 6,562 $ 6,506
5/15/01 200,000 2/3/03 7.110% - 1,048 1,057
4/18/00 100,000 4/18/04 6.760% (1,695) 5,619 5,185
9/02/03 200,000 9/1/06 3.723% (6,597) 1,741 (1,899)
2/15/03 100,000 2/15/06 3.253% (2,340) 1,827 85
2/15/03 100,000 2/15/06 3.255% (2,345) 1,830 87
------------- -------------- --------------
$ (12,977) $ 18,627 $ 11,021
============= ============== ==============

The Operating Partnership has designated its four 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. The cash flow hedges have
been and are expected to remain highly effective. Changes in the fair value of
these highly effective hedging instruments are recorded in Accumulated Other
Comprehensive Income. The effective portion that has been deferred in
Accumulated Other Comprehensive Income will be reclassified to earnings as
interest expense when the hedged items impact earnings. If a cash flow hedge
falls outside 80%-125% effectiveness for a quarter, all changes in the fair
value of the cash flow hedge for the quarter will be recognized in earnings
during the current period. If it is determined based on prospective testing that
it is no longer likely a hedge will be highly effective on a prospective basis,
the hedge will no longer be designated as a cash flow hedge in conformity with
SFAS No. 133, as amended. The Operating Partnership had no ineffectiveness
related to its cash flow hedges, resulting in no earnings impact for the year
ended December 31, 2003.

Over the next 12 months, an estimated $10.1 million will be
reclassified from Accumulated Other Comprehensive Income to interest expense and
charged against earnings related to the effective portions of the cash flow
hedge agreements.

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

The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest thereon as of and for the year
ended December 31, 2003. Unlike the additional interest on the Operating
Partnership's cash flow hedges which was expensed, the additional interest on
CRDI's cash flow hedges was capitalized, as it is related to debt incurred for
projects that are currently under development. Also presented are the unrealized
gains in Accumulated Other Comprehensive Income for the year ended December 31,
2003.

ADDITIONAL UNREALIZED
ISSUE NOTIONAL MATURITY REFERENCE FAIR CAPITALIZED GAINS IN
DATE AMOUNT DATE RATE MARKET VALUE INTEREST OCI
- ---------- --------- -------- ---------- ------------ ----------- -----------
(in thousands)

9/4/01 $ 4,650 9/4/03 4.12% $ - $ 91 $ 101
9/4/01 3,700 9/4/03 4.12% - 72 79
------- ------ -------
$ - $ 163 $ 180
======= ====== =======

CRDI's hedges were perfectly effective and no earnings impact was
experienced for the year ended December 31, 2003.

51

INTEREST RATE CAPS

In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America 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
related loan. The agreement limits the interest rate on the notional amount to a
maximum prime rate, as defined in the agreement, of 4.1%.

RECENT DEVELOPMENTS

DISPOSITION OF THE WOODLANDS

On December 31, 2003, the Operating Partnership sold all of its
interests in The Woodlands, Texas, to a subsidiary of the Rouse Company. The
interests sold by the Operating Partnership consist of:

- a 52.5% economic interest, including a 10% earned promotional
interest, in WLDC, the partnership through which the Operating
Partnership owned its interest in The Woodlands residential
development property, and a promissory note due in 2007 in the
original principal amount of $10.6 million from WLDC;

- a 75% interest in WOE, the partnership through which the Operating
Partnership owned its interests in four Office Properties located in
The Woodlands;

- a 52.5% economic interest, including a 10% earned promotional
interest, in Woodlands CPC; and

- a 52.5% economic interest, including a 10% earned promotional
interest, in The Woodlands Operating Company, L.P.

Total consideration to the Operating Partnership for the sale of its
interests in The Woodlands was $387.0 million, approximately $202.8 million in
cash and approximately $184.2 million in assumption of debt by the purchaser.
The Operating Partnership received approximately $18.0 million of the $202.8
million cash component prior to closing in the form of partnership distributions
net of working capital adjustments. The debt represents 52.5% of the debt of the
unconsolidated partnerships through which the Operating Partnership owned its
interests in The Woodlands. The sale resulted in a net gain of approximately
$83.9 million, $49.2 million net of tax, to the Operating Partnership. The
Operating Partnership allocated $15.0 million of the total consideration, which
generated a $2.3 million net loss, to the sale of its four remaining Office
Properties in The Woodlands. These Office Properties were consolidated by the
Operating Partnership and included in its Office Segment.

The Operating Partnership used approximately $119.2 million of the
proceeds from the sale of its interests in The Woodlands to fund a portion of
the acquisition from the Rouse Company of its interests in Hughes Center in Las
Vegas, Nevada, in the transaction described below. The remaining net proceeds
from the sale of The Woodlands were used to reduce amounts outstanding under the
Operating Partnership's credit facility.

ACQUISITION OF HUGHES CENTER

In November 2003, the Operating Partnership entered into a contract to
purchase from the Rouse Company its investment in the Hughes Center office
portfolio in Las Vegas, Nevada. Hughes Center contains seven Class A Office
Properties and nine retail parcels. The total purchase price for the seven
Office Properties and the nine retail parcels was approximately $214.2 million,
$119.2 million in cash and the remaining $95.0 million in assumed debt.

On December 31, 2003, the Operating Partnership acquired two of the
Class A Office Properties and two retail parcels located within Hughes Center
for approximately $38.9 million, funded by the Operating Partnership's
assumption of a $9.6 million mortgage loan from The Northwestern Mutual Life
Insurance Operating Partnership and by a portion of the proceeds from the sale
of the Operating Partnership's interests in The Woodlands. These Office
Properties are wholly-owned and included in the Office Segment.

Subsequent to December 31, 2003, the Operating Partnership acquired an
additional five Class A Office Properties and seven retail parcels located
within Hughes Center. One of these Office Properties is owned through a joint
venture in which the Operating Partnership owns a 67% interest. The remaining
four Office Properties are wholly-owned by the Operating Partnership. The
Operating Partnership acquired these five Office Properties and seven retail

52

parcels for approximately $175.3 million, funded by the Operating Partnership's
assumption of approximately $85.4 million in mortgage loans and by a portion of
the proceeds from the sale of the Operating Partnership's interests in The
Woodlands.

On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Operating Partnership completed the purchase of
two tracts of undeveloped land in Hughes Center suitable for up to 400,000
square feet of office space, within Hughes Center for approximately $10.0
million. The purchase was funded by approximately $7.5 million in loans from the
Rouse Company and a draw on the Operating Partnership's credit facility.

OTHER ACQUISITIONS

On August 26, 2003, the Operating Partnership acquired The Colonnade,
an 11-story, 216,000 square foot Class A office tower, located in the Coral
Gables submarket of Coral Gables in Miami, Florida. The Operating Partnership
acquired the Office Property for approximately $51.4 million, funded by the
Operating Partnership's assumption of a $38.0 million loan from Bank of America
and a draw on the Operating Partnership's credit facility. This Office Property
is wholly-owned and included in the Operating Partnership's Office Segment.

On August 14, 2003, CRDI, a consolidated subsidiary of the Operating
Partnership, completed the purchase of a tract of undeveloped land in Eagle
County, Colorado, for approximately $15.5 million, funded by a draw on the
Operating Partnership's credit facility. This undeveloped land is wholly-owned
and included in the Residential Development Segment.

OTHER DISPOSITIONS

On November 21, 2003, Manalapan Hotel Partners, L.L.C., owned 50% by
the Operating Partnership and 50% by WB Palm Beach Investors, L.L.C., sold the
Ritz Carlton Palm Beach Resort/Hotel Property in Palm Beach, Florida. The sale
generated net proceeds of approximately $34.7 million, of which the Operating
Partnership's portion was approximately $18.0 million, and resulted in a net
gain of approximately $6.7 million, of which the Operating Partnership's portion
was approximately $3.9 million. The proceeds from the sale were used primarily
to pay down the Operating Partnership's credit facility. This Property was an
unconsolidated investment and included in the Resort/Hotel Segment.

On December 15, 2003, the Operating Partnership completed the sale of
the Las Colinas Plaza retail property in Dallas, Texas. The sale generated net
proceeds of approximately $20.6 million and a net gain of approximately $14.5
million. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This Property was wholly-owned and
included in the Operating Partnership's Office Segment.

53

During the year ended December 31, 2003, the Operating Partnership sold four
parcels of undeveloped land. The following table presents the dispositions of
undeveloped land for the year ended December 31, 2003, including the location of
the land, acreage, net proceeds received and net gain on sale.

(dollars in millions)
NET NET
DATE LOCATION ACREAGE PROCEEDS GAIN
- ---------------------- -------------- ------- -------------------------

April 24, 2003 Dallas, Texas 0.5 $ 0.3 $ 0.3
May 15, 2003 Coppell, Texas 24.8 3.0 1.1
June 27, 2003 Houston, Texas 3.5 2.1(1) 8.9
September 30, 2003 Houston, Texas 3.1 5.3 2.4
----- ----------- ----------
31.9 $ 10.7 $ 12.7
===== =========== ==========

- ---------------------------
(1) The sale included 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.

JOINT VENTURES

On October 8, 2003, the Operating Partnership entered into a joint
venture, Crescent One BriarLake L.P., with affiliates of J.P. Morgan Fleming
Asset Management, Inc. The joint venture purchased BriarLake Plaza, located in
the Westchase submarket of Houston, Texas, for approximately $74.4 million. The
Property is a 20-story, 502,000 square foot Class A office building. The
affiliates of J.P. Morgan Fleming Asset Management, Inc. own a 70% interest, and
the Operating Partnership owns a 30% interest, in the joint venture. The initial
cash equity contribution to the joint venture was $24.4 million, of which the
Operating Partnership's portion was $7.3 million. The Operating Partnership's
equity contribution and an additional working capital contribution of $0.5
million were funded primarily through a draw under the Operating Partnership's
credit facility. The remainder of the purchase price of the Property was funded
by a secured loan to the joint venture in the amount of $50.0 million. None of
the mortgage financing at the joint venture level is guaranteed by the Operating
Partnership. The Operating Partnership manages and leases the Office Property on
a fee basis. This Office Property is an unconsolidated investment and included
in the Operating Partnership's Office Segment.

BEHAVIORAL HEALTHCARE PROPERTIES

As of December 31, 2000, the Operating Partnership owned 28 behavioral
healthcare properties in 24 states. The former tenant of the behavioral
healthcare properties declared bankruptcy and ceased operations in 2000.

This table presents the dispositions of behavioral healthcare
properties by year including the number of properties sold, net proceeds
received, gains on sales and impairments recognized. Depreciation has not been
recognized since the dates the behavioral healthcare properties were classified
as held for sale.

(dollars in millions) Number of
Properties
Year Sold Net Proceeds Gain Impairments(2)
- --------------------- ---------- ----------------- --------- ------------------

2003 6 $ 11.2(1) $ - $ 4.8
2002 3 4.6 - 3.2
2001 18 34.7 1.6 8.5
2000 60 233.7 58.6 9.3

- -------------------------------
(1) The sale of one property on February 27, 2003, also generated a note
receivable in the amount of $0.7 million, with interest only payments
beginning March 2003, through maturity in February 2005. The interest rate
is the prime rate, as defined in the note, plus 1.0%.

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

As of December 31, 2003, the Operating Partnership owned one behavioral
healthcare property. After recognition of a $0.9 million impairment relating to
this property in 2003, the carrying value of the remaining behavioral

54

healthcare property at December 31, 2003 was approximately $2.3 million. The
Operating Partnership has entered into a contract to sell the property and is
anticipating the sale will close in the second quarter of 2004.

SHARE REPURCHASE PROGRAM

The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500.0
million to $800.0 million the amount of outstanding common shares that can be
repurchased from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program"). There were no share repurchases
for the year ended December 31, 2003. As of December 31, 2003, the Company had
repurchased 20,256,423 common shares under the Share Repurchase Program, at an
aggregate cost of approximately $386.9 million, resulting in an average
repurchase price of $19.10 per common share. The repurchase of common shares by
the Company will decrease the Company's limited partner interest in the
Operating Partnership, which will, result in an increase in net income per unit.

IMPAIRMENTS

The significant impairment charges recognized by the Operating
Partnership for the year ended December 31, 2003 are described below. The
Operating Partnership's policy for impairment recognition is discussed in
"Significant Accounting Policies - Critical Accounting Policies" in this Item 7.

Office Properties

For the year ended December 31, 2003, the Operating Partnership
recognized impairment charges of $24.1 million on three Office Properties
classified as held for sale. The impairment charges are included in "Impairment
charges related to real estate assets from discontinued operations" in the
Operating Partnership's Consolidated Statements of Operations. The impairment
charges by Office Property are: $16.4 million for 1800 West Loop South in
Houston, Texas; $4.3 million for Liberty Plaza in Dallas, Texas; and $3.4
million for 12404 Park Central in Dallas, Texas. The impairment charge
represents the difference between the carrying value of the property and the
estimated sales price less costs to sell.

Behavioral Healthcare Properties

Information regarding impairment charges on the behavioral healthcare
properties is contained in "Recent Developments - Behavioral Healthcare
Properties" in this Item 7.

HBCLP, Inc.

On December 31, 2003, the Operating Partnership executed an agreement
with HBCLP, Inc., an unconsolidated investment of the Operating Partnership that
primarily held real estate investments and marketable securities, pursuant to
which the Operating Partnership surrendered 100% of its investment in HBCLP,
Inc. and released HBCLP, Inc. from its note obligation to the Operating
Partnership in exchange for cash of $3.0 million and other assets valued at
approximately $8.7 million, resulting in an impairment charge of approximately
$6.5 million reflected in "Impairment charges related to real estate assets" in
the Operating Partnership's Consolidated Statements of Operations.

Other

On June 28, 2002, the Operating Partnership purchased the home of an
executive officer to facilitate the hiring and relocation of this executive
officer. The purchase price for the home was approximately $2.6 million. The
Operating Partnership is actively marketing this asset for sale and recognized
an impairment charge of approximately $0.6 million, net of taxes, during the
year ended December 31, 2003, based on market conditions.

55

UNCONSOLIDATED INVESTMENTS

INVESTMENTS IN UNCONSOLIDATED COMPANIES

The Operating Partnership has investments of 20% to 50% in eight
unconsolidated joint ventures that own eight Office Properties. In addition,
the Operating Partnership, through ownership interests of 50% or less, or
ownership of non-voting interests only, has other unconsolidated investments.
These investments are accounted for using the equity method of accounting.

The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of December 31,
2003.

OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF DECEMBER 31, 2003
- -------------------------------------------------- ------------------------------ ------------------------

Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, LLC Office (Miami Center - Miami) 40.0% (2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0% (4)
Houston PT Four Westlake Park Office Limited Office (Four Westlake Park-Houston) 20.0% (4)
Partnership
Houston PT Three Westlake Park Office Limited Office (Three Westlake Park - 20.0% (4)
Partnership Houston)
Crescent Five Post Oak Park, L.P. Office (Five Post Oak - Houston) 30.0% (5)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0% (6)
The Woodlands Commercial Properties Company, L.P. Office - (7)(8)
The Woodlands Land Development Company, L.P. Residential Development - (7)(8)
Blue River Land Company, L.L.C. Residential Development 50.0% (9)
EW Deer Valley, L.L.C. Residential Development 41.7% (10)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) - (11)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (12)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (13)
CR License, L.L.C. Other 30.0% (14)
The Woodlands Operating Company, L.P. Other - (7)(8)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (15)
SunTX Fulcrum Fund, L.P. ("SunTx") Other 29.7% (16)
G2 Opportunity Fund, L.P. ("G2") Other 12.5% (17)

(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, LLC 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 GE.

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

(6) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JP Morgan Fleming Asset Management, Inc.

(7) The Operating Partnership sold its 52.5% economic interest, including a 10%
earned promotional interest, in each of the Woodlands CPC, WLDC and The
Woodlands Operating Company, L.P. on December 31, 2003.

(8) Distributions were made to partners based on specified payout percentages.
During the year ended December 31, 2003, the payout percentage to the
Operating Partnership was 52.5%.

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

(10) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Operating Partnership. EW Deer Valley, L.L.C. was formed
to acquire, hold and dispose of its 3.3% ownership interest in Empire
Mountain Village, L.L.C.

(11) The Operating Partnership sold its 50% interest in Manalapan on November
21, 2003.

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

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

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

(15) 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 Operating Partnership's
Resort/Hotel Properties.

(16) SunTx's objective is to invest in a portfolio of acquisitions that offer
the potential for substantial capital appreciation. The remaining 70.3% of
SunTx is owned by a group of individuals unrelated to the Operating
Partnership. The Operating Partnership's investment at December 31, 2003,
was $10.6 million.

(17) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. The remaining
87.5% interest in G2 is owned by Goff-Moore Strategic Partners, L.P.
("GMSPLP") and by parties unrelated to the Operating Partnership. G2 is
managed and controlled by an entity that is owned equally by GMSPLP and
GMAC Commercial Mortgage Corporation

56

("GMACCM"). See Note 21, "Related Party Transactions," for information
regarding the ownership interests of trust managers and officers of the
Operating Partnership in GMSPLP.

UNCONSOLIDATED DEBT ANALYSIS

The following table shows, as of December 31, 2003, information about
the Operating Partnership's share of unconsolidated fixed and variable rate debt
and does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.

OPERATING
PARTNERSHIP
BALANCE SHARE OF
OUTSTANDING BALANCE INTEREST
AT AT RATE AT
DECEMBER DECEMBER 31, DECEMBER 31,
DESCRIPTION 31, 2003 2003 2003
- ----------- ------------- ------------ ------------
(in thousands)

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40% Operating
Partnership
Goldman Sachs (1) $ 496,123 $ 198,449 6.89%
Various Capital Leases 36,270 14,509 4.84 to 13.63%
Various Mortgage Notes 16,383 6,553 7.00 to 12.88%
---------- ---------
$ 548,776 $ 219,511
---------- ---------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership $ 130,559 $ 65,279 5.52%
(2)(3)(4)
Crescent 5 Houston Center, L.P. - 25% Operating 90,000 22,500 5.00%
Partnership
Crescent Miami Center, LLC - 40% Operating Partnership 81,000 32,400 5.04%
Crescent One BriarLake Plaza, L.P. - 30% Operating 50,000 15,000 5.40%
Partnership
Houston PT Four Westlake Office Limited Partnership - 48,087 9,617 7.13%
20% Operating Partnership
Crescent Five Post Oak Park, L.P. - 30% Operating 45,000 13,500 4.82%
Partnership
Austin PT BK One Tower Office Limited Partnership - 20% 37,401 7,480 7.13%
Operating Partnership
Houston PT Three Westlake Office Limited Partnership - 33,000 6,600 5.61%
20% Operating Partnership
---------- ---------
$ 515,047 $ 172,376
---------- ---------
RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50% Operating
Partnership (5) $ 4,989 $ 2,495 4.12%
---------- ---------
$ 4,989 $ 2,495
---------- ---------
---------- ---------
TOTAL UNCONSOLIDATED DEBT $1,068,812 $ 394,382
---------- ---------
FIXED RATE/WEIGHTED AVERAGE 6.66%
VARIABLE RATE/WEIGHTED AVERAGE 5.47%
----
TOTAL WEIGHTED AVERAGE 6.45%
====

FIXED/VARIABLE
DESCRIPTION MATURITY DATE SECURED/UNSECURED
- ----------- ------------- ------------------

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40% Operating
Partnership
Goldman Sachs (1) 5/11/2023 Fixed/Secured
Various Capital Leases 6/1/2006 to 4/1/2017 Fixed/Secured
Various Mortgage Notes 4/1/2004 to 4/1/2009 Fixed/Secured

OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership 12/1/2004 Variable/Secured
(2)(3)(4)
Crescent 5 Houston Center, L.P. - 25% Operating 10/1/2008 Fixed/Secured
Partnership
Crescent Miami Center, LLC - 40% Operating Partnership 9/25/2007 Fixed/Secured
Crescent One BriarLake Plaza, L.P. - 30% Operating 11/1/2010 Fixed/Secured
Partnership
Houston PT Four Westlake Office Limited Partnership - 8/1/2006 Fixed/Secured
20% Operating Partnership
Crescent Five Post Oak Park, L.P. - 30% Operating 1/1/2008 Fixed/Secured
Partnership
Austin PT BK One Tower Office Limited Partnership - 20% 8/1/2006 Fixed/Secured
Operating Partnership
Houston PT Three Westlake Office Limited Partnership - 9/1/2007 Fixed/Secured
20% Operating Partnership

RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50% Operating
Partnership (5) 6/30/2004 Variable/Secured

TOTAL UNCONSOLIDATED DEBT

FIXED RATE/WEIGHTED AVERAGE 13.8 years
VARIABLE RATE/WEIGHTED AVERAGE 0.9 years
----------
TOTAL WEIGHTED AVERAGE 11.6 years
==========

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

(1) URS Real Estate, L.P. and Americold Real Estate, L.P., subsidiaries of the
Temperature-Controlled Logistics Corporation, expect to repay this note on
the Optional Prepayment Date of April 11, 2008. The average weighted
average maturity would be 4.21 years based on this date.

(2) Senior Note - Note A: $82.2 million at variable interest rate, LIBOR + 189
basis points, $4.8 million at variable interest rate, LIBOR + 250 basis
points with a LIBOR floor of 2.50%. Note B: $24.2 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
Mezzanine Note - $19.3 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 loan has two one-year extension options.

(4) The Operating Partnership and its joint venture partner each obtained a
separate Letter of Credit to guarantee the repayment of up to $4.3 million
each of principal of the Main Street Partners, L.P. loan.

(5) The variable rate loan has an interest rate of LIBOR + 300 basis points.
East West Resort Development III, L.P. provides an unconditional guarantee
of up to 70% of the maximum $9.0 million available under this facility with
U.S. Bank National Association. There was approximately $5.0 million
outstanding at December 31, 2003 and the guarantee was equal to $3.5
million.

57

The following table shows, as of December 31, 2003, information
about the Operating Partnership's share of unconsolidated fixed and variable
rate debt and does not take into account any extension options, hedge
arrangements or the entities' anticipated pay-off dates.

PERCENTAGE OF WEIGHTED WEIGHTED AVERAGE
(in thousands) BALANCE DEBT AVERAGE RATE MATURITY
- ------------------- ------------- -------------- ------------ -----------------

Fixed Rate Debt $ 326,608 83% 6.66% 13.8 years
Variable Rate Debt 67,774 17% 5.47% 0.9 years
------------- ----- ----- ----
Total Debt $ 394,382 100% 6.45% 11.6 years
============= ===== ===== ====

Listed below is the Operating Partnership's share of aggregate
principal payments, by year, required as of December 31, 2003, related to the
Operating Partnership's unconsolidated debt. Scheduled principal installments
and amounts due at maturity are included.

SECURED
(in thousands) DEBT(1)
- -------------- -------------

2004 $ 75,830
2005 9,916
2006 23,816
2007 46,715
2008 43,007
Thereafter 195,098
------------
$ 394,382
============

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

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

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

As of December 31, 2003, the Operating Partnership held a 40% interest
in the Temperature-Controlled Logistics Partnership, which owns all of the
common stock, representing substantially all of the economic interest of the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 million cubic feet (17.5 million square feet) of warehouse
space.

The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Operating Partnership has no economic interest in AmeriCold Logistics.
See Note 23, "COPI," in Item 8, "Financial Statements and Supplementary Data,"
for information on the proposed acquisition of COPI's 40% interest in AmeriCold
Logistics by a new entity to be owned by the Company's shareholders and the
Operating Partnership's unitholders.

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 2, 2004, the
Temperature-Controlled Logistics Corporation and Americold Logistics amended the
leases to further extend the deferred rent period to December 31, 2005 from
December 31, 2004. The parties previously extended the deferred rent period to
December 31, 2004 from December 31, 2003, on March 7, 2003.

58

Under the terms of the leases, AmeriCold Logistics elected to defer
$41.8 million of the total $155.5 million of rent payable for the year ended
December 31, 2003. The Operating Partnership's share of the deferred rent was
$16.7 million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $16.7 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the year ended December 31,
2003. As of December 31, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $82.4 million and $74.3 million, respectively, of which the Operating
Partnership's portions were $33.0 million and $29.7 million, respectively.

The following table shows the total and the Operating Partnership's
portion of deferred rent and the valuation allowance for the years ended
December 31, 2003, 2002, and 2001:

DEFERRED RENT VALUATION ALLOWANCE
-------------------------- -----------------------
OPERATING OPERATING
PARTNERSHIP'S PARTNERSHIP'S
(in thousands) TOTAL PORTION TOTAL PORTION
--------- ------------- --------- -------------

Cumulative deferred rent and valuation
allowance balance for the year ended $ 48,200 $ 19,300 $ 40,100 $ 16,000
December 31, 2001
Waived Rent as of December 31, 2001 (39,800) (15,900) (39,800) (15,900)
--------- --------- -------- --------
Balance at December 31, 2001 $ 8,400 $ 3,400 $ 300 $ 100
2002 Deferred Rent 32,200 12,900 32,200 12,900
--------- --------- -------- -------
Balance at December 31, 2002 $ 40,600 $ 16,300 $ 32,500 $ 13,000
2003 Deferred Rent 16,700 41,800
41,800 16,700
--------- --------- -------- --------
Balance at December 31, 2003 $ 82,400 $ 33,000 $ 74,300 $ 29,700
========= ========= ======== ========

On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs, escrow
reserves and the repayment of approximately $12.9 million in existing mortgages.
On February 6, 2004, the Temperature-Controlled Logistics Corporation
distributed cash of approximately $90.0 million to the Operating Partnership.

On February 23, 2004, Alec Covington, President and Chief Executive
Officer of AmeriCold Logistics, resigned effective March 31, 2004, to take an
opportunity in an unrelated industry. A search to identify a successor is
currently underway. Anthony Cossentino, Chief Financial Officer, will oversee
the AmeriCold business and Mike O'Connell, who has been with AmeriCold for over
ten years, has been promoted to be in charge of all operations and, until a
successor is in place, will report to Mr. Cossentino.

59

SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

The Operating Partnership'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 Operating Partnership to make estimates and judgments
that affect the reported amounts of assets, liabilities, and contingencies as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The Operating Partnership evaluates its
assumptions and estimates on an ongoing basis. The Operating Partnership bases
its estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances. These estimates form the
basis for making judgments about the carrying values of assets and liabilities
where that information is available from other sources. Certain estimates are
particularly sensitive due to their significance to the financial statements.
Actual results may differ significantly from management's estimates. The
Operating Partnership believes that the most significant accounting policies
that involve the use of estimates and assumptions as to future uncertainties
and, therefore, may result in actual amounts that differ from estimates are the
following:

- Impairments,

- Acquisition of operating properties,

- Relative sales method and percentage of completion (Residential
Development entities),

- Gain recognition on sale of real estate assets, and

- Allowance for doubtful accounts.

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

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

ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership
allocates the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations."

In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.

The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property and (ii) the present value of the
amortized in-place tenant improvement allowances over the remaining term of each
lease. Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate

60

taxes, insurance, and other operating expenses and estimates of lost rentals
during the expected lease-up period assuming current market conditions. The
value of the property is then allocated among building, land, site improvements,
and equipment. The value of tenant improvements is separately estimated due to
the different depreciable lives.

The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.

Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.

Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.

The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality, and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term of the
respective leases and projected renewal periods, but in no event does the
amortization period for the intangible assets exceed the remaining depreciable
life of the building.

Should a tenant terminate its lease, the unamortized portion of the
above-market or below-market in-place lease value and the customer relationship
value and above-market and below-market in-place lease value would be charged to
expense.

RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Operating
Partnership uses the accrual method to recognize earnings from the sale of
Residential Development Properties when a third-party buyer had made an adequate
cash down payment and has attained the attributes of ownership. If a sale does
not qualify for the accrual method of recognition, deferral methods are used as
appropriate including the percentage-of-completion method. In certain cases,
when the Operating Partnership receives an inadequate cash down payment and
takes a promissory note for the balance of the sales price, revenue recognition
is deferred until such time as sufficient cash is received to meet minimum down
payment requirements. 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 Operating Partnership's estimates of costs or the
percentage of completion is incorrect, it could result in either an increase or
decrease in cost of sales expense or revenue recognized and therefore, an
increase or decrease in net income.

GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. The Operating
Partnership performs evaluations of each real estate sale to determine if full
gain recognition is appropriate in accordance with SFAS No. 66, "Accounting for
Sales of

61

Real Estate." The application of SFAS No. 66 can be complex and requires the
Operating Partnership to make assumptions including an assessment of whether the
risks and rewards of ownership have been transferred, the extent of the
purchaser's investment in the property being sold, whether the Operating
Partnership's receivables, if any, related to the sale are collectible and are
subject to subordination, and the degree of the Operating Partnership's
continuing involvement with the real estate asset after the sale. If full gain
recognition is not appropriate, the Operating Partnership accounts for the sale
under an appropriate deferral method.

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

ADOPTION OF NEW ACCOUNTING STANDARDS

SFAS NO. 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 Operating Partnership adopted
this Statement for fiscal 2003 and had no impact beyond the reclassification of
costs related to early extinguishments of debt, which were shown in the
Operating Partnership's 2001 Consolidated Statements of Operations as an
extraordinary item.

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 Operating Partnership
adopted SFAS No. 149 effective July 1, 2003. The adoption of this Statement did
not have a material impact on the Operating Partnership'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. Most provisions of this Statement were 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. On October 29, 2003, the FASB agreed to
defer indefinitely certain provisions of SFAS No. 150 to non-controlling
interests in limited life subsidiaries. The Operating Partnership determined
that seven of its consolidated partnerships were limited life subsidiaries. The
carrying value of the minority interests in these partnerships at December 31,
2003 was $14.6 million, which approximated fair value. The Operating Partnership
is in the process of amending the partnership agreements to give the
partnerships indefinite lives. The adoption of the remainder of SFAS No. 150 on
July 1, 2003, had no impact on the Operating Partnership'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 15, "Commitments, Contingencies and Litigation" in Item 8,

62

"Financial Statements and Supplementary Data," for disclosure of the Operating
Partnership's guarantees at December 31, 2003. The Operating Partnership 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"), as amended, 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 for financial periods ending after March 15, 2004, except for
Special Purpose Entities which had to be consolidated by December 31, 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 VIEs. FIN 46 requires VIEs 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 VIEs were
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the VIEs; and, (b) the enterprise's maximum
exposure to loss as a result of its involvement with the VIEs. 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. Subsequent to January 31, 2003, in connection with the
Hughes Center acquisition, the Operating Partnership created a VIE by entering
into an exchange agreement with a third party intermediary. This agreement
allows the Operating Partnership to pursue favorable tax treatment on the other
properties sold by the Operating Partnership within a 180-day period. During the
180-day period, which will end on June 28, 2004, the third party intermediary is
the legal owner of the properties, although the Operating Partnership controls
the properties, retains all of the economic benefits and risks associated with
these properties and indemnifies the third party intermediary and, therefore,
the Operating Partnership will fully consolidate these properties. On the
expiration of the 180-day period, the Operating Partnership will take legal
ownership of the properties. No other VIEs were created subsequent to January
31,2003. Due to the adoption of this Interpretation, the Operating Partnership
has consolidated GDW LLC, a subsidiary of DMDC, for the year ended December 31,
2003. The Operating Partnership is in the process of analyzing other entities
which existed at January 31, 2003, to determine if any qualified as VIEs under
FIN 46. The Operating Partnership does not believe there will be a material
impact to the Operating Partnership's financial condition or results of
operations from the final adoption of FIN 46.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. On
June 5, 2003, the SEC issued new rules on internal control over financial
reporting that were mandated by Section 404 of the Sarbanes-Oxley Act of 2002
(the Act). These new rules require management reporting on internal controls
over financial reporting. The new internal control report over financial
reporting is required in the annual report of all registrants, other than
registered investment companies and asset-backed issuers, and should include: a
statement of management's responsibility for establishing and maintaining
adequate internal control over financial reporting for the company; management's
assessment of the effectiveness of the company's internal control over financial
reporting as of the end of the company's most recent fiscal year; a statement
identifying the framework used by management to evaluate the effectiveness of
the company's internal control over financial reporting; and a statement that
the public accounting firm that audited the company's financial statements
included in the annual report has issued an attestation report on management's
assessment of the company's internal control over financial reporting. The
company must file the auditor's attestation report as a part of the annual
report. For the quarters, the new SEC rules require management to evaluate any
change in the company's internal control over financial reporting that occurred
and had a material effect (or is reasonably likely to have a material effect) on
the company's internal control over financial reporting. Also, the SEC adopted
rules to require registrants to provide the certifications on disclosure
controls and on compliance with certain SEC rules and fair presentation mandated
by Sections 302 and 906 of the Act, respectively, as exhibits to periodic
reports. For the Operating Partnership, the report on internal control over
financial reporting is required in the annual report for the year ended December
31, 2004.

PURCHASE OF CERTAIN EQUITY SECURITIES BY THE ISSUER AND OTHERS. On
November 10, 2003, the SEC voted to adopt a rule that provides registrants with
a "safe harbor" from manipulation liability when they repurchase their common
stock in the market in accordance with the rule's manner, timing, price, and
volume conditions. The rule also

63

requires disclosure of all registrant repurchases, whether or not the
repurchases are effected under the safe harbor rule. The rule was effective
December 17, 2003. The repurchase disclosures required in Form 10-Q and 10-K are
required from periods ending after March 15, 2004.

FUNDS FROM OPERATIONS AVAILABLE TO PARTNERS

FFO, as used in this document, means:

- Net Income (Loss) - determined in accordance with GAAP;

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

- excluding extraordinary items (as defined by GAAP);

- plus depreciation and amortization of real estate assets;
and

- after adjustments for unconsolidated partnerships and joint
ventures.

The Operating Partnership calculates FFO available to partners in the
same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Partners.

The National Association of Real Estate Investment Trusts ("NAREIT")
developed FFO as a relative measure of performance and liquidity of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO available to partners an appropriate measure of performance for
its investment segments. However, FFO available to partners and FFO should not
be considered an alternative to net income determined in accordance with GAAP as
an indication of the Operating Partnership's operating performance.

The Operating Partnership has historically distributed an amount less
than FFO available to partners, primarily due to reserves required for capital
expenditures, including leasing costs. The aggregate cash distributions paid to
unitholders for the years ended December 31, 2003, 2002 and 2001 were $175.5
million, $176.4 million and $245.1 million, respectively. The Operating
Partnership reported FFO available to partners of $212.6 million, $251.6 million
and $206.4 million, for the years ended December 31, 2003, 2002 and 2001,
respectively.

An increase or decrease in FFO available to partners 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 available to partners
will generally require an increase in distributions to unitholders although not
necessarily on a proportionate basis.

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

64

CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS AVAILABLE TO PARTNERS
(in thousands)

FOR THE YEARS ENDED DECEMBER 31,
2003 2002
--------- ---------

Net income $ 30,568 $ 113,139
Adjustments to reconcile net income to
funds from operations available to partners before impairment charges
related to real estate assets:
Depreciation and amortization of real estate assets 150,788 136,459
(Gain) loss on property sales, net (8,919) (28,102)
Cumulative effect of a change in accounting principle -- 10,327
Impairment charges related to real estate assets and
assets held for sale 37,794 16,894
Adjustment for investments in unconsolidated companies:
Office Properties 6,254 (10,192)
Resort/Hotel Properties (2,544) 195
Residential Development Properties 3,573 4,529
Temperature-Controlled Logistics Properties 21,136 23,933
Other 206 6,213
Series A Preferred Unit distributions (18,225) (16,702)
Series B Preferred Unit distributions (8,075) (5,047)
--------- ---------
Funds from operations available to partners
before impairment charges related to real estate assets $ 212,556 $ 251,646
Impairment charges related to real estate assets (37,794) (16,894)
Cumulative effect of a change in accounting principle(2) -- (10,327)
--------- ---------
Funds from operations available to partners
after impairment charges related to real estate assets $ 174,762 $ 224,425
========= =========
Investment Segments:
Office Properties $ 283,791 $ 333,557
Resort/Hotel Properties 51,123 56,693
Residential Development Properties 88,127 51,004
Temperature-Controlled Logistics Properties 23,308 21,000
Other:
Corporate general and administrative (33,300) (26,435)
Corporate and other adjustments:
Interest expense (172,232) (179,212)
Series A Preferred Unit distributions (18,225) (16,702)
Series B Preferred Unit distributions (8,075) (5,047)
Other(1) (1,961) 16,788
--------- ---------
Funds from operations available to partners
before impairment charges related to real estate assets $ 212,556 $ 251,646
Impairment charges related to real estate assets (37,794) (16,894)
Cumulative effect of a change in accounting principle(2) -- (10,327)
--------- ---------
Funds from operations available to partners
after impairment charges related to real estate assets $ 174,762 $ 224,425
========= =========
Basic weighted average units 58,317 63,578
Diluted weighted average units(3) 58,338 63,679

- ---------------------------
(1) 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, income from investment land
sales, net, and other expenses.

(2) Due to the adoption of SFAS No. 142 on January 1, 2002, the Operating
Partnership recognized a goodwill impairment charge related to the
Temperature-Controlled Logistics Properties of approximately $10.2 million.

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

65

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

FOR THE YEARS
ENDED DECEMBER 31,
--------------------
(units in thousands) 2003 2002
- -------------------- ------ ------

Basic weighted average units: 58,317 63,578
Add: Unit options 21 101
------ ------
Diluted weighted average units 58,338 63,679
====== ======

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Operating Partnership's use of financial instruments, such as debt
instruments, subject the Operating Partnership to market risk which may affect
the Operating Partnership's future earnings and cash flows as well as the fair
value of its assets. Market risk generally refers to the risk of loss from
changes in interest rates and market prices. The Operating Partnership manages
its market risk by attempting to match anticipated inflow of cash from its
operating, investing and financing activities with anticipated outflow of cash
to fund debt payments, distributions to unitholders, investments, capital
expenditures and other cash requirements. The Operating Partnership also enters
into derivative financial instruments such as interest rate swaps to mitigate
its interest rate risk on a related financial instrument or to effectively lock
the interest rate on a portion of its variable rate debt.

The following discussion of market risk is based solely on hypothetical
changes in interest rates related to the Operating Partnership's variable rate
debt. This discussion does not purport to take into account all of the factors
that may affect the financial instruments discussed in this section.

INTEREST RATE RISK

The Operating Partnership's interest rate risk is most sensitive to
fluctuations in interest rates on its short-term variable rate debt. The
Operating Partnership had total outstanding debt of approximately $2.6 billion
at December 31, 2003, of which approximately $378.3 million, or approximately
15%, was unhedged variable rate debt. The variable rate debt is based on an
index (LIBOR or Prime plus a credit spread). The weighted average interest rate
on such variable rate debt was 5.2% as of December 31, 2003. A 10% increase in
the underlying index would cause an increase of 52 basis points to the weighted
average interest rate on such variable rate debt which would result in an annual
decrease in net income and cash flows of approximately $2.0 million. Conversely,
a 10% decrease in the underlying index would cause a decrease of 52 basis points
to the weighted average interest rate on such unhedged variable rate debt, which
would result in an annual increase in net income and cash flows of approximately
$2.0 million based on the unhedged variable rate debt outstanding as of December
31, 2003.

CASH FLOW HEDGES

The Operating Partnership uses derivative financial instruments to
convert a portion of its variable rate debt to fixed rate debt and to manage its
fixed to variable rate debt ratio. A description of these derivative financial
instruments is contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Equity and Debt Financing -
Derivative Instruments and Hedging Activities."

66

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Auditors................................................................ 69

Consolidated Balance Sheets at December 31, 2003 and 2002..................................... 70

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 71

Consolidated Statements of Partners' Capital for the years ended December 31, 2003, 2002
and 2001...................................................................................... 72

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 ... 73

Notes to Consolidated Financial Statements.................................................... 74

Schedule III Consolidated Real Estate Investments and Accumulated Depreciation ............... 136

The following Combined Financial Statements and Other Financial Information are
provided pursuant to Rule 3-09 of Regulation S-X:

The Woodlands Land Development Company, L.P., The Woodlands Commercial Properties
Company, L.P., and The Woodlands Operating Company, L.P.

Report of Independent Auditors............................................................ 142

Combined Balance Sheets at December 31, 2003, and 2002.................................... 143

Combined Statements of Earnings and Comprehensive Income for the years ended
December 31, 2003, and 2002............................................................ 144

Combined Statements of Changes in Partners' Equity (Deficit) for the years ended
December 31, 2003, and 2002............................................................ 145

Combined Statements of Cash Flows for the years ended December 31, 2003, and 2002......... 146

Notes to Combined Financial Statements.................................................... 148

The Woodlands Land Development Company, L.P., The Woodlands Commercial Properties
Company, L.P., and The Woodlands Operating Company, L.P.

Combining Balance Sheets at December 31, 2001, and 2000 (unaudited)....................... 173

Combining Statement of Earnings and Comprehensive Income for the years ended
December 31, 2001, and 2000 (unaudited)................................................. 174

Combining Statements of Changes in Partners' Equity (Deficit) for the years ended
December 31, 2001, and 2000 (unaudited)................................................. 175

Combining Statements of Cash Flows for the years ended December 31, 2001, and 2000
(unaudited)............................................................................. 176

Notes to Combining Financial Statements (unaudited)....................................... 177

67

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Limited Partnership and subsidiaries (the "Partnership") as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, partners' equity, and cash flows for each of the three years in the
period ended December 31, 2003. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Crescent Real Estate Equities Limited Partnership and subsidiaries at December
31, 2003 and 2002, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

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

ERNST & YOUNG LLP

Dallas, Texas

February 13, 2004, except
for paragraph three of
Note 8, as to which the
date is March 2, 2004,
and Note 25, as to which
the date is March 9, 2004.

68

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

DECEMBER 31,
-------------------------------
2003 2002
-------------- ---------------

ASSETS:
Investments in real estate:
Land $ 242,656 $ 223,897
Land improvements, net of accumulated depreciation of $19,270 and $16,720
at December 31, 2003 and December 31, 2002, respectively 105,236 54,804
Building and improvements, net of accumulated depreciation of $612,732 and
$639,214 at December 31, 2003 and December 31, 2002, respectively 2,253,405 2,205,143
Furniture, fixtures and equipment, net of accumulated depreciation of $44,075 and
$57,703 at December 31, 2003 and December 31, 2002, respectively 51,168 50,878
Land held for investment or development 450,279 447,778
Properties held for disposition, net 52,519 122,085
-------------- ---------------
Net investment in real estate 3,155,263 3,104,585

Cash and cash equivalents 74,885 75,418
Restricted cash and cash equivalents 217,329 105,786
Defeasance investments 9,620 -
Accounts receivable, net 40,455 41,999
Deferred rent receivable 62,582 59,869
Investments in unconsolidated companies 443,974 562,643
Notes receivable, net 78,453 115,494
Income tax asset - current and deferred 17,506 39,709
Other assets, net 210,704 179,606
-------------- ---------------
Total assets $ 4,310,771 $ 4,285,109
============== ===============
LIABILITIES:
Borrowings under Credit Facility $ 239,000 $ 164,000
Notes payable 2,319,699 2,218,910
Accounts payable, accrued expenses and other liabilities 365,673 373,020
Current income tax payable 7,995 -
-------------- ---------------
Total liabilities $ 2,932,367 $ 2,755,930
-------------- ---------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: 47,123 43,972

PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units,
liquidation preference $25.00 per unit, 10,800,000 units issued and outstanding,
at December 31, 2003 and December 31, 2002 248,160 248,160
Series B Cumulative Preferred Units,
liquidation preference $25.00 per unit, 3,400,000 units issued and outstanding,
at December 31, 2003 and December 31, 2002 81,923 81,923
Units of Partnership Interest, 58,510,500 and 58,484,396 issued and outstanding, at
December 31, 2003 and December 31, 2002, respectively:
General partner - outstanding 585,105 and 584,844 10,424 12,097

Limited partners - outstanding 57,925,395 and 57,899,552 1,004,603 1,170,279
Accumulated other comprehensive income (13,829) (27,252)
-------------- ---------------
Total partners' capital 1,331,281 1,485,207
-------------- ---------------
Total liabilities and partners' capital $ 4,310,771 $ 4,285,109
============== ===============

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

69

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

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------

REVENUE:
Office Property $ 495,468 $ 538,781 $ 575,883
Resort/Hotel Property 225,562 203,128 45,748
Residential Development Property 228,214 260,569 -
----------- ----------- -----------
Total Property Revenue 949,244 1,002,478 621,631
----------- ----------- -----------
EXPENSE:
Office Property real estate taxes 65,220 72,710 79,186
Office Property operating expenses 170,219 165,870 168,798
Resort/Hotel Property expense 182,648 157,987 -
Residential Development Property expense 202,162 238,745 -
----------- ----------- -----------
Total Property expense 620,249 635,312 247,984
----------- ----------- -----------
Income from Property Operations 328,995 367,166 373,647
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Income from sale of investment in unconsolidated company, net 86,186 - -
Income from investment land sales, net 13,038 22,591 204
Gain on joint venture of properties, net 100 18,166 7,577
Loss on property sales, net - (803) (3,356)
Interest and other income 5,737 26,504 66,907
Corporate general and administrative (33,300) (26,435) (23,116)
Interest expense (172,116) (179,059) (182,194)
Amortization of deferred financing costs (10,925) (10,178) (9,327)
Extinguishment of debt - - (12,174)
Depreciation and amortization (157,204) (138,604) (117,988)
Impairment charges related to real estate assets (8,624) (13,216) (25,332)
Impairment and other charges related to COPI - - (92,782)
Other expenses (4,637) (11,389) -
Equity in net income (loss) of unconsolidated companies:
Office Properties 10,469 23,431 6,124
Resort/Hotel Properties 5,760 (115) -
Residential Development Properties 10,427 39,778 41,014
Temperature-Controlled Logistics Properties 2,172 (2,933) 1,136
Other (4,053) (6,609) 2,957
----------- ----------- -----------
Total other income (expense) (256,970) (258,871) (340,350)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS
AND INCOME TAXES 72,025 108,295 33,297
Minority interests (307) (11,111) (19,798)
Income tax (provision) benefit (26,325) 4,424 -
----------- ----------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 45,393 101,608 13,499
Net income from discontinued operations 1,905 14,734 10,507
Impairment charges related to real estate assets from discontinued operations (28,864) (4,678) -
Gain on real estate from discontinued operations 12,134 11,802 -
Cumulative effect of a change in accounting principle - (10,327) -
----------- ----------- -----------
NET INCOME 30,568 113,139 24,006
Series A Preferred Unit distributions (18,225) (16,702) (13,501)
Series B Preferred Unit distributions (8,075) (5,047) -
----------- ----------- -----------
NET INCOME AVAILABLE TO PARTNERS $ 4,268 $ 91,390 $ 10,505
=========== =========== ===========
BASIC EARNINGS PER UNIT DATA:
Net income available to partners before discontinued operations and cumulative
effect of a change in accounting principle $ 0.33 $ 1.26 $ -
Net income available to partners from discontinued operations 0.03 0.23 0.15
Impairment charges related to real estate assets from discontinued operations (0.50) (0.07) -
Gain on real estate from discontinued operations 0.21 0.18 -
Cumulative effect of a change in accounting principle - (0.16) -
----------- ----------- -----------
Net income available to partners - basic $ 0.07 $ 1.44 $ 0.15
=========== =========== ===========
DILUTED EARNINGS PER UNIT DATA:
Net income available to partners before discontinued operations and cumulative
effect of a change in accounting principle $ 0.33 $ 1.24 $ -
Net income available to partners from discontinued operations 0.03 0.24 0.15
Impairment charges related to real estate assets from discontinued operations (0.50) (0.07) -
Gain on real estate from discontinued operations 0.21 0.19 -
Cumulative effect of a change in accounting principle - (0.16) -
----------- ----------- -----------
Net income available to partners - diluted $ 0.07 $ 1.44 $ 0.15
=========== =========== ===========

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

70

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

ACCUMULATED
PREFERRED GENERAL LIMITED OTHER
PARTNERS' PARTNERS' PARTNERS' COMPREHENSIVE PARTNERS'
CAPITAL CAPITAL CAPITAL INCOME CAPITAL
----------- ----------- ----------- ----------- -----------

PARTNERS' CAPITAL, December 31, 2000 $ 200,000 $ 19,886 $ 1,903,442 $ (6,734) $ 2,116,594

Contributions - (121) 9,888 - 9,767
Distributions - (3,691) (349,235) - (352,926)
Net Income - 105 10,400 - 10,505
Unrealized Loss Marketable Securities - - - (7,522) (7,522)
Unrealized Net Loss on Cash Flow Hedges - - - (17,228) (17,228)
----------- ----------- ----------- ----------- -----------

PARTNERS' CAPITAL, December 31, 2001 $ 200,000 $ 16,179 $ 1,574,495 $ (31,484) $ 1,759,190

Issuance of Preferred Units A 48,160 - - - 48,160
Issuance of Preferred Units B 81,923 - - - 81,923
Contributions - 24 2,338 - 2,362
Distributions - (5,020) (497,030) - (502,050)
Net Income - 914 90,476 - 91,390
Unrealized Loss on Marketable Securities - - - (833) (833)
Unrealized Net Gain on Cash Flow Hedges - - - 5,065 5,065
----------- ----------- ----------- ----------- -----------

PARTNERS' CAPITAL, December 31, 2002 $ 330,083 $ 12,097 $ 1,170,279 $ (27,252) $ 1,485,207

Contributions, net - 25 2,483 - 2,508
Distributions - (1,753) (173,523) - (175,276)
Deferred Compensation - 12 1,139 - 1,151
Net Income - 43 4,225 - 4,268
Unrealized Gain on Marketable Securities - - - 3,761 3,761
Unrealized Net Gain on Cash Flow Hedges - - - 9,662 9,662
----------- ----------- ----------- ----------- -----------

PARTNERS' CAPITAL, December 31, 2003 $ 330,083 $ 10,424 $ 1,004,603 $ (13,829) $ 1,331,281
=========== =========== =========== =========== ===========

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

71

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 30,568 $ 113,139 $ 24,006
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 168,129 148,782 127,315
Residential Development cost of sales 109,405 160,057 -
Residential Development capital expenditures (130,692) (91,046) -
Impairment charges related to real estate assets from discontinued operations 28,864 4,678
Gain on real estate from discontinued operations (12,134) (11,802) -
Discontinued operations - depreciation and minority interests 7,400 7,774 9,035
Extinguishment of debt - - 12,174
Impairment charges related to real estate assets 8,624 13,216 25,332
Impairment charges related to COPI - - 92,782
Increase in COPI hotel accounts receivable - - (20,458)
Income from sale of investment in unconsolidated company, net of tax (51,556) - -
Income from investment in land sales, net (13,038) (22,591) (204)
Gain on joint venture of properties, net (100) (18,166) (7,577)
Loss on property sales, net - 803 3,356
Minority interests 307 11,111 19,798
Cumulative effect of a change in accounting principle - 10,327 -
Non-cash compensation - 1,956 149
Equity in (earnings) loss from unconsolidated companies:
Office Properties (10,469) (23,431) (6,124)
Resort/Hotel Properties (5,760) 115 -
Residential Development Properties (10,427) (39,778) (41,014)
Temperature-Controlled Logistics Properties (2,172) 2,933 (1,136)
Other 4,053 6,609 (2,957)
Distributions received from unconsolidated companies:
Office Properties 10,313 25,510 7,344
Resort/Hotel Properties - 325 -
Residential Development Properties 11,000 34,418 42,710
Temperature-Controlled Logistics Properties 3,500 4,975 11,528
Other 1,187 974 5,013
Change in assets and liabilities, net of effect of DBL and GDW consolidations/COPI
transaction:

Restricted cash and cash equivalents (10,574) (5,357) (18,759)
Accounts receivable 4,414 7,192 829
Deferred rent receivable (2,404) 4,385 3,744
Income tax -current and deferred, net (868) (17,925) -
Other assets (2,551) 5,771 (27,810)
Accounts payable, accrued expenses and other liabilities (13,420) (40,263) (23,213)
--------- --------- ---------
Net cash provided by operating activities $ 121,599 $ 294,691 $ 235,863
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL and GDW consolidations/COPI transaction $ 11,574 $ 38,226 $ -
Proceeds from property sales 43,155 121,422 200,389
Proceeds from sale of investment in unconsolidated company and related property sales 178,667 - -
Proceeds from joint venture partner - 164,067 129,651
Proceeds from sale of marketable securities - - 107,940
Acquisition of rental properties (44,732) (120,206) -
Development of investment properties (6,613) (2,477) (13,449)
Property improvements - Office Properties (18,023) (17,241) (31,226)
Property improvements - Resort/Hotel Properties (13,574) (16,745) (20,751)
Tenant improvement and leasing costs - Office Properties (77,279) (49,175) (51,810)
Residential Development Properties Investments (42,631) (28,584) -
(Increase) decrease in restricted cash and cash equivalents (100,313) 19,071 (2,204)
Defeasance investments (9,620) - -
Return of investment in unconsolidated companies:
Office Properties 7,846 3,709 349
Resort/Hotel Properties 17,973 - -
Residential Development Properties 8,528 12,767 19,251
Temperature-Controlled Logistics Properties 3,201 - -
Other 5,231 - 12,359
Investment in unconsolidated companies:
Office Properties (7,968) (449) (16,360)
Resort/Hotel Properties - (7,924) -
Residential Development Properties (6,013) (32,966) (89,000)
Temperature-Controlled Logistics Properties (900) (3,280) (10,784)
Other (3,685) (2,930) (10,384)
Decrease in notes receivable 22,557 (19,302) (10,857)
--------- --------- ---------
Net cash (used in) provided by investing activities $ (32,619) $ 57,983 $ 213,114
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (9,321) $ (9,178) $ (16,061)
Borrowings under Credit Facility 320,500 433,000 618,000
Payments under Credit Facility (245,500) (552,000) (335,000)
Borrowings under UBS Facility - - 105,000
Payments under UBS Facility - - (658,452)
Notes Payable proceeds 177,958 380,000 393,336
Notes Payable payments (118,852) (185,415) (180,685)
Residential Development Properties note payable borrowings 79,834 83,383 -
Residential Development Properties note payable payments (85,434) (118,681) -
Purchase of GMAC preferred interest - (218,423) -
Capital distributions - joint venture partner (9,671) (3,792) (5,557)
Capital distributions - joint venture preferred equity - (6,967) (19,897)
Capital contributions to the operating partner 1,398 2,425 9,767
Issuance of preferred units-Series A - 48,160 -
Issuance of preferred units-Series B - 81,923 -
6 3/4% Series A Preferred Unit distributions (18,225) (16,702) (13,501)
9 1/2% Series B Preferred Unit distributions (8,075) (5,047) -
Distributions from the operating partnership (174,125) (221,586) (352,926)
--------- --------- ---------
Net cash used in financing activities $ (89,513) $(308,900) $(455,976)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (533) $ 43,774 $ (6,999)
CASH AND CASH EQUIVALENTS,
Beginning of period 75,418 31,644 38,643
CASH AND CASH EQUIVALENTS,
--------- --------- ---------
End of period $ 74,885 $ 75,418 $ 31,644
========= ========= =========

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

72

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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

All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of December
31, 2003, the Company's approximately 84% limited partner interest has been
treated as equivalent, for purposes of this report, to 49,052,048 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,873,347 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,105 units.

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

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

The following table shows, by consolidated entity, the real estate
assets that the Operating Partnership owned or had an interest in as of December
31, 2003.

Operating Partnership Wholly-owned assets - The Avallon IV, Datran Center
(two office properties), Houston Center (three office
properties and the Houston Center Shops), Hughes
Center (two office properties, see Note 4,
"Acquisitions," for additional information regarding
the ownership of these properties). These properties
are included in the Operating Partnership's Office
Segment.

Non wholly-owned assets, consolidated - 301 Congress
Avenue (50% interest), included in the Operating
Partnership's Office Segment. Sonoma Mission Inn
(80.1% interest), included in the Operating
Partnership's Resort/Hotel Segment.

Non wholly-owned assets, 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), BriarLake Plaza (30%
interest) and Five Post Oak Park (30% interest).
These properties are included in the Operating
Partnership Office Segment. The
Temperature-Controlled Logistics Properties (40%
interest in 87 properties). These properties are
included in the Operating Partnership
Temperature-Controlled Logistics Segment.

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

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

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

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

Crescent Real Estate Wholly-owned asset - One behavioral healthcare
Funding VII, L.P. property.
("Funding VII")

Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower,
Funding VIII, L.P. Austin Centre, The Avallon V, Chancellor Park, Frost
("Funding VIII") Bank Plaza, Greenway I & IA (two office properties),
Greenway II, Johns Manville Plaza, Palisades Central
I, Palisades Central II, Stemmons Place, Trammell
Crow Center(2), 3333 Lee Parkway, 1800 West Loop
South, 5050 Quorum, 44 Cook Street and 55 Madison.
These properties are included in the Operating
Partnership's Office Segment. The Canyon Ranch -
Tucson, Omni Austin Hotel, and Ventana Inn & Spa, all
of which are included in the Operating Partnership's
Resort/Hotel Segment.

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

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

Crescent Spectrum Non-wholly-owned assets, consolidated - Spectrum
Center, L.P. Center (approximately 100% interest), included in the
Operating Partnership's Office Segment.

Crescent Colonnade, Wholly-owned asset - The BAC-Colonnade Building,
L.L.C. included in the Operating Partnership's Office
Segment.

Mira Vista Development Non wholly-owned asset, consolidated - Mira Vista
Corp. ("MVDC") (98% interest), included in the Operating
Partnership's Residential Development Segment.

Houston Area Development Non wholly-owned assets, consolidated - Falcon Point
Corp. ("HADC") (98% interest), Falcon Landing (98% interest) and
Spring Lakes (98% interest). These properties are
included in the Operating Partnership's Residential
Development Segment.

Desert Mountain Non wholly-owned assets, consolidated - Desert
Development Corporation Mountain (93% interest), included in the Operating
("DMDC") Partnership's Residential Development Segment.

Crescent Resort Non wholly-owned assets, consolidated - Eagle Ranch
Development Inc. (60% interest), Main Street Junction (30% interest),
("CRDI") 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), Delgany
Lofts (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), Horizon
Pass Townhomes (64% interest), One Vendue Range (62%
interest), Old Greenwood (71.2% interest), Tahoe
Mountain Resorts (57% - 71.2% interests). These
properties are included in the Operating
Partnership's Residential Development Segment.

Non wholly-owned assets, unconsolidated - Blue River
Land Company, L.L.C. - Three Peaks (30% interest) and
EW Deer Valley, L.L.C. (41.7% interest), included in
the Operating Partnership's Residential Development
Segment.

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Crescent TRS Holdings Non wholly-owned assets, unconsolidated - two
Corp. quarries (56% interest). These properties are
included in the Operating Partnership's
Temperature-Controlled Logistics Segment.

- ------------------------
(1) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.

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

See Note 9, "Investments in Unconsolidated Companies," for a table that
lists the Operating Partnership's ownership in significant unconsolidated joint
ventures and investments as of December 31, 2003.

See Note 11, "Notes Payable and Borrowings under Credit Facility," for
a list of certain other subsidiaries of the Operating Partnership, all of which
are consolidated in the Operating Partnership's financial statements and were
formed primarily for the purpose of obtaining secured debt or joint venture
financing.

SEGMENTS

The assets and operations of the Operating Partnership were divided
into four investment segments at December 31, 2003, as follows:

- Office Segment;

- Resort/Hotel Segment;

- Residential Development Segment; and

- Temperature-Controlled Logistics Segment.

Within these segments, the Operating Partnership owned in whole or in
part the following real estate assets (the "Properties") as of December 31,
2003:

- OFFICE SEGMENT consisted of 72 office properties,
(collectively referred to as the "Office Properties"), located
in 27 metropolitan submarkets in seven states, with an
aggregate of approximately 30.0 million net rentable square
feet. Sixty-three of the Office Properties are wholly-owned
and nine are owned through joint ventures, one of which is
consolidated and eight of which are unconsolidated.

- RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,771 rooms (collectively referred to as the
"Resort/Hotel Properties"). Eight of the Resort/Hotel
Properties are wholly-owned, and one of the luxury and
destination fitness resorts and spas is owned through a joint
venture that is consolidated.

- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership's ownership of common stock representing interests
of 98% to 100% in four 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 (collectively referred to as the
"Residential Development Properties").

- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Operating Partnership's 40% interest in Vornado Crescent
Portland Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% non-controlling 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 Realty Corporation (the
"Temperature-Controlled Logistics Corporation"), a real estate
investment trust. As of December 31, 2003, the
Temperature-Controlled Logistics Corporation directly or
indirectly owned 87 temperature-controlled logistics
properties (collectively referred to as the
"Temperature-Controlled Logistics Properties") with an
aggregate of

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

approximately 440.7 million cubic feet (17.5 million square
feet) of warehouse space. As of December 31, 2003, the Vornado
Crescent Carthage and KC Quarry, L.L.C. own two quarries and
the related land. The Operating Partnership 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 entities.

See Note 3, "Segment Reporting," for a table showing selected financial
information for each of these investment segments for the years ended December
31, 2003, 2002 and 2001, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at December 31, 2003 and 2002.

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

BASIS OF PRESENTATION

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 Operating
Partnership adopted this Statement for fiscal 2003 and had no impact beyond the
classification of costs related to early extinguishments of debt, which were
shown in the Operating Partnership's 2001 Consolidated Statements of Operations
as an extraordinary item.

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 Operating Partnership
adopted SFAS No. 149 effective July 1, 2003. The adoption of this Statement did
not have a material impact on the Operating Partnership's financial condition or
its results of operations.

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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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. Most provisions of this Statement were 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. On October 29, 2003, the FASB agreed to
defer indefinitely the certain provisions of SFAS No. 150 to non-controlling
interests in limited life subsidiaries. The Operating Partnership determined
that seven of its consolidated partnerships were limited life subsidiaries. The
carrying value of the minority interests in these partnerships at December 31,
2003 was $14.6 million, which approximated fair value. The Operating Partnership
is in the process of amending the partnership agreements to give the
partnerships indefinite lives. The adoption of the remainder of SFAS No. 150 on
July 1, 2003, had no impact on the Operating Partnership'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"),
as amended, which elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued and liability-recognition requirements for a
guarantor of certain types of debt. The new guidance requires a guarantor to
recognize a liability at the inception of a guarantee which is covered by the
new requirements whether or not payment is probable, creating the new concept of
a "stand-ready" obligation. Initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. See Note 15, "Commitments, Contingencies and
Litigation" for disclosure of the Operating Partnership's guarantees at December
31, 2003. The Operating Partnership 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"), as amended, 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 for financial periods ending after March 15, 2004, except for
Special Purpose Entities which had to be consolidated by December 31, 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 VIEs. FIN 46 requires VIEs 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 VIEs were
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the VIEs; and, (b) the enterprise's maximum
exposure to loss as a result of its involvement with the VIEs. 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. Subsequent to January 31, 2003, in connection with the
Hughes Center acquisition, the Operating Partnership created a VIE by entering
into an exchange agreement with a third party intermediary. This agreement
allows the Operating Partnership to pursue favorable tax treatment on the other
properties sold by the Operating Partnership within a 180-day period. During the
180-day period, which will end on June 28, 2004, the third party intermediary is
the legal owner of the properties, although the Operating Partnership controls
the properties,retains all of the economic benefits and risks associated with
these properties and indemnifies the third party intermediary and, therefore,
the Operating Partnership will fully consolidate these Properties. On the
expiration of the 180-day period, the Operating Partnership will take legal
ownership of the properties. No other VIEs were created subsequent to January
31, 2003. Due to the adoption of this Interpretation, the Operating Partnership
has consolidated GDW LLC, a subsidiary of DMDC, for the year ended December 31,
2003. The Operating Partnership is in the process of analyzing other entities
which existed at January 31, 2003, to determine if any qualified as VIEs under
FIN 46. The Operating Partnership does not believe there will be a material
impact to the Operating Partnership's financial condition or results of
operations from the final adoption of FIN 46.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership
allocates the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations."

In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.

The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property and (ii) the present value of the
amortized in-place tenant improvement allowances over the remaining term of each
lease. Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements and equipment. The value of tenant improvements is separately
estimated due to the different depreciable lives.

The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.

Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.

Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.

The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term of the
respective leases and projected renewal periods, but in no event does the
amortization period for the intangible assets exceed the remaining depreciable
life of the building.

Should a tenant terminate its lease, the unamortized portion of the
above-market or below-market in-place lease value and the customer relationship
value and above-market and below-market in-place lease value would be charged to
expense.

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

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

Real Estate also includes land and capitalized project costs associated
with the acquisition and the development of land, construction of residential
units, amenities and facilities, interest and loan origination costs on land
under development, and certain general and administrative expenses to the extent
they benefit the development of land. The Operating Partnership capitalizes
interest costs as a part of the historical cost of acquiring certain assets that
qualify for capitalization under SFAS No. 34, "Capitalization of Interest Cost."
The Operating Partnership's assets that qualify for accounting treatment under
this pronouncement must require a period of time to prepare for their intended
use, such as the Operating Partnership's land development project assets that
are intended for sale or lease and constructed as discrete projects. In
accordance with the authoritative guidance, the interest cost capitalized by the
Operating Partnership is the interest cost recognized on borrowings and other
obligations. The amount capitalized is an allocation of the interest cost
incurred during the period required to complete the asset. The interest rate for
capitalization purposes is based on the rates of the Operating Partnership's
outstanding borrowings.

An impairment loss is recognized on a property by property basis on
Properties classified as held for use, when expected undiscounted cash flows are
less than the carrying value of the property. In cases where the Operating
Partnership does not expect to recover its carrying costs on a Property, the
Operating Partnership reduces its carrying costs to fair value, and for
Properties held for disposition, the Operating Partnership reduces its carrying
costs to the fair value less estimated selling costs. In accordance with SFAS
No. 144, the Operating Partnership records assets held for sale at the lower of
carrying value or sales price less costs to sell. Depreciation expense is not
recognized on Properties classified as held for disposition.

CONCENTRATION OF REAL ESTATE INVESTMENTS. The Operating Partnership's
Office Properties are located primarily in the Dallas and Houston, Texas,
metropolitan areas. As of December 31, 2003, the Operating Partnership's Office
Properties in Dallas and Houston represented an aggregate of approximately 72%
of its office portfolio based on total net rentable square feet. As a result of
this geographic concentration, the operations of the Operating Partnership could
be adversely affected by a recession or general economic downturn in the areas
where these Properties are located.

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

RESTRICTED CASH AND CASH EQUIVALENTS. Restricted cash includes escrows
established pursuant to certain mortgage financing arrangements for real estate
taxes, insurance, security deposits, ground lease expenditures, capital
expenditures and monthly interest carrying costs paid in arrears and capital
requirements related to cash flow hedges. At December 31, 2003, approximately
$97.2 million was included in "Restricted cash" in the Operating Partnership's
Consolidated Balance Sheets for escrow established pursuant to the acquisition
of the five Office Properties and seven retail parcels within Hughes Center
subsequent to December 31, 2003.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. The Operating
Partnership's accounts receivable balance consists of rents and operating cost
recoveries due from customers. The Operating Partnership also maintains an
allowance for deferred rent receivables, which arise from the straight-lining of
rents as necessary. The allowance for doubtful accounts is reviewed at least
quarterly for adequacy by reviewing such factors as the credit quality of our
customers, any delinquency in payment, historical trends and current economic
conditions. If the Operating Partnership's

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

assumptions regarding the collectibility of accounts receivable prove incorrect,
the Operating Partnership could experience write-offs in excess of the allowance
for doubtful accounts, which would result in a decrease in the Operating
Partnership's earnings.

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

Upon the adoption of SFAS No. 142 on January 1, 2002, the
Temperature-Controlled Logistics Corporation compared the fair value of
Temperature-Controlled Logistics Properties based on discounted cash flows to
the carrying value of Temperature-Controlled Logistics Properties and the
related goodwill. Based on this test, the fair value did not exceed its carrying
value, and the second step of the impairment test was performed to measure the
impairment loss. The second step compared the implied fair value of goodwill
with the carrying amounts of goodwill which exceeded the fair value on January
1, 2002. As a result, the Operating Partnership recognized a goodwill impairment
charge of approximately $10.3 million, due to the initial application of this
Statement. This charge was reported as a change in accounting principle and is
included in the Operating Partnership's Consolidated Statements of Operations as
a "Cumulative effect of a change in accounting principle" for the year ended
December 31, 2002.

OTHER ASSETS. Other assets consist principally of leasing costs,
deferred financing costs, intangible assets and marketable securities. Leasing
costs are amortized on a straight-line basis during the terms of the respective
leases, and unamortized leasing costs are written off upon early termination of
lease agreements. Deferred financing costs are amortized on a straight-line
basis (when it approximates the effective interest method) over the shorter of
the expected lives or the terms of the respective loans. The effective interest
method is used to amortize deferred financing costs on loans where the
straight-line basis does not approximate the effective interest method, over the
terms of the respective loans.

Intangible assets, which include memberships, trademarks, and net
intangible leases created by SFAS No. 141 are amortized and reviewed annually
for impairment. Upon the formation of Desert Mountain Properties, L.P. in August
1997, the partnership allocated a portion of the fair value of its assets of
Desert Mountain to the remaining club memberships and recorded the amount as an
intangible asset.

Marketable securities are considered either available-for-sale, trading
or held-to-maturity, in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities are
marked to market value on a monthly basis. The corresponding unrealized gains
and losses are included in accumulated other comprehensive income. When a
decline in the fair value of marketable securities is determined to be other
than temporary, the cost basis is written down to fair value and the amount of
the write-down is included in earnings for the applicable period. A decline in
the fair value of a marketable security is deemed non-temporary if its cost
basis has exceeded its fair value for a period of six to nine months. Trading
securities are marked to market on a monthly basis. The unrealized gains and
losses on trading securities are included in earnings. Held-to-maturity
securities are carried at amortized cost.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
and other liabilities are reasonable estimates of their fair values. The fair
value of the Operating Partnership's notes payable is most sensitive to
fluctuations in interest rates. Since the Operating Partnership's $0.9 billion
in variable rate debt changes with these changes in interest rates, it also
approximates the fair market value of the underlying debt. The Operating
Partnership reduces the variability in future cash flows by maintaining a
sizable portion of its debt with fixed payment characteristics. Although the
cash flow to the Operating Partnership does not change, the fair value of the
$1.7 billion in fixed rate debt, based upon current interest rates for similar
debt instruments with similar payment terms and expected payoff dates, would be
approximately $1.9 billion as of December 31, 2003. Disclosure about fair value
of financial instruments is based on pertinent information available to
management as of December 31, 2003.

80

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

To accomplish this objective, the Operating Partnership primarily uses
interest rate swaps as part of its cash flow hedging strategy. Interest rate
swaps designated as cash flow hedges are entered into to achieve a fixed
interest rate on variable rate debt.

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

As of December 31, 2003, no derivatives were designated as fair value
hedges or hedges of net investments in foreign operations. The Operating
Partnership does not use derivatives for trading or speculative purposes.

At December 31, 2003, derivatives with a negative fair value of $13.8
million were included in "Accounts payable, accrued expenses and other
liabilities." The change in net unrealized gains of $9.7 million in 2003 for
derivatives designated as cash flow hedges is separately disclosed in the
Consolidated Statements of Partners' Capital.

Amounts reported in accumulated other comprehensive income related to
derivatives will be reclassified to interest expense as interest payments are
made on the Operating Partnership's variable rate debt. The change in net
unrealized gains/losses on cash flow hedges reflects a reclassification of $18.6
million of net unrealized gains or losses from other comprehensive income to
interest expense during 2003. During 2004, the Operating Partnership estimates
that an additional $10.1 million of unrealized losses will be reclassified to
interest expense.

GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. The Operating
Partnership performs evaluations of each real estate sale to determine if full
gain recognition is appropriate in accordance with SFAS No. 66, "Accounting for
Sales of Real Estate." The application of SFAS No. 66 can be complex and
requires the Operating Partnership to make assumptions including an assessment
of whether the risks and rewards of ownership have been transferred, the extent
of the purchaser's investment in the property being sold, whether the Operating
Partnership's receivables, if any, related to the sale are collectible and are
subject to subordination, and the degree of the Operating Partnership's
continuing involvement with the real estate asset after the sale. If full gain
recognition is not appropriate, the Operating Partnership accounts for the sale
under an appropriate deferral method.

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

81

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

increases. Any differences between the estimated increase amounts are adjusted
at year end based upon actual expenses incurred.

REVENUE RECOGNITION - RESORT/HOTEL PROPERTIES. On February 14, 2002,
the Operating Partnership executed an agreement with COPI, pursuant to which
COPI transferred to subsidiaries of the Operating Partnership, in lieu of
foreclosure, COPI's lessee interests in the eight Resort/Hotel Properties
previously leased to COPI. See Note 23, "COPI." For all of the Resort/Hotel
Properties, except the Omni Austin Hotel, the period February 14, 2002 to
December 31, 2003, the Operating Partnership recognized revenues for room sales
and guest nights and revenues from guest services whenever rooms were occupied
and services had been rendered. Lease revenue is recognized for the Omni Austin
Hotel.

Prior to the enactment of the REIT Modernization Act, the Company's
status as a REIT for federal income tax purposes prohibited it from acting as
lessee for the Resort/Hotel Properties. During 2001, the Operating Partnership
leased all of the Resort/Hotel Properties, except the Omni Austin Hotel, to
subsidiaries of COPI pursuant to eight separate leases. The Omni Austin Hotel
had been leased under a separate lease to HCD Austin Corporation. The leases
provided for the payment by the lessee of the Resort/Hotel Property of (i) base
rent, with periodic rent increases if applicable, (ii) percentage rent based on
a percentage of gross receipts or gross room revenues, as applicable, above a
specified amount, and (iii) a percentage of gross food and beverage revenues
above a specified amount for certain Resort/Hotel Properties. Base rental income
under these leases was recognized on a straight-line basis over the terms of the
respective leases. Contingent revenue was recognized when the thresholds upon
which it is based had been met.

REVENUE RECOGNITION - RESIDENTIAL DEVELOPMENT PROPERTIES. The Operating
Partnership uses the accrual method to recognize 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. If a sale does
not qualify for the accrual method of recognition, deferral methods are used as
appropriate including the percentage-of-completion method. In certain cases,
when the Operating Partnership receives an inadequate cash down payment and
takes a promissory note for the balance of the sales price, revenue recognition
is deferred until such time as sufficient cash is received to meet minimum down
payment requirements. 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 Operating Partnership's estimates of costs or the
percentage of completion is incorrect, it could result in either an increase or
decrease in cost of sales expense or revenue recognized and therefore, an
increase or decrease in net income.

At the Operating Partnership's golf clubs, members are expected to pay
an advance initiation fee or refundable deposit upon their acceptance as a
member to the club. These initiation fees and deposits vary in amount based on a
variety of factors such as the supply and demand for the Operating Partnership's
services in each particular market, number of golf courses and breadth of
amenities available to the members, and the prestige of having the right to
membership of the club. A significant portion of the Operating Partnership's
initiation fees are deferred equity memberships which are recorded as deferred
revenue when sold and recognized as membership fee revenue on a straight-line
basis over the number of months remaining until the turnover date of the club to
the members. Refundable deposits relate to the non-equity membership portion of
each membership sold which will be refunded upon resignation by the member and
upon reissuance of the membership, or at the termination of the membership as
provided by the membership agreement. The refundable initiation deposit is not
recorded as revenue but rather as a liability due to the refundable nature of
the deposit. The deferred revenue and refundable initiation deposits, net of
related deferred expenses, are presented in the Operating Partnership's
Consolidated Balance Sheets in Accounts payable, accrued expenses, and other
liabilities.

82

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES. Generally, no provision has been made for federal or
state income taxes, because each partner's proportionate share of income or loss
from the Operating Partnership will be passed through on such partner's tax
return. However, the Operating Partnership has elected to treat certain of its
corporate subsidiaries as a taxable REIT subsidiary ("TRS"). In general, a TRS
of the Operating Partnership may perform additional services for tenants of the
Operating Partnership and generally may engage in any real estate or non-real
estate business (except for the operating or management of health care
facilities or lodging facilities or the provision to any person, under a
franchise, license or otherwise, of rights to any brand name under which any
lodging facility or health care facility is operated). A TRS is subject to
corporate federal income tax, state and local taxes.

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

STOCK-BASED COMPENSATION. Effective January 1, 2003, the Operating Partnership
adopted the fair value expense recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," on a prospective basis as permitted
by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which requires that the fair value of stock options at the date of
grant be amortized ratably into expense over the appropriate vesting period.
During the year ended December 31, 2003, the Company and the Operating
Partnership granted stock and unit options and the Operating Partnership
recognized compensation expense that was not significant to its results of
operations. With respect to the Company's stock options and the Operating
Partnership's unit options which were granted prior to 2003, the Operating
Partnership 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 (doubled for unit options) at the
date of grant over the exercise price of the option granted. Compensation cost
for stock and unit options, if any, is recognized ratably over the vesting
period. During the year ended December 31, 2003, no compensation cost was
recognized for grants of stock and unit options made prior to 2003 under the
Company's and the Operating Partnership's stock and unit option plans ("the
Plans") because the Company's and the Operating Partnership's policy is to grant
stock and unit options with an exercise price equal to the quoted closing market
price of the Company's common shares (doubled for unit options) 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 Operating Partnership's net income and earnings per unit would have
been reduced to the following pro forma amounts:

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(in thousands, except per unit amounts) 2003 2002 2001
- ------------------------------------------------------------------------ -------- -------- --------

Net income available to partners, as reported $ 4,268 $ 91,390 $ 10,505
Add: Stock-based employee compensation expense included in reported net
income 1,188 -- --
Deduct: total stock-based employee compensation expense determined under
fair value based method for all awards (2,916) (4,318) (5,141)
-------- -------- --------
Pro forma net income $ 2,540 $ 87,072 $ 5,364
Earnings per unit:
Basic - as reported $ 0.07 $ 1.44 $ 0.15
Basic - pro forma $ 0.04 $ 1.37 $ 0.08
Diluted - as reported $ 0.07 $ 1.44 $ 0.15
Diluted - pro forma $ 0.04 $ 1.37 $ 0.08

83

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER UNIT. 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 partners
by the weighted average number of units outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue units were exercised or converted into units, where such
exercise or conversion would result in a lower EPS amount. The Operating
Partnership presents both basic and diluted earnings per unit.

The following table presents a reconciliation for the years ended
December 31, 2003, 2002 and 2001 of basic and diluted earnings per unit from
"Income before discontinued operations and cumulative effect of a change in
accounting principle" to "Net income available to partners." The table also
includes weighted average units on a basic and diluted basis.

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- -------------------------- ---------------------------
Wtd. Per Wtd. Per Wtd.
Income Avg. Unit Income Avg. Unit Income Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount (Loss) Units Amount
- ------------------------------------------- --------------------------- -------------------------- ---------------------------

BASIC EPS -
Income (loss) before discontinued operations
and cumulative effect of a change in
accounting principle $ 45,393 58,317 $101,608 63,578 $ 13,499 67,815
Series A Preferred Unit distributions (18,225) (16,702) (13,501)
Series B Preferred Unit distributions (8,075) (5,047) -
--------------------------- -------------------------- ---------------------------
Net income (loss) available to partners
before discontinued operations
and cumulative effect of a change in
accounting principle $ 19,093 58,317 $ 0.33 $ 79,859 63,578 $ 1.26 $ (2) 67,815 $ -
Income from discontinued operations 1,905 0.03 14,734 0.23 10,507 0.15
Impairment charges related to real estate
assets from discontinued operations (28,864) (0.50) (4,678) (0.07) - -
Gain on real estate from discontinued
operations, 12,134 0.21 11,802 0.18 - -
Cumulative effect of a change in accounting
principle - - (10,327) (0.16) - -
--------------------------- -------------------------- ---------------------------
Net income available to partners $ 4,268 58,317 $ 0.07 $ 91,390 63,578 $ 1.44 $ 10,505 67,815 $ 0.15
=========================== ========================== ===========================

Wtd. Per Wtd. Per Wtd.
Income Avg. Unit Income Avg. Unit Income Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount (Loss) Units Amount
- ------------------------------------------- --------------------------- -------------------------- ---------------------------

DILUTED EPS -
Income (loss) before discontinued operations
and cumulative effect of a change in
accounting principle $ 45,393 58,317 $101,608 63,578 $ 13,499 67,815
Series A Preferred Unit distributions (18,225) (16,702) (13,501)
Series B Preferred Unit distributions (8,075) (5,047) -
Effect of dilutive securities
Additional units
Obligation relating to:
Unit options 21 101 763
Net income (loss) available to partners
before discontinued operations and
cumulative effect of a change in
--------- ------ ------ -------- ------ ------ -------- ------ ------
accounting principle $ 19,093 58,338 $ 0.33 $ 79,859 63,679 $ 1.24 $ (2) 68,578 $ -
Income from discontinued operations 1,905 0.03 14,734 0.24 10,507 0.15
Impairment charges related to real estate
assets from discontinued operations (28,864) (0.50) (4,678) (0.07) - -
Gain on real estate from discontinued
operations 12,134 0.21 11,802 0.19 - -
Cumulative effect of a change in accounting
principle - - (10,327) (0.16) - -
--------- ------ ------ -------- ------ ------ -------- ------ ------
Net income available to partners $ 4,268 58,338 $ 0.07 $ 91,390 63,679 $ 1.44 $ 10,505 68,578 $ 0.15
========= ====== ====== ======== ====== ====== ======== ====== ======

84

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This table presents supplemental cash flows disclosures for the years
ended December 31, 2003, 2002 and 2001.

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: ------------------------------------------
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------------- ----------- ------------ -----------

Interest paid on debt $ 153,916 $ 146,150 $ 173,264
Interest capitalized - Office - 317 813
Interest capitalized - Resort/Hotel 34 - 507
Interest capitalized - Residential Development 18,233 16,667 -
Additional interest paid in conjunction with cash flow hedges 19,278 24,125 11,036
----------- ------------ -----------
Total interest paid $ 191,461 $ 187,259 $ 185,620
=========== ============ ===========
Net cash (received) paid for income taxes $ (7,215) $ 10,200 $ -
=========== ============ ===========
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES:

Sale of marketable securities $ - $ - $ (8,118)
Unrealized gain (loss) on marketable securities 3,761 (833) 596
Impairment related to an investment in an unconsolidated company - (5,302) -
Assumption of debt in conjunction with acquisitions of Office Property 48,713 - -
Unrealized net gain on cash flow hedges 9,662 5,065 (17,228)
Acquisition of ownership of certain assets previously owned by Broadband
Office, Inc. - - 7,200
Non-cash compensation 2,529 1,781 750
Financed sale of land parcel 11,800 7,520 -
Note repayment from SH IX - 281,107 -

SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATIONS OF DBL, MVDC, HADC AND GDW
AND THE 2002 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES PURSUANT
TO THE FEBRUARY 14, 2002 AGREEMENT WITH COPI:

Net investment in real estate $ (40,178) $ (570,175)
Restricted cash and cash equivalents - (3,968)
Accounts receivable, net (3,067) (23,338)
Investments in unconsolidated companies 33,123 309,103
Notes receivable, net (25) 29,816
Income tax asset - current and deferred, net (3,564) (21,784)
Other assets, net (820) (63,263)
Notes payable 312 129,157
Accounts payable, accrued expenses and other liabilities 14,047 201,159
Minority interest - consolidated real estate partnerships 11,746 51,519
----------- ------------ -----------
Increase in cash resulting from consolidation of DBL, MVDC, HADC,
GDW and from COPI agreement $ 11,574 $ 38,226 $ N/A
=========== ============ ===========

85

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SEGMENT REPORTING

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

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

- Net Income (Loss) - determined in accordance with GAAP;

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

- excluding extraordinary items (as defined by GAAP);

- plus depreciation and amortization of real estate assets;
and

- after adjustments for unconsolidated partnerships and joint
ventures.

The Operating Partnership calculates FFO available to partners in the
same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Partners.

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 Operating Partnership
considers FFO available to partners an appropriate measure of performance for an
operating partnership of an equity REIT and for its investment segments.
However, FFO available to partners and FFO should not be considered as
alternatives to net income determined in accordance with GAAP as an indication
of the Operating Partnership's operating performance.

The Operating Partnership's measure of FFO available to partners may
not be comparable to similarly titled measures of operating partnerships of
REITs (other then the Company), if those REITs apply the definition of FFO in a
different manner than the Operating Partnership.

86

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Selected financial information related to each segment for the years
ended December 31, 2003, 2002 and 2001, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interest for each
of the segments at December 31, 2003, and 2002, are presented below:

SELECTED FINANCIAL INFORMATION:

FOR THE YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- ---------------------------------------------- --------- ------------ ---------- ------------ ---------- ---------

Total Property revenue $ 495,468 $ 225,562 $ 228,214 $ -- $ -- $ 949,244
Total Property expense (235,439) (182,648) (202,162) -- -- (620,249)
--------- ----------- ---------- ----------- ---------- ---------
Income from Property Operations $ 260,029 $ 42,914 $ 26,052 $ -- $ -- $ 328,995
Total other income (expense) (109,030) (18,890) 87,582 2,172 (218,804)(3) (256,970)
Minority interests and income taxes (344) 6,009 (34,583) -- 2,286 (26,632)
Discontinued operations - income, gain on real
estate and impairment charges related to
real estate assets (10,194) -- -- -- (4,631) (14,825)
--------- ----------- ---------- ----------- ---------- ---------
Net income (loss) $ 140,461 $ 30,033 $ 79,051 $ 2,172 $ (221,149) $ 30,568
--------- ----------- ---------- ----------- ---------- ---------
Depreciation and amortization of real estate
assets $ 122,358 $ 23,634 $ 4,820 $ -- $ (24) $ 150,788
(Gain) loss on property sales, net (9,382) -- -- -- 463 (8,919)
Impairment charges related to real estate
assets 24,100 -- 683 -- 13,011 37,794
Adjustments for investment in unconsolidated
companies 6,254 (2,544) 3,573 21,136 206 28,625
Series A Preferred unit distributions -- -- -- -- (18,225) (18,225)
Series B Preferred unit distributions -- -- -- -- (8,075) (8,075)
--------- ----------- ---------- ----------- ---------- ---------
Adjustments to reconcile net income (loss) to
funds from operations available to partners $ 143,330 $ 21,090 $ 9,076 $ 21,136 $ (12,644) $ 181,988
--------- ----------- ---------- ----------- ---------- ---------
Funds from operations available to partners
before impairment charges related to real
estate assets $ 283,791 $ 51,123 $ 88,127 $ 23,308 $ (233,793) $ 212,556
Impairment charges related to real estate
assets (24,100) -- (683) -- (13,011) (37,794)
--------- ----------- ---------- ----------- ---------- ---------
Funds from operations available to partners
after impairment charges related to real
estate assets $ 259,691 $ 51,123 $ 87,444 $ 23,308 $ (246,804) $ 174,762
========= =========== ========== =========== ========== =========

See footnotes to the following table.

87

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SELECTED FINANCIAL INFORMATION:

FOR THE YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- ---------------------------------------------- ---------- ------------ ---------- ------------ ---------- ----------

Total Property revenue $ 538,781 $ 203,128 $ 260,569 $ -- $ -- $1,002,478
Total Property expense (238,580) (157,987) (238,745) -- -- (635,312)
--------- ----------- ---------- ----------- ---------- ----------
Income from Property Operations $ 300,201 $ 45,141 $ 21,824 $ -- $ -- $ 367,166

Total other income (expense) (60,489) (28,449) 32,081 (2,933) (199,081)(3) (258,871)
Minority interests and income taxes (911) 12,110 (12,372) -- (5,514) (6,687)
Discontinued operations - income, gain on real
estate and impairment charges related to
real estate assets 25,765 -- (507) -- (3,400) 21,858
Cumulative effect of a change in accounting
principle -- -- -- (10,327) -- (10,327)
--------- ----------- ---------- ----------- ---------- ----------
Net income (loss) $ 264,566 $ 28,802 $ 41,026 $ (13,260) $ (207,995) $ 113,139
--------- ----------- ---------- ----------- ---------- ----------
Depreciation and amortization of real estate
assets $ 110,642 $ 21,816 $ 4,001 $ -- $ -- $ 136,459
(Gain) loss on property sales, net (31,459) 3,311 -- -- 46 (28,102)
Cumulative effect of a change in accounting
principle -- -- -- 10,327 -- 10,327
Impairment charges related to real estate
assets -- 2,569 1,448 -- 12,877 16,894
Adjustments for investment in unconsolidated
companies (10,192) 195 4,529 23,933 6,213 24,678
Series A Preferred unit distributions -- -- -- -- (16,702) (16,702)
Series B Preferred unit distributions -- -- -- -- (5,047) (5,047)
--------- ----------- ---------- ----------- ---------- ----------
Adjustments to reconcile net income (loss) to
funds from operations available to partners $ 68,991 $ 27,891 $ 9,978 $ 34,260 $ (2,613) $ 138,507
--------- ----------- ---------- ----------- ---------- ----------
Funds from operations available to partners
before impairment charges related to real
estate assets $ 333,557 $ 56,693 $ 51,004 $ 21,000 $ (210,608) $ 251,646
Impairment charges related to real estate
assets -- (2,569) (1,448) -- (12,877) (16,894)
Cumulative effect of a change in accounting
principle -- -- -- (10,327) -- (10,327)
--------- ----------- ---------- ----------- ---------- ----------

Funds from operations available to partners
after impairment charges related to real
estate assets $ 333,557 $ 54,124 $ 49,556 $ 10,673 $ (223,485) $ 224,425
========= =========== ========== =========== ========== ==========

See footnotes to the following table.

88

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SELECTED FINANCIAL INFORMATION:

FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- ---------------------------------------------- --------- ------------ ----------- ------------ ---------- ---------

Total Property revenue $ 575,883 $ 45,748 $ - $ - $ - $ 621,631
Total Property expense (247,984) - - - - (247,984)
--------- ------------ ----------- ------------ ---------- ---------
Income from Property Operations $ 327,899 $ 45,748 $ - $ - $ - $ 373,647

Total other income (expense) (86,995) (17,667) 41,014 1,136 (277,838)(3) (340,350)
Minority interests (781) - - - (19,017) (19,798)
Discontinued operations - income, gain on
real estate and impairment charges related
to real estate assets 10,507 - - - - 10,507
--------- ------------ ----------- ------------ ---------- ---------
Net income (loss) $ 250,630 $ 28,081 $ 41,014 $ 1,136 $ (296,855) $ 24,006
--------- ------------ ----------- ------------ ---------- ---------
Depreciation and amortization of real estate
assets $ 104,366 $ 17,667 $ - $ - $ - $ 122,033
(Gain) loss on property sales, net (2,835) - - - - (2,835)
Impairment charges related to real estate
assets - - - - 21,705 21,705
Extinguishment of debt - - - - 12,174 12,174
Adjustments for investment in unconsolidated
companies 6,955 - 13,037 22,671 144 42,807
Series A Preferred unit distributions - - - - (13,501) (13,501)
--------- ------------ ----------- ------------ ---------- ---------
Adjustments to reconcile net income (loss) to
funds from operations available to partners $ 108,486 $ 17,667 $ 13,037 $ 22,671 $ 20,522 $ 182,383
--------- ------------ ----------- ------------ ---------- ---------
Funds from operations available to partners
before impairment charges related to real
estate assets $ 359,116 $ 45,748 $ 54,051 $ 23,807 $ (276,333) $ 206,389
Impairment charges related to real estate
assets - - - - (21,705) (21,705)
--------- ------------ ----------- ------------ ---------- ---------
Funds from operations available to partners
after impairment charges related to real
estate assets $ 359,116 $ 45,748 $ 54,051 $ 23,807 $ (298,038) $ 184,684
========= ============ =========== ============ ========== =========

See footnotes to the following table.

TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(IN MILLIONS) SEGMENT SEGMENT SEGMENT(2)(4) SEGMENT OTHER TOTAL
-------- ------------ ------------- ------------ --------- -------

TOTAL ASSETS BY SEGMENT: (5)
Balance at December 31, 2003 $ 2,683 (6) $ 469 $ 753 $ 301 $ 105 $ 4,311
Balance at December 31, 2002 2,624 492 770 305 94 4,285
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at December 31, 2003 $(1,459) $ (138) $ (87) $ - $ (875)(7) $(2,559)
Balance at December 31, 2002 (1,371) (130) (93) - (789)(7) (2,383)
CONSOLIDATED OTHER LIABILITIES:
Balance at December 31, 2003 $ (124) $ (29) $ (112) $ - $ (109) $ (374)
Balance at December 31, 2002 (135) (44) (125) - (69) (373)
MINORITY INTERESTS:
Balance at December 31, 2003 $ (9) $ (7) $ (31) $ - $ - $ (47)
Balance at December 31, 2002 (11) (8) (25) - - (44)

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

(1) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $9.3 million, $16.7 million, and $8.6 million
for the years ended December 31, 2003, 2002, and 2001 respectively.

(2) The Operating Partnership sold its interest in The Woodlands Land
Development Company, L.P. on December 31, 2003.

(3) For purposes of the Note, Corporate and Other includes the total of: income
from investment land sales, net, interest and other income, corporate
general and administrative expense, interest expense, amortization of
deferred financing costs, preferred return paid to GMAC Commercial Mortgage
Corporate ("GMACCM") for 2002, impairment and other charges related to COPI
of $92.8 million for 2001, and other expenses.

(4) The Operating Partnership's net book value for the Residential Segment
includes total assets, consolidated property level financing, consolidated
other liabilities and minority interest, totaling $523 million for the year
ended December 31, 2003. The primary components of net book value are $345
million for CRDI, consisting of Tahoe Mountain Resort properties of $154
million and Colorado properties of $191 million, $137 million for Desert
Mountain and $41 million for other land development properties.

(5) Total assets by segment are inclusive of investments in unconsolidated
companies.

(6) Land held for investment or development related to the Office Segment is
$72.7 million.

(7) Inclusive of corporate bonds, credit facility, capital leases and, for
2003, a defeased loan.

89

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ACQUISITIONS

OFFICE SEGMENT

On August 26, 2003, the Operating Partnership acquired The Colonnade,
an 11-story, 216,000 square foot Class A office tower, located in the Coral
Gables submarket in Miami, Florida. The Operating Partnership acquired the
Office Property for approximately $51.4 million, funded by the Operating
Partnership's assumption of a $38.0 million loan from Bank of America and a draw
on the Operating Partnership's credit facility. This Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.

In November 2003, the Operating Partnership entered into a contract to
purchase from the Rouse Company its investment in the Hughes Center office
portfolio in Las Vegas, Nevada. Hughes Center contains seven Class A office
properties and nine retail parcels. The total purchase price for the seven
Office Properties and the nine retail parcels purchased by the Operating
Partnership in December 2003 and February 2004 was approximately $214.2 million,
$119.2 million in cash and the remaining $95.0 million in assumed debt.

On December 31, 2003, the Operating Partnership acquired two of the
Class A Office Properties and two of the retail parcels located within Hughes
Center, for approximately $38.9 million, funded by the Operating Partnership's
assumption of a $9.6 million mortgage loan from The Northwestern Mutual Life
Insurance Company and by a portion of the proceeds from the sale of the
Operating Partnership's interests in The Woodlands. See Note 6, "Other
Dispositions," for information on the sale of these interests. These Office
Properties and retail parcels are wholly-owned and included in the Office
Segment.

Subsequent to December 31, 2003, the Operating Partnership acquired an
additional five Class A Office Properties and seven retail parcels located
within Hughes Center. One of these Office Properties is owned through a joint
venture in which the Operating Partnership owns a 67% interest. The remaining
four Office Properties are wholly-owned by the Operating Partnership. The
Operating Partnership acquired these five Office Properties and seven retail
parcels for approximately $175.3 million, funded by the Operating Partnership's
assumption of approximately $85.4 million mortgage loans and by a portion of the
proceeds from the sale of the Operating Partnership's interests in The
Woodlands.

In connection with the Hughes Center acquisition, the Operating
Partnership entered into an exchange agreement with a third party intermediary
for six of the Office Properties and the nine retail parcels. This agreement is
for a maximum term of 180 days and allows the Operating Partnership to pursue
favorable tax treatment on other properties sold by the Operating Partnership
within this period. During the 180-day period, which will end on June 28, 2004,
the third party intermediary is the legal owner of the properties, although the
Operating Partnership controls the properties, retains all of the economic
benefits and risks associated with these properties and indemnifies the third
party intermediary and, therefore, the Operating Partnership will fully
consolidate these Properties. On the expiration of the 180-day period, the
Operating Partnership will take legal ownership of the properties.

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

On November 26, 2002, the Operating Partnership purchased Duddlesten
Ventures-I, Ltd.'s 20% interest in the Crescent Duddlesten Hotel Partnership for
$11.1 million, funded by a draw on the Operating Partnership's credit facility,
and increasing the Operating Partnership's ownership percentage from 80% to
100%. This partnership owned 3.79 acres of undeveloped land in downtown Houston,
and therefore the Operating Partnership recorded the $11.1 million as an
increase to land. See Note 6, "Other Dispositions," for information regarding
the December 31, 2002 sale of approximately 2.32 acres of this undeveloped land
near the Houston Convention Center, included in 5.5 acres sold on December 31,
2002. The remaining 1.47 acres in downtown Houston are wholly-owned and included
in the Operating Partnership's Office Segment.

90

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESIDENTIAL DEVELOPMENT SEGMENT

On August 14, 2003, CRDI, a consolidated subsidiary of the Operating
Partnership, completed the purchase of a tract of undeveloped land in Eagle
County, Colorado, for approximately $15.5 million, funded by a draw on the
Operating Partnership's credit facility.

5. DISCONTINUED OPERATIONS

In August 2001, the FASB issued SFAS No. 144 which requires that the
results of operations of assets sold or held for sale, including any gains or
losses recognized, be disclosed separately in the Operating Partnership's
Consolidated Statements of Operations. The Operating Partnership adopted SFAS
No. 144 on January 1, 2002. In accordance with SFAS No. 144, the results of
operations of assets sold or held for sale have been presented as "Income from
discontinued operations," gain or loss on the assets sold or held for sale have
been presented as "Gain on real estate from discontinued operations" and
impairments on the assets sold or held for sale have been presented as
"Impairment charges related to real estate assets from discontinued operations"
in the accompanying Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001. The carrying value of the assets held for sale
has been reflected as "Properties held for disposition, net" in the accompanying
Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002.

ASSETS SOLD

OFFICE SEGMENT

The following table presents the dispositions of consolidated Office
Properties for the years ended December 31, 2003 and 2002, including the
Property sold, location of the Property, net proceeds received, and net gain
(loss) on sale.

(dollars in millions)

OPERATING
OPERATING PARTNERSHIP'S
PARTNERSHIP'S NET
NET GAIN
DATE PROPERTY LOCATION PROCEEDS (LOSS)
- ------------------ ------------------------------ ---------------- ------------- -------------

2003
December 15, 2003 Las Colinas Plaza Dallas, Texas $ 20.6 $ 14.5
December 31, 2003 Woodlands Office Properties(1) Houston, Texas 15.0 (2.3)
2002
January 18, 2002 Cedar Springs Plaza Dallas, Texas 12.0 4.5
May 29, 2002 Woodlands Office Properties(2) Houston, Texas 3.2 1.9
August 1, 2002 6225 North 24th Street Phoenix, Arizona 8.8 1.3
September 20, 2002 Reverchon Plaza Dallas, Texas 29.2 0.5
December 31, 2002 Woodlands Office Properties(2) Houston, Texas 4.8(3) 3.6

- -----------------------
(1) The sale included the Operating Partnership's four remaining Office
Properties in The Woodlands. These properties were held through Woodlands
Office Equities - '95 Limited Partnership ("WOE"), which was owned 75% by
the Operating Partnership and 25% by the Woodlands Commercial Properties
Company, L.P.

(2) This sale included two Office Properties held through WOE.

(3) This sale also generated a note receivable in the amount of $10.6 million.
The interest rate on the note was 7.5% and all principal and accrued
interest was received on February 19, 2003.

91

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESIDENTIAL DEVELOPMENT SEGMENT

On December 31, 2002, CRDI, a consolidated subsidiary of the Operating
Partnership, completed the sale of its 50% interest in two Colorado
transportation companies, EWRT I and EWRT II, to an affiliate of CRDI business
partners for $7.0 million, consisting of $1.4 million in cash and a $5.6 million
note receivable. The note bears interest at 9.0%, with principal and interest
payments due annually beginning December 31, 2004 and a maturity date of
December 31, 2008. The Operating Partnership recognized a $1.4 million gain,
after tax, related to the sale of these companies.

BEHAVIORAL HEALTHCARE PROPERTIES

See Note 24, "Behavioral Healthcare Properties," for information on the
dispositions of these properties.

ASSETS HELD FOR SALE

As of December 31, 2003, three Office Properties were classified as
held for sale in accordance with SFAS No. 144. Each Property is currently being
marketed for sale and the Operating Partnership anticipates the Properties will
be sold in 2004.

As of December 31, 2003, the 1800 West Loop South Office Property
located in the West Loop/Galleria submarket in Houston, Texas, was held for
sale. During the year ended December 31, 2003, the Operating Partnership
recognized an approximately $16.4 million impairment charge on the 1800 West
Loop South Office Property.

In addition, the Liberty Plaza Office Property located in the
Quorum/Bent Tree submarket in Dallas, Texas, was held for sale as of December
31, 2003. During the fourth quarter of 2003, the Operating Partnership
recognized an approximately $4.3 million impairment charge on the Liberty Plaza
Office Property.

The 12404 Park Central Office Property located in the LBJ Freeway
submarket in Dallas, Texas, was also held for sale as of December 31, 2003.
During the year ended December 31, 2003, the Operating Partnership recognized an
approximately $3.4 million impairment charge on the 12404 Park Central Office
Property.

SUMMARY OF ASSETS HELD FOR SALE

The following table indicates the major classes of assets of the
Properties held for sale as of December 31, 2003, and December 31, 2002.

(in thousands) 2003(1) 2002(2)
- --------------------------------------------------------------------------------

Land $ 8,224 $ 24,151
Buildings and improvements 55,625 119,881
Furniture, fixture and equipment 149 1,713
Accumulated depreciation (13,540) (29,409)
Other assets, net 2,061 5,749
------------ -----------
Net investment in real estate $ 52,519 $ 122,085
============ ===========

- -----------------------------
(1) Includes three Office Properties and one behavioral healthcare property.

(2) Includes five Office Properties and seven behavioral healthcare properties.

92

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present rental revenues, operating and other
expenses, depreciation and amortization, net income, gain on sale of properties,
and impairments of real estate for years ended December 31, 2003, 2002, and
2001, for properties included in discontinued operations.

(in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------

Total revenues $ 17,323 $ 46,990 $ 35,656
Operating and other expenses (8,183) (25,315) (16,980)
Depreciation and amortization (7,235) (6,941) (8,169)
--------------------------------------
Income from discontinued operations $ 1,905 $ 14,734 $ 10,507
======================================

(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------

Gain on real estate from discontinued operations $ 12,134 $ 11,802 $ -
==============================

(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------

Impairment charges related to real estate assets from discontinued operations $ (28,864) $ (4,678) $ -
==============================

6. OTHER DISPOSITIONS

The gains and losses for consolidated asset dispositions during the
years ended December 31, 2003, 2002 and 2001, listed below in this Note did not
meet the criteria which would require reporting under SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Accordingly, the related
gains and losses from these consolidated asset dispositions are included in the
Operating Partnership's Consolidated Statements of Operations as "Loss on
property sales, net."

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

The following table presents the dispositions of consolidated Office
Properties for the year ended December 31, 2001, including the property sold,
location of the property, net proceeds received, and net gain (loss) on sale.

(dollars in millions)

NET
NET GAIN
DATE PROPERTY LOCATION PROCEEDS (LOSS)
- ------------------ --------------------------------------- ---------------- -------- -------

September 18, 2001 Washington Harbour Office Properties(1) Washington, D.C. $ 153.0 $ (9.9)
September 28, 2001 Woodlands Office Properties(1) (2) Houston, Texas 9.9 3.0
December 20, 2001 Woodlands Office Property(2) Houston, Texas 1.8 1.5

- ----------------------
(1) This sale included two Office Properties.

(2) These Office Properties were held through WOE.

93

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OFFICE SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

The following table presents the significant dispositions of
undeveloped land for the years end December 31, 2003, 2002 and 2001 including
location of the land, the acreage, net proceeds received, and net gain on sale
included in Income from investment land sales, net in the Consolidated
Statements of Operations.

(dollars in millions)

NET
NET GAIN
DATE LOCATION ACREAGE PROCEEDS (LOSS)
- -------------------- ---------------- ------- -------- --------

2003
April 24, 2003 Dallas, Texas 0.5 $ 0.3 $ 0.3
May 15, 2003 Coppell, Texas 24.8 3.0 1.1
June 27, 2003(1) Houston, Texas 3.5 2.1 (1) 8.9
September 30, 2003 Houston, Texas 3.1 5.3 2.4
2002
September 30, 2002 Washington, D.C. 1.4 15.1 (0.9)
December 31, 2002(2) Houston, Texas 5.5 33.1 15.1
December 31, 2002 Houston, Texas 3.1 5.2 2.0

- ------------------------
(1) This sale also generated 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.

(2) Under the terms of the purchase and sale contract, the purchaser has
options to purchase two additional parcels of undeveloped land from the
Operating Partnership. The first parcel is comprised of approximately 3.47
acres and has a purchase option closing deadline of June 2005. Under the
terms of the contract, the Operating Partnership will lease this parcel to
the purchaser from December 2002 through June 2005. The purchase option
closing deadline for the second parcel of approximately 1.59 acres is June
2007.

OFFICE SEGMENT - UNCONSOLIDATED

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

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

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

During the year ended December 31, 2001, the Woodlands Land Development
Company, L.P. ("WLDC") sold two office properties and one retail property
located within the Woodlands, Texas. The sales generated net proceeds, after the
repayment of debt, of approximately $41.8 million, of which the Operating
Partnership's portion was approximately $19.7 million. The sale generated a gain
of $13.3 million, of which the Operating Partnership's portion was $3.8 million.
The proceeds were used primarily to pay down the Operating Partnership's credit
facility.

94

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESORT/HOTEL SEGMENT - UNDEVELOPED LAND - CONSOLIDATED

On September 30, 2002, the Operating Partnership completed the sale of
30 acres of land adjacent to the Operating Partnership's Canyon Ranch - Tucson
Resort/Hotel Property, located in Tucson, Arizona, to an affiliate of the third
party management company of the Operating Partnership's Canyon Ranch
Resort/Hotel Properties. The sales price of the land was approximately $9.4
million, for which the Operating Partnership received $1.9 million of cash
proceeds and a promissory note in the amount of $7.5 million with an interest
rate at 6.5%, payable quarterly and maturing on October 1, 2007. The note
receivable balance at December 31, 2003 was approximately $5.6 million. The
Operating Partnership recognized a net gain of approximately $5.5 million
included in income from investment land sales, net in the Consolidated
Statements of Operations for 2002. The net cash proceeds from the sale of the
land were used to pay down the Operating Partnership's credit facility. This
land was wholly-owned by the Operating Partnership. The Operating Partnership
has committed to fund a $2.4 million construction loan to the purchaser, which
will be secured by 9 developed lots and a $0.4 million letter of credit. The
Operating Partnership had not funded any of the $2.4 million commitment as of
December 31, 2003.

RESIDENTIAL DEVELOPMENT SEGMENT - UNCONSOLIDATED

On December 31, 2003, the Operating Partnership sold all of its
interests in The Woodlands, Texas, to a subsidiary of the Rouse Operating
Partnership. The interests sold by the Operating Partnership consist of:

- a 52.5% economic interest, including a 10% earned promotional interest
in the partnership through which the Operating Partnership owned its
interest in The Woodlands residential development property, and a
promissory note due in 2007 in the original principal amount of $10.6
million from WLDC;

- a 75% interest in Woodlands Office Equities - '95 Limited Partnership,
the partnership through which the Operating Partnership owned its
interests in four office properties located in The Woodlands;

- a 52.5% economic interest, including a 10% earned promotional interest,
in Woodlands CPC; and

- a 52.5% economic interest, including a 10% earned promotional interest,
in The Woodlands Operating Company, L.P.

Total consideration to the Operating Partnership for the sale of its
interests in The Woodlands was $387.0 million, approximately $202.8 million in
cash and approximately $184.2 million in assumption of debt by the purchaser.
The Operating Partnership received approximately $18.0 million of the $202.8
million cash component prior to closing in the form of partnership distributions
net of working capital adjustments. The debt represents 52.5% of the debt of the
unconsolidated partnerships through which the Operating Partnership owned its
interests in The Woodlands. The sale resulted in a net gain of approximately
$83.9 million, $49.2 million net of tax, to the Operating Partnership. The
Operating Partnership allocated $15.0 million of the total consideration, which
generated a $2.3 million net loss included in "Gain on real estate from
discontinued operations" in the Operating Partnership's Consolidated Statements
of Operations to the sale of its interest in Woodland's Office Equities - '95
Limited Partnership, which had four remaining office properties. These Office
Properties were consolidated by the Operating Partnership and included in its
Office Segment and were classified as held for sale. The remaining $86.2 million
gain is included in "Income from sale of investment in unconsolidated company,
net" in the Operating Partnership's Consolidated Statements of Operation.

Prior to the sale on December 31, 2003, and at December 31, 2002, $57.5
million and $67.5 million, respectively, were included in "Investment in
unconsolidated companies" on the Consolidated Balance Sheets for the
unconsolidated partnerships through which the Operating Partnership owned its
interests in The Woodlands. The "Equity in net income (loss) of unconsolidated
companies" included in the Operating Partnership's Consolidated Statements of
Operations for the years ended December 31, 2003, 2002, and 2001 was $14.6
million, $52.8 million, and $26.9 million, respectively.

7. JOINT VENTURES

95

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Operating Partnership entered into the following consolidated and
unconsolidated joint ventures during the years ended December 31, 2003, 2002 and
2001:

OFFICE SEGMENT

UNCONSOLIDATED - 2003 TRANSACTIONS

BriarLake Plaza

On October 8, 2003, the Operating Partnership entered into a joint
venture, Crescent One BriarLake, L.P., with affiliates of J.P. Morgan Fleming
Asset Management, Inc. The joint venture purchased BriarLake Plaza, located in
the Westchase submarket of Houston, Texas, for approximately $74.4 million. The
Property is a 20-story, 502,000 square foot Class A office building. The
affiliates of J.P. Morgan Fleming Asset Management, Inc. own a 70% interest, and
the Operating Partnership owns a 30% interest, in the joint venture. The initial
cash equity contribution to the joint venture was $24.4 million, of which the
Operating Partnership's portion was $7.3 million. The Operating Partnership's
equity contribution and an additional working capital contribution of $0.5
million were funded primarily through a draw under the Operating Partnership's
credit facility. The remainder of the purchase price of the Property was funded
by a secured loan to the joint venture in the amount of $50.0 million. None of
the mortgage financing at the joint venture level is guaranteed by the Operating
Partnership. The Operating Partnership manages and leases this Office Property
on a fee basis. This Office Property is an unconsolidated investment and
included in the Operating Partnership's Office Segment.

UNCONSOLIDATED - 2002 TRANSACTIONS

Three Westlake Park

On August 21, 2002, the Operating Partnership entered into a joint
venture arrangement with an affiliate of General Electric Pension Fund (the
affiliate is referred to as "GE") in connection with which the Operating
Partnership contributed an Office Property, Three Westlake Park in Houston,
Texas. GE made a cash contribution. The joint venture is structured such that GE
holds an 80% equity interest in Three Westlake Park, and the Operating
Partnership continues to hold the remaining 20% equity interest in the Office
Property, which is accounted for under the equity method. The joint venture
generated approximately $47.1 million in net cash proceeds to the Operating
Partnership, resulting from the sale of its 80% equity interest and $6.6 million
from the Operating Partnership's portion of mortgage financing at the joint
venture level. None of the mortgage financing at the joint venture level is
guaranteed by the Operating Partnership. The Operating Partnership has no
commitment to reinvest the cash proceeds back into the joint venture. The joint
venture was accounted for as a partial sale of this Office Property, resulting
in a gain of $17.0 million, net of deferred gain of approximately $4.3 million.
The proceeds were used to pay down the Operating Partnership's credit facility.
The Operating Partnership manages and leases the Office Property on a fee basis.

Miami Center

On September 25, 2002, the Operating Partnership entered into a joint
venture arrangement with an affiliate of a fund managed by JPMorgan Fleming
Asset Management, Inc. (the affiliate is referred to as "JPM Fund I"), in
connection with which JPM Fund I purchased a 60% interest in Crescent Miami
Center, L.L.C. with a cash contribution. Crescent Miami Center, L.L.C. owns a
782,000 square foot Office Property, Miami Center, located in Miami, Florida.
The joint venture is structured such that JPM Fund I holds a 60% equity interest
in Miami Center, and the Operating Partnership holds the remaining 40% equity
interest in the Office Property, which is accounted for under the equity method.
The joint venture generated approximately $111.0 million in net cash proceeds to
the Operating Partnership, resulting from the sale of its 60% equity interest
and $32.4 million from the Operating Partnership's portion of mortgage financing
at the joint venture level. None of the mortgage financing at the joint venture
level is guaranteed by the Operating Partnership. The Operating Partnership has
no commitment to reinvest the cash proceeds into the joint venture. The joint
venture was accounted for as a partial sale of this Office Property, resulting
in a gain of approximately $4.6 million, net of deferred gain of approximately
$3.5 million. The proceeds

96

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

were used to pay down the Operating Partnership's credit facility. The Operating
Partnership manages this Office Property on a fee basis.

Five Post Oak Park

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

UNCONSOLIDATED - 2001 TRANSACTIONS

Four Westlake Park and Bank One Tower

On July 30, 2001, the Operating Partnership entered into two joint
venture arrangements with GE in which the Operating Partnership contributed two
Office Properties, Four Westlake Park in Houston, Texas, and Bank One Tower in
Austin, Texas, and GE made cash contributions. GE holds an 80% equity interest
in each of these Office Properties and the Operating Partnership holds the
remaining 20% equity interest. The transactions generated approximately $120.0
million in net cash proceeds to the Operating Partnership resulting from the
sale of its 80% equity interest and from mortgage financing at the joint venture
level. None of the mortgage financing at the joint venture level is guaranteed
by the Operating Partnership. The Operating Partnership has no commitment to
reinvest the cash proceeds back into the joint ventures. The joint ventures were
accounted for as partial sales of these Office Properties, resulting in a gain
of approximately $7.6 million, net of a deferred gain of approximately $1.9
million. The proceeds were used to pay down the Operating Partnership's credit
facility. The Operating Partnership manages and leases these Office Properties
on a fee basis.

5 Houston Center

On June 4, 2001, the Operating Partnership entered into a joint venture
arrangement with a pension fund advised by JPMorgan Fleming Asset Management,
Inc. (the fund is referred to as "JPM Fund II") to construct the 5 Houston
Center Office Property within the Operating Partnership's mixed-use Office
Property complex in Houston, Texas. This joint venture is structured such that
the fund holds a 75% equity interest, and the Operating Partnership holds a 25%
equity interest, in the Property. The Operating Partnership contributed
approximately $8.5 million of land and $12.3 million of development costs to the
joint venture and received a distribution of $14.8 million of net proceeds,
resulting in a net equity position of $6.0 million for the Operating
Partnership. No gain or loss was recognized by the Operating Partnership on this
transaction. The development was completed on September 16, 2002, and was
financed through a construction loan. The construction loan was refinanced and
converted to a mortgage loan on September 8, 2003. The Operating Partnership
manages and leases this Office Property on a fee basis.

97

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESORT/HOTEL SEGMENT

UNCONSOLIDATED - 2003 AND 2002 TRANSACTIONS

Manalapan Hotel Partners

On November 21, 2003, Manalapan Hotel Partners, L.L.C. ("Manalapan"),
owned 50% by the Operating Partnership and 50% by WB Palm Beach Investors,
L.L.C. ("Westbrook"), sold the Ritz Carlton Palm Beach Resort/Hotel Property in
Palm Beach, Florida. The sale generated net proceeds of approximately $34.7
million, of which the Operating Partnership's portion was approximately $18.0
million, and generated a net gain of approximately $6.7 million, of which the
Operating Partnership's portion was approximately $3.9 million. In addition,
Manalapan retained its accounts receivable of approximately $2.4 million, of
which the Operating Partnership's portion is approximately $1.3 million, of
which the Operating Partnership received approximately $0.6 million in the first
quarter of 2004. The proceeds from the sales were used primarily to pay down the
Operating Partnership's credit facility. This Property was an unconsolidated
investment.

In October 2002, in a series of transactions, the Operating Partnership
acquired the remaining 75% economic interest in Manalapan. The Operating
Partnership acquired the additional interests in Manalapan for $6.5 million,
which was funded by a draw on the Operating Partnership's credit facility.
Subsequently, the Operating Partnership entered into a joint venture arrangement
with Westbrook pursuant to which Westbrook purchased a 50% equity interest in
Manalapan. The Operating Partnership held the remaining 50% equity interest.
During 2002, the Operating Partnership recognized an impairment on this
investment of approximately $2.6 million reflected in "Impairment charges
related to real estate assets" to reflect fair value of the Operating
Partnership's 50% equity investment.

CONSOLIDATED - 2002 TRANSACTION

Sonoma Mission Inn & Spa

On September 1, 2002, the Operating Partnership entered into a joint
venture arrangement with a subsidiary of Fairmont Hotels & Resorts, Inc. (the
subsidiary is referred to as "FHR"), pursuant to which the Operating Partnership
contributed a Resort/Hotel Property, the Sonoma Mission Inn & Spa in Sonoma
County, California and FHR purchased a 19.9% equity interest in the limited
liability company that owns the Resort/Hotel Property. The Operating Partnership
continues to hold the remaining 80.1% equity interest. The joint venture
generated approximately $8.0 million in net cash proceeds to the Operating
Partnership that were used to pay down the Operating Partnership's credit
facility. The Operating Partnership loaned $45.1 million to the joint venture at
an interest rate of LIBOR plus 300 basis points. The maturity date of the loan
is the earlier of the date on which third-party financing is obtained, or one
year. The joint venture exercised its option to extend the Operating
Partnership's $45.1 million loan for two successive six-month periods by paying
a fee. The Operating Partnership manages the limited liability company that owns
the Sonoma Mission Inn & Spa, and FHR operates and manages this Property for the
tenant under the Fairmont brand. FHR has a commitment to fund $10.0 million of
future renovations at Sonoma Mission Inn & Spa through a mezzanine loan. As of
December 31, 2002, $3.0 million was outstanding under this loan. This joint
venture transaction was accounted for as a partial sale of this Resort/Hotel
Property, resulting in a loss to the Operating Partnership of approximately $4.0
million on the interest sold. The joint venture leases Sonoma Mission Inn & Spa
to a taxable REIT subsidiary in which the Operating Partnership also holds an
80.1% equity interest.

98

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

UNCONSOLIDATED - 2003 AND 2002 TRANSACTIONS

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

On December 30, 2002, the Operating Partnership contributed $11.2
million of notes receivable to purchase a 56% equity interest in VCQ. Vornado
Realty Trust L.P. ("Vornado") contributed $8.8 million in cash to purchase a 44%
equity interest. The assets of VCQ include two quarries and the related land,
acquired by VCQ from AmeriCold Logistics LLC ("AmeriCold Logistics"), the tenant
of the Operating Partnership's Temperature-Controlled Logistics Properties, for
a purchase price of $20.0 million. The purchase price was determined to be fair
market value based on an independent appraisal. The Operating Partnership's
$11.2 million contribution consisted of three notes receivable from AmeriCold
Logistics plus accrued interest, one for $2.0 million, one for $3.5 million, and
one originally for $6.5 million including principal and interest, but which was
paid down to approximately $5.5 million prior to the transaction date.

On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Operating Partnership contributed
approximately $3.1 million to VCQ for the purchase of the receivables. The
receivables were collected during the first quarter of 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 Operating Partnership's contribution, for the purchase of the trade
receivables. The receivables were collected during the second quarter of 2003.

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

8. TEMPERATURE-CONTROLLED LOGISTICS

As of December 31, 2003, the Operating Partnership held a 40% interest
in the Temperature-Controlled Logistics Partnership, which owns all of the
common stock, representing substantially all of the economic interest, of the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 million cubic feet (17.5 million square feet) of warehouse
space.

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

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 2, 2004, the
Temperature-Controlled Logistics Corporation and Americold Logistics amended the
leases to further extend the deferred rent period to December 31, 2005 from
December 31, 2004. The parties previously extended the deferred rent period to
December 31, 2004 from December 31, 2003, on March 7, 2003.

99

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under the terms of the leases, AmeriCold Logistics elected to defer
$41.8 million of the total $155.5 million of rent payable for the year ended
December 31, 2003. The Operating Partnership's share of the deferred rent was
$16.7 million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $16.7 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the year ended December 31,
2003. As of December 31, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $82.4 million and $74.3 million, respectively, of which the Operating
Partnership's portions were $33.0 million and $29.7 million, respectively.

The following table shows the total and the Operating Partnership's
portion of deferred rent and valuation allowance for the years ended December
31, 2003, 2002 and 2001:

DEFERRED RENT VALUATION ALLOWANCE
----------------------------- ---------------------------
OPERATING OPERATING
PARTNERSHIP'S PARTNERSHIP'S
(in thousands) TOTAL PORTION TOTAL PORTION
--------- ------------- -------- -------------

Cumulative deferred rent and valuation allowance
balance for the year ended December 31, 2001 $ 48,200 $ 19,300 $ 40,100 $ 16,000
Waived Rent as of December 31, 2001 (39,800) (15,900) (39,800) (15,900)
--------- ------------ -------- ------------
Balance at December 31, 2001 $ 8,400 $ 3,400 $ 300 $ 100
2002 Deferred Rent 32,200 12,900 32,200 12,900
--------- ------------ -------- ------------
Balance at December 31, 2002 $ 40,600 $ 16,300 $ 32,500 $ 13,000
2003 Deferred Rent 41,800 16,700 41,800 16,700
--------- ------------ -------- ------------
Balance at December 31, 2003 $ 82,400 $ 33,000 $ 74,300 $ 29,700
========= ============ ======== ============

As of December 31, 2003, the Operating Partnership also held a 56%
interest in Vornado Crescent Carthage and KC Quarry, L.L.C. See Note 7, "Joint
Ventures - Temperature-Controlled Logistics Segment," for additional information
regarding this investment.

On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs and the
repayment of approximately $12.9 million in existing mortgages. On February 6,
2004, the Temperature-Controlled Logistics Corporation distributed cash of
approximately $90.0 million to the Operating Partnership.

9. INVESTMENTS IN UNCONSOLIDATED COMPANIES

The Operating Partnership has investments of 20% to 50% in eight
unconsolidated joint ventures that own eight Office Properties. In addition, the
Operating Partnership, through ownership interests of 50% or less, or ownership
of non-voting interests only, has other unconsolidated investments. These
investments are accounted for using the equity method of accounting.

100

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and equity investments as of December
31, 2003.

OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF DECEMBER 31, 2003
- --------------------------------------------------------- -------------------------------------- -----------------------

Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, LLC Office (Miami Center - Miami) 40.0% (2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0% (4)
Houston PT Four Westlake Park Office Limited Partnership Office (Four Westlake Park-Houston) 20.0% (4)
Houston PT Three Westlake Park Office Limited Partnership Office (Three Westlake Park - Houston) 20.0% (4)
Crescent Five Post Oak Park, L.P. Office (Five Post Oak - Houston) 30.0% (5)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0% (6)
The Woodlands Commercial Properties Company, L.P. Office - (7)(8)
The Woodlands Land Development Company, L.P. Residential Development - (7)(8)
Blue River Land Company, L.L.C. Residential Development 50.0% (9)
EW Deer Valley, L.L.C. Residential Development 41.7% (10)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) - (11)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (12)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (13)
CR License, L.L.C. Other 30.0% (14)
The Woodlands Operating Company, L.P. Other - (7)(8)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (15)
SunTX Fulcrum Fund, L.P. ("SunTx") Other 29.7% (16)
G2 Opportunity Fund, L.P. ("G2") Other 12.5% (17)

(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, LLC 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 GE.

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

(6) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JP Morgan Fleming Asset Management, Inc.

(7) The Operating Partnership sold its 52.5% economic interest, including a 10%
earned promotional interest in each of the Woodlands CPC, WLDC and The
Woodlands Operating Company, L.P. on December 31, 2003.

(8) Distributions were made to partners based on specified payout percentages.
During the year ended December 31, 2003, the payout percentage to the
Operating Partnership was 52.5%.

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

(10) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Operating Partnership. EW Deer Valley, L.L.C. was formed
to acquire, hold and dispose of its 3.3% ownership interest in Empire
Mountain Village, L.L.C.

(11) The Operating Partnership sold its 50% interest in Manalapan on November
21, 2003.

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

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

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

(15) 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 Operating Partnership's
Resort/Hotel Properties.

(16) SunTx's objective is to invest in a portfolio of acquisitions that offer
the potential for substantial capital appreciation. The remaining 70.3% of
SunTx is owned by a group of individuals unrelated to the Operating
Partnership. The Operating Partnership's investment at December 31, 2003,
was $10.6 million.

(17) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. The remaining
87.5% interest in G2 is owned by Goff-Moore Strategic Partners, L.P.
("GMSPLP") and by parties unrelated to the Operating Partnership. G2 is
managed and controlled by an entity that is owned equally by GMSPLP and
GMAC Commercial Mortgage Corporation ("GMACCM"). See Note 21, "Related
Party Transactions," for information regarding the ownership interests of
trust managers of the Company and officers of the Operating Partnership in
GMSPLP.

101

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IMPAIRMENTS OF UNCONSOLIDATED INVESTMENTS

HBCLP, INC.

On December 31, 2003, the Operating Partnership executed an agreement
with HBCLP, Inc., pursuant to which the Operating Partnership surrendered 100%
of its investment in HBCLP, Inc. and released HBCLP, Inc. from its note
obligation to the Operating Partnership in exchange for cash of $3.0 million and
other assets valued at approximately $8.7 million, resulting in an impairment
charge of approximately $6.5 million reflected in "Impairment charges related to
real estate assets" in the Operating Partnership's Consolidated Statements of
Operations.

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

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of the Operating
Partnership, pursuant to a strict foreclosure, COPI's 1.5% interest in CR
License, L.L.C. and 5.0% interest, representing all of the voting stock, in CRL
Investments, Inc. As of December 31, 2003, the Operating Partnership had a 30%
interest in CR License, L.L.C., the entity which owns the right to the future
use of the "Canyon Ranch" name. In addition, as of December 31, 2003, the
Operating Partnership had a 100% interest in CRL Investments, Inc., which owns
an approximately 65% economic interest in the Canyon Ranch Spa Club in the
Venetian Hotel in Las Vegas, Nevada ("Canyon Ranch Las Vegas"). The Operating
Partnership evaluated its investment in Canyon Ranch Las Vegas and determined
that an impairment charge was warranted. Accordingly, a $9.6 million impairment
charge was recognized and reflected in the Operating Partnership's Consolidated
Statements of Operations for the year ended December 31, 2002 in "Impairment
charges related to real estate assets."

DBL-CBO, INC.

In 1999, DBL-CBO, Inc., a wholly-owned subsidiary of DBL Holdings, Inc.
("DBL"), in which the Operating Partnership owned a 97.4% non-voting interest at
December 31, 2002, acquired an aggregate of $6.0 million in principal amount of
Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Islands limited
liability company. Juniper 1999-1 Class C-1 is the privately-placed equity
interest of a collateralized bond obligation. During the year ended December 31,
2002, the Operating Partnership recognized a charge related to this investment
of $5.2 million reflected in "Equity in net income (loss) of unconsolidated
companies, Other" in the Operating Partnership's Consolidated Statements of
Operations. As a result of this impairment charge, at December 31, 2002, this
investment was valued at $0.

METROPOLITAN PARTNERS, LLC

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

OTHER

During the year ended December 31, 2001, the Operating Partnership
recognized impairment losses of $5.0 million which were included in "Impairment
charges related to real estate assets" related to the Operating Partnership's
investment in a fund that primarily held real estate investments and marketable
securities.

102

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY FINANCIAL INFORMATION

The Operating Partnership reports its share of income and losses based
on its ownership interest in its respective equity investments, adjusted for any
preference payments. As a result of the Operating Partnership's transaction with
COPI on February 14, 2002, certain entities that were reported as unconsolidated
entities for the year ended December 31, 2001, are consolidated in the financial
statements for the years ended December 31, 2003 and 2002. Additionally, certain
unconsolidated subsidiaries of the newly consolidated entities are now shown
separately as unconsolidated entities of the Operating Partnership. As a result
of the Operating Partnership's January 2, 2003 purchase of the remaining 2.56%
economic interest, representing 100% of the voting stock in DBL, DBL is
consolidated in the December 31, 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 December 31, 2003 financial statements.

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

Balance Sheets as of December 31, 2003:

- Other Residential Development Corporations - This includes Blue
River Land Company, L.L.C., and EW Deer Valley, L.L.C.;

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

- 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, LLC, Crescent Five Post Oak Park, L.P.
and Crescent One BriarLake Plaza, L.P.; and

- Other - This includes Manalapan, CR License, L.L.C., Canyon
Ranch Las Vegas, L.L.C., SunTx and G2.

Balance Sheets as of December 31, 2002:

- WLDC;

- Other Residential Development Corporations - This includes Blue
River Land Company, L.L.C., MVDC and HADC;

- Resort/Hotel - This includes Manalapan;

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

- 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, LLC, Crescent Five Post Oak Park, L.P.
and Woodlands CPC; and

- 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 year ended December 31, 2003:

- WLDC;

- Other Residential Development Corporations- This includes the
operating results for Blue River Land Company, L.L.C. and EW
Deer Valley, L.L.C.;

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

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

- 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, LLC,
Crescent Five Post Oak Park, L.P., Crescent One BriarLake Plaza,
L.P. and Woodlands CPC; and

103

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- 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 year ended December 31, 2002:

- WLDC - This includes WLDC's operating results for the period
February 15 through December 31, 2002, and TWLC's operating
results for the period January 1, through February 14, 2002;

- Other Residential Development Corporations- 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 December 31, 2002, and the operating results of MVDC and
HADC;

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

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

- 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., Woodlands CPC and Crescent
Miami Center, L.L.C; and

- Other - This includes the operating results for 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 year ended December 31, 2001:

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

- WLDC

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

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

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

BALANCE SHEETS:

AS OF DECEMBER 31, 2003
------------------------------------------------------------------------------------
THE
WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS LOGISTICS OFFICE OTHER TOTAL
- ------------------------------- ------------- ------------ ------------ --------- --------- ---------

Real estate, net $ - $ 25,033 $ 1,187,387 $ 754,882
Cash - 613 12,439 31,309
Other assets - 1,543 88,668 51,219
------------- ------------ ------------ ---------
Total assets $ - $ 27,189 $ 1,288,494 $ 837,410
============= ============ ============ =========

Notes payable $ - $ 4,989 $ 548,776 $ 515,047
Notes payable to the Operating
Partnership - - - -
Other liabilities - 344 11,084 29,746
Equity - 21,856 728,634 292,617
------------- ------------ ------------ ---------
Total liabilities and equity $ - $ 27,189 $ 1,288,494 $ 837,410
============= ============ ============ =========
Operating Partnership's share
of unconsolidated debt $ - $ 2,495 $ 219,511 $ 172,376 $ - $ 394,382
============= ============ ============ ========= ========= =========
Operating Partnership's
investments in
unconsolidated companies $ - $ 11,854 $ 300,917 $ 102,519 $ 28,684 $ 443,974
============= ============ ============ ========= ========= =========

104

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:

FOR THE YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL (1) LOGISTICS OFFICE (2) OTHER TOTAL
- -------------------------------- ------------- ------------ ------------ -------------- ---------- ------- -------

Total revenues $ 135,411 $ 652 $ 35,990 $ 124,413 $ 140,188
Expenses:
Operating expense 100,005 565 27,004 24,158(3) 60,576
Interest expense 6,991 - 2,815 41,727 29,976
Depreciation and amortization 6,735 - 2,626 58,014 35,613
Tax expense (benefit) - - 1,118 (2,240) -
Other (income) expense - - (7,984) (2,926) -
------------- ------------ ------------ ---------- ----------
Total expenses $ 113,731 $ 565 $ 25,579 $ 118,733 $ 126,165
------------- ------------ ------------ ---------- ----------

Net income, impairments and gain
(loss) on real estate from
discontinued operations $ (727) $ - $ - $ 810 $ 10,533
------------- ------------ ------------ ---------- ----------

Net income $ 20,953 $ 87 $ 10,411 $ 6,490(3) $ 24,556
============= ============ ============ ========== ==========

Operating Partnership's equity
in net income (loss) of
unconsolidated companies $ 11,000 $ (573) $ 5,760 $ 2,172 $ 10,469 $(4,053) $24,775
============= ============ ============ ========== ========== ======= =======

(1) This column includes information for Manalapan, which was sold on November
21, 2003.

(2) This column includes information for BriarLake Plaza, which was acquired
through a joint venture October 8, 2003.

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

BALANCE SHEETS:

AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- ----------------------------------- ------------- ------------ ------------ ------------ ---------- ------- --------

Real estate, net $ 388,587 $ 43,848 $ 81,510 $ 1,238,810 $ 845,019
Cash 15,289 5,592 3,022 13,213 43,296
Other assets 46,934 2,244 4,415 88,327 35,609
------------- ------------ ------------ ------------ ----------
Total assets $ 450,810 $ 51,684 $ 88,947 $ 1,340,350 $ 923,924
============= ============ ============ ============ ==========

Notes payable $ 284,547 $ - $ 56,000 $ 574,931 $ 507,679
Notes payable to the Operating 10,625 - - - -
Partnership
Other liabilities 70,053 17,282 5,996 9,579 53,312
Equity 85,585 34,402 26,951 755,840 362,933
------------- ------------ ------------ ------------ ----------
Total liabilities and equity $ 450,810 $ 51,684 $ 88,947 $ 1,340,350 $ 923,924
============= ============ ============ ============ ==========

Operating Partnership's share of
unconsolidated debt $ 120,933 $ - $ 28,000 $ 229,972 $ 180,132 $ - $559,037
============= ============ ============ ============ ========== ======= ========
Operating Partnership's
investments in unconsolidated
companies $ 33,960 $ 39,187 $ 13,473 $ 304,545 $ 133,530 $37,948 $562,643
============= ============ ============ ============ ========== ======= ========

105

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:

FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE(1) OTHER TOTAL
- ---------------------------------- ------------- ------------ ------- ------------ ---------- ------- -------

Total revenues $ 168,142 $ 118,492 $ 6,283 $ 111,604 $ 90,166
Expenses:
Operating expense 92,414 106,542 5,455 15,742 (2) 48,245
Interest expense 5,132 4,661 689 42,695 19,909
Depreciation and amortization 3,816 4,226 472 59,328 23,226
Tax expense (benefit) 406 (190) (108) - -
Other (income) expense - (25) - (1,228) -
------------- ------------ ------- ------------ ----------
Total expenses $ 101,768 $ 115,214 $ 6,508 $ 116,537 $ 91,380
------------- ------------ ------- ------------ ----------
Loss on property sales, net $ - $ - $ - $ (3,377) $ 48,275
------------- ------------ ------- ------------ ----------
Net income (loss) $ 66,374 $ 3,278 $ (225) $ (8,310)(2)(3) $ 47,061
============= ============ ======= ============ ==========
Operating Partnership's equity in
net income (loss) of
unconsolidated companies $ 33,847 $ 5,931 $ (115) $ (2,933) $ 23,431 $(6,609)(4) $53,552
============= ============ ======= ============ ========== ======= =======

- ---------------------------
(1) This column includes information for Three Westlake Park, which was
contributed by the Operating Partnership to a joint venture on August 21,
2002, Miami Center, which was contributed by the Operating Partnership to a
joint venture on September 25, 2002, and Five Post Oak Park, which was
acquired by the Operating Partnership in a joint venture transaction on
December 20, 2002. Information is included from the date of contribution of
Three Westlake Park and Miami Center and acquisition of Five Post Oak Park.

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

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

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

SUMMARY STATEMENTS OF OPERATIONS:

FOR THE YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------------------------------
OTHER
THE WOODLANDS CRESCENT RESORT RESIDENTIAL TEMPERATURE-
LAND COMPANY, DEVELOPMENT DEVELOPMENT CONTROLLED
(in thousands) INC. INC. CORPORATIONS LOGISTICS OFFICE (1) OTHER TOTAL
- --------------------------------- ------------- --------------- ------------ ------------ ---------- ------ -------

Total revenues $ 188,178 $ 195,163 $ 93,462 $ 127,033 $ 88,835 $
Expenses:
Operating expense 104,486 175,424 83,074 20,350(2) 37,128
Interest expense 4,967 1,373 1,641 44,988 19,184
Depreciation and Amortization 5,599 2,726 6,185 58,855 19,387
Tax expense 14,676 641 (4,222) - -
------------- --------------- ------------ ------------ ----------
Total expenses $ 129,728 $ 180,164 $ 86,678 $ 124,193 $ 75,699
------------- --------------- ------------ ------------ ----------
Net income $ 58,450 $ 14,999 $ 6,784 $ 2,840(2) $ 13,136
============= =============== ============ ============ ==========
Operating Partnership's equity
in net income of
unconsolidated companies $ 20,943 $ 14,944 $ 5,127 $ 1,136 $ 6,124 $2,957 $51,231
============= =============== ============ ============ ========== ====== =======

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

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

106

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

The following table shows, as of December 31, 2003, information about
the Operating Partnership's share of unconsolidated fixed and variable rate debt
and does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.

OPERATING
PARTNERSHIP
BALANCE SHARE OF
OUTSTANDING AT BALANCE AT INTEREST RATE AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, FIXED/VARIABLE
DESCRIPTION 2003 2003 2003 MATURITY DATE SECURED/UNSECURED
- ---------------------------------------------- -------------- ------------ ---------------- -------------------- -----------------
(in thousands)

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40%
Operating Partnership
Goldman Sachs (1) $ 496,123 $ 198,449 6.89% 5/11/2023 Fixed/Secured
Various Capital Leases 36,270 14,509 4.84 to 13.63% 6/1/2006 to 4/1/2017 Fixed/Secured
Various Mortgage Notes 16,383 6,553 7.00 to 12.88% 4/1/2004 to 4/1/2009 Fixed/Secured
-------------- ------------
$ 548,776 $ 219,511
-------------- ------------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating
Partnership (2)(3)(4) $ 130,559 $ 65,279 5.52% 12/1/2004 Variable/Secured
Crescent 5 Houston Center, L.P. - 25%
Operating Partnership 90,000 22,500 5.00% 10/1/2008 Fixed/Secured
Crescent Miami Center, LLC - 40% Operating
Partnership 81,000 32,400 5.04% 9/25/2007 Fixed/Secured
Crescent One BriarLake Plaza, L.P. - 30%
Operating Partnership 50,000 15,000 5.40% 11/1/2010 Fixed/Secured
Houston PT Four Westlake Office Limited
Partnership - 20% Operating Partnership 48,087 9,617 7.13% 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30%
Operating Partnership 45,000 13,500 4.82% 1/1/2008 Fixed/Secured
Austin PT BK One Tower Office Limited
Partnership - 20% Operating Partnership 37,401 7,480 7.13% 8/1/2006 Fixed/Secured
Houston PT Three Westlake Office Limited
Partnership - 20% Operating Partnership 33,000 6,600 5.61% 9/1/2007 Fixed/Secured
-------------- ------------
$ 515,047 $ 172,376
-------------- ------------
RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50%
Operating Partnership (5) $ 4,989 $ 2,495 4.12% 6/30/2004 Variable/Secured
-------------- ------------
$ 4,989 $ 2,495
-------------- ------------
TOTAL UNCONSOLIDATED DEBT $ 1,068,812 $ 394,382
============== ============
FIXED RATE/WEIGHTED AVERAGE 6.66% 13.8 years
VARIABLE RATE/WEIGHTED AVERAGE 5.47% 0.9 years
---------------- --------------------
TOTAL WEIGHTED AVERAGE 6.45% 11.6 years
================ ====================

- --------------------------------
(1) URS Real Estate, L.P. and Americold Real Estate, L.P., subsidiaries of the
Temperature-Controlled Logistics Corporation, expect to repay this note on
the Optional Prepayment Date of April 11, 2008. The overall weighted average
maturity would be 4.21 years based on this date.

(2) Senior Note - Note A: $82.2 million at variable interest rate, LIBOR + 189
basis points, $4.8 million at variable interest rate, LIBOR + 250 basis
points with a LIBOR floor of 2.50%. Note B: $24.2 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
Mezzanine Note - $19.3 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 loan has two one-year extension options.

(4) The Operating Partnership and its joint venture partner each obtained a
separate Letter of Credit to guarantee the repayment of up to $4.3 million
each of principal of the Main Street Partners, L.P. loan.

(5) The variable rate loan has an interest rate of LIBOR + 300 basis points.
East West Resort Development III, L.P. provides an unconditional guarantee
of up to 70% of the maximum $9.0 million available under this facility with
U.S. Bank National Association. There was approximately $5.0 million
outstanding at December 31, 2003, and the guarantee was equal to $3.5
million.

107

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows, as of December 31, 2003, information about
the Operating Partnership's share of unconsolidated fixed and variable rate debt
and does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.

PERCENTAGE WEIGHTED WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT AVERAGE RATE MATURITY
- ------------------ ------------- ---------- ------------ ----------------

Fixed Rate Debt $ 326,608 83% 6.66% 13.8 years
Variable Rate Debt 67,774 17% 5.47% 0.9 years
------------- ---------- ------------ ---------
Total Debt $ 394,382 100.00% 6.45% 11.6 years
============= ========== ============ =========

Listed below is the Operating Partnership's share of aggregate
principal payments, by year, required as of December 31, 2003, related to the
Operating Partnership's unconsolidated debt. Scheduled principal installments
and amounts due at maturity are included.

SECURED
(in thousands) DEBT(1)
- -------------- ---------

2004 $ 75,830
2005 9,916
2006 23,816
2007 46,715
2008 43,007
Thereafter 195,098
---------
$ 394,382
=========

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

10. OTHER ASSETS, NET

DECEMBER 31,
----------------------------
(in thousands) 2003 2002
- ------------------------------- ---------- ----------

Leasing costs $ 142,397 $ 144,729
Deferred financing costs 61,421 53,658
Prepaid expenses 13,294 14,586
Marketable securities 8,401(1) 9,461(2)
Other intangibles 67,143 65,405
Intangible office leases 16,875 7,590
Other 38,719 37,592
---------- ----------
$ 348,250 $ 333,021
Less - accumulated amortization (137,546) (153,415)
---------- ----------
$ 210,704 $ 179,606
========== ==========

- -----------------------
(1) During the year ended December 31, 2003, the Operating Partnership
recognized an approximately $2.1 million impairment related to its
investment in preferred equity in Captivate Network, Inc.

(2) During the year ended December 31, 2002, the Operating Partnership
recognized approximately $2.5 million in impairments related to two
investments.

108

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

The following is a summary of the Operating Partnership's debt
financing at December 31, 2003 and 2002:

DECEMBER 31,
-------------------
2003 2002
-------- --------
SECURED DEBT (in thousands)

Fleet Fund I and II Term Loan(1) due May 2005, bears interest at LIBOR plus 350
basis points (at December 31, 2003, the interest rate was 4.63%), with a
four-year interest-only term, secured by equity interests in Funding I and II.......... $264,214 $275,000

AEGON Partnership Note(2) due July 2009, bears interest at 7.53% with monthly
principal and interest payments based on a 25-year amortization schedule,
secured by the Funding III, IV and V Properties........................................ 260,101 265,200

LaSalle Note I(3) due August 2027, bears interest at 7.83% with monthly
principal and interest payments based on a 25-year amortization schedule through
maturity in August 2027, secured by the Funding I Properties........................... 235,037 238,062

Deutsche Bank-CMBS Loan(4) due May 2004, bears interest at the 30-day LIBOR rate
(with a floor of 3.50%) plus 234 basis points (at December 31, 2003, the
interest rate was 5.84%), with a three-year interest-only term and two one-year
extension options, secured by the Funding X Properties and Spectrum Center............. 220,000 220,000

JP Morgan Mortgage Note(5) bears interest at a fixed rate of 8.31% with monthly
principal and interest payments based on a 25-year amortization schedule through
maturity in October 2016, secured by the Houston Center mixed-use Office
Property Complex....................................................................... 191,311 195,515

LaSalle Note II(6) bears interest at 7.79% with an initial seven-year
interest-only term (through March 2003), followed by monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
March 2028, secured by the Funding II Properties and securities........................ 159,560 161,000

Fleet Term Loan(7) due February 2004, bears interest at LIBOR rate plus 450
basis points (at December 31, 2003, the interest rate was 5.62%) with an
interest only term, secured by excess cash flow distributions from Funding III,
Funding IV and Funding V .............................................................. 75,000 -

Cigna Note(8) due June 2010, bears interest at 5.22% with an interest-only term,
secured by 707 17th Street Office Property and the Denver Marriott City Center......... 70,000 -

Cigna Note(8) due March 2003, bears interest at 7.47% with an interest-only
term, secured by the 707 17th Street Office Property and the Denver Marriott
City Center ........................................................................... - 63,500

National Bank of Arizona Revolving Line of Credit (9) with maturities ranging
from November 2004 to December 2005, bears interest ranging from 4.00% to 5.00%,
secured by certain DMDC assets.................. ...................................... 40,588 34,580

Bank of America Note(10) due May 2013, bears interest at 5.53% with an initial
2.5-year interest-only term (through November 2005), followed by monthly
principal and interest payments based on a 30-year amortization schedule, secured
by The Colonnade Office Property....................................................... 38,000 -

Metropolitan Life Note V(11) due December 2005, bears interest at 8.49% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Datran Center Office Property................................. 37,506 38,127

Northwestern Life Note due November 2008, bears interest at 4.94% with an
interest-only term, secured by the 301 Congress Avenue Office Property(12)............. 26,000 26,000

Northwestern Life Note II(13) due July 2007, bears interest at 7.40%, with
monthly principal and interest payments based on a 25-year amortization schedule,
secured by 3980 Howard Hughes Parkway Office Property.................................. 10,713 -

109

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31,
-------------------------
2003 2002
----------- -----------
SECURED DEBT - CONTINUED (in thousands)

Woodmen of the World Note(14) due April 2009, bears interest at 8.20% with an
initial five-year interest-only term (through November 2006), followed by
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Avallon IV Office Property.................................... 8,500 8,500

Nomura Funding VI Note(15) bears interest at 10.07% with monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
July 2020, secured by the Canyon Ranch - Lenox......................................... 7,853 8,028

Mitchell Mortgage Note due December 2003, bears interest at 7.00% with an
interest-only term, secured by one of The Woodlands Office Properties.................. - 1,743

FHI Finance Loan bears interest at LIBOR plus 450 basis points (at December 31,
2003, the interest rate was 5.67%), with an initial interest only term until the
Net Operating Income Hurdle Date(16), followed by monthly principal and interest
payments based on a 20-year amortization schedule through maturity in September
2009, secured by the Sonoma Mission Inn & Spa.......................................... 2,959 -

Construction, acquisition and other obligations, bearing fixed and variable
interest rates ranging from 2.9% to 10.50% at December 31, 2003, with maturities
ranging between February 2004 and September 2008, secured by various CRDI and
MVDC projects(17)...................................................................... 47,357 58,655

UNSECURED DEBT

2009(18) Notes bear interest at a fixed rate of 9.25% with a seven-year
interest-only term, due April 2009 with a call date of April 2006...................... 375,000 375,000

2007(18) Notes bear interest at a fixed rate of 7.50% with a ten-year
interest-only term, due September 2007..... ........................................... 250,000 250,000

Credit Facility(19) interest only due May 2005, bears interest at LIBOR plus
212.5 basis points (at December 31, 2003, the interest rate was 3.35%)................. 239,000 164,000
----------- -----------
$ 2,558,699 $ 2,382,910
=========== ===========

- --------------------------------------
(1) In October 2003, the Operating Partnership received approval from the
lending group to modify key financial and other covenants in the Fleet I
and II Term Loan. In connection with these modifications, the Operating
Partnership agreed to increase the interest rate on this loan to LIBOR plus
350 basis points from LIBOR plus 325 basis points. In December 2003, the
Operating Partnership retired $10.8 million of the facility to release Las
Colinas Plaza and Liberty Plaza from the collateral pool. In January 2004,
the Operating Partnership retired an additional $105.0 million to release
the remaining Funding II Properties.

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

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

(4) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine note.
The notes are due May 2004, and bear interest at the 30-day LIBOR rate plus
a spread of (i) 164.7 basis points for the CMBS note (at December 31, 2003,
the interest rate was 5.147%), and (ii) 600 basis points for the Mezzanine
note (at December 31, 2003, the interest rate was 9.5%). The blended rate
at December 31, 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
Operating Partnership's interests in Funding X and Crescent Spectrum
Center, L.P. and the Operating Partnership's interest in each of their
general partners.

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

(6) In December 2003, the Operating Partnership purchased $9.6 million in U.S.
Treasury and government agency sponsored securities to defease
approximately $8.7 million of the loan which related to Las Colinas Plaza,
to release the property from the Deed of Trust. In January 2004, the
Operating Partnership purchased $170.0 million in U.S. Treasury and
government sponsored agency securities to

110

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

defease the remaining amount of the loan and release the rest of the
Funding II Properties. The securities were placed in a collateral account
for the sole purpose of funding payments of principal and interest on the
La Salle Note II. The marketable securities have interest and maturities
that coincide with the scheduled debt service payments of the loan and
ultimate payment of principal in March 2006.

(7) In February 2004, the Operating Partnership exercised its option to extend
this loan until February 2007.

(8) During the first quarter of 2003, the Operating Partnership paid in full
the $63.5 million Cigna Note with a draw under the Operating Partnership's
credit facility, and entered into the $70.0 million loan from Cigna in the
second quarter of 2003.

(9) 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 December 31,
2003, the interest rate was 4.0%). The warehouse facility bears interest at
prime plus 100 basis points (at December 31, 2003, the interest rate was
5.0%) and is limited to $10.0 million. The short-term facility bears
interest at prime plus 50 basis points (at December 31, 2003, the interest
rate was 4.5%) and is limited to $1.8 million. The blended rate at December
31, 2003, for the vertical facility and club loan, the warehouse facility
and the short-term facility was 4.2%.

(10) The Operating Partnership assumed this loan in connection with the
Colonnade acquisition. The outstanding principal balance of this loan at
maturity will be approximately $33.4 million.

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

(12) In October 2003, the Operating Partnership refinanced the original $26.0
million Northwestern Life Note on 301 Congress, bearing interest of 7.66%,
which had a maturity date of January 1, 2004.

(13) The Operating Partnership assumed this loan with the Hughes Center
acquisitions. The outstanding principal balance of this loan at maturity
will be approximately $8.7 million. The balance at December 31, 2003,
includes approximately $1.1 million of premium which will be amortized over
the term of the loan. The effective interest rate, including the premium,
is 3.8%.

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

(15) In July 2010, the interest rate will adjust based on current interest rates
at that time. It is the Operating Partnership's intention to repay the note
in full at such time (July 2010) by making a final payment of approximately
$6.1 million.

(16) The Operating Partnership'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.

(17) Includes $10.8 million of fixed rate debt ranging from 2.9% to 10.5% and
$36.5 million of variable rate debt ranging from 4.0% to 5.0%. In June
2003, CRDI entered into an interest rate cap agreement with Bank of America
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 related
loan. As of December 2003, $10.9 million was outstanding under this loan.
The agreement limits the interest rate exposure on the notional amount to a
maximum prime rate, as defined in the agreement, of 4.1%.

(18) To incur any additional debt, the indenture requires the Operating
Partnership to meet thresholds for a number of customary financial and
other covenants including maximum leverage ratios, minimum debt service
coverage ratios, maximum secured debt as a percentage of total
undepreciated assets, and ongoing maintenance of unencumbered assets.
Additionally, as long as the 2009 Notes are not rated investment grade,
there are restrictions on the Operating Partnership's ability to make
certain payments, including distributions to shareholders, and investments.

(19) The Credit Facility requires the Operating Partnership to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios, debt service coverage ratios,
limitations on additional secured and total indebtedness, limitations on
distributions, and a minimum net worth requirement, and with respect solely
to Funding VIII, adjusted net operating income to actual debt service,
adjusted net operating income to pro forma debt service, office assets as a
percentage of total assets, and minimum leasing requirements. In addition,
availability under the Credit Facility is limited by total indebtedness to
total asset value. At December 31, 2003, the maximum borrowing capacity
under the credit facility was $379.5 million. The outstanding balance
excludes letters of credit issued under the Operating Partnership's credit
facility of $7.9 million which reduce the Operating Partnership's maximum
borrowing capacity. In November 2003, the Operating Partnership and the
lending group modified key financial and other covenants in the Credit
Facility. In connection with these modifications, the Operating Partnership
agreed to increase the interest rate on this facility to LIBOR plus 212.5
basis points from LIBOR plus 187.5 basis points. In December 2003, the
Operating Partnership exercised its option to extend the facility's
maturity to May 2005.

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

WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT (1) RATE MATURITY
- ------------------ ----------- ----------- -------- ----------------

Fixed Rate Debt $ 1,680,408 66% 7.9% 10.4 years
Variable Rate Debt 878,291 34 4.4 1.2 years
----------- ----------- -------- ----------------
Total Debt $ 2,558,699 100% 6.8%(2) 6.8 Years
=========== =========== ======== ================

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

(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $500.0 million of hedged variable rate debt, are
85% and 15%, respectively.

(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would remain 6.8%.

111

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Listed below are the aggregate principal payments by year required as
of December 31, 2003 under indebtedness of the Operating Partnership. Scheduled
principal installments and amounts due at maturity are included.

SECURED UNSECURED UNSECURED DEBT
(in thousands) DEBT DEBT LINE OF CREDIT TOTAL(1)
- -------------- ----------- --------- -------------- ----------

2004 $ 350,385 $ - $ - $ 350,385
2005 359,922 - 239,000 598,922
2006 20,985 - - 20,985
2007 35,895 250,000 - 285,895
2008 48,356 - - 48,356
Thereafter 879,156 375,000 - 1,254,156
----------- --------- -------------- ----------
$ 1,694,699 $ 625,000 $ 239,000 $2,558,699
=========== ========= ============== ==========

- ----------------------------
(1) These amounts do not reflect the effect of two one-year extension options
on the Deutsche Bank - CMBS Loan or the extension of the Fleet Term Loan to
2007.

The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these types of covenants. Failure to comply
with covenants generally will result in an event of default under that debt
instrument. Any uncured or unwaived events of default under the Operating
Partnership's loans can trigger an increase in interest rates, an acceleration
of payment on the loan in default, and for the Operating Partnership's secured
debt, foreclosure on the Property securing the debt. In addition, a default by
the Operating Partnership or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in a default under
the Credit Facility, 2007 Bonds and the Fleet Fund I and II Term Loan after the
notice and cure periods for the other indebtedness have passed. As of December
31, 2003, no event of default had occurred, and the Operating Partnership was in
compliance with all of covenants related to its outstanding debt. The Operating
Partnership's debt facilities generally prohibit loan pre-payment for an initial
period, allow pre-payment with a penalty during a following specified period and
allow pre-payment without penalty after the expiration of that period. During
the year ended December 31, 2003, there were no circumstances that required
prepayment or increased collateral related to the Operating Partnership's
existing debt.

In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Operating Partnership
and 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 by the Company or the Operating Partnership 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 (Crescent 707 17th Street, 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), The BAC-Colonnade (CEI
Colonnade Holdings, LLC), and Crescent Finance Company.

DEFEASANCE OF LASALLE NOTE II

In December 2003, the Operating Partnership purchased $9.6 million of
U.S. Treasury and government sponsored agency securities and placed those
securities into a collateral account for the sole purpose of funding payments of
principal and interest payments on approximately $8.7 million of the LaSalle
Note II, in order to release the lien on the Las Colinas retail property, which
was held in Funding II and sold on December 15, 2003. The initial weighted
average yield on the securities was 2.10%. In January 2004, the Operating
Partnership purchased an additional $170.0 million of U.S. Treasury and
government sponsored agency securities with an initial weighted average yield of
1.76% and placed those securities into a collateral account for the sole purpose
of funding payments

112

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of principal and interest on the remainder of the LaSalle Note II, in order to
release the lien on the remaining properties securing the loan. The cash from
these marketable securities have interest and maturities that coincide with the
scheduled debt service payments of the senior notes and ultimate payment of
principal.

ADDITIONAL DEBT FINANCING

In January 2004, the Operating Partnership entered into an agreement
with Bank of America Securities LLC ("Bank of America") and Deutsche Bank for an
additional $275.0 million secured loan. The loan has an initial two-year term
maturing in January 2006, with a one-year extension option and bears interest at
an annual rate of LIBOR plus 275 basis points. This rate decreased to LIBOR plus
225 basis points upon closing of syndication of the loan in February 2004. The
loan is secured by 10 of the 12 properties that were in Funding II at December
31, 2003. The loan is subject to the same covenant requirements as the credit
facility. The net proceeds were used to reduce the outstanding principal balance
of the $275.0 million Fleet Fund I and II Term Loan by approximately $104.2
million. The remaining proceeds were used to purchase U.S. Treasury and
government sponsored agency securities in an amount sufficient to defease the
remaining portion of LaSalle Note II.

DEBT REFINANCING AND FLEET FACILITY

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

DEBT OFFERING

On April 15, 2002, the Operating Partnership completed a private
offering of $375.0 million in senior, unsecured notes due in 2009. On October
15, 2002, the Operating Partnership completed an exchange offer pursuant to
which it exchanged notes registered with the SEC for $325.0 million of the
privately issued notes. In addition, the Operating Partnership registered for
resale the remaining $50.0 million of the privately issued notes, which were
issued to Richard E. Rainwater, the Chairman of the Board of Trust Managers, and
certain of his affiliates and family members. The notes bear interest at an
annual rate of 9.25% and were issued at 100% of issue price. The notes are
callable after April 15, 2006. Interest is payable on April 15, and October 15,
of each year, beginning October 15, 2002.

The net proceeds from the offering of notes were approximately $366.5
million. Approximately $309.5 million of the proceeds were used to pay down
amounts outstanding under the Operating Partnership's credit facility, and the
remaining proceeds were used to pay down $5.0 million of short-term indebtedness
and redeem approximately $52.0 million of preferred Class A Units in Funding IX
from GMACCM. See Note 19, "Sale of Preferred Equity Interests in Subsidiary,"
for a description of the Class A Units in Funding IX previously held by GMACCM.

12. INTEREST RATE CAPS

In June 2003, CRDI, a consolidated subsidiary of the Operating
Partnership, entered into an interest rate cap agreement with Bank of America
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 related loan. The
agreement limits the interest rate on the notional amount to a maximum prime
rate, as defined in the agreement, of 4.1%.

In connection with the closing of the Deutsche Bank - CMBS Loan in
May 2001, the Operating Partnership entered into a LIBOR interest rate cap
struck at 7.16% for a notional amount of $220.0 million, and simultaneously sold
a LIBOR interest rate cap with the same terms. Since these instruments do not
reduce the Operating Partnership's net interest rate risk exposure, they do not
qualify as hedges and changes to their respective fair values are charged to
earnings as the changes occur. As the significant terms of these arrangements
are

113

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

substantially the same, the effects of a revaluation of these instruments are
expected to substantially offset each other.

114

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. CASH FLOW HEDGES

The Operating Partnership uses derivative financial instruments to
convert a portion of its variable rate debt to fixed rate debt and to manage its
fixed to variable rate debt ratio. As of December 31, 2003, the Operating
Partnership had four cash flow hedge agreements which are accounted for in
conformity with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended.

The following table shows information regarding the Operating
Partnership's cash flow hedge agreements for the year ended December 31, 2003,
and additional interest expense and unrealized gains (losses) recorded in
Accumulated Other Comprehensive Income ("OCI").

UNREALIZED
ISSUE NOTIONAL MATURITY REFERENCE FAIR ADDITIONAL GAINS (LOSSES)
DATE AMOUNT DATE RATE MARKET VALUE INTEREST EXPENSE IN OCI
- -------------- -------- -------- --------- ------------ ---------------- --------------
(in thousands)
- --------------

9/1/99 $200,000 9/2/03 6.183% $ - $ 6,562 $ 6,506
5/15/01 200,000 2/3/03 7.110% - 1,048 1,057
4/18/00 100,000 4/18/04 6.760% (1,695) 5,619 5,185
9/02/03 200,000 9/1/06 3.723% (6,597) 1,741 (1,899)
2/15/03 100,000 2/15/06 3.253% (2,340) 1,827 85
2/15/03 100,000 2/15/06 3.255% (2,345) 1,830 87
------------ ---------------- --------------
$ (12,977) $ 18,627 $ 11,021
============ ================ ==============

The Operating Partnership has designated its four 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. The cash flow hedges have
been and are expected to remain highly effective. Changes in the fair value of
these highly effective hedging instruments are recorded in Accumulated Other
Comprehensive Income. The effective portion that has been deferred in
Accumulated Other Comprehensive Income will be reclassified to earnings as
interest expense when the hedged items impact earnings. If a cash flow hedge
falls outside 80%-125% effectiveness for a quarter, all changes in the fair
value of the cash flow hedge for the quarter will be recognized in earnings
during the current period. If it is determined based on prospective testing that
it is no longer likely a hedge will be highly effective on a prospective basis,
the hedge will no longer be designated as a cash flow hedge and no longer
qualify for accounting in conformity with SFAS Nos. 133, as amended. The
Operating Partnership had no ineffectiveness related to its cash flow hedges,
resulting in no earnings impact for the year ended December 31, 2003.

Over the next 12 months, an estimated $10.1 million will be
reclassified from Accumulated Other Comprehensive Income to interest expense and
charged against earnings related to the effective portions of the cash flow
hedge agreements.

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

115

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest thereon as of and for the year
ended December 31, 2003. Unlike the additional interest on the Operating
Partnership's cash flow hedges, which was expensed, the additional interest on
CRDI's cash flow hedges was capitalized, as it is related to debt incurred for
projects that are currently under development. Also presented are the unrealized
gains in Accumulated Other Comprehensive Income for the year ended December 31,
2003.

ADDITIONAL
NOTIONAL MATURITY REFERENCE FAIR MARKET CAPITALIZED UNREALIZED
ISSUE DATE AMOUNT DATE RATE VALUE INTEREST GAINS IN OCI
- -------------- -------- -------- --------- ----------- ----------- ------------
(in thousands)
- --------------

9/4/01 $ 4,650 9/4/03 4.12% $ - $ 91 $ 101
9/4/01 3,700 9/4/03 4.12% - 72 79
----------- ----------- ------------
$ - $ 163 $ 180
=========== =========== ============

CRDI's hedges were perfectly effective and no earnings impact was
experienced for the year ended December 31, 2003.

14. RENTALS UNDER OPERATING LEASES

As of December 31, 2003, the Operating Partnership received rental
income from the lessees of 64 consolidated Office Properties and one
Resort/Hotel Property under operating leases.

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which the Operating Partnership acquired COPI's lessee
interests in the eight Resort/Hotel Properties previously leased to COPI.
Therefore, the Operating Partnership stopped recognizing rental income from
operating leases for these Resort/Hotel Properties on February 14, 2002. The
lease of the one Resort/Hotel Property for which the Operating Partnership
continues to recognize rental income under an operating lease provides for
percentage rent. For the years ended December 31, 2003, 2002 and 2001, the
percentage rent amounts for the one Resort/Hotel Property were $4.9 million,
$4.7 million and $4.9 million, respectively.

In general, Office Property leases provide for the payment of fixed
base rents and the reimbursement by the tenant to the Operating Partnership of
annual increases in operating expenses in excess of base year operating
expenses. The excess operating expense amounts totaled $80.0 million, $89.4
million and $98.7 million, for the years ended December 31, 2003, 2002 and 2001,
respectively. These excess operating expenses are generally payable in equal
installments throughout the year, based on estimated increases, with any
differences adjusted at year end based upon actual expenses.

116

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For non-cancelable operating leases for wholly-owned and joint venture
consolidated Office Properties owned as of December 31, 2003, future minimum
rentals (base rents) during the next five years and thereafter (excluding tenant
reimbursements of operating expenses for Office Properties) are as follows:

FUTURE MINIMUM
(in millions) RENTALS
- ------------- --------------

2004 $ 352.8
2005 326.6
2006 296.5
2007 242.6
2008 208.2
Thereafter 829.4
--------------
$ 2,256.1
==============

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

15. COMMITMENTS, CONTINGENCIES AND LITIGATION

COMMITMENTS

LEASE COMMITMENTS

The Operating Partnership has 13 wholly-owned Properties located on
land that is subject to long-term ground leases, which expire between 2015 and
2080. The Operating Partnership also leases parking spaces in a parking garage
adjacent to one of its Properties pursuant to a lease expiring in 2021. Lease
expense associated with these leases during each of the three years ended
December 31, 2003, 2002, and 2001 was $2.8 million, $2.7 million and $2.8
million, respectively. Future minimum lease payments due under such leases as of
December 31, 2003, are as follows:

FUTURE MINIMUM
(in thousands) LEASE PAYMENTS
- -------------- --------------

2004 $ 2,212
2005 2,201
2006 2,201
2007 2,204
2008 2,211
Thereafter 98,180
--------------
$ 109,209
==============

117

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GUARANTEE COMMITMENTS

The FASB issued Interpretation 45 requiring a guarantor to disclose its
guarantees. The Operating Partnership's guarantees in place as of December 31,
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 Operating
Partnership to provide additional capital to support the guarantees. The
Operating Partnership has not recorded a liability associated with these
guarantees as they were entered into prior to the adoption of FIN 45.

GUARANTEED MAXIMUM
AMOUNT GUARANTEED
(in thousands) OUTSTANDING AT AMOUNT AT
DEBTOR DECEMBER 31, 2003 DECEMBER 31, 2003
- -------------------------------------------------------------- ----------------- -----------------

CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 7,856 $ 7,856
Blue River Land Company, L.L.C.(2) (3) 3,492 6,300
Main Street Partners, L.P. - Letter of Credit (2) (4) 4,250 4,250
----------------- -----------------
Total Guarantees $ 15,598 $ 18,406
================= =================

- ------------------------------
(1) The Operating Partnership provides a $7.9 million letter of credit to
support the payment of interest and principal of the Eagle Ranch
Metropolitan District Revenue Development Bonds.

(2) See Note 9, "Investments in Unconsolidated Companies - Unconsolidated Debt
Analysis," for a description of the terms of this debt.

(3) 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 $5.0 million
outstanding at December 31, 2003, and the amount guaranteed was $3.5
million.

(4) The Operating Partnership 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.

OTHER COMMITMENTS

On December 31, 2003, in accordance with the agreement to acquire the
Hughes Center properties, the Operating Partnership committed to acquire, in
March 2004, the undeveloped land, suitable for up to 400,000 square feet of
future office space, within Hughes Center for approximately $10.0 million, $2.5
million of which is to be paid in cash and the remaining $7.5 million to be paid
by the Operating Partnership in the form of a note due December 2005. See Note
25, "Subsequent Events," for information regarding the purchase of this
undeveloped land.

On September 23, 2003, the Operating Partnership entered into a one
year option agreement for the future sale of approximately 1.5 acres of
undeveloped investment land located in Houston, Texas, for approximately $7.8
million. The Operating Partnership received $0.01 million of consideration in
September 2003. The option agreement may be extended up to four years on a
yearly basis at the option of the prospective purchaser for additional
consideration.

COPI COMMITMENTS

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

CONTINGENCIES

Environmental Matters

All of the Properties have been subjected to Phase I environmental
assessments, and some Properties have been subjected to Phase II soil and ground
water sampling as part of the Phase I assessments. Such assessments

118

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

have not revealed, nor is management aware of, any environmental liabilities
that management believes would have a material adverse effect on the financial
position or results of operations of the Operating Partnership.

LITIGATION

The Operating Partnership is involved from time to time in various
claims and legal actions in the ordinary course of business. Management does not
believe that the impact of such matters will have a material adverse effect on
the Operating Partnership's financial position or results of operations when
resolved. During the year ended December 31, 2003, the Operating Partnership
paid $1.7 million to settle claims arising in the ordinary course of business.
During the year ended December 31, 2002, the Operating Partnership received a
$4.5 million litigation settlement fee, which is recorded in "Interest and other
income" on the Operating Partnership's Consolidated Statements of Operations. In
connection with the same litigation, the Operating Partnership incurred $2.6
million of legal fees, which is included in "Other expenses."

16. STOCK AND UNIT BASED COMPENSATION

STOCK OPTION PLANS

Crescent Equities has two stock incentive plans, the 1995 Stock
Incentive Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994
Plan"). Due to the approval of the 1995 Plan, additional options and restricted
shares will no longer be granted under the 1994 Plan. Under the 1994 Plan,
Crescent Equities had granted, net of forfeitures, 2,509,800 options which are
fully vested and no restricted shares. The maximum number of options and/or
restricted shares that Crescent Equities was able to initially grant at
inception under the 1995 Plan was 2,850,000 shares. The maximum aggregate number
of shares available for grant under the 1995 Plan increases automatically on
January 1 of each year by an amount equal to 8.5% of the increase in the number
of common shares and units outstanding since January 1 of the preceding year,
subject to certain adjustment provisions. As of January 1, 2004, the number of
shares Crescent Equities may issue under the 1995 Plan is 9,686,745. Under the
1995 Plan, Crescent Equities had issued shares due to the exercise of options
and restricted shares (net of forfeitures) of 2,035,216 and 323,718
respectively, through December 31, 2003. In addition, under the 1995 Plan,
Crescent Equities had granted, net of forfeitures, unexercised options to
purchase 7,096,344 shares as of December 31, 2003. Under both Plans, options are
granted at a price not less than the market value of the shares on the date of
grant and expire ten years from the date of grant. The options that have been
granted under the 1995 Plan vest over five years, with the exception of 500,000
options that vest over two years, 250,000 options that vest over three and a
half years and 60,000 options that vest six months from the initial date of
grant.

In 2002, John Goff, Vice-Chairman of the Board of Trust Managers and
Chief Executive Officer of the Company and sole director and Chief Executive
Officer of the General Partner was granted the right to earn 300,000 restricted
shares under the 1995 Plan. These shares vest at 100,000 shares per year on
February 19, 2005, February 19, 2006 and February 19, 2007. Compensation expense
is being recognized on a straight-line basis. For the year ended December 31,
2003, approximately $1.2 million was recorded as compensation expense related to
this grant.

119

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTIONS PLANS

A summary of the status of the Company's 1994 and 1995 Plans as of
December 31, 2003, 2002 and 2001 and changes during the years then ended is
presented in the table below.

2003 2002 2001
---------------------- ---------------------- ----------------------
OPTIONS TO WTD. AVG. OPTIONS TO WTD. AVG. OPTIONS TO WTD. AVG.
ACQUIRE EXERCISE ACQUIRE EXERCISE ACQUIRE EXERCISE
(share amounts in thousands) SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------------------------- ---------- --------- ---------- --------- ---------- ---------

Outstanding as of January 1, 7,455 $ 21 6,975 $ 21 7,966 $ 21
Granted 70 16 1,017 18 559 22
Exercised (95) 15 (338) 16 (747) 17
Forfeited(1) (303) 29 (199) 18 (803) 20
Expired - - - - - -
----- --------- ----- --------- ----- ---------
Outstanding/Wtd. Avg. as of December 31, 7,127 $ 21 7,455 $ 21 6,975 $ 21
===== ========= ===== ========= ===== =========
Exercisable/Wtd. Avg. as of December 31, 4,794 $ 22 3,985 $ 23 3,127 $ 24
===== ========= ===== ========= ===== =========

- -------------------------
(1) Includes 205 share options which were exchanged for 102.5 unit options (205
common share equivalents) with a weighted average exercise price of $34 during
the year ended December 31, 2003. Excluding these share options, the weighted
average exercise price would have been $19.

The following table summarizes information about the options
outstanding and exercisable at December 31, 2003.

(share amounts in thousands)

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ----------------------------
WTD. AVG.
YEARS
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT BEFORE WTD. AVG. EXERCISABLE WTD. AVG.
EXERCISE PRICES 12/31/03 EXPIRATION EXERCISE PRICE AT 12/31/03 EXERCISE PRICE
- --------------- -------------- ---------- -------------- ----------- --------------

$11 to 19 3,590 6.2 $ 17 2,154 $ 16
$19 to 27 2,246 6.4 22 1,349 22
$27 to 39 1,291 4.1 32 1,291 32
----- --- -------------- ----- --------------
$11 to 39 7,127 5.9 $ 21 4,794 $ 22
===== === ============== ===== ==============

UNIT OPTION PLANS

The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan").

Effective January 2, 2003, the 1995 Unit Plan was amended to make it
available to all employees and advisors of the Company, to provide for the grant
of unit options and to increase the number of units and common shares available
for issuance. Prior to 2003, the 1995 Unit Plan was not available to officers or
trust managers of the Company and did not provide for the grant of options. The
1995 Unit Plan has an aggregate of 400,000 common shares reserved for issuance
upon the exchange of 200,000 units, which are available for issuance. As of
December 31, 2003, an aggregate of 7,012 units had been distributed under the
1995 Unit Plan and during the year ended December 31, 2003, 51,100 unit options
were granted under this plan. In addition, 204,500 stock options were exchanged
for 102,250 unit options during the year ended December 31, 2003. There was no
activity in the 1995 Unit Plan in 2002 or 2001. The unit options granted under
the 1995 Unit Plan were priced at fair market value on the date of grant, vest
over five years and expire ten years from the date of grant. Each unit that was
issued, and each unit received upon exercise of unit options that were granted,
under the 1995 Unit Plan is exchangeable for two common shares or, at the option
of the Company, an equivalent amount of cash, except that any units issued to
executive officers or trust managers will be exchangeable only for treasury
shares unless shareholder approval is received.

120

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The 1996 Unit Plan provides for the grant of options to acquire up to
2,000,000 units. Through December 31, 2003, the Operating Partnership had
granted, net of forfeitures, options to acquire 2,000,000 units. Forfeited
options are available for grant. The unit options granted under the 1996 Unit
Plan were priced at fair market value on the date of grant, generally vest over
seven years, and expire ten years from the date of grant. Pursuant to the terms
of the unit options granted under the 1996 Unit Plan, because the fair market
value of the Company's common shares equaled or exceeded $25.00 for each of ten
consecutive trading days, the vesting of an aggregate of 500,000 units was
accelerated and such units became immediately exercisable in 1996. In addition,
100,000 unit options vest 50% after three years and 50% after five years. Under
the 1996 Unit Plan, each unit that may be purchased is exchangeable, as a result
of shareholder approval in June 1997, for two common shares or, at the option of
the Company, an equivalent amount of cash.

A summary of the status of the Operating Partnership's 1995 and 1996
Unit Plans as of December 31, 2003, 2002 and 2001, and changes during the years
then ended is presented in the table below (assumes each unit is exchanged for
two common shares).

(share amounts in thousands)

2003 2002 2001
------------------------ ---------------------- ----------------------
WTD. WTD. WTD.
AVG. AVG. AVG.
EXERCISE SHARES EXERCISE SHARES EXERCISE
SHARES PRICE UNDERLYING PRICE UNDERLYING PRICE
UNDERLYING PER UNIT PER UNIT PER
(in thousands) UNIT OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
- ---------------------------------------- ------------ -------- ---------- -------- ---------- --------

Outstanding as of January 1, 2,837 $ 17 2,394 $ 17 2,414 $ 17
Granted (1) 307 28 443 18 - -
Exercised - - - - (20) 18
Forfeited - - - - - -
Expired - - - - - -
----- -------- ------- -------- ----- --------
Outstanding/Wtd. Avg. as of December 31, 3,144 $ 18 2,837 $ 17 2,394 $ 17
===== ======== ======= ======== ===== ========
Exercisable/Wtd. Avg. as of December 31, 2,942 $ 19 2,080 $ 17 1,766 $ 18
===== ======== ======= ======== ===== ========

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

(1) Includes 205 share options which were exchanged for 102.5 unit options (205
common share equivalents) with a weighted average exercise price of $34
during the year ended December 31, 2003. Excluding these unit options, the
weighted average exercise price would have been $16.

The following table summarizes information about the unit options
outstanding and exercisable at December 31, 2003.

(share amounts in thousands)

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ----------------------------
WTD.
AVG.
YEARS
NUMBER REMAINING NUMBER
RANGE OF EXERCISE OUTSTANDING AT BEFORE WTD. AVG. EXERCISABLE WTD. AVG.
PRICES 12/31/03 EXPIRATION EXERCISE PRICE AT 12/31/03 EXERCISE PRICE
- ----------------- -------------- ---------- -------------- ----------- --------------

$11 to 19 2,939 3.8 $ 17 2,737 $ 17
$19 to 27 - - - - -
$27 to 39 205 4.2 34 205 34
----- --- -------------- ----- --------------
$11 to 39 3,144 3.8 $ 18 2,942 $ 19
===== === ============== ===== ==============

121

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNIT OPTIONS GRANTED UNDER OPERATING PARTNERSHIP AGREEMENT

During the years ended December 31, 2003, 2002 and 2001, the Operating
Partnership granted options to acquire 2,848,571 units, or 5,697,142 common
share equivalents, to officers and employees. The unit options granted were
priced at fair market value on the date of grant, vest over five years and
expire ten years from the date of grant. Each unit received upon exercise of the
unit options will be exchangeable for two common shares or, at the option of the
Company, an equivalent amount of cash, except that the units will be
exchangeable only for treasury shares unless shareholder approval is received.

A summary of the status of the unit options granted under the Operating
Partnership agreement as of December 31, 2003, 2002 and 2001 and changes during
the years then ended is presented in the table below (assumes each unit is
exchanged for two common shares).

(share amounts in thousands)

2003 2002 2001
----------------------- ---------------------- ----------------------
OPTIONS TO WTD. AVG. OPTIONS TO WTD. AVG. OPTIONS TO WTD. AVG.
ACQUIRE EXERCISE ACQUIRE EXERCISE ACQUIRE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- ---------

Outstanding as of January 1, 5,357 $ 18 300 $ 22 - $ -
Granted 340 16 5,057 18 300 22
Exercised - - - - - -
Forfeited - - - - - -
Expired - - - - - -
----- --------- ----- --------- --- ---------
Outstanding/Wtd. Avg. as of December 31, 5,697 $ 18 5,357 $ 18 300 $ 22
===== ========= ===== ========= === =========
Exercisable/Wtd. Avg. as of December 31, 777 $ 18 60 $ 22 - $ -
===== ========= ===== ========= === =========

The following table summarizes information about the options
outstanding and exercisable at December 31, 2003.

(share amounts in thousands)

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ----------------------------
WTD. AVG.
YEARS
NUMBER REMAINING NUMBER
RANGE OF EXERCISE OUTSTANDING AT BEFORE WTD. AVG. EXERCISABLE WTD. AVG.
PRICES 12/31/03 EXPIRATION EXERCISE PRICE AT 12/31/03 EXERCISE PRICE
- ----------------- -------------- ---------- -------------- ----------- --------------

$11 to 19 5,397 8.2 $ 17 657 $ 18
$19 to 27 300 7.2 22 120 22
$27 to 39 - - - - -
----- --- -------------- --- --------------
$11 to 39 5,697 8.1 $ 18 777 $ 18
===== === ============== === ==============

In 2004, the Company has granted options to acquire 62,500 units as an
employment inducement to two new vice presidents, Anthony B. Click and John
Albright. The 125,000 common share equivalents were granted at a price equal to
the fair market value on the date of grant. The unit options vest over five
years, expire ten years from the date of grant and have exchange rights.

STOCK AND UNIT OPTION PLANS

On January 1, 2003, the Operating Partnership adopted the expense
recognition provisions of SFAS No. 123, "Accounting for Stock Based
Compensation" on a prospective basis as permitted by SFAS No. 148 "Accounting
for stock-based compensation-transition and disclosure." The Operating
Partnership values the Company's stock and its unit options issued using the
Black-Scholes option-pricing model and recognizes this value as an expense over
the period in which the options vest. Under this standard, recognition of
expense for stock options is applied to all options granted after the beginning
of the year of adoption.

During the year ended December 31, 2003, the Company granted 70,000
stock options under the 1995 Plan, 51,100 unit options under the 1995 Unit Plan,
and 170,000 unit options under no plan. The Operating Partnership recognized
compensation expense related to these option grants which was not significant to
its results of operations.

At December 31, 2003, 2002 and 2001, the weighted average fair value of
common share and common share equivalent options granted was $0.63, $1.40, and
$1.83, respectively. The fair value of each option is

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

estimated at the date of grant using the Black-Scholes option-pricing model
based on the expected weighted average assumptions in the following calculation.

FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
-------- -------- --------

Life of options 10 years 10 years 10 years
Risk-free interest rates 3.6% 4.0% 4.4%
Dividend yields 9.9% 8.5% 8.3%
Stock price volatility 25.1% 25.1% 25.7%

17. MINORITY INTEREST

Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and consolidates the real estate partnerships into
the financial statements of the 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 minority interest as of December 31,
2003 and 2002:

(in thousands) 2003 2002
- -------------------------------------------------------------------- -------- --------

Development joint venture partners - Residential Development Segment $ 31,305 $ 24,937
Joint venture partners - Office Segment 8,790 11,202
Joint venture partners - Resort/Hotel Segment 7,028 7,833
-------- --------
$ 47,123 $ 43,972
======== ========

The following table summarizes the minority interests' share of net
income for the years ended December 31, 2003, 2002 and 2001:

(in thousands) 2003 2002 2001
- ------------------------------------------------------------------------ ------ ------- -------

Development joint venture partners - Residential Development Segment (1) $1,785 $ 5,156 $ -
Joint venture partners - Office Segment (576) 390 782
Joint Venture partners - Resort/Hotel Segment(1) (902) (157) -
Subsidiary preferred equity(1) - 5,722 19,016
------ ------- -------
$ 307 $11,111 $19,798
====== ======= =======

(1) Not consolidated in 2001.

18. PARTNERS' CAPITAL

Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, Crescent Equities' percentage interest in the Operating
Partnership increases. During the year ended December 31, 2003, there were 4,995
units exchanged for 9,990 common shares of Crescent Equities.

During the year ended December 31, 2002, Richard E. Rainwater, Chairman
of the Board of Trust Managers of the Company, contributed an aggregate of
4,805,800 common shares to the Operating Partnership in

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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

exchange for an aggregate of 2,402,900 units. See Note 21, "Related Party
Transactions - Share and Unit Exchange by Chairman," for additional information
on this transaction. As a result of these transactions, the Company's percentage
interest in the Operating Partnership decreased.

SHARE REPURCHASE PROGRAM

The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500.0
million to $800.0 million the amount of outstanding common shares that can be
repurchased from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program"). There were no share repurchases
under the program for the year ended December 31, 2003. As of December 31, 2003,
the Company had repurchased 20,256,423 common shares under the Share Repurchase
Program, at an aggregate cost of approximately $386.9 million, resulting in an
average repurchase price of $19.10 per common share. The repurchase of common
shares by the Company will decrease the Company's limited partner interest in
the Operating Partnership, which will, result in an increase in net income per
unit.

SERIES A PREFERRED OFFERINGS

On January 15, 2004, the Company completed an offering (the "January
2004 Series A Preferred Offering") of an additional 3,400,000 Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares") at a
$21.98 per share price and with a liquidation preference of $25.00 per share for
aggregate total offering proceeds of approximately $74.7 million. The Series A
Preferred Shares are convertible at any time, in whole or in part, at the option
of the holders into common shares of the Company at a conversion price of $40.86
per common share (equivalent to a conversion rate of 0.6119 common shares per
Series A Preferred Share), subject to adjustment in certain circumstances. The
Series A Preferred Shares have no stated maturity and are not subject to sinking
fund or mandatory redemption. At any time, the Series A Preferred Shares may be
redeemed, at the Company's option, by paying $25.00 per share plus any
accumulated accrued and unpaid distributions. Dividends on the additional Series
A Preferred Shares are cumulative from November 16, 2003, and are payable
quarterly in arrears on the fifteenth of February, May, August and November,
commencing February 16, 2004. The annual fixed dividend on the Series A
Preferred Shares is $1.6875 per share.

In connection with the January 2004 Series A Preferred Offering, the
Operating Partnership issued additional Series A Preferred Units to the Company
in exchange for the contribution of the net proceeds, after underwriting
discounts and other offering costs of approximately $3.7 million, of
approximately $71.0 million. The Operating Partnership used the net proceeds to
pay down the Operating Partnership's credit facility.

On April 26, 2002, the Company completed an institutional placement
(the "April 2002 Series A Preferred Offering ") of an additional 2,800,000
Series A Preferred Shares resulting in gross proceeds to the Company of
approximately $50.4 million. In connection with the April 2002 Series A
Preferred Offering, the Operating Partnership issued additional Series A
Preferred Units to the Company in exchange for the contribution of the net
proceeds, after underwriting discounts and other offering costs of approximately
$2.2 million, of approximately $48.2 million. The net proceeds from the April
2002 Series A Preferred offering were used by the Operating Partnership to
redeem Class A Units issued by its subsidiary, Funding IX, to GMACCM.

SERIES B PREFERRED OFFERINGS

On May 17, 2002, the Company completed an offering (the "May 2002
Series B Preferred Offering") of 3,000,000 Series B Cumulative Redeemable
Preferred Shares (the "Series B Preferred Shares") with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of
approximately $75.0 million. The Series B Preferred Shares have no stated
maturity, are not subject to sinking fund or mandatory redemption, are not
convertible into any other securities of the Company and may not be redeemed
before May 17, 2007, except in order to preserve the Company's status as a
REIT. On or after May 17, 2007, the Series B Preferred Shares may be redeemed,
at the Company's option, by paying $25.00 per share plus any accumulated,
accrued and unpaid distributions. Dividends on the Series B Preferred Shares
are cumulative from the date of original issuance and are payable quarterly in
arrears on the fifteenth of February, May, August and November, commencing
August 15, 2002. The annual fixed dividend is $2.375 per share. In connection
with the May 2002

124

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Series B Preferred Offering, the Operating Partnership issued Series B Preferred
Units to the Company in exchange for the contribution of the net proceeds, after
underwriting discounts and other offering costs of approximately $2.8 million,
of approximately $72.3 million. The net proceeds from the May 2002 Series B
Preferred Offering were used by the Operating Partnership to redeem Class A
Units issued by its subsidiary, Funding IX, to GMACCM.

On June 6, 2002, an additional 400,000 Series B Preferred Shares were
sold resulting in gross proceeds to the Company of approximately $10.0 million
(the "June 2002 Series B Preferred Offering"). In connection with the June 2002
Series B Preferred Offering, the Operating Partnership issued additional Series
B Preferred Units to the Company in exchange for the contribution of the net
proceeds, after underwriting discounts and other offering costs of approximately
$0.04 million, of approximately $9.6 million. The net proceeds from the June
2002 Series B Preferred Offering were used the by the Operating Partnership to
redeem Class A Units issued by its subsidiary, Funding IX, to GMACCM.

DISTRIBUTIONS

In October 2001, the Company announced that due to its revised cash
flow expectations in the uncertain economic environment and measuring its payout
ratios to those of the Operating Partnership's peer group, the Operating
Partnership was reducing its quarterly distribution from $1.10 per unit, or an
annualized distribution of $4.40 per unit, to $0.75 per unit, or an annualized
distribution of $3.00 per unit.

The distributions to unitholders paid during the years ended December 31,
2003, 2002 and 2001, were $175.5 million, $192.7 million, and $274.4 million,
respectively. These distributions represented an annualized distribution of
$3.00 $3.00 and $4.05 per unit for the years ended December 31, 2003, 2002,
2001, respectively. During 2001 and through August 2002, the Company was holding
14,468,623 of its common shares in its wholly-owned subsidiary, Crescent SH IX,
Inc. ("SH IX"). The distribution amounts above include $16.3 million and $29.3
million of distributions for the years ended December 31, 2002 and 2001,
respectively, which were paid on the limited partner interest of the Company
that was redeemed by the Operating Partnership in connection with the repurchase
by the Company, during the year ended December 31, 2002, of the common shares
held by SH IX. On February 16, 2004, the Operating Partnership distributed $43.9
million to unitholders.

Distributions to Series A Preferred unitholders for the years ended
December 31, 2003, 2002 and 2001, were $18.2 million, $17.0 million, and $13.5
million, respectively. The distributions per Series A Preferred unit were
$1.6875 per preferred unit annualized for each of the three years. On February
16, 2004, the Operating Partnership distributed $6.0 million to Series A
Preferred unitholders.

Distributions to Series B Preferred unitholders for the years ended
December 31, 2003, and 2002 were $8.1 million and $4.1 million, respectively.
The distributions per Series B Preferred unit were $2.3750 per unit annualized
for each of the two years. On February 16, 2004, the Operating Partnership
distributed $2.0 million to Series B Preferred unitholders.

125

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY

During the year ended December 31, 2000, the Operating Partnership
formed Funding IX and issued $275.0 million of non-voting redeemable Class A
units in Funding IX (the "Class A Units") to GMACCM. The Class A Units were
redeemable at the Operating Partnership's option at the original price. As of
December 31, 2000, the Operating Partnership had redeemed approximately $56.6
million of the Class A units in Funding IX from GMACCM. All of the Class A Units
outstanding at December 31, 2000 were redeemed by Funding IX during the year
ended December 31, 2002. In connection with the final redemption of Class A
Units, SH IX, a wholly-owned subsidiary of the Operating Partnership,
transferred the 14,468,623 common shares of the Company held by SH IX to the
Company, which holds these common shares as treasury shares, and the
intracompany loan between Funding IX and SH IX was repaid.

20. INCOME TAXES

TAXABLE CONSOLIDATED ENTITIES

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. During 2003 and 2002, the taxable consolidated entities were comprised
of the taxable REIT subsidiaries of the Operating Partnership.

Significant components of the Operating Partnership's deferred tax
liabilities and assets at December 31, 2003, and 2002 are as follows:

December 31, December 31,
2003 2002
------------ -------------

Deferred Tax Liabilities:
Residential Development Costs $(21,854) $(23,140)
Depreciation (5,196) (3,195)
Minority Interest (4,782) (4,782)
-------- --------
Total Deferred Tax Liabilities: $(31,832) $(31,117)
======== ========

Deferred Tax Assets:
Deferred Revenue $ 31,686 $ 32,066
Hotel Lease Acquisition Costs 3,338 5,117
Amortization of Intangible Assets 9,055 8,659
Net Operating Loss Carryforwards 3,708 2,564
Impairment of Assets 4,087 3,859
Related Party Interest Expense Not Currently Deductible - 11,850
Other 4,399 3,486
-------- --------
Total Deferred Tax Assets $ 56,273 $ 67,601

Valuation Allowance for Deferred Tax Assets (6,935) (6,935)
-------- --------
Deferred Tax Assets, Net of Valuation Allowance $ 49,338 $ 60,666
======== ========

Net Deferred Tax Assets $ 17,506 $ 29,549
======== ========

In addition to the Net Deferred Tax Assets of approximately $29.5
million at December 31, 2002, the Operating Partnership had a current tax
receivable of $10.2 million at December 31, 2002, comprising the total Income
tax asset - current and deferred on the Operating Partnership's Consolidated
Balance Sheets at December 31, 2002. At December 31, 2003, the Operating
Partnership has a current income tax payable of approximately $8.0 million.

126

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SFAS No. 109, "Accounting for Income Taxes," requires a valuation
allowance to reduce the deferred tax assets reported if, based on the weight of
the evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management determined that a $6.9 million
valuation allowance at December 31, 2003 and 2002, necessary to reduce the
deferred tax assets to the amount that will more likely than not be realized.
The Operating Partnership has available net operating loss carryforwards of
approximately $9.5 million at December 31, 2003, arising from the operation of
the consolidated taxable REIT subsidiaries. The net operating loss carryforwards
will expire between 2017 and 2021. The Operating Partnership did not record a
deferred tax benefit or expense during the year ended December 31, 2001.

Consolidated income (loss) from continuing operations subject to tax
was $67.5 million and $(20.7) million for the years ended December 31, 2003 and
2002, respectively. The reconciliation of (i) income tax attributable to
consolidated income (loss) subject to tax computed at the U.S. statutory rate to
(ii) income tax benefit is shown below:

Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
(in thousands) Amount Percent Amount Percent
- -------------- ------ ------- ------ -------

Tax at U.S. statutory rates on consolidated $ 23,629 35.0 % $ (7,245) (35.0) %
income (loss) subject to tax
State income tax, net of federal income tax benefit 2,970 4.4 (787) (3.8)
Other (274) (0.4) (251) (1.2)
Increase in valuation allowance - - 3,859 18.6
-------- ---- -------- ----
$ 26,325 39.0 % $ (4,424) (21.4) %
======== ==== ======== ====

The Operating Partnership's current tax expense for the years ended
December 31, 2003 and 2002 was $11.3 and $3.3 million, respectively. The
Operating Partnership's deferred tax expense (benefit) for the years ended
December 31, 2003 and 2002 was $15.0 and ($7.7) million, respectively.

21. RELATED PARTY TRANSACTIONS

DBL HOLDINGS, INC.

Since June 1999, the Operating Partnership has contributed
approximately $23.8 million to DBL. The contribution was used by DBL to make an
equity contribution to DBL-ABC, Inc., a wholly owned subsidiary of DBL, which
committed to purchase an affiliated 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 (the "G2 General Partner") that is owned
equally by GMSPLP and GMAC Commercial Mortgage Corporation. The G2 General
Partner is entitled to an annual asset management fee. Additionally, the G2
General Partner has a 1% interest in profits and losses of G2 and, after payment
of specified amounts to partners, a promoted interest based on payments to
Unaffiliated Limited Partners. As an Affiliated Limited Partner, DBL-ABC, Inc.'s
returns are not impacted by the G2 General Partners's promoted interest. As of
December 31, 2003, DBL-ABC, Inc. has received approximately $20.9 million
cumulative distributions and recognized approximately $10.0 million cumulative
net income, bringing the investment balance to approximately $13.3 million.

The ownership structure of GMSPLP consists of an approximately 86%
limited partnership interest owned directly and indirectly by Richard E.
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 C. Goff, Vice-Chairman of the Company's Board of Trust Managers
and Chief Executive Officer of the Company and sole director and Chief
Executive Officer of the General Partner. The remaining approximately 2%
general partnership interest is owned by unrelated parties.

On January 2, 2003, the Operating Partnership purchased the remaining
2.56% economic interest, representing 100% of the voting stock, in DBL from Mr.
Goff. Total consideration paid for Mr. Goff's interest was $0.4 million. The
Board of Trust Managers of the Company, including all the independent trust
managers, approved the transaction based in part on an appraisal of the assets
of DBL by an independent appraisal firm. As a result of this transaction, DBL is
wholly-owned by the Operating Partnership and is consolidated in the Residential
Development Segment as of and for the year ended December 31, 2003. Also,
because DBL owns a majority of the

127

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

voting stock in MVDC and HADC, the Operating Partnership consolidated these two
Residential Development Corporations as of and for the year ended December 31,
2003.

COPI COLORADO, L. P.

On February 14, 2002, the Operating Partnership executed an agreement
with COPI, pursuant to which COPI transferred to the Operating Partnership,
COPI's 60% general partner interest in COPI Colorado, L.P. ("COPI Colorado"),
the partnership that owned a 10% interest, representing all of the voting stock
, in CRDI. John Goff, Vice Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company and sole director and Chief Executive Officer
of the General Partner, owned a 20% interest in COPI Colorado, and the remaining
20% interest was owned by a third party. As a result of this transaction, the
Operating Partnership indirectly owned a 96% interest in CRDI. John Goff owned a
2% interest in CRDI and the remaining 2% interest was owned by the third party.
The Operating Partnership fully consolidated the operations of CRDI as of the
date of the asset transfer.

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

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

As of December 31, 2003, the Operating Partnership had approximately
$38.0 million loan balances outstanding, inclusive of current interest accrued
of approximately $0.2 million, to certain employees and trust managers of the
Operating Partnership and the Company on a recourse basis pursuant to the
Company's and the Operating Partnership's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company and units of the Operating Partnership pursuant to the exercise of
vested stock and unit options. Pursuant to the loan agreements, these loans may
be repaid in full or in part at any time without premium or penalty. John Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company and sole director and Chief Executive Officer of the General Partner,
had a loan representing $26.3 million of the $37.8 million total outstanding
loans at December 31, 2003. No conditions exist at December 31, 2003 which would
cause any of the loans to be in default.

Every month, federal short-term, mid-term and long-term rates
(Applicable Federal Rates) ("AFR") are determined and published by the IRS based
upon average market yields of specified maturities. On November 1, 2001,
existing loans were amended to reduce the interest rates for their remaining
terms to the Applicable Federal Rates. As a result, the interest rates on loans
with remaining terms of three years or less at November 1, 2001 were reduced to
approximately 2.7% per year and the interest rates on loans with remaining terms
greater than three years as of November 1, 2001 were reduced to approximately
4.07% per year. These amended interest rates reflected below prevailing market
interest rates and, in accordance with GAAP, the Operating Partnership recorded
$0.8 million of compensation expense for the year ended December 31, 2001.

The Operating Partnership granted additional loans during 2002 through
July 29, 2002, with interest rates equal to the AFR of 2.70% to 2.81%, which
reflect below prevailing market interest rates and, in accordance with GAAP, the
Operating Partnership recorded compensation expense. On July 29, 2002, the loans
made pursuant to the Company's stock incentive plans were amended to extend the
remaining terms of the loans until July 2012, and to stipulate that every three
years the interest rate on the loans would be adjusted to the AFR applicable at
that time for a three-year loan, reflecting a below prevailing market interest
rate. Additionally, the employees and trust managers were given the option, at
any time, to fix the interest rate for each of the loans to the AFR applicable
at that time for a loan with a term equal to the remaining term of the loan. The
July 29, 2002, amendment resulted in $1.9 million of additional compensation
expense for the year ended December 31, 2002, recorded in "Other

128

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

expenses" in the Operating Partnership's Consolidated Statements of Operations.
Effective July 29, 2002, the Operating Partnership ceased offering to employees
and Trust Managers the option to obtain loans pursuant to the Company's and the
Operating Partnership's stock and unit incentive plans. On July 29, 2003, each
of the employees and trust managers elected to fix the interest rate on the
loans. As a result, the interest rate on the loans, each with a remaining term
of nine years, was reduced to 2.52% per year.

DEBT OFFERING

On April 15, 2002, the Operating Partnership completed a private
offering of $375.0 million in senior, unsecured notes due in 2009, $50.0 million
of which were purchased by Richard E. Rainwater, Chairman of the Board of Trust
Managers of the Company, and certain of his affiliates and family members (the
"Rainwater Group"). The notes bear interest at 9.25% and were issued at 100% of
issue price. The Operating Partnership and Crescent Finance Company registered
for resale the notes issued to the Rainwater Group. See Note 11, "Notes Payable
and Borrowings under Credit Facility," for additional information regarding the
offering and the notes.

SHARE AND UNIT EXCHANGE BY CHAIRMAN

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

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

In September 2002, Mr. Rainwater sold 300,000 of the Company's common
shares to a family member. In November 2002, in connection with the share and
unit exchange transaction described above, Mr. Rainwater purchased common shares
of the Company in the open market. Because the transactions occurred within a
six month period and the price per share of the September sale exceeded the
price per share of the November purchase, Mr. Rainwater was deemed to have
received a short swing profit under the provisions of Section 16(b) of the
Securities Exchange Act of 1934. In accordance with Section 16(b), Mr. Rainwater
paid the entire $0.3 million amount of the profit to the Operating Partnership
on November 20, 2002. The payment was a contribution by the Company to the
Operating Partnership.

OTHER

On June 28, 2002, the Operating Partnership purchased the home of an
executive officer to facilitate the hiring and relocation of this executive
officer. The purchase price for the home was approximately $2.6 million. The
Operating Partnership is actively marketing this asset for sale and has
recognized an impairment charge of approximately $0.6 million, net of taxes,
during the year ended December 31, 2003, based on market conditions.

129

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

FOR THE 2003 QUARTER ENDED
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------

Total Property Revenues $ 234,570 $ 237,509 $ 214,511 $ 262,654
Total Property Expenses 133,576 143,115 172,992 170,566
Income (loss) from continuing operations before minority
interests and income taxes (4,012) (2,100) 3,813 74,324
Minority interests 1,181 (1,611) (308) 431
Income tax (provision) benefit 2,515 3,090 4,940 (36,870)

Income (loss) from discontinued operations 1,431 2,287 (2,210) 397
Impairment charges related to real estate assets from
discontinued operations (15,828) (990) (2,356) (9,690)
(Loss) gain on real estate from discontinued operations (339) (49) (24) 12,546
Net (loss) income available to partners (21,625) (5,947) (2,720) 34,560

Per unit data:
Basic Earnings Per Unit
- Net (loss) income available to partners before
discontinued operations and cumulative effect of a
change in accounting principle (0.12) (0.12) 0.03 0.53
- Income (loss) from discontinued operations, net of
minority interests 0.02 0.04 (0.04) 0.01
Impairment charges related to real estate assets from
discontinued operations (0.27) (0.02) (0.04) (0.17)
- (Loss) gain on real estate from discontinued operations - - - 0.22
- Net (loss) income available to partners - basic (0.37) (0.10) (0.05) 0.59

Diluted Earnings Per Unit
-(Loss) income available to partners before discontinued
operations and cumulative effect of a change in
accounting principle (0.12) (0.12) 0.03 0.53
- Income (loss) from discontinued operations 0.02 0.04 (0.04) 0.01
Impairment charges related to real estate assets from
discontinued operations (0.27) (0.02) (0.04) (0.17)
- (Loss) gain on real estate from discontinued operations - - - 0.22
- Net (loss) income available to partners - diluted (0.37) (0.10) (0.05) 0.59

130

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE 2002 QUARTER ENDED
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------

Total Property Revenues $ 219,411 $ 279,074 $ 245,007 $ 258,986
Total Property Expenses 118,483 168,368 175,869 172,592
Income from continuing operations before minority interests
and income taxes 23,236 20,298 30,713 34,048
Minority interests (4,651) (3,722) (986) (1,752)
Income tax (provision) benefit 5,380 (874) 2,033 (2,115)

Net income from discontinued operations, net of minority
interests 3,931 891 1,123 8,789
Impairment charges related to real estate assets from
discontinued operations, net of minority interests (2,048) - - (2,630)
Gain on real estate from discontinued operations, net of
minority interests 4,243 1,424 1,631 4,504
Cumulative effect of a change in accounting principle (10,327) - - -
Income available to partners 17,860 13,661 26,470 33,399

Per unit data:
Basic Earnings Per Common Unit
-Income available to partners before discontinued
operations and cumulative effect of a change in
accounting principle 0.34 0.17 0.37 0.39
- Income from discontinued operations, net of minority
interests 0.06 0.01 0.02 0.15

Impairment charges related to real estate assets from
discontinued operations, net of minority interests (0.03) - - (0.04)
- Gain (loss) on real estate from discontinued operations 0.06 0.03 0.03 0.07
- Cumulative effect of change in accounting principle (0.16) - - -
- Net income available to partners- basic 0.27 0.21 0.42 0.57

Diluted Earnings Per Common Unit
-Income available to partners before discontinued
operations and cumulative effect of a change in
accounting principle 0.34 0.17 0.37 0.39
- Income from discontinued operations 0.06 0.01 0.02 0.15
Impairment charges related to real estate assets from
discontinued operations (0.03) - - (0.04)
- Gain (loss) on real estate from discontinued operations 0.06 0.03 0.03 0.07
- Cumulative effect of change in accounting principle (0.16) - - -
- Net income available to partners- diluted 0.27 0.21 0.42 0.57

131

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23. COPI

In April 1997, the Operating Partnership established a new Delaware
corporation, COPI. COPI was formed to become a lessee and operator of various
assets to be acquired by the Operating Partnership. Subsidiaries of COPI became
lessees of eight of the Resort/Hotel Properties. In addition, the Operating
Partnership made loans to COPI under a line of credit and various term loans.

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

IMPAIRMENT AND OTHER ADJUSTMENTS RELATED TO COPI

Resort/Hotel Accounts Receivable, net of allowance $ 33,200
Resort/Hotel Deferred Rent Receivable 12,700
Notes Receivable and Accrued Interest 71,500
Asset transaction costs 2,800
--------
$120,200

Less estimated collateral vale to be received from COPI:
Estimated Fair Value of Resort/Hotel FF&E $ 6,900
Estimated Fair Value of Voting Stock of
Residential Development Corporations 38,500
--------
45,400
--------
Impairment of assets $ 74,800

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

On February 14, 2002, pursuant to an agreement (the "Agreement") with
COPI, the Operating Partnership acquired COPI's lessee interests in the eight
Resort/Hotel Properties and all of COPI's voting interests in three of the
Operating Partnership's Residential Development Corporations and other assets.
In connection with the acquisition, COPI's rent and debt obligations to the
Operating Partnership were reduced.

The Operating Partnership holds the lessee interests in the eight
Resort/Hotel Properties and the voting interests in the three Residential
Development Corporations through three wholly-owned taxable REIT subsidiaries of
the Operating Partnership. Since February 15, 2002, the Operating Partnership
has included these assets in its Resort/Hotel Segment and its Residential
Development Segment, and fully consolidated the operations of the eight
Resort/Hotel Properties and the three Residential Development Corporations.

The Agreement provides that COPI and the Operating Partnership will
jointly seek to have a pre-packaged bankruptcy plan for COPI, reflecting the
terms of the Agreement, approved by the bankruptcy court. Under the Agreement,
the Operating Partnership has agreed to provide approximately $14.0 million to
COPI in the form of cash and common shares of the Company to fund costs, claims
and expenses relating to the bankruptcy and related transactions, and to provide
for the distribution of the Company's common shares to the COPI stockholders.
The Operating Partnership also agreed, however, that the Company 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. Since February 15, 2002, the Operating
Partnership has loaned $5.8 million to COPI to fund costs, claims and expenses
relating to the bankruptcy and related transactions. Currently, the Operating
Partnership estimates that the value of the common shares that will be issued to
the COPI stockholders will be approximately $2.2 million.

In addition, the Operating Partnership has agreed to use commercially
reasonable efforts to assist COPI in arranging COPI's repayment of its $15.0
million obligation to Bank of America, together with any accrued interest. The
Operating Partnership expects to form and capitalize a new entity ("Crescent
Spinco"), to be owned by the

132

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

shareholders of the Company and unitholders of the Operating Partnership.
Crescent Spinco then would purchase COPI's interest in AmeriCold Logistics for
between $15.0 million and $15.5 million. COPI has agreed that it will use the
proceeds of the sale of the AmeriCold Logistics interest to repay Bank of
America in full.

COPI obtained the loan from Bank of America primarily to participate in
investments with the Operating Partnership. At the time COPI obtained the loan,
Bank of America required, as a condition to making the loan, that Richard E.
Rainwater, the Chairman of the Board of Trust Managers of the Company, and John
C. Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company and sole director and Chief Executive Officer of the
General Partner, enter into a support agreement with COPI and Bank of America.
Pursuant to the support agreement, Messrs. Rainwater and Goff agreed to make
additional equity investments in COPI if COPI defaulted on payment obligations
under its line of credit with Bank of America and if the net proceeds of an
offering of COPI securities were insufficient to allow COPI to repay Bank of
America in full.

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

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

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.

133

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

24. BEHAVIORAL HEALTHCARE PROPERTIES

As of December 31, 2000, the Operating Partnership owned 28 behavioral
healthcare properties. The former tenant of the behavioral healthcare properties
declared bankruptcy and ceased operations in 2000.

The Operating Partnership received approximately $6.0 million in
repayment of a working capital loan from the former tenant during the year ended
December 31, 2001, which was previously written off and is included in Interest
and other income on the Consolidated Statements of Operations.

This table presents the dispositions of behavioral healthcare
properties by year including the number of properties sold, net proceeds
received, gains on sales and impairments recognized. Depreciation has not been
recognized since the dates the behavioral healthcare properties were classified
as held for sale.

Number of
(dollars in millions) Properties Net
Year Sold Proceeds Gain Impairments(2)
- ------------------ ----------- --------------- -------- ---------------

2003 6 $ 11.2(1) $ - $ 4.8
2002 3 4.6 - 3.2
2001 18 34.7 1.6 8.5
2000 60 233.7 58.6 9.3

- --------------
(1) The sale of one property on February 27, 2003 also generated a note
receivable in the amount of $0.7 million, with interest only payments
beginning March 2003, through maturity in February 2005. The interest
rate is the prime rate, as defined in the note, plus 1.0%.

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

As of December 31, 2003, the Operating Partnership owned one behavioral
healthcare property. After recognition of a $0.9 million impairment relating to
this property in 2003, the carrying value of the remaining behavioral healthcare
property at December 31, 2003, was approximately $2.3 million. The Operating
Partnership has entered into a contract to sell the Property and anticipates
that the sale will close in the second quarter of 2004.

25. SUBSEQUENT EVENTS

ASSETS HELD FOR SALE

Subsequent to December 31, 2003, four Office Properties were classified
as held for sale in accordance with SFAS No. 144 as a result of management of
the Operating Partnership committing to a plan to sell these Office Properties.
The Properties, including 3333 Lee Parkway located in the Uptown/Turtle Creek
submarket in Dallas, Texas, 5050 Quorum and Addison Tower, both located in the
Quorum/Bent Tree submarket in Dallas, Texas, and Ptarmigan Place located in the
Cherry Creek submarket in Denver, Colorado are currently being marketed for sale
and anticipated to be sold during 2004. The following table indicates the
carrying value at December 31, 2003 and 2002 of the major classes of assets of
these Office Properties.

(in thousands) 2003 2002
- -----------------------------------------------------------------

Land $ 8,104 $ 8,104
Buildings and improvements 66,471 70,220
Accumulated depreciation (15,578) (17,191)
Other assets, net 2,047 2,923
---------------------------
Net investment in real estate $ 61,044 $ 64,056
===========================

UNDEVELOPED LAND - HUGHES CENTER

On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Operating Partnership completed the purchase of
two tracts of undeveloped land in Hughes Center from the Rouse

134

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company for $10.0 million. The purchase was funded by $7.5 million loans from
the Rouse Company and a draw on the Operating Partnership's credit facility.

135

SCHEDULE III

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(dollars in thousands)

136

SCHEDULE III

137

SCHEDULE III

(1) Initial costs include purchase price, adjustments related to SFAS 141, and
any costs associated with closing of the Property.

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

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

(3) This Office Property was sold on December 15, 2003.

(4) As of September 30, 2003, Liberty Plaza I and II was held for sale, and is
included in Discontinued Operations in the Operating Partnership's
consolidated financial statements. Depreciation expense has not been
recognized since the date this Property was held for sale.

(5) As of September 30, 2003, 12404 Park Central was held for sale, and is
included in Discontinued Operations in the Operating Partnership's
consolidated financial statements. Depreciation expense has not been
recognized since the date this Property was held for sale.

(6) On December 31, 2003, the Operating Partnership sold its interest in
Woodlands Office Equities, which owned four Office Properties located
within The Woodlands, Texas, and interest in The Woodlands Land Company.

(7) As of March 31, 2003, 1800 West Loop South was held for sale, and is
included in Discontinued Operations in the Operating Partnership's
consolidated financial statements. Depreciation expense has not been
recognized since the date this Property was held for sale.

(8) Depreciation on behavioral healthcare properties held for sale ceased from
11/11/99 through 12/31/03 (the period over which these properties were held
for sale). During the year ended December 31, 2003, the Operating
Partnership sold six behavioral healthcare properties. The Operating
Partnership owns one behavioral healthcare property, which was held for
disposition as of December 31, 2003.

(9) This property was acquired on August 26, 2003.

(10) These properties were acquired on December 31, 2003.

(11) Land and cost capitalized subsequent to acquisition includes property under
development and is net of residential development cost of sales.

(12) Beginning on January 2,2003, Mira Vista Development Company and Houston
Area Development Corporation were consolidated in the Operating
Partnership's financial statements, as a result of the purchase by the
Operating Partnership of the remaining 2.56% voting stock in DBL Holdings,
Inc. from John Goff, Vice-Chairman of the Company's Board of Directors and
Chief Executive Officer of the Company, and sole director and Chief
Executive Officer of the General Partner.

(13) On April 24, 2003, the Company sold 0.5 acres of land located in Dallas,
Texas. On May 15, 2003, the Company sold 24.8 acres located in Coppell,
Texas.

138

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

139

COMBINED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Years ended December 31, 2003 and 2002

140

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combined Financial Statements and Other Financial Information

Years ended December 31, 2003 and 2002

CONTENTS

Report of Independent Auditors....................................................142

Audited Combined Financial Statements

Combined Balance Sheets...........................................................143
Combined Statements of Earnings and Comprehensive Income..........................144
Combined Statements of Changes in Partners' Equity (Deficit)......................145
Combined Statements of Cash Flows.................................................146
Notes to Combined Financial Statements............................................147

Other Financial Information

Report of Independent Auditors on Other Financial Information.....................171

Combining Balance Sheets..........................................................172
Combining Statements of Earnings (Loss) and Comprehensive Income (Loss)...........174
Combining Statements of Changes in Partners' Equity (Deficit).....................176
Combining Statements of Cash Flows................................................177

141

Report of Independent Auditors

To the Executive Committee of
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

We have audited the accompanying combined balance sheets of The Woodlands Land
Development Company, L.P., The Woodlands Commercial Properties Company, L.P.,
and The Woodlands Operating Company, L.P., Texas limited partnerships,
(collectively, the "Companies"), as of December 31, 2003 and 2002, and the
related combined statements of earnings and comprehensive income, changes in
partners' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Companies at
December 31, 2003 and 2002, and the combined results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.

February 9, 2004

142

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combined Balance Sheets

See accompanying notes.

143

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combined Statements of Earnings and Comprehensive Income

See accompanying notes.

144

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combined Statements of Changes in Partners' Equity (Deficit)

See accompanying notes.

145

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combined Statements of Cash Flows

See accompanying notes.

146

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements

December 31, 2003 and 2002

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONTROL

The Woodlands Land Development Company, L.P. ("Woodlands Development"), The
Woodlands Commercial Properties Company, L.P. ("Woodlands Commercial"), and The
Woodlands Operating Company, L.P. ("Woodlands Operating"), Texas limited
partnerships (together "The Woodlands Partnerships"), are owned by entities
controlled by The Rouse Company ("Rouse") and Morgan Stanley Real Estate Fund
II, L.P. ("Morgan Stanley"). Woodlands Development and Woodlands Commercial are
successors to The Woodlands Corporation. Prior to July 31, 1997, The Woodlands
Corporation was a wholly owned subsidiary of Mitchell Energy & Development Corp.
On July 31, 1997, The Woodlands Corporation was acquired by Crescent Real Estate
Equities Limited Partnership ("Crescent") and Morgan Stanley. On December 31,
2003, Crescent sold its interest in The Woodlands Partnerships to Rouse.

Woodlands Operating and its subsidiary, WECCR General Partnership ("WECCR GP"),
manage assets owned by Woodlands Commercial and Woodlands Development as
described in Note 8. In July 2000, Woodlands Development and Woodlands
Commercial established subsidiaries, Woodlands VTO 2000 Land, L.P. ("VTO Land"),
and Woodlands VTO 2000 Commercial, L.P. ("VTO Commercial"), to own and operate
certain commercial properties in The Woodlands. These subsidiaries purchased
certain commercial properties owned by Woodlands Development and Woodlands
Commercial. In June 2001, Woodlands Development established a subsidiary, The
Woodlands Hotel, L.P. ("the Hotel"), to construct and operate a hotel in The
Woodlands.

PRINCIPLES OF COMBINATION

The combined financial statements include the accounts of The Woodlands
Partnerships and are combined due to common ownership in certain cases and
management. All significant transactions and accounts between The Woodlands
Partnerships are eliminated in combination. The Woodlands Partnerships follow
the equity method of accounting for their investments in 20% to 50% owned
entities.

147

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BUSINESS

The Woodlands Partnerships' real estate activities are concentrated in The
Woodlands, a planned community located north of Houston, Texas. Consequently,
these operations and the associated credit risks may be affected, either
positively or negatively, by changes in economic conditions in this geographical
area. Activities associated with The Woodlands Partnerships include residential
and commercial land sales and the construction, operation, and management of
office and industrial buildings, apartments, golf courses, and two hotel
facilities.

REAL ESTATE

Costs associated with the acquisition and development of real estate, including
holding costs consisting principally of interest and ad valorem taxes, are
capitalized as incurred. Capitalization of such holding costs is limited to
properties for which active development continues. Capitalization ceases upon
completion of a property or cessation of development activities. Where
practicable, capitalized costs are specifically assigned to individual assets;
otherwise, costs are allocated based on estimated values of the affected assets.

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. For the years ended
December 31, 2003 and 2002, there were no impairments recognized.

REVENUE RECOGNITION

Staff Accounting Bulletin No. 104 ("SAB 104") provides interpretive guidance on
the proper revenue recognition, presentation, and disclosure in financial
statements. The Woodlands Partnerships have reviewed their revenue recognition
policies and determined that they are in compliance with accounting principles
generally accepted in the United States and the related interpretive guidance
set forth in SAB 104.

148

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LAND SALES

Earnings from sales of real estate are recognized when a third-party buyer has
made an adequate cash down payment and has attained the attributes of ownership.
Notes received in connection with land sales are discounted when the stated
purchase prices are significantly different from those that would have resulted
from similar cash transactions. The cost of land sold is generally determined as
a specific percentage of the sales revenues recognized for each land development
project. The percentages are based on total estimated development costs and
sales revenues for each project. These estimates are revised annually and are
based on the then-current development strategy and operating assumptions
utilizing internally developed projections for product type, revenue, and
related development cost.

SALES OF COMMERCIAL PROPERTIES

Sales of commercial properties are accounted for under the accrual method when
certain criteria are met. Gains or losses are recognized when a significant down
payment has been made, the earnings process is complete, and the collection of
any remaining receivables is reasonably assured.

LEASE REVENUE

Commercial properties are leased to third-party tenants generally involving
multi-year terms. These leases are accounted for as operating leases. See Note 3
for further discussion.

DEPRECIATION

Depreciation of operating assets is recorded on the straight-line method over
the estimated useful lives of the assets. Useful lives range predominantly from
15 to 40 years for land improvements and buildings, 3 to 20 years for leasehold
improvements, and 3 to 10 years for furniture, fixtures, and equipment. Property
and equipment are carried at cost less accumulated depreciation. Costs incurred
for computer software developed for internal use are capitalized for application
development activities.

149

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING

Advertising costs are charged to operations when incurred. For the years ended
December 31, 2003 and 2002, advertising costs totaled $4,407,000 and $5,686,000,
respectively.

DEFERRED FINANCING COSTS

Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related debt using the interest method.

INCOME TAXES

Woodlands Development, Woodlands Commercial, and Woodlands Operating are not
income tax-paying entities, and all income and expenses are reported by the
partners for tax reporting purposes. No provision for federal income taxes is
included in the accompanying combined financial statements for these entities.
Effective March 1, 2002, WECCR GP elected to be classified as an association
taxable as a corporation for federal income tax purposes. Accordingly, federal
income tax has been provided. For state purposes, WECCR GP is a partnership, and
no state tax has been provided for. WECCR GP had no foreign operations.

The tax returns, the qualification of The Woodlands Partnerships for tax
purposes, and the amount of distributable partnership income or loss are subject
to examination by federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.

INVENTORY

Inventory is carried at the lower of cost or market and consists primarily of
golf-related clothing and equipment sold at golf course pro shops and food and
beverages sold at the hotel facilities in The Woodlands. Cost is determined
based on a first-in, first-out method.

150

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STATEMENTS OF CASH FLOWS

Short-term investments with maturities of three months or less when purchased
are considered to be cash equivalents. Debt borrowings and repayments with
initial terms of three months or less are reported net. For the years ended
December 31, 2003 and 2002, The Woodlands Partnerships paid interest totaling
$19,760,000 and $20,827,000, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in the prior year's combined financial
statements to conform with classifications used in the current year.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of Others. This
Interpretation requires a guarantor to recognize, at the inception of a
guarantee issued or modified after December 31, 2002, a liability for the fair
value of the obligation undertaken for issuing the guarantee. Adoption of this
Interpretation did not have a material impact on The Woodlands Partnerships'
results of operations or financial position.

In January 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities. This Interpretation requires the consolidation of
entities in which an enterprise absorbs a majority of the entity's losses,
receives a majority of the entity's expected residual returns, or both, as a
result of ownership, contractual, or other financial interests in the entity.

151

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Prior to the issuance of this Interpretation, entities were generally
consolidated by an enterprise when it had a controlling interest through
ownership of a majority voting interest. This Interpretation applies immediately
to entities created after January 31, 2003, and with respect to variable
interests held prior to that date, The Woodlands Partnerships will apply the
Interpretation beginning in 2005, when required for nonpublic entities. The
Woodlands Partnerships do not have any variable interests with entities created
after January 31, 2003, and are in the process of evaluating their investments
in variable interest entities created prior to that date. Adoption of this
Interpretation is not expected to have a material impact on The Woodlands
Partnerships' results of operations or financial position.

2. NOTES AND CONTRACTS RECEIVABLE

Notes receivable are carried at cost, net of discounts. At December 31, 2003 and
2002, Woodlands Development held notes and contracts receivable totaling
$31,054,000 and $29,048,000, respectively, including amounts related to utility
district receivables totaling $27,746,000 and $27,904,000, respectively. During
2003 and 2002, Woodlands Development sold $7,000,000 and $13,885,000,
respectively, of its utility district receivables to a financial institution
under a factoring agreement and recorded a retained interest related to these
receivables of $324,000 and $1,305,000, respectively, which is included in the
utility district receivables. The retained interest was calculated using a
discount rate of 5% and assumes the receivables are collected in three years.
Woodlands Development recorded a discount of $215,000 and $600,000 on these
factorings during the years ended December 31, 2003 and 2002, respectively.
Utility district receivables, the collection of which is dependent on the
ability of utility districts in The Woodlands to sell bonds, have a market
interest rate of approximately 4.75% at December 31, 2003. Other notes
receivable totaling $3,308,000 bear interest at an average rate of 6.1%.
Maturities for 2004 through 2008 and thereafter are $186,000, $201,000,
$217,000, $230,000, $-0-, and $2,474,000, respectively.

At December 31, 2003 and 2002, Woodlands Commercial held notes receivable
totaling $200,000 and $366,000, respectively. The notes receivable have stated
interest rates between prime plus .5% and prime plus 1.5%, with a yield of
approximately 5.5% at December 31, 2003. The remaining $200,000 note at December
31, 2003, has no stated maturity.

152

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

3. REAL ESTATE

The following is a summary of real estate (in thousands):

LAND

The principal land development is The Woodlands, a mixed-use, master-planned
community located north of Houston, Texas. Residential land is divided into
eight villages in various stages of development. Each village has or is planned
to contain a variety of housing, neighborhood retail centers, schools, parks,
and other amenities. Woodlands Development controls the development of the
residential communities and produces finished lots for sale to qualified
builders. Housing is constructed in a wide range of pricing and product styles.

Commercial land is divided into distinct centers that serve or are planned to
serve as locations for office buildings, retail and entertainment facilities,
industrial and warehouse facilities, research and technology facilities, and
college and training facilities. Woodlands Development produces finished sites
for third parties or for its own building development activities.

153

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

3. REAL ESTATE (CONTINUED)

COMMERCIAL PROPERTIES

Commercial and industrial properties owned or leased by The Woodlands
Partnerships are leased to third-party tenants. At December 31, 2003 and 2002,
the net book value of assets under operating leases totaled $24,722,000 and
$34,379,000, respectively. Lease terms, including renewal periods, range from 1
to 26 years with an average remaining term of 3 years. Contingent rents include
pass-throughs of incremental operating costs. Minimum future lease revenues from
noncancelable operating leases and subleases exclude contingent rentals that may
be received under certain lease agreements. Tenant rents include rent for
noncancelable operating leases, cancelable leases, and month-to-month rents and
are included in other revenue. For the years ended December 31, 2003 and 2002,
tenant rents totaled $8,589,000 and $9,180,000, respectively. For the years
ended December 31, 2003 and 2002, contingent rents totaled $2,315,000 and
$2,496,000, respectively. Minimum future lease rentals for 2004 through 2008 and
thereafter total $6,616,000, $3,560,000, $2,962,000, $2,438,000, $1,586,000, and
$1,013,000, respectively.

During 2002, The Woodlands Partnerships sold commercial properties for
$37,000,000 and recognized as other revenue a gain on sale of properties of
$11,507,000.

PROPERTIES HELD FOR SALE AND DISCONTINUED OPERATIONS

In December 2002, a subsidiary of Woodlands Commercial acquired the limited
partner interests in two partnerships for which Woodlands Commercial is the
general partner. These properties, with a carrying value of $8,882,000, were
classified as properties held for sale on the combined balance sheet at December
31, 2002. Woodlands Commercial sold these properties in July 2003 for $16.2
million and recognized a gain of $6,186,000. Other partnerships in which
Woodlands Commercial holds an equity interest sold their assets during 2003.
Woodlands Commercial recognized $2,774,000 as its share of the gain from the
sales. In December 2003, Woodlands Development sold a commercial property for
$8.4 million and recognized a loss of $862,000 on the sale.

154

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

3. REAL ESTATE (CONTINUED)

In October 2003, The Woodlands Partnerships contracted with third parties to
provide property management, leasing and related functions that were previously
provided by in-house staff. The Woodlands Partnerships recorded termination
benefits of $505,000 that are included in "operating expenses" in the summary of
discontinued operations below for the year ended December 31, 2003.

A summary of the gain from discontinued operations for the years ended December
31, 2003 and 2002, follows (in thousands):

4. EQUITY INVESTMENTS

During 2003, The Woodlands Partnerships' principal partnership and corporation
interests included the following:

155

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

4. EQUITY INVESTMENTS (CONTINUED)

Other partnerships own various commercial properties, all of which are located
in The Woodlands. Woodlands Operating provides various management and leasing
services to these affiliated entities on the same terms and conditions as those
of unrelated third parties. The Woodlands Partnerships' net investment in each
of these entities is included in the real estate caption on the combined balance
sheets and their shares of these entities' pretax earnings is included in other
revenues on the combined statements of earnings and comprehensive income. A
summary of The Woodlands Partnerships' net investment as of December 31, 2003
and 2002 and their share of pretax earnings for the years then ended follows (in
thousands):

156

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

4. EQUITY INVESTMENTS (CONTINUED)

Summarized financial statement information for partnerships and a corporation in
which The Woodlands Partnerships' have an equity ownership interest at December
31, 2003 and 2002, and for the years then ended follows (in thousands):

Woodlands Commercial has guaranteed mortgage debt of its unconsolidated
affiliates totaling $12,909,000 and $14,733,000 at December 31, 2003 and 2002,
respectively. These guarantees reduce in varying amounts through 2017 and would
require payments only in the event of default on payment by the respective
debtors. Woodlands Commercial believes that the likelihood is remote that
payments will be required under these guarantees.

157

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

4. EQUITY INVESTMENTS (CONTINUED)

In December 2002, Woodlands Commercial sold its interest in The Woodlands Mall
Associates for $43,400,000 and recognized as gain on sale of properties of
$33,628,000.

5. DEBT

A summary of The Woodlands Partnerships' outstanding debt at December 31, 2003
and 2002, follows (in thousands):

BANK CREDIT AGREEMENT

In November 2002, Woodlands Development and Woodlands Commercial renegotiated
their existing bank credit agreement. The new bank credit agreement consists of
a $300 million term loan and a $100 million revolving credit loan. The credit
agreement has a three-year term expiring in November 2005 with two one-year
extension options for the term loan and a one year extension option for the
revolving loan. At December 31, 2003 and 2002, $100,000,000 was available to be
borrowed under the revolving credit agreement. The interest rate, based on the
London Interbank Offered Rate plus a margin, is approximately 4.4% at December
31, 2003. Interest is paid monthly. Commitment fees, based on .25% of the unused
commitment, totaled $109,000 and $126,000 for the years ended December 31, 2003
and 2002, respectively. The credit agreement contains certain restrictions that,
among other things, require the maintenance of specified financial ratios,
restrict indebtedness and sale, lease or transfer of certain assets, and limit
the right of Woodlands Development and Woodlands Commercial to merge with other
companies and make distributions to their partners. At December 31, 2003,
Woodlands Development and Woodlands Commercial were

158

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

5. DEBT (CONTINUED)

in compliance with their debt covenants. Certain assets of Woodlands Development
and Woodlands Commercial, including cash, receivables, commercial properties and
equity investments in joint ventures and partnerships, secure the credit
agreement. Mandatory debt maturities for 2004 and 2005 are $22,500,000 and
$257,500,000, respectively. Payments may be made by Woodlands Development or
Woodlands Commercial or both at their option. In addition to stipulated
principal payments, principal payments are also required based on distributions
to Rouse and Morgan Stanley and certain covenant tests. Prepayments can also be
made at the discretion of Woodlands Development and Woodlands Commercial.
Prepayments on the term loan are subject to a prepayment penalty of up to 1%.

At December 31, 2003, Woodlands Development and Woodlands Commercial had
interest rate swap agreements with two commercial banks to reduce the impact of
increases in interest rates on their bank credit agreement. The interest swap
agreements effectively limits their interest rate exposure on the notional
amount of $100,000,000 to LIBOR rates of 1.735%. The interest swap agreements
expire July 3, 2006. Woodlands Development and Woodlands Commercial are exposed
to credit loss in the event of nonperformance by the other parties. However,
management does not anticipate nonperformance by the other parties.

SUBSIDIARIES' CREDIT AGREEMENTS

VTO Land and VTO Commercial entered into a $67,500,000 credit agreement that had
a three-year term expiring in October 2003 with two one-year extension options.
The first one-year extension option was exercised. The interest rate, based on
the London Interbank Offered Rate plus a margin, is approximately 3.2% and 3.4%
at December 31, 2003 and 2002, respectively. Interest is paid monthly. At
December 31, 2003 and 2002, the outstanding balance was $5,836,000 and
$6,944,000, respectively, for VTO Land and $2,845,000 and $3,385,000,
respectively, for VTO Commercial. The credit agreement contains certain
restrictions that, among other things, require the maintenance of specified
financial ratios and restrict indebtedness and leasing. At December 31, 2003,
VTO Land and VTO Commercial were in compliance with their debt covenants.
Certain assets of the subsidiaries secure the agreement. Debt maturities for
2004 are $8,681,000. VTO Land, VTO Commercial or both may make payments at their
option.

159

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

5. DEBT (CONTINUED)

Prior to 2002, VTO Land and VTO Commercial had entered into an interest rate cap
agreement with a commercial bank to reduce the impact of increases in interest
rates on their credit agreement. The interest cap effectively limited the
interest rate exposure on a notional amount of $33,750,000 to a maximum rate of
1%. The interest cap agreement matured in October 2003 and was not renewed.

The Woodlands Hotel, L.P., a subsidiary of Woodlands Development, has a
$39,000,000 revolving credit agreement to finance the construction of a hotel.
This agreement matures in December 2005. At December 31, 2003 and 2002, the
outstanding balance was $37,762,000 and $32,494,000, respectively. The interest
rate, based on the London Interbank Offered Rate plus a margin, is approximately
4.1% at December 31, 2003. Interest is paid monthly. No principal payments are
due until 2005. The credit agreement contains certain restrictions that, among
other things, restrict indebtedness and leasing. At December 31, 2003, The
Woodlands Hotel, L.P., was in compliance with its debt covenants. Certain assets
of the subsidiary secure the agreement, and Woodlands Development and Woodlands
Commercial have guaranteed repayment of the loan.

DERIVATIVES

Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133, and SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, establish accounting and
reporting standards for derivative instruments and hedging activities.
Derivative instruments are recorded on the balance sheet at fair value by
"marking-to-market" all derivatives at period-end. Changes in fair value are
recorded as an increase or decrease in partners' equity through either
comprehensive income or net earnings, depending on the facts and circumstances
with respect to the derivatives and their documentation. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document and assess the effectiveness of transactions that receive
hedge accounting. To the extent that changes in market values are initially
recorded in other comprehensive income, such changes reverse out and are
recorded in net earnings in the same period in which the hedged item affects
earnings. During 2003, The Woodlands

160

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

5. DEBT (CONTINUED)

Partnerships recorded a $1,534,000 gain in other comprehensive income related to
hedges. During 2002, The Woodlands Partnerships recorded a $119,000 loss in net
earnings and a $392,000 gain in other comprehensive income related to hedges.

DEBT RELATED TO PROPERTIES HELD FOR SALE

The debt consisted of two mortgages related to the properties held for sale
discussed in Note 3. The mortgages had an average interest rate of 6.8%. The
mortgages were repaid when the two apartment properties were sold in July 2003.

MORTGAGES PAYABLE

The mortgages payable have an average interest rate of 5.9%. Debt maturities for
2004 through 2008 and thereafter total $646,000, $1,676,000, $636,000,
$3,556,000, $6,824,000, and $101,000, respectively. Mortgages payable are all
secured by certain tracts of land.

6. NOTES PAYABLE TO PARTNERS

Woodlands Development has notes payable to its partners totaling $25,000,000.
The notes bear interest at 15%. Interest is payable quarterly. All outstanding
balances are due in 2007. These notes are subordinate to the bank credit
agreement and mortgages payable described above.

7. COMMITMENTS AND CONTINGENCIES

CONTINGENT LIABILITIES

The Woodlands Partnerships had contingent liabilities consisting of letters of
credit and guarantees at December 31, 2003 and 2002, totaling approximately
$9,694,000 and $12,559,000, and $7,721,000 and $7,869,000, respectively. The
letters of credit act as guarantee of payment to third parties in accordance
with specified terms and conditions. The guarantees consist primarily of loan
guarantees and would require payment only in the event of default by the
debtors.

161

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LEASES

The Woodlands Partnerships have various noncancelable facilities and equipment
lease agreements that provide for aggregate future payments of approximately
$36,965,000. Included in this amount is $9,650,000 for a capital lease of a
convention center facility adjoining a hotel owned by a subsidiary of Woodlands
Development. The lease has a 99-year term expiring in 2101. The present value of
the lease payments, $1,755,000, is included in other liabilities in the
accompanying combining balance sheet at December 31, 2003. Other lease terms
extend to 2009 and have an average remaining term of six years. Minimum rentals
for the years subsequent to December 31, 2003, total approximately (in
thousands):

Rental expense for operating leases for the years ended December 31, 2003 and
2002, were $4,979,000 and $4,922,000, respectively.

162

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LEGAL ACTIONS

The Woodlands Partnerships are a party to claims and legal actions arising in
the ordinary course of their business and to recurring examinations by the
Internal Revenue Service and other regulatory agencies. Management believes,
after consultation with outside counsel, that adequate financial statement
accruals have been provided for all known litigation contingencies where losses
are deemed probable. Based on the status of other cases, The Woodlands
Partnerships are unable to determine a range of such possible additional losses,
if any, that might be incurred. The Woodlands Partnerships believe it is not
probable that the ultimate resolution of these actions will have a material
adverse effect on their financial position, results of operations, and cash
flows.

8. RELATED-PARTY TRANSACTIONS

Woodlands Operating provides services to Woodlands Development and Woodlands
Commercial under management and advisory services agreements. These agreements
are automatically renewed annually. Woodlands Development and Woodlands
Commercial pay Woodlands Operating a management and advisory fee equal to cost
plus 3%. In addition, they reimburse Woodlands Operating for all costs and
expenses incurred on their behalf. For the years ended December 31, 2003 and
2002, Woodlands Operating recorded revenues of $12,496,000 and $13,337,000,
respectively, for services provided to Woodlands Development and $4,212,000 and
$4,795,000, respectively, for services provided to Woodlands Commercial. These
revenues are eliminated in the accompanying combined financial statements.

Woodlands Operating, through WECCR GP, leases The Woodlands Conference Center
and Country Club ("the Facilities") from Woodlands Commercial. The Facilities
are operated by WECCR GP and consist of a 416-room hotel, conference center,
country clubs, and golf and tennis facilities. The lease agreement has an
eight-year term ending July 31, 2005. WECCR GP operates the Facilities and pays
Woodlands Commercial a base rent of $750,000 per month and a quarterly
percentage rent based on the gross receipts of the Facilities. For the years
ended December 31, 2003 and 2002, rent under the lease agreement totaled
$12,453,000 and $14,315,000, respectively, which has been eliminated in the
accompanying combined financial statements. In 2002, WECCR GP contracted with an
affiliate of Morgan

163

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

8. RELATED-PARTY TRANSACTIONS (CONTINUED)

Stanley to manage the Facilities for a management fee equal to 2.5% of cash
receipts, as defined in the agreement. During 2003 and 2002, the management fee
totaled $1,232,000 and $1,089,000, respectively.

In 1999, Woodlands Development purchased approximately 1,000 acres of land in
The Woodlands from Woodlands Commercial for $33,090,000, the then-current fair
market value, which approximated the carrying cost. The transaction consisted of
cash and a $26,000,000 note. The remaining balance was repaid in 2002. For the
year ended December 31, 2002, interest totaled $80,000. Interest is eliminated
in the accompanying combined financial statements.

9. PARTNERS' EQUITY

Rouse's ownership interests in The Woodlands Partnerships are through TWC Land
Development L.P., TWC Commercial Properties L.P., and TWC Operating L.P. Morgan
Stanley's ownership interests are through MS/TWC Joint Venture and MS TWC, Inc.
The partners' percentage interests are summarized below:

164

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

9. PARTNERS' EQUITY (CONTINUED)

The partnership agreements for each of the partnerships provide, among other
things, the following:

(i) Woodlands Development, Woodlands Commercial, and Woodlands Operating
are each governed by an Executive Committee composed of equal
representation from their respective general partners.

(ii) Net income and losses from operations are currently allocated based on
the payout percentages discussed below. A reclassification of
approximately $730,000 has been made to the 2002 income allocation for
Woodlands Operating between the Morgan Stanley and Crescent partners to
reflect the achievement in 2001 of the payout percentages discussed
below.

(iii) Distributions are made by The Woodlands Partnerships to the partners
based on specified payout percentages and include cumulative preferred
returns to Morgan Stanley's affiliates. The payout percentage to Morgan
Stanley's affiliates is 57.5% until the affiliates receive
distributions on a combined basis equal to their capital contributions
and a 12% cumulative preferred return compounded quarterly. Then, the
payout percentage to Morgan Stanley's affiliates is 50.5% until the
affiliates receive distributions equal to their capital contributions
and an 18% cumulative preferred return compounded quarterly.
Thereafter, the payout percentage to Morgan Stanley's affiliates is
47.5%. During 2001, Morgan Stanley's affiliates received sufficient
cumulative distributions from The Woodlands Partnerships to exceed
Morgan Stanley's affiliates' capital contributions plus cumulative
returns of 18%. Accordingly, Morgan Stanley's affiliates are currently
receiving a payout percentage of 47.5%, and Rouse's affiliates are
receiving 52.5% from The Woodlands Partnerships.

(iv) The Woodlands Partnerships will continue to exist until December 31,
2040, unless terminated earlier due to specified events.

165

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

9. PARTNERS' EQUITY (CONTINUED)

(v) No additional partners may be admitted to The Woodlands Partnerships
unless specific conditions in the partnership agreements are met.
Partnership interests may be transferred to affiliates of Rouse or
Morgan Stanley. Rouse has the right of first refusal to buy the
partnership interests of the Morgan Stanley affiliates at the same
terms and conditions offered to a third-party purchaser or sell its
affiliates' interests to the same third-party purchaser.

(vi) Rouse and Morgan Stanley have the right to offer to purchase the other
partner's affiliates' partnership interests in the event of failure to
make specified capital contributions or a specified default by the
other. Specified defaults include bankruptcy, breach of partnership
covenants, transfer of partnership interests except as permitted by the
partnership agreements, and fraud or gross negligence.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of The Woodlands Partnerships' financial instruments
as of December 31, 2003 and 2002, approximated their carrying amounts, with the
exception of the notes payable to partners for Woodlands Development, which had
an estimated fair value of $31,000,000 and $33,000,000, respectively.

Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could be
made for similar maturities to borrowers with comparable credit ratings. Fair
values of fixed-rate, long-term debt were based on current interest rates
offered to The Woodlands Partnerships for debt with similar remaining
maturities. For floating-rate debt obligations, carrying amounts and fair values
were assumed to be equal because of the nature of these obligations. The
carrying amounts of The Woodlands Partnerships' other financial instruments
approximate their fair values.

166

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

11. EMPLOYEE PLANS

DEFINED CONTRIBUTION PLAN

Woodlands Operating has a 401(k) defined contribution plan that is available to
all full-time employees who meet specified service requirements. The plan is
administered by a third party. Contributions to the plan are based on a match of
employee contributions up to a specified limit. For the years ended December 31,
2003 and 2002, Woodlands Operating contributions totaled approximately $700,000
each year.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Woodlands Operating has deferred compensation arrangements for a select group of
management employees that provide the opportunity to defer a portion of their
cash compensation. Woodlands Operating's obligations under this plan are
unsecured general obligations to pay in the future the value of the deferred
compensation adjusted to reflect the performance of its investments, whether
positive or negative, of selected measurement options, chosen by each
participant, during the deferral period. Woodlands Operating has established
trust accounts on behalf of the participating employees totaling $2,233,000 and
$1,822,000 that are included in other assets at December 31, 2003 and 2002,
respectively.

INCENTIVE PLANS

Woodlands Operating instituted an incentive compensation plan for certain
employees in 2001. The plan is unfunded and while certain payments are made
currently, a portion of these payments is deferred and will be paid based on a
vesting period of up to three years. For the years ended December 31, 2003 and
2002, expenses recognized by The Woodlands Partnerships under this plan totaled
$2,026,000 and $3,883,000, respectively.

167

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

12. INCOME TAXES

The income tax benefit for the years ended December 31, 2003 and 2002, is as
follows (in thousands):

The income tax benefit reflected in the statements of earnings and comprehensive
income differs from the amounts computed by applying the federal statutory rate
of 35% to income before income taxes as follows (in thousands):

168

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Notes to Combined Financial Statements (continued)

12. INCOME TAXES (CONTINUED)

Deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of WECCR GP's assets and liabilities and for
operating loss carryforwards. Significant components of WECCR GP's net deferred
tax asset are as follows (in thousands):

WECCR GP has net operating loss carryforwards of $3,270,000 and $792,000 at
December 31, 2003 and 2002, respectively, which begin to expire in the year
2022.

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. Accordingly, management has provided a valuation allowance
of $7,176,000 and $4,371,000 at December 31, 2003 and 2002, respectively, due to
uncertainties regarding the realizations of certain deferred tax assets in
future periods.

169

OTHER FINANCIAL INFORMATION

170

Report of Independent Auditors on Other Financial Information

To the Executive Committee of
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Our audits were conducted for the purpose of forming an opinion on the combined
financial statements taken as a whole. The accompanying combining balance sheets
as of December 31, 2003 and 2002, and the related combining statements of
earnings (loss) and comprehensive income (loss), changes in partners' equity
(deficit), and cash flows for the years then ended, are presented for purposes
of additional analysis and are not a required part of the combined financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of the combined financial statements, and in our opinion,
is fairly stated in all material respects in relation to the combined financial
statements taken as a whole.

/s/ Ernst & Young LLP

February 9, 2004

171

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Balance Sheets as of December 31, 2003

172

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Balance Sheets as of December 31, 2002

173

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statements of Earnings (Loss) and Comprehensive Income (Loss) for the
Year Ended December 31, 2003

174

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statement of Earnings (Loss) and Comprehensive Income (Loss) for the
Year Ended December 31, 2002

175

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statements of Changes in Partners' Equity (Deficit) for the Years
Ended December 31, 2003 and 2002

176

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statements of Cash Flows for the Year Ended
December 31, 2003

177

The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.

Combining Statements of Cash Flows for the Year Ended December 31, 2002

178

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.

UNAUDITED COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

179

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING BALANCE SHEET AS OF DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

180

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

181

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

182

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
UNAUDITED COMBINING STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2001 AND 2000 (DOLLARS IN THOUSANDS)

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

183

THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
THE WOODLANDS COMMERCIAL PROPERTIES COMPANY, L.P.
THE WOODLANDS OPERATING COMPANY, L.P.
NOTES TO COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONTROL. The Woodlands Land Development Company, L.P. ("Woodlands
Development"), The Woodlands Commercial Properties Company, L.P. ("Woodlands
Commercial"), and The Woodlands Operating Company, L.P. ("Woodlands Operating"),
Texas limited partnerships, (together "the CMS Partnerships") are owned by
entities controlled by Crescent Real Estate Equities Limited Partnership or
Crescent Operating, Inc. (together "Crescent") and Morgan Stanley Real Estate
Fund II, L.P. ("Morgan Stanley"). Woodlands Development and Woodlands Commercial
are successors to The Woodlands Corporation. Prior to July 31, 1997, The
Woodlands Corporation was a wholly owned subsidiary of Mitchell Energy &
Development Corp. On July 31, 1997 The Woodlands Corporation was acquired by
Crescent and Morgan Stanley and merged into Woodlands Commercial, a Texas
limited partnership. Woodlands Commercial was then divided into two
partnerships: Woodlands Commercial and Woodlands Development. Woodlands
Operating and its subsidiary, WECCR General Partnership ("WECCR GP"), purchased
certain assets from Woodlands Commercial. Woodlands Operating and WECCR GP
manage assets owned by Woodlands Commercial and Woodlands Development as
described in Note 8. In July 2000, Woodlands Development and Woodlands
Commercial established Woodlands VTO 2000 Land, LP ("VTO Land"), a subsidiary of
Woodlands Development, and Woodlands VTO 2000 Commercial, LP ("VTO Commercial"),
a subsidiary of Woodlands Commercial, to own and operate certain commercial
properties in The Woodlands. These subsidiaries purchased certain commercial
properties owned by Woodlands Development and Woodlands Commercial. In June
2001, Woodlands Development established a subsidiary, The Woodlands Hotel, LP
("the Hotel") to construct and operate a hotel in The Woodlands.

PRINCIPLES OF COMBINATION. The combining financial statements include
the accounts of the CMS Partnerships and are combined due to common ownership in
certain cases and management. All significant transactions and accounts between
the CMS Partnerships are eliminated in combination. The CMS Partnerships follow
the equity method of accounting for their investments in 20% to 50% owned
entities.

BUSINESS. The CMS Partnerships' real estate activities are concentrated
in The Woodlands, a planned community located north of Houston, Texas.
Consequently, these operations and the associated credit risks may be affected,
either positively or negatively, by changes in economic conditions in this
geographical area. Activities associated with The Woodlands include residential
and commercial land sales and the construction and management of office and
industrial buildings, apartments, retail shopping centers, golf courses and a
conference center and two hotels.

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REAL ESTATE. Costs associated with the acquisition and development of
real estate, including holding costs consisting principally of interest and ad
valorem taxes, are capitalized as incurred. Capitalization of such holding costs
is limited to properties for which active development continues. Capitalization
ceases upon completion of a property or cessation of development activities.
Where practicable, capitalized costs are specifically assigned to individual
assets; otherwise, costs are allocated based on estimated values of the affected
assets.

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. For the years ended
December 31, 2001 and 2000, there were no impairments recognized.

REVENUE RECOGNITION. Staff Accounting Bulletin No. 101 ("SAB 101")
provides interpretive guidance on the proper revenue recognition, presentation
and disclosure in financial statements. The CMS Partnerships have reviewed their
revenue recognition policies and determined that they are in compliance with
generally accepted accounting principles and the related interpretive guidance
set forth in SAB 101.

LAND SALES. Earnings from sales of real estate are recognized when a
third-party buyer has made an adequate cash down payment and has attained the
attributes of ownership. Notes received in connection with land sales are
discounted when the stated purchase prices are significantly different from
those that would have resulted from similar cash transactions. The cost of land
sold is generally determined as a specific percentage of the sales revenues
recognized for each land development project. The percentages are based on total
estimated development costs and sales revenues for each project. These estimates
are revised annually and are based on the then-current development strategy and
operating assumptions utilizing internally developed projections for product
type, revenue and related development cost.

SALES OF COMMERCIAL PROPERTIES. Sales of commercial properties are
accounted for under the accrual method when certain criteria are met. Gains or
losses are recognized when a significant down payment has been made, the
earnings process is complete, and the collection of any remaining receivables is
reasonably assured. Gains or losses are recognized as other revenue in the
combining statement of earnings and comprehensive income.

LEASE REVENUE. Commercial properties are leased to third-party tenants
generally involving multi-year terms. These leases are accounted for as
operating leases. See Note 3 for further discussion.

DEPRECIATION. Depreciation of operating assets is provided on the
straight-line method over the estimated useful lives of the assets. Useful lives
range from 15 to 50 years for land improvements and buildings, 3 to 20 years for
leasehold improvements and 3 to 10 years for furniture, fixtures and equipment.
Property and equipment are carried at cost less accumulated depreciation. Upon

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retirement or disposal an asset, the cost is removed from the property account
and the accumulated depreciation is removed from accumulated depreciation. Costs
incurred for computer software developed for internal use are capitalized for
application development activities.

DEFERRED FINANCING COSTS. Costs incurred to obtain debt financing are
deferred and amortized over the estimated term of the related debt.

INCOME TAXES. No provision for Federal income taxes is included in the
accompanying combining financial statements since the CMS Partnerships are not
tax-paying entities and all income and expenses are reported by the partners for
tax reporting purposes.

The tax returns, the qualification of the CMS Partnerships for tax
purposes and the amount of distributable partnership income or loss are subject
to examination by Federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.

STATEMENTS OF CASH FLOWS. Short-term investments with original
maturities of three months or less are considered to be cash equivalents. Debt
borrowings and repayments with initial terms of three months or less are
reported net. For the years ended December 31, 2001 and 2000, Woodlands
Development paid interest totaling $24,045,000 and $30,018,000. Woodlands
Commercial paid interest totaling $7,936,000 and $13,460,000. These amounts are
related to debt described in Notes 5, 6 and 8.

USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS. In August 2001, the Financial
Accounting Standards Board issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." which supercedes SFAS No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed
Of." It also supercedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and used and
measurement of the long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The CMS
Partnerships will adopt SFAS No. 144 on January 1, 2002 and believe that this
adoption will not have a material impact on their results of operations or
financial position.

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STATEMENT PRESENTATION. Certain reclassifications were made to amounts
previously reported to conform to current year presentation.

(2) NOTES AND CONTRACTS RECEIVABLE

Notes receivable are carried at cost, net of discounts. At December 31,
2001 and 2000, Woodlands Development held notes and contracts receivable
totaling $25,698,000 and $30,471,000, including utility district receivables
totaling $24,394,000 and $30,471,000. Utility district receivables, the
collection of which is dependent on the ability of utility districts in The
Woodlands to sell bonds, have a market interest rate of approximately 5.0% at
December 31, 2001. During 2001 and 2000, Woodlands Development sold $24,050,000
and $27,200,000 of its utility district receivables to a financial institution
under a factoring agreement. The difference between the proceeds and carrying
value of the receivables was an immaterial amount and was recorded as an
addition to land cost.

At December 31, 2001 and 2000, Woodlands Commercial held notes
receivable totaling $170,000 and $377,000. The notes receivable have stated
interest rates between 5.25% and 7.5%, with an average effective yield of
approximately 5.25% at December 31, 2001. Contractual maturities are $170,000 in
2003.

In December 2000, Woodlands Development sold certain notes receivable
totaling $5,560,000 to a financial institution. Woodlands Development has
guaranteed repayment of the notes. For this transaction, no gain or loss was
recognized since the proceeds approximated the carrying value of the notes.

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(3) REAL ESTATE

The following is a summary of real estate at December 31, 2001 and 2000
(in thousands):

LAND. The principal land development is The Woodlands, a mixed-use,
master-planned community located north of Houston, Texas. Residential land is
divided into seven villages in various stages of development. Each village has
or is planned to contain a variety of housing, neighborhood retail centers,
schools, parks and other amenities. Woodlands Development controls the
development of the residential communities and produces finished lots for sale
to qualified builders. Housing is constructed in a wide range of pricing and
product styles.

Commercial land is divided into distinct centers that serve or are
planned to serve as locations for office buildings, retail and entertainment
facilities, industrial and warehouse facilities, research and technology
facilities, and college and training facilities. Woodlands Development produces
finished sites for third parties or for its own building development activities.

COMMERCIAL PROPERTIES. Commercial, industrial and retail properties
owned or leased by the CMS Partnerships are leased to third-party tenants. At
December 31, 2001, the net book value of assets under operating leases totaled
$24,207,000 for Woodlands Development and $45,660,000 for Woodlands Commercial.
Other commercial properties, which include a hotel, hotel expansion and a golf
course, are under development at December 31, 2001. Lease terms range from one
to eleven years with an average term of five years. Minimum future lease
revenues from noncancellable operating leases and subleases exclude contingent
rentals that may be received under certain lease agreements. Tenant rents
include rent for noncancellable operating leases, cancelable leases and

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month-to-month rents and are included in other revenue. For the years ended
December 31, 2001 and 2000, tenant rents totaled $6,319,000 and $2,589,000 for
Woodlands Development. Tenant rents totaled $12,404,000 and $27,132,000 for
Woodlands Commercial. Contingent rents include pass-throughs of incremental
operating costs and rents based on a percentage of tenants' sales offset by
certain leasing costs. For the years ended December 31, 2001 and 2000,
contingent rents totaled $873,000 and $63,000 for Woodlands Development.
Contingent rents totaled $2,377,000 and $2,479,000 for the Woodlands Commercial.
Minimum future lease rentals for the years subsequent to December 31, 2001 total
$2,482,000, $2,610,000, $2,576,000, $2,633,000, $2,162,000 and $4,490,000
thereafter for Woodlands Development. Minimum future lease rentals total
$10,926,000, $10,743,000, $8,861,000, $4,599,000, $4,013,000 and $7,469,000
thereafter for Woodlands Commercial.

Woodlands Commercial has two commercial properties held for sale that
are expected to be sold during 2002. These properties have a net book value of
$22,316,000 at December 31, 2001, which is less than their fair value less costs
to sell. During 2001, Woodlands Development and Woodlands Commercial sold
commercial properties for $57,700,000 and $7,900,000 and recognized as other
revenue gains on the sales of $10,662,000 and $3,465,000. During 2000, Woodlands
Commercial sold commercial properties for $61,846,000 and recognized as other
revenue a $15,579,000 gain on the sales.

(4) EQUITY INVESTMENTS

During 2001 and 2000, Woodlands Development and Woodlands Commercial's
principal partnership and corporation interests included the following:

Other partnerships own various commercial properties, all of which are
located in The Woodlands. Woodlands Operating provides various management and
leasing services to these affiliated entities on the same terms and conditions
as unrelated third parties. Woodlands Development and Woodlands Commercial's net
investment in each of these entities is included in the real estate caption on
the combining balance sheets and their share of these entities' pretax earnings
is included in other revenues on the combining statements of earnings and
comprehensive income. A summary of their net investment as of December 31, 2001
and 2000 and their share of pre-tax earnings for the years ended December 31,
2001 and 2000 follows (in thousands):

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In June 2001, Woodlands Development sold its interest in Sterling Ridge
Retail 2000 for $10,718,000 and recognized as other revenue a gain of
$2,639,000. During 2001 Woodlands Office Equities -'95 sold three commercial
properties for $16,882,000. Woodlands Commercial recognized as other revenue its
share of the gains totaling $1,276,000.

In January 2000, Woodlands Commercial sold its 25% partnership interest
in Woodlands Retail Equities -'96 Limited for approximately $10,300,000 and
recognized as other revenue a gain of approximately $3,800,000.

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Summarized financial statement information for partnerships and a
corporation in which Woodlands Development and Woodlands Commercial have an
ownership interest at December 31, 2001 and 2000 and for the years ended
December 31, 2001 and 2000 follows (in thousands):

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Woodlands Development and Woodlands Commercial's investment in their
unconsolidated affiliates exceeds their equity in their net assets. This excess
is being amortized over a 25-year period. For the years ended December 31, 2001
and 2000, amortization of this excess totaled $54,000 each year for Woodlands
Development and $500,000 each year for Woodlands Commercial.

(5) DEBT

A summary of the CMS Partnerships' outstanding debt at December 31,
2001 and 2000 follows (in thousands):

BANK CREDIT AGREEMENT. In November 1999, Woodlands Development and
Woodlands Commercial replaced their existing bank credit agreement and
construction loan agreement with a new facility, consisting of a $300,000,000
term loan and a $100,000,000 revolving loan. The new bank credit agreement has a
three-year term expiring in November 2002 with two one-year extension options
provided to the borrowers. Management expects to exercise the first one-year
extension option or explore other options. The interest rate, based on the
London Interbank Offered Rate plus a margin, is approximately 5.1% at December
31, 2001. Interest is paid monthly. Commitment fees, based on .25% of the unused
commitment, totaled $164,000 and $57,000 for the years ended December 31, 2001
and 2000. The credit agreement contains certain restrictions which, among other
things, require the maintenance of specified financial ratios, restrict
indebtedness and sale, lease or transfer of certain assets, and limit the right
of Woodlands Development and Woodlands Commercial to merge with other companies
and make distributions to their partners. At December 31, 2001, Woodlands
Development and Woodlands Commercial were in compliance with their debt
covenants. Certain assets of Woodlands Development and Woodlands Commercial,
including cash, receivables, commercial properties and equity investments in
joint ventures and partnerships, secure the credit agreement. Mandatory debt
maturities, assuming the extension option is not exercised, are $261,890,000 in
2002. Payments may be made by Woodlands Development or Woodlands Commercial or
both at their option. In addition to stipulated principal payments, principal
payments are also required based on distributions to Crescent and Morgan Stanley
and certain covenant tests. Prepayments can also be made at the discretion of
Woodlands Development and Woodlands Commercial. Prepayments on the term loan are
subject to a prepayment penalty of up to 1%.

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Woodlands Development and Woodlands Commercial entered into an interest
rate cap agreement with a commercial bank to reduce the impact of increases in
interest rates on their bank credit agreement. The interest cap agreement
effectively limits their interest rate exposure on the notional amount of
$121,000,000 to a maximum LIBOR rate of 9%. The interest cap agreement expires
at the same time as the bank credit agreement. Woodlands Development and
Woodlands Commercial also entered into an interest rate swap agreement with a
commercial bank. Interest on the notional amount of $50,000,000 is paid based on
a fixed LIBOR rate of 2.78%. This agreement expires in October 2002. Woodlands
Development and Woodlands Commercial are exposed to credit loss in the event of
nonperformance by the other parties. However, management does not anticipate
nonperformance by the other parties.

SUBSIDIARIES' CREDIT AGREEMENTS. VTO Land and VTO Commercial entered
into a credit agreement that has a three-year term expiring in October 2003 with
two one-year extension options. The interest rate, based on the London Interbank
Offered Rate plus a margin, is approximately 4.1% at December 31, 2001. Interest
is paid monthly. At December 31, 2001 and 2000, the outstanding balance was
$7,077,000 and $31,727,000 for VTO Land, and $30,887,000 and $35,773,000 for VTO
Commercial. The credit agreement contains certain restrictions which, among
other things, require the maintenance of specified financial ratios and restrict
indebtedness and leasing. At December 31, 2001, VTO Land and VTO Commercial were
in compliance with their debt covenants. Certain assets of the subsidiaries
secure the agreement. Debt maturities for the two years subsequent to December
31, 2001 are $1,043,000 and $36,921,000. VTO Land, VTO Commercial, or both may
make payments at their option.

VTO Land and VTO Commercial entered into an interest rate cap agreement
with a commercial bank to reduce the impact of increases in interest rates on
their credit agreement. The interest cap agreement effectively limits their
interest rate exposure on a notional amount to a maximum LIBOR rate of 9%. The
notional amount is $33,750,000. The interest cap agreement matures at the same
time as the credit agreement. VTO Land and VTO Commercial are exposed to credit
loss in the event of nonperformance by the other party with respect to the
interest cap agreement. However, management does not anticipate nonperformance
by the other party.

In June 2001, The Woodlands Hotel, L.P., a subsidiary of Woodlands
Development, entered into a $39,000,000 credit agreement to finance the
construction of a hotel. This agreement matures in December 2005. At December
31, 2001 the outstanding balance was $5,611,000. The interest rate, based on the
London Interbank Offered Rate plus a margin, is approximately 4.9% at December
31, 2001. Interest is paid monthly. No principal payments are due until 2005.
The credit agreement contains certain restrictions which, among other things,
require the maintenance of specified financial ratios and restrict indebtedness
and leasing. At December 31, 2001, The Woodlands Hotel, L.P. was in compliance
with its debt covenants. Certain assets of the subsidiary secure the agreement.

DERIVATIVES. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" establish accounting and reporting standards for derivative

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instruments and hedging activities. Derivative instruments are recorded on the
balance sheet at fair value by "marking-to-market" all derivatives at
period-end. Changes in fair value are recorded as an increase or decrease in
partners' equity through either comprehensive income or net earnings, depending
on the facts and circumstances with respect to the derivatives and their
documentation. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document and assess the
effectiveness of transactions that receive hedge accounting. To the extent that
changes in market values are initially recorded in other comprehensive income,
such changes reverse out and are recorded in net earnings in the same period in
which the hedged item affects earnings. On January 1, 2001 the adoption of these
standards resulted in a reduction of derivative instruments of $744,000. Of this
amount, $352,000 is reported in net earnings as a cumulative effect of a change
in accounting principle and $392,000 is reported in other comprehensive loss.

MORTGAGES PAYABLE. The mortgages payable have debt maturities for the
years subsequent to December 31, 2001 totaling $731,000, $793,000, $3,250,000,
$2,345,000, $4,201,000 and $101,000 thereafter. Mortgages payable are secured by
certain tracts of land.

(6) NOTES PAYABLE TO PARTNERS

Woodlands Development has notes payable to its partners totaling
$25,000,000. The notes bear interest at 15%. Interest is payable quarterly. All
outstanding balances are due in 2007. These notes are subordinate to the bank
credit agreement and mortgages payable described above.

(7) COMMITMENTS AND CONTINGENCIES

CONTINGENT LIABILITIES. At December 31, 2001 and 2000, the CMS
Partnerships had contingent liabilities totaling approximately $13,600,000 and
$11,500,000, consisting of letters of credit and commitments to complete certain
improvements in The Woodlands. Under the terms of a land sales agreement,
Woodlands Development has committed to construct, or cause to be constructed,
certain improvements in The Woodlands and is contingently liable for up to
$2,100,000 in liquidating damages if the improvements are not complete by
certain dates.

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LEASES. The CMS Partnerships have various noncancellable facilities and
equipment lease agreements which provide for aggregate future payments of
approximately $36,600,000, most of which is due from Woodlands Commercial. Lease
terms extend to 2009 and have an average remaining term of seven years. Minimum
rentals for the years subsequent to December 31, 2001 total approximately
$5,247,000, $5,156,000, $4,791,000, $4,901,000, $5,102,000 and $11,411,000
thereafter. Rental expense for operating leases for the years ended December 31,
2001 and 2000 follows (in thousands):

LEGAL ACTIONS. The 221st Judicial District Court of Montgomery County,
Texas entered a judgment against Woodlands Development in October 1999 awarding
a total of $1,433,000 in damages to the plaintiffs. In addition to these
damages, the judgment also awarded attorneys' fees and postjudgment interest.
Woodlands Development appealed the ruling. In May 2001, the Ninth District Court
of Appeals reversed, reformed and affirmed, in part, the lower court's judgement
and awarded a total of $127,220 that was paid in full by Woodlands Development
to the plaintiffs in August 2001.

The CMS Partnerships are also a party to other claims and legal actions
arising in the ordinary course of their business and to recurring examinations
by the Internal Revenue Service and other regulatory agencies.

Management believes, after consultation with outside counsel, that
adequate financial statement accruals have been provided for all known
litigation contingencies where losses are deemed probable. Based on the status
of the cases, the CMS Partnerships are unable to determine a range of such
possible additional losses, if any, that might be incurred. The CMS Partnerships
believe it is not probable that the ultimate resolution of these actions will
have a material adverse effect on their financial position.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Woodlands Operating has
deferred compensation arrangements for a select group of management employees
that provides the opportunity to defer a portion of their cash compensation.
Woodlands Operating's obligations under this plan are unsecured general
obligations to pay in the future the value of the deferred compensation adjusted
to reflect the performance of their investments, whether positive or negative,
of selected measurement options, chosen by each participant, during the deferral
period. Woodlands Operating has established trust accounts on behalf of the
participating employees that are included in other assets.

INCENTIVE PLANS. Woodlands Operating instituted an incentive
compensation plan for certain employees effective January 1, 1998. In 2001,
final payments were made to employees and this plan was terminated. Effective in
2001 a new incentive compensation plan was initiated. The plan is unfunded and
while certain payments are made currently, a portion of these payments is
deferred and

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will be paid based on a vesting period of three years. For the years ended
December 31, 2001 and 2000, the CMS Partnerships recognized expenses of
$3,674,000 and $2,744,000 under these plans.

(8) RELATED PARTY TRANSACTIONS

Woodlands Operating provides services to Woodlands Development and
Woodlands Commercial under management and advisory services agreements. These
agreements are automatically renewed annually. Woodlands Development and
Woodlands Commercial pay Woodlands Operating an advisory fee equal to cost plus
3%. In addition, they reimburse Woodlands Operating for all costs and expenses
incurred on their behalf. For the years ended December 31, 2001 and 2000,
Woodlands Operating recorded revenues of $12,795,000 and $12,606,000 for
services provided to Woodlands Development, and $5,129,000 and $6,398,000 for
services provided to Woodlands Commercial.

WECCR GP leases The Woodlands Conference Center, Resort and Country
Club ("the Facilities") from Woodlands Commercial. This agreement has an
eight-year term ending July 31, 2005. WECCR GP operates the Facilities and pays
Woodlands Commercial a base rent of $750,000 per month and a quarterly
percentage rent based on the gross receipts of the Facilities. For the years
ended December 31, 2001 and 2000, rent under the lease agreement totaled
$13,604,000 and $14,349,000.

In July 1999, Woodlands Development purchased approximately 1,000 acres
of land in The Woodlands from Woodlands Commercial for $33,090,000, the then
current fair market value which approximated the carrying cost. No gain or loss
was recognized from the transaction. The transaction consisted of cash and a
$26,000,000 note. The note bears interest at 8.5% and matures in August 2009.
For the years ended December 31, 2001 and 2000, interest totaled $931,000 and
$1,616,000. Interest is eliminated in the accompanying combining financial
statements. Principal and interest payments are due quarterly and additional
principal payments are due when a portion of the land is conveyed to a third
party or built upon. The note is unsecured and subordinate to the bank credit
agreement described in Note 5.

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(9) PARTNERS' EQUITY

Crescent's ownership interests in the CMS Partnerships are through The
Woodlands Land Company, Inc., Crescent Real Estate Equities Limited Partnership,
CresWood Development, L.L.C., and WOCOI Investment Company. Morgan Stanley's
ownership interests are through MS/TWC Joint Venture and MS TWC, Inc. The
partners' percentage interests are summarized below:

The partnership agreements for each of the partnerships provide, among
other things, the following:

(i) Woodlands Development, Woodlands Commercial and Woodlands
Operating are each governed by an Executive Committee composed of equal
representation from their respective general partners.

(ii) Net income and losses from operations are currently
allocated so that partners' capital accounts stand in the ratio of the
percentage interest listed above.

(iii) Distributions are made to partners based on specified
payout percentages and include cumulative preferred returns to Morgan Stanley's
affiliates. The payout percentage to Morgan Stanley's affiliates is 57.5% until
the affiliates receive distributions equal to their capital contributions and a
12% cumulative preferred return compounded quarterly. Then, the payout
percentage to Morgan Stanley's affiliates is 50.5% until the affiliates receive
distributions equal to their capital contributions and an 18% cumulative
preferred return compounded quarterly. Thereafter, the payout percentage to
Morgan Stanley's affiliates is 47.5%. During 2001, Morgan Stanley's affiliates
received sufficient cumulative distributions to exceed their capital
contributions plus cumulative returns of 18%. Accordingly, Morgan Stanley's
affiliates are currently receiving a payout percentage of 47.5% and Crescent's
affiliates are receiving 52.5%.

(iv) The CMS Partnerships will continue to exist until
December 31, 2040 unless terminated earlier due to specified events.

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(v) No additional partners may be admitted to the CMS
Partnerships unless specific conditions in the partnership agreements are met.
Partnership interests may be transferred to affiliates of Crescent or Morgan
Stanley. Crescent has the right of first refusal to buy the partnership
interests of the Morgan Stanley affiliates at the same terms and conditions
offered to a third party purchaser, or sell its affiliates' interests to the
same third party purchaser.

(vi) Crescent and Morgan Stanley have the right to offer to
purchase the other partner's affiliates' partnership interests in the event of
failure to make specified capital contributions or a specified default by the
other. Specified defaults include bankruptcy, breach of partnership covenants,
transfer of partnership interests except as permitted by the partnership
agreements, and fraud or gross negligence.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the CMS Partnerships'
financial instruments as of December 31, 2001 and 2000 follows (in thousands):

Fair values of notes and contracts receivable were estimated by
discounting future cash flows using interest rates at which similar loans
currently could be made for similar maturities to borrowers with comparable
credit ratings. Fair values of fixed-rate, long-term debt were based on current
interest rates offered to the CMS Partnerships for debt with similar remaining
maturities. For floating-rate debt obligations, carrying amounts and fair values
were assumed to be equal because of the nature of these obligations. The
carrying amounts of the CMS Partnerships' other financial instruments
approximate their fair values.

(11) EMPLOYEE SAVINGS PLAN

Woodlands Operating has a 401(k) defined contribution plan that is
available to all full-time employees who meet specified service requirements.
The plan is administered by a third party. Contributions to the plan are based
on a match of employee contributions up to a specified limit. For

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the years ended December 31, 2001 and 2000, Woodlands Operating contributions
totaled $707,000 and $634,000.

(12) SUBSEQUENT EVENT

On February 14, 2002, Crescent Real Estate Equities Company ("CREEC")
and Crescent Operating, Inc. ("COPI") entered into an agreement that provides
for the transfer of certain assets of COPI to CREEC in satisfaction of
indebtedness and lease obligations and for the filing of a prepackaged
bankruptcy plan by COPI. Pursuant to the agreement, COPI transferred its
interest in The Woodlands Land Company, Inc. to CREEC on February 14, 2002, and
will also transfer its interest in WOCOI Investment Company to CREEC. Management
does not believe that the transfer of COPI's assets to CREEC or the planned
bankruptcy filing by COPI will have a material adverse impact on the financial
position or results of operations of the CMS Partnerships, individually or on a
combined basis.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

The Operating Partnership and Crescent Finance Company maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Operating Partnership's and Crescent Finance
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 Operating Partnership's
and Crescent Finance Company's management, including the Chief Executive Officer
and the Chief Financial and Accounting Officer of the General Partner and
Crescent Finance Company, 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 December 31, 2003, the Operating Partnership and Crescent Finance
Company carried out an evaluation, under the supervision and with the
participation of the Operating Partnership's and Crescent Finance Company's
management, including the Chief Executive Officer and the Chief Financial and
Accounting Officer of the General Partner and Crescent Finance Company, of the
effectiveness of the design and operation of the Operating Partnership's
disclosure controls and procedures. Based on the foregoing, the Chief Executive
Officer and the Chief Financial and Accounting Officer of the General Partner
and Crescent Finance Company concluded that the Operating Partnership's and
Crescent Finance Company's disclosure controls and procedures were effective.

During the three months ended December 31, 2003, there was no change in
the Operating Partnership's and Crescent Finance Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Operating Partnership's and Crescent Finance Company's
internal control over financial reporting.

PART III

Certain information Part III requires is omitted from the Report. The
Company will file a definitive proxy statement with the SEC pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information to be included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement which specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.

ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2004.

ITEM 11. EXECUTIVE COMPENSATION

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2004.

200

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2004.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

Report of Independent Auditors

Crescent Real Estate Equities Limited Partnership Consolidated Balance
Sheets at December 31, 2003 and 2002.

Crescent Real Estate Equities Limited Partnership Consolidated
Statements of Operations for the years ended December 31, 2003, 2002
and 2001.

Crescent Real Estate Equities Limited Partnership Consolidated
Statements of Partners' Capital for the years ended December 31, 2003,
2002 and 2001.

Crescent Real Estate Equities Limited Partnership Consolidated
Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001.

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

(a)(2) Financial Statement Schedules and Financial Statements of Subsidiaries
Not Consolidated and Fifty-Percent-or-Less-Owned Persons

Financial Statement Schedules

Schedule III - Crescent Real Estate Equities Limited Partnership
Consolidated Real Estate Investments and Accumulated Depreciation at
December 31, 2003.

All other schedules have been omitted either because they are not
applicable or because the required information has been disclosed in
the Financial Statements and related notes included in the consolidated
statements.

Financial Statements of Subsidiaries Not Consolidated and
Fifty-Percent-or-Less-Owned Persons

The Woodlands Land Development Company, L.P., The Woodlands Commercial
Properties Company, L.P., and The Woodlands Operating Company, L.P.

Report of Independent Auditors................................142

Combined Balance Sheets at December 31, 2003 and 2002.........143

Combined Statements of Earnings and Comprehensive Income for the
years ended

201

December 31, 2003 and 2002.................................... 144

Combined Statement of Changes in Partners' Equity (Deficit)
for the year ended December 31, 2003 and 2002 ................ 145

Combined Statements of Cash Flows for the years ended
December 31, 2003 and 2002.................................... 146

Notes to Combining Financial Statements....................... 147

The Woodlands Land Development Company, L.P., The Woodlands Commercial
Properties Company, L.P., and the Woodlands Operating Company, L.P.

Combining Balance Sheets at December 31, 2001 and 2000
(unaudited)...................................................

Combining Statement of Earnings and Comprehensive Income for
the years Ended December 31, 2001 and 2000 (unaudited)........

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

Combining Statements of Cash Flows for the years
ended December 31, 2001 and 2000 (unaudited)..................

Notes to Combined Financial Statements (unaudited) ...........

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

(a) (3) Exhibits

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

(b) Reports on Form 8-K

None

(c) Exhibits

See Item 15(a)(3) above.

(d) Financial Statement Schedules and Financial Statements of Subsidiaries
Not Consolidated and Fifty-Percent-or-Less-Owned Persons

See Item 15(a)(2) above.

202

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 10th day of
March, 2004.

CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
(Registrant)

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

By /s/John C. Goff
-----------------------------
John C. Goff
Sole Director and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ John C. Goff Sole Director, Chief Executive 3/10/04
- ------------------------------- Officer and President of Crescent Real Estate
John C. Goff Equities, Ltd. (Principal Executive Officer)

/s/ Jerry R. Crenshaw Jr. Senior Vice President and Chief Financial 3/10/04
- ------------------------------- Officer of Crescent Real Estate Equities, Ltd.
Jerry R. Crenshaw Jr. (Principal Accounting and Financial Officer)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 10th day of
March, 2004.

CRESCENT FINANCE COMPANY
(Registrant)

By /s/John C. Goff
-----------------------------
John C. Goff
Sole Director and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ John C. Goff Sole Director, Chief Executive 3/10/04
- ------------------------------- Officer and President of Crescent Finance
John C. Goff Company (Principal Executive Officer)

/s/ Jerry R. Crenshaw Jr. Senior Vice President and Chief Financial 3/10/04
- ------------------------------- Officer of Crescent Finance Company
Jerry R. Crenshaw Jr. (Principal Accounting and Financial Officer)

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS

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

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

INDEX TO EXHIBITS