UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

                      FOR QUARTER ENDED September 30, 2004
                           COMMISSION FILE NO. 1-13038

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

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

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

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

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

                                 YES [X] NO [ ]

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

                                 YES [X] NO [ ]

Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of October 31,2004.


                                                                                       
Series A Convertible Cumulative Preferred Shares, par value $0.01 per share:              14,200,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share:                3,400,000
Common Shares, par value $0.01 per share:                                                 97,532,788




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



                                                                                                                       PAGE
                                                                                                                    
PART I:      FINANCIAL INFORMATION

Item 1.   Financial Statements

          Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003
          (unaudited)..........................................................................................         3

          Consolidated Statements of Operations for the three and nine months ended
          September 30, 2004 and 2003 (unaudited)..............................................................         4

          Consolidated Statement of Shareholders' Equity for the nine months ended
          September 30, 2004 (unaudited).......................................................................         5

          Consolidated Statements of Cash Flows for the nine months ended September 30, 2004
          and 2003 (unaudited).................................................................................         6

          Notes to Consolidated Financial Statements...........................................................         7

Item 2.   Management's Discussion and Analysis of Financial Condition and Results
          of Operations........................................................................................        39

Item 3.   Quantitative and Qualitative Disclosures About Market Risk...........................................        70

Item 4.   Controls and Procedures..............................................................................        70

PART II:     OTHER INFORMATION

Item 2.   Changes in Securities and Use of Proceeds............................................................        70

Item 6.   Exhibits and Reports on Form 8-K.....................................................................        70




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



                                                                                        SEPTEMBER 30,          DECEMBER 31,
                                                                                            2004                  2003
                                                                                        -------------          ------------
                                                                                                         
ASSETS:
Investments in real estate:
       Land                                                                             $     274,260          $    237,058
       Land improvements, net of accumulated depreciation of $22,937 and $19,270 at
          September 30, 2004 and December 31, 2003, respectively                              113,217               105,236
       Building and improvements, net of accumulated depreciation of $650,194 and
          $584,861 at September 30, 2004 and December 31, 2003, respectively                2,377,177             2,135,338
       Furniture, fixtures and equipment, net of accumulated depreciation of $38,374
          and $33,344 at September 30, 2004 and December 31, 2003, respectively                41,313                43,227
       Land held for investment or development                                                505,543               450,279
       Properties held for disposition, net                                                    78,067               186,135
                                                                                        -------------          ------------
         Net investment in real estate                                                  $   3,389,577          $  3,157,273

       Cash and cash equivalents                                                        $      64,517          $     78,052
       Restricted cash and cash equivalents                                                    75,800               217,329
       Defeasance investments                                                                 170,589                 9,620
       Accounts receivable, net                                                                48,796                40,740
       Deferred rent receivable                                                                79,573                66,567
       Investments in unconsolidated companies                                                356,950               440,594
       Notes receivable, net                                                                   74,157                78,453
       Income tax asset-current and deferred, net                                              31,138                17,506
       Other assets, net                                                                      295,872               208,329
                                                                                        -------------          ------------
         Total assets                                                                   $   4,586,969          $  4,314,463
                                                                                        =============          ============

LIABILITIES:
       Borrowings under Credit Facility                                                 $     307,500          $    239,000
       Notes payable                                                                        2,548,391             2,319,699
       Accounts payable, accrued expenses and other liabilities                               466,514               370,136
       Current income tax payable                                                                   -                 7,995
                                                                                        -------------          ------------
         Total liabilities                                                              $   3,322,405          $  2,936,830
                                                                                        -------------          ------------

COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
       Operating partnership, 8,863,889 and 8,873,347 units, at September 30, 2004
         and December 31, 2003, respectively                                            $      83,304          $    108,706
       Consolidated real estate partnerships                                                   44,137                47,123
                                                                                        -------------          ------------
         Total minority interests                                                       $     127,441          $    155,829
                                                                                        -------------          ------------
SHAREHOLDERS' EQUITY:
   Preferred shares, $0.01 par value, authorized 100,000,000 shares:
         Series A Convertible Cumulative Preferred Shares, liquidation
           preference of $25.00 per share, 14,200,000 and 10,800,000 shares
           issued and outstanding at September 30, 2004 and December 31, 2003, 
            respectively                                                                $     319,166          $    248,160
         Series B Cumulative Preferred Shares,
           liquidation preference of $25.00 per share,
           3,400,000 shares issued and outstanding
           at September 30, 2004 and December 31, 2003                                         81,923                81,923
   Common shares, $0.01 par value, authorized 250,000,000 shares,
          124,446,656 and 124,396,168 shares issued and outstanding
          at September 30, 2004 and December 31, 2003, respectively                             1,238                 1,237
   Additional paid-in capital                                                               2,245,927             2,245,683
   Deferred compensation on restricted shares                                                  (3,124)               (4,102)
   Accumulated deficit                                                                     (1,043,673)             (877,120)
   Accumulated other comprehensive income                                                      (4,186)              (13,829)
                                                                                        -------------          ------------
                                                                                        $   1,597,271          $  1,681,952
   Less - shares held in treasury, at cost, 25,121,861
       common shares at September 30, 2004 and December 31, 2003                             (460,148)             (460,148)
                                                                                        -------------          ------------
       Total shareholders' equity                                                       $   1,137,123          $  1,221,804
                                                                                        -------------          ------------
       Total liabilities and shareholders' equity                                       $   4,586,969          $  4,314,463
                                                                                        =============          ============


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

                                       3


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



                                                                                    FOR THE THREE MONTHS    FOR THE NINE MONTHS
                                                                                     ENDED SEPTEMBER 30,    ENDED SEPTEMBER 30,
                                                                                      2004      2003         2004          2003
                                                                                   ---------  ----------  -----------   ---------
                                                                                                            
REVENUE:
           Office Property                                                         $ 128,331  $  123,155  $   384,564   $  364,137
           Resort/Hotel Property                                                      46,986      42,319      137,241      132,873
           Residential Development Property                                           60,595      34,936      163,875      140,631
                                                                                   ---------  ----------  -----------   ----------
                Total Property revenue                                             $ 235,912  $  200,410  $   685,680   $  637,641
                                                                                   ---------  ----------  -----------   ----------
EXPENSE:
           Office Property real estate taxes                                       $  15,719  $   15,323  $    49,719   $   49,794
           Office Property operating expenses                                         46,699      42,976      132,906      125,956
           Resort/Hotel Property expense                                              39,479      35,397      115,382      108,706
           Residential Development Property expense                                   54,480      34,975      146,803      131,977
                                                                                   ---------  ----------  -----------   ----------
                Total Property expense                                             $ 156,377  $  128,671  $   444,810   $  416,433
                                                                                   ---------  ----------  -----------   ----------

                Income from Property Operations                                    $  79,535  $   71,739  $   240,870   $  221,208
                                                                                   ---------  ----------  -----------   ----------

OTHER INCOME (EXPENSE):
           Income from investment land sales, net                                  $   7,583  $   11,334  $     8,532   $   12,961
           Gain on joint venture of properties, net                                        -           -            -          100
           Interest and other income                                                   2,576       1,319        8,295        3,954
           Corporate general and administrative                                       (9,023)     (7,356)     (22,734)     (18,968)
           Interest expense                                                          (46,571)    (43,044)    (137,008)    (129,298)
           Amortization of deferred financing costs                                   (3,453)     (2,783)     (10,243)      (7,751)
           Extinguishment of debt                                                       (155)          -       (3,082)           -
           Depreciation and amortization                                             (45,715)    (35,550)    (127,702)    (104,761)
           Impairment charges related to real estate assets                           (4,094)          -       (4,094)      (1,200)
           Other expenses                                                                (88)       (130)        (236)      (1,042)
           Equity in net income (loss) of unconsolidated companies:
                Office Properties                                                      1,268       5,871        3,871        9,981
                Resort/Hotel Properties                                                   22        (89)        (227)        2,036
                Residential Development Properties                                      (803)      1,725      (1,110)        4,235
                Temperature-Controlled Logistics Properties                             (906)       (949)      (4,514)         152
                Other                                                                    190        (864)        (391)      (1,679)
                                                                                   ---------  ----------  -----------   ----------

           Total Other Income (Expense)                                            $ (99,169) $  (70,516) $  (290,643)  $ (231,280)
                                                                                   ---------  ----------  -----------   ----------

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
      MINORITY  INTERESTS AND INCOME TAXES                                         $ (19,634) $    1,223  $   (49,773)  $  (10,072)
           Minority interests                                                            710      (1,174)       4,615         (667)
           Income tax benefit                                                          6,613       4,865       13,214       10,336
                                                                                   ---------  ----------  -----------   ----------

(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
      EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                                   $ (12,311) $    4,914  $   (31,944)  $     (403)
           Income from discontinued operations, net of minority interests              1,967         373        6,192        8,052
           Impairment charges related to real estate assets from discontinued
              operations, net of minority interests                                     (297)     (1,998)      (2,715)     (16,263)
           Loss on real estate from discontinued operations, net of minority
              interests                                                                  (32)        (19)      (2,152)        (349)
           Cumulative effect of a change in accounting principle, net of minority
              interests                                                                    -           -         (363)           -
                                                                                   ---------  ----------  -----------   ----------

NET (LOSS) INCOME                                                                  $ (10,673) $    3,270  $   (30,982)  $   (8,963)
            Series A Preferred Share distributions                                    (5,991)     (4,556)     (17,733)     (13,668)
            Series B Preferred Share distributions                                    (2,019)     (2,019)      (6,057)      (6,057)
                                                                                   ---------  ----------  -----------   ----------

NET LOSS AVAILABLE TO COMMON  SHAREHOLDERS                                         $ (18,683) $   (3,305) $ (54,772)    $  (28,688)
                                                                                   =========  ==========  ===========   ==========

BASIC EARNINGS PER SHARE DATA:
           Loss available to common shareholders before discontinued operations
              and cumulative effect of a change in accounting principle            $   (0.21) $    (0.01) $     (0.56)  $    (0.20)
           Income from discontinued operations, net of minority interests               0.02           -         0.06         0.08
           Impairment charges related to real estate assets from discontinued
              operations, net of minority interests                                        -       (0.02)       (0.03)       (0.17)
           Loss on real estate from discontinued operations, net of minority
              interests                                                                    -           -        (0.02)           -
           Cumulative effect of a change in accounting principle, net of minority
              interests                                                                    -           -            -            -
                                                                                   ---------  ----------  -----------   ----------
           Net loss available to common shareholders - basic                       $   (0.19) $    (0.03) $     (0.55)  $    (0.29)
                                                                                   =========  ==========  ===========   ==========
DILUTED EARNINGS PER SHARE DATA:
           Loss available to common shareholders before discontinued operations
              and cumulative effect of a change in accounting principle            $   (0.21) $    (0.01) $     (0.56)  $    (0.20)
           Income from discontinued operations, net of minority interests               0.02           -         0.06         0.08
           Impairment charges related to real estate assets from discontinued
              operations, net of minority interests                                        -       (0.02)       (0.03)       (0.17)
           Loss on real estate from discontinued operations, net of minority
              interests                                                                    -           -        (0.02)           -
           Cumulative effect of a change in accounting principle, net of minority
              interests                                                                    -           -            -            -
                                                                                   ---------  ----------  -----------   ----------

           Net loss available to common shareholders - diluted                     $   (0.19) $    (0.03) $     (0.55)  $    (0.29)
                                                                                   =========  ==========  ===========   ==========


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

                                       4


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



                                                       Series A             Series B
                                                    Preferred Shares      Preferred Shares      Treasury Shares
                                                ---------------------  --------------------  ----------------------
                                                  Shares    Net Value    Shares   Net Value   Shares     Net Value
                                                ----------  ---------  ---------  ---------  ----------  -- -------
                                                                                       
SHAREHOLDERS' EQUITY, December 31, 2003         10,800,000  $ 248,160  3,400,000  $  81,923  25,121,861  $ (460,148)

Issuance of Common Shares                                -          -          -          -           -           -

Exercise of Common Share Options                         -          -          -          -           -           -

Accretion of Discount on Employee
   Stock Option Notes                                    -          -          -          -           -           -

Issuance of Shares in Exchange for Operating
    Partnership Units                                    -          -          -          -           -           -

Preferred Equity Issuance                        3,400,000     71,006          -          -           -           -

Stock Option Grants                                      -          -          -          -           -           -

Amortization of Deferred Compensation
     on Restricted Shares                                -          -          -          -           -           -

Dividends Paid                                           -          -          -          -           -           -

Net Loss Available to Common Shareholders                -          -          -          -           -           -

Unrealized Gain on Marketable Securities                 -          -          -          -           -           -

Unrealized Net Gain on Cash Flow Hedges                  -          -          -          -           -           -

                                                ----------  ---------  ---------  ---------  ----------  ----------
SHAREHOLDERS' EQUITY, September 30, 2004        14,200,000  $ 319,166  3,400,000  $  81,923  25,121,861  $ (460,148)
                                                ==========  =========  =========  =========  ==========  ==========




                                                                                        Deferred
                                                    Common Shares        Additional  Compensation
                                               -----------------------    Paid-in    on Restricted   Accumulated
                                                  Shares     Par Value    Capital      Shares         (Deficit)
                                               ------------  ---------   ----------  -------------   -----------
                                                                                      
SHAREHOLDERS' EQUITY, December 31, 2003         124,396,168  $   1,237  $ 2,245,683  $      (4,102)  $  (877,120)

Issuance of Common Shares                             5,672          -           94              -             -

Exercise of Common Share Options                     25,900          1          361              -             -

Accretion of Discount on Employee
   Stock Option Notes                                     -          -         (189)             -             -

Issuance of Shares in Exchange for Operating
    Partnership Units                                18,916          -            -              -             -

Preferred Equity Issuance                                 -          -            -              -             -

Stock Option Grants                                       -          -          (22)             -             -

Amortization of Deferred Compensation
     on Restricted Shares                                 -          -            -            978             -

Dividends Paid                                            -          -            -              -      (111,781)

Net Loss Available to Common Shareholders                 -          -            -              -       (54,772)

Unrealized Gain on Marketable Securities                  -          -            -              -             -

Unrealized Net Gain on Cash Flow Hedges                   -          -            -              -             -

                                               ------------  ---------   ----------  -------------   -----------
SHAREHOLDERS' EQUITY, September 30, 2004       124,446,656   $   1,238  $ 2,245,927  $      (3,124)  $(1,043,673)
                                               ============  =========  == ========  =============   ===========




                                                  Accumulated
                                                     Other
                                                 Comprehensive
                                                    Income        Total
                                                -------------   -----------
                                                          
SHAREHOLDERS' EQUITY, December 31, 2003         $     (13,829)  $ 1,221,804

Issuance of Common Shares                                   -            94

Exercise of Common Share Options                            -           362

Accretion of Discount on Employee
   Stock Option Notes                                       -          (189)

Issuance of Shares in Exchange for Operating
    Partnership Units                                       -             -

Preferred Equity Issuance                                   -        71,006

Stock Option Grants                                         -           (22)

Amortization of Deferred Compensation
     on Restricted Shares                                   -           978

Dividends Paid                                              -      (111,781)

Net Loss Available to Common Shareholders                   -       (54,772)

Unrealized Gain on Marketable Securities                1,445         1,445

Unrealized Net Gain on Cash Flow Hedges                 8,198         8,198

                                                -------------   -----------
SHAREHOLDERS' EQUITY, September 30, 2004        $      (4,186)   $1,137,123
                                                =============   ===========


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

                                       5


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



                                                                                      FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                                                                          2004                      2003
                                                                                      -------------           ---------------
                                                                                                        
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                              $     (30,982)          $        (8,963)
Adjustments to reconcile net loss to net cash provided  by operating activities:
         Depreciation and amortization                                                      137,945                   112,512
         Residential Development cost of sales                                               67,519                    66,658
         Residential Development capital expenditures                                      (126,622)                  (98,506)
         Impairment charges related to real estate assets from discontinued                   2,715                    16,263
           operations, net of minority interests
         Loss on real estate from discontinued operations, net of minority interests          2,152                       349
         Discontinued operations - depreciation and minority interests                        2,939                    14,360
         Extinguishment of debt                                                               3,082                         -
         Impairment charges related to real estate assets                                     4,094                     1,200
         Income from investment in land sales, net                                           (8,532)                  (12,961)
         Gain on joint venture of properties, net                                                 -                      (100)
         Minority interests                                                                  (4,615)                      667
         Cumulative effect of a change in accounting principle, net of minority                 363                         -
           interests
         Non-cash compensation                                                                  861                       (43)
         Equity in (earnings) loss from unconsolidated companies:
            Office Properties                                                                (3,871)                   (9,981)
            Resort/Hotel Properties                                                             227                    (2,036)
            Residential Development Properties                                                1,110                    (4,235)
            Temperature-Controlled Logistics Properties                                       4,514                      (152)
            Other                                                                               391                     1,679
         Distributions received from unconsolidated companies:
            Office Properties                                                                 4,465                    10,220
            Residential Development Properties                                                    -                        46
            Temperature-Controlled Logistics Properties                                       1,822                         -
            Other                                                                               938                       852
         Change in assets and liabilities, net of consolidations, acquisitions 
          and dispositions:
            Restricted cash and cash equivalents                                             52,695                       602
            Accounts receivable                                                              (6,903)                    4,824
            Deferred rent receivable                                                        (12,998)                   (1,501)
            Income tax asset - current and deferred, net                                    (22,223)                  (11,223)
            Other assets                                                                    (11,045)                    7,465
            Accounts payable, accrued expenses and other liabilities                         15,295                   (29,395)
                                                                                      -------------           ---------------
               Net cash provided by operating activities                              $      75,336           $        58,601
                                                                                      -------------           ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Net cash impact of consolidation of previously unconsolidated companies      $         334           $        11,374
         Proceeds from property sales                                                       113,871                    16,030
         Acquisition of investment properties                                              (193,275)                  (14,802)
         Development of investment properties                                                (3,804)                   (3,612)
         Property improvements - Office Properties                                           (9,040)                  (11,342)
         Property improvements - Resort/Hotel Properties                                    (22,228)                   (7,097)
         Tenant improvement and leasing costs - Office Properties                           (68,145)                  (51,114)
         Residential Development Properties Investments                                     (28,319)                  (28,696)
         Decrease (increase) in restricted cash and cash equivalents                         92,347                      (835)
         Purchases of defeasance investments and other securities                          (195,781)                   (2,963)
         Proceeds from defeasance investment maturities                                       8,809                         -
         Return of investment in unconsolidated companies:
            Office Properties                                                                 2,288                      7,721
            Resort/Hotel  Properties                                                          1,299                         -
            Residential Development Properties                                                   14                       227
            Temperature-Controlled Logistics Properties                                      90,776                     3,201
            Other                                                                               204                     5,428
         Investment in unconsolidated companies:
            Office Properties                                                               (10,086)                      (85)
            Residential Development Properties                                                 (991)                   (4,738)
            Temperature-Controlled Logistics Properties                                      (2,404)                     (897)
            Other                                                                            (2,646)                   (1,419)
         Decrease in notes receivable                                                         4,810                    19,098
                                                                                      -------------           ---------------
            Net cash used in investing activities                                     $    (221,967)          $       (64,521)
                                                                                      -------------           ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
         Debt financing costs                                                         $      (8,218)          $        (2,603)
         Borrowings under Credit Facility                                                   440,000                   284,500
         Payments under Credit Facility                                                    (371,500)                 (134,000)
         Notes payable proceeds                                                             454,623                   100,435
         Notes payable payments                                                            (386,590)                  (97,164)
         Residential Development Properties notes payable borrowings                         77,706                    57,516
         Residential Development Properties notes payable payments                          (62,462)                  (56,042)
         Amortization of debt premiums                                                       (1,766)                        -
         Obligation related to  property financing transaction                               79,920                         -
         Capital distributions - joint venture partner                                       (6,331)                   (9,462)
         Capital contributions - joint venture partner                                        2,101                         -
         Proceeds from exercise of share options                                                362                         -
         Treasury shares purchase under compensation plan                                         -                      (880)
         Issuance of preferred shares - Series A                                             71,006                         -
         Series A Preferred Share distributions                                             (17,972)                  (13,668)
         Series B Preferred Share distributions                                              (6,057)                   (6,057)
         Dividends and unitholder distributions                                            (131,726)                 (131,616)
                                                                                      -------------           ---------------
             Net cash provided by (used in) financing activities                      $     133,096           $        (9,041)
                                                                                      -------------           ---------------
DECREASE IN CASH AND CASH EQUIVALENTS                                                 $     (13,535)          $       (14,961)
CASH AND CASH EQUIVALENTS,
         Beginning of period                                                                 78,052                    78,444
                                                                                      -------------           ---------------
CASH AND CASH EQUIVALENTS,
         End of period                                                                $      64,517           $        63,483
                                                                                      =============           ===============


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

                                       6


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

      The direct and indirect subsidiaries of Crescent Equities at September 30,
2004 included:

            -     CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP

                  The "Operating Partnership."

            -     CRESCENT REAL ESTATE EQUITIES, LTD. 

                  The "General Partner" of the Operating Partnership.

            -     SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE GENERAL
                  PARTNER

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

      The following table shows the consolidated subsidiaries of the Company
that owned or had an interest in real estate assets and the real estate assets
that each subsidiary owned or had an interest in as of September 30, 2004.

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

                                   Non wholly-owned assets, consolidated - 301
                                   Congress Avenue (50% interest) and Fountain
                                   Place (0.1% interest), included in the
                                   Company's Office Segment. Sonoma Mission Inn
                                   (80.1% interest), included in the Company's
                                   Resort/Hotel Segment.

                                   See Note 6, "Other Transactions," for a
                                   description of the Fountain Place Office
                                   Property transaction.

                                   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 Company's Office Segment.
                                   Temperature-Controlled Logistics Properties
                                   (40% interest in 87 properties), included in
                                   the Company's Temperature-Controlled
                                   Logistics Segment.

Hughes Center Entities(1)          Wholly-owned assets - Hughes Center
                                   Properties (seven office properties each in a
                                   separate limited liability company). These
                                   properties are included in the Company's
                                   Office Segment.

                                   Non wholly-owned asset, consolidated - 3770
                                   Hughes Parkway (67% interest), included in
                                   the Company's Office Segment.

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

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

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

Crescent Real Estate Funding       Wholly-owned assets - The Addison, Austin
VIII, L.P. ("Funding VIII")        Centre, The Avallon V, Chancellor Park, 816
                                   Congress, Greenway I & IA (two office
                                   properties), Greenway II, Johns Manville
                                   Plaza, Palisades Central I, Palisades Central
                                   II, Stemmons Place, Trammell Crow Center(3),
                                   3333 Lee Parkway, 44 Cook and 55 Madison.
                                   These properties are included in the
                                   Company's Office Segment. The Canyon Ranch -
                                   Tucson, Omni Austin Hotel, and Ventana Inn &
                                   Spa, all of which are included in the
                                   Company's Resort/Hotel Segment.

Crescent Real Estate Funding X,    Wholly-owned assets - Post Oak Central (three
L.P. ("Funding X")                 Office Properties). These properties are
                                   included in the Company's Office Segment.

                                       7


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Crescent Alhambra, L.L.C.          Wholly-owned asset - Alhambra Plaza (two
                                   Office Properties), included in the Company's
                                   Office Segment.

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

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

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

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

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

Crescent Resort Development Inc.   Non wholly-owned assets, consolidated -
("CRDI")                           Brownstones (64% interest), Creekside at
                                   Riverfront (64% interest), Cresta (60%
                                   interest), Delgany (64% interest), Eagle
                                   Ranch (60% interest), Gray's Crossing (71%
                                   interest), Horizon Pass (64% interest),
                                   Hummingbird (64% interest), Main Street
                                   Station (30% interest), Northstar (57%
                                   interest), Old Greenwood (71% interest),
                                   Park Place at Riverfront (64% interest), Park
                                   Tower at Riverfront (64% interest), Riverbend
                                   (60% interest), Riverfront Park (64%
                                   interest). These properties are included in
                                   the Company'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.
                                   (42% interest), included in the Company's
                                   Residential Development Segment.

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

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

(1)   In addition, the Company owns nine retail parcels located in Hughes
      Center.

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

(3)   The Company owns the 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 8, "Investments in Unconsolidated Companies," for a table that
lists the Company's ownership in significant unconsolidated joint ventures and
investments as of September 30, 2004.

      See Note 9, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.

                                       8


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENTS

      The assets and operations of the Company were divided into four investment
segments at September 30, 2004, as follows:

      -     Office Segment;

      -     Resort/Hotel Segment;

      -     Residential Development Segment; and

      -     Temperature-Controlled Logistics Segment.

      Within these segments, the Company owned in whole or in part the following
real estate assets (the "Properties") as of September 30, 2004:

      -     OFFICE SEGMENT consisted of 75 office properties (collectively
            referred to as the "Office Properties"), located in 27 metropolitan
            submarkets in seven states, with an aggregate of approximately 29.9
            million net rentable square feet. Sixty-five of the Office
            Properties are wholly-owned and ten are owned through joint
            ventures, two of which are 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 is owned through a joint venture that is consolidated.

      -     RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company'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 28 upscale
            residential development properties (collectively referred to as the
            "Residential Development Properties").

      -     TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the Company'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. ("VCQ"). The Temperature-Controlled Logistics
            Partnership owns all of the common stock, representing substantially
            all of the economic interest, of AmeriCold Realty Trust (the
            "Temperature-Controlled Logistics Corporation"), a REIT. As of
            September 30, 2004, 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 approximately 440.7
            million cubic feet (17.5 million square feet) of warehouse space. As
            of September 30, 2004, VCQ owned two quarries and the related land.
            The Company accounts for its interests in the Temperature-Controlled
            Logistics Partnership and in VCQ as unconsolidated equity entities.

      See Note 3, "Segment Reporting," for a table showing selected financial
information for each of these investment segments for the three and nine months
ended September 30, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at September 30, 2004 and December 31, 2003.

      See Note 17, "Subsequent Events," for a discussion of (i) the Company's
joint venture transaction related to three of its Office Properties, (ii) the
sale of one of its business-class hotel properties and (iii) the restructuring
of the Company's investment in the Temperature-Controlled Logistics Segment.

BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and nine-
month periods ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.

      The consolidated balance sheet at December 31, 2003 has been derived from
the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.

                                       9


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      You should read these consolidated financial statements in conjunction
with the consolidated financial statements and footnotes thereto in the
Company's annual report on Form 10-K for the year ended December 31, 2003.

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      This section should be read in conjunction with the more detailed
information regarding the Company's significant accounting policies contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

ADOPTION OF NEW ACCOUNTING STANDARD

      EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by the
FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other - than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and additional evidence gathering in determining whether or not
securities are other-than-temporarily impaired and lists some of these
impairment indicators. The impairment accounting guidance is effective for
periods beginning after June 15, 2004 and the disclosure requirements for annual
reporting periods are effective for periods ending after June 15, 2004. The
Company adopted EITF 03-1 effective July 1, 2004 and it had no impact on the
Company's financial condition or its results of operations.

SIGNIFICANT ACCOUNTING POLICIES

      CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 15, 2003, the FASB
approved the issuance of Interpretation 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." In December 2003, the FASB issued FIN 46R,
"Consolidation of Variable Interest Entities" ("FIN 46R"), which amended FIN 46.
Under FIN 46R, 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 other
entities such as VIEs. FIN 46R requires VIEs to be consolidated by a company if
the company is subject to a majority of the expected losses of the VIE's
activities or entitled to receive a majority of the entity's expected residual
returns or both.

      The adoption of FIN 46R did not have a material impact to the Company's
financial condition or results of operations. Due to the adoption of this
Interpretation and management's assumptions in application of the guidelines
stated in the Interpretation, the Company has consolidated GDW LLC, a subsidiary
of DMDC, as of December 31, 2003 and Elijah Fulcrum Fund Partners, L.P.
("Elijah") as of January 1, 2004. Elijah is a limited partnership whose purpose
is to invest in the SunTx Fulcrum Fund, L.P. SunTx Fulcrum Fund, L.P.'s
objective is to invest in a portfolio of acquisitions that offer the potential
for substantial capital appreciation. While it was determined that one of the
Company's unconsolidated joint ventures, Main Street Partners, L.P., and its
investments in Canyon Ranch Las Vegas, L.L.C., CR License, L.L.C. and CR License
II, L.L.C. ("Canyon Ranch Entities") are VIEs under FIN 46R, the Company is not
the primary beneficiary and is not required to consolidate these entities under
other GAAP. The Company's maximum exposure to loss is limited to its equity
investment of approximately $57.7 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at September 30, 2004.

                                       10


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      During 2004, the Company entered into three separate exchange agreements
with a third party intermediary. The first exchange agreement included two
parcels of undeveloped land, the second exchange agreement included the 3930
Hughes Parkway Office Property, and the third exchange agreement included The
Alhambra Office Property. The agreements were for a maximum term of 180 days and
allow the Company to pursue favorable tax treatment on other properties sold by
the Company within this period. During the 180-day periods, which ended or will
end on August 28, 2004, November 6, 2004, and February 2, 2005, respectively,
the third party intermediary is the legal owner of the properties, although the
Company controls the properties, retains all of the economic benefits and risks
associated with these properties and indemnifies the third party intermediary
and, therefore, the Company fully consolidates these properties. The Company
took or will take legal ownership of the properties no later than on the
expiration of the respective 180-day period.

      STOCK-BASED COMPENSATION. Effective January 1, 2003, the Company 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 nine months
ended September 30, 2004, the Company granted stock options and recognized
compensation expense that was not significant to its results of operations. With
respect to the Company's stock options which were granted prior to 2003, the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB No. 25"). Had
compensation cost been determined based on the fair value at the grant dates for
awards under the Plans consistent with SFAS No. 123, the Company's net loss and
loss per share would have been reduced to the following pro forma amounts:



                                                                FOR THE THREE MONTHS ENDED       FOR THE NINE MONTHS
                                                                      SEPTEMBER 30,                ENDED SEPTEMBER 30,
                                                                --------------------------    ---------------------------
(in thousands, except per share amounts)                            2004            2003          2004            2003
------------------------------------------                      ------------    ----------    ------------   ------------
                                                                                                 
Net loss available to common shareholders, as reported          $    (18,683)   $   (3,305)   $    (54,772)  $    (28,688)
Add: Stock-based employee compensation expense included in
      reported net income                                                355            15           1,056             21
Deduct: total stock-based employee compensation expense
      determined under fair value based method for all
      awards, net of minority interest                                  (838)         (594)         (2,534)        (1,794)
                                                                ------------    ----------    ------------   ------------
Pro forma net loss                                              $    (19,166)   $   (3,884)   $    (56,250)  $    (30,461)
Loss per share:
Basic/Diluted - as reported                                     $      (0.19)   $    (0.03)   $      (0.55)  $      (0.29)
Basic/Diluted - pro forma                                       $      (0.19)   $    (0.04)   $      (0.57)  $      (0.31)


                                       11


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      MARKETABLE SECURITIES. The Company has classified and recorded its
marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Realized gains or losses on the sale
of securities are recorded based on specific identification. 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.
Investments in securities with no readily determinable market value are reported
at cost, as they are not considered marketable under SFAS No. 115, and total
$5.5 million at September 30, 2004 and December 31, 2003.

      The following tables present the cost, fair value and unrealized gains and
losses as of September 30, 2004 and December 31, 2003 and the realized gains and
change in Accumulated Other Comprehensive Income ("OCI") for the nine months
ended September 30, 2004 and 2003 for the Company's marketable securities.




                             AS OF SEPTEMBER 30, 2004                   AS OF DECEMBER 31, 2003
                       -------------------------------------    ------------------------------------------
(in thousands)                          FAIR     UNREALIZED                        FAIR        UNREALIZED
TYPE OF SECURITY           COST        VALUE     GAIN/(LOSS)       COST            VALUE       GAIN/(LOSS)
------------------     ----------  -----------  ------------    ----------      -----------    -----------
                                                                             
Held to maturity(1)    $  170,589  $   169,042  $    (1,547)    $    9,620      $     9,621    $        1
Trading(2)                  7,963        8,270          N/A          4,473            4,714           N/A
Available for sale(3)      24,204       24,908          705          2,278            2,278             -
                       ----------  -----------  -----------     ----------      -----------    -----------
    Total              $  202,756  $   202,220  $      (842)    $   16,371      $    16,613    $        1
                       ==========  ===========  ===========     ==========      ===========    ===========




                       FOR THE NINE MONTHS ENDED  FOR THE NINE MONTHS ENDED
                           SEPTEMBER 30, 2004      SEPTEMBER 30, 2003
                       ------------------------- --------------------------
(in thousands)          REALIZED    CHANGE          REALIZED      CHANGE
TYPE OF SECURITY       GAIN/(LOSS)   IN OCI        GAIN/(LOSS)    IN OCI
-----------------      ----------  ------------  -------------  ----------
                                                    
Held to maturity(1)    $        -         N/A    $           -  $      N/A
Trading(2)                    367         N/A                -         N/A
Available for sale(3)           6         705             (502)        514
                       ----------  ------------  -------------  ----------
    Total              $      373  $      705    $        (502) $      514
                       ==========  ============  =============  ==========


(1)   Held to maturity securities are carried at amortized cost and consist of
      U.S. Treasury and government sponsored agency securities purchased for the
      sole purpose of funding debt service payments on the LaSalle Note II. See
      Note 9, "Notes Payable and Borrowings Under Credit Facility," for
      additional information on the defeasance of the LaSalle Note II.

(2)   Trading securities consist of primarily marketable securities purchased in
      connection with the Company's dividend incentive unit program. These
      securities are included in "Other assets, net" in the accompanying
      Consolidated Balance Sheets and are marked to market value on a monthly
      basis with the change in fair value recognized in earnings.

(3)   Available for sale securities consist of marketable securities which the
      Company intends to hold for an indefinite period of time. These securities
      consist of $18.3 million of bonds and $6.6 million of preferred stock
      which are included in "Other assets, net" in the accompanying Consolidated
      Balance Sheets and are marked to market value on a monthly basis with the
      corresponding unrealized gain or loss recorded in OCI.

      In July 2004, Fresh Choice, Inc., in which the Company owns $5.5 million
Series B Preferred shares reported at cost at September 30, 2004 and December
31, 2003, filed for protection under Chapter 11 of the U.S. Bankruptcy Court in
order to facilitate a reorganization and restructuring. At September 5, 2004,
the accrued liquidation preference on the Series B Preferred shares was $9.3
million. Based on the Company's evaluation of its preferred interest in Fresh
Choice, the Company estimates the value of its shares at a minimum to be equal
to the investment balance of $5.5 million.

                                       12


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

      The following tables present reconciliations for the three and nine months
ended September 30, 2004 and 2003 of basic and diluted earnings per share from
"Loss before discontinued operations and cumulative effect of a change in
accounting principle" to "Net loss available to common shareholders." The table
also includes weighted average shares on a basic and diluted basis, which for
the periods presented, are the same.



                                                                           FOR THE THREE MONTHS ENDED SEPTEMBER 30,
                                                                ---------------------------------------------------------------
                                                                              2004                         2003
                                                                --------------------------------  -----------------------------
                                                                 Income     Wtd. Avg.  Per Share  Income   Wtd. Avg.  Per Share
(in thousands, except per share amounts)                         (Loss)    Shares (1)   Amount    (Loss)   Shares (1)  Amount
-----------------------------------------                       ---------  ----------  ---------  -------  ---------  ---------
                                                                                                    
BASIC/DILUTED  EPS -
 Loss before discontinued operations and cumulative effect
      of a change in accounting principle                       $ (12,311)   99,024               $ 4,914     99,172
Series A Preferred Share distributions                             (5,991)                         (4,556)
Series B Preferred Share distributions                             (2,019)                         (2,019)
                                                                ---------  ----------  ---------  -------  ---------  ---------
Loss available to common shareholders
   before discontinued operations and cumulative
   effect of a change in accounting principle                   $ (20,321)   99,024    $   (0.21) $(1,661)    99,172  $   (0.01)
Income from discontinued operations, net of minority interests      1,967                   0.02      373                     -
Impairment charges related to real estate assets from
   discontinued operations, net of minority interests                (297)                     -   (1,998)                (0.02)
Loss on real estate from discontinued operations, net of
   minority interests                                                 (32)                     -      (19)                    -
Cumulative effect of a change in accounting principle                   -                      -        -                     -
                                                                ---------  ----------  ---------  -------  ---------  ---------
Net loss available to common shareholders                       $ (18,683)   99,024    $   (0.19) $(3,305)    99,172  $   (0.03)
                                                                =========  ==========  =========  =======  =========  =========


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

(1)   Anti-dilutive shares not included are 112 and 10 for the three months
      ended September 30, 2004 and 2003, respectively.



                                                                           FOR THE THREE MONTHS ENDED SEPTEMBER 30,
                                                                ---------------------------------------------------------------
                                                                              2004                          2003
                                                                --------------------------------  -----------------------------
                                                                 Income     Wtd. Avg.  Per Share   Income   Wtd. Avg. Per Share
(in thousands, except per share amounts)                         (Loss)    Shares (1)   Amount     (Loss)  Shares (1)  Amount
-----------------------------------------                       ---------  ----------  ---------  -------- ---------  ---------
                                                                                                    
BASIC/DILUTED  EPS -
Loss before discontinued operations and cumulative effect
      of a change in accounting principle                       $ (31,944)    99,013              $   (403)   99,186
Series A Preferred Share distributions                            (17,733)                         (13,668)
Series B Preferred Share distributions                             (6,057)                          (6,057)
                                                                ---------  ----------  ---------  -------- ---------  ---------
Loss available to common shareholders
   before discontinued operations and cumulative
   effect of a change in accounting principle                   $ (55,734)    99,013   $   (0.56) $(20,128)   99,186  $   (0.20)
Income from discontinued operations, net of minority interests      6,192                   0.06     8,052                 0.08
Impairment charges related to real estate assets from
   discontinued operations, net of minority interests              (2,715)                 (0.03)  (16,263)               (0.17)
Loss on real estate from discontinued operations, net of
   minority interests                                              (2,152)                 (0.02)     (349)                   -
Cumulative effect of a change in accounting principle                (363)                     -         -                    -
                                                                ---------  ----------  ---------  -------- ---------  ---------
Net loss available to common shareholders                       $ (54,772)    99,013   $   (0.55) $(28,688)   99,186  $   (0.29)
                                                                =========  ==========  =========  ======== =========  =========


---------

(1)   Anti-dilutive shares not included are 170 and 6 for the nine months ended
      September 30, 2004 and 2003, respectively.

                                       13 


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS



                                                                                                          
                                                                                 FOR THE NINE MONTHS ENDED
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                     SEPTEMBER 30,
(in thousands)                                                                    2004           2003
---------------------------------------------------                             ----------   -------------
                                                                                        
Interest paid on debt                                                           $  121,622   $     110,670
Interest capitalized - Resort/Hotel                                                    278               -
Interest capitalized - Residential Development                                      11,090          13,896
Additional interest paid in conjunction with cash flow hedges                        8,935          15,472
                                                                                ----------   -------------
Total interest paid                                                             $  141,925   $     140,038
                                                                                ==========   =============

Cash paid for income taxes                                                      $    8,406   $       1,954
                                                                                ==========   =============

SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES:

Conversion of Operating Partnership units to common shares with resulting
   reduction in minority interest and increases in common shares and
   additional paid-in capital                                                   $        -   $           8
Assumption of debt in conjunction with acquisitions of Office Properties           139,807          38,000
Non-cash compensation                                                                  962             147
Financed sale of land parcel                                                         4,878          11,800
Financed purchase of land parcel                                                     7,500               -

SUPPLEMENTAL SCHEDULE OF  2003 CONSOLIDATION OF DBL, MVDC,  HADC, AND 
 2004 CONSOLIDATION OF ELIJAH:

Net investment in real estate                                                   $        -   $      (9,692)
Accounts receivable, net                                                              (848)         (3,057)
Investments in unconsolidated companies                                             (2,478)         13,552
Notes receivable, net                                                                4,363             (25)
Income tax asset - current and deferred, net                                          (274)         (3,564)
Other assets, net                                                                        -            (820)
Notes payable                                                                            -             312
Accounts payable, accrued expenses and other liabilities                                 -          12,696
Minority interest - consolidated real estate partnerships                             (140)          1,972
Other comprehensive income, net of tax                                                 139               -
Cumulative effect of a change in accounting principle                                 (428)              -
                                                                                ----------   -------------
Increase in cash                                                                $      334   $      11,374
                                                                                ==========   =============


3. SEGMENT REPORTING

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

      The Company uses funds from operations ("FFO") as the measure of segment
profit or loss. FFO, as used in this document, is based on the definition
adopted by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and means:

      -     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.

                                       14 


                     CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company calculates FFO available to common shareholders - diluted in
the same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Common Shareholders and the Company includes the effect of
Operating Partnership unitholder minority interests.

      NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO
available to common shareholders - diluted and FFO appropriate measures of
performance for an equity REIT and for its investment segments. However, FFO
available to common shareholders - diluted and FFO should not be considered as
alternatives to net income determined in accordance with GAAP as an indication
of the Company's operating performance.

      The Company's measures of FFO available to common shareholders - diluted
and FFO may not be comparable to similarly titled measures of other REITs if
those REITs apply the definition of FFO in a different manner than the Company.

      Selected financial information related to each segment for the three and
nine months ended September 30, 2004 and 2003, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at September 30, 2004 and December 31, 2003, are
presented below:

    SELECTED FINANCIAL INFORMATION:



                                                               FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
                                         -------------------------------------------------------------------------------------
                                                                                       TEMPERATURE-
                                                                        RESIDENTIAL    CONTROLLED
                                            OFFICE        RESORT/HOTEL  DEVELOPMENT     LOGISTICS     CORPORATE
 (in thousands)                            SEGMENT(1)        SEGMENT    SEGMENT(2)       SEGMENT      AND OTHER       TOTAL
---------------------------------------  -------------    ------------  -----------    ------------   ----------    ----------
                                                                                                  
Total Property revenue                   $     128,331     $   46,986   $    60,595     $       -     $       -     $  235,912
Total Property expense                          62,418         39,479        54,480             -             -        156,377
                                         -------------     ----------   -----------     ---------     ---------     ----------
  Income from Property Operations        $      65,913     $    7,507   $     6,115     $       -     $       -     $   79,535

Total other income (expense)                   (34,238)        (5,993)       (8,310)         (906)      (49,722)(3)    (99,169)
Minority interests and income taxes               (512)         2,454         3,469             -         1,912          7,323
Discontinued operations -income, loss
  on real estate and impairment charges
  related to real estate assets                   (341)         2,642           103             -          (766)         1,638
                                         -------------     ----------   -----------     ---------     ---------     ----------
  Net income (loss)                      $      30,822     $    6,610   $     1,377     $    (906)    $ (48,576)    $  (10,673)
                                         -------------     ----------   -----------     ---------     ---------     ----------

Depreciation and amortization of real
 estate assets                           $      35,141     $    5,662   $     2,181     $       -     $       -     $   42,984
(Gain) loss on property sales, net                 164              -          (126)            -           155            193
Impairment charges related to real
 estate assets                                       -              -         2,497             -           350          2,847
Adjustments for investment in
unconsolidated companies                         2,283              -        (2,150)        5,768             -          5,901
Unitholder minority interest                         -              -             -             -        (1,912)        (1,912)
Series A Preferred share distributions               -              -             -             -        (5,991)        (5,991)
Series B Preferred share distributions               -              -             -             -        (2,019)        (2,019)
                                         -------------     ----------   -----------     ---------     ---------     ----------
Adjustments to reconcile net income
 (loss) to funds from operations -
 diluted                                 $      37,588     $    5,662   $     2,402     $   5,768     $  (9,417)    $   42,003
                                         -------------     ----------   -----------     ---------     ---------     ----------
Funds from operations available to
 common shareholders before
 impairment charges related to real
 estate assets - diluted                 $      68,410     $   12,272   $     3,779     $   4,862     $ (57,993)    $   31,330
Impairment charges related to real
  estate assets                                      -              -        (2,497)            -          (350)        (2,847)
                                         -------------     ----------   -----------     ---------     ---------     ----------
Funds from operations available to
   common shareholders after impairment
   charges related to real estate
   assets - diluted                      $      68,410     $   12,272   $     1,282     $   4,862     $ (58,343)    $   28,483
                                         =============     ==========   ===========     =========     =========     ==========


See footnotes to the following table.

                                       15


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    SELECTED FINANCIAL INFORMATION:



                                                               FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
                                         --------------------------------------------------------------------------------------
                                                                                       TEMPERATURE-
                                                                        RESIDENTIAL    CONTROLLED
                                            OFFICE        RESORT/HOTEL  DEVELOPMENT     LOGISTICS     CORPORATE
 (in thousands)                            SEGMENT(1)        SEGMENT    SEGMENT(2)       SEGMENT      AND OTHER        TOTAL
---------------------------------------  -------------    ------------  -----------    ------------   ----------     ----------
                                                                                                   
Total Property revenue                   $     123,155     $   42,319   $    34,936    $          -   $        -     $  200,410
Total Property expense                          58,299         35,397        34,975               -            -        128,671
                                         -------------     ----------   -----------    ------------   ----------     ----------
  Income from Property Operations        $      64,856     $    6,922   $       (39)   $          -   $        -     $   71,739

Total other income (expense)                   (21,254)        (4,988)         (670)           (949)     (42,655)(3)    (70,516)
Minority interests and income taxes                  7          1,481         2,347               -         (144)         3,691
Discontinued operations -income, loss
  on real estate and impairment charges
  related to real estate assets                 (1,177)         1,600            10               -       (2,077)        (1,644)
                                         -------------     ----------   -----------    ------------   ----------     ----------

  Net income (loss)                      $      42,432     $    5,015   $     1,648    $       (949)  $  (44,876)    $    3,270
                                         -------------     ----------   -----------    ------------   ----------     ----------
Depreciation and amortization of real
  estate assets                          $      32,438    $     6,062   $     1,117    $          -   $        -     $   39,617
(Gain) loss on property sales, net                  28              -             -               -          (14)            14
Impairment charges related to real
  estate assets                                      -              -             -               -        2,356          2,356
Adjustments for investment in
  unconsolidated companies                      (1,613)           394             8           5,147          260          4,196
Unitholder minority interest                         -              -             -               -          585            585
Series A Preferred share distributions               -              -             -               -       (4,556)        (4,556)
Series B Preferred share distributions               -              -             -               -       (2,019)        (2,019)
                                         -------------     ----------   -----------    ------------   ----------     ----------
Adjustments to reconcile net income
  (loss) to funds from operations -
  diluted                                $      30,853     $    6,456   $     1,125    $      5,147   $   (3,388)    $   40,193
                                         -------------     ----------   -----------    ------------   ----------     ----------
Funds from operations available to
   common shareholders before
   impairment charges related to real
   estate assets - diluted               $      73,285     $   11,471   $     2,773    $      4,198   $  (48,264)    $   43,463
Impairment charges related to real
  estate assets                                      -              -             -               -       (2,356)        (2,356)
                                         -------------     ----------   -----------    ------------   ----------     ----------
Funds from operations available to
   common shareholders  after
   impairment charges related to real
   estate assets - diluted               $      73,285     $   11,471   $     2,773    $      4,198   $  (50,620)    $   41,107
                                         =============     ==========   ===========    ============   ==========     ==========


See footnotes to the following table.

    SELECTED FINANCIAL INFORMATION:



                                                                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
                                         --------------------------------------------------------------------------------------
                                                                                       TEMPERATURE-
                                                                        RESIDENTIAL    CONTROLLED
                                            OFFICE        RESORT/HOTEL  DEVELOPMENT     LOGISTICS     CORPORATE
 (in thousands)                            SEGMENT(1)        SEGMENT    SEGMENT(2)       SEGMENT      AND OTHER        TOTAL
---------------------------------------  -------------    ------------  -----------    ------------   ----------     ----------
                                                                                                   
Total Property revenue                   $     384,564    $    137,241  $   163,875    $          -   $        -     $  685,680
Total Property expense                         182,625         115,382      146,803               -            -        444,810
                                         -------------    ------------  -----------    ------------   ----------     ----------
  Income from Property Operations        $     201,939    $     21,859  $    17,072    $          -   $        -     $  240,870
Total other income (expense)                   (94,131)        (16,738)     (15,794)         (4,514)    (159,466)(3)   (290,643)
Minority interests and income taxes             (1,230)          6,531        8,308               -        4,220         17,829
Discontinued operations -income, loss
  on real estate and impairment charges
  related to real estate assets                 (4,434)          6,611          149               -       (1,001)         1,325
Cumulative effect of a change in
  accounting principle                               -               -            -               -         (363)          (363)
                                         -------------    ------------  -----------    ------------   ----------     ----------

  Net income (loss)                      $     102,144    $     18,263  $     9,735    $     (4,514)  $ (156,610)    $  (30,982)
                                         -------------    ------------  -----------    ------------   ----------     ----------
Depreciation and amortization of real
  estate assets                          $      97,205    $     17,030  $     5,115    $          -   $       56     $  119,406
(Gain) loss on property sales, net               2,319               -         (127)              -          491          2,683
Impairment charges related to real
  estate assets                                  2,852               -        2,497               -          350          5,699
Adjustments for investment in
  unconsolidated companies                       7,188               -       (2,099)         17,348            -         22,437
Unitholder minority interest                         -               -            -               -       (5,548)        (5,548)
Series A Preferred share distributions               -               -            -               -      (17,733)       (17,733)
Series B Preferred share distributions               -               -            -               -       (6,057)        (6,057)
                                         -------------    ------------  -----------    ------------   ----------     ----------
Adjustments to reconcile net income
  (loss) to funds from operations
  available to common shareholders -
  diluted                                $     109,564    $     17,030  $     5,386    $     17,348   $  (28,441)    $  120,887
                                         -------------    ------------  -----------    ------------   ----------     ----------
Funds from operations available to
  common shareholders before
  impairment charges related to real
  estate assets - diluted                $     211,708    $     35,293  $    15,121    $     12,834   $ (185,051)    $   89,905
Impairment charges related to real
  estate assets                                 (2,852)              -       (2,497)              -         (350)        (5,699)
                                         -------------    ------------  -----------    ------------   ----------     ----------
Funds from operations available to
  common shareholders after impairment
  charges related to real estate
  assets - diluted                       $     208,856    $     35,293  $    12,624    $     12,834   $ (185,401)    $   84,206
                                         =============    ============  ===========    ============   ==========     ==========


See footnotes to the following table.

                                       16


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    SELECTED FINANCIAL INFORMATION:



                                                                FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
                                         --------------------------------------------------------------------------------------
                                                                                       TEMPERATURE-
                                                                        RESIDENTIAL    CONTROLLED
                                            OFFICE        RESORT/HOTEL  DEVELOPMENT     LOGISTICS     CORPORATE
 (in thousands)                            SEGMENT(1)        SEGMENT    SEGMENT(2)       SEGMENT      AND OTHER        TOTAL
---------------------------------------  -------------    ------------  -----------    ------------   ----------     ----------
                                                                                                   
Total Property revenue                   $     364,137    $    132,873  $   140,631    $          -   $        -     $  637,641
Total Property expense                         175,750         108,706      131,977               -            -        416,433
                                         -------------    ------------  -----------    ------------   ----------     ----------
  Income from Property Operations        $     188,387    $     24,167  $     8,654    $          -   $        -     $  221,208

Total other income (expense)                   (71,493)        (12,187)      (3,336)             151    (144,415)(3)   (231,280)
Minority interests and income taxes               (267)          4,031        4,671               -        1,234          9,669
Discontinued operations -income, loss
  on real estate and impairment charges
  related to real estate assets                (10,340)          4,659           (1)              -       (2,878)        (8,560)
                                         -------------    ------------  -----------    ------------   ----------     ----------

  Net income (loss)                      $     106,287    $     20,670  $     9,988    $        151   $ (146,059)    $   (8,963)
                                         -------------    ------------  -----------    ------------   ----------     ----------
Depreciation and amortization of real
estate assets                            $      87,829    $     17,645  $     3,543    $          -   $        -     $  109,017
(Gain) loss on property sales, net                 447               -            -               -          272            719
Impairment charges related to real
estate assets                                   16,200               -            -               -        4,174         20,374
Adjustments for investment in
unconsolidated companies                         3,805           1,143          235          16,143          178         21,504
Unitholder minority interest                         -               -            -               -       (1,605)        (1,605)
Series A Preferred share distributions               -               -            -               -      (13,668)       (13,668)
Series B Preferred share distributions               -               -            -               -       (6,057)        (6,057)
                                         -------------    ------------  -----------    ------------   ----------     ----------
Adjustments to reconcile net income
  (loss) to funds from operations -
  diluted                                $     108,281    $     18,788  $     3,778    $     16,143   $  (16,706)    $  130,284
                                         -------------    ------------  -----------    ------------   ----------     ----------
Funds from operations available to
   common shareholders before
   impairment charges related to real
   estate assets - diluted               $     214,568    $     39,458  $    13,766    $     16,294   $ (162,765)    $  121,321
Impairment charges related to real
   estate assets                               (16,200)               -            -               -      (4,174)       (20,374)
                                         -------------    ------------  -----------    ------------   ----------     ----------
Funds from operations available to
   common shareholders after impairment
   charges related to real estate
   assets - diluted                      $     198,368    $     39,458  $    13,766    $     16,294   $ (166,939)    $  100,947
                                         =============    ============  ===========    ============   ==========     ==========


See footnotes to the following table.



                                                                                   TEMPERATURE-
                                                        RESORT/     RESIDENTIAL     CONTROLLED   CORPORATE
                                             OFFICE      HOTEL      DEVELOPMENT     LOGISTICS      AND
(IN MILLIONS)                               SEGMENT     SEGMENT    SEGMENT(2)(4)     SEGMENT       OTHER         TOTAL
---------------------------------------    ---------   ---------   --------------  ------------  ---------      --------
                                                                                              
TOTAL ASSETS BY SEGMENT: (5) (6)
   Balance at September 30, 2004           $   2,692   $     500     $     834       $   206     $     355(7)   $  4,587
   Balance at December 31, 2003                2,503         468           707           300           336         4,314
CONSOLIDATED PROPERTY LEVEL FINANCING:
   Balance at September 30, 2004              (1,437)       (143)         (103)            -        (1,173)(8)    (2,856)
   Balance at December 31, 2003               (1,459)       (138)          (88)            -          (874)(8)    (2,559)
CONSOLIDATED OTHER LIABILITIES:
   Balance at September 30, 2004                (188)        (43)         (178)            -           (57)         (466)
   Balance at December 31, 2003                 (120)        (27)         (109)            -          (122)         (378)
MINORITY INTERESTS:
   Balance at September 30, 2004                  (9)         (6)          (29)            -           (83)         (127)
   Balance at December 31, 2003                   (9)         (7)          (31)            -          (109)         (156)


--------------------
(1)   The property revenue includes lease termination fees (net of the write-off
      of deferred rent receivables) of approximately $1.3 million and $5.0
      million for the three months ended September 30, 2004 and 2003,
      respectively and $8.5 million and $7.9 million for the nine months ended
      September 30, 2004 and 2003, respectively.

(2)   The Company sold its interest in The Woodlands Land Development Company,
      L.P. on December 31, 2003. 

(3)  For purposes of this 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, extinguishment of debt, other
     expenses, and equity in net income of unconsolidated companies-other.

(4)   The Company's net book value for the Residential Development Segment
      includes total assets, consolidated property level financing, consolidated
      other liabilities and minority interest totaling $524 million at September
      30, 2004. The primary components of net book value are $361 million for
      CRDI, consisting of Tahoe Mountain Resort properties of $215 million,
      Denver development properties of $62 million and Colorado Mountain
      development properties of $84 million, $135 million for Desert Mountain
      and $28 million for other land development properties.

(5)   Total assets by segment are inclusive of investments in unconsolidated
      companies.

(6)   Non-income producing land held for investment or development of $82.2
      million by segment is as follows: Corporate $75.3 million and Resort/Hotel
      $6.9 million.

(7)   Includes U.S. Treasury and government sponsored agency securities of
      $170.6 million.

(8)   Inclusive of Corporate bonds, credit facility, the $75 million Fleet Term
      Loan, The Rouse Company Note, and Funding II defeased debt.

                                       17


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.    ASSET ACQUISITIONS

OFFICE PROPERTIES

      During January and February 2004, in accordance with the original purchase
contract, the Company acquired an additional five Class A Office Properties and
seven retail parcels located within Hughes Center in Las Vegas, Nevada from the
Rouse Company. One of these Office Properties is owned through a joint venture
in which the Company acquired a 67% interest. The remaining four Office
Properties are wholly-owned by the Company. The Company acquired these five
Office Properties and seven retail parcels for approximately $175.3 million,
funded by the Company's assumption of approximately $85.4 million in mortgage
loans and by a portion of the proceeds from the sale of the Company's interests
in The Woodlands on December 31, 2003. The Company recorded the loans assumed at
their fair value of approximately $93.2 million, which included $7.8 million of
premium. The five Office Properties are included in the Company's Office
Segment.

      On March 31, 2004, the Company acquired Dupont Centre, a 250,000 square
foot Class A office property, located in the John Wayne Airport submarket of
Irvine, California. The Company acquired the Office Property for approximately
$54.3 million, funded by a draw on the Company's credit facility and
subsequently placed a $35.5 million non-recourse first mortgage loan on the
property. This Office Property is wholly-owned and included in the Company's
Office Segment.

      On May 10, 2004, the Company completed the purchase of the remaining
Hughes Center Office Property in Las Vegas, Nevada for approximately $18.3
million. The purchase was funded by a draw on the Company's credit facility.
This Office Property is wholly-owned and included in the Company's Office
Segment.

      On August 6, 2004, the Company acquired The Alhambra, two Class A Office
Properties, located in the Coral Gables submarket of Miami, Florida. The Company
acquired the Office Properties for approximately $72.3 million, funded by the
Company's assumption of a $45.0 million loan from Wachovia Securities and a draw
on the Company's credit facility. The Office Properties are wholly-owned and are
included in the Company's Office Segment.

UNDEVELOPED LAND

      On March 1, 2004, in accordance with the agreement to acquire the Hughes
Center Properties, the Company 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 Company's credit facility.

5.    DISCONTINUED OPERATIONS

      In accordance with SFAS No. 144,"Accounting for the Impairment or Disposal
of Long-Lived Assets," the results of operations of the assets sold or held for
sale have been presented as "Income from discontinued operations, net of
minority interests," gain or loss on the assets sold or held for sale have been
presented as "Loss on real estate from discontinued operations, net of minority
interests" and impairments on the assets sold or held for sale have been
presented as "Impairment charges related to real estate assets from discontinued
operations, net of minority interests" in the accompanying Consolidated
Statements of Operations for the three and nine months ended September 30, 2004
and 2003. Minority interests for wholly-owned properties represents unitholders'
share of related income, gains, losses and impairments. 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 September 30, 2004
and December 31, 2003.

ASSETS SOLD

      On March 23, 2004, the Company completed the sale of the 1800 West Loop
South Office Property in Houston, Texas. The sale generated proceeds, net of
selling costs, of approximately $28.2 million and a net gain of approximately
$0.2 million. The Company previously recorded an impairment charge of
approximately $13.9 million during the year ended December 31, 2003. The
proceeds from the sale were used primarily to pay down the Company's credit
facility. This property was wholly-owned.

      On March 31, 2004, the Company sold its last remaining behavioral
healthcare property. The sale generated proceeds, net of selling costs, of
approximately $2.0 million and a net loss of approximately $0.3 million. This
property was wholly-owned.

                                       18


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On April 13, 2004, the Company completed the sale of the Liberty Plaza
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $10.8 million and a net loss of approximately $0.2
million. The Company previously recorded an impairment charge of approximately
$3.6 million during the year ended December 31, 2003. The proceeds from the sale
were used primarily to pay down the Company's credit facility. This property was
wholly-owned.

      On June 17, 2004, the Company completed the sale of the Ptarmigan Place
Office Property in Denver, Colorado. The sale generated proceeds, net of selling
costs, of approximately $25.3 million and a net loss of approximately $2.0
million. The Company previously recorded an impairment charge of approximately
$0.5 million during the quarter ended March 31, 2004. In addition, the Company
completed the sale of approximately 3.0 acres of undeveloped land adjacent to
Ptarmigan Place. The sale generated proceeds, net of selling costs, of
approximately $2.9 million and a net gain of approximately $0.9 million. The
proceeds from these sales were used to pay down a portion of the Company's Bank
of America Fund XII Term Loan. The property and adjacent land were wholly-owned.

      On June 29, 2004, the Company completed the sale of the Addison Tower
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $8.8 million and a net gain of approximately $0.2
million. The proceeds from the sale were used primarily to pay down the
Company's credit facility. This property was wholly-owned.

      On July 2, 2004, the Company completed the sale of the 5050 Quorum Office
Property in Dallas, Texas. The sale generated proceeds, net of selling costs, of
approximately $8.9 million and a loss of approximately $0.1 million. The Company
previously recorded an impairment charge of approximately $0.8 million during
the quarter ended March 31, 2004. The proceeds from the sale were used primarily
to pay down the Company's credit facility. This property was wholly-owned. The
Company continues to provide management and leasing services for this property.

      On July 29, 2004, the Company completed the sale of the 12404 Park Central
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $9.3 million. The Company previously recorded impairment
charges totaling approximately $4.0 million, $2.9 million during the year ended
December 31, 2003, $0.7 million during the quarter ended March 31, 2004 and $0.4
million during the quarter ended June 30, 2004. The proceeds from the sale were
used primarily to pay down the Bank of America Fund XII Term Loan. This property
was wholly-owned.

      On September 14, 2004, the Company completed the sale of Breckenridge
Commercial Retail Center in Breckenridge, Colorado. The sale generated proceeds
to the Company, net of selling costs and repayment of debt, of approximately
$1.5 million, and a net gain of approximately $0.1 million, net of minority
interests and income tax. The Company previously recorded an impairment charge
of approximately $0.7 million, net of minority interests and income tax, during
the year ended December 31, 2003. The proceeds from the sale were used primarily
to pay down the Company's credit facility.

ASSETS HELD FOR SALE

      The following Properties are classified as held for sale as of September
30, 2004.



          PROPERTY                       LOCATION
----------------------------     -----------------------
                              
Hyatt Regency Albuquerque(1)     Albuquerque, New Mexico
Denver Marriott City Center      Denver, Colorado


---------------
(1)   This property was sold in October 2004.

OFFICE SEGMENT

      As of September 30, 2004, the Company determined that Albuquerque Plaza,
in the CBD submarket in Albuquerque, New Mexico was no longer held for sale due
to the Office Property no longer being actively marketed for sale as a result of
changes in market conditions. The Property has been reclassified from
"Properties held for disposition, net" to "Land," "Building and improvements,
net of accumulated depreciation," and "Other assets, net" in the accompanying
Consolidated Balance Sheets with a net book value of $32.9 million at September
30, 2004. In addition, approximately $2.5 million has

                                       19


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

been reclassified from "Income from discontinued operations, net of minority
interests," to "Office Property revenue," "Interest and other income," "Office
Property real estate taxes," "Office Property operating expenses" and
"Depreciation and amortization" line items in the accompanying Consolidated
Statements of Operations for the nine months ended September 30, 2004.

SUMMARY OF ASSETS HELD FOR SALE

      The following table indicates the major asset classes of the properties
held for sale.



(in thousands)                           SEPTEMBER 30, 2004(1)  DECEMBER 31, 2003(2)
---------------------------------        ---------------------  --------------------
                                                          
Land                                          $       375             $   13,823
Buildings and improvements                         85,900                201,784
Furniture, fixtures and equipment                  20,892                 18,822
Accumulated depreciation                          (29,131)               (52,142)
Other assets, net                                      31                  3,848
                                              -----------             ----------
Net investment in real estate                 $    78,067             $  186,135
                                              ===========             ==========


------------------
(1)   Includes two Resort/Hotel Properties and other assets.

(2)   Includes six Office Properties, two Resort/Hotel Properties, one
      behavioral healthcare property and other assets.

      The following tables present total revenues, operating and other expenses,
depreciation and amortization, unitholder minority interests, impairments of
real estate assets and realized loss on sale of properties for the nine months
ended September 30, 2004 and 2003, for properties included in discontinued
operations.



                                                                    FOR THE NINE MONTHS ENDED
                                                                          SEPTEMBER 30,
                                                                   ----------------------------
(in thousands)                                                        2004             2003
--------------                                                     -----------      -----------
                                                                              
Total revenues                                                     $   41,853       $    62,139
Operating and other expenses                                          (32,691)          (40,059)
Depreciation and amortization                                          (1,861)          (12,587)
Unitholder minority interests                                          (1,109)           (1,441)
                                                                   ----------       -----------
Income from discontinued operations, net of minority interests     $    6,192       $     8,052
                                                                   ==========       ===========




                                                                    FOR THE NINE MONTHS ENDED
                                                                          SEPTEMBER 30,
                                                                   ----------------------------
(in thousands)                                                        2004             2003
--------------                                                     -----------      -----------
                                                                              
Impairment charges related to real estate assets                   $    (3,201)     $   (19,174)
Unitholder minority interests                                              486            2,911
                                                                   -----------      -----------
Impairment charges related to real estate assets from
 discontinued operations, net of minority interests                $    (2,715)     $   (16,263)
                                                                   ===========      ===========




                                                                    FOR THE NINE MONTHS ENDED
                                                                          SEPTEMBER 30,
                                                                    -------------------------
(in thousands)                                                        2004            2003
                                                                    ----------      ---------
                                                                              
Realized loss on sale of properties                                 $   (2,537)     $    (411)
Unitholder minority interests                                              385             62
                                                                    ----------      ---------
Loss on sale of real estate from discontinued operations,
 net of minority interests                                          $   (2,152)     $    (349)
                                                                    ==========      =========


                                       20


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.    OTHER TRANSACTIONS

FOUNTAIN PLACE TRANSACTION

      On June 28, 2004, the Company completed a transaction related to the
Fountain Place Office Property with Crescent FP Investors, L.P., ("FP
Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Company. In the transaction, the Fountain Place
Office Property was, for tax purposes, sold to FP Investors for $168.2 million,
including the assumption by FP Investors of a new $90.0 million loan from Lehman
Capital. The Company received net proceeds of approximately $78.2 million. This
transaction resulted in the completion of a reverse Section 1031 like-kind
exchange associated with the Company's prior purchase of a portion of the Hughes
Center office portfolio.

      Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Company to purchase Lehman's
interest in FP Investors for an agreed upon fair value of $79.9 million at any
time until November 30, 2004. For GAAP purposes, under SFAS No. 66, "Accounting
for Sales of Real Estate," this unconditional right, or contingency, results in
the transaction requiring accounting associated with a financing transaction. As
a result, no gain has been recorded on the transaction and the Company's
accompanying financial statements continue to include the Office Property,
related debt and operations until expiration of the contingency. The Company
pays 99.9% of the distributable funds from the Office Property to Lehman, which
is recorded in the "Interest expense" line item in the Company's Consolidated
Statement of Operations. The fair value of the contingency, $79.9 million, is
included in the "Accounts payable, accrued expenses and other liabilities" line
item in the Company's Consolidated Balance Sheet at September 30, 2004.

      Also on June 28, 2004, the Company paid off the $220.0 million Deutsche
Bank - CMBS loan with proceeds from the Fountain Place Office Property
transaction and a draw on the Company's revolving credit facility. 

UNDEVELOPED LAND

      On August 16, 2004, the Company sold approximately 2.5 acres of
undeveloped land located in Houston, Texas. The sale generated proceeds, net of
selling costs, of approximately $6.4 million and a note receivable in the amount
of $5.6 million. The note provides for payments of principal of $0.5 million due
in December 2004, annual installments of $1.0 million each due beginning August
2005 through August 2008, and $1.1 million due at maturity in August 2009 and
does not bear interest. The Company recognized a net gain of approximately $7.6
million included in the "Income from investment land sales, net" line item in
the accompanying Consolidated Statements of Operations. The proceeds were used
to pay down the Company's credit facility.

RESIDENTIAL DEVELOPMENT

      During the quarter ended September 30, 2004, the Sonoma Club was
demolished in order to begin construction on a new clubhouse. Accordingly, the
Company recorded an impairment charge of approximately $2.5 million, net of
income tax, included in the "Impairment charges related to real estate assets"
line item in the accompanying Consolidated Statements of Operations.

                                       21


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.    TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

      As of September 30, 2004, AmeriCold Logistics, LLC owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"). As
sole lessee of the Temperature-Controlled Logistics Properties, AmeriCold
Logistics leased the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended. The Company has an indirect 40% ownership interest in the
Temperature-Controlled Logistics Corporation. The Company has no interest in
COPI or AmeriCold Logistics. 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.

      Under terms of the leases, AmeriCold Logistics elected to defer $40.0
million of the total $120.4 million of rent payable for the nine months ended
September 30, 2004. The Company's share of the deferred rent was $16.0 million.
The Company recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $16.0 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the nine months ended September 30, 2004. As of September 30,
2004, the Temperature-Controlled Logistics Corporation's deferred rent and
valuation allowance from AmeriCold Logistics were $122.4 million and $114.4
million, respectively, of which the Company's portions were $49.0 million and
$45.8 million, respectively.

      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 Company.

      See Note 17, "Subsequent Events," for information regarding the purchase
by the Temperature-Controlled Logistics Corporation of all the ownership
interests in AmeriCold Logistics, the termination of the three triple-net master
leases, and the agreement to sell an interest in the Temperature-Controlled
Logistics Corporation to the Yucaipa Companies.

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

      On January 20, 2004, VCQ purchased $6.1 million of trade receivables from
Americold Logistics at a 2% discount. VCQ used cash from a $6.0 million
contribution from its owners, of which approximately $2.4 million represented
the Company's contribution for the purchase of the trade receivables. The
receivables were collected during the first quarter of 2004. On March 29, 2004,
VCQ purchased an additional $4.1 million of receivables from AmeriCold Logistics
at a 2% discount. VCQ used cash from collection of the trade receivables
previously purchased. The remaining $2.0 million was distributed to its owners,
of which $0.8 million was received by the Company on April 1, 2004. On July 2,
2004 and September 29, 2004, VCQ purchased an additional $6.0 million and $5.6
million, respectively, of receivables from AmeriCold Logistics at a 2%
discount, using cash from collection of the trade receivables previously
purchased.

       See Note 17, "Subsequent Events," for information regarding the purchase
by the Temperature-Controlled Logistics Corporation of all of the ownership 
interests in VCQ.


                                       22

                     CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.    INVESTMENTS IN UNCONSOLIDATED COMPANIES

      The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of September 30, 2004.



                                                                                                  COMPANY'S OWNERSHIP
                       ENTITY                                       CLASSIFICATION              AS OF SEPTEMBER 30, 2004
----------------------------------------------------     -----------------------------------    ------------------------
                                                                                          
Main Street Partners, L.P.                               Office (Bank One Center-Dallas)                 50.0% (1)
Crescent Miami Center, L.L.C.                            Office (Miami Center - Miami)                   40.0% (2)
Crescent Five Post Oak Park L.P.                         Office (Five Post Oak - Houston)                30.0% (3)
Crescent One BriarLake Plaza, L.P.                       Office (BriarLake Plaza - Houston)              30.0% (4)
Crescent 5 Houston Center, L.P.                          Office (5 Houston Center-Houston)               25.0% (5)
Austin PT BK One Tower Office Limited Partnership        Office (Bank One Tower-Austin)                  20.0% (6)
Houston PT Three Westlake Office Limited Partnership     Office (Three Westlake Park - Houston)          20.0% (6)
Houston PT Four Westlake Office Limited Partnership      Office (Four Westlake Park-Houston)             20.0% (6)
Vornado Crescent Carthage and KC Quarry, L.L.C.          Temperature-Controlled Logistics                56.0% (7)
Vornado Crescent Portland Partnership                    Temperature-Controlled Logistics                40.0% (8)
Blue River Land Company, L.L.C.                          Other                                           50.0% (9)
Canyon Ranch Las Vegas, L.L.C.                           Other                                           50.0% (10)
EW Deer Valley, L.L.C.                                   Other                                           41.7% (11)
CR License, L.L.C.                                       Other                                           30.0% (12)
CR License II, L.L.C.                                    Other                                           30.0% (13)
SunTx Fulcrum Fund, L.P.                                 Other                                           23.5% (14)
SunTx Capital Partners, L.P.                             Other                                           14.4% (15)
G2 Opportunity Fund, L.P. ("G2")                         Other                                           12.5% (16)


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

(1)   The remaining 50% interest in Main Street Partners, L.P. is owned by
      Trizec Properties, Inc.

(2)   The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by an
      affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.

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

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

(5)   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.

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

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

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

(9)   The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
      parties unrelated to the Company. Blue River Land Company, L.L.C. was
      formed to acquire, develop and sell certain real estate property in Summit
      County, Colorado.

(10)  Of the remaining 50% interest in Canyon Ranch Las Vegas, L.L.C., 35% is
      owned by an affiliate of the management company of two of the Company's
      Resort/Hotel Properties and 15% is owned by the Company through its
      investment in CR License II, L.L.C. Canyon Ranch Las Vegas, L.L.C.
      operates a Canyon Ranch spa in a hotel in Las Vegas.

(11)  The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
      unrelated to the Company. 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. Empire Mountain Village, L.L.C. was formed to acquire,
      develop and sell certain real estate property at Deer Valley Ski Resort
      next to Park City, Utah.

(12)  The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
      of the management company of two of the Company's Resort/Hotel Properties.
      CR License, L.L.C. owns the licensing agreement related to certain Canyon
      Ranch trade names and trademarks.

(13)  The remaining 70% interest in CR License II, L.L.C is owned by an
      affiliate of the management company of two of the Company's Resort/Hotel
      Properties. CR License II, L.L.C. and its wholly-owned subsidiaries
      provide management and development consulting services to a variety of
      entities in the hospitality, real estate, and health and wellness
      industries.

(14)  Of the remaining 76.5% of SunTx Fulcrum Fund, L.P., 37.1% is owned by
      SunTx Capital Partners, L.P. and the remaining 39.4% is owned by a group
      of individuals unrelated to the Company. SunTx Fulcrum Fund, L.P.'s
      objective is to invest in a portfolio of acquisitions that offer the
      potential for substantial capital appreciation.

(15)  SunTx Capital Partners, L.P. is the general Partner of the SunTx Fulcrum
      Fund, L.P. The remaining 85.6% interest in SunTx Capital Partners, L.P. is
      owned by parties unrelated to the Company.

(16)  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 Company. G2 is managed and
      controlled by an entity that is owned equally by GMSPLP and GMAC
      Commercial Mortgage Corporation ("GMACCM"). 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. The remaining approximately 2% general
      partnership interest is owned by unrelated parties.

                                       23


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY FINANCIAL INFORMATION

      The Company reports its share of income and losses based on its ownership
interest in its respective equity investments, adjusted for any preference
payments. The unconsolidated entities that are included under the headings on
the following tables are summarized below.

      Balance Sheets as of September 30, 2004:

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

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

            -     Other - This includes Blue River Land Company, L.L.C., EW Deer
                  Valley, L.L.C., CR License, L.L.C., CR License II, L.L.C.,
                  Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum Fund, L.P.,
                  SunTx Capital Partners, L.P. and G2.

      Balance Sheets as of December 31, 2003:

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

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

            -     Other - This includes Blue River Land Company, L.L.C., EW Deer
                  Valley, L.L.C., CR License, L.L.C., CR License II, L.L.C.,
                  Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum Fund, L.P. and
                  G2.

      Summary Statements of Operations for the nine months ended September 30,
2004:

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

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

            -     Other - This includes Blue River Land Company, L.L.C., EW Deer
                  Valley, L.L.C., CR License, L.L.C., CR License II, L.L.C.,
                  Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum Fund, L.P.,
                  SunTx Capital Partners, L.P. and G2.

      Summary Statements of Operations for the nine months ended September 30,
2003:

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

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

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

            -     Other - This includes Manalapan Hotel Partners, L.L.C., Blue
                  River Land Company, L.L.C., CR License, L.L.C., CR License II,
                  L.L.C., the Woodlands Operating Company and Canyon Ranch Las
                  Vegas, L.L.C., SunTx Fulcrum Fund, L.P. and G2.

                                       24



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BALANCE SHEETS:



                                                      AS OF SEPTEMBER 30, 2004
                                       ------------------------------------------------------
                                                       TEMPERATURE-
                                                        CONTROLLED
         (in thousands)                  OFFICE         LOGISTICS        OTHER       TOTAL
-------------------------------        ----------      ------------    --------    ----------
                                                                       
Real estate, net                       $  742,629      $  1,147,614
Cash                                       31,473            19,378
Other assets                               63,230           114,121
                                       ----------      ------------
   Total assets                        $  837,332      $  1,281,113
                                       ==========      ============

Notes payable                          $  493,249      $    773,292
Notes payable to the Company                    -                 -
Other liabilities                          44,448             7,014
Equity                                    299,635           500,807
                                       ----------      ------------
   Total liabilities and equity        $  837,332      $  1,281,113
                                       ==========      ============

Company's share of
   unconsolidated debt                 $  161,748      $    309,318    $  1,402    $  472,468
                                       ==========      ============    ========    ==========

Company's investments in
   unconsolidated companies            $  107,671      $    205,971    $ 43,308    $  356,950
                                       ==========      ============    ========    ==========


BALANCE SHEETS:



                                                      AS OF DECEMBER 31, 2003
                                       ------------------------------------------------------
                                                       TEMPERATURE-
                                                        CONTROLLED
         (in thousands)                  OFFICE         LOGISTICS        OTHER       TOTAL
-------------------------------        ----------      ------------    --------    ----------
                                                                       
Real estate, net                       $  754,882      $  1,187,387
Cash                                       31,309            12,439
Other assets                               51,219            88,668
                                       ----------      ------------
   Total assets                        $  837,410      $  1,288,494
                                       ==========      ============

Notes payable                          $  515,047      $    548,776
Notes payable to the Company                    -                 -
Other liabilities                          29,746            11,084
Equity                                    292,617           728,634
                                       ----------      ------------
   Total liabilities and equity        $  837,410      $  1,288,494
                                       ==========      ============

Company's share of
   unconsolidated debt                 $  172,376      $    219,511    $  2,495    $  394,382
                                       ==========      ============    ========    ==========

Company's investments in
   unconsolidated companies            $   99,139      $    300,917    $ 40,538    $  440,594
                                       ==========      ============    ========    ===========


                                       25



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:



                                             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
                                       -------------------------------------------------------
                                                        TEMPERATURE-
                                                         CONTROLLED
             (in thousands)                  OFFICE      LOGISTICS      OTHER           TOTAL
---------------------------------------    ----------   ------------  ----------      --------
                                                                          
Total revenues                             $   97,178   $  88,276
Expenses:
   Operating expense                           49,609      18,661 (2)
   Interest expense                            22,592      38,351
   Depreciation and amortization               22,175      43,666
   Taxes and other (income) expense               113      (3,377)
                                           ----------   ---------
Total expenses                             $   94,489   $  97,301
                                           ----------   ---------

Net income, impairments and gain (loss)
   on real estate from discontinued
   operation                               $    2,689   $  (9,025)
                                           ==========   =========

Company's equity in net income (loss)
   of unconsolidated companies             $    3,871   $  (4,514)    $   (1,728)     $ (2,371)
                                           ==========   =========     ==========      ========


SUMMARY STATEMENTS OF OPERATIONS:



                                             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
                                       -------------------------------------------------------
                                                                      THE WOODLANDS
                                                                          LAND
                                                        TEMPERATURE-   DEVELOPMENT
                                                         CONTROLLED      COMPANY,
             (in thousands)                  OFFICE      LOGISTICS       L.P.(1)       OTHER        TOTAL
---------------------------------------    ----------   ------------  -------------   --------    ----------
                                                                                   
Total revenues                             $  107,601   $  90,722       $   82,644
Expenses:
   Operating expense                           41,934      18,322 (2)       63,950
   Interest expense                            20,486      30,853            5,174
   Depreciation and amortization               24,326      43,963            5,235
   Taxes and other (income) expense                 -      (1,389)               -
                                           ----------   ---------       ----------
Total expenses                             $   86,746   $  91,749       $   74,359
                                           ----------   ---------       ----------

     Gain on sale of properties                     -       1,452                -
                                           ----------   ---------       ----------

Net income, impairments and gain (loss)
   on real estate from discontinued
   operations                              $   20,855   $     425       $    8,285
                                           ==========   =========       ==========

Company's equity in net income (loss)
   of unconsolidated companies             $    9,981   $     152       $    4,350    $    242    $   14,725
                                           ==========   =========       ==========    ========    ==========


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

(1)   The Company sold its interest in The Woodlands Land Development Company,
      L.P. on December 31, 2003.

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

                                       26


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

            The following table shows, as of September 30, 2004, information
about the Company's share of unconsolidated fixed and variable rate debt and
does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.



                                                              COMPANY
                                              BALANCE         SHARE OF
                                           OUTSTANDING AT    BALANCE AT     INTEREST RATE AT
                                           SEPTEMBER 30,    SEPTEMBER 30,     SEPTEMBER 30,                         FIXED/VARIABLE
               DESCRIPTION                     2004             2004              2004            MATURITY DATE    SECURED/UNSECURED
-----------------------------------------  --------------   -------------   ----------------  -------------------- -----------------
                                           (in thousands)
                                                                                                    
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
   Vornado Crescent-Portland Partnership
    - 40% Company
      Goldman Sachs (1)                     $   486,770      $  194,708          6.89%              5/11/2023       Fixed/Secured
      Morgan Stanley (2)                        251,457         100,583          4.71%              4/9/2009        Variable/Secured
      Various Capital Leases                     35,015          14,007      4.84 to 13.63%   6/1/2006 to 4/1/2017  Fixed/Secured
      Bank of New York                               50              20         12.88%              5/1/2008        Fixed/Secured
                                            -----------      ----------
                                                773,292         309,318
                                            -----------      ----------
OFFICE SEGMENT:
   Main Street Partners, L.P. - 50%
     Company (3)(4)(5)                          109,662          54,831          4.76%              12/1/2004       Variable/Secured
   Crescent 5 Houston Center, L.P. - 25%
     Company                                     90,000          22,500          5.00%              10/1/2008       Fixed/Secured
   Crescent Miami Center, LLC - 40%
     Company                                     81,000          32,400          5.04%              9/25/2007       Fixed/Secured
   Crescent One BriarLake Plaza, L.P. -
     30% Company                                 50,000          15,000          5.40%              11/1/2010       Fixed/Secured
   Houston PT Four Westlake Office
     Limited Partnership - 20% Company           47,580           9,516          7.13%              8/1/2006        Fixed/Secured
   Crescent Five Post Oak Park, L.P. -
     30% Company                                 45,000          13,500          4.82%              1/1/2008        Fixed/Secured
   Austin PT BK One Tower Office Limited
     Partnership - 20% Company                   37,007           7,401          7.13%              8/1/2006        Fixed/Secured
   Houston PT Three Westlake Office
     Limited Partnership - 20% Company           33,000           6,600          5.61%              9/1/2007        Fixed/Secured
                                            -----------      ----------
                                                493,249         161,748
                                            ------------     ----------
RESIDENTIAL SEGMENT:

   Blue River Land Company, L.L.C. - 50%
      Company (6)                                 2,804           1,402          4.84%             12/31/2004       Variable/Secured
                                            -----------      ----------
TOTAL UNCONSOLIDATED DEBT                   $ 1,269,345      $  472,468
                                            ===========      ==========
FIXED RATE/WEIGHTED AVERAGE                                                      6.62%             13.3 years
VARIABLE RATE/WEIGHTED AVERAGE                                                   4.73%              3.0 years
                                                                             --------------   --------------------
TOTAL WEIGHTED AVERAGE                                                           5.99%              9.9 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 3.6 years based on this date.

(2)   The loan bears interest at LIBOR + 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. In connection with this loan, the
      Temperature-Controlled Logistics Corporation entered into an interest-rate
      cap agreement with a maximum LIBOR of 6.5% on the entire loan.

(3)   Senior Note - Note A: $81.1 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: $23.8 million at variable
      interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%. In
      connection with this loan, the Company entered into an interest-rate cap
      agreement with a maximum LIBOR of 4.52% on all notes. All notes are
      amortized based on a 25-year schedule. In August 2004, the Company
      contributed cash of approximately $9.6 million to Main Street Partners,
      L.P. Main Street Partners, L.P. used this cash, along with an equal cash
      contribution from the joint venture partner, to pay off approximately
      $19.1 million of the Mezzanine Note with Deutsche Bank due in December
      2004. The Company and the joint venture partners have entered into an
      extension letter to extend the maturity to December 1, 2005.

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

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

(6)   The variable rate loan has an interest rate of LIBOR + 300 basis points. A
      fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides an
      unconditional guarantee of up to 70% of the outstanding balance of up to a
      $9.0 million loan to Blue River Land Company, L.L.C. There was
      approximately $2.8 million outstanding at September 30, 2004 and the
      amount guaranteed was approximately $2.0 million.

                                       27



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

      The following is a summary of the Company's debt financing at September
30, 2004:

SECURED DEBT



                                                                                                                  SEPTEMBER 30, 2004
                                                                                                                  ------------------
                                                                                                                    (in thousands)
                                                                                                               
AEGON Partnership Note 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
(Greenway Plaza)...............................................................................................      $  256,017

LaSalle Note I(1) due August 2027, bears interest at 7.83% with monthly principal and interest
payments based on a 25-year amortization schedule, secured by the Funding I Properties.........................         232,673

Bank of America Fund XII Term Loan due January 2006, bears interest at LIBOR plus 225 basis points (at
September 30, 2004, the interest rate was 3.93%), with a two-year interest-only term and a one-year extension
option, secured by the Funding XII Properties..................................................................         226,035

JP Morgan Mortgage Note(2) bears interest at 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 ..............................................................................................         187,922

Fleet Fund I Term Loan due May 2005, bears interest at LIBOR plus 350 basis points (at September 30, 2004, the
interest rate was 5.15%), with a four-year interest-only term, secured by equity interests in Funding I........         160,000

LaSalle Note II bears interest at 7.79% with monthly principal and interest payments based on a 25-year
Amortization schedule through maturity in March 2006, secured by defeasance investments (3)....................         158,030

Lehman Capital Note (4) due March 2005, bears interest at the 30-day LIBOR rate plus 150 basis points (at
September 30, 2004, the interest rate was 3.26%), with a nine-month interest-only term, secured by the
Fountain Place Office Property.................................................................................          90,000

Fleet Term Loan due February 2007, bears interest at LIBOR rate plus 450 basis points (at September 30, 2004,
the interest rate was 6.21%) with an interest-only term, secured by excess cash flow distributions from
Funding III, Funding IV and Funding V..........................................................................          75,000

Cigna Note due June 2010, bears interest at 5.22% with an interest-only term, secured by the 707 17th Street
Office Property and the Denver Marriott City Center............................................................          70,000

Wachovia Securities(5) due November 2005, bears interest at LIBOR plus 275 basis points (at September 30,
2004, the interest rate was 4.51%) with an interest-only term, secured by the Alhambra Office Property.........          45,000

Bank of America Note 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

Mass Mutual Note(6) due August 2006, bears interest at 7.75% with principal and interest payments based
on a 25-year amortization schedule, secured by the 3800 Hughes Parkway Office Property.........................          37,315

Metropolitan Life Note V 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................          37,006

Metropolitan Life Note VII due May 2011, bears interest at 4.31% with monthly interest-only payments based on a
25-year amortization schedule, secured by the Dupont Centre Office Property....................................          35,500


                                       28



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURED DEBT (CONTINUED)



                                                                                                                  SEPTEMBER 30, 2004
                                                                                                                  ------------------
                                                                                                                    (in thousands)
                                                                                                               
National Bank of Arizona Revolving Line of Credit(7) with maturities ranging from November 2004 to
December 2005, bears interest at prime rate plus 0 to 100 basis points (at September 30, 2004,
the interest rate was 4.75% to 5.75%) secured by certain DMDC assets...........................................          31,041

Northwestern Life Note due November 2008, bears interest at 4.94% with an interest-only term, secured by the
301 Congress Avenue Office Property............................................................................          26,000

Allstate Note(6) due September 2010, bears interest at 6.65% with principal and interest payments based on a
25-year amortization schedule, secured by the 3993 Hughes Parkway Office Property..............................          25,687

JP Morgan Chase Note due September 2011, bears interest at 4.98% with an interest-only term, secured by the
3773 Hughes Parkway Office Property............................................................................          24,755

Metropolitan Life Note VI(6) due October 2009, bears interest at 7.71% with principal and interest payments
based on a 25-year amortization schedule, secured by the 3960 Hughes Parkway Office Property...................          24,142

JP Morgan Chase Note I due September 2011, bears interest at 4.98% with an interest-only term, secured by the
3753 and 3763 Hughes Parkway Office Properties.................................................................          14,350

Northwestern Life Note II(6) due July 2007, bears interest at 7.40% with monthly principal and interest
payments based on a 25-year amortization schedule, secured by the 3980 Howard Hughes Parkway Office Property...          10,310

FHI Finance Loan bears interest at LIBOR plus 450 basis points (at September 30, 2004, the interest rate was
6.17%), with an initial interest-only term until the Net Operating Income Hurdle Date(8), 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 ................................................................          10,000

Woodmen of the World Note 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

Texas Capital Bank(9) pre-construction line of credit due July 2006, bears interest at LIBOR plus 225 basis
points (at September 30, 2004, the interest rate was 4.09%) with principal and interest payments based
on a 25-year amortization schedule, secured by land underlying development project.............................           7,977

Nomura Funding VI Note(10) due July 2020 bears interest at 10.07% with monthly principal and interest payments
based on a 25-year amortization schedule, secured by the Funding VI Property...................................           7,709

The Rouse Company Note due December 2005 bears interest at prime rate plus 100 basis points (at September 30,
2004, the interest rate was 5.75%) with an interest-only term, secured by undeveloped land
at Hughes Center...............................................................................................           7,500

Wells Fargo Note due November 2004, bears interest at LIBOR rate plus 200 basis points (at September 30, 2004, 
the interest rate was 3.88%) with an interest-only term, secured by 3770 Howard Hughes 
Parkway Office Property........................................................................................           4,774

Construction, acquisition and other obligations, bearing fixed and variable interest rates ranging from
2.9% to 10.5% at September 30, 2004, with maturities ranging between October 2004 and February 2009, secured
by various CRDI and MVDC projects(11) .........................................................................          72,148


                                       29



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                                                                  SEPTEMBER 30, 2004
                                                                                                                  ------------------
                                                                                                                    (in thousands)
                                                                                                               
UNSECURED DEBT

2009 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

2007 Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only term, due September 2007.......         250,000

Credit Facility (12) interest-only due May 2005, bears interest at LIBOR plus 212.5 basis points (at
September 30, 2004, the interest rate was 3.82%)...............................................................         307,500
                                                                                                                     ----------
   Total Notes Payable                                                                                               $2,855,891
                                                                                                                     ==========


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

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

(3)   In December 2003 and January 2004, the Company purchased a total of $179.6
      million in U.S. Treasuries and government sponsored agency securities
      ("defeasance investments") to substitute as collateral for this loan. The
      cash flow from the defeasance investments (principal and interest) match
      the total debt service payments of this loan.

(4)   The Company's obligations under this loan were transferred to FP Investors
      L.L.C. as part of the transaction in connection with the Fountain Place
      Office Property. See Note 6, "Other Transactions," for further information
      regarding this transaction.

(5)   Includes two notes from Wachovia Securities. The notes are due November
      2005, and bear interest at the LIBOR rate plus a spread of (i) 100.5 basis
      points for a $31 million Wachovia note (at September 30, 2004, the
      interest rate was 2.765%), and (ii) 661.0 basis points for a $14 million
      Wachovia note (at September 30, 2004, the interest rate was 8.37%). Both
      notes are secured by The Alhambra Office Property. The blended rate at
      September 30, 2004 for both notes was 4.51%. In October 2004, the Company
      refinanced this loan with a $50.0 million loan from Morgan Stanley for a
      7-year interest-only term at a fixed rate of 5.06%.

(6)   The Company assumed these loans in connection with the Hughes Center
      acquisitions. The following table lists the unamortized premium associated
      with the assumption of above market interest rate debt which is included
      in the balance outstanding at September 30, 2004 and the effective
      interest rate of the debt including the premium.



(dollars in thousands)
-------------------------------------------------------------------
                                    Unamortized
       Loan                            Premium       Effective Rate
-------------------------------------------------------------------
                                               
Mass Mutual Note                      $  2,648            3.47%
Allstate Note                            1,522            5.19%
Metropolitan Life Note VI                2,032            5.68%
Northwestern Life Note II                  872            3.80%
                                      --------
     Total                            $  7,074
                                      ========


      The premium was recorded as an increase in the carrying amount of the
      underlying debt and is being amortized as a reduction of interest expense
      through maturity of the underlying debt.

(7)   This facility is a $35.6 million line of credit secured by certain DMDC
      land and asset improvements ("revolving credit facility"), notes
      receivable ("warehouse facility") and additional land ("short-term
      facility"). The line restricts the revolving credit facility to a maximum
      outstanding amount of $24.0 million and is subject to certain borrowing
      base limitations and bears interest at prime (at September 30, 2004, the
      interest rate was 4.75%). The warehouse facility bears interest at prime
      plus 100 basis points (at September 30, 2004, the interest rate was 5.75%)
      and is limited to $10.0 million. The short-term facility bears interest
      from prime plus 50 basis points to prime plus 100 basis points (at
      September 30, 2004, the interest rates were 5.25% to 5.75%) and is limited
      to $1.6 million. The blended rate at September 30, 2004, for the revolving
      credit facility, the warehouse facility and the short-term facility was
      5.06%.

(8)   The Company's joint venture partner, which owns a 19.9% interest in the
      Sonoma Mission Inn & Spa, had funded $10.0 million of 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.

(9)   This facility is a $10.5 million pre-construction development line of
      credit secured by land underlying the development project located in
      Dallas, Texas.

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

(11)  Includes $4.3 million of fixed rate debt ranging from 2.9% to 10.5% and
      $67.8 million of variable rate debt ranging from 3.87% to 5.75%.

(12)  The $400.0 million Credit Facility with Fleet is an unsecured revolving
      line of credit to Funding VIII and guaranteed by the Operating
      Partnership. Availability under the line of credit is subject to certain
      covenants including limitations on total leverage, fixed charge ratio,
      debt service coverage, minimum tangible net worth, and specific mix of
      office and hotel assets and average occupancy of Office Properties. At
      September 30, 2004, the maximum borrowing capacity under the credit
      facility was $399 million. The outstanding balance excludes letters of
      credit issued under the Company's credit facility of $7.6 million which
      reduce the Company's maximum borrowing capacity.

                                       30



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On June 28, 2004, the Company paid off the $220.0 million Deutsche
Bank-CMBS loan with proceeds from the Fountain Place transaction and a draw on
the Company's credit facility. See Note 6, "Other Transactions," for additional
information regarding the Fountain Place transaction. The loan was secured by
the Funding X Properties and Spectrum Center. In July 2004, the Company unwound
the $220.0 million interest rate cap with JP Morgan Chase that corresponded to
this loan.

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



                                                                                        WEIGHTED
                                                                 PERCENTAGE              AVERAGE           WEIGHTED AVERAGE
   (in thousands)                      BALANCE                   OF DEBT (1)              RATE               MATURITY (1)
---------------------             ------------------             -----------            --------           ----------------
                                                                                               
Fixed Rate Debt                   $        1,823,238                  64%               7.76%                 7.4 years
Variable Rate Debt(2)                      1,032,653                  36                4.30                  1.1 years
                                  ------------------                 ---                ----                  ---------
Total Debt                        $        2,855,891                 100%               6.52%(3)              4.8 years
                                  ==================                 ===                ====                  =========


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

(1)   Based on contractual maturity and does not include an extension option on
      Bank of America Fund XII term loan or expected early payment of LaSalle
      Note I, J.P. Morgan Mortgage Note, or the Nomura Funding VI Note.

(2)   Balance excludes hedges. The percentages for fixed and variable rate debt,
      including the $428 million of hedged variable rate debt, are 79% and 21%,
      respectively.

(3)   Including the effect of hedge arrangements, the overall weighted average
      interest rate would have been 6.78%.

      Listed below are the aggregate principal payments by year required as of
September 30, 2004 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included and are based on
contractual maturities and do not include extension options.



                               SECURED       UNSECURED  UNSECURED DEBT
(in thousands)                  DEBT           DEBT     LINE OF CREDIT     TOTAL(1)
--------------              ------------    ----------  --------------  -------------
                                                            
2004                        $     21,274    $        -    $             $      21,274
2005                             422,277                      307,500         729,777
2006                             460,288             -                        460,288
2007                             112,193       250,000                        362,193
2008                              47,321             -                         47,321
Thereafter                       860,038       375,000                      1,235,038
                            ------------    ----------    -----------   -------------
                            $  1,923,391    $  625,000    $   307,500   $   2,855,891
                            ============    ==========    ===========   =============


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

(1)   Based on contractual maturity and does not include extension option on
      Bank of America Fund XII term loan or expected early payment of LaSalle
      Note I, J.P. Morgan Mortgage Note, or the Nomura Funding VI Note.

      The Company is generally obligated by its debt agreements to comply with
financial covenants, affirmative covenants and negative covenants, or some
combination of these types of covenants. 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 Company's loans can trigger an
increase in interest rates, an acceleration of payment on the loan in default,
and for the Company's secured debt, foreclosure on the property securing the
debt. In addition, a default by the Company or any of its subsidiaries with
respect to any indebtedness in excess of $5.0 million generally will result in a
default under the Credit Facility, 2007 Notes, 2009 Notes, the Bank of America
Fund XII Term Loan, the Fleet Fund I Term Loan and the Fleet Term Loan after the
notice and cure periods for the other indebtedness have passed. As of September
30, 2004, no event of default had occurred, and the Company was in compliance
with all covenants related to its outstanding debt. The Company's debt
facilities generally prohibit loan pre-payment for an initial period, allow
pre-payment with a penalty during a following specified period and allow
pre-payment without penalty after the expiration of that period. During the nine
months ended September 30, 2004, there were no circumstances that required
prepayment or increased collateral related to the Company's existing debt.

DEFEASANCE OF LASALLE NOTE II

      In January 2004, the Company released the remaining properties in Funding
II by reducing the Fleet Fund I and II Term Loan by $104.2 million and
purchasing an additional $170.0 million of U.S. Treasury and government
sponsored agency securities with an initial weighted average yield of 1.76%. The
Company placed those securities into a collateral

                                       31



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

account for the sole purpose of funding payments of principal and interest on
the remainder of the LaSalle Note II. The cash flow from the securities is
structured to match the cash flow (principal and interest payments) required
under the LaSalle Note II. The retirement of the Fleet loan and the purchase of
the defeasance securities were funded through the $275 million Bank of America
Fund XII Term Loan. The collateral for the Bank of America loan was 10 of the 11
properties previously in the Funding II collateral pool. The Bank of America
loan is structured to allow the Company the flexibility to sell, joint venture
or long-term finance these 10 assets over the next 36 months. The final Funding
II property, Liberty Plaza, was moved to the Operating Partnership and
subsequently sold in April 2004.

      In addition to the subsidiaries listed in Note 1, "Organization and Basis
of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate, are: Funding I Properties
(CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent Funding Interest,
LLC, CRE Management I 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); Funding XII Properties (CREF XII Parent
GP, LLC, CREF XII Parent L.P., CREF XII Holding GP, LLC, CREF Holdings, L.P.,
CRE Management XII, 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.

10.   CASH FLOW HEDGES

      The Company uses derivative financial instruments to convert a portion of
its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of September 30, 2004, the Company had three cash flow hedge
agreements which are accounted for in conformity with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133."

      The following table shows information regarding the Company's interest
rate swaps designated as cash flow hedge agreements during the nine months ended
September 30, 2004, and additional interest expense and unrealized gains
(losses) recorded in Accumulated Other Comprehensive Income ("OCI").



                                                                                                                CHANGE IN
                    NOTIONAL        MATURITY    REFERENCE    FAIR MARKET        ADDITIONAL INTEREST          UNREALIZED GAINS
EFFECTIVE DATE       AMOUNT           DATE        RATE          VALUE                 EXPENSE                (LOSSES) IN OCI
--------------      ---------       --------    ---------    -----------        -------------------          ----------------
(in thousands)
                                                                                           
   4/18/00          $ 100,000       4/18/04       6.76%      $        -              $   1,712                   $  1,695
   2/15/03            100,000       2/15/06       3.26%            (931)                 1,531                      1,415
   2/15/03            100,000       2/15/06       3.25%            (927)                 1,529                      1,413
   9/02/03            200,000       9/01/06       3.72%          (3,475)                 3,786                      3,122
                                                             ----------              ---------                   --------
                                                             $   (5,333)                 8,558                   $  7,645
                                                             ==========              =========                   ========


      In addition, two of the Company's unconsolidated companies have cash flow
hedge agreements of which the Company's portion of change in unrealized gains
reflected in OCI was approximately $0.6 million for the nine months ended
September 30, 2004.

      The Company has designated its 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 OCI. The effective portion that has been deferred in
OCI will be reclassified to earnings as interest expense when the hedged items
impact earnings. If a cash flow hedge falls outside 80%-125% effectiveness for a
quarter, all changes in the fair value of the cash flow hedge for the quarter
will be recognized in earnings during the current period. If it is determined
based on prospective testing that it is no longer likely a hedge will be highly
effective on a prospective basis, the hedge will no longer be designated as a
cash flow hedge in conformity with SFAS No. 133, as amended. The Company had no
ineffectiveness related to its cash flow hedges, resulting in no earnings impact
due to ineffectiveness for the nine months ended September 30, 2004.

                                       32



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTEREST RATE CAP

      In March 2004, in connection with the Bank of America Fund XII Term Loan,
the Company entered into a LIBOR interest rate cap struck at 6.00% for a
notional amount of approximately $206.3 million through August 31, 2004, $137.5
million from September 1, 2004 through February 28, 2005, and $68.8 million from
March 1, 2005 through March 1, 2006. Simultaneously, the Company sold a LIBOR
interest rate cap with the same terms. Since these instruments do not reduce the
Company's net interest rate risk exposure, they do not qualify as hedges and
changes to their respective fair values are charged to earnings as the changes
occur. As the significant terms of these arrangements are the same, the effects
of a revaluation of these instruments are expected to offset each other.

11.   COMMITMENTS AND CONTINGENCIES

GUARANTEE COMMITMENTS

      The FASB issued Interpretation 45, "Guarantors' Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), requiring a guarantor to disclose its guarantees. The
Company's guarantees in place as of September 30, 2004 are listed in the table
below. For the guarantees on indebtedness, no triggering events or conditions
are anticipated to occur that would require payment under the guarantees and
management believes the assets associated with the loans that are guaranteed are
sufficient to cover the maximum potential amount of future payments and
therefore, would not require the Company to provide additional collateral to
support the guarantees. The Company has recorded a liability, in an amount not
significant to its operations, for guarantees entered into following the
adoption of FIN 45.



                                                                        GUARANTEED
                                                                          AMOUNT                 MAXIMUM
                                                                      OUTSTANDING AT            GUARANTEED
                         DEBTOR                                     SEPTEMBER 30, 2004            AMOUNT
--------------------------------------------------------------      ------------------          ----------
                                                                                   (in thousands)
                                                                                          
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1)         $     7,583             $    7,583
Blue River Land Company, L.L.C.(2) (3)                                        1,963                  6,300
Main Street Partners, L.P. - Letter of Credit (2) (4)                         4,250                  4,250
Sovereign Bank  (5)                                                           3,654                  3,654
                                                                        -----------             ----------
Total Guarantees                                                        $    17,450             $   21,787
                                                                        ===========             ==========


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

(1)   The Company provides a $7.6 million letter of credit to support the
      payment of interest and principal of the Eagle Ranch Metropolitan District
      Revenue Development Bonds.

(2)   See Note 8, "Investments in Unconsolidated Companies," for a description
      of the terms of this debt.

(3)   A fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides an
      unconditional guarantee of up to 70% of the outstanding balance of up to a
      $9.0 million loan to Blue River Land Company, L.L.C. There was
      approximately $2.8 million outstanding at September 30, 2004 and the
      amount guaranteed was $2.0 million.

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

(5)   The Company provided guarantees for the repayment of up to $3.7 million of
      loans to Sovereign Bank in the event a final certificate of occupancy is
      not obtained for timeshare units sold at a residential development project
      at an entity which is consolidated into CRDI. The loans guaranteed
      represent third-party financing obtained by buyers of the units.

OTHER COMMITMENTS

      In 2003, the Company 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 Company received $0.01
million of consideration in 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. In September 2004, the Company received $0.01 million
of consideration to extend this option for an additional year.

      See Note 16, "COPI," for a description of the Company's commitments
related to the agreement with COPI, executed on February 14, 2002.

                                       33



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONTINGENCIES

      See Note 6, "Other Transactions," for information on the Company's $79.9
million contingent obligation included in the "Accounts payable, accrued
expenses and other liabilities" line item in the Company's Consolidated Balance
Sheet at September 30, 2004, related to the Fountain Place Office Property
transaction.

      The Company has a contingent obligation of approximately $1.0 million
related to a construction warranty matter. The Company believes it is probable
that a significant amount would be recovered through reimbursements from third
parties.

12.   MINORITY INTEREST

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

      Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the nine months ended September 30, 2004, there were 9,458
units exchanged for 18,916 common shares of the Company.

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

      The following table summarizes the minority interest as of September 30,
2004 and December 31, 2003:



                                                                               SEPTEMBER 30,       DECEMBER 31,
(in thousands)                                                                     2004                2003
--------------                                                                 -------------       ------------
                                                                                             
Limited partners in the Operating Partnership                                  $     83,304        $    108,706
Development joint venture partners - Residential Development Segment                 28,742              31,305
Joint venture partners - Office Segment                                               8,775               8,790
Joint venture partners - Resort/Hotel Segment                                         6,805               7,028
Other                                                                                  (185)                  -
                                                                               ------------        ------------
                                                                               $    127,441        $    155,829
                                                                               ============        ============


      The following table summarizes the minority interests' share of net loss
(income) for the nine months ended September 30, 2004 and 2003:



                                                                               SEPTEMBER 30,       SEPTEMBER 31,
(in thousands)                                                                     2004                2003
--------------                                                                 -------------       -------------
                                                                                             
Limited partners in the Operating Partnership                                  $      5,721        $         72
Development joint venture partners - Residential Development Segment                 (2,086)             (1,630)
Joint venture partners - Office Segment                                                  96                 367
Joint venture partners - Resort/Hotel Segment                                           840                 524
Other                                                                                    44                   -
                                                                               ------------        ------------
                                                                               $      4,615        $       (667)
                                                                               ============        ============


                                       34



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. SHAREHOLDERS' EQUITY

DISTRIBUTIONS

      The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the nine
months ended September 30, 2004 (dollars in thousands, except per share
amounts).



                                   PER SHARE                                              ANNUAL
                                   DIVIDEND/       TOTAL         RECORD      PAYMENT     DIVIDEND/
        SECURITY                 DISTRIBUTION      AMOUNT         DATE         DATE    DISTRIBUTION
-------------------------        ------------    ----------     --------     --------  ------------
                                                                        
Common Shares/Units (1)           $    0.375     $   43,910     01/31/04     02/13/04   $     1.50
Common Shares/Units (1)           $    0.375     $   43,921     04/30/04     05/14/04   $     1.50
Common Shares/Units (1)           $    0.375     $   43,892     07/30/04     08/13/04   $     1.50
Series A Preferred Shares         $    0.422     $    5,991     01/31/04     02/13/04   $   1.6875
Series A Preferred Shares         $    0.422     $    5,991     04/30/04     05/14/04   $   1.6875
Series A Preferred Shares         $    0.422     $    5,991     07/30/04     08/13/04   $   1.6875
Series B Preferred Shares         $    0.594     $    2,019     01/31/04     02/13/04   $   2.3750
Series B Preferred Shares         $    0.594     $    2,019     04/30/04     05/14/04   $   2.3750
Series B Preferred Shares         $    0.594     $    2,019     07/30/04     08/13/04   $   2.3750


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

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.

      Net proceeds to the Company from the January 2004 Series A Preferred
Offering were approximately $71.0 million after underwriting discounts, offering
costs and dividends accrued on the shares up to the issuance date. The Company
used the net proceeds to pay down the Company's credit facility.

14.   INCOME TAXES

TAXABLE CONSOLIDATED ENTITIES

      Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. For the nine months ended September 30, 2004, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Company.

      The Company intends to maintain its qualification as a REIT under Section
856 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, the Company generally will not be subject to federal corporate income
taxes as long as it satisfies certain technical requirements of the Code,
including the requirement to distribute 90% of REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the federal level or in
most of the states in which it operates. The Company consolidates certain
taxable REIT subsidiaries, which are subject to federal and state income tax.
For the nine months ended September 30, 2004 and 2003, the Company's federal
income tax benefit from continuing operations was $13.2 million and $10.3
million,

                                       35



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

respectively. The Company's $13.2 million income tax benefit at September 30,
2004 consists primarily of $10.4 million for the Residential Development Segment
and $5.7 million for the Resort/Hotel Segment partially offset by $1.3 million
tax expense for the Office Segment and $1.6 million expense for other taxable
REIT subsidiaries.

      The Company's total net tax asset of approximately $31.1 million at
September 30, 2004 includes $17.7 million of net deferred tax assets. SFAS No.
109, "Accounting for Income Taxes," requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. There was no change in the valuation allowance during the nine months
ended September 30, 2004.

15.   RELATED PARTY TRANSACTIONS

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

      As of September 30, 2004, the Company had approximately $38.0 million loan
balances outstanding, inclusive of current interest accrued of approximately
$0.3 million, to certain employees and trust managers of the Company on a
recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Trust Managers
and the Executive Compensation Committee of the Company. The proceeds of these
loans were used by the employees and the trust managers to acquire common shares
of the Company pursuant to the exercise of vested stock and unit options.
Pursuant to the loan agreements, these loans bear interest at a rate of 2.52%
per year, payable quarterly, and mature on July 28, 2012 and may be repaid in
full or in part at any time without premium or penalty. Mr. Goff had a loan
representing $26.4 million of the $38.0 million total outstanding loans at
September 30, 2004. No conditions exist at September 30, 2004 which would cause
any of the loans to be in default. Effective July 29, 2002, the Company ceased
offering to its employees and trust managers the option to obtain loans pursuant
to the Company's stock and unit incentive plans.

OTHER

      On June 28, 2002, the Company purchased the home of an executive officer
of the Company to facilitate the hiring and relocation of this executive
officer. The purchase price was approximately $2.6 million, consistent with a
third-party appraisal obtained by the Company. Shortly after the purchase of the
home, certain changes in the business environment in Houston resulted in a
weakened housing market. In May 2004, the Company completed the sale of the home
for proceeds, net of selling costs, of approximately $1.8 million. The Company
previously recorded an impairment charge of approximately $0.6 million, net of
taxes, during the year ended December 31, 2003. The purchase was part of the
officer's relocation agreement with the Company.

16.   COPI

      On February 14, 2002, the Company and COPI entered into an agreement (the
"Agreement") pursuant to which COPI and the Company agreed to jointly seek
approval by the bankruptcy court of a pre-packaged bankruptcy plan for COPI. The
Company agreed to fund certain of COPI's costs, claims and expenses relating to
the bankruptcy and related transactions. From February 14, 2002 through
September 30, 2004, the Company loaned to COPI, or paid directly on COPI's
behalf, approximately $13.2 million to fund these costs, claims and expenses,
$2.2 million of which was funded in the nine months ended September 30, 2004.
The Company also agreed to issue common shares with a minimum dollar value of
approximately $2.2 million to the COPI stockholders.

      In addition, the Company 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. COPI obtained the loan from
Bank of America primarily to participate in investments with the Company. As a
condition to making the loan, Bank of America required 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, to enter into a support agreement with COPI and Bank of America,
pursuant to which Messrs. Rainwater and Goff agreed to make additional equity
investments in COPI under certain circumstances. COPI has agreed that it will
use the proceeds of the sale of its interest in AmeriCold Logistics to repay
Bank of America in full.

      On March 10, 2003, COPI filed a plan under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Texas. On June 22, 2004, the bankruptcy court confirmed the bankruptcy plan,
as amended. Effectiveness of the pre-packaged bankruptcy plan for COPI is
contingent upon a number of conditions,

                                       36



                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

including the sale of COPI's interest in AmeriCold Logistics, the repayment of
COPI's obligation to Bank of America prior to November 22, 2004 and the issuance
by the Company of common shares to the COPI stockholders.

      On November 4, 2004, COPI sold its interest in AmeriCold Logistics for
approximately $19.1 million. In accordance with the confirmed bankruptcy plan,
COPI used approximately $15.4 million of the proceeds to repay the loan from
Bank of America, including accrued interest. In addition, in accordance with the
bankruptcy plan COPI used approximately $4.5 million of the proceeds to
satisfy a portion of its debt obligations to the Company. Since the Company
wrote off these debt obligations in 2001, the $4.5 million will be included in
"Interest and Other Income" in the Company's Consolidated Statement of
Operations for the year ended December 31, 2004. 

17.   SUBSEQUENT EVENTS

JOINT VENTURES

        On November 5, 2004, the Company entered into a joint venture with
affiliates of J.P. Morgan Fleming Asset Management, Inc. ("JPM") in connection
with which JPM will purchase a 60% interest in three Office Properties, The
Crescent, Houston Center and Post Oak Central, based on a valuation of $898.5
million. The Company initially will hold the remaining 40% interest and
anticipates a gain on the transaction.

         Under this joint venture, the Company will continue to manage and
lease the Office Properties on a fee basis. The Company anticipates the joint
venture will be accounted for under the equity method.

TEMPERATURE-CONTROLLED LOGISTICS

      On November 4, 2004, the Temperature-Controlled Logistics Corporation
purchased 100% of the ownership interests in its tenant, AmeriCold Logistics,
for approximately $47.7 million. In connection with this transaction, the three
triple-net master leases between the Temperature-Controlled Logistics
Corporation and AmeriCold Logistics were terminated and all deferred rent was
cancelled.

      On November 4, 2004, the Temperature-Controlled Logistics Corporation also
purchased 100% of the ownership interests in VCQ for approximately $24.8
million. The Temperature-Controlled Logistics Corporation used cash
contributions from its owners, of which the Company's 40% portion was
approximately $9.9 million, to fund the purchase. As a result of its 56%
ownership interests in VCQ, the Company received proceeds from the sale of VCQ
of approximately $13.2 million.

      In addition, on November 4, 2004, the Temperature-Controlled Logistics
Partnership, through which the Company owns its 40% interest in the
Temperature-Controlled Logistics Corporation, entered into an agreement to sell
a 20.7% interest in the Temperature-Controlled Logistics Corporation to the
Yucaipa Companies for $145.0 million. In addition, Yucaipa will assist in the
management of the Temperature-Controlled Logistics Corporation and may earn a
promote of up to 20% of the increase in value through December 31, 2007.  The
promote is limited to 10% of the Temperature-Controlled Logistics Partnership's
remaining common shares in the Temperature-Controlled Logistics Corporation.
Immediately following this transaction, the Temperature-Controlled Logistics
Partnership will dissolve and, after the payment of all of its liabilities,
distribute its remaining assets to its partners. The assets to be distributed to
the Company consist of common shares, representing an approximately 31.7%
interest in the Temperature-Controlled Logistics Corporation and cash of
approximately $34.6 million. In addition, the partners have reached an agreement
to resolve the preferential allocation.

                                       37


                      CRESCENT REAL ESTATE EQUITIES COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASSET ACQUISITIONS

      On October 21, 2004, the Company entered into a partnership agreement
with affiliates of JPI Multi-family Investments L.P. to develop a single
multi-family luxury apartment project in Dedham, Massachusetts. The Company
funded $13.3 million or 100% of the equity, and received a limited partnership
interest which earns a preferred return and a profit split above the preferred
return hurdle. The Company will consolidate the partnership, Jefferson Station,
L.P., in accordance with FIN 46, as it was determined to be a VIE of which the
Company is the primary beneficiary.

ASSET DISPOSITIONS

      On October 19, 2004, the Company completed the sale of the Hyatt Regency
Hotel in Albuquerque, New Mexico. The sale generated proceeds, net of selling
costs, of approximately $32.5 million and a net gain of approximately $3.3
million, net of minority interests. This property was wholly-owned. The proceeds
were used to pay down $26.0 million of the Company's Bank of America Fund XII
Term Loan and the remainder was used to pay down the Company's credit facility.

                                       38


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

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



                                                                                          
Forward-Looking Statements............................................................       40

Overview..............................................................................       41

Recent Developments...................................................................       44

Results of Operations
     Three and nine months ended September 30, 2004 and 2003..........................       48
Liquidity and Capital Resources
     Cash Flows for the nine months ended September 30, 2004..........................       55

Equity and Debt Financing.............................................................       59

Unconsolidated Investments............................................................       63

Significant Accounting Policies.......................................................       64

Funds from Operations.................................................................       68


                                       39


                           FORWARD-LOOKING STATEMENTS

      You should read this section in conjunction with the consolidated interim
financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Company's Form 10-K for the year ended December 31, 2003. In management's
opinion, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation of the unaudited interim financial
statements are included. Capitalized terms used but not otherwise defined in
this section have the meanings given to them in the notes to the consolidated
financial statements in Item 1, "Financial Statements."

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

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

            The following factors might cause such a difference:

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

      -     The continuation of relatively high vacancy rates and reduced rental
            rates in the Company's office portfolio as a result of conditions 
            within the Company's principal markets;

      -     Adverse changes in the financial condition of existing tenants, in
            particular El Paso Energy and its affiliates which provide 4.5% of
            the Company's annualized office revenues;

      -     Further deterioration in the resort/business-class hotel markets or
            in the economy generally;

      -     Further deterioration in the market or in the economy generally and 
            increases in construction costs associated with development for
            residential land or luxury residences, including single-family
            homes, townhomes and condominiums;

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

      -     The ability of the Company to dispose of its investment land, and
            other non-core assets, on favorable terms and within anticipated
            time frames;

      -     The ability of the Company to reinvest available funds at
            anticipated returns and consummate anticipated office acquisitions 
            on favorable terms and within anticipated time frames;

      -     The ability of the Company to close and consummate its significant 
            pending transactions on the terms and within the time frames
            anticipated by management; 

      -     The concentration of a significant percentage of the Company'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 from time to time in the Company's filings with
            the Securities and Exchange Commission.

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

                                       40


                                    OVERVIEW

      The Company is a REIT with assets and operations divided into four
investment segments: Office, Resort/Hotel, Residential Development and
Temperature-Controlled Logistics. The primary business of the Company is its
Office Segment, which consisted of 75 Office Properties and represented 67% of
gross assets as of September 30, 2004.

      Capital flows in the real estate industry have changed significantly over
the last few years. Institutions as well as other investors, principally U.S.
pension funds, have increased their allocation to real estate and it appears
that this will continue for the foreseeable future. This inflow of capital has
created a uniquely attractive environment for the sale of assets as well as
joint ventures. Likewise, the acquisition environment is highly competitive,
making it more difficult to provide attractive returns on equity that are
comparable to those achieved in acquisitions made during the 1990's.

      The Company has adapted its strategy to align itself with institutional
partners, with the goal of transitioning towards being a real estate investment
management company. Rather than competing with the substantial inflow of capital
into the acquisition market, the Company is focusing on acquiring assets jointly
with these institutional investors, moving existing assets into joint-venture
arrangements with these investors, and capitalizing on its award-winning
platform in office management and its leasing expertise to continue to provide
these services, for a fee, for the properties in the ventures. Where possible,
the Company will strive to negotiate performance based incentives that allow for
additional equity to be earned if return targets are exceeded.

      Consistent with this strategy, the Company continually evaluates its
existing portfolio for potential joint-venture opportunities. In the near term,
the Company could more than double its existing level of joint ventures to over
$2 billion by contributing existing assets to ventures. Recently, the Company
announced significant joint venture transactions involving five of its landmark
Properties. The Company anticipates that these transactions, to be completed in
two phases with institutional partners, will be finalized in the fourth quarter
of 2004. As with previous ventures, the Company would be a minority partner but
would continue to provide leasing and management services to the ventures. In
addition, the Company has sold $140 million in 2004 and expects to sell an
additional $135 million in non-core assets in the near term, including land
holdings that are currently not contributing to the Company's earnings. Also
included in these sales are two business class hotels, one of which was sold in
October 2004 at an attractive gain and the remaining hotel, which the Company
believes it can sell at an attractive gain, and at the same time further
simplify its business model. As these ventures and sales are completed, the
Company will redeploy proceeds into future acquisitions of traditional core
assets, pay down and defease certain consolidated debt and obligations,
repurchase common shares consistent with the requirements of its existing debt,
and allocate capital to select operating partners.

OFFICE SEGMENT

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



                                                                                                       2004            2003
                                                                                                   -----------     ------------
                                                                                                             
Economic Occupancy (at September 30 and December 31)                                                   86.4% (1)          84.0% (1)
Leased Occupancy (at September 30 and December 31)                                                     88.8% (2)          86.4% (2)
In-Place Weighted Average Full-Service Rental Rate (at September 30 and December 31)                 $22.73             $22.63
Tenant Improvement and Leasing Costs per Sq. Ft. per year (three months ended September 30)          $ 2.97             $ 3.16
Tenant Improvement and Leasing Costs per Sq. Ft. per year (nine months ended September 30)           $ 3.03             $ 3.21
Average Lease Term (three months ended September 30)                                              8.6 years          8.0 years
Average Lease Term (nine months ended September 30)                                               7.5 years          7.4 years
Same-Store NOI(3) (Decline) (three months ended September 30)                                          (3.8)%            (14.4)%
Same-Store NOI(3)  (Decline) (nine months ended September 30)                                          (3.3)%            (12.5)%
Same-Store Average Occupancy (three months ended September 30)                                         85.9%              84.2%
Same-Store Average Occupancy (nine months ended September 30)                                          85.8%              84.7%


-------------------------------
(1)    Economic occupancy reflects the occupancy of all tenants paying rent.

(2)    Leased occupancy reflects the amount of contractually obligated space,
       whether or not commencement has occurred.

(3)    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.

      The Company continues to expect that 2004 will be a year of stabilization
in the Office Segment 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.

                                       41


RESORTS

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




                                                                  FOR THE THREE MONTHS ENDED SEPTEMBER 30,
                                             ---------------------------------------------------------------------------------
                                                                                                             REVENUE
                                                    AVERAGE                     AVERAGE                        PER
                                                   OCCUPANCY                     DAILY                      AVAILABLE
                                                     RATE                        RATE                    ROOM/GUEST NIGHT
                                             ----------------------    --------------------------    -------------------------
                                               2004         2003         2004            2003          2004           2003
                                             ---------    ---------    ----------     -----------    ----------    -----------
                                                                                                 
Luxury and Destination Fitness Resorts          80%          76%       $     436      $     406      $   332       $     300




                                                                  FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                             ----------------------------------------------------------------------------------
                                                                                                              REVENUE
                                                    AVERAGE                     AVERAGE                         PER
                                                   OCCUPANCY                     DAILY                       AVAILABLE
                                                     RATE                        RATE                    ROOM/GUEST NIGHT
                                             ----------------------    --------------------------    --------------------------
                                               2004         2003         2004            2003          2004           2003
                                             ---------    ---------    ----------     -----------    ----------   -------------
                                                                                                
Luxury and Destination Fitness Resorts          71%          72%       $    490       $     460      $   334      $      320 


      The occupancy decrease at the Company's luxury and destination fitness
resorts for the nine months ended September 30, 2004 as compared to the same
period in 2003 is partially driven by a seven percentage point decrease in
occupancy at Sonoma Mission Inn (from 66% to 59%) as a result of the renovation
of 97 rooms which were taken out of service in November 2003. Renovation was
completed in the second quarter of 2004 and the 97 rooms were put back into
service. In addition, occupancy decreased thirteen percentage points (from 77%
in the third quarter 2003 to 64% in the third quarter 2004) at Ventana Inn as a
result of the renovation of 13 suites which were taken out of service in April
2004.

      The luxury and destination fitness resorts occupancy, average daily rate,
and revenue per available room increases in the third quarter 2004 compared to
third quarter 2003 were driven primarily by increases at Canyon Ranch Tucson and
Canyon Ranch Lenox at which occupancy increased seven percentage points (from
77% to 84%), average daily rate increased 6% (from $620 to $658), and revenue
per available room increased 12% (from $448 to $503) as a result of expanded
medical service offerings.

      The Company anticipates a minimal change in occupancy and a modest
increase in revenue per available room in 2004 at the Resort Properties as
the economy and the travel industry continue to recover, offset by the financial
impact of Sonoma Mission Inn and Ventana Inn renovations in 2004.

                                       42


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 September 30, 2004.

Desert Mountain



                                              FOR THE THREE MONTHS ENDED SEPTEMBER 30,
                                           ----------------------------------------------
                                                    2004                     2003
                                           -----------------------    -------------------
                                                                
Residential Lot Sales                                   5                        10
Average Sales Price per Lot (1)                  $923,000                  $457,000


--------------------------------
(1) Includes equity golf membership




                                               FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                           ----------------------------------------------
                                                   2004                      2003
                                           -----------------------    -------------------
                                                                
Residential Lot Sales                                  44                       34
Average Sales Price per Lot (1)                  $807,000                  $611,000


--------------------------------
(1) Includes equity golf membership

      Desert Mountain is in the latter stages of development and has primarily
its premier lots remaining in inventory. An increase in lot sales, combined with
higher average sales prices in 2004 compared to 2003, is expected to result in
improved results in 2004.

CRDI



                                                                            FOR THE THREE MONTHS ENDED SEPTEMBER 30,
                                                                         ----------------------------------------------
                                                                                 2004                      2003
                                                                         ----------------------    --------------------
                                                                                             
Residential Lot Sales                                                                 31                        36
Residential Unit Sales                                                                 9                        10
Residential Timeshare Units                                                          3.9                       0.6
Average Sales Price per Residential Lot                                         $200,000                   $60,000
Average Sales Price per Residential Unit                                      $1,901,000                $1,240,000
Average Sales Price per Residential Equivalent Timeshare Unit                 $2,262,000                $1,762,000




                                                                             FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                                                         ----------------------------------------------
                                                                                 2004                      2003
                                                                         ----------------------    --------------------
                                                                                             
Residential Lot Sales                                                                150                        62
Residential Unit Sales                                                                20                        50
Residential Timeshare Units                                                         7.32                       3.7
Average Sales Price per Residential Lot                                         $137,000                   $53,000
Average Sales Price per Residential Unit                                      $1,413,000                $1,180,000
Average Sales Price per Residential Equivalent Timeshare Unit                 $2,151,000                $1,432,000


      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
2004, management expects that CRDI will be primarily affected by product mix
available at its Residential Development Properties as product inventory is
developed in 2004 for delivery in 2005.

LIQUIDITY

      The Company's primary sources of liquidity are cash flow from operations,
its credit facility, return of capital from the Residential Development Segment,
and proceeds from asset sales and joint ventures. The Company believes cash
flows from operations will be sufficient to offset normal operating expenses, as
well as capital requirements (including property improvements, tenant
improvements and leasing commissions) in 2004. The cash flow from the
Residential Development segment is cyclical in nature and primarily realized in
the last quarter of each year. The Company expects to meet any interim
shortfalls in operating cash flow caused by this cyclicality through working
capital draws under the credit facility. As of September 30, 2004, the Company
had $83.9 million in borrowing capacity remaining under its credit facility.
However, net cash flows from operations are not anticipated to fully cover the
projected dividends on the Company's common stock. The Company expects to use
cash

                                       43

from operations as well as return of capital from the Residential Development
Segment, estimated at approximately $85 million for 2004, proceeds from asset
sales and joint ventures and business initiatives including investment land
sales and other income to cover the shortfall.

      Through the sale of the Woodlands in December 2003, the issuance of
preferred shares and additional financing of Temperature-Controlled Logistics
this year, and additional leverage on Hughes Center assets, the Company has in
excess of  $200 million in liquidity to make new investments throughout 2004, of
which $90.5 million has been invested through September 30, 2004 and $64.6
million has been used to pay down debt until reinvestment opportunities arise.
Additionally, the Company continues to execute on its capital recycling program
and has sold six office properties and one business class hotel generating
proceeds, net of selling costs, of $126.7 million which were used to pay down a
portion of the Bank of America Fund XII Term Loan and to reduce the amount
outstanding under the credit facility.

                               RECENT DEVELOPMENTS

JOINT VENTURES

        On November 5, 2004, the Company entered into a joint venture with
affiliates of J.P. Morgan Fleming Asset Management, Inc. ("JPM") in connection
with which JPM will purchase a 60% interest in three Office Properties, The
Crescent, Houston Center and Post Oak Central, based on a valuation of $898.5
million. The Company initially will hold the remaining 40% interest and is
currently in negotiations with another institutional investor, for a transaction
that would reduce its interest to 24%. In addition, the Company is in final
negotiations with JPM to form a second joint venture in which JPM will purchase
a 76% interest in two Office Properties, Trammell Crow Center and Fountain
Place. The Company anticipates a gain on these transactions.

         Under both joint ventures, the Company will continue to manage and
lease the Office Properties on a fee basis. The Company anticipates the joint
ventures will be accounted for under the equity method.

TEMPERATURE-CONTROLLED LOGISTICS

      On November 4, 2004, the Temperature-Controlled Logistics Corporation
purchased 100% of the ownership interests in its tenant, AmeriCold Logistics,
for approximately $47.7 million. In connection with this transaction, the three
triple-net master leases between the Temperature-Controlled Logistics
Corporation and AmeriCold Logistics were terminated and all deferred rent was
cancelled.

      On November 4, 2004, the Temperature-Controlled Logistics Corporation also
purchased 100% of the ownership interests in VCQ for approximately $24.8
million. The Temperature-Controlled Logistics Corporation used cash
contributions from its owners, of which the Company's 40% portion was
approximately $9.9 million, to fund the purchase. As a result of its 56%
ownership interests in VCQ, the Company received proceeds from the sale of VCQ
of approximately $13.2 million.

      In addition, on November 4, 2004, the Temperature-Controlled Logistics
Partnership, through which the Company owns its 40% interest in the
Temperature-Controlled Logistics Corporation, entered into an agreement to sell
a 20.7% interest in the Temperature-Controlled Logistics Corporation to the
Yucaipa Companies for $145.0 million. In addition, Yucaipa will assist in the
management of the Temperature-Controlled Logistics Corporation and may earn a
promote of up to 20% of the increase in value through December 31, 2007.  The
promote is limited to 10% of the Temperature-Controlled Logistics Partnership's
remaining common shares in the Temperature-Controlled Logistics Corporation.
Immediately following this transaction, the Temperature-Controlled Logistics
Partnership will dissolve and, after the payment of all of its liabilities,
distribute its remaining assets to its partners. The assets to be distributed to
the Company consist of common shares, representing an approximately 31.7%
interest in the Temperature-Controlled Logistics Corporation and cash of
approximately $34.6 million. In addition, the partners have reached an agreement
to resolve the preferential allocation.

                                       44


ASSET ACQUISITIONS

OFFICE

      During January and February 2004, in accordance with the original purchase
contract, the Company acquired an additional five Class A Office Properties and
seven retail parcels located within Hughes Center in Las Vegas, Nevada from the
Rouse Company. One of these Office Properties is owned through a joint venture
in which the Company acquired a 67% interest. The remaining four Office
Properties are wholly-owned by the Company. The Company acquired these five
Office Properties and seven retail parcels for approximately $175.3 million,
funded by the Company's assumption of approximately $85.4 million in mortgage
loans and by a portion of the proceeds from the sale of the Company's interests
in The Woodlands on December 31, 2003. The Company recorded the loans assumed at
their fair value of approximately $93.2 million, which included $7.8 million of
premium. The five Office Properties are included in the Company's Office
Segment.

      On March 31, 2004, the Company acquired Dupont Centre, a 250,000 square
foot Class A office property, located in the John Wayne Airport submarket of
Irvine, California. The Company acquired the Office Property for approximately
$54.3 million, funded by a draw on the Company's credit facility and
subsequently placed a $35.5 million non-recourse first mortgage loan on the
property. This Office Property is wholly-owned and included in the Company's
Office Segment.

      On May 10, 2004, the Company completed the purchase of the remaining
Hughes Center Office Property in Las Vegas, Nevada for approximately $18.3
million. The purchase was funded by a draw on the Company's credit facility.
This Office Property is wholly-owned and included in the Company's Office
Segment.

      On August 6, 2004, the Company acquired The Alhambra, two Class A Office
Properties, located in the Coral Gables submarket of Miami, Florida. The Company
acquired the Office Properties for approximately $72.3 million, funded by the
Company's assumption of a $45.0 million loan from Wachovia Securities and a draw
on the Company's credit facility. The Office Properties are wholly-owned and are
included in the Company's Office Segment.

UNDEVELOPED LAND

      On March 1, 2004, in accordance with the agreement to acquire the Hughes
Center Properties, the Company 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 Company's credit facility.

RESIDENTIAL DEVELOPMENT

      On October 21, 2004, the Company entered into a partnership agreement with
affiliates of JPI Multi-family Investments, L.P. to develop a single
multi-family luxury apartment project in Dedham, Massachusetts. The Company
funded $13.3 million or 100% of the equity, and received a limited partnership
interest which earns a preferred return and a profit split above the preferred
return hurdle. The Company will consolidate the partnership, Jefferson Station,
L.P., in accordance with FIN 46, as it was determined to be a VIE of which the
Company is the primary beneficiary.

ASSET DISPOSITIONS

OFFICE

      On March 23, 2004, the Company completed the sale of the 1800 West Loop
South Office Property in Houston, Texas. The sale generated proceeds, net of
selling costs, of approximately $28.2 million and a net gain of approximately
$0.2 million, net of minority interests. The Company previously recorded an
impairment charge of approximately $13.9 million, net of minority interests,
during the year ended December 31, 2003. The proceeds from the sale were used
primarily to pay down the Company's credit facility. This property was
wholly-owned.

      On March 31, 2004, the Company sold its last remaining behavioral
healthcare property. The sale generated proceeds, net of selling costs, of
approximately $2.0 million and a net loss of approximately $0.3 million, net of
minority interests. This property was wholly-owned.

      On April 13, 2004, the Company completed the sale of the Liberty Plaza
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $10.8 million and a net loss of approximately $0.2
million, net of minority interests. The Company previously recorded an
impairment charge of approximately $3.6 million, net of minority interests,
during the year ended December 31, 2003. The proceeds from the sale were used
primarily to pay down the Company's credit facility. This property was
wholly-owned.

                                       45

      On June 17, 2004, the Company completed the sale of the Ptarmigan Place
Office Property in Denver, Colorado. The sale generated proceeds, net of selling
costs, of approximately $25.3 million and a net loss of approximately $2.0
million, net of minority interests. The Company previously recorded an
impairment charge of approximately $0.5 million, net of minority interests,
during the quarter ended March 31, 2004. In addition, the Company completed the
sale of approximately 3.0 acres of undeveloped land adjacent to Ptarmigan Place.
The sale generated proceeds, net of selling costs, of approximately $2.9 million
and a net gain of approximately $0.9 million. The proceeds from these sales were
used to pay down a portion of the Company's Bank of America Fund XII Term Loan.
The property and adjacent land were wholly-owned.

      On June 29, 2004, the Company completed the sale of the Addison Tower
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $8.8 million and a net gain of approximately $0.2
million, net of minority interests. The proceeds from the sale were used
primarily to pay down the Company's credit facility. This property was
wholly-owned.

      On July 2, 2004, the Company completed the sale of the 5050 Quorum Office
Property in Dallas, Texas. The sale generated proceeds, net of selling costs, of
approximately $8.9 million and a loss of approximately $0.1 million, net of
minority interests. The Company previously recorded an impairment charge of
approximately $0.8 million, net of minority interests, during the quarter ended
March 31, 2004. The proceeds from the sale were used primarily to pay down the
Company's credit facility. This property was wholly-owned. The Company continues
to provide management and leasing services for this property.

      On July 29, 2004, the Company completed the sale of the 12404 Park Central
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $9.3 million. The Company previously recorded impairment
charges totaling approximately $4.0 million, net of minority interests, $2.9
million during the year ended December 31, 2003, $0.7 million during the quarter
ended March 31, 2004 and $0.4 million during the quarter ended June 30, 2004.
The proceeds from the sale were used primarily to pay down the Bank of America
Fund XII Term Loan. This property was wholly-owned.

UNDEVELOPED LAND

      On August 16, 2004, the Company sold approximately 2.5 acres of
undeveloped land located in Houston, Texas. The sale generated proceeds, net of
selling costs, of approximately $6.4 million and a note receivable in the amount
of $5.6 million. The note provides for payments of principal of $0.5 million due
in December 2004, annual installments of $1.0 million each due beginning August
2005 through August 2008, and $1.1 million due at maturity in August 2009 and
does not bear interest. The Company recognized a net gain of approximately $7.6
million included in the "Income from investment land sales, net" line item in
the accompanying Consolidated Statements of Operations. The proceeds were used
to pay down the Company's credit facility.

RESORT/HOTEL

      On October 19, 2004, the Company completed the sale of the Hyatt Regency
Hotel in Albuquerque, New Mexico. The sale generated proceeds, net of selling
costs, of approximately $32.5 million and a net gain of approximately $3.3
million, net of minority interests. This property was wholly-owned. The proceeds
were used to pay down $26.0 million of the Company's Bank of America Fund XII
Term Loan and the remainder was used to pay down the Company's credit facility.

RESIDENTIAL DEVELOPMENT

      On September 14, 2004, the Company completed the sale of Breckenridge
Commercial Retail Center in Breckenridge, Colorado. The sale generated proceeds
to the Company, net of selling costs and repayment of debt, of approximately
$1.5 million, and a net gain of approximately $0.1 million, net of minority
interests and income tax. The Company previously recorded an impairment charge
of approximately $0.7 million, net of minority interests and income tax, during
the year ended December 31, 2003. The proceeds from the sale were used primarily
to pay down the Company's credit facility.

                                       46


OTHER TRANSACTIONS

FOUNTAIN PLACE TRANSACTION

      On June 28, 2004, the Company completed a transaction related to the
Fountain Place Office Property with Crescent FP Investors, L.P., ("FP
Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Company. In the transaction, the Fountain Place
Office Property was, for tax purposes, sold to FP Investors for $168.2 million,
including the assumption by FP Investors of a new $90.0 million loan from Lehman
Capital. The Company received net proceeds of approximately $78.2 million. This
transaction resulted in the completion of a reverse Section 1031 like-kind
exchange associated with the Company's prior purchase of a portion of the Hughes
Center office portfolio.

      Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Company to purchase Lehman's
interest in FP Investors for an agreed upon fair value of $79.9 million at any
time until November 30, 2004. For GAAP purposes, under SFAS No. 66, "Accounting
for Sales of Real Estate," this unconditional right, or contingency, results in
the transaction requiring accounting associated with a financing transaction. As
a result, no gain has been recorded on the transaction and the Company's
accompanying financial statements continue to include the Office Property,
related debt and operations until expiration of the contingency. The Company
pays 99.9% of the distributable funds from the Office Property to Lehman, which
is recorded in the "Interest expense" line item in the Company's Consolidated
Statement of Operations. The fair value of the contingency, $79.9 million, is
included in the "Accounts payable, accrued expenses and other liabilities" line
item in the Company's Consolidated Balance Sheet at September 30, 2004.

      Also on June 28, 2004, the Company paid off the $220.0 million Deutsche
Bank - CMBS loan with proceeds from the Fountain Place Office Property
transaction and a draw on the Company's revolving credit facility.

      See "Recent Developments" for a description of the joint venture
transaction involving this Office Property. As a result of this transaction,
Lehman's unconditional right to require the Company to repurchase Lehman's
interest in FP Investors will be terminated.

                                       47


                              RESULTS OF OPERATIONS

      The following table shows the Company's variance in dollars between the
three and nine months ended September 30, 2004 and 2003.



                                                                        TOTAL VARIANCE IN         TOTAL VARIANCE IN
                                                                         DOLLARS BETWEEN           DOLLARS BETWEEN
                                                                        THE THREE MONTHS           THE NINE MONTHS
                                                                              ENDED                      ENDED
                                                                          SEPTEMBER 30,             SEPTEMBER 30,
                                                                      ---------------------     --------------------
(in millions)            
                                                                          2004 AND 2003            2004 AND 2003
                                                                      ---------------------     --------------------
                                                                                          
REVENUE:
  Office Property                                                          $     5.2                 $    20.4
  Resort/Hotel Property                                                          4.7                       4.4
  Residential Development Property                                              25.6                      23.2
                                                                           ---------                 ---------
     TOTAL PROPERTY REVENUE                                                $    35.5                 $    48.0
                                                                           ---------                 ---------

EXPENSE:
  Office Property real estate taxes                                        $     0.4                 $    (0.1)
  Office Property operating expenses                                             3.7                       6.9
  Resort/Hotel Property expense                                                  4.1                       6.7
  Residential Development Property expense                                      19.5                      14.8
                                                                           ---------                 ---------
     TOTAL PROPERTY EXPENSE                                                     27.7                      28.3
                                                                           ---------                 ---------
     INCOME FROM PROPERTY OPERATIONS                                       $     7.8                 $    19.7
                                                                           ---------                 ---------

OTHER INCOME (EXPENSE):
  Income from investment land sales, net                                   $    (3.8)                $    (4.4)
  Gain on joint venture of properties, net                                         -                      (0.1)
  Interest and other income                                                      1.3                       4.3
  Corporate general and administrative                                          (1.7)                     (3.8)
  Interest expense                                                              (3.5)                     (7.7)
  Amortization of deferred financing costs                                      (0.7)                     (2.5)
  Extinguishment of debt                                                        (0.2)                     (3.1)
  Depreciation and amortization                                                (10.1)                    (22.9)
  Impairment charges related to real estate assets                              (4.1)                     (2.9)
  Other expenses                                                                   -                       0.8
  Equity in net income (loss) of unconsolidated companies:
     Office Properties                                                          (4.6)                     (6.1)
     Resort/Hotel Properties                                                     0.1                      (2.3)
     Residential Development Properties                                         (2.5)                     (5.3)
     Temperature-Controlled Logistics Properties                                   -                      (4.7)
     Other                                                                       1.1                       1.3
                                                                           ---------                 ---------
     TOTAL OTHER INCOME (EXPENSE)                                          $   (28.7)                 $  (59.4)
                                                                           ---------                 ---------

LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND
INCOME TAXES                                                               $   (20.9)                $   (39.7)

  Minority interests                                                             1.9                       5.3
  Income tax benefit                                                             1.7                       2.9
                                                                           ---------                 ---------

LOSS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE                                             $   (17.3)                $   (31.5)

  Income from discontinued operations, net of minority interests                 1.6                      (1.9)
  Impairment charges related to real estate assets from discontinued
    operations, net of minority interests                                        1.7                      13.5
  Loss on real estate from discontinued operations, net of
    minority interests                                                             -                      (1.8)
  Cumulative effect of a change in accounting principle                            -                      (0.3)
                                                                           ---------                 ---------

NET (LOSS) INCOME                                                          $  (14.0)                 $   (22.0)

  Series A Preferred Share distributions                                       (1.4)                      (4.1)
  Series B Preferred Share distributions                                           -                         -
                                                                           ---------                 ---------

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS                                  $  (15.4)                 $   (26.1)
                                                                           =========                 =========


                                       48


COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003

PROPERTY REVENUES

      Total property revenues increased $35.5 million, or 17.7%, to $235.9
million for the three months ended September 30, 2004, as compared to $200.4
million for the three months ended September 30, 2003. The primary components of
the increase in total property revenues are discussed below.

      -     Office Property revenues increased $5.2 million, or 4.2%, to $128.3
            million, primarily due to:

              -    an increase of $13.9 million from the acquisitions of The
                   Colonnade in August 2003, the Hughes Center Properties in
                   December 2003 through May 2004, the Dupont Centre in March
                   2004 and The Alhambra in August 2004; and

              -    an increase of $0.6 million primarily resulting from third
                   party management and leasing services and related direct
                   expense reimbursements; partially offset by

              -    a decrease of $5.8 million from the 55 consolidated Office
                   Properties (excluding 2003 and 2004 acquisitions and
                   dispositions) that the Company owned or had an interest in,
                   primarily due to a decrease in full service weighted
                   average rental rates, a decrease in recoveries due to
                   expense reductions, and a decline in net parking revenue,
                   partially offset by a 0.2 percentage point increase in
                   same-store average occupancy (from 85.7% to 85.9%); and

              -    a decrease of $3.7 million in net lease termination fees
                   (from $5.0 million to $1.3 million).

      -     Resort/Hotel Property revenues increased $4.7 million, or 11.1%, to
            $47.0 million, primarily due to:

              -    an increase of $3.0 million at the Destination Fitness
                   Resorts related to a 12.3% increase in revenue per
                   available room (from $448 to $503) as a result of a 6.1%
                   increase in average daily rate (from $620 to $658) and a 7
                   percentage point increase in occupancy (from 77% to 84%);
                   and

              -    an increase of $1.7 million at the Resort Properties
                   related to a 6.2% increase in revenue per available room
                   (room $177 to $188) as a result of a 6.0% increase in
                   average daily rate (from $234 to $248) and a $1.1 million
                   increase in food and beverage revenue.

      -     Residential Development Property revenues increased $25.6 million,
            or 73.1%, to $60.6 million, primarily due to:

              -    an increase of $21.5 million in CRDI revenues related to
                   product mix in lots and units available for sale in 2004
                   versus 2003, primarily at the Old Greenwood project in
                   Tahoe, California and the Horizon Pass project in Bachelor
                   Gulch, Colorado which had sales in 2004, but none in the
                   three months ended September 30, 2003 as the projects were
                   not available for sale, partially offset by the One Vendue
                   project in Charleston, South Carolina which had sales in
                   2003, but none in 2004 as the project sold out in 2003;

              -    an increase of $2.7 million in other revenue at DMDC due to
                   a settlement for reimbursement of construction remediation
                   costs;

              -    an increase of $1.7 million in club revenue at CRDI
                   primarily due to the addition of a restaurant, and the full
                   impact in 2004 of the sale of Tahoe Club memberships at the
                   Tahoe Mountain Resorts Property, which began selling
                   memberships in mid-2003; and

              -    an increase of $0.5 million in club revenue at DMDC and CRDI
                   primarily due to increased membership levels; partially
                   offset by

              -    a decrease of $0.7 million in real estate sales primarily
                   due to decreased home sales at DMDC.

PROPERTY EXPENSES

      Total property expenses increased $27.7 million, or 21.5%, to $156.4
million for the three months ended September 30, 2004, as compared to $128.7
million for the three months ended September 30, 2003. The primary components of
the variances in property expenses are discussed below.

      -     Office Property expenses increased $4.1 million, or 7.0%, to $62.4
            million, primarily due to:

              -    an increase of $5.0 million from the acquisition of The
                   Colonnade in August 2003, the Hughes Center Properties in
                   December 2003 through May 2004, the Dupont Centre in March
                   2004 and The Alhambra in August 2004; and

              -    an increase of $0.8 million related to the cost of
                   providing third party management and leasing services;
                   partially offset by

                                       49



              -    a decrease of $1.7 million from the 55 consolidated Office
                   Properties (excluding 2003 and 2004 acquisitions and
                   dispositions) that the Company owned or had an interest in,
                   primarily due to:

                     -   $2.0 million decrease in building repairs and
                         maintenance;

                     -   $1.2 million decrease in property taxes and insurance;
                         and

                     -   $0.4 million decrease in utilities expense; partially
                         offset by

                     -   $1.4 million increase in administrative expenses.

      -     Resort/Hotel Property expenses increased $4.1 million, or 11.6%, to
            $39.5 million, due to:

              -    an increase of $2.3 million in operating expenses and
                   general and administrative costs at the Destination Fitness
                   Resorts primarily related to increased employee health
                   insurance costs and increased average occupancy of 7
                   percentage points (from 77% to 84%); and

              -    an increase of $1.7 million in operating expenses at the
                   Resort Properties related to food, beverage and marketing
                   costs.

      -     Residential Development Property expenses increased $19.5 million,
            or 55.7%, to $54.5 million, primarily due to:

              -    an increase of $15.6 million in CRDI cost of sales related
                   to product mix in lots and units available for sale in 2004
                   versus 2003, primarily at the Old Greenwood project in
                   Tahoe, California and the Horizon Pass project in Bachelor
                   Gulch, Colorado which had sales in 2004, but none in the
                   three months ended September 30, 2003 as the projects were
                   not available for sale, partially offset by the One Vendue
                   project in Charleston, South Carolina which had sales in
                   2003, but none in 2004 as the project sold out in 2003;

              -    an increase of $3.4 million in club operating expenses due to
                   increased membership levels, a restaurant addition at CRDI
                   and the golf course addition at DMDC; and

              -    an increase of $0.5 million in expenses related to
                   marketing efforts at the Ritz-Carlton condominium residence
                   project.

OTHER INCOME/EXPENSE

      Total other expenses increased $28.7 million, or 40.7%, to $99.2 million
for the three months ended September 30, 2004, compared to $70.5 million for the
three months ended September 30, 2003. The primary components of the increase in
total other expenses are discussed below.

            OTHER INCOME

      Other income decreased $8.4 million, or 46.2%, to $9.8 million for the
three months ended September 30, 2004, as compared to $18.2 million for the
three months ended September 30, 2003. The primary components of the decrease in
other income are discussed below.

      -     Equity in net income of unconsolidated companies decreased $5.9
            million, or 105.4%, to a $0.3 million loss, primarily due to:

              -    a decrease of $6.1 million in Office, Residential
                   Development and Other equity in net income primarily due to
                   net income recorded in 2003 for the Company's interests in
                   the entities through which the Company held its interests
                   in The Woodlands, which were sold in December 2003;

      -     Income from investment land sales, net decreased $3.8 million due to
            the gain on sale of two parcels of undeveloped investment land in
            Texas in 2003, offset by the gain on sale of two parcels of
            undeveloped investment land in Texas, in 2004.

      -     Interest and other income increased $1.3 million primarily due to
            $0.7 million of interest on U.S. Treasury and government sponsored
            agency securities purchased in December 2003 and January 2004
            related to debt defeasance, $0.4 million of dividends received on
            other marketable securities and a $0.3 million increase in interest
            on certain notes resulting from note amendments in December 2003.

                                       50


OTHER EXPENSES

     Other expenses increased $20.3 million, or 22.9%, to $108.9 million for the
three months ended September 30, 2004, as compared to $88.6 million for the
three months ended September 30, 2003. The primary components of the increase in
other expenses are discussed below.

     -    Depreciation expense increased $10.1 million, or 28.4 %, to $45.7
          million, primarily due to:

          -    $8.3 million increase in Office Property depreciation expense,
               attributable to:

               -    $6.4 million from the acquisitions of The Colonnade in
                    August 2003 and the Hughes Center Properties in December
                    2003 through May 2004, the Dupont Centre in March 2004 and
                    The Alhambra in August 2004; and

               -    $1.9 million due to an increase in leasehold improvements,
                    lease commissions, building improvements, and accelerated
                    depreciation of leasehold improvements and lease commissions
                    upon lease terminations;

          -    $1.1 million increase in Resort/Hotel Property depreciation
               expense; and

          -    $1.0 million increase in Residential Development Property
               depreciation expense.

     -    Impairment charges increased $4.1 million due to the impairment
          related to the demolition of the old clubhouse at the Sonoma Club in
          the third quarter 2004 in order to construct a new clubhouse.

     -    Interest expense increased $3.5 million, or 8.1%, to $46.5 million
          primarily due to the Fountain Place Office Property transaction.

     -    Corporate general and administrative expense increased $1.7 million,
          or 23.3%, to $9.0 million primarily due to salary merit increases,
          cost increases of employee benefits, restricted stock compensation
          recorded in 2004, and Sarbanes-Oxley related costs.

DISCONTINUED OPERATIONS

     Income from discontinued operations on assets sold and held for sale
increased $3.3 million, or 194.1%, to $1.6 million, primarily due to:

     -    an increase of $2.0 million, net of minority interests, due to
          impairments recorded in 2003 on behavioral healthcare properties; and

     -    an increase of $1.5 million, net of minority interests, due to the
          increase in net income associated with properties held for sale in
          2004 compared to 2003.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003

PROPERTY REVENUES

     Total property revenues increased $48.0 million, or 7.5%, to $685.6 million
for the nine months ended September 30, 2004, as compared to $637.6 million for
the nine months ended September 30, 2003. The primary components of the increase
in total property revenues are discussed below.

     -    Office Property revenues increased $20.4 million, or 5.6 %, to $384.6
          million, primarily due to:

          -    an increase of $34.7 million from the acquisitions of The
               Colonnade in August 2003, the Hughes Center Properties in
               December 2003 through May 2004, the Dupont Centre in March 2004
               and The Alhambra in August 2004;

          -    an increase of $2.0 million primarily resulting from third party
               management and leasing services and related direct expense
               reimbursements; and

          -    an increase of $0.6 million in net lease termination fees (from
               $7.9 million to $8.5 million); partially offset by

          -    a decrease of $15.8 million from the 55 consolidated Office
               Properties (excluding 2003 and 2004 acquisitions and
               dispositions) that the Company owned or had an interest in,
               primarily due to a decrease in full service weighted average
               rental rates, a decrease in recoveries due to expense reductions,
               and a decline in net parking revenues, partially offset by a 0.2
               percentage point increase in same-store average occupancy (from
               85.6% to 85.8%); and

          -    a decrease of $1.1 million due to nonrecurring revenue earned in
               2003.

                                       51

     -    Resort/Hotel Property revenues increased $4.4 million, or 3.3%, to
          $137.2 million, primarily due to:

          -    an increase of $6.3 million at the Destination Fitness Resorts
               related to a 9.1% increase in revenue per available room (from
               $481 to $525) as a result of a 7.2% increase in average daily
               rate (from $642 to $688) and a 3 percentage point increase in
               occupancy (from 79% to 82%); partially offset by

          -    a decrease of $1.1 million at the Resort Properties related to
               5.9% decrease in revenue per available room (room $185 to $174)
               as a result of a 4 percentage point decrease in occupancy (from
               65% to 61%); and

          -    a decrease of $0.8 million at the Business Class Hotel Properties
               related to a 6.5% decrease in revenue per available room (from
               $77 to $72) as a result of a 3 percentage point decrease in
               occupancy (from 69% to 66%).

     -    Residential Development Property revenues increased $23.2 million, or
          16.5%, to $163.9 million, primarily due to:

          -    an increase of $17.0 million primarily due to increased sales of
               10 lots (from 34 to 44) at DMDC;

          -    an increase of $3.0 million in club revenue at CRDI primarily due
               to the addition of a restaurant and the full impact in 2004 of
               the sale of Tahoe Club memberships at the Tahoe Mountain Resorts
               Property, which began selling memberships in mid-2003;

          -    an increase of $2.7 million in club revenue at DMDC primarily due
               to increased membership levels; and

          -    an increase of $2.7 million in other revenue at DMDC due to a
               settlement for reimbursement of construction remediation costs;
               partially offset by

          -    a decrease of $1.2 million in CRDI cost of sales related to
               product mix in lots and units available for sale in 2004 versus
               2003, primarily at the One Vendue project in Charleston, South
               Carolina which had sales in 2003, but none in 2004 as the project
               sold out in 2003, partially offset by the Old Greenwood project
               in Tahoe, California and the Horizon Pass project in Bachelor
               Gulch, Colorado which had sales in 2004, but none in the nine
               months ended September 30, 2003 as the projects were not
               available for sale; and

          -    a decrease of $1.2 million in other revenue due to interest
               income recorded in 2003 on a note receivable from the Woodlands
               Land Development Company, L.P., entity which was sold in December
               2003.

PROPERTY EXPENSES

     Total property expenses increased $28.3 million, or 6.8%, to $444.8 million
for the nine months ended September 30, 2004, as compared to $416.5 million for
the nine months ended September 30, 2003. The primary components of the
variances in property expenses are discussed below.

     -    Office Property expenses increased $6.8 million, or 3.9%, to $182.6
          million, primarily due to:

          -    an increase of $11.6 million from the acquisition of The
               Colonnade in August 2003, the Hughes Center Properties in
               December 2003 through May 2004, the Dupont Centre in March 2004,
               and The Alhambra in August 2004; and

          -    an increase of $1.5 million related to the cost of providing
               third party management and leasing services to joint venture
               properties; partially offset by

          -    a decrease of $5.7 million from the 55 consolidated Office
               Properties (excluding 2003 and 2004 acquisitions and
               dispositions) that the Company owned or had an interest in,
               primarily due to:

               -    $4.2 million decrease in building repairs and maintenance;

               -    $4.2 million decrease in property taxes and insurance; and

               -    $0.6 million decrease in utilities; partially offset by

               -    $2.0 million increase in administrative expenses;

     -    Resort/Hotel Property expenses increased $6.7 million, or 6.2%, to
          $115.4 million, primarily due to:

          -    an increase of $5.8 million in operating expenses and general and
               administrative costs at the Destination Fitness Resorts primarily
               related to increased employee health insurance costs and
               increased average occupancy of 3 percentage points (from 79% to
               82%); and

          -    an increase of $1.1 million in resort property food and beverage
               operating expense and marketing costs.

                                       52


     -    Residential Development Property expenses increased $14.8 million, or
          11.2%, to $146.8 million, primarily due to:

          -    an increase of $8.7 million in DMDC cost of sales due to
               increased lot sales compared to 2003 (from 34 to 44);

          -    an increase of $6.9 million in club operating expenses due to
               increased membership levels at CRDI and DMDC, a restaurant
               addition at CRDI and the golf course addition at DMDC;

          -    an increase of $5.0 million in marketing expenses at certain CRDI
               projects and the Ritz Carlton condominium residence project; and

          -    an increase of $0.6 million in other expense categories;
               partially offset by

          -    a decrease of $6.4 million in CRDI cost of sales related to
               product mix in lots and units available for sale in 2004 versus
               2003, primarily at the One Vendue project in Charleston, South
               Carolina which had sales in 2003, but none in 2004 as the project
               sold out in 2003, partially offset by the Old Greenwood project
               in Tahoe, California and the Horizon Pass project in Bachelor
               Gulch, Colorado which had sales in 2004, but none in the nine
               months ended September 30, 2003 as the projects were not
               available for sale.

OTHER INCOME/EXPENSE

     Total other expenses increased $59.4 million, or 25.7%, to $290.6 million
for the nine months ended September 30, 2004, compared to $231.2 million for the
nine months ended September 30, 2003. The primary components of the increase in
total other expenses are discussed below.

     OTHER INCOME

     Other income decreased $17.3 million, or 54.6%, to $14.4 million for the
nine months ended September 30, 2004, as compared to $31.7 million for the nine
months ended September 30, 2003. The primary components of the decrease in other
income are discussed below.

     -    Equity in net income of unconsolidated companies decreased $17.1
          million, or 116.3%, to a $2.4 million loss, primarily due to:

          -    a decrease of $10.1 million equity in Office, Residential
               Development and Other net income, primarily due to net income
               recorded in 2003 for the Company's interests in the entities
               through which the Company held its interests in The Woodlands,
               which were sold in December 2003;

          -    a decrease of $4.7 million in Temperature-Controlled Logistics
               Properties equity in net income primarily due to a decrease in
               rental revenues net of deferred rent and an increase in interest
               expense primarily attributable to the $254.4 million financing
               with Morgan Stanley Mortgage Capital, Inc. in February 2004; and

          -    a decrease of $2.3 million in Resort/Hotel Properties equity in
               net income primarily due to net income recorded in 2003 for the
               Company's interest in the Ritz-Carlton Hotel Property which was
               sold in November 2003 and included a $1.1 million payment which
               the Company received from the operator of the Resort/Hotel
               Property pursuant to the terms of the operating agreement because
               the Property did not achieve the specified net operating income
               level.

     -    Income from investment land sales, net decreased $4.4 million due to
          the gains on sales of three parcels of undeveloped investment land in
          Texas in 2003, offset by the gains on sales of three parcels of
          undeveloped investment land in Texas, in 2004.

     -    Interest and other income increased $4.3 million primarily due to $2.2
          million of interest on U.S. Treasury and government sponsored agency
          securities purchased in December 2003 and January 2004 related to debt
          defeasance, $0.9 million of dividends received on other marketable
          securities and a $0.8 million increase in interest on certain notes
          resulting from note amendments in December 2003.

                                       53


     OTHER EXPENSES

     Other expenses increased $42.1 million, or 16.0%, to $305.0 million for the
nine months ended September 30, 2004, as compared to $262.9 million for the nine
months ended September 30, 2003. The primary components of the increase in other
expenses are discussed below.

     -    Depreciation expense increased $22.9 million, or 21.9%, to $127.7
          million, primarily due to:

          -    $18.1 million increase in Office Property depreciation expense,
               attributable to:

               -    $12.3 million from the acquisitions of The Colonnade in
                    August 2003 and the Hughes Center Properties in December
                    2003 though May 2004, the Dupont Centre in March 2004 and
                    The Alhambra in August 2004; and

               -    $5.8 million due to an increase in leasehold improvements,
                    lease commissions, building improvements, and accelerated
                    depreciation of leasehold improvements and lease commissions
                    upon lease terminations;

          -    $3.0 million increase in Residential Development Property
               depreciation expense; and

          -    $2.3 million increase in Resort/Hotel Property depreciation
               expense.

     -    Interest expense increased $7.7 million, or 6.0%, to $137.0 million,
          primarily due to:

          -    $3.7 million increase from an increase of approximately $312
               million in the weighted average debt balance, partially offset by
               a .58 percentage point decrease in the weighted average interest
               rate (from 7.19% to 6.61%) primarily due to the refinancing and
               new financings of fixed rate debt at lower interest rates and the
               termination of a $400 million cash flow hedge, which were
               replaced with $400 million of cash flow hedges resulting in a 3.1
               percentage point reduction in strike prices (from 6.6% to 3.5%);
               and

          -    $3.2 million increase related to the Fountain Place Office
               Property transaction.

     -    Corporate general and administrative expense increased $3.8 million,
          or 20.1%, to $22.7 million primarily due to salary merit increases,
          cost increases of employee benefits, restricted stock compensation
          recorded in 2004 and Sarbanes-Oxley related costs.

     -    Extinguishment of debt increased $3.1 million primarily due to the
          write off of deferred financing costs associated with the following:

          -    reduction of the Fleet Fund I and II Term Loan in January 2004;

          -    the write off of deferred financing costs associated with
               reduction of the Bank of America Fund XII Term Loan funded by
               proceeds from the sale of Ptarmigan Place Office Property and
               adjacent land and the 12404 Park Central Office Property; and

          -    the write off of deferred financing costs associated with the
               payoff of the $220.0 million Deutsche Bank-CMBS Loan in June 2004
               funded with proceeds from the Fountain Place Office Property
               transaction and a draw on the credit facility.

     -   Impairment charges increased $2.9 million primarily due to the $4.1
         million impairment related to the demolition of the old clubhouse at
         the Sonoma Club in the third quarter 2004 in order to construct a new
         clubhouse, partially offset by a $1.2 million impairment of the North
         Dallas Athletic Club in the first quarter 2003.

     -   Amortization of deferred financing costs increased $2.5 million, or
         32.5%, to $10.2 million primarily due to the addition of deferred
         financing costs related to debt restructuring and refinancing
         associated with the $275.0 million secured loan with Bank of America
         and Deutsche Bank in January 2004.

DISCONTINUED OPERATIONS

     Income from discontinued operations on assets sold and held for sale
increased $9.8 million, or 114.0%, to income of $1.3 million, primarily due to:

     -   an increase of $12.8 million, net of minority interests, due to the
         impairment of the 1800 West Loop South Office Property in 2003; and

     -   an increase of $3.5 million, net of minority interests, impairments
         recorded in 2003 on the behavioral healthcare properties; partially
         offset by

     -   a decrease of $2.4 million, net of minority interests, due to the
         impairment of three Office Properties in 2004;

     -   a decrease of $1.9 million, net of minority interests, due to the
         reduction of net income associated with properties held for sale in
         2004 compared to 2003; and

     -   a decrease of $2.0 million, net of minority interests, due to an
         aggregate loss on six Office Properties sold in 2004.

                                       54


                        LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS



                                                          FOR THE NINE MONTHS
(in millions)                                           ENDED SEPTEMBER 30, 2004
                                                        ------------------------
                                                     
Cash provided by Operating Activities                         $    75.3
Cash used in Investing Activities                                (221.9)
Cash provided by Financing Activities                             133.1
                                                              ---------
Decrease in Cash and Cash Equivalents                         $   (13.5)
Cash and Cash Equivalents, Beginning of Period                     78.0
                                                              ---------
Cash and Cash Equivalents, End of Period                      $    64.5
                                                              =========


OPERATING ACTIVITIES

     The Company's cash provided by operating activities of $75.3 million is
attributable to Property operations.

INVESTING ACTIVITIES

     The Company's cash used in investing activities of $221.9 million is
primarily attributable to:

     -    $195.8 million purchase of U.S. Treasuries and government sponsored
          agency securities in connection with the defeasance of LaSalle Note
          II and other securities;

     -    $193.3 million for the acquisition of investment properties, primarily
          due to the acquisition of Hughes Center, the Dupont Centre and The
          Alhambra Office Properties;

     -    $68.1 million for revenue and non-revenue enhancing tenant improvement
          and leasing costs for Office Properties;

     -    $31.3 million for property improvements for rental properties,
          primarily attributable to non-recoverable building improvements for
          the Office Properties, renovations at Sonoma Mission Inn and Ventana
          Inn, and replacement of furniture, fixtures and equipment for the
          Resort/Hotel Properties;

     -    $28.3 million for development of amenities at the Residential
          Development Properties;

     -    $10.1 million of additional investment in unconsolidated Office
          Properties primarily due to a $9.6 million contribution to Main Street
          Partners L.P.;

     -    $3.8 million for development of investment properties;

     -    $2.6 million of additional investment in unconsolidated Other
          companies;

     -    $2.4 million of additional investment in unconsolidated
          Temperature-Controlled Logistics Properties; and

     -    $1.0 million of additional investment in unconsolidated Residential
          Development Properties.

     The cash used in investing activities is partially offset by:

     -    $113.9 million of proceeds from property sales, primarily due to the
          sale of the 1800 West Loop South, Liberty Plaza, Ptarmigan Place,
          Addison Tower, 5050 Quorum and 12404 Park Central Office Properties;

     -    $92.3 million decrease in restricted cash, due primarily to decreased
          escrow deposits for the purchase of the Hughes Center Office
          Properties in January and February 2004;

     -    $90.8 million from return of investment in Temperature-Controlled
          Logistics Properties due primarily to the $254.4 million of additional
          financing at the Temperature-Controlled Logistics Corporation;

     -    $8.8 million of proceeds from defeasance investment maturities;

     -    $4.8 million decrease in notes receivable;

     -    $2.3 million from return of investment in unconsolidated Office
          Properties; and

     -    $1.3 million from return of investment in unconsolidated Resort/Hotel
          Properties.

                                       55


FINANCING ACTIVITIES

     The Company's cash provided by financing activities of $133.1 million is
primarily attributable to:

     -    $454.6 million of proceeds from other borrowings, primarily as a
          result of the Bank of America Fund XII Term Loan secured by the Fund
          XII Properties, the Lehman Capital Note secured by the Fountain Place
          Office Property, the Metropolitan Life Note VII secured by the Dupont
          Centre Office Property, and the new JP Morgan Chase Notes secured by
          certain Hughes Center Properties;

     -    $440.0 million of proceeds from borrowings under the Company's credit
          facility;

     -    $79.9 million of proceeds from the Fountain Place Office Property
          transaction;

     -    $77.7 million of proceeds from borrowings for construction costs for
          infrastructure development at the Residential Development Properties;

     -    $71.0 million of net proceeds from issuance of Series A Preferred
          Shares;

     -    $2.1 million of capital contributions from joint venture partners; and

     -    $0.4 million of net proceeds from the exercise of share options.

     The cash provided by financing activities is partially offset by:

     -    $386.6 million of payments under other borrowings, due primarily to
          the pay off of the Deutsche Bank-CMBS Loan, the pay down of the Fleet
          Fund I Term Loan and the pay down of the Bank of America Fund XII Term
          Loan;

     -    $371.5 million of payments under the Company's credit facility;

     -    $131.7 million of distributions to common shareholders and
          unitholders;

     -    $62.5 million of Residential Development Property note payments;

     -    $24.0 million of distributions to preferred shareholders;

     -    $8.2 million of debt financing costs primarily associated with the
          $275 million Bank of America Fund XII Term Loan and the Lehman Capital
          Note;

     -    $6.3 million of capital distributions to joint venture partners; and

     -    $1.8 million of amortization of debt premiums.

LIQUIDITY REQUIREMENTS

DEBT FINANCING SUMMARY

     The following tables show summary information about the Company's debt,
including its share of unconsolidated debt as of September 30, 2004. Additional
information about the significant terms of the Company's debt financing
arrangements and its unconsolidated debt is contained in Note 9, "Notes Payable
and Borrowings under Credit Facility" and Note 8, "Investments in Unconsolidated
Companies," of Item 1, "Financial Statements."



                                              AS OF SEPTEMBER 30, 2004
                            ------------------------------------------------------
                                                      SHARE OF
                                TOTAL              UNCONSOLIDATED
(in thousands)              COMPANY DEBT               DEBT               TOTAL
                            ------------           --------------       ----------
                                                               
Fixed Rate Debt             $ 1,823,238            $  315,652           $2,138,890
Variable Rate Debt            1,032,653               156,816            1,189,469
                            -----------            ----------           ----------
Total Debt                  $ 2,855,891            $  472,468           $3,328,359
                            ===========            ==========           ==========


                                       56


                  Listed below are the aggregate principal payments by year
required as of September 30, 2004. Scheduled principal installments and amounts
due at maturity are included.



                                                   UNSECURED
                                                     DEBT               TOTAL            SHARE OF
                     SECURED       UNSECURED        LINE OF            COMPANY        UNCONSOLIDATED
(in thousands)        DEBT           DEBT           CREDIT              DEBT               DEBT            TOTAL(1)
--------------    ------------     ---------     --------------     --------------    --------------     ----------
                                                                                       
2004              $     21,274     $       -     $            -     $       21,274    $       58,163     $   79,437
2005                   422,277             -            307,500            729,777             8,517        738,294
2006                   460,288             -                  -            460,288            25,300        485,588
2007                   112,193       250,000                  -            362,193            48,169        410,362
2008                    47,321             -                  -             47,321            44,841         92,162
Thereafter             860,038       375,000                  -          1,235,038           287,478      1,522,516
                  ------------     ---------     --------------     --------------    --------------     ----------
                  $  1,923,391     $ 625,000     $      307,500     $    2,855,891    $      472,468     $3,328,359
                  ============     =========     ==============     ==============    ==============     ==========


------------------------
(1)  Based on contractual maturity and does not include extension option on Bank
     of America Fund XII term loan or expected early payment of LaSalle Note I,
     JP Morgan Mortgage Note, or the Nomura Funding VI Note.

OFF-BALANCE SHEET ARRANGEMENTS - GUARANTEE COMMITMENTS

     The FASB issued Interpretation 45, "Guarantors' Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," requiring a guarantor to disclose its guarantees. The Company's
guarantees in place as of September 30, 2004 are listed in the table below. For
the guarantees on indebtedness, no triggering events or conditions are
anticipated to occur that would require payment under the guarantees and
management believes the assets associated with the loans that are guaranteed are
sufficient to cover the maximum potential amount of future payments and
therefore, would not require the Company to provide additional collateral to
support the guarantees. The Company has recorded a liability, in an amount not
significant to its operations, for guarantees entered into following the
adoption of FIN 45.



                                                                           GUARANTEED
                                                                             AMOUNT           MAXIMUM
                                                                         OUTSTANDING AT     GUARANTEED
DEBTOR                                                                 SEPTEMBER 30, 2004     AMOUNT
                                                                       ------------------   ----------
                                                                                (in thousands)
                                                                                       
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1)           $   7,583          $ 7,583
Blue River Land Company, L.L.C.(2) (3)                                        1,963            6,300
Main Street Partners, L.P. - Letter of Credit (2) (4)                         4,250            4,250
Sovereign Bank  (5)                                                           3,654            3,654
                                                                          ---------          -------
Total Guarantees                                                          $  17,450          $21,787
                                                                          =========          =======


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

(1)  The Company provides a $7.6 million letter of credit to support the payment
     of interest and principal of the Eagle Ranch Metropolitan District Revenue
     Development Bonds.

(2)  See Note 8, "Investments in Unconsolidated Companies," 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 $2.8 million
     outstanding at September 30, 2004 and the amount guaranteed was $2.0
     million.

(4)  The Company and its joint venture partner each provide separate Letters of
     Credit to guarantee repayment of up to $4.3 million each of the Main Street
     Partners, L.P. loan.

(5)  The Company provided guarantees for the repayment of up to $3.7 million of
     loans from Sovereign Bank in the event a final certificate of occupancy is
     not obtained for timeshare units sold at a residential development project
     at an entity which is consolidated into CRDI. The loans guaranteed
     represent third-party financing obtained by buyers of the units.

OTHER COMMITMENTS AND CONTINGENCIES

     See "Recent Developments" in this Item 2, for information on the Company's
$79.9 million contingent obligation related to the Fountain Place Office
Property transaction.

     The Company has a contingent obligation of approximately $1.0 million
related to a construction warranty matter. The Company believes it is probable
that a significant amount would be recovered through reimbursements from third
parties.

                                       57


CAPITAL EXPENDITURES

     As of September 30, 2004, the Company had unfunded capital expenditures of
approximately $26.1 million relating to capital investments that are not in the
ordinary course of operations of the Company's business segments. The table
below specifies the Company's requirements for capital expenditures and its
amounts funded as of September 30, 2004, and amounts remaining to be funded
(future fundings classified between short-term and long-term capital
requirements):

(in millions)



                                                                                                         CAPITAL EXPENDITURES
                                                                      AMOUNT                         -----------------------------
                                                        TOTAL      FUNDED AS OF       AMOUNT         SHORT-TERM
                                                       PROJECT     SEPTEMBER 30,      REMAINING       (NEXT 12       LONG-TERM
                     PROJECT                           COST(1)        2004            TO FUND         MONTHS)(2)   (12+ MONTHS)(2)
-------------------------------------------------      -------     -------------      ---------      -----------   ---------------
                                                                                                    
OFFICE SEGMENT
     Acquired Properties (3)                           $  2.9         $ 2.7           $  0.2          $ 0.2            $   -
     Houston Center Shops Redevelopment (4)              11.6          10.9              0.7            0.7                -

RESIDENTIAL DEVELOPMENT SEGMENT
     Tahoe Mountain Club(5)                              54.3          50.6              3.7            3.7                -

RESORT/HOTEL SEGMENT
      Canyon Ranch - Tucson Land -
                Construction Loan (6)                     2.4           1.0              1.4            1.2              0.2

OTHER
      SunTx (7)                                          19.0          14.3              4.7            1.7              3.0
      Purchase of AmeriCold Logistics (formerly
               "Crescent Spinco") (8)                    15.4             -             15.4            15.4               -
                                                       ------         -----           ------          ------           -----
TOTAL                                                  $105.6         $79.5           $ 26.1          $ 22.9           $ 3.2
                                                       ======         =====           ======          ======           =====


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

(1)  All amounts are approximate.

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

(3)  The capital expenditures reflect the Company's ownership percentage of 30%
     for Five Post Oak Park Office Property.

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

(5)  As of September 30, 2004, the Company had invested $50.6 million in Tahoe
     Mountain Club, which includes the acquisition of land and development of a
     golf course and retail amenities. During 2004, the Company is developing a
     swim and fitness facility, clubhouse, and completing the golf course.

(6)  The Company has a $2.4 million construction loan with the purchaser of the
     land, which will be secured by nine developed lots and a $0.4 million
     letter of credit.

(7)  This commitment is related to the Company's investment in a private equity
     fund and its general partner. The commitment is based on cash contributions
     and distributions and does not consider equity gains or losses.

(8)  On November 4, 2004 COPI sold its interests in AmeriCold Logistics and paid
     off the $15.4 million, inclusive of accrued interest, loan to Bank of
     America. As a result, the Company has no further capital expenditure
     requirements with respect to the COPI bankruptcy.

     In April 2004, the Company entered into agreements with Ritz-Carlton Hotel
Company, L.L.C. to develop the first Ritz-Carlton hotel and condominium project
in Dallas, Texas with development to commence upon reaching an acceptable level
of pre-sales for the residences. The development plans include a Ritz-Carlton
with approximately 216 hotel rooms and 70 residences. Construction on the
development is anticipated to begin in the second quarter of 2005.

LIQUIDITY OUTLOOK

     The Company expects to fund its short-term capital requirements of
approximately $22.9 million through a combination of net cash flow from
operations and borrowings under the Company's credit facility or additional debt
facilities. As of September 30, 2004, the Company had maturing debt obligations
of $610.6 million through September 30, 2005, consisting primarily of its credit
facility, Fleet Fund I Term Loan and the Lehman Capital Note. The Company plans
to refinance the credit facility and the Fleet Fund I Term Loan in 2004. The
Lehman Capital Note is also expected to be refinanced. The remaining maturities
consist primarily of normal principal amortization and will be met with cash
flow from operations. In addition, $26.0 million of debt relating to the
Residential Developments is maturing within the next 12 months and will be
retired with the sales of the corresponding land or units or will be refinanced.

     The Company 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), and distributions to shareholders and
unitholders, primarily through cash flow provided by operating activities. The
Company expects to fund the remainder of these short-term liquidity requirements
with borrowings under the

                                       58

Company's credit facility, return of capital from Residential Development
Properties, proceeds from the sale of non-core investments, other business
initiatives or the joint venture of Properties, and borrowings under additional
debt facilities.

     The Company's long-term liquidity requirements as of September 30, 2004
consist primarily of $2.2 billion of debt maturing after September 30, 2005. The
Company also has $3.2 million of long-term capital expenditures requirements.
The Company anticipates meeting these long-term maturity obligations 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 Company
to satisfy its liquidity requirements and commitments for material capital
expenditures include:

     -   Additional proceeds from the Company's Credit Facility under which the
         Company had up to $83.9 million of borrowing capacity available as of
         September 30, 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 or
         joint ventures of existing properties.

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

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

     -   A reduction in the operating results of the Properties could limit the
         Company's ability to refinance existing secured and unsecured debt, or
         extend maturity dates or could result in an uncured or unwaived event
         of default;

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

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

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

     The Company's portion of unconsolidated debt maturing through September
2005 is $64.5 million. The Company's portion of unconsolidated debt maturing
after September 2005 is $408.0 million. Unconsolidated debt is the liability of
the unconsolidated entity, is typically secured by that entity's property, and
is non-recourse to the Company except where a guarantee exists.

                           EQUITY AND DEBT 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.

     Net proceeds to the Company from the January 2004 Series A Preferred
Offering were approximately $71.0 million after underwriting discounts, offering
costs and dividends accrued on the shares up to the issuance date. The Company
used the net proceeds to pay down the Company's credit facility.

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 or the nine months ended
September 30, 2004. As of September 30, 2004, the Company had repurchased
20,256,423 common shares under the Share Repurchase Program, at an aggregate
cost of approximately $386.9 million, resulting in an average repurchase price
of $19.10 per common share. All repurchased shares were recorded as treasury
shares.


                                       59


DEBT FINANCING ARRANGEMENTS

     The significant terms of the Company's primary debt financing arrangements
existing as of September 30, 2004, are shown below:



                                                                                    BALANCE          INTEREST
                                                                                 OUTSTANDING AT      RATE AT
                                                                 MAXIMUM         SEPTEMBER 30,    SEPTEMBER 30,    MATURITY
                 DESCRIPTION (1)                                BORROWINGS          2004              2004           DATE
------------------------------------------------------------   -----------       --------------   -------------   ----------
                                                                               (dollars in thousands)
                                                                                                      
SECURED FIXED RATE DEBT:
     AEGON Partnership Note (Greenway Plaza)                   $   256,017      $  256,017           7.53%        July 2009
     LaSalle Note I (Fund I)                                       232,673         232,673           7.83         August 2027
     JP Morgan Mortgage Note (Houston Center)                      187,922         187,922           8.31         October 2016
     LaSalle Note II (Fund II Defeasance) (2)                      158,030         158,030           7.79         March 2006
     Cigna Note (707 17th Street/Denver Marriott)                   70,000          70,000           5.22         June 2010
     Bank of America Note (Colonnade)                               38,000          38,000           5.53         May 2013
     Mass Mutual Note (3800 Hughes) (3)                             37,315          37,315           7.75         August 2006
     Metropolitan Life Note V (Datran Center)                       37,006          37,006           8.49         December 2005
     Metropolitan Life Note VII (Dupont Centre)                     35,500          35,500           4.31         May 2011
     Northwestern Life Note (301 Congress)                          26,000          26,000           4.94         November 2008
     Allstate Note (3993 Hughes) (3)                                25,687          25,687           6.65         September 2010
     JP Morgan Chase (3773 Hughes)                                  24,755          24,755           4.98         September 2011
     Metropolitan Life Note VI (3960 Hughes)(3)                     24,142          24,142           7.71         October 2009
     JP Morgan Chase I (3753/3763 Hughes)                           14,350          14,350           4.98         September 2011
     Northwestern Life II (3980 Hughes)(3)                          10,310          10,310           7.40         July 2007
     Woodmen of the World Note (Avallon IV)                          8,500           8,500           8.20         April 2009
     Nomura Funding VI Note (Canyon Ranch - Lenox)                   7,709           7,709          10.07         July 2020
     Construction, Acquisition and other obligations
        for various CRDI and Mira Vista projects                     4,322           4,322       2.90 to 10.50    Nov 04 to Feb 09
                                                               -----------     -----------       -------------
             Subtotal/Weighted Average                         $ 1,198,238     $ 1,198,238           7.35%
                                                               -----------     -----------       -------------

UNSECURED FIXED RATE DEBT:

     The 2009 Notes                                            $   375,000     $   375,000           9.25%        April 2009
     The 2007 Notes                                                250,000         250,000           7.50         September 2007
                                                               -----------     ------------      -------------
             Subtotal/Weighted Average                         $   625,000     $   625,000           8.55%
                                                               -----------     ------------      -------------

SECURED VARIABLE RATE DEBT:

     Bank of America Fund XII Term Loan (Fund XII) (4)         $   226,035     $   226,035           3.93%        January 2006
     Fleet Fund I Term Loan (Fund I)                               160,000         160,000           5.15         May 2005
     Lehman Capital Note (Fountain Place)                           90,000          90,000           3.26         March 2005
     Fleet Term Loan (Distributions from Fund III, IV and V)        75,000          75,000           6.21         February 2007
     Wachovia Securities (Alhambra)(5)                              45,000          45,000           4.51         November 2005
     National Bank of Arizona (Desert Mountain)                     35,580          31,041       4.75 to 5.75     Nov 04 to Dec 05
     FHI Finance Loan (Sonoma Mission Inn)                          10,000          10,000           6.17         September 2009
     Texas Capital Bank (Land)                                      10,500           7,977           4.09         July 2006
     The Rouse Company (Hughes Center undeveloped land)              7,500           7,500           5.75         December 2005
     Wells Fargo Bank (3770 Hughes)                                  4,774           4,774           3.88         November 2004
     Construction, Acquisition and other obligations
        for various CRDI and Mira Vista projects                   180,248          67,826       3.87 to 5.75     Oct 04 to Sep 08
                                                               -----------     ------------      -------------
             Subtotal/Weighted Average                         $   844,637     $   725,153           4.53%
                                                               -----------     ------------      -------------
UNSECURED VARIABLE RATE DEBT:
     Credit Facility                                           $   399,000     $   307,500(6)        3.82%        May 2005
                                                               -----------     ------------      -------------
             Subtotal/Weighted Average                         $   399,000     $   307,500           3.82%
                                                               -----------     ------------      -------------
             TOTAL/WEIGHTED AVERAGE                            $ 3,066,875     $ 2,855,891           6.52%(7)
                                                               ===========     ===========       =============
AVERAGE REMAINING TERM                                                                                            4.8 years


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

(1)  For more information regarding the terms of the Company's debt financing
     arrangements, including properties securing the Company's secured debt and
     the method of calculation of the interest rate for the Company's variable
     rate debt, see Note 9, "Notes Payable and Borrowings under the Credit
     Facility," included in Item 1, "Financial Statements."

(2)  In December 2003, the Company defeased approximately $8.7 million of this
     loan to release one of the Funding II Properties securing the loan by
     purchasing $9.6 million in U.S. Treasuries and government sponsored agency
     securities to substitute as collateral. On January 15, 2004, the Company
     defeased approximately $150.7 million to release the remainder of the
     Funding II properties by purchasing $170.0 million in U.S. Treasuries and
     government sponsored agency securities. The earnings and principal maturity
     from these investments will pay the principal and interest associated with
     the LaSalle Note II.

(3)  Includes a portion of total premiums of $7.1 million reflecting market
     value of debt acquired with purchase of Hughes Center portfolio.

(4)  This loan has one one-year extension option.

                                       60


(5)  This includes two notes from Wachovia Securities. The notes are due
     November 2004, and bear interest at the LIBOR rate plus a spread of (i)
     100.5 basis points for the $31 million Wachovia note (at September 30,
     2004, the interest rate was 2.765%), and (ii) 661.0 basis points for the
     $14 million Wachovia note (at September 30, 2004, the interest rate was
     8.37%). Both notes are secured by The Alhambra Office Property. The blended
     rate at September 30, 2004 for the two notes was 4.51%. In October 2004,
     the Company refinanced this loan with a $50 million loan from Morgan
     Stanley for a 7-year interest only term at a fixed rate of 5.06%.

(6)  The outstanding balance excludes letters of credit issued under the credit
     facility of $7.6 million.

(7)  The overall weighted average interest rate does not include the effect of
     the Company's cash flow hedge agreements. Including the effect of these
     agreements, the overall weighted average interest rate would have been
     6.78%.

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

     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 Company's loans can trigger an increase in interest rates, an
acceleration of payment on the loan in default, and for the Company's secured
debt, foreclosure on the property securing the debt, and could cause the credit
facility to become unavailable to the Company. In addition, an event of default
by the Company or any of its subsidiaries with respect to any indebtedness in
excess of $5.0 million generally will result in an event of default under the
Credit Facility, 2007 Notes, 2009 Notes, Bank of America Fund XII Term Loan, the
Fleet Fund I 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 Company's business,
financial condition, or liquidity.

     The Company's debt facilities generally prohibit loan prepayment for an
initial period, allow prepayment with a penalty during a following specified
period and allow prepayment without penalty after the expiration of that period.
During the nine months ended September 30, 2004, there were no circumstances
that required prepayment penalties or increased collateral related to the
Company's existing debt.

     On June 28, 2004, the Company paid off the $220.0 million Deutsche
Bank-CMBS loan with proceeds from the Fountain Place transaction and a draw on
the Company's credit facility. See "Recent Developments," in this Item 2, for
additional information regarding the Fountain Place transaction. The loan was
secured by the Funding X Properties and Spectrum Center. In July 2004, the
Company unwound the $220.0 million interest rate cap with JP Morgan Chase that
corresponded to this loan.

DEFEASANCE OF LASALLE NOTE II

     In January 2004, the Company released the remaining properties in Funding
II by reducing the Fleet Fund I and II Term Loan by $104.2 million and
purchasing an additional $170.0 million of U.S. Treasury and government
sponsored agency securities with an initial weighted average yield of 1.76%. The
Company 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. The cash flow from the securities is structured to match the cash flow
(principal and interest payments) required under the LaSalle Note II. The
retirement of the Fleet loan and the purchase of the defeasance securities were
funded through the $275 million Bank of America Fund XII Term Loan. The
collateral for the Bank of America loan was 10 of the 11 properties previously
in the Funding II collateral pool. The Bank of America loan is structured to
allow the Company the flexibility to sell, joint venture or long-term finance
these 10 assets over the next 36 months. The final Funding II property, Liberty
Plaza, was moved to the Operating Partnership and subsequently sold in April
2004.

UNCONSOLIDATED DEBT ARRANGEMENTS

     As of September 30, 2004, the total debt of the unconsolidated joint
ventures and equity investments in which the Company has ownership interests was
$1.3 billion, of which the Company's share was $472.5 million. The Company had
guaranteed $6.2 million of this debt as of September 30, 2004. Additional
information relating to the Company's unconsolidated debt financing arrangements
is contained in Note 8, "Investments in Unconsolidated Companies," of Item 1,
"Financial Statements."

                                       61


DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Company uses derivative financial instruments to convert a portion of
its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of September 30, 2004, the Company had three cash flow hedge
agreements which are accounted for in conformity with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133."

     The following table shows information regarding the Company's interest rate
swaps designated as cash flow hedge agreements during the nine months ended
September 30, 2004, and additional interest expense and unrealized gains
(losses) recorded in Accumulated Other Comprehensive Income ("OCI").



                                                                                                                  CHANGE IN
                         NOTIONAL             MATURITY       REFERENCE     FAIR MARKET   ADDITIONAL INTEREST  UNREALIZED GAINS
   EFFECTIVE DATE         AMOUNT                DATE           RATE           VALUE            EXPENSE        (LOSSES) IN OCI
   --------------         ------                ----           ----           -----            -------        ---------------
  (in thousands)
                                                                                            
      4/18/00            $ 100,000            4/18/04          6.76%        $      -            $ 1,712           $ 1,695
      2/15/03              100,000            2/15/06          3.26%            (931)             1,531             1,415
      2/15/03              100,000            2/15/06          3.25%            (927)             1,529             1,413
      9/02/03              200,000            9/01/06          3.72%          (3,475)             3,786             3,122
                                                                            --------            -------           -------
                                                                            $ (5,333)           $ 8,558           $ 7,645
                                                                            ========            =======           =======


     In addition, two of the Company's unconsolidated companies have cash flow
hedge agreements of which the Company's portion of change in unrealized gains
reflected in OCI was approximately $0.6 million for the nine months ended
September 30, 2004.

INTEREST RATE CAP

     In March 2004, in connection with the Bank of America Fund XII Term Loan,
the Company entered into a LIBOR interest rate cap struck at 6.00% for a
notional amount of approximately $206.3 million through August 31, 2004, $137.5
million from September 1, 2004 through February 28, 2005, and $68.8 million from
March 1, 2005 through March 1, 2006. Simultaneously, the Company sold a LIBOR
interest rate cap with the same terms. Since these instruments do not reduce the
Company's net interest rate risk exposure, they do not qualify as hedges and
changes to their respective fair values are charged to earnings as the changes
occur. As the significant terms of these arrangements are the same, the effects
of a revaluation of these instruments are expected to offset each other.

                                       62


                           UNCONSOLIDATED INVESTMENTS

INVESTMENTS IN UNCONSOLIDATED COMPANIES

     The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of September 30, 2004.



                                                                                                            COMPANY'S OWNERSHIP
                       ENTITY                                             CLASSIFICATION                  AS OF SEPTEMBER 30, 2004
----------------------------------------------------          --------------------------------------      ------------------------
                                                                                                    
Main Street Partners, L.P.                                    Office (Bank One Center-Dallas)                     50.0% (1)
Crescent Miami Center, L.L.C.                                 Office (Miami Center - Miami)                       40.0% (2)
Crescent Five Post Oak Park L.P.                              Office (Five Post Oak - Houston)                    30.0% (3)
Crescent One BriarLake Plaza, L.P.                            Office (BriarLake Plaza - Houston)                  30.0% (4)
Crescent 5 Houston Center, L.P.                               Office (5 Houston Center-Houston)                   25.0% (5)
Austin PT BK One Tower Office Limited Partnership             Office (Bank One Tower-Austin)                      20.0% (6)
Houston PT Three Westlake Office Limited Partnership          Office (Three Westlake Park - Houston)              20.0% (6)
Houston PT Four Westlake Office Limited Partnership           Office (Four Westlake Park-Houston)                 20.0% (6)
Vornado Crescent Carthage and KC Quarry, L.L.C.               Temperature-Controlled Logistics                    56.0% (7)
Vornado Crescent Portland Partnership                         Temperature-Controlled Logistics                    40.0% (8)
Blue River Land Company, L.L.C.                               Other                                               50.0% (9)
Canyon Ranch Las Vegas, L.L.C.                                Other                                               50.0% (10)
EW Deer Valley, L.L.C.                                        Other                                               41.7% (11)
CR License, L.L.C.                                            Other                                               30.0% (12)
CR License II, L.L.C.                                         Other                                               30.0% (13)
SunTx Fulcrum Fund, L.P.                                      Other                                               23.5% (14)
SunTx Capital Partners, L.P.                                  Other                                               14.4% (15)
G2 Opportunity Fund, L.P. ("G2")                              Other                                               12.5% (16)


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

(1)  The remaining 50% interest in Main Street Partners, L.P. is owned by Trizec
     Properties, Inc.

(2)  The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by an
     affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.

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

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

(5)  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.

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

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

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

(9)  The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
     parties unrelated to the Company. Blue River Land Company, L.L.C. was
     formed to acquire, develop and sell certain real estate property in Summit
     County, Colorado.

(10) Of the remaining 50% interest in Canyon Ranch Las Vegas, L.L.C., 35% is
     owned by an affiliate of the management company of two of the Company's
     Resort/Hotel Properties and 15% is owned by the Company through its
     investments in CR License II, L.L.C. Canyon Ranch Las Vegas, L.L.C.
     operates a Canyon Ranch spa in a hotel in Las Vegas.

(11) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
     unrelated to the Company. 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. Empire Mountain Village, L.L.C. was formed to acquire, develop and
     sell certain real estate property at Deer Valley Ski Resort next to Park
     City, Utah.

(12) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
     of the management company of two of the Company's Resort/Hotel Properties.
     CR License, L.L.C. owns the licensing agreement related to certain Canyon
     Ranch trade names and trademarks.

(13) The remaining 70% interest in CR License II, L.L.C. is owned by an
     affiliate of the management company of two of the Company's Resort/Hotel
     Properties. CR License II, L.L.C. and its wholly-owned subsidiaries provide
     management and development consulting services to a variety of entities in
     the hospitality, real estate, and health and wellness industries.

(14) Of the remaining 76.5% of SunTx Fulcrum Fund, 37.1% is owned by SunTx
     Capital Partners, L.P. and the remaining 39.4% is owned by a group of
     individuals unrelated to the Company. SunTx Fulcrum Fund, L.P.'s objective
     is to invest in a portfolio of acquisitions that offer the potential for
     substantial capital appreciation.

(15) SunTx Capital Partners, L.P. is the general Partner of the SunTx Fulcrum
     Fund, L.P. The remaining 85.6% interest in SunTx Capital Partners, L.P. is
     owned by parties unrelated to the Company.

(16) 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 Company. G2 is managed and
     controlled by an entity that is owned equally by GMSPLP and GMAC Commercial
     Mortgage Corporation ("GMACCM"). 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. The remaining approximately 2% general partnership interest is
     owned by unrelated parties.

                                       63


TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

      As of September 30, AmeriCold Logistics, LLC was owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"). As
sole lessee of the Temperature-Controlled Logistics Properties, AmeriCold
Logistics leases the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended. The Company has an indirect 40% ownership interest in the
Temperature-Controlled Logistics Corporation. The Company has no interest in
COPI or AmeriCold Logistics. 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.

     Under terms of the leases, AmeriCold Logistics elected to defer $40.0
million of the total $120.4 million of rent payable for the nine months ended
September 30, 2004. The Company's share of the deferred rent was $16.0 million.
The Company recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $16.0 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the nine months ended September 30, 2004. As of September 30,
2004, the Temperature-Controlled Logistics Corporation's deferred rent and
valuation allowance from AmeriCold Logistics were $122.4 million and $114.4
million, respectively, of which the Company's portions were $49.0 million and
$45.8 million, respectively.

     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 Company.

      See "Recent Developments," for information regarding the purchase by the
Temperature-Controlled Logistics Corporation of all the ownership interests in
AmeriCold Logistics, the termination of the three triple-net master leases, and
the agreement to sell an interest in the Temperature-Controlled Logistics
Corporation to the Yucaipa Companies.

                        SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

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

     The Company believes that the most significant accounting policies that
involve the use 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,

     -   Consolidation of variable interest entities, and

     -   Allowance for doubtful accounts.

                                       64


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

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

     ACQUISITION OF OPERATING PROPERTIES. The Company 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
Company 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.

                                       65


     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 Company's overall relationship with that respective customer.
Characteristics considered by management in allocating these values include the
nature and extent of the Company'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
in-place lease value and the customer relationship value and above-market and
below-market in-place lease values would be charged to expense.

     RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Company 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
Company 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 Company's estimates of costs or the percentage of
completion is incorrect, it could result in either an increase or decrease in
cost of sales expense or revenue recognized and therefore, an increase or
decrease in net income.

     GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. The Company 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 Company
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 Company's receivables, if any, related to the
sale are collectible and are subject to subordination, and the degree of the
Company's continuing involvement with the real estate asset after the sale. If
full gain recognition is not appropriate, the Company accounts for the sale
under an appropriate deferral method.

     CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 15, 2003, the FASB
approved the issuance of Interpretation 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." In December 2003, the FASB issued FIN 46R,
"Consolidation of Variable Interest Entities" ("FIN 46R"), which amended FIN 46.
Under FIN 46R, 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 other
entities such as VIEs. FIN 46R requires VIEs to be consolidated by a company if
the company is subject to a majority of the expected losses of the VIE's
activities or entitled to receive a majority of the entity's expected residual
returns or both.

                                       66


     The adoption of FIN 46R did not have a material impact to the Company's
financial condition or results of operations. Due to the adoption of this
Interpretation and management's assumptions in application of the guidelines
stated in the Interpretation, the Company has consolidated GDW LLC, a subsidiary
of DMDC, as of December 31, 2003 and Elijah Fulcrum Fund Partners, L.P.
("Elijah") as of January 1, 2004. Elijah is a limited partnership whose purpose
is to invest in the SunTx Fulcrum Fund, L.P. SunTx Fulcrum Fund, L.P.'s
objective is to invest in a portfolio of acquisitions that offer the potential
for substantial capital appreciation. While it was determined that one of the
Company's unconsolidated joint ventures, Main Street Partners, L.P., and its
investments in Canyon Ranch Las Vegas, L.L.C., CR License, L.L.C. and CR License
II, L.L.C. ("Canyon Ranch Entities") are VIEs under FIN 46R, the Company is not
the primary beneficiary and is not required to consolidate these entities under
other GAAP. The Company's maximum exposure to loss is limited to its equity
investment of approximately $57.7 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at September 30, 2004.

     During 2004, the Company entered into three separate exchange agreements
with a third party intermediary. The first exchange agreement included two
parcels of undeveloped land, the second exchange agreement included the 3930
Hughes Parkway Office Property, and the third exchange agreement included The
Alhambra Office Property. The agreements were for a maximum term of 180 days and
allow the Company to pursue favorable tax treatment on other properties sold by
the Company within this period. During the 180-day periods, which ended or will
end on August 28, 2004, November 6, 2004, and February 2, 2005, respectively,
the third party intermediary is the legal owner of the properties, although the
Company controls the properties, retains all of the economic benefits and risks
associated with these properties and indemnifies the third party intermediary
and, therefore, the Company fully consolidates these properties. The Company
took or will take legal ownership of the properties no later than on the
expiration of the 180-day period.

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

ADOPTION OF NEW ACCOUNTING STANDARD

     EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by the
FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and additional evidence gathering in determining whether or not
securities are other-than-temporarily impaired and lists some of these
impairment indicators. The impairment accounting guidance is effective for
periods beginning after June 15, 2004 and the disclosure requirements for annual
reporting periods are effective for periods ending after June 15, 2004. The
Company adopted EITF 03-1 effective July 1, 2004 and it had no impact on the
Company's financial condition or its results of operations.

                                       67


                             FUNDS FROM OPERATIONS

     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 Company calculates FFO available to common shareholders - diluted in
the same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Common Shareholders and the Company includes the effect of
operating partnership unitholder minority interests.

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

     The aggregate cash distributions paid to common shareholders and
unitholders for the nine months ended September 30, 2004 and 2003 were $131.7
million and $131.6 million, respectively. The Company reported FFO available to
common shareholders before impairments charges related to real estate assets -
diluted of $89.9 million and $121.3 million, for the nine months ended September
30, 2004 and 2003, respectively. The Company reported FFO available to common
shareholders after impairments charges related to real estate assets - diluted
of $84.2 million and $100.9 million, for the nine months ended September 30,
2004 and 2003, respectively.

     An increase or decrease in FFO available to common shareholders - diluted
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 common shareholders - diluted will generally require an
increase in distributions to shareholders and unitholders although not
necessarily on a proportionate basis.

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

                                       68


                CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
                                 (in thousands)



                                                                             FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,               SEPTEMBER 30,
                                                                             -------------------------------------------------------
                                                                                 2004          2003        2004          2003
                                                                             ----------     ---------    ----------   -----------
                                                                                                          
Net (loss) income                                                            $ (10,673)     $   3,270    $ (30,982)   $  (8,963)
Adjustments to reconcile net (loss) income to
         funds from operations available to common shareholders - diluted:
Depreciation and amortization of real estate assets                             42,984         39,617      119,406      109,017
Loss on property sales, net                                                        193             14        2,683          719
Impairment charges related to real estate assets and assets
    held for sale                                                                2,847          2,356        5,699       20,374
Adjustment for investments in unconsolidated companies:
        Office Properties                                                        2,283         (1,613)       7,188        3,805
        Resort/Hotel Properties                                                      -            394            -        1,143
        Residential Development Properties                                      (2,150)             8       (2,099)         235
        Temperature-Controlled Logistics Properties                              5,768          5,147       17,348       16,143
        Other                                                                        -            260            -          178
Unitholder minority interest                                                    (1,912)           585       (5,548)      (1,605)
Series A Preferred Share distributions                                          (5,991)        (4,556)     (17,733)     (13,668)
Series B Preferred Share distributions                                          (2,019)        (2,019)      (6,057)      (6,057)
                                                                             ---------      ---------    ---------    ---------
Funds from operations available to common shareholders before
    impairment charges related to real estate assets - diluted(1)            $  31,330      $  43,463    $  89,905    $ 121,321
Impairment charges related to real estate assets                                (2,847)        (2,356)      (5,699)     (20,374)
                                                                             ---------      ---------    ---------    ---------
Funds from operations available to common shareholders after
    impairment charges related to real estate assets - diluted(1)            $  28,483      $  41,107    $  84,206    $ 100,947
                                                                             =========      =========    =========    =========

Investment Segments:
        Office Properties                                                    $  68,410      $  73,285    $ 211,708    $ 214,568
        Resort/Hotel Properties                                                 12,272         11,471       35,293       39,458
        Residential Development Properties                                       3,779          2,773       15,121       13,766
        Temperature-Controlled Logistics Properties                              4,862          4,198       12,834       16,294
Other:
        Corporate general and administrative                                    (9,023)        (7,356)     (22,734)     (18,968)
        Interest expense                                                       (46,571)       (43,074)    (137,008)    (129,380)
        Series A Preferred Share distributions                                  (5,991)        (4,556)     (17,733)     (13,668)
        Series B Preferred Share distributions                                  (2,019)        (2,019)      (6,057)      (6,057)
        Other(2)                                                                 5,611          8,741       (1,519)       5,308
                                                                             ---------      ---------    ---------    ---------
Funds from operations available to common shareholders before 
  impairment charges related to real estate assets - diluted(1)              $  31,330      $  43,463    $  89,905    $ 121,321
  Impairment charges related to real estate assets                              (2,847)        (2,356)      (5,699)     (20,374)
                                                                             ---------      ---------    ---------    ---------
Funds from operations available to common shareholders after
  impairment charges related to real estate assets - diluted(1)              $  28,483      $  41,107    $  84,206    $ 100,947
                                                                             =========      =========    =========    =========

Basic weighted average shares                                                   99,024         99,172       99,013       99,186
Diluted weighted average shares and units(3)                                   116,864        116,929      116,913      116,941


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

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

(2)  Includes income from investment land sales, net, interest and other income,
     income/loss from other unconsolidated companies, other expenses,
     depreciation and amortization of non-real estate assets and amortization of
     deferred financing costs.

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

                                       69


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



                                                               FOR THE THREE MONTHS ENDED        FOR THE NINE MONTHS ENDED
                                                                     SEPTEMBER 30,                    SEPTEMBER 30,
                                                              ---------------------------        -------------------------
(shares/units in thousands)                                     2004            2003              2004             2003
                                                              -------         -------            -------         -------
                                                                                                     
Basic weighted average shares:                                 99,024          99,172             99,013          99,186
Add:        Weighted average units                             17,728          17,747             17,730          17,749
            Restricted shares and share and unit options          112              10                170               6
                                                              -------         -------            -------         -------
Diluted weighted average shares and units                     116,864         116,929            116,913         116,941
                                                              ========        =======            =======         =======


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     No material changes in the Company's market risk occurred from December 31,
2003 through September 30, 2004. Information regarding the Company's market risk
at December 31, 2003 is contained in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.

ITEM 4.  CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls
and procedures that are designed to ensure that information required to be
disclosed in the Company's reports under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), such as this report on Form 10-Q, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. These controls and procedures
are based closely on the definition of "disclosure controls and procedures" in
Rule 13a-15(e) promulgated under the Exchange Act. Rules adopted by the SEC
require that the Company present the conclusions of the Chief Executive Officer
and Chief Financial Officer about the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report.

INTERNAL CONTROL OVER FINANCIAL REPORTING. Internal control over financial
reporting is a process designed by, or under the supervision of, the Company's
Chief Executive Officer and Chief Financial Officer, as appropriate, and
effected by the Company's employees, including management and the Company's
Board of Trust Managers, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. This process includes policies and procedures that:

     o    pertain to the maintenance of records that accurately and fairly
          reflect the transactions and dispositions of the Company's assets in
          reasonable detail;

     o    provide reasonable assurance that transactions are recorded as
          necessary to permit preparation of financial statements in accordance
          with generally accepted accounting principles, and that the Company's
          receipts and expenditures are made only in accordance with the
          authorization procedures the Company has established; and

     o    provide reasonable assurance regarding prevention or timely detection
          of unauthorized acquisition, use or disposition of any of the
          Company's assets in circumstances that could have a material adverse
          effect on the Company's financial statements.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Management, including the
Company's Chief Executive Officer and Chief Financial Officer, do not expect
that the Company's disclosure controls and procedures or internal control over
financial reporting will prevent all errors and fraud. In designing and
evaluating the Company's control system, management recognized that any control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance of achieving the desired control objectives. Further,
the design of a control system must reflect the fact that there are resource
constraints, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, that may affect the Company's operation have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management's override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that the Company's design will succeed in achieving its stated goals under all
potential future conditions. Over time, the Company's current controls may
become inadequate because of changes in conditions that cannot be anticipated at
the present time, or the degree of compliance with the policies or procedures
may deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

SCOPE OF THE EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES. As
of September 30, 2004, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation of the Company's disclosure controls and
procedures included a review of procedures and the Company's internal audit, as
well as discussions with the Company's Disclosure Committee, and others in the
Company, as appropriate. In the course of the evaluation, the Company sought to
identify data errors, control problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements, were being
undertaken. The overall goals of these various evaluation activities are to
monitor the Company's disclosure controls and procedures and to make
modifications as necessary. The Company's intent in this regard is that the
disclosure controls and procedures will be maintained as systems that change
(including with improvements and corrections) as conditions warrant. Among other
matters, the Company sought in this evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the Company's
internal control over financial reporting, or whether the Company had identified
any acts of fraud involving personnel who have a significant role in the
Company's internal control over financial reporting. The Company also sought to
deal with other control matters in the evaluation, and in any case in which a
problem was identified, management considered what revision, improvement and/or
correction was necessary to be made in accordance with the Company's on-going
procedures.

PERIODIC EVALUATION AND CONCLUSION OF DISCLOSURE CONTROLS AND PROCEDURES. As of
September 30, 2004, the Company carried out an evaluation, under the supervision
and with the participation of the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that such controls and procedures were effective as of September 30,
2004.

SCOPE OF THE EVALUATION OF THE COMPANY'S INTERNAL CONTROL OVER FINANCIAL
REPORTING. As with the Company's evaluation of its disclosure controls and
procedures, the evaluation by the Company's Chief Executive Officer and Chief
Financial Officer of the Company's internal control over financial reporting
included a review, in conjunction with the Company's internal auditors and
others in the Company's organization, of the Company's procedures relating to
the reliability of the Company's financial reporting and preparation of the
Company's financial statements in accordance with generally accepted accounting
principles ("GAAP"). Among other matters, the Company sought in its evaluation
to determine whether there were any "significant deficiencies" or "material
weaknesses" in its internal control over financial reporting, or whether the
Company had identified any acts of fraud involving personnel who have a
significant role in the Company's internal control over financial reporting.
This information is important both for the evaluation generally and because the
Section 302 certifications require that the Company's Chief Executive Officer
and Chief Financial Officer disclose that information to the Audit Committee of
the Board of Trust Managers and the Company's independent auditors and also
require the Company to report on related matters in this section of the report
on Form 10-Q. In the professional auditing literature, "significant
deficiencies" are referred to as "reportable conditions"; these are control
issues that could have a significant adverse effect on the Company's ability to
record, process, summarize and report financial data reliably, in accordance
with GAAP, in the Company's external financial statements. A "material weakness"
is defined in the auditing literature as a significant deficiency where the
internal control does not reduce to a relatively low risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and would not be detected within a timely period by
employees in the normal course of performing their assigned functions. In
addition to evaluating the Company's internal control over financial reporting,
the Company has devoted significant resources to documenting its internal
control design and to testing the effectiveness of its internal control
processes. In connection with this documentation and testing, the Company has
made changes to improve the effectiveness of its internal controls over
financial reporting, including changes in the underlying controls and its
documentation of existing controls.

     Management identified and reported to the Audit Committee of the Company's
Board of Trust Managers certain deficiencies in the operations of internal
controls at entities in which the Company invests but which are managed by third
parties, such as Crescent Resort Development, Inc. ("CRDI") and Ventana Inn &
Spa. Management identified deficiencies at CRDI and Ventana Inn & Spa in the
course of performing documentation and testing phases of the internal controls
of these entities. These deficiencies included the lack of segregation of
management and accounting responsibilities, lack of timely reconciliations and
deficiencies in the design and operation of general computer controls and, in a
number of cases, incomplete account analysis. Management does not believe that
these deficiencies had an impact on the accuracy of the Company's financial
statements. The Company and the management of CRDI and Ventana Inn & Spa are
working together to correct these identified deficiencies through alternatives
such as hiring additional accounting staff to mitigate the lack of segregation
and enhance the account reconciliation and account analysis process.

     The Company is continuing its evaluation, documentation and testing of the
Company's internal control over financial reporting so that management will be
able to report on, and the Company's independent auditors will be able to attest
to, the Company's internal control over financial reporting as of December 31,
2004, as required by applicable laws and regulations, and the Company will
continue to remediate its internal controls to the extent that the Company's
testing reveals inadequacies in its controls. Management believes that the
Company has adequate internal control over financial reporting but cannot be
certain that the identified deficiencies at CRDI or Ventana Inn & Spa will not
result in a management assessment that there is a material weakness in its
internal controls over financial reporting for these entities at the end of the
year or, since there is no precedent available by which the Company can measure
the adequacy of its control system in advance, that the Company or the Company's
independent auditors will be able to complete all the required testing of
controls to attest to the Company's assessment of these controls on a timely
basis.

     CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the period
ended September 30, 2004, there was no change in the Company's internal control
over financial reporting that materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

                                    PART II

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     During the three months ended September 30, 2004, the Company issued an
aggregate of 18,916 common shares to holders of Operating Partnership units in
exchange for 9,458 units. All of the common shares were issued on August 3,
2004. The issuances of common shares were exempt from registration as private
placements under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). The Company has registered the resale of such common shares
under the Securities Act.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

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

(b)  Reports on Form 8-K

     None.

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                                   SIGNATURES

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

                                       CRESCENT REAL ESTATE EQUITIES COMPANY
                                                   (Registrant)

                                       By /s/   John C. Goff
                                          ------------------------------------
                                          John C. Goff
Date:  November 8, 2004                   Vice-Chairman of the Board and Chief
                                          Executive Officer

                                       By /s/   Jerry R. Crenshaw, Jr.
                                          ------------------------------------
                                          Jerry R. Crenshaw, Jr.
                                          Executive Vice President and Chief
Date:  November 8, 2004                   Financial Officer (Principal Financial
                                          and Accounting Officer)

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                               INDEX TO EXHIBITS



EXHIBIT
 NUMBER   DESCRIPTION OF EXHIBIT
       
  3.01    Restated Declaration of Trust of Crescent Real Estate Equities Company,
          as amended (filed as Exhibit No. 3.1 to the Registrant's Current
          Report on Form 8-K filed April 25, 2002 (the "April 2002 8-K") and
          incorporated herein by reference)

  3.02    Second Amended and Restated Bylaws of Crescent Real Estate Equities
          Company (filed as Exhibit No. 3.02 to the Registrant's Quarterly
          Report on Form 10-Q for the quarter ended September 30, 2003 and
          incorporated herein by reference)

  4.01    Form of Common Share Certificate (filed as Exhibit No. 4.03 to the
          Registrant's Registration Statement on Form S-3 (File No. 333-21905)
          and incorporated herein by reference)

  4.02    Statement of Designation of 6-3/4% Series A Convertible Cumulative
          Preferred Shares of Crescent Real Estate Equities Company dated
          February 13, 1998 (filed as Exhibit No. 4.07 to the Registrant's
          Annual Report on Form 10-K for the fiscal year ended December 31, 1997
          and incorporated herein by reference)

  4.03    Form of Certificate of 6-3/4% Series A Convertible Cumulative
          Preferred Shares of Crescent Real Estate Equities Company (filed as
          Exhibit No. 4 to the Registrant's Registration Statement on Form 8-A/A
          filed on February 18, 1998 and incorporated by reference)

  4.04    Statement of Designation of 6-3/4% Series A Convertible Cumulative
          Preferred Shares of Crescent Real Estate Equities Company dated April
          25, 2002 (filed as Exhibit No. 4.1 to the April 2002 8-K and
          incorporated herein by reference)

  4.05    Statements of Designation of 6-3/4% Series A Convertible Cumulative
          Preferred Shares of Crescent Real Estate Equities Company dated
          January 14, 2004 (filed as Exhibit No. 4.1 to the Registrant's Current
          Report on Form 8-K filed January 15, 2004 (the "January 2004 8-K") and
          incorporated herein by reference)

  4.06    Form of Global Certificate of 6-3/4 Series A Convertible Cumulative
          Preferred Shares of Crescent Real Estate Equities Company (filed as
          Exhibit No. 4.2 to the January 2004 8-K and incorporated herein by
          reference)

  4.07    Statement of Designation of 9.50% Series B Cumulative Redeemable
          Preferred Shares of Crescent Real Estate Equities Company dated May
          13, 2002 (filed as Exhibit No. 2 to the Registrant's Form 8-A dated
          May 14, 2002 (the "Form 8-A") and incorporated herein by reference)

  4.08    Form of Certificate of 9.50% Series B Cumulative Redeemable Preferred
          Shares of Crescent Real Estate Equities Company (filed as Exhibit No.
          4 to the Form 8-A and incorporated herein by reference)

   *4     Pursuant to Regulation S-K Item 601 (b) (4) (iii), the Registrant by
          this filing agrees, upon request, to furnish to the Securities and
          Exchange Commission a copy of instruments defining the rights of
          holders of long-term debt of the Registrant

  31.01   Certifications of Chief Executive Officer and Chief Financial Officer
          pursuant to Rule 13a - 14(a) as adopted pursuant to Section 302 of the
          Sarbanes-Oxley Act of 2002 (filed herewith)

  32.01   Certifications of Chief Executive Officer and Chief Financial Officer
          pursuant to 18 U.S.C. Section 350 as adopted pursuant to Section 906
          of the Sarbanes-Oxley Act of 2002 (filed herewith)


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