<PAGE>   1



                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

     (Mark One)
     [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.

                                       OR

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM __________ TO ______________

                         COMMISSION FILE NUMBER 1-13038

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

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

              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

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

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<CAPTION>
                                                                          Name of Each Exchange
Title of each class:                                                      on Which Registered: 
--------------------                                                      ---------------------
<S>                                                                       <C> 


Common Shares of Beneficial Interest par value $.01 per share             New York Stock Exchange, Inc.

6 3/4% Series A Convertible Cumulative Preferred Shares of
  Beneficial Interest par value $.01 per share                            New York Stock Exchange, Inc.
</TABLE>

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

                   YES     X                 NO 
                         -----                    -----

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

As of March 26, 1999, the aggregate market value of the 118,545,354 common
shares and 8,000,000 preferred shares held by non-affiliates of the registrant
was approximately $2.6 billion, based upon the closing price of $20 13/16 for
common shares and $15 11/16 for preferred shares on the New York Stock Exchange.

Number of Common Shares outstanding as of March 26, 1999:       124,710,139
Number of Preferred Shares outstanding as of March 26, 1999:      8,000,000

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 1998 Annual Meeting of Shareholders to be held in
June 1999 are incorporated by reference into Part III.

<PAGE>   2

                                TABLE OF CONTENTS

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<CAPTION>
                                                                                                       PAGE
                                                      PART I.

<S>        <C>                                                                                         <C>
Item 1.    Business..............................................................................        2
Item 2.    Properties............................................................................       16
Item 3.    Legal Proceedings.....................................................................       28
Item 4.    Submission of Matters to a Vote of Security Holders...................................       29



                                                     PART II.

Item 5.    Market for Registrant's Common Equity and Related Shareholder Matters.................       30
Item 6.    Selected Financial Data...............................................................       32
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.............................................................       33
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk............................       54
Item 8.    Financial Statements and Supplementary Data...........................................       56
Item 9.    Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure................................................       90


                                                     PART III.

Item 10.   Trust Managers and Executive Officers of the Registrant...............................       90
Item 11.   Executive Compensation................................................................       90
Item 12.   Security Ownership of Certain Beneficial Owners and Management........................       90
Item 13.   Certain Relationships and Related Transactions........................................       91


                                                     PART IV.

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................       91
</TABLE>


                                       1
<PAGE>   3


                                     PART I

ITEM 1.  BUSINESS

                                   THE COMPANY

         Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT"), and,
together with its subsidiaries, is a fully integrated real estate company. The
Company, as defined below, provides management, leasing and development services
with respect to certain of its properties. Crescent Equities is a Texas real
estate investment trust, which became the successor to Crescent Real Estate
Equities, Inc., a Maryland corporation, on December 31, 1996, through the merger
of Crescent Real Estate Equities, Inc. with CRE Limited Partner, Inc., a
Delaware corporation, into Crescent Equities.

         The term "Company" includes, unless the context otherwise requires, all
of the direct and indirect subsidiaries of Crescent Equities and the predecessor
corporation, Crescent Real Estate Equities, Inc.

         The direct and indirect subsidiaries of Crescent Equities include:

               o        CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP;

                        Operating Partnership

               o        CRESCENT REAL ESTATE EQUITIES, LTD.;

                        Sole General Partner of the Operating Partnership

               o        SEVEN SINGLE-PURPOSE LIMITED PARTNERSHIPS;

                        Formed for the purpose of obtaining securitized debt,
                        substantially all the economic interests owned directly
                        or indirectly by the Operating Partnership and the
                        remaining interests owned indirectly by Crescent
                        Equities through seven separate corporations described
                        below.

               o        SEVEN SEPARATE CORPORATIONS.

                        Wholly owned subsidiaries of the General Partner, each
                        of which is a general partner of one of the seven
                        limited partnerships described above.

         Crescent Equities conducts all of its business directly through the
Operating Partnership and its other subsidiaries. The Company is structured to
facilitate and maintain its qualification as a REIT. This structure permits
persons contributing properties (or interests therein) to the Company to defer
some or all of the tax liability that they otherwise might have incurred in
connection with the sale of assets to the Company.

         See Note 1 of Item 8. Financial Statements and Supplementary Data for a
table that lists the principal subsidiaries of Crescent Equities and the
Properties owned by such subsidiaries.

         As of December 31, 1998, the Company's assets and operations were
composed of five major industry segments:

o        Office and Retail Segment;

o        Hospitality Segment;

o        Residential Development Segment;

o        Refrigerated Storage Segment; and

o        Behavioral Healthcare Segment.


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<PAGE>   4

         Within these segments, the Company, through various entities, owned
directly or indirectly the following real estate assets (the "Properties") as of
December 31, 1998:

o             OFFICE AND RETAIL SEGMENT includes 89 office properties
              (collectively referred to as the "Office Properties") located
              primarily in 17 metropolitan submarkets in Texas, with an
              aggregate of approximately 31.8 million net rentable square feet
              and seven retail properties (collectively referred to as the 
              "Retail Properties") with an aggregate of approximately 0.8 
              million net rentable square feet.

o             HOSPITALITY SEGMENT includes seven full service hotels with a
              total of 2,257 rooms and two destination health and fitness
              resorts that can accommodate up to 462 guests daily (collectively
              referred to as the "Hotel Properties"). All Hotel Properties,
              except the Omni Austin Hotel, are leased to subsidiaries of
              Crescent Operating, Inc. ("COI"). As of January 1, 1999, the Omni
              Austin Hotel is leased to HCD Austin Corporation, an unrelated
              third party.

o             RESIDENTIAL DEVELOPMENT SEGMENT includes the Company's ownership
              of real estate mortgages and non-voting common stock representing
              interests ranging from 40% to 95% in five unconsolidated
              residential development corporations (collectively referred to as
              the "Residential Development Corporations"), which in turn,
              through joint venture or partnership arrangements, own 13
              residential development properties (collectively referred to as
              the "Residential Development Properties").

o             REFRIGERATED STORAGE SEGMENT includes the Company's indirect 38%
              interest in three partnerships (collectively referred to as the
              "Refrigerated Storage Partnerships"), each of which owns one or
              more corporations or limited liability companies (collectively
              referred to as the "Refrigerated Storage Corporations") which, as
              of December 31, 1998, directly or indirectly owned or operated
              approximately 101 refrigerated storage properties (collectively
              referred to as the "Refrigerated Storage Properties") with an
              aggregate of approximately 530.1 million cubic feet (21.4 million
              square feet). The remaining interest in the Refrigerated Storage
              Partnerships is owned by Vornado Realty Trust ("Vornado") (60% of
              each Refrigerated Storage Partnership) and COI (2% indirect
              interest in each Refrigerated Storage Partnership). See "Industry
              Segments - Refrigerated Storage Segment - New Ownership Structure"
              below for a description of the Company's restructuring of its
              investment in the Refrigerated Storage Segment, effective March
              12, 1999. As a result of this restructuring, the Company increased
              its indirect ownership in the Refrigerated Storage Partnerships to
              39.6%, and the Refrigerated Storage Corporations own, but no
              longer operate, the Refrigerated Storage Properties.

o             BEHAVIORAL HEALTHCARE SEGMENT includes 89 properties in 26 states
              (collectively referred to as the "Behavioral Healthcare
              Properties") that are leased to Charter Behavioral Health Systems,
              LLC ("CBHS"). CBHS was formed to operate the Behavioral Healthcare
              Properties and is owned 50% by a subsidiary of Magellan Health
              Services, Inc. and 50% by Crescent Operating, Inc.


         See Note 3 of Item 8. Financial Statements and Supplementary Data for a
table showing revenues, funds from operations and identifiable assets for each
of these industry Segments for the last three fiscal years.




                                       3
<PAGE>   5

                  BUSINESS OBJECTIVES AND OPERATING STRATEGIES

         The Company's business objective is to maximize the total return to its
shareholders through increases in distributions and share price. From the
Company's initial public offering of common shares on May 5, 1994, through March
26, 1999, the total return to shareholders was approximately 122%, with
distributions having increased by approximately 160% and the market price per
common share having increased by approximately 67%.

         In response to the challenging market conditions of 1998, management
has renewed its focus on the fundamentals of the Company's business. Management
believes that the earnings growth in both the Office and Retail Segment and the
Hospitality Segment reflects this focus. The Residential Development Segment
also continues to generate sales growth, and the Company continues to reinvest
in new developments within this Segment.

         Management believes that, as the Company enters 1999, it is
well-positioned for another year of growth in revenues, driven not only by
revenues generated from leases of existing Office Properties, but also by
revenues from additional investments in existing Properties and businesses.

OPERATING AND FINANCING STRATEGIES

         Based on management's assessment of current conditions in the real
estate and financial markets, in 1999 the Company will continue to focus on
growth in revenues from its existing Property portfolio.

         The Company seeks to enhance its operating performance and financial
position by:

o                 applying well-defined leasing strategies in order to capture
                  the potential rental growth in the Company's portfolio of
                  Office Properties as occupancy and rental rates increase with
                  the continued recovery of the markets and submarkets in which
                  the Company has invested;

o                 achieving a high tenant retention rate at the Company's Office
                  Properties through quality service, individualized attention
                  to its tenants and active preventive maintenance programs;

o                 empowering management and employing compensation formulas
                  linked directly with enhanced operating performance of the
                  Company and its Properties; and

o                 optimizing the use of various sources of capital including
                  the refinancing of existing debt and selectively obtaining
                  additional debt to enhance revenue growth.

INVESTMENT STRATEGIES

       The Company intends, in 1999, to focus primarily on operations but will
also continue to assess investment opportunities, consistent with its long-term
investment strategy of acquiring premier assets and assets that have been
undervalued. The Company will continue to employ the corporate, transactional
and financial skills of its management team to assess investment opportunities.
The Company expects that its principal investment focus during 1999 will be on
internal investment opportunities. These internal investment opportunities
include, for example, investments in additional residential development
properties and additional refrigerated storage properties, expansion of existing
Refrigerated Storage Properties, and resort expansions and upgrades in the
Hospitality Segment, such as the construction of additional suites at Sonoma
Mission Inn & Spa and the addition of a spa at the Ventana Country Inn.

       Furthermore, the Company will continue to focus, in its assessment of
investment opportunities, on office properties that can be acquired at
significant discounts from replacement cost and that provide both a favorable
current return on invested capital and the opportunity for significant cash flow
growth through future increases in rental rates. In particular, the Company will
focus on office properties which satisfy these criteria and which are located in
the Company's core office markets and submarkets. Consistent with its investment
strategies, the Company also will consider innovative real estate investments
that offer superior returns on its capital investment.



                                       4
<PAGE>   6

       Finally, the Company is evaluating the possibility of using proceeds from
potential sales of non-core or non-strategic office assets to reinvest in higher
return businesses or assets, with a focus on the Company's core business
segments.

                                    EMPLOYEES

         As of December 31, 1998, the Company had more than 500 employees. None
of these employees are covered by collective bargaining agreements.

                                   TAX STATUS

         The Company elected under Section 856(c) of the Internal Revenue Code
of 1986, as amended (the "Code"), to be taxed as a REIT under the Code beginning
with its taxable year ended December 31, 1994. As a REIT for federal income tax
purposes, the Company generally is not subject to federal income tax on REIT
taxable income that it distributes to its shareholders. Under the Code, REITs
are subject to numerous organizational and operational requirements, including a
requirement that they distribute at least 95% of their REIT taxable income each
year. The Company will be subject to federal income tax on its REIT taxable
income (including any applicable alternative minimum tax) at regular corporate
rates if it fails to qualify as a REIT for tax purposes in any taxable year. The
Company will also not be permitted to qualify for treatment as a REIT for
federal income tax purposes for four years following the year during which
qualification is lost. Even if the Company qualifies as a REIT for federal
income tax purposes, it may be subject to certain federal, state and local taxes
on its REIT taxable income and property and to federal income and excise tax on
its undistributed REIT taxable income. In addition, certain of its subsidiaries
are subject to federal, state and local income taxes.

                              ENVIRONMENTAL MATTERS

         The Company and its Properties are subject to a variety of federal and
state environmental laws, ordinances and regulations, including:

o        Comprehensive Environmental Response, Compensation, and Liability Act
         of 1980, as amended;

o        Superfund Amendments and Reauthorization Act of 1986;

o        Federal Clean Water Act;

o        Federal Clean Air Act; and

o        Toxic Substances Control Act.

The application of these laws to a specific property that the Company owns will
be dependent on a variety of property-specific circumstances, including the
former uses of the property and the building materials used at each property.

         Under the environmental laws listed above, a current or previous owner
or operator of real estate may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at the property. They may also be held liable to a governmental
entity or the third parties for property damage and for investigation and clean
up costs such parties incur in connection with the contamination, whether or not
the owner or operator knew of, or was responsible for, the contamination. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral. The owner or operator
of a site may be liable under common law to third parties for damages and
injuries resulting from environmental contamination emanating from the site.
Such costs or liabilities could exceed the value of the affected real estate. No
governmental authorities have notified the Company of any non-compliance,
liability or other claims in connection with any of the Company's Properties.
Prior to the Company's acquisition of its Properties, independent environmental
consultants conducted or updated Phase I environmental 



                                       5
<PAGE>   7

assessments on the Properties and, at some Properties, conducted Phase II soil
and ground water sampling as part of the Phase I assessments to also assess the
potential for environmental contamination at those Properties. None of these
Phase I assessments, updates, or Phase II samplings revealed any materially
adverse environmental conditions. Although management does not anticipate any
material environmental liabilities, there can be no assurances that
environmental liabilities have not developed since such environmental
assessments were prepared, or that future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in imposition of environmental liability.

                                INDUSTRY SEGMENTS

                            OFFICE AND RETAIL SEGMENT

OWNERSHIP STRUCTURE

         Crescent Equities is a REIT which, through its direct and indirect
subsidiaries, owns 89 Office Properties located primarily in 17 metropolitan
submarkets in Texas with an aggregate of approximately 31.8 million net rentable
square feet and seven Retail Properties with an aggregate of approximately 0.8
million net rentable square feet. The Company, as a lessor, has retained
substantially all of the risks and benefits of ownership of the Office and
Retail Properties and accounts for its leases as operating leases. Additionally,
the Company provides management and leasing services for the majority of its
Office and Retail Properties.

         See Item 2. Properties for more information about the Company's Office
and Retail Properties, and Note 1 of Item 8. Financial Statements and
Supplementary Data for a table that lists the principal subsidiaries of Crescent
Equities and the Properties owned by such subsidiaries.

MARKET INFORMATION

         The Office and Retail Properties reflect the Company's strategy of
investing in premier assets within markets that have significant potential for
rental growth. In selecting the Office and Retail Properties, the Company
analyzed demographic and economic data to focus on markets expected to benefit
from significant employment growth as well as corporate relocations. After
identifying and analyzing attractive regional markets, the Company selected
submarkets that it believed would be the major beneficiaries of this projected
growth and that would integrate a premier office environment with quality of
life features such as: affordable residential housing; an environment generally
well-protected from crime; effective transportation systems; a significant
concentration of retailing alternatives; and cultural centers, entertainment
attractions and recreational facilities. Other factors the Company considered in
selecting the submarkets in which its Office and Retail Properties are located
included proximity to major airports and the relative aggressiveness of local
governments in providing tax and other incentives designed to favor business.
Currently, the Company's Office and Retail Properties are located primarily in
Dallas/Fort Worth and Houston, Texas.

         Within its selected submarkets, the Company has focused on premier
locations that management believes are able to attract and retain the highest
quality tenants and command premium rents. In addition, several of the
Properties benefit from improvements made by prior owners or developers beyond
what currently could be justified by expected economic returns. Examples of
these improvements, which should not materially increase the future operating
cost of the Properties, are the inclusion of various amenities, the use of
expensive materials and the addition of extensive landscaping. Such premier
locations also tend to be more stable in downward property cycles. Consistent
with its long-term investment strategies, the Company has sought situations
where it was able to acquire properties that have strong economic returns based
on in-place tenancy and have a dominant position within the submarket due to
quality and/or location. Accordingly, management's long-term investment strategy
not only demands acceptable current cash flow return on invested capital, but
also considers long-term cash flow growth prospects.



                                       6
<PAGE>   8

         The Company does not depend on a single or a few major customers within
the Office and Retail Segment, the loss of which would have a material adverse
effect on the Company's financial condition or results of operations. Based on
rental revenues from office and retail leases in effect as of December 31, 1998,
no single tenant accounted for more than 4% of the Company's total Office and
Retail Segment rental revenues.

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


    Projected Population Growth and Employment Growth for all Company Markets

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                                                                           Population    Employment
                                                                             Growth        Growth
                  Metropolitan Statistical Area (MSA)                      1998-2008     1998-2008
                  ------------------------------------------------------- ------------- -------------

<S>                                                                           <C>           <C>  
                  Dallas/Fort Worth, TX...............................        18.4%         16.3%
                  Houston, TX.........................................        12.4          11.4
                  Austin, TX..........................................        29.2          24.6
                  Denver, CO..........................................        16.4          15.2
                  Colorado Springs, CO................................        16.2          17.8
                  New Orleans, LA.....................................         4.0           8.0
                  Miami, FL...........................................        11.1          12.2
                  Phoenix, AZ.........................................        23.2          22.2
                  Washington, DC......................................        17.2          17.0
                  Omaha, NE...........................................        11.6          13.7
                  Albuquerque, NM.....................................        14.7          16.2
                  San Francisco, CA...................................        14.6          13.8
                  San Diego, CA.......................................        19.3          18.0
                  UNITED STATES.......................................         8.5          11.6
</TABLE>

---------------------------------
Source:  Compiled from information published by Cognetics, Inc.

         The Company applies a well-defined leasing strategy in order to capture
the potential rental growth in the Company's portfolio of Office Properties as
occupancy and rental rates increase with the continued recovery of the markets
and the submarkets in which the Company has invested. The Company's strategy has
been and continues to be based in part on identifying and making its investments
in submarkets in which weighted average full-service rental rates (representing
base rent after giving effect to free rent and scheduled rent increases that
would be taken into account under generally accepted accounting principles
("GAAP") and including adjustments for expenses payable by or reimbursed from
tenants) are significantly less than weighted average full-service replacement
cost rental rates (the rate management estimates to be necessary to provide a
return to a developer of a comparable, multi-tenant building sufficient to
justify construction of new buildings) in that submarket. In calculating
replacement cost rental rates, management relies on available third-party data
and its own estimates of construction costs (including materials and labor in a
particular market) and assumes replacement cost rental rates are achieved at a
95% occupancy level. The Company believes that the difference between the two
rates is a useful measure of the additional revenue that the Company may be
able to obtain from a property, because the difference should represent the
amount by which rental rates would be required to increase in order to justify
construction of new properties. For the Company's Office Properties, the
weighted average full-service rental rate as of December 31, 1998 was $19.53 per
square foot, compared to an estimated weighted average full-service replacement
cost rental rate of $28.49 per square foot.

         Many of the Company's submarkets have experienced substantial rental
rate growth during the past two years. For example, Class A office rental rates
in Dallas, Houston, Austin and Denver have increased approximately 23%, 49%, 30%
and 21%, respectively, from year-end 1996 to year-end 1998, according to Jamison
Research, Inc. (for Dallas); Baca Landata, Inc., The Woodlands Operating
Company, L.P. and Cushman & Wakefield of Texas, Inc. (for Houston); CB Richard
Ellis (for Austin); and Cushman & Wakefield of Colorado, Inc. (for Denver). The
Company has been successful in renewing or re-leasing office space in these
markets at rental rates significantly above the expiring rental rates.

                                       7
<PAGE>   9

COMPETITION

The Company believes that it does not have any direct competition for its Office
Properties considered as a group. The Company's Office Properties, primarily
Class A properties located within the Southwest, individually compete against a
wide range of property owners and developers, including property management
companies and other REITs, that offer space in similar types of office
properties (for example, Class A and Class B properties). A number of these
owners and developers may own more than one property. The number and type of
competing properties in a particular market or submarket could have a material
effect on the Company's ability to lease space and maintain or increase
occupancy or rents in its existing Office Properties as well as at any newly
acquired Office Properties. Management believes, however, that the quality
services and individualized attention that the Company offers its tenants,
together with its active preventive maintenance program and superior building
locations within markets, enhance the Company's ability to attract and retain
tenants for its Office Properties. In addition, on a weighted average basis, the
Company owns 18% of the Class A office space in the 30 submarkets in which the
Company owns Class A office properties, and 9% of the Class B office space in
the five submarkets in which the Company owns Class B office properties.
Management believes that ownership of a significant percentage of office space
in a particular market offers the Company the opportunity to reduce property
operating expenses that the Company and its tenants pay, enhancing the Company's
ability to attract and retain tenants and potentially resulting in increases in
Company net revenues. For example, during 1998, the Company successfully
negotiated bulk contracts for services such as elevator maintenance and parking
garage management, resulting in discounts of up to 15% from service contracts
previously in place. In 1998, the Company also negotiated bulk contracts for 
supplies and equipment including contracts for general maintenance supplies and
energy management systems resulting in discounts of up to 40% from contracts for
supplies and equipment previously in place.

1998 COMPLETED ACQUISITIONS

         AUSTIN CENTRE. On January 23, 1998, the Company acquired Austin Centre,
a mixed-use property developed in 1986, that includes: a Class A office building
containing approximately 344,000 net rentable square feet; an attached,
five-level, underground parking structure that accommodates 588 cars; the
314-room Omni Austin Hotel Property (see "Hospitality Segment" below); and 61
apartments. The Property is located in the CBD submarket of Austin, Texas, four
blocks from the state capitol building and was purchased for approximately $96.4
million.

         POST OAK CENTRAL. On February 13, 1998, the Company acquired Post Oak
Central, a three-building Class A office complex located in the West
Loop/Galleria suburban office submarket of Houston, Texas. Built between 1974
and 1981, the office complex contains approximately 1.3 million net rentable
square feet with three multi-level detached, but connected via covered walkway
or tunnel, above-ground parking structures that accommodate a total of
approximately 4,400 cars. Post Oak Central was purchased for approximately
$155.3 million.

         WASHINGTON HARBOUR. On February 25, 1998, the Company acquired
Washington Harbour, a Class A office complex, consisting of a six-story office
building and a seven-story office building (the top three stories of which
comprise 35 luxury condominiums, which were not included in the purchase),
located in the Georgetown submarket of Washington, D.C. Built in 1986, the two
Office Properties contain approximately 536,000 net rentable square feet with a
two-level attached, underground parking structure that accommodates 613 cars.
Washington Harbour was purchased for approximately $161.0 million.

         DATRAN CENTER. On May 1, 1998, the Company acquired, subject to a
ground lease, Datran Center, two Class A office buildings, containing
approximately 472,000 net rentable square feet located in the South Dade/Kendall
submarket of Miami, Florida. Construction of One Datran Center was completed in
1986 with an eight-level attached parking garage containing 650 covered spaces
and 26 uncovered spaces. Construction of Two Datran Center was completed in
1988, with a nine-level attached parking garage containing 771 covered spaces
and 65 uncovered spaces. Datran Center was purchased for approximately $70.6
million.

         BP PLAZA. On June 30, 1998, the Company acquired BP Plaza, a 20-story
Class A Office Property, and 3.2 acres of adjacent undeveloped land located in
the Katy Freeway submarket of Houston, Texas. Construction of the Office
Property was completed in 1992. BP Plaza contains approximately 561,000 square
feet of net rentable 



                                       8
<PAGE>   10

area with an attached six-level above-ground parking structure that accommodates
approximately 1,700 cars. BP Plaza and the undeveloped land were purchased for
approximately $83.1 million.

RECENT DEVELOPMENTS

         On December 8, 1998, Tower Realty Trust ("Tower"), Reckson Associates
Realty Corporation ("Reckson") and Metropolitan Partners, LLC ("Metropolitan"),
a newly formed limited liability company owned equally by the Company and
Reckson, entered into a revised agreement and plan of merger that superseded the
merger agreement with Tower to which the Company was a party. Pursuant to the
Revised Tower Merger Agreement, Metropolitan has agreed to acquire Tower for a
combination of cash and Reckson exchangeable Class B common shares. The Company,
Reckson and Metropolitan have agreed that the Company's investment in
Metropolitan will be an $85 million preferred member interest. The investment
will have a cash flow preference of 7.5% for a two-year period and may be
redeemed by Metropolitan within the two-year period for $85 million, plus an
amount sufficient to provide a 9.5% internal rate of return to the Company. If
Metropolitan does not redeem the preferred interest within the two-year period,
the Company may convert the interest either into (i) a common equity interest in
Metropolitan or (ii) shares of common stock of Reckson at a conversion price of
$24.61.

         In connection with the Revised Tower Merger Agreement, the Company
contributed $10 million of the $85 million required capital contribution to
Metropolitan in December 1998 and agreed to make the additional $75 million
capital contribution to Metropolitan when all of the conditions to the funding
have been met, which is expected to occur in the second quarter of 1999.


                               HOSPITALITY SEGMENT

OWNERSHIP STRUCTURE

         Because of the Company's status as a REIT for federal income tax
purposes, it does not operate the Hotel Properties. The Company has leased all
of the Hotel Properties, except the Omni Austin Hotel, to subsidiaries of COI
pursuant to eight separate leases. As of January 1, 1999, the Omni Austin Hotel
has been leased, under a separate lease, to HCD Austin Corporation, an unrelated
third party. Under the leases, each having a term of 10 years, the Hotel
Property lessees have assumed the rights and obligations of the property owner
under the respective management agreements with the hotel operators, as well as
the obligation to pay all property taxes and other charges against the property.
The Company has agreed to fund all capital expenditures relating to furniture,
fixtures and equipment reserves required under the applicable management
agreements as part of each of the lease agreements for eight of the Hotel
Properties. The only exception is Canyon Ranch-Tucson, in which the Hotel
Property lessee owns all furniture, fixtures and equipment associated with the
property and will fund all related capital expenditures.

         Each of the leases provides for the payment by the Hotel Property
lessees of all or a combination of the following:

o        base rent, with periodic rent increases if applicable;

o        percentage rent based on a percentage of gross hotel receipts or gross
         room revenues, as applicable, above a specified amount; and

o        a percentage of gross food and beverage revenues above a specified
         amount for certain Hotel Properties.

         See Item 2. Properties for more information about the Company's Hotel
Properties.


                                       9
<PAGE>   11

MARKET INFORMATION

         The following information is derived from various industry sources.
Average hotel room rental rates grew 4.4%, 6.2%, and 6.3%, in 1998, 1997, and
1996, respectively. Within the luxury and upscale segment of the industry,
average room rental rates increased approximately 4.0% from 1997 to 1998.

         Business and convention travel accounts for approximately two-thirds of
room demand and has risen along with the improving economy and increased
corporate profits. Domestic leisure travel has also increased, especially among
the "baby boomers", who are not only at the prime age for leisure travel but
also have a greater tendency to travel than previous generations. A healthier,
more active senior population is also contributing to the increase in travel.
With the aging of the "baby boomer" generation and the growing interest in
quality of life activities, the resort/spa industry also is experiencing
significant growth in the United States.

         The average annual growth rates in REVPAR, from 1994 through 1998, for
the upscale and luxury hotel segments were 4.6% and 6.7%, respectively,
according to Smith Travel Research. This demand comes not only from the business
and convention sector, but also from the leisure traveler who vacations
increasingly at higher-end hotels.

         The following table sets forth hotel REVPAR by price segment for the
years 1994 through 1998.

<TABLE>
<CAPTION>
                                                                                                   Annual
                                                                                                   Average
                                   1998         1997        1996        1995         1994        Growth Rate
                                 ---------     -------     -------     --------    ---------    --------------

<S>                               <C>          <C>         <C>         <C>         <C>           <C>   
Luxury(1)..................       $101.33      $98.33     $92.31       $83.93      $79.15
   % Change................           3.1%        6.5%      10.0%         6.0%        7.8%           6.7%
Upscale(2).................        $61.65      $60.05     $57.42       $54.28      $51.76
   % Change................           2.7%        4.6%       5.8%         4.9%        5.2%           4.6%
Mid-Priced.................        $45.45      $44.20     $41.84       $39.70      $37.57
   % Change................           2.8%        5.6%       5.4%         5.7%        5.2%           4.9%
Economy....................        $31.37      $30.45     $29.63       $28.64      $27.27
   % Change................           3.0%        2.8%       3.5%         5.0%        4.2%           3.7%
Budget.....................        $26.70      $25.07     $24.40       $23.77      $22.75
   % Change................           6.5%        2.7%       2.7%         4.5%        4.4%           4.2%
</TABLE>

---------------------------
(1)  Includes destination health and fitness resorts, such as the Canyon Ranch
     resorts.
(2)  Includes full-service and limited-service hotels.
Source:  Compiled from information published by Smith Travel Research

COMPETITION

         The Company's Hotel Properties in Denver, Albuquerque, Austin and
Houston are convention center hotels that compete against other convention
center hotels, which are owned by different types of owners, including national
hotel chains and local owners. The Company believes, however, that its
destination health and fitness resorts are unique properties that do not have
direct competitors. In addition, the Company believes that each of the remaining
Hotel Properties experiences little to no direct competition due to its high
replacement cost and unique concept or location. The Hotel Properties do
compete, to a limited extent, against business class hotels or middle-market
resorts in their geographic areas, as well as against luxury resorts nationwide
and around the world.

1998 COMPLETED ACQUISITIONS

         OMNI AUSTIN HOTEL. On January 23, 1998, the Company acquired Austin
Centre (see "Office and Retail Segment" above), which included the 314-room Omni
Austin Hotel Property. As of January 1, 1999, the Omni 



                                       10
<PAGE>   12

Austin Hotel is leased to HCD Austin Corporation, an unrelated third party and
COI will provide limited asset management services for the Property.

         SONOMA GOLF COURSE. On October 13, 1998, the Company acquired Sonoma
Golf Course, an 18-hole golf course located in Sonoma County, California, for
approximately $15.3 million. The course is near the Sonoma Mission Inn & Spa and
has a 4,000 square foot club house with a banquet facility. The Company
simultaneously entered into a 10-year lease of the property with COI. The
Company believes that the golf course will enhance the amenities provided to the
Sonoma Mission Inn & Spa guests.

                         RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

         The Company owns economic interests in five Residential Development
Corporations through the Residential Development Property mortgages and the
non-voting common stock of these Residential Development Corporations. The
Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in 13 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties.

         See Item 2. Properties for more information about the Company's
Residential Development Properties.

COMPETITION

         The Company's Residential Development Properties compete against a
variety of other housing alternatives in each of their respective areas. These
alternatives include other planned developments, pre-existing single-family
detached housing, condominiums, townhouses and non-owner occupied housing, such
as luxury apartments. Management believes that The Woodlands Land Company, Inc.
and Desert Mountain Development Corp. ("Desert Mountain"), representing the
Company's most significant investments in Residential Development Properties,
contain certain features that provide competitive advantages to these
developments. For example, The Woodlands, which is an approximately 27,000-acre,
master-planned residential and commercial community north of Houston, Texas, is
unique among developments in the Houston area, because it functions as a
self-contained community. Amenities contained in the development, which are not
contained within other local developments, include a shopping mall, retail
centers, office buildings, a hospital, a community college, places of worship,
60 parks, two man-made lakes and a performing arts pavilion. Desert Mountain, a
luxury residential and recreational community in Scottsdale, Arizona, which also
offers five 18-hole golf courses and tennis courts, does not have any
significant direct competitors due in part to the types of amenities that it
offers. Substantially all of the remaining residential lots for the four
developments that traditionally have competed with Desert Mountain were sold
during 1997. As a result, these developments have become resale communities that
no longer compete with Desert Mountain in any significant respect.

                          REFRIGERATED STORAGE SEGMENT

ORIGINAL OWNERSHIP STRUCTURE

         Prior to the restructuring of its investment in the Refrigerated
Storage Properties in March 1999, the Company, through two subsidiaries (the
"Crescent Subsidiaries"), owned an indirect 38% interest in each of the three
Refrigerated Storage Partnerships. One of the Refrigerated Storage Partnerships
owned Americold Corporation ("Americold"), the second Refrigerated Storage
Partnership owned URS Logistics, Inc. ("URS") and the third Refrigerated Storage
Partnership owned the assets and business operations acquired from Freezer
Services, Inc. ("Freezer Services") and Carmar Group, Inc. ("Carmar Group") (see
"1998 Completed Acquisitions" below). Vornado owned a 60% interest in the
Refrigerated Storage Partnerships and COI owned a 2% indirect interest in the
Refrigerated Storage Partnerships.



                                       11
<PAGE>   13

         In order to permit the Company to satisfy certain REIT qualification
requirements, the Company (which is not permitted to operate the Refrigerated
Storage Properties because of the status of Crescent Equities as a REIT) owned
its indirect 38% interest in the Refrigerated Storage Partnerships through its
ownership of all of the nonvoting common stock, representing a 95% economic
interest, in each of the Crescent Subsidiaries, and COI owned its 2% indirect
interest in the Refrigerated Storage Partnerships through its ownership of all
of the voting common stock, representing a 5% economic interest, in each of the
Crescent Subsidiaries.

         The Refrigerated Storage Partnerships owned or operated, as of
December 31, 1998, approximately 101 Refrigerated Storage Properties, with an
aggregate of approximately 530.1 million cubic feet (21.4 million square feet),
with the operations conducted pursuant to arrangements with national food
suppliers.

         See Item 2. Properties for more information about the Company's
Refrigerated Storage Properties.


                                       12
<PAGE>   14


1998 INVESTMENTS

         In April 1998, two of the Refrigerated Storage Corporations refinanced
$607 million of secured and unsecured debt that had a weighted average interest
rate of approximately 12% with a $550 million non-recourse, ten-year loan with
an interest rate of 6.89% secured by 58 Refrigerated Storage Properties.

         On June 1, 1998, the Crescent Subsidiaries and Vornado formed the third
Refrigerated Storage Partnership which acquired, through newly formed
Refrigerated Storage Corporations, nine Refrigerated Storage Properties and the
associated operations from Freezer Services for approximately $134 million. On 
July 1, 1998, the third Refrigerated Storage Partnership acquired, through newly
formed Refrigerated Storage Corporations, five Refrigerated Storage Properties
and the associated operations from Carmar Group for approximately $163 million.
The Company's cash investments in connection with these acquisitions were
approximately $36.7 million and $55.9 million, respectively. These additional 14
Refrigerated Storage Properties contain approximately 90 million cubic feet (4.1
million square feet) of refrigerated storage space. 

NEW OWNERSHIP STRUCTURE

         Effective March 12, 1999, the Company, Vornado, the Refrigerated
Storage Partnerships, the Refrigerated Storage Corporations (including all
affiliated entities that owned any portion of the business operations of the
Refrigerated Storage Properties at that time) and COI restructured their
investment in the Refrigerated Storage Properties (the "Restructuring"). In the
Restructuring, the Refrigerated Storage Corporations (including all affiliated
entities that owned any portion of the business operations of the Refrigerated
Storage Properties) sold their ownership of the business operations to a newly
formed partnership (the "Refrigerated Storage Operating Partnership") owned 60%
by Vornado Operating L.P. and 40% by a newly formed subsidiary of COI, in
consideration of the payment of $48.7 million by the Refrigerated Storage
Operating Partnership. The Refrigerated Storage Operating Partnership, as
lessee, entered into triple-net master leases of the Refrigerated Storage
Properties with certain of the Refrigerated Storage Corporations. Each of the
Refrigerated Storage Properties is subject to one or more of the leases, each of
which has an initial term of 15 years, subject to two, five-year renewal
options. The leases provide for an aggregate annual base rental rate of $123
million for the first through fifth lease years, $126 million for the sixth
through 10th lease years and $130.5 million for the 11th through 15th lease
years, plus percentage rent based on the gross revenues received from customers
at the Refrigerated Storage Properties above a specified amount.

         As a result of the Restructuring, the Refrigerated Storage Partnerships
and the Refrigerated Storage Corporations directly or indirectly own the real
estate assets associated with the Refrigerated Storage Properties. The business
operations associated with the Refrigerated Storage Properties are owned by the
Refrigerated Storage Operating Partnership, in which the Company has no
interest.

         Under the terms of the existing partnership agreements for each of the
Refrigerated Storage Partnerships, Vornado has the right to make all decisions
relating to the management and operations of the Refrigerated Storage
Partnerships other than certain major decisions that require the approval of
both the Company and Vornado. The partnership agreement for each of the
Refrigerated Storage Partnerships provides for a buy-sell arrangement upon a
failure of the Company and Vornado to agree on any of the specified major
decisions which, until November 1, 2000, can be exercised only by Vornado. Major
decisions include approval of the annual capital and operating budgets for each
of the Refrigerated Storage Partnerships, decisions to deviate from the budgets
by 10% or more and additional capital contributions.

         In addition, in connection with the Restructuring and also effective in
March 1999, the Company purchased from COI an additional 4% nonvoting interest
in each of the Crescent Subsidiaries for an aggregate purchase price of $13.2
million. As a result, the Company holds an indirect 39.6% interest in the
Refrigerated Storage Partnerships and COI holds an indirect 0.4% interest in the
Refrigerated Storage Partnerships. The Company also granted COI an option to
require the Company to purchase COI's remaining 1% interest in each of the
Crescent Subsidiaries at such time as the purchase would not, in the opinion of
counsel to the Company, adversely affect the status of Crescent Equities as a
REIT for an aggregate price, payable by the Company, of approximately $3.3 
million. 

         In connection with these transactions, the Company established a new
line of credit in the principal amount of $19.5 million available to COI at an
interest rate of 9% per annum.


INDUSTRY INFORMATION

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

         Transportation management services offered include freight routing,
dispatching, freight rate negotiation, backhaul coordination, freight bill
auditing, network flow management, order consolidation and distribution channel
assessment. The temperature-controlled logistics expertise of management of the
Refrigerated Storage Corporations and access to both the Refrigerated Storage
Properties and distribution channels enable the customers of the Refrigerated
Storage Corporations to respond quickly and efficiently to time-sensitive orders
from distributors and retailers. 

         Customers consist primarily of national, regional and local frozen food
manufacturers, distributors, retailers and food service organizations, including
ConAgra, Inc., H.J. Heinz Company, Kraft Foods, Inc. and Tyson Foods, Inc.

COMPETITION

         The Refrigerated Storage Corporations are the largest owners and
operators of public refrigerated storage space in the country in terms of public
storage space owned. Including the 1998 acquisitions (see "1998 Investments" 
above), the Refrigerated Storage Corporations owned or operated an aggregate of
approximately 30% of total public refrigerated storage space as of December 31,
1998. Among other owners and operators of public refrigerated storage space, no
other owner and operator owned or operated more than 8% of total public
refrigerated storage space as of December 31, 1998. As a result, the Company
believes that the Refrigerated Storage Corporations do not have any competitors
of comparable size. The Refrigerated Storage Corporations operate in an
environment in which competition is national, regional and local in nature and
in which the range of 



                                       13
<PAGE>   15

service, refrigerated storage facilities, customer mix, service performance and
price are the principal competitive factors. The range of total logistics
services and refrigerated storage locations are major competitive factors
because frozen food manufacturers and distributors incur transportation costs
which typically are significantly greater than refrigerated storage costs. In
addition, in certain locations, customers depend upon pooling shipments, which
involves combining their products with the products of other customers destined
for the same markets. In these cases, the mix of customers at a refrigerated
storage facility can significantly influence the cost of delivering products to
markets. The size of a refrigerated storage facility is important because large
customers prefer to have all of the products needed to serve a given market in a
single location in order to have the flexibility to increase storage in that
single location during seasonal peaks. If there are several refrigerated storage
facilities that satisfy customer mix and size requirements, the Company believes
that customers generally will select a refrigerated storage facility based upon
the types of services available, service performance and price.




                                       14
<PAGE>   16

                          BEHAVIORAL HEALTHCARE SEGMENT

OWNERSHIP STRUCTURE

         On June 17, 1997, the Company acquired substantially all of the real
estate assets of the domestic hospital provider business of Magellan Health
Services, Inc. ("Magellan") as previously owned and operated by a wholly owned
subsidiary of Magellan. The transaction involved various components, the
principal component being the acquisition of the Behavioral Healthcare
Properties for approximately $387.2 million.

               Because of the Company's REIT status for federal income tax
purposes, the Company does not operate the Behavioral Healthcare Properties. The
Behavioral Healthcare Properties are leased to CBHS and its subsidiaries under a
triple-net lease. CBHS, which is the nation's largest operator of acute-care
psychiatric hospitals and other behavioral care treatment facilities, is a
Delaware limited liability company, formed to operate the Behavioral Healthcare
Properties. CBHS is owned 50% by a subsidiary of Magellan and 50% by COI. The
lease requires the payment of annual minimum rent in the amount of approximately
$43.8 million for the period ending June 16, 1999, increasing in each subsequent
year during the remaining 10-year term at a 5% compounded annual rate. All
maintenance and capital improvement costs are the responsibility of CBHS during
the term of the lease. In addition, the obligation of CBHS, pursuant to a
franchise agreement, to pay an approximately $78.2 million franchise fee to
Magellan and one of its subsidiaries, as franchisor, is subordinated to the
obligation of CBHS to pay annual minimum rent to the Company. The franchisor
does not have the right to terminate the franchise agreement due to any
nonpayment of the franchise fee as a result of the subordination of the
franchise fee to the annual minimum rent. The lease is designed to provide the
Company with a secure, above-average return on its investment as a result of the
priority of annual minimum rent to the franchise fee and the initial amount and
annual escalation in the lease payments.  In December 1998, the independent
accountants for CBHS, in connection with their audit of the financial statements
for the year ended September 30, 1998, issued a modified auditors' report
related to the ability of CBHS to continue as a going concern. In October 1998,
CBHS hired a new President and Chief Executive Officer (formerly the Vice
President of Operations for the Southeast Region of Tenet Healthcare), who
announced a set of initiatives to address cost reductions and revenue
enhancements for 1999. CBHS has continued to make timely rent payments to the
Company for the first five months of CBHS's fiscal year.

               See Item 2. Properties for more information about the Company's
Behavioral Healthcare Properties.

INDUSTRY INFORMATION

         In an era of cost-containment and the reduction of dollars available
for care, behavioral healthcare providers such as CBHS have focused attention on
developing treatment approaches that respond to payors' increasing demands for
shorter stays, lower costs, and expanded access to care. Changes in the mix of
services, the prices of services, and the intensity of service are all part of
this response. These changes have also been bolstered by a rapidly expanding
science base, improved medications management, and the growing availability of
non-hospital treatment settings in more and more communities that help to make
it possible to manage complex and severe illnesses in less intensive treatment
settings. One of the effects that the behavioral healthcare industry is
experiencing is an increasing percentage of non-inpatient care. According to the
National Association of Psychiatric Health Systems 1997 Annual Survey Report,
the most recent available report, nearly one in four admissions in 1996 was to a
service other than inpatient hospitalization, compared to just one in ten
admissions in 1992. Although non-inpatient admissions are increasing rapidly and
inpatient admissions also are increasing, average length of stay and care costs
are decreasing.

         Due to these changes in the behavioral healthcare industry, the
position of a hospital or other behavioral care facility such as the Behavioral
Healthcare Facilities relative to its competitors has been affected by its
ability to obtain contracts with HMOs, PPOs and other managed care plans for the
provision of health care services. 



                                       15
<PAGE>   17
Although such contracts generally provide for discounted services, pre-admission
certification and concurrent length of stay reviews, they also provide a strong
patient referral base. The importance of entering into contracts with HMOs, PPOs
and other managed care companies varies from market to market and depends upon
the market strength of the particular managed care company.

         The behavioral healthcare industry in general, and CBHS in particular, 
is influenced by the cyclical nature of the business, with a reduced demand for 
services during the summer months and around major holidays.

COMPETITION

         The Behavioral Healthcare Properties, which are acute-care psychiatric
hospitals and other behavioral care treatment facilities, are located in 26
states within well-populated urban and suburban locations. Most of the
Behavioral Healthcare Properties offer a full continuum of behavioral care in
their service area, including inpatient hospitalization, partial
hospitalization, intensive outpatient services and, in some markets, residential
treatment services. The Behavioral Healthcare Properties provide structured and
intensive treatment programs for mental health, alcohol and drug dependency
disorders in children, adolescents and adults. A significant portion of
admissions is provided by referrals from former patients, local marketplace
advertising, managed care organizations and physicians. The Behavioral
Healthcare Properties work closely with mental health professionals,
non-psychiatric physicians, emergency rooms and community agencies that come in
contact with individuals who may need treatment for mental illness or substance
abuse.

          In general, the operation of behavioral healthcare programs is
characterized by intense competition. The Company anticipates that competition
will become more intense as pressure to contain the rising costs of health care
increases, particularly as programs such as those operated by CBHS are perceived
to help contain mental health care costs. Each of the Behavioral Healthcare
Properties competes with other hospitals and behavioral healthcare facilities,
some of which are larger and have greater financial resources than CBHS. Some
competing facilities are owned and operated by governmental agencies, others by
nonprofit organizations supported by endowments and charitable contributions.
The Behavioral Healthcare Properties frequently draw patients from areas outside
their immediate locale and, therefore, the Behavioral Healthcare Properties may,
in certain markets, compete with both local and distant hospitals and other
facilities. In addition, the Behavioral Healthcare Properties compete not only
with other psychiatric hospitals, but also with psychiatric units in general
hospitals. With respect to outpatient services, CBHS competes with private
practicing mental health professionals, publicly funded mental health centers,
and partial hospitalization and other intensive outpatient services programs and
facilities. The competitive position of a particular facility is, to a
significant degree, dependent upon the number and quality of physicians who
practice at the facility and who are members of its medical staff. There can be
no assurance that CBHS will be able to compete effectively with its present or
future competitors, and any such inability could have a material adverse effect
on CBHS' business, financial condition and results of operations.

ITEM 2.  PROPERTIES

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

                                OFFICE PROPERTIES

         The Company's Office Properties are located primarily in Dallas/Fort
Worth and Houston, Texas. As of March 26, 1999, the Company's Office Properties
in Dallas/Fort Worth and Houston represent an aggregate of approximately 72% of
its office portfolio based on total net rentable square feet (39% for
Dallas/Fort Worth and 33% for Houston).

OFFICE PROPERTIES TABLES

         The following table sets forth, as of December 31, 1998, certain
information about the Company's Office Properties. Based on rental revenues from
office and retail leases in effect as of December 31, 1998, no single tenant
accounted for more than 4% of the Company's total Office and Retail Segment
rental revenues for 1998.



                                       16
<PAGE>   18

<TABLE>
<CAPTION>
                                                                                                                   WEIGHTED
                                                                                                                    AVERAGE
                                                                                        NET                      FULL-SERVICE
                                                                                     RENTABLE                     RENTAL RATE
                                       NO. OF                            YEAR          AREA         PERCENT       PER LEASED
      STATE, CITY, PROPERTY          PROPERTIES       SUBMARKET       COMPLETED      (SQ. FT.)       LEASED       SQ. FT. (1)
      -------------------------      ----------  ------------------   ---------     ----------     ---------    --------------

<S>                                  <C>         <C>                  <C>           <C>             <C>          <C>
TEXAS
 DALLAS
   Bank One Center(2)..............       1      CBD                       1987      1,530,957         75%(5)    $      22.17
   The Crescent Office Towers......       1      Uptown/Turtle Creek       1985      1,204,720         99               29.43
   Fountain Place..................       1      CBD                       1986      1,200,266         96               18.52
   Trammell Crow Center(3).........       1      CBD                       1984      1,128,331         95               25.38
   Stemmons Place..................       1      Stemmons Freeway          1983        634,381         89               14.28
   Spectrum Center(4)..............       1      Far North Dallas          1983        598,250         85               21.93
   Waterside Commons...............       1      Las Colinas               1986        458,739        100               18.74
   Caltex House....................       1      Las Colinas               1982        445,993         97               28.46
   Reverchon Plaza.................       1      Uptown/Turtle Creek       1985        374,165         95               18.12
   The Aberdeen....................       1      Far North Dallas          1986        320,629        100               18.29
   MacArthur Center I & II.........       1      Las Colinas          1982/1986        294,069         98               19.46
   Stanford Corporate Centre.......       1      Far North Dallas          1985        265,507        100               17.52
   The Amberton....................       1      Central Expressway        1982        255,052         85               12.08
   Concourse Office Park...........       1      LBJ Freeway          1972-1986        244,879         91               14.30
   12404 Park Central..............       1      LBJ Freeway               1987        239,103        100               20.96
   Palisades Central II............       1      Richardson/Plano          1985        237,731         91               19.42
   3333 Lee Parkway................       1      Uptown/Turtle Creek       1983        233,769         98               19.97
   Liberty Plaza I & II............       1      Far North Dallas     1981/1986        218,813         98               15.16
   The Addison.....................       1      Far North Dallas          1981        215,016        100               17.65
   The Meridian....................       1      LBJ Freeway               1984        213,915         86(5)            15.82
   Palisades Central I.............       1      Richardson/Plano          1980        180,503         94               15.58
   Walnut Green....................       1      Central Expressway        1986        158,669         94               17.59
   Greenway II.....................       1      Richardson/Plano          1985        154,329         99               19.86
   Addison Tower...................       1      Far North Dallas          1987        145,886         91(5)            14.36
   Greenway I & IA.................       2      Richardson/Plano          1983        146,704        100               23.22
   5050 Quorum.....................       1      Far North Dallas          1981        133,594         91               16.11
   Cedar Springs Plaza.............       1      Uptown/Turtle Creek       1982        110,923         84               17.44
   Valley Centre...................       1      Las Colinas               1985         74,861         99               15.63
   One Preston Park................       1      Far North Dallas          1980         40,525         87               16.28
                                       ----                                         ----------    -------        ------------
     Subtotal/Weighted Average.....      30                                         11,460,279         92%       $      20.84
                                        ---                                         ----------    -------        ------------

 FORT WORTH
  UPR Plaza........................       1      CBD                       1982        954,895         98%       $      16.40
                                       ----                                         ----------    ---------      ------------

 HOUSTON
  Greenway Plaza Office Portfolio..      10      Richmond-Buffalo     1969-1982      4,286,277         92%       $      16.15
                                                 Speedway
  Houston Center...................       3      CBD                  1974-1983      2,764,418         96               15.54
  Post Oak Central.................       3      West Loop/Galleria   1974-1981      1,277,516         94               15.85
  The Woodlands Office
    Properties(6)..................      12      The Woodlands        1980-1996        810,630         98               15.53
  BP Plaza.........................       1      Katy Freeway              1992        561,065        100               18.26
  Three Westlake Park(7)...........       1      Katy Freeway              1983        414,251         99               14.18
  1800 West Loop South.............       1      West Loop/Galleria        1982        399,777         80               15.88
                                       ----                                         ----------    --------       ------------
     Subtotal/Weighted Average.....      31                                         10,513,934         94%       $      15.93
                                       ----                                         ----------    --------       ------------


 AUSTIN
  Frost Bank Plaza.................       1      CBD                       1984        433,024         84%(5)    $      18.84
  301 Congress Avenue(8)...........       1      CBD                       1986        418,338         89               21.66
  Bank One Tower...................       1      CBD                       1974        389,503         96               17.35
  Austin Centre....................       1      CBD                       1986        343,665         96               20.09
  The Avallon......................       1      Northwest            1993/1997        232,301         93(5)            19.50
  Barton Oaks Plaza One............       1      Southwest                 1986         99,895        100               21.24
                                       ----                                         ----------    --------       ------------
     Subtotal/Weighted Average.....       6                                          1,916,726         92%       $      19.56
                                       ----                                         ----------    --------       ------------
</TABLE>




                                       17
<PAGE>   19

<TABLE>
<CAPTION>
                                                                                                                       WEIGHTED
                                                                                                                        AVERAGE
                                                                                            NET                       FULL-SERVICE
                                                                                          RENTABLE                    RENTAL RATE
                                            NO. OF                             YEAR         AREA        PERCENT       PER LEASED
      STATE, CITY, PROPERTY               PROPERTIES      SUBMARKET          COMPLETED    (SQ. FT.)     LEASED        SQ. FT. (1)
      ------------------------------      ----------   ---------------       ---------    ----------    -------      -------------

COLORADO
 DENVER
<S>                                       <C>          <C>                   <C>          <C>           <C>           <C>
  MCI Tower.........................          1        CBD                       1982        550,807       99%        $   18.10  
  Ptarmigan Place...................          1        Cherry Creek              1984        418,630       95             16.52  
  Regency Plaza One.................          1        DTC                       1985        309,862       98             21.27  
  AT&T Building.....................          1        CBD                       1982        184,581       80             14.96  
  The Citadel.......................          1        Cherry Creek              1987        130,652      100             19.94  
  55 Madison........................          1        Cherry Creek              1982        137,176       97             15.28  
  44 Cook...........................          1        Cherry Creek              1984        124,174       87(5)          17.60  
                                             --                                           ----------   ------         ---------  
       Subtotal/Weighted Average....          7                                            1,855,882       95%        $   17.94  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
COLORADO SPRINGS                                                                                                                 
  Briargate Office and 
    Research Center.................          1        Colorado Springs          1988        252,857      100%        $   17.17  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
LOUISIANA                                                                                                                        
 NEW ORLEANS                                                                                                                     
  Energy Centre.....................          1        CBD                       1984        761,500       78%        $   15.17  
  1615 Poydras......................          1        CBD                       1984        508,741       79             15.10  
                                             --                                           ----------   ------         ---------  
       Subtotal/Weighted Average....          2                                            1,270,241       78%        $   15.14  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
FLORIDA                                                                                                                          
 MIAMI                                                                                                                           
  Miami Center......................          1        CBD                       1983        782,686       81%(5)     $   23.68  
  Datran Center.....................          2        South Dade/Kendall   1986/1988        472,236       91             21.02  
                                             --                                           ----------   ------         ---------  
       Subtotal/Weighted Average....          3                                            1,254,922       85%        $   22.59  
                                             --                                           ----------   ------         ---------  

ARIZONA                                                                                                                          
 PHOENIX                                                                                                                         
  Two Renaissance Square............          1        Downtown/CBD              1990        476,373       94%(5)     $   23.25  
  6225 North 24th Street............          1        Camelback Corridor        1981         86,451       83             21.53  
                                             --                                           ----------   ------         ---------  
       Subtotal/Weighted Average....          2                                              562,824       93%        $   23.01  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
WASHINGTON, D.C                                                                                                                  
 WASHINGTON, D.C                                                                                                                 
  Washington Harbour................          2        Georgetown                1986        536,206       93%        $   35.84  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
NEBRASKA                                                                                                                         
 OMAHA                                                                                                                           
  Central Park Plaza................          1        CBD                       1982        409,850      100%        $   15.38  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
NEW MEXICO                                                                                                                       
 ALBUQUERQUE                                                                                                                     
  Albuquerque Plaza.................          1        CBD                       1990        366,236       95%        $   18.79  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
CALIFORNIA                                                                                                                       
 SAN FRANCISCO                                                                                                                   
  160 Spear Street..................          1        South of Market/CBD       1984        276,420       99%        $   25.42  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
SAN DIEGO                                                                                                                        
 Chancellor Park (9)................          1        UTC                       1988        195,733       90%        $   21.48  
                                             --                                           ----------   ------         ---------  
                                                                                                                                 
                                                                                                                                 
                                                                                                                                 
    TOTAL/WEIGHTED AVERAGE..........         89                                           31,827,005       92%(5)     $   18.88(10)
                                             ==                                           ==========   ======         =========  
</TABLE>

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

   (1)    Calculated based on base rent payable as of December 31, 1998, without
          giving effect to free rent or scheduled rent increases that would be
          taken into account under GAAP and including adjustments for expenses
          payable by or reimbursable from tenants.

   (2)    The Company has a 49.5% limited partner interest and a .5% general
          partner interest in the partnership that owns Bank One Center.



                                       18
<PAGE>   20



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

   (4)    The Company owns the principal economic interest in Spectrum Center
          through an interest in Spectrum Mortgage Associates L.P., which owns
          both a mortgage note secured by Spectrum Center and the ground
          lessor's interest in the land underlying the office building.

   (5)    Leases have been executed at certain Office Properties but had not
          commenced as of December 31, 1998. If such leases had commenced as of
          December 31, 1998, the percent leased for Office Properties would have
          been 94%. The total percent leased for such Properties would have been
          as follows: Bank One Center - 78%; The Meridian - 90%; Addison Tower -
          94%; Frost Bank Plaza - 92%; The Avallon - 100%; 44 Cook - 97%; Miami
          Center - 86%; and Two Renaissance Square - 98%.

   (6)    The Company has a 75% limited partner interest and an approximate 10%
          indirect general partner interest in the partnership that owns the 12
          Office Properties that comprise The Woodlands Office Properties.

   (7)    The Company owns the principal economic interest in Three Westlake
          Park through its ownership of a mortgage note secured by Three
          Westlake Park.

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

   (9)    The Company owns Chancellor Park through its ownership of a mortgage
          note secured by the building and through its direct and indirect
          interests in the partnership which owns the building.

  (10)    The weighted average full-service rental rate per square foot 
          calculated based on base rent payable for Company Office Properties as
          of December 31, 1998, giving effect to free rent and scheduled rent
          increases that would be taken into consideration under GAAP and
          including adjustments for expenses payable by or reimbursed from
          tenants, is $19.53.

         The following table provides information, as of December 31, 1998, for
the Company's Office Properties by state, city, and submarket.


<TABLE>
<CAPTION>
                                                                          PERCENT 
                                                               PERCENT    LEASED        OFFICE
                                                                 OF         AT         SUBMARKET
                                                     TOTAL      TOTAL     COMPANY       PERCENT
                                         NUMBER OF  COMPANY    COMPANY    OFFICE        LEASED/
     STATE, CITY, SUBMARKET             PROPERTIES   NRA(1)     NRA(1)   PROPERTIES   OCCUPIED(2)
     ----------------------             ----------   ------     ------   ----------   -----------

<S>                                     <C>        <C>         <C>       <C>           <C>
CLASS A OFFICE PROPERTIES
TEXAS 
 DALLAS

   CBD................................       3      3,859,554     12%       87%(6)        84%     
   Uptown/Turtle Creek................       4      1,923,577      6        97            92      
   Far North Dallas...................       7      1,897,695      6        94            82      
   Las Colinas........................       4      1,273,662      4        98            90      
   Richardson/Plano...................       5        719,267      2        95            95      
   Stemmons Freeway...................       1        634,381      2        89            92      
   LBJ Freeway........................       2        453,018      1        93(6)         91      
                                            --      ---------     --       ---          ----      
     Subtotal/Weighted Average........      26     10,761,154     33%       92%           88%     
                                            --     ----------     --       ---          ----      
 FORT WORTH                                                                                       
   CBD................................       1        954,895      3%       98%           89%     
                                            --      ---------     --       ---          ----      
 HOUSTON                                                                                          
   CBD................................       3      2,764,418      9%       96%           96%     
   Richmond-Buffalo Speedway                 6      2,735,030      9        92            93      
   West Loop/Galleria.................       4      1,677,293      5        91            95      
   The Woodlands......................       7        486,867      2        99           100      
   Katy Freeway.......................       2        975,316      3       100            98      
                                            --      ---------     --       ---         -----      
     Subtotal/Weighted Average........      22      8,638,924     28%       94%           96%     
                                            --      ---------     --       ---         -----      
                                                                                                  
AUSTIN                                                                                            
   CBD................................       4      1,584,530      5%       91%(6)        97%     
   Northwest..........................       1        232,301      1        93(6)         94      
   Southwest..........................       1         99,895      0       100            98      
                                            --      ---------     --       ---         -----      
     Subtotal/Weighted Average........       6      1,916,726      6%       92%           97%     
                                            --      ---------     --       ---         -----      
                                                                                                  
COLORADO                                                                                          
 DENVER                                                                                           
   Cherry Creek.......................       4        810,632      3%       95%(6)        87%     
   CBD................................       2        735,388      2        94            96      
   DTC................................       1        309,862      1        98            95      
                                            --      ---------     --       ---         -----      
     Subtotal/Weighted Average........       7      1,855,882      6%       95%           95%     
                                            --      ---------     --       ---         -----      
                                                                                                  
 COLORADO SPRINGS                                                                                 
   Colorado Springs...................       1        252,857      1%      100%           94%     
                                            --      ---------     --       ---         -----      
                                                                                                  
                                                                                                  
LOUISIANA                                                                                         
 NEW ORLEANS                                                                                      
   CBD................................       2      1,270,241      5%       78%           87%     
                                            --      ---------     --       ---         -----      
</TABLE>




<TABLE>
<CAPTION>
                                                                                    WEIGHTED   
                                                                                    AVERAGE 
                                                         WEIGHTED                   COMPANY 
                                                         AVERAGE        COMPANY     FULL-
                                              COMPANY     QUOTED         QUOTED     SERVICE
                                             SHARE OF     MARKET         RENTAL      RENTAL
                                              OFFICE     RENTAL RATE    RATE PER    RATE PER
                                             SUBMARKET   PER SQUARE      SQUARE     SQUARE
     STATE, CITY, SUBMARKET                  NRA(1)(2)   FOOT(2)(3)      FOOT(4)    FOOT(5)
     ----------------------                  ---------   ----------      -------    -------

<S>                                          <C>         <C>           <C>        <C> 
CLASS A OFFICE PROPERTIES
TEXAS 
 DALLAS
   CBD................................          21%          $ 22.76    $  25.20   $  21.94
   Uptown/Turtle Creek................          35             26.56       30.44      25.54
   Far North Dallas...................          25             25.34       24.31      18.32
   Las Colinas........................          15             27.04       26.69      22.06
   Richardson/Plano...................          18             22.81       23.65      19.38
   Stemmons Freeway...................          31             20.97       19.50      14.28
   LBJ Freeway........................           4             24.97       22.67      18.72
                                                --           -------    --------   --------
     Subtotal/Weighted Average........          19%          $ 24.39    $  25.61   $  21.23
                                                --           -------    --------   --------
 FORT WORTH                                                                                
   CBD................................          24%          $ 19.59    $  18.79   $  16.40
                                                --           -------    --------   --------
 HOUSTON                                                                                   
   CBD................................           11%         $ 21.93    $  21.88   $  15.54
   Richmond-Buffalo Speedway..........           56            21.08       23.37      16.94
   West Loop/Galleria.................           13            21.93       23.91      15.86
   The Woodlands......................          100            15.69       15.69      15.62
   Katy Freeway.......................           40            25.00       25.29      16.53
                                                ---          -------    --------   --------
     Subtotal/Weighted Average........           19%         $ 21.66    $  22.78   $  16.15
                                                ---          -------    --------   --------
                                                                                           
AUSTIN                                                                                     
   CBD................................           44%         $ 26.19    $  26.16   $  19.45
   Northwest..........................           14            26.15       24.50      19.50
   Southwest..........................            5            26.33       24.00      21.24
                                                ---          -------    --------   --------
     Subtotal/Weighted Average........           26%         $ 26.19    $  25.84   $  19.56
                                                ---          -------    --------   --------
                                                                                           
COLORADO                                                                                   
 DENVER                                                                                    
   Cherry Creek.......................           53%         $ 20.30    $  21.16   $  17.05
   CBD................................            7            22.84       20.75      17.40
   DTC................................            6            23.64       25.00      21.27
                                                ---          -------    --------   --------
     Subtotal/Weighted Average........           11%         $ 21.86    $  21.64   $  17.94
                                                ---          -------    --------   --------
                                                                                           
COLORADO SPRINGS                                                                          
  Colorado Springs....................            6%         $ 19.29    $  20.00   $  17.17
                                                ---          -------    --------   --------
                                                                                           
LOUISIANA                                                                                  
 NEW ORLEANS                                                                               
   CBD................................           14%         $ 16.55    $  17.00   $  15.14
                                                ---          -------    --------   --------
</TABLE>



                                       19
<PAGE>   21



<TABLE>
<CAPTION>
                                                                                                                 PERCENT   
                                                                                           PERCENT OF           LEASED AT  
                                                                        TOTAL                 TOTAL              COMPANY   
                                                 NUMBER OF             COMPANY               COMPANY              OFFICE   
           STATE, CITY, SUBMARKET               PROPERTIES              NRA(1)               NRA(1)             PROPERTIES 
           ----------------------               ----------              ------               ------             ---------- 

<S>                                                 <C>                <C>                     <C>                <C>   
FLORIDA
 MIAMI
   CBD.......................................       1                  782,686                 2%                 81%(6)
   South Dade/Kendall........................       2                  472,236                 1                  91 
                                                   --               ----------                --                 --- 
     Subtotal/Weighted Average...............       3                1,254,922                 3%                 85%
                                                   --               ----------                --                 ---          

ARIZONA
 PHOENIX
   Downtown/CBD..............................       1                  476,373                 1%                 94%(6)      
   Camelback Corridor........................       1                   86,451                 0                  83          
                                                   --               ----------                --                 ---          
     Subtotal/Weighted Average...............       2                  562,824                 1%                 93%         
                                                   --               ----------                --                 ---          

WASHINGTON D.C.
 WASHINGTON D.C.
   Georgetown................................       2                  536,206                 2%                 93%         
                                                   --               ----------                --                 ---          

NEBRASKA
 OMAHA
   CBD.......................................       1                  409,850                 1%                100%         
                                                   --               ----------                --                 ---          

NEW MEXICO
 ALBUQUERQUE
   CBD.......................................       1                  366,236                 1%                 95%         
                                                   --               ----------                --                 ---          

CALIFORNIA
 SAN FRANCISCO
   South of Market/CBD.......................       1                  276,420                 1%                 99%         
                                                   --               ----------                --                 ---          

 SAN DIEGO
   UTC.......................................       1                  195,733                 1%                 90%         
                                                   --               ----------                --                 ---          
     CLASS A OFFICE PROPERTIES
       SUBTOTAL/WEIGHTED
       AVERAGE...............................      76               29,252,870                92%                 93%         
                                                   ==               ==========                ==                 ===          

CLASS B OFFICE PROPERTIES
TEXAS
 DALLAS
   Central Expressway........................       2                  413,721                  1%                88%         
   LBJ Freeway...............................       1                  244,879                  1                 91          
   Far North Dallas..........................       1                   40,525                  0                 87          
                                                   --               ----------                ---                 --          
     Subtotal/Weighted Average...............       4                  699,125                  2%                89%         
                                                   --               ----------                ---                 --          

 HOUSTON
   Richmond-Buffalo Speedway.................       4                1,551,247                  5%                93%         
   The Woodlands.............................       5                  323,763                  1                 97          
                                                   --               ----------                ---                 --          
     Subtotal/Weighted Average...............       9                1,875,010                  6%                94%         
                                                   --               ----------                ---                 --          
     CLASS B OFFICE PROPERTIES
       SUBTOTAL/WEIGHTED
       AVERAGE...............................      13                2,574,135                  8%                92%         
                                                   ==               ==========                ===                 ==          
     CLASS A AND CLASS B OFFICE
       PROPERTIES TOTAL/WEIGHTED
       AVERAGE...............................      89               31,827,005                100%                92%(6)      
                                                   ==               ==========                ===                 ==          
</TABLE>


<TABLE>
<CAPTION>
                                                                                                                      WEIGHTED
                                                                                                                       AVERAGE
                                                                                       WEIGHTED                        COMPANY
                                                                                       AVERAGE          COMPANY         FULL-
                                                     OFFICE            COMPANY          QUOTED          QUOTED         SERVICE
                                                   SUBMARKET          SHARE OF          MARKET          RENTAL         RENTAL
                                                    PERCENT            OFFICE        RENTAL RATE       RATE PER       RATE PER
                                                    LEASED/           SUBMARKET       PER SQUARE        SQUARE         SQUARE
           STATE, CITY, SUBMARKET                 OCCUPIED(2)         NRA(1)(2)       FOOT(2)(3)        FOOT(4)        FOOT(5)
           ----------------------                 -----------         ---------       ----------        -------        -------

<S>                                                   <C>                 <C>           <C>            <C>            <C>     
FLORIDA
 MIAMI
   CBD.......................................         90%                 23%            $ 28.30        $  28.50       $  23.68
   South Dade/Kendall........................         94                 100               23.19           23.19          21.02
                                                   -----                 ---             -------        --------       --------
     Subtotal/Weighted Average...............         90%                 33%            $ 26.38        $  26.50       $  22.59
                                                   -----                 ---             -------        --------       --------
                                                                                       
ARIZONA                                                                                
 PHOENIX                                                                               
   Downtown/CBD..............................         92%                 27%            $ 23.38        $  23.00       $  23.25
   Camelback Corridor........................         95                   2               26.48           22.00          21.53
                                                   -----                 ---             -------        --------       --------
     Subtotal/Weighted Average...............         94%                 11%            $ 23.86        $  22.85       $  23.01
                                                   -----                 ---             -------        --------       --------
                                                                                       
WASHINGTON D.C.                                                                        
 WASHINGTON D.C.                                                                       
   Georgetown................................         97%                100%            $ 36.66        $  36.66       $  35.84
                                                   -----                 ---             -------        --------       --------
                                                                                       
NEBRASKA                                                                               
 OMAHA                                                                                 
   CBD.......................................         97%                 32%            $ 18.61        $  18.50       $  15.38
                                                   -----                 ---             -------        --------       --------
                                                                                       
NEW MEXICO                                                                             
 ALBUQUERQUE                                                                           
   CBD.......................................         97%                 63%            $ 19.30        $  19.50       $  18.79
                                                   -----                 ---             -------        --------       --------
                                                                                       
CALIFORNIA                                                                             
 SAN FRANCISCO                                                                         
   South of Market/CBD.......................         97%                  3%            $ 45.20        $  38.00       $  25.42
                                                   -----                 ---             -------        --------       --------
                                                                                       
 SAN DIEGO                                                                             
   UTC.......................................         87%                  6%            $ 28.50        $  27.00       $  21.48
                                                   -----                 ---             -------        --------       --------
     CLASS A OFFICE PROPERTIES                                                         
       SUBTOTAL/WEIGHTED                                                               
       AVERAGE...............................         92%                 18%            $ 23.38        $  24.03       $  19.24
                                                   =====                 ===             =======        ========       ========
                                                                                       
CLASS B OFFICE PROPERTIES                                                              
TEXAS                                                                                  
 DALLAS                                                                                
   Central Expressway........................         82%                 11%            $ 16.73        $  18.35       $  14.37
   LBJ Freeway...............................         91                   2               19.00           18.25          14.30
   Far North Dallas..........................         88                   0               20.61           18.50          16.28
                                                    ----                 ---             -------        --------       --------
     Subtotal/Weighted Average...............         88%                  3%            $ 17.75        $  18.32       $  14.45
                                                    ----                 ---             -------        --------       --------

 HOUSTON                                                                               
   Richmond-Buffalo Speedway.................         92%                 47%            $ 17.82        $  22.03       $  14.75
   The Woodlands.............................         99                 100               15.17           15.17          15.39
                                                    ----                 ---             -------        --------       --------
     Subtotal/Weighted Average...............         93%                 51%            $ 17.36        $  20.85       $  14.87
                                                    ----                 ---             -------        --------       --------
     CLASS B OFFICE PROPERTIES                                                         
       SUBTOTAL/WEIGHTED                                                               
       AVERAGE...............................         89%                  9%            $ 17.47        $  20.16       $  14.75
                                                    ====                 ===             =======        ========       ========
     CLASS A AND CLASS B OFFICE                                                        
       PROPERTIES TOTAL/WEIGHTED                                                       
       AVERAGE...............................         92%                 16%            $ 22.90        $  23.72       $  18.88(7)
                                                    ====                 ===             =======        ========       ========
</TABLE>

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

(1) NRA means net rentable area in square feet.
(2) Market information is for Class A office space under the caption "Class A
    Office Properties" and market information is for Class B office space under
    the caption "Class B Office Properties." Sources are Jamison Research, Inc.
    (for the Dallas CBD, Uptown/Turtle Creek, Far North Dallas, Las Colinas,
    Richardson/Plano, Stemmons Freeway, LBJ Freeway and Central Expressway,
    Fort Worth CBD and the New Orleans CBD submarkets), Baca Landata, Inc. (for
    the Houston Richmond-Buffalo Speedway, CBD and West Loop/Galleria
    submarkets), The Woodlands Operating Company, L.P. (for The Woodlands
    submarket), Cushman & Wakefield of Texas, Inc. (for the Houston Katy Freeway
    submarket), CB Richard Ellis (for CBD, Northwest and Southwest submarkets),
    Cushman & Wakefield of Colorado, Inc. (for the Denver Cherry Creek, CBD and
    DTC submarkets), Turner Commercial Research (for the Colorado Springs
    market), Grubb and Ellis Company (for the Phoenix Downtown/CBD, Camelback
    Corridor and San Francisco South of Market/CBD submarkets), Grubb and Ellis
    Company and the Company (for the Washington D.C. Georgetown submarket),
    Pacific Realty Group, Inc. (for the Omaha CBD submarket), Building
    Interests, Inc. (for the Albuquerque CBD submarket), RealData Information
    Systems, Inc. (for the Miami CBD and South Dade/Kendall submarkets) and John
    Burnham & Co. (for the San Diego UTC submarket). 
(3) Represents full-service quoted market rental rates. These rates do not 
    necessarily represent the amounts at which available space at the Office
    Properties will be leased. The weighted average subtotals and total are
    based on total net rentable square feet of Company Office Properties in the
    submarket.


                                       20
<PAGE>   22

(4) For Office Properties, represents weighted average rental rates per square
    foot quoted by the Company as of December 31, 1998, based on total net
    rentable square feet of Company Office Properties in the submarket,
    adjusted, if necessary, based on management estimates, to equivalent
    full-service quoted rental rates to facilitate comparison to weighted
    average Class A or Class B, as the case may be, quoted submarket rental
    rates per square foot. These rates do not necessarily represent the amounts
    at which available space at the Company's Office Properties will be leased.
(5) Calculated based on base rent payable for Company Office Properties in the
    submarket as of December 31, 1998, without giving effect to free rent or
    scheduled rent increases that would be taken into account under GAAP and
    including adjustments for expenses payable by or reimbursed from tenants,
    divided by total net rentable square feet of Company Office Properties in
    the submarket.
(6) Leases have been executed at certain Properties in these submarkets but had
    not commenced as of December 31, 1998. If such leases had commenced as of
    December 31, 1998, the percent leased for all Office Properties in the
    Company's submarkets would have been 94%. The total percent leased at the
    Company's Office Properties would have been as follows: Dallas CBD - 89%;
    LBJ Freeway - 94%; Austin CBD -- 94%; Austin Northwest -- 100%; Denver
    Cherry Creek -- 98%; Miami CBD - 86%; and Phoenix Downtown CBD - 98%.
(7) The weighted average full-service rental rate per square foot calculated 
    based on base rent payable for Company Office Properties as of December 31,
    1998, giving effect to free rent and scheduled rent increases that would be
    taken into consideration under GAAP and including adjustments for expenses
    payable by or reimbursed from tenants, is $19.53.

         The following table sets forth, as of December 31, 1998, the principal
businesses conducted by the tenants at the Company's Office Properties, based on
information supplied to the Company from the tenants.

<TABLE>
<CAPTION>
                                                                       Percent of
                                      Industry Sector                Leased Sq. Ft.
                                      ---------------                --------------

<S>                                                                  <C> 
                            Professional Services (1)                       25%
                            Financial Services (2)                          20%
                            Energy(3)                                       20%
                            Telecommunications                               6%
                            Technology                                       6%
                            Manufacturing                                    2%
                            Retail                                           2%
                            Medical                                          3%
                            Government                                       2%
                            Food Service                                     3%
                            Other (4)                                       11%

                                                                    ------------------
                            Total Leased                                   100%
</TABLE>

------------------
(1) Includes legal, accounting, engineering, architectural, and advertising
    services.
(2) Includes banking, title and insurance, and investment services.
(3) Of the 20% of energy tenants at the Company's Office Properties, 65% are
    located in Houston, 24% are located in Dallas, 6% are located in Denver and
    5% are located in New Orleans. Of the 65% of energy tenants located in
    Houston (approximately 4 million square feet), 65% (approximately 2.6
    million square feet) are obligated under long-term leases (expiring in 2003
    or later).
(4) Includes construction, real estate, transportation and other industries.

AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES

         The following tables set forth schedules of lease expirations for
leases in place as of December 31, 1998 at the Company's total Office Properties
and for Dallas and Houston, Texas individually, for each of the ten years
beginning with 1999, assuming that none of the tenants exercise or have
exercised renewal options and excluding an aggregate 2,326,676 square feet of
unleased space and 335,984 square feet of leased space for which the leases have
not yet commenced.




                                       21
<PAGE>   23

TOTAL OFFICE PROPERTIES

<TABLE>
<CAPTION>
                                                                                   PERCENTAGE        ANNUAL 
                                                                                   OF TOTAL       FULL-SERVICE
                                    NET RENTABLE                                     ANNUAL         RENT PER 
                                        AREA        PERCENTAGE OF     ANNUAL      FULL-SERVICE       SQUARE 
                      NUMBER OF      REPRESENTED     LEASED NET    FULL-SERVICE       RENT        FOOT OF NET
                     TENANTS WITH   BY EXPIRING     RENTABLE AREA   RENT UNDER     REPRESENTED      RENTABLE
   YEAR OF LEASE       EXPIRING        LEASES      REPRESENTED BY    EXPIRING      BY EXPIRING        AREA 
     EXPIRATION         LEASES     (SQUARE FEET)   EXPIRING LEASES   LEASES(1)       LEASES        EXPIRING(1)
   -------------     ------------  -------------   --------------- ------------   ------------    ------------

<S>                  <C>           <C>             <C>              <C>           <C>             <C>   
1999..............       589         3,947,267(2)       13.5%       $72,074,173       12.2%       $18.26
2000..............       407         3,375,059          11.6         64,634,853       10.9         19.15
2001 .............       410         3,937,251          13.5         72,098,759       12.2         18.31
2002..............       302         3,547,240          12.2         72,142,547       12.2         20.34
2003..............       280         2,658,719           9.1         50,784,489        8.6         19.10
2004..............       110         2,961,320          10.2         60,143,639       10.1         20.31
2005..............        74         2,297,346           7.9         49,925,513        8.4         21.73
2006..............        28           711,519           2.4         15,008,808        2.5         21.09
2007..............        32         1,264,512           4.3         28,273,098        4.8         22.36
2008..............        30         1,077,621           3.7         26,513,766        4.5         24.60
2009 and thereafter       31         3,386,491          11.6         81,153,538       13.6         23.96
</TABLE>

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

(2) As of December 31, 1998, leases have been signed for approximately 1,500,000
    net rentable square feet commencing in 1999.


DALLAS OFFICE PROPERTIES

<TABLE>
<CAPTION>
                                                                                       PERCENTAGE        ANNUAL    
                                                                                        OF TOTAL      FULL-SERVICE 
                                        NET RENTABLE                                     ANNUAL         RENT PER   
                                            AREA        PERCENTAGE OF     ANNUAL      FULL-SERVICE       SQUARE    
                          NUMBER OF      REPRESENTED     LEASED NET    FULL-SERVICE       RENT        FOOT OF NET  
                         TENANTS WITH   BY EXPIRING     RENTABLE AREA   RENT UNDER     REPRESENTED      RENTABLE   
   YEAR OF LEASE           EXPIRING        LEASES      REPRESENTED BY    EXPIRING      BY EXPIRING        AREA     
     EXPIRATION             LEASES     (SQUARE FEET)   EXPIRING LEASES   LEASES(1)       LEASES        EXPIRING(1) 
   -------------         ------------  -------------   --------------- ------------   ------------    ------------ 
                                                                                                                
<S>                      <C>           <C>             <C>              <C>           <C>              <C>      
1999..................       216         1,477,060           14.1%       $31,200,758       13.6%         $21.12 
2000..................       153         1,785,125           17.0         36,924,141       16.1           20.68 
2001 .................       144         1,157,442           11.0         23,950,375       10.4           20.69 
2002..................        81           933,139            8.9         22,280,907        9.7           23.98 
2003..................        87         1,127,819           10.8         21,900,757        9.5           19.42 
2004..................        23           512,434            4.9         12,951,390        5.6           25.27 
2005..................        18         1,140,886           10.9         23,712,921       10.3           20.78 
2006..................         9           197,031            1.9          4,889,176        2.1           24.81 
2007..................        12           526,184            5.0         12,605,163        5.5           23.96 
2008..................        10           553,504            5.3         13,588,530        5.9           24.55 
2009 and thereafter...         7         1,077,940           10.2         25,868,424       11.3           24.00 
</TABLE>

(1) Calculated based on base rent payable under the lease for net rentable
    square feet expiring, without giving effect to free rent or scheduled rent
    increases that would be taken into account under generally accepted
    accounting principles and including adjustments for expenses payable by or
    reimbursable from tenants based on current levels.



                                       22
<PAGE>   24

HOUSTON OFFICE PROPERTIES

<TABLE>
<CAPTION>
                                                                                       PERCENTAGE        ANNUAL    
                                                                                        OF TOTAL      FULL-SERVICE 
                                        NET RENTABLE                                     ANNUAL         RENT PER   
                                            AREA        PERCENTAGE OF     ANNUAL      FULL-SERVICE       SQUARE    
                          NUMBER OF      REPRESENTED     LEASED NET    FULL-SERVICE       RENT        FOOT OF NET  
                         TENANTS WITH   BY EXPIRING     RENTABLE AREA   RENT UNDER     REPRESENTED      RENTABLE   
   YEAR OF LEASE           EXPIRING        LEASES      REPRESENTED BY    EXPIRING      BY EXPIRING        AREA     
     EXPIRATION             LEASES     (SQUARE FEET)   EXPIRING LEASES   LEASES(1)       LEASES        EXPIRING(1) 
   -------------         ------------  -------------   --------------- ------------   ------------    ------------ 
                                                                                                                
<S>                      <C>           <C>             <C>              <C>           <C>              <C>      
1999..................       188         1,394,659          14.2%       $20,503,413       11.7%         $14.70
2000..................       132           768,009           7.8         11,548,164        6.6           15.04
2001 .................       130         1,865,036          19.0         29,990,561       17.1           16.08
2002..................       123         1,051,584          10.7         18,353,365       10.4           17.45
2003..................        94           798,859           8.1         14,090,838        8.0           17.64
2004..................        44         1,403,068          14.3         24,905,835       14.2           17.75
2005..................        15           185,456           1.9          3,470,307        2.0           18.71
2006..................         9           266,909           2.7          4,660,045        2.7           17.46
2007..................         6           477,167           4.9          9,045,788        5.1           18.96
2008..................         7           183,719           1.9          3,160,729        1.8           17.20
2009 and thereafter...        10         1,437,952          14.5         36,024,423       20.4           25.05
</TABLE>

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

(1) Calculated based on base rent payable under the lease for net rentable
    square feet expiring, without giving effect to free rent or scheduled rent
    increases that would be taken into account under generally accepted
    accounting principles and including adjustments for expenses payable by or
    reimbursable from tenants based on current levels.


                                RETAIL PROPERTIES

         The Company owns seven Retail Properties, which in the aggregate
contain approximately 777,000 net rentable square feet. Four of the Retail
Properties, The Woodlands Retail Properties with an aggregate of approximately
356,000 net rentable square feet, are located in The Woodlands, a master-planned
development located 27 miles north of downtown Houston, Texas. The Company has a
75% limited partner interest and an approximately 10% indirect general partner
interest in the partnership that owns The Woodlands Retail Properties. Two of
the Retail Properties, Las Colinas Plaza with approximately 135,000 net rentable
square feet, and The Crescent Atrium with approximately 95,000 net rentable
square feet, are located in submarkets of Dallas, Texas. The remaining Retail
Property, The Park Shops at Houston Center, with an aggregate of approximately
191,000 net rentable square feet, is located in the CBD submarket of Houston,
Texas. As of December 31, 1998, the Retail Properties were 95% leased.



                                       23
<PAGE>   25

                                HOTEL PROPERTIES

HOTEL PROPERTIES TABLES

         The following table sets forth certain information for the years ended
December 31, 1998 and 1997, about the Company's Hotel Properties. The
information for the Hotel Properties is based on available rooms, except for
Canyon Ranch-Tucson and Canyon Ranch-Lenox, which are destination health and
fitness resorts that measure their performance based on available guest nights.

<TABLE>
                                                                                      For the year ended December 31,
                                                                                      -------------------------------
                                                                                                                   Revenue
                                                                                  Average          Average            Per
                                                                                 Occupancy          Daily          Available
                                                      Year                         Rate             Rate            Room
                                                   Completed/                      ----             ----            ----
Hotel Property(1)                   Location       Renovated        Rooms      1998     1997     1998    1997    1998    1997
--------------                      --------       ---------        -----      ----     ----     ----    ----    ----    ----
<S>                              <C>               <C>              <C>        <C>      <C>      <C>     <C>     <C>     <C>  
Full-Service/Luxury Hotels:
---------------------------
Denver Marriott City Center      Denver, CO        1982/1994          613        80%      80%    $124    $117    $100    $ 94
Four Seasons Hotel-Houston       Houston, TX          1982            399        65       67      181     161     118     108
Hyatt Regency Albuquerque        Albuquerque,NM       1990            395        69       74      103      98      71      73
Omni Austin Hotel                Austin, TX           1986            314        77       78      114     103      88      81
Hyatt Regency Beaver Creek       Avon, CO             1989            276(2)     69       66      233     229     162     151
Sonoma Mission Inn & Spa         Sonoma, CA       1927/1987/1997      198(3)     82       87      235     210     194     183
Ventana Country Inn              Big Sur, CA      1975/1982/1988       62        63(4)    84      387     337     245(4)  282
                                                                    -----      ----     ----     ----    ----    ----    ----
     TOTAL/WEIGHTED AVERAGE                                         2,257        74%      75%    $158    $149    $116    $112
                                                                    =====      ====     ====     ====    ====    ====    ====
</TABLE>

<TABLE>
<CAPTION>
Destination Health & Fitness                                     
Resorts:                                                         Guest Nights
----------------------------                                     ------------

<S>                              <C>                  <C>        <C>         <C>   <C>       <C>      <C>      <C>      <C>
Canyon Ranch - Tucson            Tucson, AZ           1980            250(5)
Canyon Ranch - Lenox             Lenox, MA            1989            212(5)
                                                                     ----
     TOTAL/WEIGHTED AVERAGE                                           462        86%(6)   81%(6) $508(7) $477(7) $422(8) $370(8)
                                                                    =====      ====     ====     ====    ====    ====    ====
</TABLE>


--------------------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
    it does not operate the Hotel Properties and has leased all of the Hotel
    Properties, except the Omni Austin Hotel, to subsidiaries of COI pursuant to
    long term leases. As of January 1, 1999, the Omni Austin Hotel is leased
    pursuant to a separate long term lease to HCD Austin Corporation, an
    unrelated third party.
(2) In 1998, the number of available rooms at Hyatt Regency Beaver Creek was
    reduced to 276 due to 19 rooms being converted into a 20,000 square foot
    spa.
(3) In July 1997, 30 additional rooms were completed.
(4) Temporarily closed from February 1, 1998 through May 1, 1998 due to flooding
    in the region affecting the roadway passage to the hotel.
(5) Represents available guest nights, which is the maximum number of guests
    that the resort can accommodate per night.
(6) Represents the number of paying and complimentary guests for the period,
    divided by the maximum number of available guest nights for the period.
(7) Represents the average daily "all-inclusive" guest package charges for the
    period, divided by the average daily number of paying guests for the period.
(8) Represents the total "all-inclusive" guest package charges for the period,
    divided by the maximum number of available guest nights for the period.

         The following table sets forth average occupancy rate, average daily
rate ("ADR"), and revenue per available room ("REVPAR") for the Company's Hotel
Properties by full-service/luxury hotels and destination health and fitness
resorts for each of the years ended December 31, 1994 through 1998. The
information for the Hotel Properties is based on available rooms, except for
Canyon Ranch-Tucson and Canyon Ranch-Lenox, which are destination health and
fitness resorts, that measure performance based on available guest nights and
calculate average occupancy rate, ADR and REVPAR as described in the footnotes
to the preceding table.


                                       24
<PAGE>   26

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                              --------------------------------------------------------------
                                                1998          1997         1996         1995         1994
                                              ---------     ---------    ---------    ---------    ---------
<S>                                               <C>           <C>          <C>          <C>          <C>
Full-Service/Luxury Hotels
   Average Occupancy Rate..............           74%           75%          75%          74%          71%
   ADR.................................         $158          $149         $136         $125         $119
   REVPAR..............................         $116          $112         $102         $ 92         $ 85
Destination Health and Fitness Resorts
   Average Occupancy Rate..............           86%           81%          81%          77%          78%
   ADR.................................         $508          $477         $446         $437         $418
   REVPAR..............................         $422          $370         $345         $321         $312
</TABLE>

                         REFRIGERATED STORAGE PROPERTIES

REFRIGERATED STORAGE PROPERTIES TABLE

         The following table shows the number and aggregate size of Refrigerated
Storage Properties by state as of December 31, 1998:

<TABLE>
<CAPTION>

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

<S>                 <C>              <C>             <C>              <C>             <C>            <C>               <C>
Alabama                    5              9.5              0.4        Mississippi            1              4.7            0.2
Arizona                    1              2.9              0.1        Missouri(2)            2             37.9            2.2
Arkansas                   6             33.1              1.0        Nebraska               2              4.4            0.2
California                13             50.3              1.9        New Jersey             1              2.7            0.1
Colorado                   2              3.4              0.1        New York               1             11.8            0.4
Florida                    5              7.5              0.3        North Carolina         3              8.5            0.3
Georgia                    7             41.1              1.5        Oklahoma               2              2.1            0.1
Idaho                      2             18.7              0.8        Oregon                 6             40.4            1.7
Illinois                   2             11.6              0.4        Pennsylvania           4             50.8            1.5
Indiana                    1              9.1              0.3        South Carolina         1              1.6            0.1
Iowa                       2             12.5              0.5        South Dakota           2              6.3            0.2
Kansas(2)                  3             40.2              2.5        Tennessee              4             13.0            0.5
Kentucky                   1              2.7              0.1        Texas                  4             27.2            0.8
Maine                      1              1.8              0.2        Utah                   1              8.6            0.4
Massachusetts              6             15.2              0.7        Virginia               1              1.9            0.1
Minnesota                  1              5.9              0.2        Washington             6             28.7            1.1
                                                                      Wisconsin              2             14.0            0.5
                                                                                        ------          -------         ------
                                                                                                                              
                                                                         TOTAL             101            530.1           21.4
                                                                                        ======          =======         ======
</TABLE>

(1)  The Company has an indirect 38% interest in the Refrigerated Storage
     Partnerships, each of which owns one or more of the Refrigerated Storage
     Corporations which, as of December 31, 1998, directly or indirectly owned
     or operated approximately 101 refrigerated storage properties (collectively
     referred to as the "Refrigerated Storage Properties") with an aggregate of
     approximately 530.1 million cubic feet (21.4 million square feet). The
     remaining interest in the Refrigerated Storage Partnerships is owned by
     Vornado Realty Trust ("Vornado") (60% of each Refrigerated Storage
     Partnership) and COI (2% indirect interest in each Refrigerated Storage
     Partnership). As a result of the Restructuring, effective March 12, 1999,
     the Company increased its indirect ownership in the Refrigerated Storage 
     Partnerships to 39.6%, and the Refrigerated Storage Corporations own, but
     no longer operate, the Refrigerated Storage Properties.

(2)  Both Kansas and Missouri have one underground storage facility. These
     underground facilities in Kansas and Missouri approximate 35.2 million and
     33.1 million cubic feet (2.2 million and 2.1 million square feet),
     respectively. It is anticipated that the underground facility in Kansas
     will be closed in 1999.



                                       25
<PAGE>   27

                       RESIDENTIAL DEVELOPMENT PROPERTIES

RESIDENTIAL DEVELOPMENT PROPERTIES TABLE

         The following table sets forth certain information as of December 31,
1998, relating to the Residential Development Properties.

<TABLE>
<CAPTION> 
                                                                                              Total         Total      
                   Residential                                  Residential       Total      Lots/Units     Lots/Units 
  Residential      Development                                  Development       Lots/      Developed        Closed   
  Development      Properties       Type of                     Corporation's      Units        Since          Since   
Corporation (1)       (RDP)         RDP(2)       Location       Ownership %       Planned     Inception      Inception 
---------------    -----------     -------       --------       -------------     -------     ---------      ---------              
<S>                <C>             <C>          <C>             <C>              <C>         <C>            <C>        
Desert Mountain    Desert Mountain      SF     Scottsdale, AZ             93.0%     2,486         2,050         1,777  
 Development                                                                       ------        ------        ------ 
 Corp.
                                                                                                          
The Woodlands      The Woodlands        SF     The Woodlands, TX          42.5%    38,313        20,063        18,730
 Land Company                                                                      ------        ------        ------
 Inc.

Crescent           The Reserve at
 Development         Frisco             SF     Frisco, CO                 60.0%       134(5)        134           128  
 Management        Villa Montane        
 Corp.               Townhomes          TH     Avon, CO                   30.0%        27(5)         27            14  
                   Villa Montane 
                     Club               TS     Avon, CO                   30.0%        38(5)         38            32  
                   Villas at Beaver                                                                                    
                     Creek              TH     Avon, CO                   30.0%        10            10             9  
                   Deer Trail          SFH     Avon, CO                   60.0%        16(5)         --            --  
                   Buckhorn  
                     Townhomes          TH     Avon, CO                   60.0%        24(5)          4             2   
                   Bear Paw Lodge       CO     Avon, CO                   60.0%        53(5)         --            --  
                                                                                   ------        ------        ------  
  Total Crescent Development Management Corp.                                         302           213           185
                                                                                   ------        ------        ------
Mira Vista         Mira Vista           SF     Fort Worth, TX           100.00%       710           677           559  
 Development       The Highlands        SF     Breckenridge,CO           12.25%       750           270           245  
 Corp.                                                                            ------        ------        ------


  Total Mira Vista Development Corp.                                                1,460           947           804
                                                                                   ------        ------        ------

Houston Area      Falcon Point          SF     Houston, TX               100.0%     1,205           556           375  
  Development     Spring Lakes          SF     Houston, TX               100.0%       536            93            35  
  Corp.                                                                            ------        ------        ------

     Total Houston Area Development Corp.                                           1,741           649           410  
                                                                                   ------        ------        ------

     TOTAL                                                                         44,302        23,922        21,906
                                                                                   ======        ======        ====== 
<CAPTION> 
                                                     Average
                   Residential                        Closed              Range of
  Residential      Development                          Sale              Proposed
  Development      Properties       Type of            Price             Sale Prices
Corporation (1)       (RDP)         RDP(2)       Per Lot/Unit($)(3)   Per Lot/Unit($)(4)
---------------    -----------     -------       ------------------  --------------------                
<S>                <C>             <C>         <C>
Desert Mountain    Desert Mountain      SF                430,000     150,000 - 2,500,000
 Development                                   
 Corp.

The Woodlands      The Woodlands        SF                 50,371       14,700 - 500,000
 Land Company                                  
 Inc.

Crescent           The Reserve at
 Development         Frisco             SF                 95,000       60,000 - 165,000
 Management        Villa Montane        
 Corp.               Townhomes          TH                905,000      515,000 - 1,700,000
                   Villa Montane 
                     Club               TS                 60,000       18,000  - 150,000
                   Villas at Beaver                           
                     Creek              TH              2,070,000           2,995,000  
                   Deer Trail          SFH                    N/A     2,560,000 - 3,325,000
                   Buckhorn  
                     Townhomes          TH              1,088,000      945,000 - 1,850,000   
                   Bear Paw Lodge       CO                    N/A     1,495,000 - 1,895,000 

  Total Crescent Development Management Corp. 

Mira Vista         Mira Vista           SF                 97,000       50,000 - 265,000
 Development       The Highlands        SF                143,000       55,000 - 250,000
 Corp.                                       


  Total Mira Vista Development Corp.          


Houston Area      Falcon Point          SF                 31,000      22,000 - 60,000
 Development      Spring Lakes          SF                 31,000      22,000 - 33,000
 Corp.                                      

     Total Houston Area Development Corp.      


</TABLE>

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

(1)  The Company has an approximate 94%, 94%, 90%, 95% and 95% ownership
     interest in Mira Vista Development Corp., Houston Area Development Corp.,
     Crescent Development Management Corp., The Woodlands Land Company, Inc.,
     and Desert Mountain Development Corporation, respectively, through
     ownership of non-voting common stock in each of these Residential
     Development Corporations.

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

(3)  Based on Lots/Units closed during the Company's ownership period.

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

(5)  As of December 31, 1998, 6 lots were under contract at the Reserve at
     Frisco representing $.5 million in sales (all 6 of these lots are projected
     to close in the first quarter of 1999), 4 units were under contract at
     Villa Montane Townhomes representing $5.5 million in sales (all 4 of these
     units are projected to close in the first quarter of 1999), 5 units were
     under contract at Villa Montane Club representing $5.8 million in sales
     (all 5 of these units are projected to close in the first quarter of 1999),
     9 units were under contract at Deer Trail representing $26.6 million in
     sales (these are projected to close as units are completed over the second
     and third quarters of 1999), 12 units were under contract at Buckhorn
     Townhomes representing $17.2 million in sales (these are projected to close
     as units are completed over the second and third quarters of 1999), and 6
     units were under contract at Bear Paw Lodge representing $10.4 million in
     sales (these are projected to close as units are completed over the second
     and third quarters of 1999).

                                       26
<PAGE>   28


                        BEHAVIORAL HEALTHCARE PROPERTIES

BEHAVIORAL HEALTHCARE PROPERTIES TABLE

         The following chart sets forth the locations of the 89 Behavioral
Healthcare Properties by state:

<TABLE>
<CAPTION>
                              Number of         Number of                                 Number of        Number of
             State           Properties(1)        Beds                 State             Properties(1)        Beds
             -----           ----------         ---------              -----             ----------         --------
<S>                          <C>                <C>            <C>                        <C>               <C>
        Alabama                  1                   70         Mississippi                    2               217
        Arkansas                 2                  109         North Carolina                 4               410
        Arizona                  2                  170         New Hampshire                  2               100
        California               8                  649         New Jersey                     1               150
        Delaware                 1                   72         Nevada                         1                84
        Florida                 12                  648         Pennsylvania                   1               169
        Georgia                 15                  986         South Carolina                 3               248
        Indiana                  8                  577         Tennessee                      1               204
        Kansas                   2                  160         Texas                          9               816
        Kentucky                 3                  251         Utah                           2               196
        Louisiana                1                    0         Virginia                       3               285
        Maryland                 1                    0         Wisconsin                      2               160
        Minnesota                1                   40                                   ------            ------
        Missouri                 1                   96         Total                         89             6,867
                                                                                          ======            ======
</TABLE>

(1)  The Behavioral Healthcare Properties include 89 properties in 26 states
     that are leased to CBHS. CBHS was formed to operate the Behavioral
     Healthcare Properties and is owned 50% by a subsidiary of Magellan and 50%
     by COI.



                                     27
<PAGE>   29


ITEM 3.  LEGAL PROCEEDINGS

STATION CASINOS, INC.

         The Company was a party to an Agreement and Plan of Merger, dated
January 16, 1998, as amended, (the "Merger Agreement") between the Company and
Station Casinos, Inc. ("Station"). Pursuant to the Merger Agreement, Station
would have merged with and into the Company (the "Merger"). On July 27, 1998,
Station canceled the joint annual and special meeting of its common and
preferred stockholders scheduled for August 4, 1998, at which the common and
preferred stockholders were to vote on the Merger, over the Company's objection.
Thereafter, the Company demanded that Station call the stockholders meeting by
August 18, 1998, the last date for which the then-existing record date was
effective. The Company subsequently notified Station that it was exercising its
termination rights under the Merger Agreement based on Station's material
breaches of the Merger Agreement and thereafter notified Station that the Merger
Agreement had been terminated in accordance with its terms.

         On July 30, 1998, Station filed a complaint in Clark County District
Court, State of Nevada seeking declaratory relief in connection with the Merger
Agreement. The complaint alleges that the Company consented to Station's
cancellation of its meeting of stockholders. The action seeks a declaratory
judgment that:

     o    Station has complied in all material respects with its obligations
          under the Merger Agreement;

     o    Station is not obligated to reschedule immediately a meeting of its
          common and preferred stockholders;

     o    the Company has no right to terminate the Merger Agreement; and

     o    the Company is obligated to purchase up to $115 million in redeemable
          preferred stock of Station in accordance with certain provisions of
          the Merger Agreement.

         On August 7, 1998, the Company filed a complaint in the United States
District Court, Northern District of Texas, seeking damages and declaratory
relief as a result of Station's alleged breaches of the Merger Agreement. The
complaint alleges that Station breached the Merger Agreement by unilaterally
canceling its scheduled stockholders meeting and refusing to reschedule and
conduct the meeting, and that Station's representations and warranties were not
true and correct in all material respects. The action seeks:

     o    compensatory damages, including the $54 million breakup fee or its
          equivalent and the Company's expenses associated with the transaction;

     o    a declaratory judgment that Station's alleged breaches under the
          Merger Agreement excuse the Company from any further obligations under
          the Merger Agreement; and

     o    a declaratory judgment that the Company is not required to purchase
          shares of Station Casinos, Inc.'s redeemable preferred stock due to
          Station's material breaches of the Merger Agreement.

         On August 11, 1998, Station amended its complaint to expand the matters
as to which declaratory relief was sought and to add claims for damages and for
specific performance relating to the purchase of Station's redeemable preferred
stock. The amended complaint alleges that the Company breached its obligations
under the Merger Agreement by failing to use all reasonable efforts to
consummate the Merger and by refusing to provide Station with access to
additional information concerning the Company. The amended complaint also
alleges that the Company had no right to terminate the Merger Agreement or to
refuse to purchase 115,000 shares of Station's redeemable preferred stock for an
aggregate purchase price of $115 million.


                                       28
<PAGE>   30

     As amended, the action by Station seeks, in addition to the prior requests
for declaratory relief: 

     o    an order of specific performance requiring the Company to purchase 
          $115 million of the redeemable preferred stock;

     o    damages consisting of compensatory damages (which Station states to be
          in excess of $400 million);

     o    costs associated with Station's obtaining capital needed to replace
          the $115 million that was to have been paid by the Company to purchase
          the redeemable preferred stock;

     o    expenses incurred by Station in connection with the proposed Merger;
          and

     o    a declaratory judgment that the Company was in breach of its
          representations, warranties, and covenants at the time that the
          Company exercised its termination rights under the Merger Agreement
          and that the Company's breach and exercise of termination rights
          excuses Station from any further performance obligation under the
          Merger Agreement.

         On December 22, 1998, the Company filed its answer to Station's Nevada
state court action, in which the Company reasserted as a counterclaim all of its
original claims against Station for Station's breaches of the Merger Agreement
and for declaratory judgments which had previously been included in the
Company's Texas federal court suit filed against Station on August 7, 1998.
Pursuant to the answer, the Company also vigorously denied the allegations
raised by Station. The parties have commenced discovery in the Nevada state
court action.

         With respect to the forum for the litigation, the Company has sought 
to have the dispute tried in federal court either in Texas or Nevada, while 
Station has sought to maintain the action in state court in Nevada. On August 
14, 1998, the Nevada federal district court remanded the action filed by 
Station to Nevada state court, and on December 15, 1998, the Texas federal 
court followed suit by dismissing for lack of subject matter jurisdiction the 
Company's Texas federal action. The Texas federal court's decision is the 
subject of an expedited appeal by the Company to the Fifth Circuit Court of 
Appeals. If the Company's appeal is successful, the case (including the 
Company's claims against Station) would resume in Texas federal court and 
proceed simultaneously with the Nevada state court action.        
         
         The Company intends to pursue its claims against Station and to
continue to contest Station's claims vigorously. As with any litigation it is
not possible to predict the resolution of the outcome of the pending litigation
with Station. The Company believes that the pending action against the Company
will not have a material adverse effect on the Company's financial condition or
results of operations.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the Registrant's fiscal year ended December 31, 1998.


                                       29
<PAGE>   31



                                     PART II

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

         All information provided below has been adjusted to reflect the
two-for-one stock split effected in the form of 100% share dividend paid by the
Company on March 26, 1997 to shareholders of record on March 20, 1997. The
Company's common shares have been traded on the New York Stock Exchange under
the symbol "CEI" since the completion of its initial public offering at a price
of $12.50 per share in May 1994. For each calendar quarter indicated, the
following table reflects the high and low sales prices for the common shares and
the distributions declared by the Company with respect to each such quarter.


<TABLE>
<CAPTION>
                                                  PRICE
                                          ---------------------
                                            HIGH          LOW       DISTRIBUTIONS
                                          --------     --------     -------------
<S>                                       <C>          <C>          <C>
    1997
    ----
    First Quarter                         $31 3/8      $25 1/8         $.305
    Second Quarter                        $32          $25 1/8         $.305(1)
    Third Quarter                         $40 1/8      $30             $.38
    Fourth Quarter                        $40 7/8      $30             $.38

    1998
    ----
    First Quarter                         $40 3/8      $33 1/16        $.38
    Second Quarter                        $37 7/16     $30 3/4         $.38
    Third Quarter                         $34 11/16    $21 1/8         $.55
    Fourth Quarter                        $26 3/8      $21 1/16        $.55
</TABLE>

(1)  In addition to the regular quarterly distribution, the Company made a
     one-time distribution of shares of the common stock of COI valued at $.99
     per share, which was distributed to the shareholders of the Company and the
     partners of the Operating Partnership on a pro rata basis, in a spin-off
     effective June 12, 1997.

         As of March 26, 1999, there were approximately 901 holders of record of
the common shares.

                               DISTRIBUTION POLICY

         On September 2, 1998, the Company announced a 45% increase in the
quarterly distribution, increasing the quarterly distribution on its common
shares and equivalent units from $.38 per share and equivalent unit to $.55 per
share and equivalent unit. This equates to an indicated annualized dividend
increase from $1.52 per share and equivalent unit to $2.20 per share and
equivalent unit. The higher distribution rate commenced with the Company's
distribution for the third quarter of 1998, which was paid on November 3, 1998,
to shareholders and equivalent unitholders of record as of October 14, 1998.

         Distributions on the 8,000,000 6 3/4% Series A Convertible Cumulative
Preferred Shares issued by the Company in February 1998 are payable at the rate
of $1.69 per annum per Series A Convertible Cumulative Preferred Share, prior to
distributions on the common shares.



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

     o    the operating and interest expenses of the Company;

     o    the ability of tenants to meet their rent obligations;


                                       30
<PAGE>   32


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

     o    consumer preferences relating to the Hotel Properties;

     o    any additional properties acquired in the future;

     o    the general condition of the United States economy;

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

     o    capital expenditure requirements; and

     o    the adequacy of reserves.


         In addition, the requirements for the Company's line of credit limit
distributions to the partners of the Operating Partnership for any four
successive quarters to an amount that will not exceed 90% of funds from
operations for such period and 100% of funds available for distribution for such
period.

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

         Under the Code, real estate investment trusts are subject to numerous
organizational and operational requirements, including the requirement to
distribute at least 95% of REIT taxable income. Pursuant to this requirement,
the Company was required to distribute $136.8 million and $103.9 million for
1998 and 1997, respectively. Actual distributions by the Company were $220.6
million and $140.8 million for 1998 and 1997, respectively.

         Distributions by the Company to the extent of its current and
accumulated earnings and profits for federal income tax purposes generally will
be taxable to a shareholder as ordinary dividend income. Distributions in excess
of current and accumulated earnings and profits will be treated as a nontaxable
reduction of the shareholder's basis in such shareholder's shares, to the extent
thereof, and thereafter as taxable gain. Distributions that are treated as a
reduction of the shareholder's basis in its shares will have the effect of
deferring taxation until the sale of the shareholder's shares. Given the dynamic
nature of the Company's long-term acquisition strategy and the extent to which
any future acquisitions would alter this calculation, no assurances can be given
regarding what portion, if any, of distributions in 1999 or subsequent years
will constitute a return of capital for federal income tax purposes.

         Following is the income tax status of dividends paid during the years
ended December 31, 1998 and 1997 to common shareholders:

              
<TABLE>
<CAPTION>
                                            1998              1997
                                            ----              ----
<S>                                         <C>               <C>  
                  Ordinary income           58.8 %            74.3%
                  Capital gain               5.6 %              --
                  Return of capital         35.6 %            25.7%
</TABLE>

         Following is the income tax status of dividends paid during the years
ended December 31, 1998 and 1997 to preferred shareholders:

<TABLE>
<CAPTION>
                                            1998              1997
                                            ----              ----
<S>                                         <C>               <C>  
                  Ordinary income           94.4 %              --
                  Capital gain               5.6 %              --
</TABLE>


                                       31

<PAGE>   33
ITEM 6 .  SELECTED FINANCIAL DATA

         The following table sets forth certain financial information for the
Company on a consolidated historical basis and for the Rainwater Property Group
(the Company's predecessor) on a combined historical basis, which consists of
the combined financial statements of the entities that contributed properties
in exchange for units or common shares in connection with the formation of the
Company. All information relating to common shares has been adjusted to reflect
the two-for-one stock split effected in the form of a 100% share dividend paid
on March 26, 1997 to shareholders of record on March 20, 1997. Such information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 and the
Financial Statements and Supplementary Data included in Item 8.

                    CRESCENT REAL ESTATE EQUITIES COMPANY
                 CONSOLIDATED HISTORICAL FINANCIAL DATA AND
                          RAINWATER PROPERTY GROUP
                     COMBINED HISTORICAL FINANCIAL DATA
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                                        RAINWATER 
                                                                                                                        PROPERTY
                                                                                                                          GROUP 
                                                             COMPANY                                                  (PREDECESSOR)
                                     ------------------------------------------------------------------------------ ----------------
                                                                                                    For the Period
                                                                                                       from May 5,  For the Period
                                               Year Ended December 31,                                   1994 to    from January 1,
                                     ------------------------------------------------------------     December 31,   1994 to May 4,
                                         1998           1997             1996            1995             1994           1994
                                         ----           ----             ----            ----       --------------  ---------------
<S>                               <C>           <C>                <C>              <C>              <C>            <C>
OPERATING DATA:
Total revenue .................   $    698,343   $      447,373     $    208,861     $    129,960     $     50,343   $ 21,185
Operating income (loss) .......        143,893          111,281           44,101           30,858           10,864     (1,599)
Income (loss) before                                                                                  
    minority interests                                                                                     
    and extraordinary                                                                                      
    item ......................        183,210          135,024           47,951           36,358           12,595     (1,599)
 Basic earnings per common                                                                             
    share:                                                                                            
    Income before                                                                                      
    extraordinary                                                                                          
    item ......................   $       1.26   $         1.25     $        .72     $        .66     $        .28        N/A
    Net income ................           1.26             1.25              .70              .66              .26        N/A
Diluted earnings per common                                                                            
    share:                                                                                             
    Income before extraordinary                                                                                              
    item ......................   $       1.21   $         1.20     $        .70     $        .65     $        .28        N/A
    Net income.................           1.21             1.20              .68              .65              .26        N/A
BALANCE SHEET DATA                                                                                     
     (AT PERIOD END)                                                                                   
Total assets ..................   $  5,043,447   $    4,179,980     $  1,730,922     $    964,171     $    538,354        N/A
Total debt ....................      2,318,156        1,710,124          667,808          444,528          194,642        N/A
Total shareholders' equity ....      2,422,545        2,197,317          865,160          406,531          235,262        N/A
OTHER DATA:                                                                                            
Funds from Operations                                                                                  
     before minority                                                                                                         
     interests(1) .............   $    360,148   $      214,396     $     87,616     $     64,475     $     32,723        N/A
Cash distribution declared per
     common share .............   $       1.86   $         1.37     $       1.16     $       1.05     $        .65        N/A
Weighted average                                                                                       
     common shares and units                                                                           
     outstanding - basic ......    132,429,405      106,835,579       64,684,842       54,182,186       44,997,716        N/A
Weighted average                                                                                       
     common shares and units                                                                           
     outstanding - diluted ....    140,388,063      110,973,459       65,865,517       54,499,690       45,039,840        N/A
Cash flow provided by                                                                                  
 (used in)                                                                                             
    Operating activities ......   $    277,075   $      211,714     $     77,384     $     65,011     $     21,642   $  2,455
    Investing activities ......       (798,085)      (2,294,428)        (513,038)        (421,406)        (260,666)    (2,379)
    Financing activities ......        564,680        2,123,744          444,315          343,079          265,608    (21,310)
</TABLE>

NOTES:


                                      32
<PAGE>   34

 (1)  Funds from Operations ("FFO"), based on the revised definition adopted by
      the Board of Governors of the National Association of Real Estate
      Investment Trusts ("NAREIT") and as used herein, means net income (loss)
      (determined in accordance with generally accepted accounting principles),
      excluding gains (or losses) from debt restructuring and sales of
      property, plus depreciation and amortization of real estate assets, and
      after adjustments for unconsolidated partnerships and joint ventures. For
      a more detailed definition and description of FFO, see Item 7.
      Management's Discussion and Analysis of Financial Condition and Results
      of Operations.

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

         The following discussion should be read in conjunction with the
Selected Financial Data and the financial statements and notes thereto,
appearing in Item 6 and Item 8, respectively, of this report. Historical results
and percentage relationships set forth in Selected Financial Data, the Financial
Statements and Supplementary Data included in Item 6 and Item 8 and this section
should not be taken as indicative of future operations of the Company.
Capitalized terms used but not otherwise defined herein, shall have the meanings
ascribed to those terms in Items 1 through 6 of this 10-K.

         This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements generally are
characterized by the use of terms such as "believe", "expect" 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 set forth in the
forward-looking statements. Certain factors that might cause such a difference
are set forth in the Company's Current Report on Form 8-K/A dated April 17,
1998 and filed November 24, 1998. Among the factors that might cause such a
difference are the following: changes in real estate conditions (including
rental rates and competing properties); changes in industries in which the
Company's principal tenants compete; changes in the financial condition of
existing tenants; the Company's ability to timely lease unoccupied square
footage and timely release of occupied square footage upon expiration; the
Company's ability to generate revenues sufficient to meet debt service payments
and other operating expenses; financing risks, such as the availability of
funds sufficient to service existing debt, changes in interest rates associated
with its variable rate debt, the availability of equity and debt financing
terms acceptable to the Company, the possibility that the Company's outstanding
debt (which requires so-called "balloon" payments of principal) may be
refinanced at higher interest rates or otherwise on terms less favorable to the
Company and the fact that interest rates under the line of credit held by
BankBoston ("Credit Facility") and certain of the Company's other financing
arrangements may increase; 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 and the adverse consequences of the failure to
qualify as such; changes in general economic conditions; risks related to
certain ongoing litigation with Station Casinos, Inc. ("Station"); the
Company's inability to control the management and operation of its Residential
Development Properties, its tenants and the businesses associated with its
investment in Refrigerated Storage Properties; and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission ("SEC"). Given these uncertainties, readers are cautioned not to
place undue reliance on such statements. The Company undertakes no obligation
to update these forward-looking statements to reflect any future events or
circumstances.

OFFICE AND RETAIL SEGMENT

         Office and Retail net operating income growth for the year ended
December 31, 1998, compared to the year ended December 31, 1997, was
approximately 15% for the 16.3 million square feet of office properties owned
as of January 1, 1997. For these properties, the average occupancy for the year
ended December 31, 1998 was approximately 90%, and the average occupancy for
the year ended December 31, 1997 was approximately 85%.

         For the year ended December 31, 1998, leases were executed (all of
which have commenced or will commence during the next twelve months) renewing
or re-leasing 1.8 million net rentable square feet of office space at a
weighted average full-service rental rate (including expense recoveries) and a
funds from operations ("FFO") annual net effective rate (calculated as weighted
average full-service rental rate minus Company-paid operating expenses) of
$20.84 and $13.07 per square foot, respectively, compared to expiring leases
with a weighted average full-service rental rate and an FFO annual net
effective rate of $17.17 and $9.51 per square foot, a 21% and 37% increase,
respectively. Weighted average full-service rental rates represent base rent
after giving effect to free rent and scheduled rent increases that would 


                                   33
<PAGE>   35
 be taken into account under GAAP and including adjustments for the tenant's
share of expenses payable by or reimbursed to the Company ("expense
recoveries").

         The leases executed for the year ended December 31, 1998, all of which
have commenced or will commence during the next twelve months, required tenant
improvement and leasing costs of $4.82 and $3.02 per square foot, respectively
or $.83 and $.61 per square foot per year, respectively. Tenant improvement and
leasing costs in 1998 were approximately 30% and 27%, respectively, lower than
1997. The overall office portfolio was approximately 94% leased (based on
executed leases) and 92% leased (based on commenced leases) at December 31,
1998.

HOSPITALITY SEGMENT

         Hotel Property rental income growth, including weighted average base
rent and percentage rent for the year ended December 31, 1998, compared to the
year ended December 31, 1997, was approximately 9% for the full-service hotel
properties and two destination health and fitness resorts owned as of January
1, 1997 (weighted average base rent includes scheduled rent increases that
would be taken into account under GAAP).

         For the year ended December 31, 1998, weighted average occupancy,
average daily rate and revenue per available room for all Hotel Properties were
76%, $223 and $168 respectively, compared to 76%, $204 and $154, respectively,
for the same period of 1997.

RESIDENTIAL DEVELOPMENT SEGMENT

         The Company owns economic interests in five Residential Development
Corporations through the Residential Development Property Mortgages and the
non-voting common stock of these Residential Development Corporations. The
Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in 13 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties. Management plans to maintain the Residential
Development Segment at its current investment level and reinvest returned
capital into projects which it expects to achieve comparable rates of return.

         The Woodlands Land Company, Inc. and The Woodlands Commercial
Properties Company, L.P., The Woodlands, Texas. For the year ended December 31,
1998, these entities sold 1,462 lots in The Woodlands with an average sales
price of $52,500 per lot and 205 acres of commercial land, compared to 1,250
lots with an average sales price of $46,300 per lot and 34 acres of commercial
land, for the same period of 1997.

         Desert Mountain Development Corporation ("Desert Mountain"),
Scottsdale, Arizona. For the year ended December 31, 1998, Desert Mountain sold
258 lots with an average sales price of $430,000 per lot (including club
memberships), compared to 226 lots with an average sales price of $382,000 per
lot (including club memberships), for the same period of 1997. Desert Mountain
opened three new villages in the fourth quarter of 1998 with approximately 120
residential lots and, as of year-end, more than 50% of the lots had sold with
an average sales price of $600,000.

         Crescent Development Management Corp. ("CDMC"), Beaver Creek,
Colorado. For the year ended December 31, 1998, CDMC's sales from its five
active projects were 48 residential lots, 27 townhomes, and 638 time share
units, compared to 1997 sales from its three active projects of 40 residential
lots and 44 condominiums. The Company has recently made a long-term commitment
to fund an additional $50 million for new projects in CDMC.

         Mira Vista Development Corp. ("Mira Vista"), Fort Worth, Texas. For
the year ended December 31, 1998, Mira Vista sold 79 lots with an average sales
price of $111,000 per lot, compared to 67 lots with an average sales price of
$95,000 per lot, for the same period of 1997.

         Houston Area Development Corp. ("Houston Area Development"), Houston,
Texas. For the year ended December 31, 1998, Houston Area Development sold 181
lots with an average sales price of $25,000 per lot, compared to 214 lots with
an average sales price of $27,000 per lot, for the same period of 1997.


                                   34
<PAGE>   36

REFRIGERATED STORAGE SEGMENT

         Growth in earnings generated from the 380 million cubic feet (15.4
million square feet) of Refrigerated Storage Properties owned as of January 1,
1997 before interest, taxes, depreciation and amortization ("EBITDA") for the
Refrigerated Storage Corporations, for the year ended December 31, 1998,
compared to the year ended December 31, 1997, was approximately 3.5%. The
Company believes that in addition to cash flows and net income, EBITDA is a
useful financial performance measurement for assessing the operating
performance of the Refrigerated Storage Properties. EBITDA does not represent
net income or cash flows from operating, financing and investing activities as
defined by GAAP.

BEHAVIORAL HEALTHCARE SEGMENT

         In 1998, the Company received rental payments of $42.8 million from
CBHS as required under its lease with CBHS. The Company recognizes rent on a
straight-line basis, resulting in a deferred rent receivable balance due from
CBHS of approximately $20 million at December 31, 1998. In December 1998, the
independent accountants for CBHS, in connection with their audit of the
financial statements for the year ended September 30, 1998, issued a modified
auditors' report related to the ability of CBHS to continue as a going concern.
In October 1998, CBHS hired a new President and Chief Executive Officer
(formerly the Vice President of Operations for the Southeast Region of Tenet
Healthcare), who announced a set of initiatives to address cost reductions and
revenue enhancements for 1999. CBHS has continued to make timely rent payments
to the Company for the first five months of CBHS's fiscal year; however,
management will continue to evaluate the business, financial condition and
results of operations of CBHS in connection with the collectibility of the
deferred rent receivable balance.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

         On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
established standards for the reporting and presentation of comprehensive
income and its components (generally, total nonowner changes in equity). As a
result of the adoption of SFAS No. 130, comprehensive income has been presented
as part of the statement of shareholders' equity. During the year ended
December 31, 1998, the Company held securities classified as available-for-sale
which had unrealized losses during the period of $5 million. Prior to 1998, the
Company's comprehensive income was not material to the Company's financial
statements.

         In March 1998, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") issued EITF 97-11, "Accounting
for Internal Costs Relating to Real Estate Property Acquisitions," which
provides that internal costs of identifying and acquiring operating property
should be expensed as incurred. This pronouncement was effective March 19,
1998, and has had no material impact on the Company's 1998 financial
statements.

         Beginning with the fiscal year ended December 31, 1998, the Company
adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
This statement is effective for financial statements for periods beginning
after December 15, 1997. (See Note 3 of Item 8. Financial Statements and
Supplementary Data).

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provided that all derivative
instruments should be recognized as either assets or liabilities, depending on
the rights or obligations under the contract and that all derivative instruments
should be measured at fair value. This pronouncement will be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999, and would not
have materially impacted the Company's 1998 financial statements.


                                   35
<PAGE>   37


                             RESULTS OF OPERATIONS

         The following table sets forth the Company's financial data as a
percent of total revenues for the years ended December 31, 1998, 1997 and 1996.
See Item 8. Financial Statements and Supplementary Data, Note 3 to the
Company's Consolidated Financial Statements for financial information about
industry segments.

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                       1998          1997           1996
                                                     --------      --------       --------    
<S>                                                    <C>           <C>           <C>        
REVENUES                                                                                      
   Office and retail properties                         80.6%         81.2%         87.2%     
                                                                                              
   Hotel properties                                      7.7%          8.3%          9.5%     
                                                                                              
   Behavioral healthcare properties                      7.9%          6.7%         --        
                                                                                              
   Interest and other income                             3.8%          3.8%          3.3%     
                                                       -----         -----         -----      
                                                                                              
      Total revenues                                   100.0%        100.0%        100.0%     
                                                       -----         -----         -----      
                                                                                              
EXPENSES                                                                                      
   Operating Expenses                                   34.8%         35.5%         35.3%     
                                                                                              
   Corporate general and administrative                  2.3%          2.9%          2.2%     
                                                                                              
   Interest expense                                     21.8%         19.3%         20.6%     
                                                                                              
   Amortization of deferred financing costs              0.9%          0.8%          1.4%     
                                                                                              
   Depreciation and amortization                        16.9%         16.6%         19.4%     
                                                                                              
   Write-off costs associated with terminated                                                 
        acquisitions                                     2.7%         --            --        
                                                       -----         -----         -----      
                                                                                              
   Total expenses                                       79.4%         75.1%         78.9%     
                                                       -----         -----         -----      
Operating income                                        20.6%         24.9%         21.1%     
                                                                                              
OTHER INCOME                                                                                  
   Equity in net income of unconsolidated companies:                                          
       Refrigerated storage corporations                 0.1%          0.3%         --        
       Residential development corporations              4.4%          4.2%          1.8%     
       Other                                             1.1%          0.8%         --        
                                                       -----         -----         -----      
                                                                                              
   Total other income                                    5.6%          5.3%          1.8%     
                                                       -----         -----         -----      
                                                                                              
INCOME BEFORE MINORITY INTERESTS                                                              
AND EXTRAORDINARY ITEM                                  26.2%         30.2%         22.9%     
                                                                                              
   Minority interests                                   (2.5%)        (4.0%)        (4.5%)    
                                                       -----         -----         -----      
                                                                                              
INCOME BEFORE EXTRAORDINARY ITEM                        23.7%         26.2%         18.4%     
                                                                                              
   Extraordinary item                                   --            --            (0.6%)    
                                                       -----         -----         -----      
                                                                                              
NET INCOME                                              23.7%         26.2%         17.8%     
                                                                                              
PREFERRED STOCK DIVIDENDS                               (1.7%)        --            --        
                                                                                              
FORWARD SHARE PURCHASE                                                                        
   AGREEMENT RETURN                                     (0.4%)        --            --        
                                                       -----         -----         -----      
                                                                                              
NET INCOME AVAILABLE TO COMMON                                                                
   SHAREHOLDERS                                         21.6%         26.2%         17.8%     
                                                       =====         =====         =====
</TABLE>


                                      36
<PAGE>   38

COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997

REVENUES

         Total revenues increased $250.9 million, or 56.1%, to $698.3 million
for the year ended December 31, 1998, as compared to $447.4 million for the
year ended December 31, 1997.

         The increase in Office and Retail Property revenues of $199.7 million,
or 55.0%, compared to 1997 is attributable to:

             o    the acquisition of nine Office Properties in 1998, which
                  resulted in $54.7 million of incremental revenues;
                   
             o    the acquisition of 26 Office Properties and one Retail
                  Property in 1997, which contributed revenues for a full year
                  in 1998, as compared to a partial year in 1997, resulting in
                  $111.3 million of incremental revenues; and

             o    increased revenues of $33.7 million from the 59 Office and
                  Retail Properties acquired prior to January 1, 1997,
                  primarily as a result of rental rate and occupancy increases
                  at these Properties.

         The increase in Hotel Property revenues of $16.1 million, or 43.2%, 
compared to 1997 is attributable to:

             o    the acquisition of one full-service Hotel Property and a
                  golf course in 1998, which resulted in $3.9 million of
                  incremental revenues;

             o    the acquisition of two full-service Hotel Properties in
                  1997, which contributed revenues for a full year in 1998, as
                  compared to a partial year in 1997, resulting in $8.9 million
                  of incremental revenues; and

             o    increased revenues of $3.3 million from the six Hotel
                  Properties acquired prior to January 1, 1997, which resulted
                  in an increase in revenues, primarily from an increase in 
                  percentage rent.

         The increase in Behavioral Healthcare Property revenues of $25.5
million, or 85.6%, compared to 1997 is primarily attributable to the fact that
the Behavioral Healthcare Properties contributed revenues for a full year in
1998 as compared to approximately six months in 1997.

         The increase in interest and other income of $9.7 million, or 57.1%,
compared to 1997 is primarily attributable to:

             o    the sale of marketable securities in 1998; and

             o    the acquisition of certain notes included in the portfolio
                  acquired from Carter-Crowley in May of 1997 and the extension
                  of loans to COI, also in May of 1997, both of which earned
                  interest for a full year in 1998 as compared to a partial
                  year in 1997, resulting in incremental interest income on
                  these notes receivable.

EXPENSES

         Total expenses increased $218.4 million, or 65.0%, to $554.5 million
for the year ended December 31, 1998, as compared to $336.1 million for the
year ended December 31, 1997.

         The increase in rental property operating expenses of $84.1 million,
or 52.9%, compared to 1997 is attributable to:

             o    the acquisition of nine Office Properties in 1998, which
                  resulted in $22.1 million of incremental expenses;

             o    the acquisition of 26 Office Properties and one Retail
                  Property in 1997, which incurred expenses for a full year in
                  1998, as compared to a partial year in 1997, resulting in
                  $52.4 million of incremental expenses; and

             o    increased expenses of $9.6 million from the 59 Office and
                  Retail Properties acquired prior to January 1, 1997,
                  primarily as a result of occupancy increases at these
                  Properties.


                                      37
<PAGE>   39

         The increase in depreciation and amortization expense of $43.7
million, or 58.7%, compared to 1997, is primarily attributable to the
acquisitions of Office, Retail, Hotel and the Behavioral Healthcare Properties
in 1997 and 1998.

         The increase in interest expense of $65.8 million, or 76.2%, compared
to 1997 is primarily attributable to:

             o    $21.6 million of interest payable under the Notes due 2002
                  and Notes due 2007, which were issued in a private offering
                  in September 1997 (the "September 1997 Notes Offering");

             o    $6.1 million of interest payable under the Chase Manhattan
                  Note, which was assumed in connection with the acquisition of
                  the Fountain Place Office Property in November 1997;

             o    $1.2 million of interest payable on the BankBoston N.A.
                  ("BankBoston") Note, which the Company entered into in August
                  1997;

             o    $3.0 million of interest payable under the Metropolitan
                  Life Note II, which was assumed in connection with the
                  acquisition of the Energy Centre Office Property in December
                  1997;

             o    $2.3 million of interest payable under the Metropolitan
                  Life Notes III and IV, which were assumed in connection with
                  the acquisition of the Datran Center Office Property in May
                  1998;

             o    $3.3 million of interest payable under the promissory note
                  payable to Merrill Lynch International issued in conjunction
                  with the termination of the equity swap agreement with
                  Merrill Lynch International on September 30, 1998; and

             o    $28.0 million of incremental interest payable due to draws
                  under the Credit Facility and short-term borrowings with
                  BankBoston (average balance outstanding for the year ended
                  December 31, 1998 and 1997 was $728.3 million and $329.8
                  million, respectively).

         All of these financing arrangements were used to fund investments and
working capital.

         The increase in corporate general and administrative expense of $3.4
million, or 26.4%, compared to 1997 is primarily attributable to the
incremental costs associated with the operations of the Company as a result of
property acquisitions.

         An additional increase in expenses of $18.4 million is attributable to
a non-recurring write-off of costs associated with terminated acquisitions.

EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES

         Equity in net income of unconsolidated companies increased $15.6
million, or 65.8%, to $39.3 million for the year ended December 31, 1998, as
compared to $23.7 million for the year ended December 31, 1997.

         The increase is primarily attributable to:

             o    an increase in equity in net income of the Residential
                  Development Corporations of $12.2 million, or 64.9%, compared
                  to 1997 which is primarily attributable to the investments in
                  The Woodlands Land Company, Inc. in July 1997, and Desert
                  Mountain Development Corporation in August 1997, which
                  resulted in $11.6 million of incremental net income; and

             o    an increase in equity in net income of other unconsolidated
                  companies of $4.1 million, or 107.9%, compared to 1997, which
                  is primarily attributable to the investment in The Woodlands
                  Commercial Properties Company, L.P. in July 1997, which
                  resulted in $6.5 million of incremental net income, partially
                  offset by the distributions of $3.1 million received in 1997
                  from the Company's investment in HBCLP, Inc. (the primary
                  asset of which is the investment in Hudson Bay Partners,
                  L.P., an investment partnership in which the Company holds an
                  effective 95% economic interest).


                                      38
<PAGE>   40

COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996

REVENUES

         Total revenues increased $238.5 million, or 114.2%, to $447.4 million
for the year ended December 31, 1997, as compared to $208.9 million for the
year ended December 31, 1996.

         The increase in Office and Retail Property revenues of $181.1 million,
or 99.4%, compared to 1996 is attributable to:

             o    the acquisition of 26 Office Properties and one Retail
                  Property during 1997, which resulted in $79.5 million of
                  incremental revenues;

             o    the acquisition of 23 Office Properties and four Retail
                  Properties during 1996, which contributed revenues for a full
                  year in 1997, as compared to a partial year in 1996,
                  resulting in $91.6 million of incremental revenues; and

             o    increased revenues of $10.0 million from the 32 Office and
                  Retail Properties acquired prior to January 1, 1996,
                  primarily as a result of rental rate increases at these
                  Properties.

         The increase in Hotel Property revenues of $17.5 million, or 88.4%,
compared to 1996 is attributable to:

             o    the acquisition of two Hotel Properties during 1997, which
                  resulted in $2.1 million of incremental revenues;

             o    the acquisition of three Hotel Properties during 1996,
                  which contributed revenues for a full year in 1997, as
                  compared to a partial year in 1996, resulting in $14.5
                  million of incremental revenues; and

             o    increased revenues of $0.9 million from the three Hotel
                  Properties acquired prior to January 1, 1996, which resulted
                  from an increase in percentage rent.

         The increase in Behavioral Healthcare Property revenues of $29.8
million is attributable to the fact that the Behavioral Healthcare Properties
were not acquired until June 1997.

         The increase in interest and other income of $10.1 million for the
year ended December 31, 1997, or 146.4%, compared to 1996 is primarily
attributable to:

             o    the acquisition of certain notes included in the
                  Carter-Crowley Portfolio, the extension of loans to COI and
                  to Desert Mountain Properties Limited Partnership ("DMPLP")
                  (in which one of the Residential Development Corporations
                  owns a majority economic interest) and the acquisition of a
                  note receivable secured by a hotel property, all of which
                  occurred in 1997, resulting in incremental interest income on
                  these notes receivable; and

             o    the interest earned on available cash from the common share
                  offering completed in April 1997.

EXPENSES

         Total expenses increased $171.3 million, or 103.9%, to $336.1 million
for the year ended December 31, 1997, as compared to $164.8 million for the
year ended December 31, 1996.

         The increase in rental property operating expenses of $85.1 million,
or 115.3%, compared to 1996 is primarily attributable to:

             o    the acquisition of 26 Office Properties and one Retail
                  Property during 1997, which resulted in $38.3 million of
                  incremental expenses;

             o    the acquisition of 23 Office Properties and four Retail
                  Properties during 1996, which incurred expenses for a full
                  year in 1997, as compared to a partial year in 1996,
                  resulting in $40.8 million of incremental expenses; and


                                      39
<PAGE>   41

             o    increased expenses of $5.5 million from the 32 Office and 
                  Retail Properties acquired prior to January 1, 1996,
                  primarily as a result of occupancy increases at these
                  Properties.

         The increase in depreciation and amortization expense of $33.9 million,
or 83.7%, compared to 1996 is primarily attributable to the acquisitions of
Office and Retail Properties, Hotel Properties and Behavioral Healthcare
Properties in 1996 and 1997.

         The increase in interest expense of $43.5 million, or 101.4%, compared
to 1996 is attributable to:

             o    $6.9 million of interest payable under LaSalle Note III,
                  which was assumed in connection with the acquisition of the
                  Greenway Plaza Portfolio in October 1996;

             o    $0.8 million of interest payable to Nomura Asset Capital
                  Corporation under the Nomura Funding VI Note, which was
                  assumed in connection with the acquisition of the Canyon
                  Ranch-Lenox Hotel Property in December 1996;

             o    $2.0 million of interest payable under the financing
                  arrangement with Northwestern Mutual Life Insurance Company,
                  which was entered into in December 1996 and is secured by the
                  301 Congress Avenue Office Property; 

             o    $1.0 million of interest payable under LaSalle Note II
                  secured by the Funding II properties;

             o    $10.0 million of interest payable under various short-term
                  notes with BankBoston, with principal amounts ranging between
                  $150 million and $235 million, which were entered into from
                  June through December 1997;

             o    $14.0 million of incremental interest payable due to draws
                  under the Company's Credit Facility (average balance
                  outstanding for the year ended December 31, 1997 and 1996 was
                  $216.8 million and $64.3 million, respectively);

             o    $7.7 million of interest payable under the Notes due 2002
                  and Notes due 2007, which were issued in the September 1997
                  Notes Offering; and

             o    $1.1 million of interest payable under the Chase Manhattan
                  Note, which was assumed in connection with the acquisition of
                  the Fountain Place Office Property in November 1997.

         The increase in corporate general and administrative expense of $8.2
million, or 174.5%, compared to 1996 is primarily attributable to incremental
costs associated with the operation of the Company as a result of the
acquisition of additional Properties and to incentive compensation paid to the
Company's executive officers.

EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES

         Equity in net income of unconsolidated companies increased $19.8
million, or 508%, to $23.7 million for the year ended December 31, 1997, as
compared to $3.9 million for the year ended December 31, 1996.

         The increase is primarily attributable to the 1997 investments in:

             o    The Woodlands Land Company, Inc;

             o    Desert Mountain Development Corporation; and

             o    The Woodlands Commercial Properties Company, LP.

                        LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents were $110.3 million and $66.6 million at
December 31, 1998 and December 31, 1997, respectively. This 65.6% increase is
attributable to $564.7 million and $277.1 million of cash provided by financing
and operating activities, respectively, offset by $798.1 million used in
investing activities.


                                      40
<PAGE>   42

FINANCING ACTIVITIES

         The Company's inflow of cash provided by financing activities of $564.7
million is primarily attributable to:

             o    net borrowings under the Credit Facility of $310.0 million;

             o    net proceeds from the February 1998 offering of Series A
                  convertible cumulative preferred shares (the "February 1998
                  Preferred Offering") of $191.2 million;

             o    net proceeds from the June 1998 offering of Series B
                  convertible preferred shares (the "June 1998 Preferred
                  Offering") of $224.8 million; 

             o    net proceeds from the April 1998 common share offering (the
                  "April 1998 Unit Investment Trust Offering") of $43.9
                  million; and

             o    net borrowings under short-term facilities of $41.8
                  million.

         The inflow of cash provided by financing activities is partially offset
by:

             o    distributions paid to common shareholders and unitholders
                  of $220.6 million;

             o    distributions paid to preferred shareholders of $11.7
                  million;

             o    debt financing costs of $9.6 million; 

             o    capital distributions paid to joint venture partners of
                  $2.9 million; and

             o    fees paid related to the extension of the forward share
                  purchase agreement with affiliates of the predecessor of UBS
                  AG of $2.9 million.


OPERATING ACTIVITIES

         The Company's inflow of cash provided by operating activities of $277.1
million is primarily attributable to:

             o    inflows from Property operations of $253.8 million;

             o    inflows from minority interests of $17.6 million;

             o    inflows from distributions received in excess of equity in
                  earnings from unconsolidated companies of $9.3 million; and

             o    inflows from increases in accounts payable, accrued
                  liabilities and other liabilities of $22.2 million.

         The inflow of cash provided by operating activities is partially offset
by increases in other assets and restricted cash and cash equivalents of $25.8
million.

INVESTING ACTIVITIES

         The Company utilized $798.1 million of cash flow, primarily in the
following investing activities:

             o    $530.8 million for the acquisition of nine Office
                  Properties and one Hotel Property;

             o    $68.8 million for recurring and non-recurring tenant
                  improvement and leasing costs for the Office and Retail
                  Properties;

             o    $31.3 million for capital expenditures on rental properties
                  primarily attributable to non-recoverable building
                  improvements for the Office and Retail Properties, and
                  replacement of furniture, fixtures and equipment for the
                  Hotel Properties;

             o    $31.9 million for the development of investment properties;

             o    $147.2 million for investments in unconsolidated companies,
                  which is primarily attributable to the additional investment
                  in the Refrigerated Storage Partnerships; and

             o    $27.3 million attributable to increased notes receivable
                  primarily due to loans to COI.

         The outflow of cash used in investing activities is partially offset
by:

             o    $35.6 million in return of investment received from the
                  Residential Development Corporations; and

             o    $5.8 million inflow from a decrease in escrow deposits held
                  for acquisitions of investment properties.


                                      41
<PAGE>   43

SHELF REGISTRATION STATEMENT

         On October 29, 1997, the Company filed a shelf registration statement
(the "October Shelf Registration Statement") with the SEC for an aggregate of
$1.5 billion of common shares, preferred shares and warrants exercisable for
common shares. Management believes the October Shelf Registration Statement will
provide the Company with more efficient and immediate access to capital markets
at such time as it is considered appropriate. As of December 31, 1998,
approximately $782.7 million was available under the October Shelf Registration
Statement for the issuance of securities.

PREFERRED OFFERINGS

         On February 19, 1998, the Company completed the February 1998
Preferred Offering of 8,000,000 shares of 6 3/4% Series A convertible
cumulative preferred shares (the "Series A Preferred Shares") with a
liquidation preference of $25 per share. The Series A Preferred Shares are
convertible at any time, in whole or in part, at the option of the holders
thereof into common shares of the Company at a conversion price of $40.86 per
common share (equivalent to a conversion rate of .6119 common shares per Series
A Preferred Share based on the original offering price), subject to adjustment
in certain circumstances. Net proceeds to the Company from the February 1998
Preferred Offering, after underwriting discounts of $8.0 million and other
offering costs of approximately $.8 million, were approximately $191.2 million.
The net proceeds from the February 1998 Preferred Offering were used to repay
borrowings under the Credit Facility. Dividends on the Series A Preferred
Shares are cumulative from the date of original issuance and are payable
quarterly in arrears commencing on May 15, 1998. The dividend represents an
annualized dividend of $1.69 per share, or $.42 per share per quarter.

         On June 30, 1998, the Company completed the June 1998 Preferred
Offering of 6,948,734 Series B convertible preferred shares at $32.28 per share
(the "Series B Preferred Shares") for aggregate total offering proceeds of
approximately $225.0 million to The Prudential Insurance Company of America and
certain of its affiliates. The Company used the proceeds from the offering, net
of professional fees, of approximately $224.8 million to repay approximately
$170.0 million of short-term indebtedness and to make an indirect investment of
approximately $55.9 million in five additional Refrigerated Storage Properties.
Based on the underwriting fees the Company has typically paid in connection
with previous underwritten public offerings, management estimates that if the
Series B Preferred Shares had been sold in an underwritten public offering, the
Company would have incurred approximately $12 million in underwriting fees and
offering costs. In that case, the Company would have been required to sell
approximately 372,000 additional shares (based on the $32.38 per share price on
the date of the offering) to raise the same amount of net proceeds. On October
7, 1998, the Series B Preferred Shares became convertible at any time, at the
option of the holder. On November 30, 1998, upon the election of the holder,
the Series B Preferred Shares were converted into 8,400,582 of the Company's
common shares at a conversion rate which was calculated by comparing the
investment return produced by the common shares of the Company and an
investment return of a portfolio of equity REIT's as computed by The National
Association of Real Estate Investment Trusts ("NAREIT"). On March 17, 1999, the
Company agreed to issue an additional 12,356 common shares to the former holder
of the Series B Preferred Shares in settlement of a dispute regarding the
calculation of the conversion rate used in the conversion, on November 30,
1998, of the Series B Preferred Shares into the Company's common shares.

COMMON OFFERING

         On April 23, 1998, the Company completed the April 1998 Unit
Investment Trust Offering of 1,365,138 common shares at $32.27 per share to
Merrill Lynch & Co. Net proceeds to the Company from the April 1998 Unit
Investment Trust Offering were approximately $43.9 million. The net proceeds
were used to reduce borrowings outstanding under the Credit Facility.


                                      42
<PAGE>   44

FORWARD SHARE PURCHASE AGREEMENT

         On August 12, 1997, the Company entered into two transactions with
affiliates of the predecessor of UBS AG ("UBS"). In one transaction, the
Company sold 4,700,000 common shares to UBS for approximately $148 million and
received approximately $145 million in net proceeds. In the other transaction,
the Company entered into a forward share purchase agreement (the "Forward Share
Purchase Agreement") with UBS. On August 11, 1998, the Company paid a fee of
approximately $3 million to UBS in connection with the exercise by the Company
and UBS of the right to extend the term of the Forward Share Purchase Agreement
until August 12, 1999. The Forward Share Purchase Agreement with UBS is not
considered a debt instrument. 

         Under the Forward Share Purchase Agreement, the Company is committed
to settle its obligations under the agreement by purchasing 4,700,000 common
shares from UBS by August 12, 1999. The price to be paid by the Company for the
4,700,000 common shares (the "Settlement Price") will be determined on the date
the Company settles the Forward Share Purchase Agreement and will be calculated
based on the gross proceeds that the Company received from the original
issuance of common shares to UBS, plus a forward accretion component equal to
90-day LIBOR plus 75 basis points, minus an adjustment for the Company's
distributions paid to UBS. The forward accretion component represents a
guaranteed rate of return to UBS.

         The Company may fulfill its settlement obligations under the Forward
Share Purchase Agreement in cash or common shares, at its option, at any time
on or before August 12, 1999.

         The Company currently intends to fulfill its settlement obligations in
cash, which will decrease the Company's liquidity and result in an increase in
the Company's net income per common share and net book value per common share.
The Company, however, will continue to evaluate its sources of capital and the
potential uses of its capital until the time that settlement is required under
the Forward Share Purchase Agreement or until such earlier time as it
determines to settle the Agreement. The Company is currently evaluating various
alternatives that would result in the settlement of the Agreement prior to the
expiration date on August 12, 1999.

         In the event that the Company elects to fulfill its settlement
obligations in common shares, UBS will sell, on behalf of the Company, a
sufficient number of common shares to realize the Settlement Price. If, as a
result of an increase in the market price of the common shares, the number of
common shares required to be sold to achieve the Settlement Price is less than
the number of common shares previously issued to UBS, UBS will deliver common
shares to the Company. In contrast, if, as a result of a decrease in the market
price of the common shares, such number of common shares is greater than the
number of common shares previously issued to UBS, the Company will deliver
additional common shares to UBS.

         On a quarterly basis, if the number of common shares previously
delivered to UBS is not sufficient to permit UBS to realize the Settlement
Price through the sale of such common shares, the Company is obligated to
deliver additional common shares to UBS. On November 20, 1998, the Company
issued 1,852,162 additional common shares to UBS under the Forward Share
Purchase Agreement, as a result of the decline in the market price of the
Company's common shares.

         The Company included in the calculation of diluted earnings per share
for the year ended December 31, 1998, approximately 395,489 common shares. The
Company calculated this number of common shares using the Company's average
share price for the year. According to the terms of the Forward Share Purchase
Agreement, had the forward share purchase agreement been settled and the
closing share price of $23 on December 31, 1998 been used, the Company would
have had a contingent obligation to issue approximately 249,555 common shares.
In that event, the Company's net income - diluted per common share would have
remained unchanged at $1.21 for the year ended December 31, 1998 and the net
book value per common share outstanding at December 31, 1998 would have
remained unchanged at $17.81. On February 18, 1999, the Company delivered cash
collateral of $14,700 in lieu of the issuance of additional common shares, as
permitted under the Forward Share Purchase Agreement as a result of a decline
in the market price of the common shares. The Company may issue additional
common shares in substitution for the cash collateral at any time in the
future.


                                      43
<PAGE>   45

         To the extent that the Company is obligated, as a result of a further
decline in the market price of the common shares, to issue additional common
shares in the future under the terms of the Forward Share Purchase Agreement,
the issuance will result in a reduction of the Company's net income per common
share and net book value per common share.

EQUITY SWAP AGREEMENT

         On December 12, 1997, the Company entered into two transactions with
Merrill Lynch International ("Merrill Lynch"). In one transaction, pursuant to
which the Company obtained additional equity capital through the issuance of
common shares, the Company sold 5,375,000 common shares at $38.125 per share to
Merrill Lynch for $204.9 million ($199.9 million in net proceeds) (the "Merrill
Lynch Offering"). The net proceeds to the Company from the Merrill Lynch
Offering were used to repay borrowings under the Credit Facility. In the other
transaction, the Company entered into an equity swap agreement (the "Swap
Agreement") with Merrill Lynch relating to 5,375,000 common shares (the
"Settlement Shares"), pursuant to which Merrill Lynch would sell, as directed
by the Company on or before December 12, 1998, a sufficient number of common
shares to achieve net sales proceeds equal to the market value of the
Settlement Shares on December 12, 1997, plus a forward accretion component,
minus an adjustment for the Company's distribution rate.

         On February 20, 1998 and June 25, 1998, the Company issued 525,000
common shares and 759,254 common shares, respectively, to Merrill Lynch,
pursuant to the terms of the Swap Agreement, as a result of the decline in
market price of the common shares from December 12, 1997, through February 12,
1998 and June 12, 1998, respectively. The issuance of these common shares did
not have a material impact on the Company's net income per common share or net
book value per common share.

         Effective September 30, 1998, the Company terminated the Swap
Agreement with Merrill Lynch. As of that date, the Company repurchased the
6,659,254 common shares that Merrill Lynch held and terminated the additional
contingent share obligation provided for under the Swap Agreement by issuing a
$209.3 million promissory note (the "Merrill Lynch Note") due December 14,
1998. The Merrill Lynch Note, which provided for interest at the rate of 75
basis points above 30-day LIBOR is secured by a first mortgage lien on the
Houston Center mixed-use Property complex. On December 14, 1998, the Company
and Merrill Lynch modified the Merrill Lynch Note. In connection with the
modification, (i) the Company made a payment of $25 million of principal, (ii)
the term of the Merrill Lynch Note was extended to September 14, 1999, and
(iii) the interest rate was increased to an initial rate of 200 basis points
above 30-day LIBOR. In connection with this extension, the Company paid an
extension fee of $1.8 million.

STATION CASINOS, INC.

         The Company was a party to the Merger Agreement between the Company
and Station. Pursuant to the Merger Agreement, Station would have merged with
and into the Company in the Merger. On July 27, 1998, Station canceled its
joint annual and special meeting of its common and preferred stockholders
scheduled for August 4, 1998, at which the common and preferred stockholders
were to vote on the Merger. The Company subsequently notified Station that it
was exercising its termination rights under the Merger Agreement based on
Station's material breaches of the Merger Agreement. Under the Merger
Agreement, the Company has the right to terminate the Merger Agreement if a
material breach by the other party is not cured within 10 business days after
notice. The Company subsequently notified Station that the Merger Agreement had
been terminated in accordance with its terms. Station and the Company are
currently involved in litigation relating to the Merger Agreement. Each of
Station and the Company are seeking damages from the other and declaratory
relief. In addition, the action by Station seeks, among other matters, an order
of specific performance requiring the Company to purchase $115 million of a
class of Station's redeemable preferred stock and damages consisting of
compensatory damages (which Station states to be in excess of $400 million).

         The Company intends to pursue its claims against Station and to
continue to contest Station's claims vigorously. As with any litigation, it is
not possible to predict the resolution of the pending actions. However, the
Company believes that the outcome of the pending litigation with Station will
not have a material adverse effect on the Company's financial condition or
results of operations.


                                      44
<PAGE>   46

TOWER REALTY TRUST, INC.

         The Company was a party to an Amended and Restated Agreement and Plan
of Merger, dated August 11, 1998 (the "Tower Merger Agreement"), among the
Company, Tower, Reckson and Metropolitan, a newly formed company owned equally
by the Company and Reckson (collectively, the "Buying Entities"), pursuant to
which Tower would have merged with and into Metropolitan.

         On November 2, 1998, Tower filed suit against the Buying Entities for
declaratory and other relief, including damages of not less than $75 million,
arising out of the alleged anticipatory repudiation by the Buying Entities of
the Tower Merger Agreement. Tower's lawsuit followed meetings in which
representatives of the Buying Entities had questioned, among other things,
whether Tower could meet certain conditions to closing. The Buying Entities
subsequently advised Tower that they had not terminated the Tower Merger
Agreement and considered the Tower Merger Agreement to be in full force and
effect, subject to its terms and conditions.

         As of December 8, 1998, Tower, Reckson and Metropolitan entered into a
revised agreement and plan of merger (the "Revised Tower Merger Agreement") that
superseded the Tower Merger Agreement to which the Company was a party. In
connection with the Revised Tower Merger Agreement, the Company made a $10
million capital contribution to Metropolitan in December 1998 and agreed to make
an additional $75 million capital contribution to Metropolitan in exchange for a
preferred interest. In addition, the Company and Tower entered into mutual
releases in which each released the other from all claims relating to the Tower
Merger Agreement. Tower's release of the Company provides for the dismissal of
Tower's suit against the Buying Entities without prejudice, but the release
states that it shall become void and unenforceable if all of the conditions to
the funding of the $75 million capital contribution by the Company to
Metropolitan have been met, but the Company fails to fully fund its $75 million
capital contribution to Metropolitan. The Company's release of Tower states that
it shall become void and unenforceable if, but only if, the release from Tower
to the Company becomes void and unenforceable.

         The funding by the Company of the additional $75 million capital
contribution to Metropolitan and the merger of Tower with Metropolitan are
expected to close in the second quarter of 1999.

RIGHTS OFFERING

        On September 4, 1998, in anticipation of repaying the $209.3 million
Merrill Lynch Note and consummating the Tower Merger Agreement, both originally
scheduled for December 1998, the Company announced a planned rights offering
(the "Rights Offering") that would grant the Company's shareholders rights to
purchase common shares at an exercise price of $22 per share, in an aggregate
amount of approximately $215 million. On December 16, 1998, in view of the
Company's reduced need for capital in the near term, primarily as a result of
the extension of the Merrill Lynch Note and the execution of the Revised Tower
Merger Agreement, the Company elected to cancel the previously announced Rights
Offering.

CAPITAL COMMITMENTS

         As of March 26, 1999, the Company has an additional $75 million capital
commitment due in the second quarter of 1999 relating to the Revised Tower
Merger Agreement. The Company expects to fund this obligation through cash flow
provided by operating activities and additional borrowings.

LIQUIDITY REQUIREMENTS

         The Company has approximately $347 million of secured debt expiring in
1999, consisting primarily of two major components. The first component is the
$115 million LaSalle Note III maturing in July 1999, which is secured by the
Greenway Plaza office complex. Management expects to refinance this debt before
maturity and is currently in the application phase with a lender for a 10-year
$280 million loan with an interest rate comparable to that of the existing
debt. At this level, the replacement debt would be sufficient to repay the
existing debt and result in additional loan proceeds of approximately $165
million. The Company currently intends to use the net proceeds to settle the
UBS forward share purchase agreement. The second component is the $184 million
Merrill Lynch Note maturing in 


                                      45
<PAGE>   47
September 1999, which is secured by the Houston Center mixed-use Property
complex and the Four Seasons Hotel in Houston. Based on management's estimate of
the value of the Properties securing the Merrill Lynch Note, management believes
that it will be able to refinance the Merrill Lynch Note with net proceeds after
repayment of the Note in the range of $30 million to $40 million. Management is
currently engaged in discussions, but has not entered into an agreement, with
any lender. In addition, the Metropolitan Life Notes III and IV, in the
aggregate principal amount of approximately $47 million, mature in December
1999. The Company intends to refinance these Notes prior to maturity but does
not currently expect to obtain additional loan proceeds in connection with the
refinancing.

         The Company expects to meet its other short-term liquidity
requirements primarily through cash flow provided by operating activities. The
Company believes that cash flow provided by operating activities will be
adequate to fund normal recurring operating expenses, regular debt service
requirements (including debt service relating to additional and replacement
debt), recurring capital expenditures and distributions to shareholders and
unitholders, as well as non-recurring capital expenditures, such as tenant
improvement and leasing costs related to previously unoccupied space. To the
extent that the Company's cash flow from operating activities is not sufficient
to finance non-recurring capital expenditures, the Company expects to finance
such activities with available cash reserves or, as described above, additional
debt financing. The Company also anticipates that it will fund any investments
during the next 12 months primarily with additional debt financing.

         The Company expects to meet its long-term liquidity requirements
through long-term secured and unsecured borrowings and other debt and equity
financing alternatives. As of March 26, 1999, the Company's long-term liquidity
requirements consisted primarily of maturities under the Company's fixed and
variable rate debt.

         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 refinancing of
existing secured and unsecured debt, obtaining additional debt secured by
existing investment properties or by investment property acquisitions or
developments and issuances of Operating Partnership units or common and/or
preferred shares to existing holders or in exchange for contributions of
investment properties.

                               REIT QUALIFICATION

         The Company intends to maintain its qualifications as a REIT under the
Code. As a REIT, the Company generally will not be subject to corporate federal
income taxes as long as it satisfies certain technical requirements of the
Code, including the requirement to distribute 95% of its REIT taxable income to
its shareholders.


                                      46
<PAGE>   48

                          DEBT FINANCING ARRANGEMENTS

         The significant terms of the Company's primary debt financing
arrangements are shown below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                 INTEREST                             
                                                                  RATE                               BALANCE
                                                 MAXIMUM           AT            EXPIRATION       OUTSTANDING AT
               DESCRIPTION                      BORROWINGS      12/31/98           DATE               12/31/98
               -----------                      ----------      ---------        --------------    ---------------
<S>                                             <C>              <C>           <C>                    <C>
Secured Fixed Rate Debt:
LaSalle Note I(1)                               $  239,000         7.83%         August 2027           $  239,000
LaSalle Note II(2)                                 161,000         7.79           March 2028              161,000
CIGNA Note (3)                                      63,500         7.47         December 2002              63,500
Metropolitan Life Note I(4) (5)                     11,777         8.88         September 2001             11,777
Metropolitan Life Note II(6)                        44,364         6.93         December 2002              44,364
Metropolitan Life Note III(7)                       40,000         7.74         December 1999              40,000
Metropolitan Life Note IV(8)                         6,752         7.11         December 1999               6,752
Northwestern Life Note (9)                          26,000         7.65          January 2003              26,000
Nomura Funding VI Note(5) (10)                       8,586        10.07           July 2020                 8,586
Rigney Promissory Note(11)                             755         8.50           June 2012                   755
                                                ----------      -------                                ----------
     Subtotal/Weighted Average                  $  601,734         7.75%                               $  601,734
                                                ==========      =======                                ==========

Secured Capped Variable Rate Debt:
     LaSalle Note III(5) (12)                   $  115,000         7.20%          July 1999            $  115,000
                                                ==========      =======                                ==========

Secured Variable Rate Debt:
     BankBoston Note(13)                        $  320,000         8.31%        October 2001           $  260,000
     Merrill Lynch Note(14)                        184,299         7.06         September 1999            184,299
     Chase Manhattan Note(15)                       97,123         6.81         September 2001             97,123
                                                ----------      -------                                ----------
          Subtotal/Weighted Average             $  601,422         7.62%                               $  541,422
                                                ==========      =======                                ==========

Unsecured Fixed Rate Debt:
Notes due 2007(16)                              $  250,000         7.50%        September 2007         $  250,000
Notes due 2002(16)                                 150,000         7.00         September 2002            150,000
                                                ----------      -------                                ----------
     Subtotal/Weighted Average                  $  400,000         7.31%                               $  400,000
                                                ==========      =======                                ==========

Unsecured Variable Rate Debt:
Line of Credit(17)                              $  660,000         6.44%          June 2000            $  660,000
                                                ==========      =======                                ==========

TOTAL/WEIGHTED AVERAGE                          $2,378,156         7.24%                               $2,318,156
                                                ==========      =======                                ==========
</TABLE>

NOTES:

(1)  The note has a seven-year period during which only interest is payable
     (through August 2002), followed by principal amortization based on a
     25-year amortization schedule through maturity. At the end of 12 years
     (August 2007), the interest rate increases, and the Company is required to
     remit, in addition to the monthly debt service payment, excess property
     cash flow, as defined, to be applied first against principal until the
     note 


                                      47
<PAGE>   49

     is paid in full and thereafter, against accrued excess interest, as
     defined. It is the Company's intention to repay the note in full at such
     time (August 2007) by making a final payment of approximately $220
     million. LaSalle Note I is secured by Properties owned by Funding I (See
     Note 1 to Item 8. Financial Statements and Supplementary Data). The note
     agreement prohibits Funding I from engaging in certain activities,
     including incurring liens on the Properties securing the note, pledging
     the Properties securing the note, incurring other indebtedness (except as
     specifically permitted in the note agreement), canceling a material claim
     or debt owed to it, entering into an affiliate transaction (except as
     specifically permitted in the note agreement), distributing funds derived
     from operation of the Properties securing the note (except as specifically
     permitted in the note agreement), or creating easements with respect to
     the Properties securing the note.

(2)  The note has a seven-year period during which only interest is payable
     (through March 2003), followed by principal amortization based on a
     25-year amortization schedule through maturity. At the end of 10 years
     (March 2006), the interest rate increases, and the Company is required to
     remit, in addition to the monthly debt service payment, excess property
     cash flow, as defined, to be applied first against principal until the
     note is paid in full and thereafter, against accrued excess interest, as
     defined. It is the Company's intention to repay the note in full at such
     time (March 2006) by making a final payment of approximately $154 million.
     LaSalle Note II is secured by Properties owned by Funding II (See Note 1
     to Item 8. Financial Statements and Supplementary Data). The note
     agreement prohibits Funding II from engaging in certain activities,
     including incurring liens on the Properties securing the note, pledging
     the Properties securing the note, incurring other indebtedness (except as
     specifically permitted in the note agreement), canceling a material claim
     or debt owed to it, entering into an affiliate transaction (except as
     specifically permitted in the note agreement), distributing funds derived
     from operation of the Properties securing the note (except as specifically
     permitted in the note agreement), or creating easements with respect to
     the Properties securing the note.

(3)  The note requires payments of interest only during its term. The CIGNA
     Note is secured by the MCI Tower and Denver Marriott City Center
     properties. The note agreement has no negative covenants. The deed of
     trust requires the Company to maintain the Properties that secure the
     note, and requires approval to grant liens, transfer the Properties, or
     issue new leases.

(4)  The note requires monthly payments of principal and interest based on
     20-year amortization schedule through maturity, at which time the
     outstanding principal balance is due and payable. The Metropolitan Note I
     is secured by five of The Woodlands Office Properties. The note agreement
     has no negative covenants.

(5)  The note was assumed in connection with an acquisition and was not
     subsequently retired by the Company because of prepayment penalties.

(6)  The note requires monthly payments of principal and interest based on a
     25-year amortization schedule through maturity, at which time the
     outstanding principal balance is due and payable. The Metropolitan Life
     Note II is secured by Energy Centre. The note agreement requires the
     Company to maintain compliance with a number of customary covenants,
     including maintaining the Property that secures the note and not creating
     any lien with respect to or otherwise encumbering such Property.

(7)  The note requires monthly payment of interest only during its term, and is
     secured by Datran Center. The note agreement requires compliance with a
     number of customary covenants including the maintenance of the Property
     and the limitations on other liens and borrowings. The note is
     cross-defaulted with the Metropolitan Life Note IV.

(8)  The note requires monthly payment of principal and interest based on a
     15-year amortization until maturity and is secured by Datran Center. The
     note agreement requires compliance with a number of customary covenants
     including the maintenance of the property and the limitations on other
     liens and borrowings. The note is cross-defaulted with the Metropolitan
     Life Note III.

(9)  The note requires payments of interest only during its term. The
     Northwestern Life Note is secured by the 301 Congress Avenue Property. The
     note agreement requires the Company to maintain compliance with a number
     of customary covenants, including maintaining the Property that secures
     the note and not creating any lien with respect to or otherwise
     encumbering such Property.

(10) Under the terms of the note, principal and interest are payable based on a
     25-year amortization schedule. Beginning in July 1998, the Company
     obtained the right to defease the note by purchasing Treasury obligations
     in an amount sufficient to pay the note without penalty. The Nomura
     Funding VI Note is secured by Canyon Ranch-Lenox, the Property owned by
     Funding VI (see Note 1 to Item 8. Financial Statements and Supplementary
     Data). In July of 2010, the interest rate due under the note will change
     to a 10-year Treasury yield plus 500 basis points or, if the Company so
     elects, it may repay the note without penalty. The note agreement requires
     Funding VI to maintain compliance with a number of customary covenants,
     including a debt service coverage ratio for the Property that secures the
     note, a restriction on the ability to transfer or encumber the Property
     that secures the note, and covenants related to maintaining its single
     purpose nature, including restrictions on ownership by Funding VI of
     assets other than the Property that secures the note, restrictions on the
     ability to incur indebtedness and make loans, and restrictions on
     operations.

(11) The note requires quarterly payments of principal and interest based on a
     15-year amortization schedule through maturity, at which time the
     outstanding principal balance is due and payable. The Rigney Promissory
     Note is secured by a parcel of land owned by the Company and located
     across from an Office Property. The note agreement has no negative
     covenants.

(12) The note bears interest at the rate for 30-day LIBOR plus a weighted
     average rate of 2.135% (subject to a rate cap of 10%), and requires
     payments of interest only during its term. The LaSalle Note III is secured
     by the Properties owned by Funding III, IV, and V (see Note 1 to Item 8.
     Financial Statements and Supplementary Data). The note agreement prohibits
     Fundings III, IV and V from engaging in certain activities, including
     using the Properties securing the note in certain ways, imposing any
     restrictions, agreements or covenants that run with the land upon the
     Properties securing the note, incurring additional indebtedness (except as
     specifically permitted in the note agreement), canceling or releasing a
     material claim or debt owed to it, or distributing funds derived from
     operation of the Properties securing the note (except as specifically
     permitted in the note agreement).

(13) This note requires payments of interest only during its term. The note
     bears interest at the Company's election of Base Rate plus 100 basis
     points or Eurodollar plus 325 basis points. The note is secured by a first
     lien on 3333 Lee Parkway, Frost Bank Plaza, BP Plaza, Central Park Plaza,
     Bank One Tower, Washington Harbour and Greenway I and IA Office
     Properties. The term loan requires the Company to maintain compliance with
     a number of customary financial and other covenants on an ongoing basis,
     including leverage ratios based on book value and debt service coverage
     ratios, limitations on additional secured and total indebtedness and
     distributions, limitations on additional investments and the incurrence of
     additional liens, restrictions on real estate development activity and a
     minimum net worth requirement. On February 10, 1999, this loan was
     increased to $320 million based on the inclusion of the Addison and
     Reverchon Plaza Office Properties in the pool of Properties securing this
     note.

(14) On December 14, 1998, the Company and Merrill Lynch modified the note. In
     connection with the modification, the Company made a payment of $25
     million of principal on December 14, 1998, the term was extended to
     September 14, 1999 and the interest rate was increased to an initial rate
     of 200 basis points above the 30-day LIBOR rate. In connection with this
     extension, the Company paid an extension fee of $1.8 million.

(15) The note bears interest at the rate of LIBOR plus 175 basis points and
     requires payment of interest only during its term. The Chase Manhattan
     Note is secured by Fountain Place. The note agreement requires that the
     Company maintain compliance with customary covenants including maintaining
     the Property that secures the note.

(16) The notes are unsecured and require payments of interest only during their
     terms. The interest rates on the notes were subject to temporary increase
     by 50 basis points in the event that a registered offer to exchange the
     notes for the notes of the Company with terms identical in all material
     respects to the notes is not consummated or a shelf registration statement
     with respect to the resale of the notes is not declared effective by the
     Commission on or before March 21, 1998. The interest rates on the notes
     were increased by 50 basis points temporarily (until July 2, 1998),
     because the exchange offer was not completed by March 21, 1998. The
     interest rates on the notes were also permanently increased (on July 28,
     1998) by 37.5 basis points due to a lower than investment grade rating (as
     defined in the notes) by specified rating agencies. The indenture requires
     the Company to maintain compliance with a number of customary financial
     and other covenants on an ongoing basis, including leverage ratios and
     debt service coverage ratios, limitations on the incurrence of additional
     indebtedness and maintaining the Company's Properties.


                                      48
<PAGE>   50

(17) The Credit Facility is unsecured with an interest rate of the Eurodollar
     rate plus 137 basis points. In connection with the refinancing of a
     BankBoston term note, the Company used $90 million of the net proceeds of
     the refinancing to purchase a 12% participation interest from BankBoston in
     the $750 million Credit Facility. As a result, the Company's borrowing
     capacity under the Credit Facility is limited to $660 million. The Credit
     Facility requires the Company to maintain compliance with a number of
     customary financial and other covenants on an ongoing basis, including
     leverage ratios based on book value and debt service coverage ratios,
     limitations on additional secured and total indebtedness and distributions,
     limitations on additional investments and the incurrence of additional
     liens, restrictions on real estate development activity and minimum net
     worth requirement. See Note 6 of Item 8. Financial Statements and
     Supplementary Data for a more detailed description of the Credit Facility.

         The combined aggregate principal amounts, either at maturity or in the
form of scheduled principal installments due pursuant to borrowings under the
Credit Facility and other indebtedness of the Company, are as follows:

<TABLE>
<CAPTION>
                                                                 (In Thousands)
               <S>                                                    <C>
               1999.....................................              $347,302
               2000.....................................               661,351
               2001.....................................               369,181
               2002.....................................               215,655
               2003.....................................                72,201
               Thereafter...............................               652,466
</TABLE>

         The Company's policy with regard to the incurrence and maintenance of
debt is based on a review and analysis of investment opportunities for which
capital is required and the cost of debt in relation to such investment
opportunities, the type of debt available (secured or unsecured), the effect of
additional debt on existing coverage ratios and the maturity of the proposed
debt in relation to maturities of existing debt.

         The Company's debt service coverage ratio for both the three months
and the year ended December 31, 1998 was approximately 3.1, compared to
approximately 3.5 for the three months and the year ended December 31, 1997.
Debt service coverage for the particular period is generally calculated as net
income plus depreciation and amortization, plus interest expense, plus
extraordinary or non-recurring losses, minus extraordinary or non-recurring
gains, divided by debt service (including principal and interest payable during
the period of calculation). The most restrictive debt service coverage ratio
the Company is required to maintain as stipulated by the Company's debt
arrangements and calculated as described above is 1.5. In addition, the
Company's Credit Facility requires a debt service coverage ratio (which is
calculated in a different manner) of 2.5. Under this calculation, the Company's
debt service coverage ratio is 3.5.

                             FUNDS FROM OPERATIONS

         FFO, based on the definition adopted by the Board of Governors of the
NAREIT and as used herein, means net income (loss) determined in accordance
with GAAP, excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. NAREIT
developed FFO as a relative measure of performance and liquidity of an equity
REIT in order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. The Company considers FFO
an appropriate measure of performance of an equity REIT. However, FFO (i) does
not represent cash generated from operating activities determined in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net income),
(ii) is not necessarily indicative of cash flow available to fund cash needs,
and (iii) should not be considered as an alternative to net income determined
in accordance with GAAP as an indication of the Company's operating
performance, or to cash flow from operating activities determined in accordance
with GAAP as a measure of either liquidity or the Company's ability to make
distributions. The Company has historically distributed an amount less than
FFO, primarily due to reserves required for capital expenditures, including
leasing costs. The aggregate cash distributions paid to shareholders and
unitholders for the years ended December 31, 1998 and 1997 were $220.6 and
$140.8 million, respectively. An increase in FFO does not necessarily result in
an increase in aggregate distributions because the Company's Board of Trust
Managers is not required to increase distributions on a quarterly basis unless
necessary in order to enable the Company to maintain REIT status. However, the
Company must distribute 95% of its REIT taxable income (as defined in the Code).
Therefore, a significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis. Accordingly, the Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be considered in conjunction with the
Company's net income (loss) and cash flows as reported in the consolidated 


                                      49
<PAGE>   51

financial statements and notes thereto. However, the Company's measure of FFO
may not be comparable to similarly titled measures of other REITs because these
REITs may not apply the definition of FFO in the same manner as the Company.

                      STATEMENTS OF FUNDS FROM OPERATIONS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                  --------------------------------
                                                                                     1998                1997
                                                                                     ----                ----
<S>                                                                                <C>                 <C>
Income before minority interest                                                    $   183,210         $   135,024

Adjustments:
     Depreciation and amortization of real estate assets                               115,678              72,503
      Write-off of costs associated with terminated acquisitions                        18,435                   -
      Adjustment for investments in real estate mortgages
        and equity of unconsolidated companies                                          56,024               8,303
      Minority interest in joint ventures                                               (1,499)             (1,434)
      Preferred stock dividends                                                        (11,700)                  -
                                                                                   -----------         -----------

Funds from operations                                                              $   360,148         $   214,396
                                                                                   ===========         ===========

Investment Segments:
  Office and Retail Segment                                                        $   325,442         $   204,243
  Hospitality Segment                                                                   52,375              36,439
  Behavioral Healthcare Segment                                                         55,295              29,789
  Refrigerated Storage Segment                                                          28,626               2,200
  Residential Development Segment                                                       58,892              25,623
  Corporate general & administrative                                                   (16,264)            (12,858)
  Interest expense                                                                    (152,214)            (86,441)
  Preferred stock dividends                                                            (11,700)                  -
  Other(1)                                                                              19,696              15,401
                                                                                   -----------         -----------

Funds from operations                                                              $   360,148         $   214,396
                                                                                   ===========         ===========
</TABLE>

--------------------------
(1) Includes interest and other income less depreciation and amortization of
    non-real assets and amortization of deferred financing costs.


                                      50
<PAGE>   52

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

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                               ------------------------
                                                                  1998        1997
                                                                  ----        ----
<S>                                                              <C>         <C>
Funds from operations                                            360,148     214,396

Adjustments:
  Depreciation and amortization of non-real estate assets          1,631       1,235
  Write-off of costs associated with terminated acquisitions     (18,435)       --
  Amortization of deferred financing costs                         6,486       3,499
  Minority interest in joint ventures profit and depreciation
      and amortization                                             2,272       2,122
  Adjustment for investments in real estate mortgages
      and equity of unconsolidated companies                     (56,024)     (8,303)
  Change in deferred rent receivable                             (34,047)    (23,371)
  Change in current assets and liabilities                        (6,138)     34,500
  Equity in earnings in excess of distributions received from
      unconsolidated companies                                      --       (12,536)
  Distributions received in excess of equity in earnings from
      unconsolidated companies                                     9,308        --
  Preferred Stock Dividends                                       11,700        --
  Non-cash compensation                                              174         172
                                                                --------    --------

Net cash provided by operating activities                        277,075     211,714
                                                                ========    ========
</TABLE>

                HISTORICAL RECURRING OFFICE AND RETAIL PROPERTY
           CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS

         The following table sets forth annual and per square foot recurring
capital expenditures (excluding those expenditures which are recoverable from
tenants) and tenant improvement and leasing costs for the years ended December
31, 1998, 1997 and 1996, attributable to signed leases, all of which have
commenced or will commence during the next twelve months (i.e., the renewal or
replacement tenant began or will begin to pay rent) for the Office and Retail
Properties consolidated in the Company's financial statements during each of
the periods presented. Tenant improvement and leasing costs for signed leases
during a particular period do not equal the cash paid for tenant improvement
and leasing costs during such period due to timing of payments. 


                                      51
<PAGE>   53

<TABLE>
<CAPTION>
                                                   1998         1997         1996
                                               -----------  ----------   ----------
<S>                                           <C>          <C>          <C>
CAPITAL EXPENDITURES:
  Capital Expenditures (in thousands) ......   $    5,107   $    3,310   $    1,214
  Per square foot ..........................   $      .16   $      .15   $      .07
TENANT IMPROVEMENT AND LEASING COSTS:(1)
  Replacement Tenant Square Feet ...........      850,325      584,116      390,945
  Renewal Tenant Square Feet ...............      923,854    1,001,653      248,603
  Tenant Improvement Costs (in thousands)...   $    8,552   $   10,958   $    6,263
  Per square foot leased ...................   $     4.82   $     6.91   $     9.79
  Tenant Leasing Costs (in thousands) ......   $    5,358   $    6,601   $    2,877
  Per square foot leased ...................   $     3.02   $     4.16   $     4.50
  Total (in thousands) .....................   $   13,910   $   17,559   $    9,140
        Total per square foot ..............   $     7.84   $    11.07   $    14.29
        Average lease term .................    5.4 years    6.4 years    6.0 years
        Total per square foot per year .....   $     1.44   $     1.73   $     2.38
</TABLE>


(1) Excludes leasing activity for leases that have less than a one-year term 
    (i.e., storage and temporary space).

         Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Property portfolio. The Company maintains an active preventive maintenance
program in order to minimize required capital improvements. In addition,
capital improvement costs are recoverable from tenants in many instances.

         Tenant improvement and leasing costs also may fluctuate in any given
year depending upon factors such as the property, the term of the lease, the
type of lease (renewal or replacement tenant), the involvement of external
leasing agents and overall competitive market conditions. Management believes
that future recurring tenant improvements and leasing costs for the Company's
existing Office Properties will approximate on average for "renewal tenants"
$6.00 to $8.00 per square foot, or $1.20 to $1.60 per square foot per year
based on an average five-year lease term, and, on average for "replacement
tenants," $12.00 to $14.00 per square foot, or $2.40 to $2.80 per square foot
per year based on an average five-year lease term.

                              YEAR 2000 COMPLIANCE

         The year 2000 issue relates to whether computer systems will properly
recognize date-sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. In addition, the
year 2000 issue relates to whether non-Information Technology ("IT") systems
that depend on embedded computer technology will recognize the year 2000.
Systems that do not properly recognize such information could generate
erroneous information or fail.

         In early 1998, the Company assigned a group of individuals with the
task of creating a program to identify, understand and address the myriad of
issues associated with the year 2000 problem. The group's initial step in
assessing the Company's year 2000 readiness consists of a comprehensive review
of IT and non-IT systems at the Company's principal executive offices and at
the Company's Properties to identify any systems that are date sensitive and,
accordingly, could have potential year 2000 problems.

         The Company is in the process of conducting such comprehensive review
of all mission-critical IT systems, such as in-house accounting and property
management systems, network operating systems, telecommunication systems and
desktop software systems, and determining whether they are year 2000 compliant.
The Company believes that such review is approximately 75% completed, and it is
expected that the review will be completed on or before June 30, 1999. In
addition, as a result of the Company's normal upgrade and replacement process,
most network and desktop equipment currently meets the requirements for year
2000 compliance. Although the initial assessment and testing is not yet
complete, the Company has not identified any significant problem areas and it
believes that the mission-critical systems, 


                                      52
<PAGE>   54

AS/400 and accounting system, local network servers, WAN equipment and the
majority of desktop PC's are compliant, or can be made compliant with minor
software upgrades.

         For non-IT systems, the Company is also in the process of conducting
such comprehensive review of computer hardware and software in mechanical
systems and developing a program to repair or replace non-IT systems that are
not year 2000 compliant. The Company has identified substantially all of the
non-IT systems and is considering the use of an outside specialist company to
assist in identifying any year 2000 exposure relating to these systems. While
the process was recently commenced, it is expected that the assessment and
remediation plan should be completed on or before June 30, 1999. The Company's
non-IT systems or embedded technology are primarily property-related and
include escalator and elevator service, building automation (e.g., energy
management and HVAC systems), security access systems, fire and life safety
systems.

         The Company believes that the greatest exposure lies with third
parties, such as its tenants, vendors, financial institutions and the Company's
transfer agent and unaffiliated joint venture partners. The Company depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash, its transfer agent to maintain and track investor
information, its vendors for day-to-day services and its unaffiliated joint
venture partners for operations and management of certain of the Company's
Properties. If any of these third parties are unable to meet their obligations
to the Company because of the year 2000 problem, such a failure may have a
material adverse effect on the financial condition or results of operations of
the Company. Although the Company is in the process of working with such third
parties in order to attempt to eliminate its year 2000 concerns, the cost and
timing of the third party year 2000 compliance is not within the Company's
control, and no assurance can be given with respect to the cost and timing of
such efforts or the potential effects of any failure to comply.

         The majority of the work performed to date has been performed by
employees of the Company without significant additional costs to the Company.
Although the full extent of any year 2000 exposure has not been finalized and
the total cost to specifically remediate IT and non-IT systems has not fully
been quantified, the Company currently estimates that the total cost to repair
and replace IT and non-IT systems that are not year 2000 compliant (not
including costs associated with the Company's normal upgrade and replacement
process) will be approximately $1.2 million. Management does not believe that
such estimated total cost will have a material adverse effect on the Company's
financial condition or results of operations given current vendor estimates for
complete remediation for non-IT systems.

         The Company currently believes that it will have performed all year
2000 compliance testing and completed its remedial measures on its IT and
non-IT systems on or before October 31, 1999. Based on the progress the Company
has made in addressing the Company's year 2000 issues and its plan and timeline
to complete its compliance program, at this time, the Company does not foresee
significant risks associated with the Company's year 2000 compliance.
Management does not believe that the year 2000 issue will pose significant
problems to its IT or non-IT systems, or that resolution of any potential
problems with respect to these systems will have a material adverse effect on
the Company's financial condition or results of operations. Management believes
that the year 2000 risks to the Company's financial condition or results of
operation associated with a failure of non-IT systems is immaterial, due to the
fact that each of the Company's Properties has, for the most part, separate
non-IT systems. Accordingly, a year 2000 problem that is experienced at one
Property generally should have no effect on the other Company Properties. In
addition, management believes that the Company has sufficient time to correct
those system problems within its control before the year 2000. Because the
Company's major source of income is rental payments under long-term leases, a
failure of the Company's mission-critical IT systems is not expected to have a
material adverse effect on the Company's financial condition or results of
operations. Even if the Company were to experience problems with its IT
systems, the payment of rent under the leases would not be excused. In
addition, the Company expects to correct those IT system problems within its
control before the year 2000, thereby minimizing or avoiding the increased cost
of correcting problems after the fact.

         Because the Company is still evaluating the status of its systems and
those of third parties with which it conducts business, the Company has not yet
developed a comprehensive contingency plan, and it is very difficult to
identify "the most reasonably likely worst-case scenario" at this time. As the
Company identifies significant risks related to the Company's year 2000
compliance, or if the Company's year 2000 compliance program's progress
deviates substantially from the anticipated timeline, the Company will develop
appropriate contingency plans.


                                      53
<PAGE>   55
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's use of financial instruments, such as debt instruments
and its Forward Share Purchase Agreement with UBS, subject the Company to
market risk which may affect the Company's future earnings and cash flows as
well as the fair value of its assets. Market risk generally refers to the risk
of loss from changes in interest rates and market prices. The Company manages
its market risk by attempting to match anticipated inflow of cash from its
operating, investing and financing activities with anticipated outflow of cash
to fund debt payments, distributions to shareholders, investments, capital
expenditures and other cash requirements. The Company does not enter into
financial instruments for trading purposes.

         The following discussion of market risk is based solely on
hypothetical changes in interest rates related to its variable rate debt and
the Forward Share Purchase Agreement and in the market price of the Company's
common shares as such changes relate to the Forward Share Purchase Agreement.
This discussion does not purport to take into account all of the factors that
may affect the financial instruments discussed in this section.

INTEREST RATE RISK

         The Company's interest rate risk is most sensitive to fluctuations in
interest rates on its short-term variable rate debt. The Company generally does
not use financial instruments to hedge interest rate risk. The Company had total
outstanding debt of approximately $2.3 billion at December 31, 1998, of which
approximately $1.3 billion or 56.8%, was variable rate debt. The weighted
average interest rate on such variable rate debt was 7.0% as of December 31,
1998. A 10% (70 basis point) increase in the weighted average interest rate on
such variable rate debt would result in a decrease in net income and cash flows
of approximately $9.1 million based on the variable rate debt outstanding as of
December 31, 1998, as a result of the increased interest expense associated with
the change in rate. Conversely, a 10% (70 basis point) decrease in the weighted
average interest rate on such variable rate debt would result in an increase in
net income and cash flows of approximately $9.1 million based on the variable
rate debt outstanding as of December 31, 1998, as a result of the decreased
interest expense associated with the change in rate.

         In addition, the Company's settlement obligations under the Forward
Share Purchase Agreement with UBS, as described in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Share Purchase Agreement, are subject to interest rate risk,
specifically changes in the 90-day LIBOR rate.

         The Company has the option to settle the Forward Share Purchase
Agreement in common shares or cash. The information in this paragraph assumes a
settlement in common shares. If the 90-day LIBOR rate remains unchanged from
December 31, 1998, and assuming no change from the $23 per share closing price
of the common shares on December 31, 1998 and no change in the fourth quarter
dividend rate, the Company would issue an additional 139,988 common shares
pursuant to the Forward Share Purchase Agreement by the final settlement date of
August 11, 1999. If the 90-day LIBOR rate increases by 10% (51 basis points)
from the 90-day LIBOR rate on December 31, 1998, and assuming no change from the
$23 per share closing price of the common shares on December 31, 1998 and no
change in the fourth quarter dividend rate, the Company would issue 167,899
common shares by the final settlement date of August 12, 1999. If the 90-day
LIBOR rate decreases by 10% (51 basis points) from the 90-day LIBOR rate on
December 31, 1998, and assuming no change from the $23 per share closing price
of the common shares on December 31, 1998 and no change in the fourth quarter
dividend rate, the Company would issue 112,076 common shares by the final
settlement date of August 12, 1999. The issuance of common shares under the
terms of the Forward Share Purchase Agreement will result in a reduction of the
Company's net income per common share and net book value per common share.

         The Company also has the option to settle the Forward Share Purchase
Agreement in cash rather than common shares, which will reduce cash flow. If the
Company elects to settle the Forward Share Purchase Agreement in cash on the
final settlement date of August 12, 1999, and assuming the 90-day LIBOR rate and
quarterly dividend rate remain unchanged from December 31, 1998, the Company
will pay $149.8 million to UBS to settle the Forward Share Purchase Agreement.
If the 90-day LIBOR rate increases by 10%, the settlement amount will increase
by approximately $.5 million. Conversely, if the 90-day LIBOR rate decreases by
10%, the settlement amount will decrease by approximately $.5 million.
Settlement of the Forward Share Purchase Agreement in cash will reduce cash
flows.

         The Company includes the Forward Share Purchase Agreement return on the
Forward Share Purchase Agreement, which is based on the 90-day LIBOR rate, to
arrive at net income available to common shareholders. If the 90-day LIBOR rate
remains unchanged from December 31, 1998, the Forward Share Purchase Agreement
return through settlement at August 12, 1999 would be approximately $6


                                      54
<PAGE>   56
million. A 10% increase in the 90-day LIBOR rate from December 31, 1998 would
increase the return through settlement at August 12, 1999 by approximately $.5
million. Conversely, if the 90-day LIBOR rate decreases by 10%, the return
through settlement at August 12, 1999 would decrease by approximately $.5
million. An increase in the Forward Share Purchase Agreement return will result
in a decrease in net income available to common shareholders and net income per
common share, and a decrease in the Forward Share Purchase Agreement return will
result in an increase in net income available to common shareholders and net
income per common share. 

MARKET PRICE RISK

         The Forward Share Purchase Agreement is subject to market rate risk
because changes in the closing share price for the Company's common shares
affect the Company's settlement obligation. If the market price of the common
shares decreases by 10% from the $23 per share closing price of the common
shares on December 31, 1998, and assuming no change in the 90-day LIBOR rate
from the rate at December 31, 1998, the Company will issue an additional 935,782
common shares by the final settlement date of August 12, 1999. If the market
price of the common shares increases by 10% from the $23 per share closing price
of the common shares of December 31, 1998, and assuming no change in the 90-day
LIBOR rate from December 31, 1998, UBS will return to the Company 511,117 common
shares by the final settlement date of August 12, 1999. The issuance of
additional common shares under the terms of the Forward Share Purchase Agreement
will result in the reduction of the Company's net income per common share and
net book value per common share. A change in the market price will not affect
the amount required to be paid to settle the Forward Share Purchase Agreement in
cash.

                                       55
<PAGE>   57


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

                          INDEX TO FINANCIAL STATEMENTS

                                                                                                                  PAGE    
                                                                                                                          
<S>                                                                                                              <C>    
Report of Independent Public Accountants.....................................................................      57     
                                                                                                                          
Consolidated  Balance Sheets of Crescent Real Estate Equities Company (successor to Crescent                              
Real Estate Equities,  Inc.) at December 31, 1998 and 1997...................................................      58     
                                                                                                                          
Consolidated  Statements  of  Operations  of Crescent  Real Estate  Equities  Company  (successor                         
to Crescent  Real Estate Equities, Inc.) for the years ended December 31, 1998, 1997 and 1996................      59     
                                                                                                                          
Consolidated  Statements of  Shareholders'  Equity of Crescent  Real Estate  Equities  Company                            
(successor to Crescent Real Estate Equities, Inc.) for the years ended                                                    
December 31, 1998, 1997 and 1996.............................................................................      60     
                                                                                                                          
Consolidated  Statements  of Cash Flows of Crescent  Real  Estate  Equities  Company  (successor                          
to  Crescent  Real Estate Equities, Inc.) for the years ended December 31, 1998, 1997 and 1996...............      61     
                                                                                                                          
Notes to Financial Statements................................................................................      62     
                                                                                                                          
Schedule III Consolidated Real Estate Investments and Accumulated Depreciation ..............................      87     
                                                                                                                          
</TABLE>


                                       56


<PAGE>   58



                                                           


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Trust Managers of Crescent Real Estate Equities Company:

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Company and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crescent Real Estate Equities
Company and Subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.


                               ARTHUR ANDERSEN LLP


Dallas, Texas,
February 17, 1999 (except with respect to the
matters discussed in Note 14, as to which the 
date is March 19, 1999)

                                       57

<PAGE>   59
                     CRESCENT REAL ESTATE EQUITIES COMPANY
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
                                (NOTES 1 AND 2)

<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,
                                                                         ----------------------------
                                                                             1998             1997
                                                                             ----             ----
<S>                                                                      <C>              <C>        
ASSETS:
 Investments in real estate:
   Land                                                                  $   400,690      $   353,374
   Land held for development or sale                                          95,282           94,954
   Building and improvements                                               3,569,774        2,923,097
   Furniture, fixtures and equipment                                          63,626           51,705
   Less -  accumulated depreciation                                         (387,457)        (278,194)
                                                                         -----------      -----------
             Net investment in real estate                                 3,741,915        3,144,936

   Cash and cash equivalents                                                 110,292           66,622
   Restricted cash and cash equivalents                                       46,841           41,528
   Accounts receivable, net                                                   32,730           30,179
   Deferred rent receivable                                                   73,635           39,588
   Investments in real estate mortgages and equity
       of unconsolidated companies                                           743,516          601,770
   Notes receivable, net                                                     183,974          156,676
   Other assets, net                                                         110,544           98,681
                                                                         -----------      -----------
               Total assets                                              $ 5,043,447      $ 4,179,980
                                                                         ===========      ===========


LIABILITIES:
   Borrowings under Credit Facility                                      $   660,000      $   350,000
   Notes payable                                                           1,658,156        1,360,124
   Accounts payable, accrued expenses and other liabilities                  149,444          127,258
                                                                         -----------      -----------
              Total liabilities                                            2,467,600        1,837,382
                                                                         -----------      -----------

COMMITMENTS AND CONTINGENCIES:

MINORITY INTERESTS:
  Operating partnership, 6,545,528 and 6,397,072 units,
       respectively                                                          126,575          117,103
  Investment joint ventures                                                   26,727           28,178
                                                                         -----------      -----------
              Total minority interests                                       153,302          145,281
                                                                         -----------      -----------

SHAREHOLDERS' EQUITY:
  Preferred shares, $.01 par value, authorized 100,000,000 shares:
   6 3/4% Series A Convertible Cumulative Preferred Shares,
      8,000,000 shares issued and outstanding at December 31, 1998           200,000                -
  Common stock, $.01 par value, authorized 250,000,000 shares,
      124,555,447 and 117,977,907 shares issued and outstanding
      at December 31, 1998 and 1997, respectively                              1,245            1,179
   Additional paid-in capital                                              2,336,621        2,253,928
   Deferred compensation on restricted shares                                    (88)            (283)
   Retained deficit                                                         (110,196)         (57,507)
   Accumulated other comprehensive income                                     (5,037)               -
                                                                         -----------      -----------
              Total shareholders' equity                                   2,422,545        2,197,317
                                                                         -----------      -----------
              Total liabilities and shareholders' equity                 $ 5,043,447      $ 4,179,980
                                                                         ===========      ===========
</TABLE>

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

                                       58











<PAGE>   60

                     CRESCENT REAL ESTATE EQUITIES COMPANY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS,EXCEPT PER SHARE DATA)
                                (NOTES 1 AND 2)

<TABLE>
<CAPTION>

                                                          For the year ended December 31,
                                                     ---------------------------------------

                                                       1998            1997          1996
                                                       ----            ----          ----
<S>                                                  <C>            <C>            <C>      
REVENUES:
    Office and retail properties                     $ 563,005      $ 363,324      $ 182,198
    Hotel properties                                    53,355         37,270         19,805
    Behavioral healthcare properties                    55,295         29,789             --
    Interest and other income                           26,688         16,990          6,858
                                                     ---------      ---------      ---------
      Total revenues                                   698,343        447,373        208,861
                                                     ---------      ---------      ---------

EXPENSES:
    Real estate taxes                                   75,076         44,154         20,606
    Repairs and maintenance                             41,160         27,783         12,292
    Other rental property operating                    126,733         86,931         40,915
    Corporate general and administrative                16,264         12,858          4,674
    Interest expense                                   152,214         86,441         42,926
    Amortization of deferred financing costs             6,486          3,499          2,812
    Depreciation and amortization                      118,082         74,426         40,535
    Write-off of costs associated with terminated
      acquisitions                                      18,435             --             --
                                                     ---------      ---------      ---------

      Total expenses                                   554,450        336,092        164,760
                                                     ---------      ---------      ---------

      Operating income                                 143,893        111,281         44,101

OTHER INCOME:
    Equity in net income of unconsolidated
        companies                                       39,317         23,743          3,850
                                                     ---------      ---------      ---------

INCOME BEFORE MINORITY INTERESTS
    AND EXTRAORDINARY ITEM                             183,210        135,024         47,951

    Minority interests                                 (17,610)       (17,683)        (9,510)
                                                     ---------      ---------      ---------

INCOME BEFORE EXTRAORDINARY ITEM                       165,600        117,341         38,441
    Extraordinary item                                      --             --         (1,306)
                                                     ---------      ---------      ---------

NET INCOME                                             165,600        117,341         37,135

PREFERRED STOCK DIVIDENDS                              (11,700)            --             --

FORWARD SHARE PURCHASE AGREEMENT
    RETURN                                              (3,316)            --             --
                                                     ---------      ---------      ---------

NET INCOME AVAILABLE TO COMMON
    SHAREHOLDERS                                     $ 150,584      $ 117,341      $  37,135
                                                     =========      =========      =========

BASIC EARNINGS PER SHARE DATA:
    Income before extraordinary item                 $    1.26      $    1.25      $    0.72
    Extraordinary item                                      --             --          (0.02)
                                                     ---------      ---------      ---------

    Net income                                       $    1.26      $    1.25      $    0.70
                                                     =========      =========      =========

DILUTED EARNINGS PER SHARE DATA:
    Income before extraordinary item                 $    1.21      $    1.20      $    0.70
    Extraordinary item                                      --             --          (0.02)
                                                     ---------      ---------      ---------

    Net income                                       $    1.21      $    1.20      $    0.68
                                                     =========      =========      =========
</TABLE>



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


                                       59
<PAGE>   61

                     CRESCENT REAL ESTATE EQUITIES COMPANY
                            CONSOLIDATED STATEMENTS
                            OF SHAREHOLDERS' EQUITY

                             (DOLLARS IN THOUSANDS)
                               (NOTES 1,2 AND 10)

<TABLE>
<CAPTION>

                                                                                                                             
                                                                                                                             
                                                                        Preferred Stock                Common Stock          
                                                            ---------------------------------- ---------------------------------
                                                                  Shares         Net Value       Shares          Par Value  
                                                                  ------         ---------       ------          ---------  

<S>                                                         <C>                  <C>          <C>              <C>          
   SHAREHOLDERS' EQUITY, December 31, 1995                  $          --               --    $  23,523,547    $         236

   Common Share Offerings                                              --               --       11,950,000              119

   Issuance of Common Shares                                           --               --          599,794                6

   Issuance of Common Shares in Exchange for
      Operating Partnership Units                                      --               --           53,789               -- 

   Exercise of Common Share Options                                    --               --           19,250               -- 

   Amortization of Deferred Compensation                               --               --               --               -- 

   Dividends Paid                                                      --               --               --               -- 

   Net Income                                                          --               --               --               -- 
                                                            -------------    -------------    -------------    -------------

   SHAREHOLDERS' EQUITY, December 31, 1996                             --               --       36,146,380              361

   Common Share Offerings                                              --               --       45,076,185              451

   Issuance of Common Shares                                           --               --          341,112                3

   Issuance of Restricted Shares                                       --               --              181               -- 

   Common Share Dividend - 2 for 1 Split                               --               --       36,162,095              362 

   Issuance of Common Shares in Exchange for
      Operating Partnership Units                                      --               --          133,412                1

   Exercise of Common Share Options                                    --               --          118,542                1

   Amortization of Deferred Compensation                               --               --               --               -- 

   Crescent Operating, Inc. share distribution                         --               --               --               -- 

   Dividends Paid                                                      --               --               --               -- 

   Net Income                                                          --               --               --               -- 
                                                            -------------    -------------    -------------    -------------

SHAREHOLDERS' EQUITY, December 31, 1997                                --               --      117,977,907            1,179

   Issuance of common shares                                           --               --        2,651,732               27

   Issuance of preferred shares                                14,948,734          425,000               --               -- 

   Exercise of common share options                                    --               --           52,164               -- 

   Cancellation of restricted shares                                   --               --           (6,638)              -- 

   Amortization of deferred compensation                               --               --               --               -- 

   Issuance of common shares in exchange for Operating
      Partnership units                                                --               --          286,792                3

   Settlement of equity swap agreement                                 --               --       (6,659,254)             (67)

   Preferred share conversion                                  (6,948,734)        (225,000)       8,400,582               84

   Forward share purchase agreement                                    --               --        1,852,162               19

   Dividends paid                                                      --               --               --               -- 

   Net income available to common shareholders - diluted               --               --               --               -- 

   Unrealized loss on available-for-sale securities                    --               --               --               -- 

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

SHAREHOLDERS' EQUITY, December 31, 1998                     $   8,000,000    $     200,000      124,555,447    $       1,245
                                                            =============    =============    =============    =============


<CAPTION>                 
                                                                              Deferred                          
                                                              Additional    Compensation       Retained         
                                                               Paid-in      on Restricted       Earning         
                                                               Capital          Shares         (Deficit         
                                                               -------          ------         --------         

<S>                                                         <C>            <C>            <C>         
   SHAREHOLDERS' EQUITY, December 31, 1995                  $   423,530    $      (455)   $   (16,780)
                                                                                                                     
   Common Share Offerings                                       456,214             --             -- 

   Issuance of Common Shares                                     25,014             --             -- 

   Issuance of Common Shares in Exchange for
      Operating Partnership Units                                   856             --             -- 

   Exercise of Common Share Options                                 110             --             -- 

   Amortization of Deferred Compensation                             --             91             -- 

   Dividends Paid                                                    --             --        (60,916)

   Net Income                                                        --             --         37,135 
                                                            -----------    -----------    -----------

   SHAREHOLDERS' EQUITY, December 31, 1996                      905,724           (364)       (40,561)

   Common Share Offerings                                     1,317,873             --             -- 

   Issuance of Common Shares                                     28,245             --             -- 

   Issuance of Restricted Shares                                     10            (10)            -- 

   Common Share Dividend - 2 for 1 Split                           (362)            --             -- 

   Issuance of Common Shares in Exchange for
      Operating Partnership Units                                 1,017             --             -- 

   Exercise of Common Share Options                               1,421             --             -- 

   Amortization of Deferred Compensation                             --             91             -- 

   Crescent Operating, Inc. share distribution                       --             --        (10,474)

   Dividends Paid                                                    --             --       (123,813)

   Net Income                                                        --             --        117,341
                                                            -----------    -----------    -----------

SHAREHOLDERS' EQUITY, December 31, 1997                       2,253,928           (283)       (57,507)

   Issuance of common shares                                     62,072             --            687

   Issuance of preferred shares                                  (9,000)            --             -- 

   Exercise of common share options                                 725             --             -- 

   Cancellation of restricted shares                               (100)           100             -- 

   Amortization of deferred compensation                             --             95             -- 

   Issuance of common shares in exchange for Operating
      Partnership units                                           4,846             --             -- 

   Settlement of equity swap agreement                         (200,766)            --         (8,466)

   Preferred share conversion                                   224,916             --             -- 

   Forward share purchase agreement                                  --             --             -- 

   Dividends paid                                                    --             --       (198,810)

   Net income available to common shareholders - diluted             --             --        153,900

   Unrealized loss on available-for-sale securities                  --             --             -- 
                                                            -----------    -----------    -----------
SHAREHOLDERS' EQUITY, December 31,1998                      $ 2,336,621    $       (88)   $  (110,196)
                                                            ===========    ===========    ===========


<CAPTION>
                                                              Accumulated                               
                                                                 Other                                    
                                                             Comprehensive                             
                                                                Income         Total                              
                                                                ------         -----                              

<S>                                                         <C>            <C>        
   SHAREHOLDERS' EQUITY, December 31, 1995                  $        --    $   406,531

   Common Share Offerings                                            --        456,333

   Issuance of Common Shares                                         --         25,020

   Issuance of Common Shares in Exchange for
      Operating Partnership Units                                    --            856

   Exercise of Common Share Options                                  --            110

   Amortization of Deferred Compensation                             --             91

   Dividends Paid                                                    --        (60,916)

   Net Income                                                        --         37,135
                                                            -----------    -----------

   SHAREHOLDERS' EQUITY, December 31, 1996                           --        865,160

   Common Share Offerings                                            --      1,318,324

   Issuance of Common Shares                                         --         28,248

   Issuance of Restricted Shares                                     --             --

   Common Share Dividend - 2 for 1 Split                             --             --

   Issuance of Common Shares in Exchange for
      Operating Partnership Units                                    --          1,018

   Exercise of Common Share Options                                  --          1,422

   Amortization of Deferred Compensation                             --             91

   Crescent Operating, Inc. share distribution                       --        (10,474)

   Dividends Paid                                                    --       (123,813)

   Net Income                                                        --        117,341
                                                            -----------    -----------

SHAREHOLDERS' EQUITY, December 31, 1997                              --      2,197,317

   Issuance of common shares                                         --         62,786

   Issuance of preferred shares                                      --        416,000

   Exercise of common share options                                  --            725

   Cancellation of restricted shares                                 --             --

   Amortization of deferred compensation                             --             95

   Issuance of common shares in exchange for Operating
      Partnership units                                              --          4,849

   Settlement of equity swap agreement                               --       (209,299)

   Preferred share conversion                                        --             --

   Forward share purchase agreement                                  --             19

   Dividends paid                                                    --       (198,810)

   Net income available to common shareholders - diluted             --        153,900

   Unrealized loss on available-for-sale securities              (5,037)        (5,037)
                                                            -----------    -----------
SHAREHOLDERS' EQUITY, December 31,1998                      $    (5,037)   $ 2,422,545
                                                            ===========    ===========
</TABLE>




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

                                     60

<PAGE>   62

                     CRESCENT REAL ESTATE EQUITIES COMPANY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                (NOTES 1 AND 2)

<TABLE>
<CAPTION>

                                                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                                           ---------------------------------------------------
                                                                                1998               1997                 1996
                                                                                ----               ----                 ----
<S>                                                                         <C>                 <C>                 <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:                                                    
   Net income                                                               $   165,600         $   117,341         $    37,135
   Adjustments to reconcile net income to
       net cash provided by operating activities:
           Depreciation and amortization                                        124,568              77,925              43,347
           Extraordinary item                                                        --                  --               1,306
           Minority interests                                                    17,610              17,683               9,510
           Non-cash compensation                                                    174                 172                 111
           Distributions received in excess of equity in earnings
              from unconsolidated companies                                       9,308                  --                  --
           Equity in earnings net of distributions received
              from unconsolidated companies                                          --             (12,536)               (322)
           Increase in accounts receivable                                       (2,551)            (14,850)             (8,324)
           Increase in deferred rent receivable                                 (34,047)            (23,371)             (6,210)
           Increase in other assets                                             (22,612)            (29,029)               (388)
           Increase in restricted cash and cash equivalents                      (3,161)               (417)            (15,537)
           Increase in accounts payable, accrued expenses
              and other liabilities                                              22,186              78,796              16,756
                                                                            -----------         -----------         -----------
              Net cash provided by operating activities                         277,075             211,714              77,384
                                                                            -----------         -----------         -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of investment properties                                        (530,807)         (1,523,735)           (460,113)
   Development of investment properties                                         (31,875)             (9,012)                 --
   Capital expenditures - rental properties                                     (31,339)            (22,005)             (2,380)
   Tenant improvement and leasing costs - rental properties                     (68,779)            (53,886)            (20,052)
   (Increase) decrease in restricted cash and cash equivalents                   (2,152)             (4,229)                842
   Investment in unconsolidated companies                                      (147,208)           (278,001)             (3,900)
   Investment in residential development corporations                            35,613            (270,174)            (16,657)
   Increase in notes receivable                                                 (27,298)           (127,786)            (10,918)
   Decrease (increase) in escrow deposits - acquisition of
          investment properties                                                   5,760              (5,600)                140
                                                                            -----------         -----------         -----------
              Net cash used in investing activities                            (798,085)         (2,294,428)           (513,038)
                                                                            -----------         -----------         -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Debt financing costs                                                          (9,567)            (12,132)             (7,081)
   Borrowings under Credit Facility                                             672,150           1,171,000             191,500
   Payments under Credit Facility                                              (362,150)           (861,000)           (171,500)
   Debt proceeds                                                                418,100           1,127,596             152,755
   Debt payments                                                               (376,301)           (493,203)            (92,254)
   Capital distributions - joint venture partner                                 (2,951)             (2,522)            (14,505)
   Capital contributions - joint venture partner                                     --                  --                 750
   Net proceeds from common share offerings                                      40,992           1,345,291             456,333
   Proceeds from exercise of common share options                                   725               1,422                 110
   Net proceeds from preferred share offerings                                  416,000                  --                  --
   Issuance of Operating Partnership units                                           --                  --               1,574
   Distribution of Crescent Operating, Inc. shares to
     unitholders of Operating Partnership and shareholders
     of Crescent Equities                                                            --             (11,907)                 --
   Preferred dividends                                                          (11,700)                 --                  --
   Dividends and unitholder distributions                                      (220,618)           (140,801)            (73,367)
                                                                            -----------         -----------         -----------
               Net cash provided by financing activities                        564,680           2,123,744             444,315
                                                                            -----------         -----------         -----------

INCREASE IN CASH AND CASH EQUIVALENTS                                            43,670              41,030               8,661
CASH AND CASH EQUIVALENTS,
   Beginning of period                                                           66,622              25,592              16,931
                                                                            -----------         -----------         -----------
CASH AND CASH EQUIVALENTS,
   End of period                                                            $   110,292         $    66,622         $    25,592
                                                                            ===========         ===========         ===========
</TABLE>

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



                                       61


<PAGE>   63





                      CRESCENT REAL ESTATE EQUITIES COMPANY
                          NOTES TO FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.   ORGANIZATION AND BASIS OF PRESENTATION:

ORGANIZATION

         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, is a fully integrated real estate company. The
Company, as defined below, provides management, leasing, and development
services with respect to certain of its properties. Crescent Equities is a Texas
real estate investment trust, which became the successor to Crescent Real Estate
Equities, Inc., a Maryland corporation (the "Predecessor Corporation"), on
December 31, 1996, through the merger of the Predecessor Corporation with CRE
Limited Partner, Inc., a Delaware corporation, into Crescent Equities. The
direct and indirect subsidiaries of Crescent Equities include Crescent Real
Estate Equities Limited Partnership (the "Operating Partnership"); Crescent Real
Estate Equities, Ltd. (the "General Partner"), which is the sole general partner
of the Operating Partnership; seven single purpose limited partnerships (formed
for the purpose of obtaining securitized debt) in which the Operating
Partnership owns substantially all of the economic interests directly or
indirectly, with the remaining interests owned indirectly by Crescent Equities
through seven separate corporations, each of which is a wholly owned subsidiary
of the General Partner and a general partner of one of the seven limited
partnerships. The term "Company" includes, unless the context otherwise
requires, Crescent Equities, the Predecessor Corporation, the Operating
Partnership, the General Partner and the other direct and indirect subsidiaries
of Crescent Equities.

         As of December 31, 1998, the Company directly or indirectly owned a
portfolio of real estate assets (the "Properties"). The Properties include 89
office properties (collectively referred to as the "Office Properties") located
primarily in 17 metropolitan submarkets in Texas with an aggregate of
approximately 31.8 million net rentable square feet, seven retail properties
(collectively referred to as the "Retail Properties") with an aggregate of
approximately 0.8 million net rentable square feet, seven full-service hotels
(collectively referred to as the "Hotel Properties") with a total of 2,257 rooms
and two destination health and fitness resorts that can accommodate up to 462
guests daily, real estate mortgages and non-voting common stock representing
interests ranging from 40% to 95% in five unconsolidated residential development
corporations (collectively referred to as the "Residential Development
Corporations"), which in turn, through joint venture or partnership
arrangements, own interests in 13 residential development properties
(collectively referred to as the "Residential Development Properties"), and 89
behavioral healthcare properties (collectively referred to as the "Behavioral
Healthcare Properties"). In addition, the Company owned an indirect 38% interest
in three partnerships (collectively referred to as the "Refrigerated Storage
Partnerships") each of which owned one or more corporations or limited liability
companies (collectively referred to as the "Refrigerated Storage Corporations")
which, as of December 31, 1998, directly or indirectly owned or operated
approximately 101 refrigerated storage properties (collectively referred to as
the "Refrigerated Storage Properties") with an aggregate of approximately 530.1
million cubic feet (21.4 million square feet). The Company also has a 42.5%
partnership interest in a partnership, the primary holdings of which consist of
a 364-room executive conference center and general partner interests, ranging
from one to 50%, in additional office, retail, multi-family and industrial
properties.

         Crescent Equities owns its assets and carries on its operations and
other activities through the Operating Partnership and its other subsidiaries.



                                       62

<PAGE>   64




         The following table sets forth, by subsidiary, the Properties such
subsidiaries own as of December 31, 1998:

<TABLE>
<S>                        <C>
Operating Partnership:     62 Office Properties, six Hotel Properties and five Retail Properties

Crescent Real Estate       The Aberdeen, The Avallon, Caltex House, The Citadel, The Crescent Atrium,
Funding I, L.P.:           The Crescent Office Towers, Regency Plaza One, UPR Plaza and Waterside Commons
("Funding I")

Crescent Real Estate       Albuquerque Plaza,  Barton Oaks Plaza One,  Briargate Office and Research Center,  Hyatt Regency
Funding II, L.P.:          Beaver Creek, MacArthur Center I & II, Ptarmigan Place, Stanford Corporate Centre, Two Renaissance Square
("Funding II")             and 12404 Park Central

Crescent Real Estate       Greenway Plaza Portfolio(1) 
Funding III, IV and V, L.P.:
("Funding III, IV and V")

Crescent Real Estate       Canyon Ranch-Lenox
Funding VI, L.P.:
("Funding VI")

Crescent Real Estate       Behavioral Healthcare Properties
Funding VII, L.P.:
("Funding VII")                             
</TABLE>
----------
(1)      Funding III owns the Greenway Plaza Portfolio, except for the central
         heated and chilled water plant building and Coastal Tower Office
         Property, both located within Greenway Plaza, which are owned by
         Funding IV and Funding V, respectively.

BASIS OF PRESENTATION

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

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

         All information relating to common shares has been adjusted to reflect
the two-for-one stock split effected in the form of a 100% share dividend paid
on March 26, 1997 to shareholders of record on March 20, 1997.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

INVESTMENTS IN REAL ESTATE

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

     Buildings and Improvements                    5 to 40 years
     Tenant Improvements                           Terms of leases
     Furniture, Fixtures and Equipment             3 to 10 years

An impairment loss is recognized, on a property by property basis, when expected
undiscounted cash flows are less than the carrying value of the asset. In cases
where the Company does not expect to recover its carrying costs, the Company
reduces its carrying costs to fair value. No such reductions have occurred to
date.


                                       63

<PAGE>   65



CONCENTRATION OF REAL ESTATE INVESTMENTS

         The majority of the Company's Office and Retail Properties are in the
Dallas/Fort Worth and Houston, Texas metropolitan areas. As of December 31,
1998, these Office and Retail Properties together represented approximately 72%
of the Company's total net rentable square feet in the Office and Retail
Segment. The Dallas/Fort Worth Office and Retail properties accounted for
approximately 39% of that amount, and the Houston Office and Retail Properties
accounted for the remaining approximate 33%. As a result of the geographic
concentration, the operations of the Company could be adversely affected by a
recession or general economic downturn in the areas where these properties are
located.

RESTRICTED CASH AND CASH EQUIVALENTS

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

OTHER ASSETS

         Other assets consist principally of leasing costs and deferred
financing costs. Leasing costs are amortized on a straight-line basis during the
terms of the respective leases, and unamortized lease costs are written off upon
early termination of lease agreements. Deferred financing costs are amortized on
a straight-line basis over the terms of the respective loans.

DEFERRED COMPENSATION ON RESTRICTED SHARES

         Deferred compensation on restricted shares relates to the issuance of
restricted shares to employees of the Company. Such restricted shares are
amortized to expense during the applicable vesting period.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company entered into a forward share purchase agreement with Union
Bank of Switzerland ("UBS") and an equity swap agreement with Merrill Lynch
International ("Merrill Lynch") as further discussed in Note 10, Shareholders'
Equity.

         Effective September 30, 1998, the Company terminated the equity swap
agreement with Merrill Lynch. As of that date, the Company repurchased the
6,659,254 common shares Merrill Lynch held and terminated the additional
contingent share obligation provided for under that agreement by issuing a
$209,299 promissory note due December 14, 1998, which was subsequently extended
to September 14, 1999, following a principal payment of $25,000 on December 14,
1998.

         On August 11, 1998, the Company and UBS exercised the right to extend
the term of the forward share purchase agreement between the Company and UBS
until August 12, 1999.

         At December 31, 1998, the Company had a contingent obligation to
deliver approximately an additional 207,471 common shares to UBS under the
forward share purchase agreement calculated using the Company's average share
price for the quarter.


                                       64

<PAGE>   66





         The carrying values of cash and cash equivalents and short-term
investments are reasonable estimates of their fair values because of the short
maturities of these instruments. The fair value of notes receivable, which
approximates carrying value, is estimated based on year-end interest rates for
receivables of comparable maturity. Notes payable and borrowings under the
Company's line of credit ("Credit Facility") have aggregate carrying values
which approximate their estimated fair values based upon the current interest
rates for debt with similar terms and remaining maturities, without considering
the adequacy of the underlying collateral. Disclosure about fair value of
financial instruments is based on pertinent information available to management
as of December 31, 1998 and 1997.

REVENUE RECOGNITION


         OFFICE & RETAIL PROPERTIES The Company, as a lessor, has retained
substantially all of the risks and benefits of ownership of the Office and
Retail Properties and accounts for its leases as operating leases. Income on
leases, which includes scheduled increases in rental rates during the lease term
and/or abated rent payments for various periods following the tenant's lease
commencement date, is recognized on a straight-line basis. Deferred rent
receivable represents the excess of rental revenue recognized on a straight-line
basis over cash received pursuant to the applicable lease provisions.

         HOTEL PROPERTIES The Company cannot, consistent with its status as a
REIT, operate the Hotel Properties directly. It has leased all of the Hotel
Properties except The Omni Austin Hotel to subsidiaries of Crescent Operating,
Inc. ("COI") pursuant to eight separate leases (See Note 12, Formation and
Capitalization of COI). As of January 1, 1999, the Omni Austin Hotel has been
leased under a separate lease to HCD Austin Corporation, an unrelated third
party. The leases provide for the payment by the lessee of the Hotel Property of
(i) base rent, with periodic rent increases if applicable, (ii) percentage rent
based on a percentage of gross receipts or gross room revenues, as applicable,
above a specified amount, and (iii) a percentage of gross food and beverage
revenues above a specified amount for certain Hotel Properties. Base rental
income under these leases is recognized on a straight-line basis over the terms
of the respective leases. Percentage rental income is recognized on an accrual
basis.

         BEHAVIORAL HEALTHCARE PROPERTIES The Company has leased the Behavioral
Healthcare Properties to Charter Behavioral Health Systems, LLC ("CBHS") under a
triple-net lease. The lease requires the payment of annual minimum rent in the
amount of approximately $43,800 for the period ending June 16, 1999, increasing
in each subsequent year during the remaining 10-year term at a 5% compounded
annual rate. The Company recognizes the rent on a straight-line basis, resulting
in a deferred rent receivable balance due from CBHS of approximately $20,000 at
December 31, 1998. In December 1998, the independent accountants for CBHS, in
connection with their audit of the financial statements for the year ended
September 30, 1998, issued a modified auditors' report related to the ability of
CBHS to continue as a going concern. In October 1998, CBHS hired a new President
and Chief Executive Officer (formerly the Vice President of Operations for the
Southeast Region of Tenet Healthcare), who announced a set of initiatives to
address cost reductions and revenue enhancements for 1999. CBHS has continued to
make timely rent payments to the Company for the first five months of CBHS's
fiscal year; however, management will continue to evaluate the business,
financial condition and results of operations of CBHS in connection with the
collectibility of the deferred rent receivable balance.

INCOME TAXES

         The ongoing operations of the Properties generally will not be subject
to federal income taxes as long as the Company maintains its REIT status. A REIT
will generally not be subject to federal income taxation on that portion of its
income that qualifies as REIT taxable income to the extent that it distributes
such taxable income to its shareholders and complies with certain requirements
(including distribution of at least 95% of its REIT taxable income). As a REIT,
the Company is allowed to reduce REIT taxable income by all or a portion of its
distributions to shareholders. Because distributions have exceeded REIT taxable
income, no federal income tax provision (benefit) has been reflected in the
accompanying consolidated financial statements. State income taxes are not
significant.

                                       65

<PAGE>   67



EARNINGS PER SHARE

         Beginning with the year ended December 31, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share" ("EPS"), which supersedes APB No. 15 for
periods ending after December 15, 1997. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share. Primary EPS is
replaced by Basic EPS, and Fully Diluted EPS is replaced by Diluted EPS. Basic
EPS, unlike Primary EPS, excludes all dilution while Diluted EPS, like Fully
Diluted EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common shares were exercised or converted into common
shares.

<TABLE>
<CAPTION>

                                                          For the year ended December 31,
                                ---------------------------------------   -------------------------------------           
                                                 1998                                    1997                          
                                ---------------------------------------   -------------------------------------           
                                              Wtd. Avg.      Per Share                   Wtd. Avg.   Per Share    
                                   Income      Shares         Amount        Income        Shares       Amount  
<S>                             <C>             <C>         <C>           <C>              <C>        <C>      
Basic EPS -
Net income available            $ 150,584       119,443     $    1.26     $ 117,341        93,709     $    1.25
   to common shareholders                                   =========                                 =========

Effect of dilutive
securities:
   Share and unit options              --         3,903                          --         4,138                
   Preferred shares                    --         3,478                          --            --                
   Equity swap agreement               --           183                          --            --                
   Forward share                                                                                                 
    purchase agreement              3,316           395                          --            --                
                                ---------     ---------                   ---------     ---------                
Diluted EPS -                                                                                                    
Net income available
   to common shareholders       $ 153,900       127,402     $    1.21     $ 117,341        97,847     $    1.20
                                =========     =========     =========     =========     =========     =========


<CAPTION>

                                ---------------------------------------         
                                                  1996                                     
                                ---------------------------------------                     
                                                Wtd. Avg.  Per Share    
                                   Income        Shares     Amount              
                                                                                    
<S>                             <C>              <C>        <C>      
Basic EPS -
Net income available            $  37,135        53,282     $    0.70
   to common shareholders                                   =========

Effect of dilutive
securities:
   Share and unit options              --         1,181                  
   Preferred shares                    --            --                  
   Equity swap agreement               --            --                  
   Forward share                                                         
    purchase agreement                 --            --                  
                                ---------     ---------                  
Diluted EPS -
Net income available
   to common shareholders       $  37,135        54,463     $    0.68
                                =========     =========     =========
</TABLE>



STATEMENTS OF CASH FLOWS

         For purposes of the statements of cash flows, all highly liquid
investments purchased with an original maturity of 90 days or less are included
in cash and cash equivalents.



                                       66

<PAGE>   68



SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                 For the year ended December 31,
                                                               -----------------------------------
                                                                 1998         1997        1996
                                                                 ----         ----        ----
<S>                                                            <C>          <C>          <C>     
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest paid                                                  $145,603     $ 78,980     $ 42,488

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:

Mortgage notes assumed in property acquisitions                $ 46,934     $ 97,923     $142,799
Minority interest - joint venture capital                            --           --       31,985
Conversion of operating partnership units to common
   shares with resulting reduction in minority interest
   and increases in common shares and additional
   paid-in capital                                                4,849        1,018          856
Issuance of operating partnership units in conjunction
   with investments and settlement of an obligation              19,972           --       52,236
Issuance of common shares in conjunction with                                  
   investments                                                   21,000        1,200       25,000
Issuance of restricted common shares                                 --           10           --
Two-for-one common share dividend                                    --          362           --
Debt incurred in conjunction with termination of equity
   swap agreement                                               184,299           --           --
Unrealized loss on available-for-sale securities                  5,037           --           --
Guaranteed return on forward share purchase
   agreement return                                               3,316           --           --
</TABLE>


ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

          On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and presentation of comprehensive income and
its components (generally, total nonowner changes in equity). As a result of the
adoption of SFAS No. 130, comprehensive income has been presented as part of the
statement of shareholders' equity. During the year ended December 31, 1998, the
Company held securities classified as available-for-sale which had unrealized
losses during the period of $5,037. Prior to 1998, the Company's comprehensive
income was not material to the Company's financial statements.

         In March 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 97-11, "Accounting for Internal
Costs Relating to Real Estate Property Acquisitions," which provides that
internal costs of identifying and acquiring operating property should be
expensed as incurred. This pronouncement was effective March 19, 1998, and had
no material impact on the Company's 1998 financial statements.

         Beginning with the fiscal year ended December 31, 1998, the Company
adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which establishes standards for the way that 


                                       67

<PAGE>   69
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997 (See Note 3, Segment Reporting).

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provides that all derivative
instruments should be recognized as either assets or liabilities depending on
the rights or obligations under the contract and that all derivative instruments
be measured at fair value. This pronouncement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, and would not have 
materially impacted the Company's 1998 financial statements.

3.       SEGMENT REPORTING

         The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" for the year ended December 31, 1998. The
Company currently has five major operating segments: the Office and Retail
Segment; the Hospitality Segment; the Refrigerated Storage Segment; the
Residential Development Segment and the Behavioral Healthcare Segment.
Therefore, operating segments for SFAS No. 131 were determined on the same
basis. Management organizes the segments within the Company based on property
type for making operating decisions and assessing performance.

         The Company uses Funds from Operations ("FFO") as the measure of
segment profit or loss. FFO, based on the definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") and as used herein, means net income (loss) (determined in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. NAREIT developed
FFO as a relative measure of performance and liquidity of an equity REIT in
order to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO an
appropriate measure of performance of an equity REIT, and therefore for the
operating segments contained therein. However, the Company's measure of FFO may
not be comparable to similarly titled measures of other REITs because these
REITs may not apply the definition of FFO in the same manner as the Company. 



                                       68


<PAGE>   70
     Selected financial information related to each segment for the years ended
     December 31, 1998, 1997, 1996 is presented below.

<TABLE>
<CAPTION>

                                                                        YEAR ENDED             YEAR ENDED             YEAR ENDED
                                                                    -----------------      -----------------      -----------------
                                                                    DECEMBER 31, 1998      DECEMBER 31, 1997      DECEMBER 31, 1996
                                                                    -----------------      -----------------      -----------------

<S>                                                                 <C>                    <C>                    <C>              
REVENUES:
     Office and Retail Segment                                      $         563,005      $         363,324      $         182,198
     Hospitality Segment                                                       53,355                 37,270                 19,805
     Behavioral Healthcare Segment                                             55,295                 29,789                     --
     Refrigerated Storage Segment                                                  --                     --                     --
     Residential Development Segment                                               --                     --                     --
     Corporate and other                                                       26,688                 16,990                  6,858
                                                                    -----------------      -----------------      -----------------
     TOTAL CONSOLIDATED REVENUE                                     $         698,343      $         447,373      $         208,861
                                                                    =================      =================      =================

FUNDS FROM OPERATIONS:
     Office and Retail Segment                                      $         325,442      $         204,243      $         106,819
     Hospitality Segment                                                       52,375                 36,439                 19,479
     Behavioral Healthcare Segment                                             55,295                 29,789                     --
     Refrigerated Storage Segment                                              28,626                  2,200                     --
     Residential Development Segment                                           58,892                 25,623                  5,707
     Corporate and other adjustments
         Interest expense                                                    (152,214)               (86,441)               (42,926)
         Preferred dividends                                                  (11,700)                    --                     --
         Interest and other income                                             19,696                 15,401                  3,211
         Corporate G & A                                                      (16,264)               (12,858)                (4,674)
                                                                    -----------------      -----------------      -----------------
     TOTAL FUNDS FROM OPERATIONS:                                   $         360,148      $         214,396      $          87,616
                                                                    -----------------      -----------------      -----------------

ADJUSTMENTS TO RECONCILE FUNDS FROM OPERATIONS TO
CONSOLIDATED NET INCOME:
      Depreciation and amortization of real estate assets           $        (115,678)     $         (72,503)     $         (39,290)
      Write-off costs associated with terminated acquisitions                 (18,435)                    --                     --
      Minority interests in joint ventures                                      1,499                  1,434                  1,482
      Adjustment for investments in real estate mortgages
          and equity of unconsolidated companies                              (56,024)                (8,303)                (1,857)
      Preferred share dividends                                                11,700                     --                     -- 
                                                                    -----------------      -----------------      -----------------
CONSOLIDATED NET INCOME BEFORE MINORITY INTEREST AND
      EXTRAORDINARY ITEM                                            $         183,210      $         135,024      $          47,951
                                                                    =================      =================      =================


EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES:
      Office and Retail Segment                                     $              --      $              --      $              --
      Hospitality Segment                                                          --                     --                     --
      Behavioral Healthcare Segment                                                --                     --                     --
      Refrigerated Storage Segment                                                512                  1,200                     --
      Residential Development Segment                                          30,979                 18,771                  3,850
      Corporate and other                                                       7,826                  3,772                     --
                                                                    -----------------      -----------------      -----------------
      TOTAL EQUITY IN NET INCOME OF UNCONSOLIDATED
      COMPANIES                                                     $          39,317      $          23,743      $           3,850
                                                                    =================      =================      =================

IDENTIFIABLE ASSETS:
      Office and Retail Segment                                     $       3,214,208      $       2,651,877      $       1,341,252
      Hospitality Segment                                                     453,583                363,424                262,885
      Behavioral Healthcare Segment                                           386,434                384,796                     --
      Refrigerated Storage Segment                                            277,856                153,994                     --
      Residential Development Segment                                         289,615                317,950                 37,069
      Corporate and other                                                     421,751                307,939                 89,716
                                                                    -----------------      -----------------      -----------------
      TOTAL IDENTIFIABLE ASSETS                                     $       5,043,447      $       4,179,980      $       1,730,922
                                                                    =================      =================      =================
</TABLE>






                                       69

<PAGE>   71




         COI and CBHS are the largest single lessees of the Company in terms of
total rental revenues derived through their leases. Total rental revenues from
each of COI and CBHS for the year ended December 31, 1998 were 8% of the
Company's total rental revenues. COI was the sole lessee of the Hotel Properties
for the year ended December 31, 1998, and CBHS was the sole lessee of the
Behavioral Healthcare Properties during that period. No other lessee
individually accounted for more than 4% of the respective segment revenues.


4. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES:

        The following is a summary of the Company's ownership in significant
unconsolidated companies:

<TABLE>
<CAPTION>

                                                                                           COMPANY'S OWNERSHIP
                   ENTITY                                CLASSIFICATIONS                 AS OF DECEMBER 31, 1998
---------------------------------------------- ------------------------------------ -----------------------------------
<S>                                            <C>                                   <C>
Desert Mountain Development Corporation        Residential Development Corporation                95%(1)
Houston Area Development Corp.                 Residential Development Corporation                94%(1)
The Woodlands Land Company, Inc.               Residential Development Corporation                95%(1)
Crescent Development Management Corp.          Residential Development Corporation                90%(1)
Mira Vista Development Corp.                   Residential Development Corporation                94%(1)
Crescent CS Holdings Corp.                             Crescent Subsidiary                        95%(2)
Crescent CS Holdings II Corp.                          Crescent Subsidiary                        95%(2)
The Woodlands Commercial
    Properties Company, L.P.                 Other (various commercial properties)              42.5%
Main Street Partners, L.P.                    Other (office property - Bank One                   50%
                                                             Center)
</TABLE>


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

(1)      See Item 2. Residential Development Properties and the Residential
         Development Properties Table included in that section for the
         Residential Development Corporation's ownership interest in Residential
         Development Properties.

(2)      The Crescent Subsidiaries have a 40% interest in three partnerships
         each of which owns one or more corporations or limited liability
         companies. Accordingly, each of the Crescent Subsidiaries has an
         indirect 40% interest in the Refrigerated Storage Properties.

The Company reports its share of income and losses based on its ownership
interest in the respective equity investments. The following summarized
information for all unconsolidated companies has been presented on an aggregate
basis and classified under the captions "Residential Development Corporations,"
"Refrigerated Storage Corporations," and "Other," as applicable, as of December
31, 1998.


                                       70


<PAGE>   72
BALANCE SHEETS AT DECEMBER 31, 1998:

<TABLE>
<CAPTION>

                                             RESIDENTIAL      REFRIGERATED
                                             DEVELOPMENT        STORAGE
                                             CORPORATIONS     CORPORATIONS        OTHER
                                             ------------     ------------     ------------

<S>                                         <C>              <C>              <C>         
Real estate, net                             $    623,106     $  1,308,059     $    475,322
Cash                                               25,849           14,219           31,582
Other assets                                      156,782          420,934           86,641
                                             ------------     ------------     ------------
     Total Assets                            $    805,737     $  1,743,212     $    593,545
                                             ============     ============     ============

Notes payable                                $    295,998     $    617,166     $    258,000
Notes payable to the Company                      164,578               --           12,085
Other liabilities                                 131,874          396,836           42,192
Equity                                            213,287          729,210          281,268
----------------------------------------     ------------     ------------     ------------
                                                                                    
     Total Liabilities and Equity            $    805,737     $  1,743,212     $    593,545
                                             ============     ============     ============

Company's investments in real estate
    mortgages and equity of uncon-
    solidated companies                      $    289,615     $    277,856     $    176,045
                                             ============     ============     ============
</TABLE>




          SUMMARY STATEMENTS OF OPERATIONS:

<TABLE>
<CAPTION>

                                                              FOR THE YEAR ENDED
                                                              DECEMBER 31, 1998
                                               ----------------------------------------------
                                                RESIDENTIAL     REFRIGERATED
                                               DEVELOPMENT        STORAGE
                                               CORPORATIONS     CORPORATIONS        OTHER
                                               ------------     ------------     ------------

<S>                                           <C>                <C>                <C>           
Total revenues ...........................     $    360,191     $    567,867     $     82,473
Total expenses ...........................          307,546          559,013           66,118
                                               ------------     ------------     ------------
Net income ...............................     $     52,645     $      8,854     $     16,355
                                               ============     ============     ============

Company's equity in net income 
   of unconsolidated companies ...........     $     30,979     $        512     $      7,826
                                               ============     ============     ============
</TABLE>


5.  OTHER ASSETS, NET:

     Other assets, net consist of the following:

<TABLE>
<CAPTION>


                                              December 31,
                                        ------------------------
                                           1998           1997
                                        ---------      ---------

<S>                                     <C>            <C>      
Leasing costs .....................     $  76,385      $  56,740
Deferred financing costs ..........        35,655         26,088
Escrow deposits ...................            50          5,810
Prepaid expenses ..................         2,829          3,451
Other .............................        44,144         36,453
                                        ---------      ---------
                                          159,063        128,542
Less - Accumulated amortization ...       (48,519)       (29,861)
                                        ---------      ---------
                                        $ 110,544      $  98,681
                                        =========      =========
</TABLE>




                                       71


<PAGE>   73

6.   NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:

<TABLE>
<CAPTION>


The following is a summary of the Company's debt financing at December 31,                        December 31,
1998 and 1997:                                                                             -------------------------

                                                                                            1998                1997
                                                                                           -----                ----
SECURED DEBT

<S>                                                                                      <C>                  <C>
BankBoston Term Note due October 30, 2001, bears interest at Eurodollar plus 325
basis points or Base Rate plus 100 basis points (at December 31, 1998, the rate
was 8.31% based on Eurodollar) with a three-year interest-only term secured by
Greenway I and IA, BP Plaza, Washington Harbour, Bank One Tower, Frost Bank
Plaza, Central Park Plaza and 3333 Lee Parkway Office Properties with a combined
book value of $374,679..........................................................          $ 260,000(1)                --

LaSalle Note I bears interest at 7.83% with an initial seven-year interest-only
term (through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity in August 2027(2), secured by the
Funding I Properties with a combined book value of $305,959.....................            239,000              239,000

Merrill Lynch Promissory Note due September 14, 1999(3), bears interest at
30-day LIBOR plus 200 basis points (at December 31, 1998, the rate was 7.06%)
with an interest-only term, secured by the Houston Center mixed-use Property
complex with a book value of $271,479...........................................            184,299                   --

LaSalle Note II bears interest at 7.79% with an initial seven-year interest-only
term (through March 2003), followed by principal amortization based on a 25-year
amortization schedule through maturity in March 2028(4), secured by the Funding
II Properties with a combined book value of $308,828............................            161,000              161,000

LaSalle Note III due July 1999, bears interest at 30-day LIBOR plus a weighted
average rate of 2.135% (at December 31, 1998 the rate was 7.20%, subject to a
rate cap of 10%) with an interest-only term, secured by the Funding III, IV and
V Properties with a combined book value of $242,096.............................            115,000              115,000

Chase Manhattan Note due September 30, 2001, bears interest at 30-day LIBOR plus
an average rate of 1.75% (at December 31, 1998, the rate was 6.81%) with an
interest-only term, secured by the Fountain Place Office Property with a book
value of $112,927...............................................................             97,123               97,123

CIGNA Note due December 2002, bears interest at 7.47% with an interest-only
term, secured by the MCI Tower Office Property and Denver Marriott City Center
Hotel Property with a combined book value of $99,050............................             63,500               63,500

Metropolitan Life Note II due December 2002, bears interest at 6.93% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Energy Centre Office Property with a book value of
$74,389.........................................................................             44,364               45,000

Metropolitan Life Note III due December 1999, bears interest at 7.74% with an
interest-only term, secured by the Datran Center Office Property with a book
value of $70,076................................................................             40,000                   --

Northwestern Note due January 2003, bears interest at 7.65% with an
interest-only term, secured by the 301 Congress Avenue Office Property with a
book value of $45,607...........................................................             26,000               26,000

</TABLE>


                                       72

<PAGE>   74

<TABLE>

<S>                                                                                       <C>                 <C>
Metropolitan Life Note I due September 2001, bears interest at 8.88% with
monthly principal and interest payments based on a 20-year amortization
schedule, secured by five of The Woodlands Office Properties with a combined
book value of $18,051...........................................................             11,777               12,109

Nomura Funding VI Note bears interest at 10.07% with monthly principal and
interest payments based on a 25-year amortization schedule through July 2020(5),
secured by the Funding VI property with a book value of $33,799.................              8,586                8,692

Metropolitan Life Note IV due December 1999, bears interest at 7.11% with
monthly principal and interest payments based on a 15-year amortization
schedule, secured by the Datran Center Office Property with a book value of
$70,076.........................................................................              6,752                   --

Rigney Note due June 2012, bears interest at 8.50% with quarterly principal and
interest payments based on a 15-year amortization schedule, secured by a parcel
of land with a book value of $16,885............................................                755                  800


UNSECURED DEBT

Line of Credit with BankBoston, N.A. ("BankBoston") ("Credit Facility") (see                                           
description of Credit Facility below)...........................................            660,000              350,000

BankBoston Term Note due March 1998, bears interest at Eurodollar rate Plus 120
basis points (at December 31, 1997, the rate was 7.14%).........................                 --               91,900

BankBoston Term Note due August 1998, bears interest at Eurodollar rate plus 120
basis points (at December 31, 1997, the rate was 7.14%).........................                 --              100,000

2007 Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only
term, due September 2007(6).....................................................            250,000              250,000

2002 Notes bear interest at a fixed rate of 7.00% with a five-year interest-only
term, due September 2002(6).....................................................            150,000              150,000
                                                                                        -----------          -----------

Total Notes Payable                                                                     $ 2,318,156          $ 1,710,124
                                                                                        ===========          ===========
</TABLE>


------------------------------------------------
(1)      On February 10, 1999, this term note was increased to $320,000    
         based on the inclusion of the Addison and Reverchon Plaza Office
         Properties in the pool of Properties securing this term note.

(2)      In August 2007, the interest rate increases, and the Company is
         required to remit, in addition to the monthly debt service payment,
         excess property cash flow, as defined, to be applied first against
         principal until the note is paid in full and thereafter, against
         accrued excess interest, as defined. It is the Company's intention to
         repay the note in full at such time (August 2007) by making a final
         payment of approximately $220,000.

(3)      On December 14, 1998, the Company and Merrill Lynch modified the
         note. In connection with the modification, the Company made a payment
         of $25,000 of principal on December 14, 1998, the term of the note was
         extended to September 14, 1999, and the interest rate was increased to
         an initial rate of 200 basis points above the 30-day LIBOR rate. In
         connection with this extension, the Company paid an extension rate fee
         of $1,800.

(4)      In March 2006, the interest rate increases, and the Company is required
         to remit, in addition to the monthly debt service payment, excess
         property cash flow, as defined, to be applied first against principal
         until the note is paid in full and thereafter, against accrued excess
         interest, as defined. It is the Company's intention to repay the note
         in full at such time (March 2006) by making a final payment of
         approximately $154,000.



                                       73


<PAGE>   75


(5)      The Company has the option to defease the note by purchasing Treasury
         obligations in an amount sufficient to pay the note without penalty. In
         July 2010, the interest rate due under the note will change to a
         10-year Treasury yield plus 500 basis points or, if the Company so
         elects, it may repay the note without penalty.

(6)      The notes are unsecured and require payments of interest only during
         their terms. The interest rates on the notes were subject to temporary
         increase by 50 basis points in the event that a registered offer to
         exchange the notes for the notes of the Company with terms identical in
         all material respects to the notes is not consummated or a shelf
         registration statement with respect to the resale of the notes is not
         declared effective by the Securities and Exchange Commission on or
         before March 21, 1998. The interest rates on the notes were increased
         by 50 basis points temporarily (until July 2, 1998), because the
         exchange offer was not completed by March 21, 1998. The interest rates
         on the notes were also permanently increased (on July 28, 1998) by 37.5
         basis points due to a lower than investment grade rating (as defined in
         the notes) by specified rating agencies. The indenture requires the
         Company to maintain compliance with a number of customary financial and
         other covenants on an ongoing basis, including leverage ratios and debt
         service coverage ratios, limitations on the incurrence of additional
         indebtedness and maintaining the Company's Properties.


Combined aggregate principal maturities of notes payable and borrowings under
the Credit Facility are as follows:

<TABLE>
<CAPTION>

Year
----
<S>                                <C>         
1999 .........................     $    347,302
2000 .........................          661,351
2001 .........................          369,181
2002 .........................          215,655
2003 .........................           72,201
     Thereafter ..............          652,466
                                   ------------
                                   $  2,318,156
                                   ============
</TABLE>

CREDIT FACILITY

         On June 30, 1998, the Credit Facility was increased to $850,000
(currently limited to $750,000 of borrowing capacity, subject to increase based
upon certain events) to enhance the Company's financial flexibility in making
new real estate investments. The interest rate on advances under the Credit
Facility is the Eurodollar rate plus 137 basis points. The Credit Facility is
unsecured and expires in June 2000. In connection with the refinancing of a
BankBoston term note, the Company used $90,000 of the net proceeds of the
refinancing to purchase a 12% participation interest from BankBoston in the
Credit Facility. As a result the Company's borrowing capacity under the Credit
Facility is limited to $660,000. The Credit Facility requires the Company to
maintain compliance with a number of customary financial and other covenants on
an ongoing basis, including leverage ratios based on book value and debt service
coverage ratios, limitations on additional secured and total indebtedness and
distributions, and a minimum net worth requirement. As of December 31, 1998, the
Company was in compliance with all covenants. As of December 31, 1998, the
interest rate was 6.44%.

7.  RENTALS UNDER OPERATING LEASES:

       The Company receives rental income from the leasing of Office Property,
Retail Property, Hotel Property and Behavioral Healthcare Property space under
operating leases. For noncancelable operating leases that were in effect as of
December 31, 1998, future minimum rentals (base rents) during the next five
years and thereafter (excluding tenant reimbursements of operating expenses for
Office and Retail Properties) are as follows:


<TABLE>
<CAPTION>

                         Office and                          Behavioral
                           Retail             Hotel           Healthcare         Combined
                        Properties         Properties         Properties        Properties
                      --------------     --------------     --------------     --------------

<S>                   <C>                <C>                <C>                <C>           
1999 ............     $      440,048     $       37,442     $       44,901     $      522,391
2000 ............            397,857             40,541             47,146            485,544
2001 ............            352,392             41,541             49,504            443,437
2002 ............            282,016             42,241             51,979            376,236
2003 ............            224,810             42,798             54,578            322,186
Thereafter ......            692,196            123,451            352,332          1,167,979
                      --------------     --------------     --------------     --------------
                      $    2,389,319     $      328,014     $      600,440     $    3,317,773
                      ==============     ==============     ==============     ==============
</TABLE>


                                       74




<PAGE>   76

         Generally, the office and retail leases also require that tenants
reimburse the Company for increases in operating expenses above operating
expenses during the base year of the tenants lease. These amounts totaled
$78,708, $42,385 and $20,859 for the years ended December 31, 1998, 1997 and
1996, respectively. These increases are generally payable in equal installments
throughout the year, based on estimated increases, with any differences adjusted
at year end based upon actual expenses.

         The Company recognized percentage lease revenue from the Hotel
Properties of approximately $13,848, $9,678 and $4,493 for the years ended
December 31, 1998, 1997 and 1996, respectively.

         (See Note 2, Summary of Significant Accounting Policies, for further
discussion of revenue recognition, and Note 3, Segment Reporting, for further
discussion of significant tenants.)

8.  COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

         The Company has eleven properties located on land that is subject to
long-term ground leases which expire between 2001 and 2080. The Company also
leases parking spaces in a parking garage adjacent to one of its Properties
pursuant to a lease expiring in 2021. Lease expense associated with these leases
during each of the three years ended December 31, 1998, 1997, and 1996 was
$2,482, $1,247 and $681, respectively. Future minimum lease payments due under
such leases as of December 31, 1998, are as follows:

<TABLE>
<CAPTION>

                                   Leases
                                 Commitments
                               ---------------

<S>                            <C>            
1999.......................    $         2,266
2000.......................              2,275
2001.......................              2,258
2002.......................              2,185
2003.......................              2,191
Thereafter.................            101,203
                               ---------------
                               $       112,378
                               ===============
</TABLE>

CONTINGENCIES

STATION CASINOS, INC.

         The Company was a party to an Agreement and Plan of Merger dated
January 16, 1998, as amended, (the "Merger Agreement"), between the Company and
Station Casinos, Inc. ("Station"). Pursuant to the Merger Agreement, Station
would have merged with and into the Company (the "Merger"). On July 27, 1998,
Station canceled its joint annual and special meeting of its common and
preferred stockholders scheduled for August 4, 1998, at which the common and
preferred stockholders were to vote on the Merger. The Company subsequently
notified Station that it was exercising its termination rights under the Merger
Agreement based on Station's material breaches of the Merger Agreement. Under
the Merger Agreement, the Company has the right to terminate the Merger
Agreement if a material breach by the other party is not cured within 10
business days after notice. The Company subsequently notified Station that the
Merger Agreement had been terminated in accordance with its terms. Station and
the Company are currently involved in litigation relating to the Merger
Agreement. Each of Station and the Company are seeking damages from the other
and declaratory relief. In addition, the action by Station seeks, among other
matters, an order of specific performance requiring the Company to purchase
$115,000 of a class of Station's redeemable preferred stock and damages
consisting of compensatory damages (which Station states to be in excess of
$400,000).




                                       75


<PAGE>   77

         The Company intends to pursue its claims against Station and to
continue to contest Station's claims vigorously. As with any litigation, it is
not possible to predict the resolution of the pending actions. The Company
believes that the outcome of the pending litigation with Station will not have a
material adverse effect on the Company's financial condition or results of
operations.

TOWER REALTY TRUST, INC.

         The Company was a party to an Amended and Restated Agreement and Plan
of Merger, dated August 11, 1998 (the "Tower Merger Agreement"), among the
Company, Tower Realty Trust, Inc. ("Tower"), Reckson Associates Realty
Corporation ("Reckson") and Metropolitan Partners, LLC ("Metropolitan"), a newly
formed limited liability company owned equally by the Company and Reckson
(collectively, the "Buying Entities"), pursuant to which Tower would have merged
with and into Metropolitan.

         On November 2, 1998, Tower filed suit against the Buying Entities for
declaratory and other relief, including damages of not less than $75,000,
arising out of the alleged anticipatory repudiation by the Buying Entities of
the Tower Merger Agreement. Tower's lawsuit followed meetings in which
representatives of the Buying Entities had questioned, among other things,
whether Tower could meet certain conditions to closing. The Buying Entities
subsequently advised Tower that they had not terminated the Tower Merger
Agreement and considered the Tower Merger Agreement to be in full force and
effect, subject to its terms and conditions.

         As of December 8, 1998, Tower, Reckson, and Metropolitan entered into a
revised agreement and plan of merger (the "Revised Tower Merger Agreement") that
superseded the Tower Merger Agreement to which the Company was a party. In
connection with the Revised Tower Merger Agreement, the Company made a $10,000
capital contribution to Metropolitan in December 1998 and agreed to make an
additional $75,000 capital contribution to Metropolitan in exchange for a
preferred interest. In addition, the Company and Tower entered into mutual
releases, in which each released the other from all claims relating to the Tower
Merger Agreement. Tower's release of the Company provides for the dismissal of
Tower's suit against the Buying Entities without prejudice, but the release
states that it shall become void and unenforceable if all of the conditions to
the funding of the $75,000 capital contribution by the Company to Metropolitan
have been met, but the Company fails to fully fund its $75,000 capital
contribution to Metropolitan. The Company's release of Tower states that it
shall become void and unenforceable if, but only if, the release from Tower to
the Company becomes void and unenforceable.

         The funding by the Company of the additional $75,000 capital
contribution to Metropolitan and the merger of Tower with Metropolitan are
expected to close in the second quarter of 1999.

ENVIRONMENTAL MATTERS

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

9.  STOCK AND UNIT BASED COMPENSATION PLANS:

STOCK OPTION PLANS

         The Company has two stock incentive plans, the 1995 Stock Incentive
Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994 Plan"). In
June 1996, the shareholders amended the 1995 Plan, which increased the maximum
number of options and/or restricted shares that the Company may grant to
2,850,000 shares. The maximum aggregate number of shares available for grant
under the 1995 Plan increases automatically on January 1 of each year by an
amount equal to 8.5% of the increase in the number of common shares and units
outstanding since January 1 of the preceding year, subject to certain adjustment
provisions. As of January 1, 1999, the number of shares the Company may grant
under the 1995 Plan is 9,229,680. Under the 1995 Plan, the Company had granted,
net of forfeitures, options and restricted shares of 4,680,272 and 23,934,
respectively, through December 


                                       76


<PAGE>   78


31, 1998. Due to the approval of the 1995 Plan, additional options and
restricted shares will no longer be granted under the 1994 Plan. Under the 1994
Plan, the Company had granted, net of forfeitures, 2,510,800 options and no
restricted shares. Under both Plans, options are granted at a price not less
than the market value of the shares on the date of grant and expire ten years
from the date of grant. The options that have been granted under the 1995 Plan
vest over five years, with the exception of 500,000 options that vest over two
years. The options that have been granted under the 1994 Plan vest over periods
ranging from one to five years.

         A summary of the status of the Company's 1994 and 1995 Plans as of
December 31, 1998, 1997 and 1996 and changes during the years then ended is
presented in the table below:

                              STOCK OPTION PLANS


<TABLE>
<CAPTION>

                                                      1998                      1997                       1996
                                            -----------------------    ------------------------    ------------------------
                                                                        Options                    Options
                                             Options to                   to                         to
                                             Acquire       Wtd. Avg.    Acquire       Wtd. Avg.    Acquire       Wtd. Avg.  
                                              Shares       Exercise      Shares       Exercise     Shares        Exercise
                                              (000)          Price        (000)        Price        (000)         Price
                                             --------      --------     --------      --------     --------      --------

<S>                                          <C>        <C>             <C>        <C>             <C>        <C>     
Outstanding as of January 1,                    4,943      $     16        4,681      $     15        3,050      $     13
Granted                                         2,728            32          485            28        1,760            18
Exercised                                         (52)           18         (134)           14          (39)           13
Forfeited                                        (652)           29          (89)           21          (90)           16
Expired                                            --            --           --            --           --            --
                                             --------     --------      --------     --------      --------      --------
Outstanding/Wtd. Avg. as of December 31,        6,967      $     21        4,943      $     16        4,681      $     15
                                             --------      --------     --------      --------     --------      --------
Exercisable/Wtd. Avg. as of December 31,        3,727      $     15        3,285      $     14        2,258      $     13
</TABLE>


         The following table summarizes information about the options
outstanding and exercisable at December 31, 1998:

<TABLE>
<CAPTION>


                                       Options Outstanding                             Options Exercisable
                        --------------------------------------------------------   -------------------------------------
     Range of           Number Outstanding    Wtd. Avg. Years        Wtd. Avg.      Number Exercisable       Wtd. Avg.
  Exercise Prices         at 12/31/98            Remaining           Exercise          at 12/31/98            Exercise
                             (000)           Before Expiration        Price              Price                Price
--------------------    ------------------   -----------------   ---------------   -------------------   ---------------

<S>                      <C>                 <C>                <C>                <C>                   <C>            
   $11 to 18                       3,736           5.8 years     $            14               3,297     $            13
   $19 to 27                         919           8.5                        23                 259                  23
   $28 to 39                       2,312           9.3                        32                 171                  32
                         ---------------     ---------------     ---------------     ---------------     ---------------
   $11 to 39                       6,967           7.3 years     $            21               3,727     $            15
                         ===============     ===============     ===============     ===============     ===============
</TABLE>


UNIT PLANS

         The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not
trust managers, officers or 10% shareholders of the Company. An aggregate of
100,000 common shares are reserved for issuance upon the exchange of 50,000
units available for issuance to employees and advisors under the 1995 Unit Plan.
As of December 31, 1998, an aggregate of 7,012 units had been distributed under
the 1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of
options. The 1996 Unit Plan provides for the grant of options to acquire up to
2,000,000 units, all of which were granted to the Chief Executive Officer and
Vice Chairman of the Board of the Company in July 1996. The unit options granted
under the 1996 Unit Plan were priced at fair market value on the date of grant,
vest over seven years, and expire ten years from the date of grant. Pursuant to
the terms of the unit options granted under the 1996 Unit Plan, because the fair
market value of the Company's common shares equaled or exceeded $25 for each of
ten consecutive trading days, the vesting of an aggregate of 500,000 units was
accelerated and such units became immediately exercisable in 1996. Under the
1996 Unit Plan, each unit that may be purchased is exchangeable, as a result of
shareholder approval in June 1997, for two common shares.

         A summary of the status of the Company's 1996 Unit Plan as of December
31, 1998 and 1997, and changes during the years then ended is presented in the
table below (assumes each unit is exchanged for two common shares):


                                       77


<PAGE>   79

                         1996 UNIT INCENTIVE OPTION PLAN

<TABLE>
<CAPTION>

                                                           1998                            1997               
                                                 ---------------------------   --------------------------
                                                    Shares                        Shares                     
                                                  Underlying       Wtd. Avg.    Underlying      Wtd. Avg.    
                                                 Unit Options      Exercise    Unit Options     Exercise     
                                                     (000)           Price        (000)           Price      
                                                 ------------     ----------   ------------    ----------

<S>                                              <C>            <C>            <C>             <C>       
Outstanding as of  January 1                           4,000     $       18          4,000     $       18
Granted                                                   --             --             --             --
Exercised                                                 --             --             --             -- 
Forfeited                                                 --             --             --             -- 
Expired                                                   --             --             --             -- 
                                                  ----------     ----------     ----------     ----------
Outstanding/Wtd. Avg. as of December 31                4,000     $       18          4,000     $       18
                                                  ----------     ----------     ----------     ----------
Exercisable/Wtd. Avg. as of December 31                1,857     $       18          1,429     $       18



<CAPTION>


                                                            1996
                                                 --------------------------
                                                    Shares
                                                  Underlying      Wtd. Avg.
                                                 Unit Options     Exercise
                                                     (000)         Price
                                                 ------------    ----------

<S>                                              <C>             <C>
Outstanding as of  January 1                              --     $       --
Granted                                                4,000             18
Exercised                                                 --             --
Forfeited                                                 --             --
Expired                                                   --             --
                                                  ----------     ----------
Outstanding/Wtd. Avg. as of December 31                4,000     $       18
                                                  ----------     ----------
Exercisable/Wtd. Avg. as of December 31                1,000     $       18

</TABLE>




STOCK OPTION AND UNIT PLANS

       The Company applies APB No. 25 in accounting for options granted pursuant
to the 1995 Plan, 1994 Plan and 1996 Unit Plan (collectively, the "Plans").
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
grant dates for awards under the Plans, consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

<TABLE>
<CAPTION>

                                                           FOR THE YEAR ENDED DECEMBER 31,
                                        1998                           1997                            1996
                            ---------------------------     ---------------------------     ---------------------------
                            As reported      Pro forma      As reported      Pro forma      As reported     Pro forma
                            -----------     -----------     -----------     -----------     -----------     -----------

<S>                         <C>             <C>             <C>             <C>             <C>             <C>        
Basic EPS:
Net Income available to  
Common shareholders         $   150,584     $   145,115     $   117,341     $   114,442     $    37,135     $    31,074

Diluted EPS:
Net Income
available to
common shareholders         $   153,900     $   143,431     $   117,341     $   114,442     $    37,135     $    31,074


Basic Earnings per Share    $      1.26     $      1.21     $      1.25     $      1.22     $       .70     $       .58
                                                                                                                       

Diluted Earnings per Share  $      1.21     $      1.17     $      1.20     $      1.17     $       .68     $       .57
</TABLE>



       Because SFAS No. 123 was not required to be applied to options granted
prior to January 1, 1995, the resulting program compensation cost may not be
representative of what is to be expected in future years.

       At December 31, 1998, 1997 and 1996, the weighted average fair value of
options granted was $5.01, $6.52 and $4.59, respectively. The fair value of each
option is estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 1998,
1997 and 1996, respectively: risk free interest rates of 7.0%, 6.7% and 6.8%;
expected dividend yields of 7.0%, 4.0% and 6.2%; expected lives of 10 years and
expected volatility of 26.13%, 19.3% and 17.0%.




                                       78

<PAGE>   80




10. SHAREHOLDERS' EQUITY:

PREFERRED SHARE OFFERINGS

         On February 19, 1998, the Company completed an offering (the "February
1998 Preferred Offering") of 8,000,000 shares of 6 3/4% Series A convertible
cumulative preferred shares (the "Series A Preferred Shares") with a liquidation
preference of $25 per share. Series A Preferred Shares are convertible at any
time, in whole or in part, at the option of the holders thereof into common
shares of the Company at a conversion price of $40.86 per common share
(equivalent to a conversion rate of .6119 common share per Series A Preferred
Share based on the original offering price), subject to adjustment in certain
circumstances. Net proceeds to the Company from the February 1998 Preferred
Offering, after underwriting discounts of $8,000 and other offering costs of
$750 were approximately $191,250. The net proceeds from the February 1998
Preferred Offering were used to repay borrowings under the Credit Facility.
Dividends on the Series A Preferred Shares are cumulative from the date of
original issuance and are payable quarterly in arrears commencing on May 15,
1998. The dividend represents an annualized dividend of $1.69 per share, or $.42
per share per quarter.

         On June 30, 1998, the Company completed an offering (the "June 1998
Preferred Offering") of 6,948,734 Series B convertible preferred shares at
$32.38 per share (the "Series B Preferred Shares") for aggregate total offering
proceeds of approximately $225,000 to The Prudential Insurance Company of
America and certain of its affiliates. The Company used the proceeds from the
offering, net of professional fees, of approximately $224,750, to repay
approximately $170,000 of short-term indebtedness and to make an indirect
investment of approximately $55,900 in five additional Refrigerated Storage
Properties. Based on the underwriting fees the Company has typically paid in
connection with underwritten public offerings, management estimates that if the
shares had been sold in an underwritten public offering, the Company would have
incurred approximately $12,000 in underwriting fees and offering costs. In that
case, the Company would have been required to sell approximately 372,000
additional shares (based on the $32.38 per share price on the date of the
offering) to raise the same amount of net proceeds. On October 7, 1998, the
Series B Preferred Shares became convertible at any time, at the option of the
holder. On November 30, 1998, upon the election of the holder, the Series B
Preferred Shares were converted into 8,400,582 of the Company's common shares at
a conversion rate which was calculated by comparing the investment return
produced by the common shares of the Company and an investment return of a
portfolio of equity REITs as computed by NAREIT. (See Note 14, Subsequent
Events)

COMMON SHARE OFFERING

         On April 23, 1998, the Company completed an offering of 1,365,138
common shares at $32.27 per share (the "April 1998 Unit Investment Trust
Offering") to Merrill Lynch & Co. Net proceeds to the Company from the April
1998 Unit Investment Trust Offering were approximately $43,959. The net proceeds
were used to reduce borrowings outstanding under the Credit Facility.

FORWARD SHARE PURCHASE AGREEMENT

         On August 12, 1997, the Company entered into two transactions with UBS.
In one transaction, the Company sold 4,700,000 common shares to UBS for
approximately $148,000 and received approximately $145,000 in net proceeds. In
the other transaction, the Company entered into a forward share purchase
agreement (the "Forward Share Purchase Agreement") with UBS. On August 11, 1998,
the Company paid a fee of approximately $3,000 to UBS in connection with the
exercise by the Company and UBS of the right to extend the term of the Forward
Share Purchase Agreement until August 12, 1999.

         Under the Forward Share Purchase Agreement, the Company is committed to
settle its obligations under the agreement by purchasing 4,700,000 common shares
from UBS by August 12, 1999. The price to be paid by the Company for the
4,700,000 common shares (the "Settlement Price") will be determined on the date
the Company settles the Forward Share Purchase Agreement and will be calculated
based on the gross proceeds the Company received from the original issuance of
common shares to UBS, plus a forward accretion component equal to 90-day




                                       79

<PAGE>   81

LIBOR plus 75 basis points, minus an adjustment for the Company's distributions
paid to UBS. The forward accretion component represents a guaranteed rate of
return to UBS.

         The Company may fulfill its settlement obligations under the Forward
Share Purchase Agreement in cash or common shares, at its option, at any time on
or before August 12, 1999. In the event that the Company elects to fulfill its
settlement obligations in common shares, UBS will sell, on behalf of the
Company, a sufficient number of common shares to realize the Settlement Price.
If, as a result of an increase in the market price of the common shares, the
number of common shares required to be sold to achieve the Settlement Price is
less than the number of common shares previously issued to UBS, UBS will deliver
common shares to the Company. In contrast, if, as a result of a decrease in the
market price of the common shares, such number of common shares is greater than
the number of common shares previously issued to UBS, the Company will deliver
additional common shares to UBS.

         On a quarterly basis, if the number of common shares previously
delivered to UBS is not sufficient to permit UBS to realize the Settlement Price
through the sale of such common shares, the Company is obligated to deliver
additional common shares to UBS. On November 20, 1998, the Company issued
1,852,162 additional common shares to UBS under the Forward Share Purchase
Agreement as a result of the decline in the market price of the Company's common
shares.

         The Company included in the calculation of diluted earnings per share
for the year ended December 31, 1998, approximately 395,489 common shares. The
Company calculated this number of common shares using the Company's average
share price for the year. According to the terms of the Forward Share Purchase
Agreement, had the Forward Share Purchase Agreement been settled and the closing
share price of $23 on December 31, 1998 been used, the Company would have had a
contingent liability to issue approximately 249,555 common shares. In that
event, the Company's net income - diluted per common share would have remained
unchanged at $1.21 for the year ended December 31, 1998, and the net book value
per common share outstanding at December 31, 1998 would have remained unchanged
at $17.81. (See Note 14, Subsequent Events, for a description of cash collateral
posted on February 18, 1999.)

         To the extent that the Company is obligated, as a result of a further
decline in the market price of the common shares, to issue additional common
shares in the future under the terms of the Forward Share Purchase Agreement,
the issuance will result in a reduction of the Company's net income per common
share and net book value per common share.

EQUITY SWAP AGREEMENT

         On December 12, 1997, the Company entered into two transactions with
Merrill Lynch. In one transaction, pursuant to which the Company obtained
additional equity capital through the issuance of common shares, the Company
sold 5,375,000 common shares at $38.125 per share to Merrill Lynch for $204,900
($199,900 in net proceeds) (the "Merrill Lynch Offering"). The net proceeds to
the Company from the Merrill Lynch Offering were used to repay borrowings under
the Credit Facility. In the other transaction, the Company entered into an
equity swap agreement (the "Swap Agreement") with Merrill Lynch relating to
5,375,000 common shares (the "Settlement Shares"), pursuant to which Merrill
Lynch would sell, as directed by the Company on or before December 12, 1998, a
sufficient number of common shares to achieve net sales proceeds equal to the
market value of the Settlement Shares on December 12, 1997, plus a forward
accretion component, minus an adjustment for the Company's distribution rate.

         On February 20, 1998, and June 25, 1998, the Company issued 525,000
common shares and 759,254 common shares, respectively, to Merrill Lynch,
pursuant to the terms of the Swap Agreement, as a result of the decline in
market price of the common shares from December 12, 1997 through February 12,
1998 and June 12, 1998, respectively. The issuance of these common shares did
not have a material impact on the Company's net income per common share or net
book value per common share.

         Effective September 30, 1998, the Company terminated the Swap Agreement
with Merrill Lynch. As of that date, the Company repurchased the 6,659,254
common shares that Merrill Lynch held and terminated the 




                                       80


<PAGE>   82


additional contingent share obligation provided for under the Swap Agreement by
issuing a $209,299 promissory note (the "Merrill Lynch Note") due December 14,
1998. The Merrill Lynch Note, which provided for interest at the rate of 75
basis points above 30-day LIBOR, is secured by a first mortgage lien on the
Houston Center mixed-use Property complex. On December 14, 1998, the Company and
Merrill Lynch modified the Merrill Lynch Note. In connection with the
modification, (i) the Company made a payment of $25,000 of principal, (ii) the
term of the Merrill Lynch Note was extended to September 14, 1999, and (iii) the
interest rate was increased to an initial rate of 200 basis points above 30-day
LIBOR. In connection with this extension, the Company paid an extension fee of
$1,800.

DISTRIBUTIONS

Common Shares

         The distribution to common shareholders and unitholders paid during the
year ended December 31, 1997, was $140,801 or $1.295 per common share and
equivalent unit.

         The distribution to common shareholders and unitholders paid during the
year ended December 31, 1998, was $220,618 or $1.69 per common share and
equivalent unit.

         Following is the income tax status of dividends paid on common shares
and equivalent units during the years ended December 31, 1998 and 1997 to common
shareholders:

<TABLE>
<CAPTION>

                                               1998       1997
                                             ------     ------

<S>                                          <C>          <C>  
                  Ordinary income            58.8%        74.3%
                  Capital gain                5.6%          --
                  Return of capital          35.6%        25.7%
</TABLE>

Preferred Shares

         There were no preferred shares outstanding during the year ended
December 31, 1997.

         The distribution to preferred shareholders during the year ended
December 31, 1998, was $11,700 or $1.46 per preferred share.

         Following is the income tax status of dividends paid during the years
ended December 31, 1998 and 1997 to preferred shareholders:

<TABLE>
<CAPTION>

                          1998       1997
                         ------     ------

<S>                      <C>       <C>       
Ordinary income          94.4%          --
Capital gain              5.6%          --
</TABLE>

11. MINORITY INTEREST:

         Minority interest represents (i) the limited partnership interests
owned by limited partners in the Operating Partnership, and (ii) joint venture
interests held by third parties. Due to the March 26, 1997 two-for-one common
share split (effected in the form of a 100% share dividend), the exchange factor
has been adjusted in accordance with the Operating Partnership's limited
partnership agreement, and each unit may be exchanged for either two common
shares 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 1998 and 1997, 143,396 and 66,706 units, respectively, were exchanged for
common shares of the Company.



                                       81

<PAGE>   83
12.  FORMATION AND CAPITALIZATION OF COI

       In April 1997, the Company established a new Delaware corporation, COI.
All of the outstanding common stock of COI, valued at $.99 per share, was
distributed, effective June 12, 1997, to those persons who were limited partners
of the Operating Partnership or shareholders of the Company on May 30, 1997, in
a spin-off.

       COI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the Intercompany Agreement between COI
and the Company, pursuant to which each has agreed to provide the other with
rights to participate in certain transactions. As a result of the formation of
COI and the execution of the Intercompany Agreement, persons who own equity
interests in both the Company and COI have the opportunity to participate in the
benefits of both the real estate investments of the Company (including ownership
of real estate assets) and the lease of certain of such assets and the ownership
of other non-real estate assets by COI. The certificate of incorporation, as
amended and restated, of COI generally prohibits COI, for so long as the
Intercompany Agreement remains in effect, from engaging in activities or making
investments that a REIT could make, unless the Company was first given the
opportunity, but elected not to pursue such activities or investments.

       In connection with the formation and capitalization of COI, the Company
provided to COI approximately $50,000 in the form of cash contributions and
loans to be used by COI to acquire certain assets. The Company also made
available to COI a line of credit to be used by COI to fulfill certain ongoing
obligations associated with these assets. As of December 31, 1998, COI had
$27,752 and $34,534 outstanding under the line of credit and term loans,
respectively, with the Company.

13.  ACQUISITIONS AND INVESTMENTS:

OFFICE AND HOTEL PROPERTIES

         During 1998, the Company acquired the following Office and Hotel
Properties from unrelated third parties (certain of the Properties are owned in
fee simple or pursuant to a lessee's interest under a ground lease). The Company
funded these acquisitions through borrowings under the Credit Facility and
borrowings under short-term notes with BankBoston.

<TABLE>
<CAPTION>


                                                                                                          Office
                                                                                                         Property
                                                                                                           Net
                                                                                                        Rentable
                                                    Company's                   Hotel                      Area
    Property Name      Acq. Date   City, State     Ownership %      Acq. Price  Rooms     Apartments   (In Sq. Ft.)
    -------------      ---------   -----------     ------------     ----------  -----     ----------   ------------

<S>                     <C>        <C>             <C>              <C>         <C>        <C>          <C>
    Austin
    Centre/Omni         
      Austin Hotel      1/23/98    Austin, TX           100         $  96,400    314         61            344,000
    Post Oak Central    2/13/98    Houston, TX          100         $ 155,250    N/A         N/A         1,278,000
    Washington Harbour  2/25/98    Washington, D.C.     100         $ 161,000    N/A         N/A           536,000
    Datran Center       5/01/98    Miami, FL            100         $  70,550    N/A         N/A           472,000
    BP Plaza            6/30/98    Houston, TX          100         $  79,100    N/A         N/A           561,000
</TABLE>



REFRIGERATED STORAGE PROPERTIES

         In April 1998, two of the Refrigerated Storage Corporations refinanced
$607,000 of secured and unsecured debt with a weighted average rate of
approximately 12%, with a $550,000 non-recourse, ten-year loan with an interest
rate of 6.89%, secured by 58 Refrigerated Storage Properties.

         On June 1, 1998, the Crescent Subsidiaries and Vornado formed the third
Refrigerated Storage Partnership which acquired, through newly formed
Refrigerated Storage Corporations, nine Refrigerated Storage Properties and the
associated operations from Freezer Services, Inc. for approximately $134,000. On
July 1, 1998, the third Refrigerated Storage Partnership acquired, through newly
formed Refrigerated Storage Corporations, five Refrigerated Storage



                                       82


<PAGE>   84
Properties and the associated operations from Carmar Group, Inc. for
approximately $163,000. The Company's cash investments in connection with these
acquisitions were approximately $36,700 and $55,900, respectively. These
additional 14 Refrigerated Storage Properties contain approximately 90 million
cubic feet (4.1 million square feet) of refrigerated storage space. For a
description of the Company's restructuring of this investment, see Note 14,
Subsequent Events.

PENDING INVESTMENT

         On December 8, 1998, Tower, Reckson and Metropolitan entered into a 
revised agreement and plan of merger that superceded the Tower Merger Agreement
to which the Company was a party, under which Metropolitan has agreed to
acquire Tower for a combination of cash and Reckson exchangeable Class B common
shares. The Company, Reckson and Metropolitan have agreed that the Company's
investment in Metropolitan will be an $85,000 preferred member interest in
Metropolitan. The investment will have a cash flow preference of 7.5% for a
two-year period and may be redeemed by Metropolitan within the two-year period
for $85,000, plus an amount sufficient to provide a 9.5% internal rate of
return to the Company. If Metropolitan does not redeem the preferred interest
upon expiration of the two-year period, the Company may convert the interest
either into (i) a common equity interest in Metropolitan or (ii) shares of
common stock of Reckson at a conversion price of $24.61.

         In connection with the Revised Tower Merger Agreement, the Company
contributed $10,000 of the $85,000 required capital contribution to Metropolitan
in December 1998 and agreed to make the additional $75,000 capital contribution
to Metropolitan when all of the conditions to the funding have been met, which
is expected to occur in the second quarter of 1999. 

PRO FORMA OPERATING RESULTS

       The pro forma financial information for the years ended December 31, 1998
and 1997 assumes completion, in each case as of January 1, 1997, of (i) the
common share offerings in 1997 pursuant to which an aggregate of 39,350,000
common shares were issued and an aggregate of $1,107,022 in net proceeds
received; (ii) the issuance in 1997 of the 2002 Notes and the 2007 Notes (an
aggregate of $400,000) resulting in net proceeds of $394,800; (iii) the 1997
acquisitions of Office, Hotel, Retail, Residential Developments and Refrigerated
Storage Properties, and investment in CBHS; the 1998 acquisitions and 1999
pending investment; (iv) the February 1998 Preferred Offering (described in Note
10); (v) the April 1998 Unit Investment Trust Offering (described in Note 10);
(vi) the June 1998 Preferred Offering (described in Note 10); and (vii) the
September 1998 termination of the Swap Agreement with Merrill Lynch.






                                       83

<PAGE>   85

<TABLE>
<CAPTION>



                                           For the year ended December 31,
                                          ---------------------------------
                                              1998               1997
                                          -------------     --------------
                                            (unaudited)     (unaudited)

<S>                                          <C>            <C>       
Total revenue ..........................     $  711,211     $  638,373
Operating income .......................        128,404        110,877
Income before minority interest ........        176,943        156,296

Net income available to common
  shareholders .........................        136,487        117,854

Basic Earnings Per Common Share:
    Net income .........................     $     1.10     $      .95

Diluted Earnings Per Common
  Share:
  Net income ...........................     $     1.06     $      .92
</TABLE>


   The pro forma operating results combine the Company's consolidated historical
statement of operations for the years ended December 31, 1998 and 1997 with the
following adjustments:

         o   Adjustment to rental income and operating expenses for the 1997 and
             1998 acquired Office Properties; 

         o   Adjustment to rental income for the 1997 and 1998 acquired Hotel
             Properties and 1998 acquired golf course to reflect the lease 
             payment (base rent and percentage rent if applicable) from the 
             hotel and golf course lessee to the Company as calculated by 
             applying the rent provisions (as defined in the lease agreements)
             to the historical revenues of the Hotel Properties and the golf
             course Property;

         o   Adjustment to rental income for the 1997 acquired Behavioral
             Healthcare Properties to reflect the lease payment from CBHS to
             the Company by applying the base rent provisions as set forth in 
             the lease agreement;

         o   Adjustment to equity in net income for The Woodlands, Desert
             Mountain and Refrigerated Storage transactions that occurred in
             1997;

         o   Adjustment to equity in net income of unconsolidated companies for
             the Refrigerated Storage Corporations 1998 acquired Refrigerated
             Storage Properties;

         o   Adjustment to interest income for the notes acquired in connection
             with the 1997 acquisition of substantially all of the assets of
             Carter-Crowley Properties, Inc. and the 1997 loans to COI and
             Desert Mountain Properties Limited Partnership (in which one of the
             Residential Development Corporations holds the majority economic
             interest);
        
         o   Adjustment to interest income for the September 1998 term loan to 
             COI;

         o   Adjustment to increase interest expense as a result of interest
             costs for long and short-term financing for investments;

         o   Adjustment to depreciation based on acquisition prices associated
             with the 1997 and 1998 acquired Office and Hotel Properties, 1998
             acquired golf course and 1997 acquired Behavioral Healthcare
             Properties;

         o   Adjustment to reflect prorated preferred dividends in connection
             with the February 1998 Preferred Offering; and

         o   Adjustment to reflect minority partners' weighted average interest
             in the net income of the Operating Partnership less joint venture
             minority interests assuming completion of share and unit issuances
             as of January 1, 1997.

         These pro forma amounts are not necessarily indicative of what the
actual financial position of the Company would have been assuming the above
investments had been consummated as of the beginning of the period, nor do they
purport to represent the future financial position of the Company.






                                       84

<PAGE>   86

14. SUBSEQUENT EVENTS

         On February 18, 1999, the Company delivered cash collateral of $14.7
million in lieu of the issuance of additional common shares, as permitted under
the Forward Share Purchase Agreement, as a result of a decline in the market
price of the common shares. The Company may issue additional common shares in
substitution for the cash collateral at any time in the future.

         Effective March 12, 1999, the Company, Vornado, the Refrigerated
Storage Partnerships, the Refrigerated Storage Corporations (including all
affiliated entities that owned any portion of the business operations of the
Refrigerated Storage Properties at that time) and COI restructured their
investment in the Refrigerated Storage Properties (the "Restructuring"). In the
Restructuring, the Refrigerated Storage Corporations (including all affiliated
entities that owned any portion of the business operations of the Refrigerated
Storage Properties) sold their ownership of the business operations to a newly
formed partnership (the "Refrigerated Storage Operating Partnership") owned 60%
by Vornado Operating L.P. and 40% by a newly formed subsidiary of COI, in
consideration of the payment of $48,700 by the Refrigerated Storage Operating
Partnership. The Refrigerated Storage Operating Partnership, as lessee, entered
into triple-net master leases of the Refrigerated Storage Properties with
certain of the Refrigerated Storage Corporations. Each of the Refrigerated
Storage Properties is subject to one or more of the leases, each of which has an
initial term of 15 years, subject to two, five-year renewal options. The leases
provide for an aggregate annual base rental rate of $123,000 for the first
through fifth lease years, $126,000 for the sixth through 10th lease years and
$130,500 for the 11th through 15th lease years, plus percentage rent based on
the gross revenues received from customers at the Refrigerated Storage
Properties above a specified amount.

         As a result of the Restructuring, the Refrigerated Storage Partnerships
and the Refrigerated Storage Corporations directly or indirectly own the real
estate assets associated with the Refrigerated Storage Properties. The business
operations associated with the Refrigerated Storage Properties are owned by the
Refrigerated Storage Operating Partnership, in which the Company has no
interest.

         In addition, in connection with the Restructuring and also effective in
March 1999, the Company purchased from COI an additional 4% nonvoting interest
in each of the Crescent Subsidiaries for an aggregate purchase price of $13,200.
As a result, the Company holds an indirect 39.6% interest in the Refrigerated
Storage Partnerships and COI holds an indirect .4% interest in the Refrigerated
Storage Partnerships. The Company also granted COI an option to require the
Company to purchase COI's remaining 1% interest in each of the Crescent
Subsidiaries at such time as the purchase would not, in the opinion of counsel
to the Company, adversely affect the status of Crescent Equities as a REIT for
an aggregate price, payable by the Company, of approximately $3,300.

         In connection with these transactions, the Company established a new
line of credit in the principal amount of $19,500 available to COI at an
interest rate of 9% per annum.

         On March 17, 1999, the Company agreed to issue an additional 12,356
common shares to the former holder of the Series B Preferred Shares in
settlement of a dispute regarding the calculation of the conversion rate used in
the conversion, on November 30, 1998, of the Series B Preferred Shares into the
Company's common shares.

                                       85


<PAGE>   87

15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):


<TABLE>
<CAPTION>


                                                                                   1998
                                                     ------------------------------------------------------------------
                                                       March 31,         June 30,        September 30,     December 31,
                                                     ------------      ------------      -------------     ------------

<S>                                                  <C>               <C>               <C>               <C>         
Revenues .......................................     $    161,149      $    169,104      $    179,793      $    188,297
Income before minority interests and
   extraordinary item ..........................           47,154            48,278            32,795            54,983
Minority interests .............................           (4,746)           (4,834)           (3,217)           (4,813)
Net income applicable to common shareholders
     - basic ...................................           40,833            40,069            26,203            43,479
Net income applicable to common shareholders
     - diluted .................................           40,833            40,069            26,203            46,795
                                                                 
Per share data:
   Basic Earnings Per Common Share .............              .35               .33               .22               .37

   Diluted Earnings Per Common Share ...........              .33               .32               .21               .37
</TABLE>




<TABLE>
<CAPTION>

                                                                                     1997
                                                     ------------------------------------------------------------------
                                                       March 31,        June 30,         September 30,     December 31,
                                                     ------------      ------------      -------------     ------------

<S>                                                  <C>               <C>               <C>               <C>         
Revenues .......................................     $     84,074      $     99,129      $    120,057      $    147,257
Income before minority interests and
   extraordinary item ..........................           20,245            29,186            34,835            50,758
Minority interests .............................           (3,494)           (4,092)           (4,432)           (5,665)
Net income .....................................           16,751            25,094            30,403            45,093
Per share data:
   Basic Earnings Per Common Share .............              .23               .28               .30               .40
   Diluted Earnings Per Common Share ...........              .22               .27               .29               .38
</TABLE>





                                       86

<PAGE>   88
                                                                    SCHEDULE III

                      CRESCENT REAL ESTATE EQUITIES COMPANY
        CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1998
                             (dollars in thousands)


<TABLE>
<CAPTION>
                                                                             Costs
                                                                          Capitalized    Gross Amount at Which
                                                                         Subsequent to         Carried at 
                                                     Initial Costs        Acquisition       Close of Period
                                               ------------------------ --------------- ------------------------
                                                                        Land, Buildings,            Buildings,    
                                                                         Improvements,             Improvements,  
                                                                           Furniture,               Furniture,    
                                                          Buildings and  Fixtures and              Fixtures and   
       Description                                Land     Improvements    Equipment       Land      Equipment    
--------------------------------------------- ----------- -------------  -------------  ----------   -----------  
<S>                                            <C>          <C>          <C>            <C>          <C>          
The Crescent , Dallas, TX                      $    6,723   $  153,383   $    75,284    $    6,723   $  228,667   
Continental Plaza, Fort Worth, TX                   1,375       66,649        34,912         1,375      101,561   
The Citadel, Denver, CO                             1,803       17,259         3,905         1,803       21,164   
MacArthur Center I & II, Irving, TX                   704       17,247         2,633           880       19,704   
Las Colinas Plaza, Irving, TX                       2,576        7,125         1,626         2,582        8,745   
Caltex House, Irving, TX                            2,200       48,744         1,550         2,200       50,294   
Liberty Plaza I & II, Dallas, TX                    1,650       15,956           164         1,650       16,120   
Regency Plaza One, Denver, CO                         950       31,797         1,607           950       33,404   
Waterside Commons, Irving, TX                       3,650       20,135         1,986         3,650       22,121   
The Avallon, Austin, TX                               475       11,207            53           475       11,260   
Two Renaissance Square, Phoenix, AZ                  --         54,412         5,599          --         60,011   
Stanford Corporate Centre, Dallas, TX                --         16,493         1,123          --         17,616   
Hyatt Regency Beaver Creek, Avon, CO               10,882       40,789         9,378        10,882       50,167   
The Aberdeen, Dallas, TX                              850       25,895           304           850       26,199   
Barton Oaks Plaza One, Austin, TX                     900        8,207         1,261           900        9,468   
12404 Park Central, Dallas, TX                      1,604       14,504         1,737         1,604       16,241   
MCI Tower, Denver, CO                                --         56,593           689          --         57,282   
Denver Marriott City Center, Denver, CO              --         50,364         2,261          --         52,625   
The Woodlands Office Properties, Houston, TX       12,007       35,865         2,645        12,153       38,364   
Spectrum Center, Dallas, TX                         2,000       41,096         6,046         2,000       47,142   
Ptarmigan Place, Denver, CO                         3,145       28,815         4,110         3,145       32,925   
6225 North 24th Street, Phoenix, AZ                   719        6,566         2,539           719        9,105   
Briargate Office and Research                                                                                     
    Center, Colorado Springs, CO                    2,000       18,044           638         2,000       18,682   
Albuquerque Plaza, Albuquerque, NM                   --         36,667         1,708          --         38,375   
Hyatt Regency Albuquerque, Albuquerque, NM           --         32,241         2,604          --         34,845   
3333 Lee Parkway, Dallas, TX                        1,450       13,177         3,165         1,468       16,324   
301 Congress Avenue, Austin, TX                     2,000       41,735         5,209         2,000       46,944   
Central Park Plaza, Omaha, NE                       2,514       23,236           106         2,514       23,342   
Canyon Ranch, Tucson, AZ                           14,500       43,038         4,077        18,390       43,225   
The Woodlands Office Properties, Houston, TX        2,393        8,523          --           2,393        8,523   
</TABLE>
                                               
<TABLE>
<CAPTION>
                                                                                                              Life on Which
                                                                                                             Depreciation in
                                                                                                              Latest Income
                                                              Accumulated      Date of        Acquisition     Statement Is
       Description                                  Total     Depreciation   Construction         Date         Computed
---------------------------------------------    ----------   -----------   ------------    -------------   ---------------
<S>                                              <C>          <C>                <C>            <C>             <C> 
The Crescent , Dallas, TX                        $  235,390   $ (141,057)        1985            --             (1) 
Continental Plaza, Fort Worth, TX                   102,936      (35,296)        1982            1990           (1) 
The Citadel, Denver, CO                              22,967      (13,133)        1987            1987           (1) 
MacArthur Center I & II, Irving, TX                  20,584       (5,456)   1982/1986            1993           (1) 
Las Colinas Plaza, Irving, TX                        11,327       (3,356)        1989            1989           (1) 
Caltex House, Irving, TX                             52,494       (6,099)        1982            1994           (1) 
Liberty Plaza I & II, Dallas, TX                     17,770       (1,843)   1981/1986            1994           (1) 
Regency Plaza One, Denver, CO                        34,354       (3,784)        1985            1994           (1) 
Waterside Commons, Irving, TX                        25,771       (2,990)        1986            1994           (1) 
The Avallon, Austin, TX                              11,735       (1,177)        1986            1994           (1) 
Two Renaissance Square, Phoenix, AZ                  60,011       (7,338)        1990            1994           (1) 
Stanford Corporate Centre, Dallas, TX                17,616       (2,343)        1985            1995           (1) 
Hyatt Regency Beaver Creek, Avon, CO                 61,049       (4,310)        1989            1995           (1) 
The Aberdeen, Dallas, TX                             27,049       (3,201)        1986            1995           (1) 
Barton Oaks Plaza One, Austin, TX                    10,368       (1,135)        1986            1995           (1) 
12404 Park Central, Dallas, TX                       17,845       (1,475)        1987            1995           (1) 
MCI Tower, Denver, CO                                57,282       (4,976)        1982            1995           (1) 
Denver Marriott City Center, Denver, CO              52,625       (5,881)        1982            1995           (1) 
The Woodlands Office Properties, Houston, TX         50,517       (7,420)   1980-1993            1995           (1) 
Spectrum Center, Dallas, TX                          49,142       (4,678)        1983            1995           (1) 
Ptarmigan Place, Denver, CO                          36,070       (2,674)        1984            1995           (1) 
6225 North 24th Street, Phoenix, AZ                   9,824         (867)        1981            1995           (1) 
Briargate Office and Research                                                                                       
    Center, Colorado Springs, CO                     20,682       (1,521)        1988            1995           (1) 
Albuquerque Plaza, Albuquerque, NM                   38,375       (2,931)        1990            1995           (1) 
Hyatt Regency Albuquerque, Albuquerque, NM           34,845       (3,332)        1990            1995           (1) 
3333 Lee Parkway, Dallas, TX                         17,792       (1,137)        1983            1996           (1) 
301 Congress Avenue, Austin, TX                      48,944       (3,337)        1986            1996           (1) 
Central Park Plaza, Omaha, NE                        25,856       (1,869)        1982            1996           (1) 
Canyon Ranch, Tucson, AZ                             61,615       (2,591)        1980            1996           (1) 
The Woodlands Office Properties, Houston, TX         10,916         (588)   1995-1996            1996           (1) 
</TABLE>
<PAGE>   89
                                                                    SCHEDULE III


<TABLE>
<CAPTION>
                                                                             Costs
                                                                          Capitalized    Gross Amount at Which
                                                                         Subsequent to         Carried at 
                                                     Initial Costs        Acquisition       Close of Period
                                               ------------------------ --------------- ------------------------
                                                                        Land, Buildings,            Buildings,    
                                                                         Improvements,             Improvements,  
                                                                           Furniture,               Furniture,    
                                                          Buildings and  Fixtures and              Fixtures and   
       Description                                Land     Improvements    Equipment       Land      Equipment    
--------------------------------------------- ----------- -------------  -------------  ----------   -----------  
<S>                                            <C>          <C>          <C>            <C>          <C>          
Three Westlake Park, Houston, TX                    2,920       26,512           563         2,920       27,075   
1615 Poydras, New Orleans, LA                        --         37,087         1,752         1,104       37,735   
Greenway Plaza, Houston, TX                        27,204      184,765        46,550        27,204      231,315   
Chancellor Park, San Diego, CA                      8,028       23,430        (5,991)        2,328       23,139   
The Woodlands Retail Properties, Houston, TX       11,340       18,948           606        11,340       19,554   
Sonoma Mission Inn & Spa, Sonoma, CA               10,000       44,922        12,421        10,000       57,343   
Canyon Ranch, Lenox, MA                             4,200       25,218         7,017         4,200       32,235   
160 Spear Street, San Francisco, CA                  --         35,656         2,368          --         38,024   
Greenway I & IA, Richardson, TX                     1,701       15,312            98         1,701       15,410   
Bank One Tower, Austin, TX                          3,879       35,431         1,388         3,879       36,819   
Frost Bank Plaza, Austin, TX                         --         36,019         2,763          --         38,782   
Greenway II, Richardson, TX                         1,823       16,421            33         1,823       16,454   
55 Madison, Denver, CO                              1,451       13,253           276         1,451       13,529   
44 Cook, Denver, CO                                 1,451       13,253           354         1,451       13,607   
AT&T Building, Denver, CO                           1,366       12,471         1,620         1,366       14,091   
Trammell Crow Center, Dallas, TX                   25,029      137,320         5,293        25,029      142,613   
The Addison                                         1,990       17,998           583         1,990       18,581   
Addison Tower                                         830        7,701           193           830        7,894   
Amberton Tower                                      1,050        9,634           538         1,050       10,172   
Cedar Springs Plaza                                   700        6,549           488           700        7,037   
Concourse Office Park                                 800        7,449           485           800        7,934   
The Meridian                                        1,500       13,613           570         1,500       14,183   
One Preston Park                                      180        1,694           169           180        1,863   
Palidades Central I                                 1,300       11,797           519         1,300       12,316   
Palidades Central II                                2,100       19,176           389         2,100       19,565   
5050 Quorum                                           898        8,243           198           898        8,441   
Reverchon Plaza                                     2,850       26,302           783         2,850       27,085   
Stemmons Place                                       --         37,537           349          --         37,886   
Valley Centre                                         421        3,873           332           421        4,205   
Walnut Green                                          980        8,923           307           980        9,230   
Carter-Crowley Land/Multi-Family, Dallas, TX       46,900        3,600       (29,439)       21,061         --     
Behavioral Healthcare Facilities                   89,000      301,269        (1,398)       87,270      301,601   
Houston Center, Houston, TX                        52,504      224,041         2,416        47,254      231,707   
Four Seasons Hotel, Houston, TX                     5,569       45,138         2,203         5,569       47,341   
Miami Center, Miami, FL                            13,145      118,763         1,551        13,145      120,314   
1800 West Loop, Houston, TX                         4,165       40,857           633         4,165       41,490   
Fountain Place, Dallas, TX                         10,364      103,212         2,446        10,364      105,658   
Energy Centre, New Orleans, LA                      7,500       67,704           898         7,500       68,602   
</TABLE>
                                               
                                               
                                               
                                               
                                               
<TABLE>
<CAPTION>
                                                                                                              Life on Which
                                                                                                             Depreciation in
                                                                                                              Latest Income
                                                              Accumulated      Date of        Acquisition     Statement Is
       Description                                  Total     Depreciation   Construction         Date         Computed
---------------------------------------------    ----------   -----------   ------------    -------------   ---------------
<S>                                              <C>          <C>                <C>            <C>             <C> 
Three Westlake Park, Houston, TX                     29,995       (1,547)        1983            1996           (1) 
1615 Poydras, New Orleans, LA                        38,839       (2,306)        1984            1996           (1) 
Greenway Plaza, Houston, TX                         258,519      (16,423)   1969-1982            1996           (1) 
Chancellor Park, San Diego, CA                       25,467       (1,273)        1988            1996           (1) 
The Woodlands Retail Properties, Houston, TX         30,894       (2,302)        1984            1996           (1) 
Sonoma Mission Inn & Spa, Sonoma, CA                 67,343       (3,798)        1927            1996           (1) 
Canyon Ranch, Lenox, MA                              36,435       (2,636)        1989            1996           (1) 
160 Spear Street, San Francisco, CA                  38,024       (2,132)        1984            1996           (1) 
Greenway I & IA, Richardson, TX                      17,111         (802)        1983            1996           (1) 
Bank One Tower, Austin, TX                           40,698       (1,931)        1974            1996           (1) 
Frost Bank Plaza, Austin, TX                         38,782       (2,070)        1984            1996           (1) 
Greenway II, Richardson, TX                          18,277         (821)        1985            1997           (1) 
55 Madison, Denver, CO                               14,980         (694)        1982            1997           (1) 
44 Cook, Denver, CO                                  15,058         (741)        1984            1997           (1) 
AT&T Building, Denver, CO                            15,457         (764)        1982            1997           (1) 
Trammell Crow Center, Dallas, TX                    167,642       (6,526)        1984            1997           (1) 
The Addison                                          20,571         (722)   1980/1986            1997           (1) 
Addison Tower                                         8,724         (398)   1980/1986            1997           (1) 
Amberton Tower                                       11,222         (402)   1980/1986            1997           (1) 
Cedar Springs Plaza                                   7,737         (324)   1980/1986            1997           (1) 
Concourse Office Park                                 8,734         (355)   1980/1986            1997           (1) 
The Meridian                                         15,683         (561)   1980/1986            1997           (1) 
One Preston Park                                      2,043          (88)   1980/1986            1997           (1) 
Palidades Central I                                  13,616         (501)   1980/1986            1997           (1) 
Palidades Central II                                 21,665         (776)   1980/1986            1997           (1) 
5050 Quorum                                           9,339         (362)   1980/1986            1997           (1) 
Reverchon Plaza                                      29,935       (1,088)   1980/1986            1997           (1) 
Stemmons Place                                       37,886       (1,590)   1980/1986            1997           (1) 
Valley Centre                                         4,626         (164)   1980/1986            1997           (1) 
Walnut Green                                         10,210         (362)   1980/1986            1997           (1) 
Carter-Crowley Land/Multi-Family, Dallas, TX         21,061         --                           --           --    
Behavioral Healthcare Facilities                    388,871      (22,297)   1850-1992            1997           (1) 
Houston Center, Houston, TX                         278,961       (7,482)   1974-1983            1997           (1) 
Four Seasons Hotel, Houston, TX                      52,910       (1,880)        1983            1997           (1) 
Miami Center, Miami, FL                             133,459       (3,505)        1983            1997           (1) 
1800 West Loop, Houston, TX                          45,655       (1,252)        1982            1997           (1) 
Fountain Place, Dallas, TX                          116,022       (3,095)        1986            1997           (1) 
Energy Centre, New Orleans, LA                       76,102       (1,713)        1984            1997           (1) 
</TABLE>
<PAGE>   90
                                                                    SCHEDULE III

<TABLE>
<CAPTION>
                                                                             Costs
                                                                          Capitalized    Gross Amount at Which
                                                                         Subsequent to         Carried at 
                                                     Initial Costs        Acquisition       Close of Period
                                               ------------------------ --------------- ------------------------
                                                                        Land, Buildings,            Buildings,    
                                                                         Improvements,             Improvements,  
                                                                           Furniture,               Furniture,    
                                                          Buildings and  Fixtures and              Fixtures and   
       Description                                Land     Improvements    Equipment       Land      Equipment    
--------------------------------------------- ----------- -------------  -------------  ----------   -----------  
<S>                                            <C>          <C>          <C>            <C>          <C>          
Ventana Country Inn, Big Sur, CA                    2,782       26,744           627         2,782       27,371   
Avallon Phase II, Building V, Austin, TX            1,102         --          10,147           597       10,652   
Austin Centre (including condo's)                   2,007       48,566         1,040         2,007       49,606   
Omni Hotel                                          1,896       44,579          --           1,896       44,579   
Post Oak                                           15,525      139,777         2,399        15,525      142,176   
Washington Harbor                                  16,100      146,438           641        16,100      147,079   
Datran Center                                        --         71,091           174          --         71,265   
BP Plaza                                            3,910       79,190            24         3,910       79,214   
Sonoma Golf Course                                 14,956         --             231        15,187         --     
Plaza Park Garage                                   2,032       14,125         1,185         2,032       15,310   
Washington Harbor Phase II                         15,279          411          (133)       15,188          369   
Crescent Real Estate Equities L.P.                   --           --          14,775          --         14,775   
Other                                              23,270        2,874        13,304        29,719        9,729   
                                               -------------------------------------------------------------------
Total                                          $  523,067   $3,320,648   $   285,657    $  495,972   $3,633,400   
                                               ==========   ==========   ===========    ==========   ==========   
</TABLE>
                                               
                                               
                                               
                                               
                                               
<TABLE>
<CAPTION>
                                                                                                              Life on Which
                                                                                                             Depreciation in
                                                                                                              Latest Income
                                                              Accumulated      Date of        Acquisition     Statement Is
       Description                                  Total     Depreciation   Construction         Date         Computed
---------------------------------------------    ----------   -----------   ------------    -------------   ---------------
<S>                                              <C>          <C>                <C>            <C>             <C> 
Ventana Country Inn, Big Sur, CA                     30,153         (795)   1975-1988            1997           (1) 
Avallon Phase II, Building V, Austin, TX             11,249         (396)        1997            --             (1) 
Austin Centre (including condo's)                    51,613         (850)        1986            1998           (1) 
Omni Hotel                                           46,475       (1,251)        1986            1998           (1) 
Post Oak                                            157,701       (2,968)   1974-1981            1998           (1) 
Washington Harbor                                   163,179       (3,064)        1986            1998           (1) 
Datran Center                                        71,265       (1,189)   1986-1992            1998           (1) 
BP Plaza                                             83,124         (990)        1992            1998           (1) 
Sonoma Golf Course                                   15,187         --           1929            1998           (1) 
Plaza Park Garage                                    17,342         --           1998            --             (1) 
Washington Harbor Phase II                           15,557         --           1998            --             (1) 
Crescent Real Estate Equities L.P.                   14,775       (2,274)        --              --             (1) 
Other                                                39,448         (202)        --              --             (1) 
                                                                                                                    
                                                 -----------------------
Total                                            $4,129,372   $ (387,457)                                           
                                                 ==========   ==========
</TABLE>
<PAGE>   91

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

<TABLE>

<S>                                                    <C>
                  Building and improvements                   5 to 40 years
                  Tenant improvements                         Terms of leases
                  Furniture, fixtures, and equipment          3 to 10 years
</TABLE>

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

<TABLE>
<CAPTION>

                                                 1998             1997             1996
                                             -----------      -----------      -----------

<S>                                          <C>              <C>              <C>        
Real estate investments:
     Balance, beginning of year...........   $ 3,423,130      $ 1,732,626      $ 1,006,706
       Acquisitions.......................       580,694        1,643,587          680,148
       Improvements.......................       145,409           58,634           13,787
       Disposition........................       (19,861)         (11,717)              --
       Consolidation of Joint Venture.....            --               --           31,985
                                             -----------      -----------      -----------
     Balance, end of year.................   $ 4,129,372      $ 3,423,130      $ 1,732,626
                                             ===========      ===========      ===========


Accumulated depreciation:
     Balance, beginning of year...........       278,194          208,808      $   172,267
       Depreciation.......................       109,551           69,457           36,541
       Disposition........................          (288)             (71)              --
                                             -----------      -----------      -----------
     Balance, end of year.................   $   387,457      $   278,194      $   208,808
                                             ===========      ===========      ===========
</TABLE>



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

Not Applicable.

                                    PART III

       Certain information Part III requires is omitted from the Report. The
Registrant will file a definitive proxy statement with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A (the "Proxy
Statement") not later than 120 days after the end of the fiscal year covered by
this Report, and certain information to be included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Compensation Committee Report or the
Performance Graph included in the Proxy Statement.

ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1999.

ITEM 11. EXECUTIVE COMPENSATION

       The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1999.








                                       90
<PAGE>   92

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1999.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements

         Report of Independent Public Accountants

         Crescent Real Estate Equities Company Consolidated Balance Sheets at
         December 31, 1998 and 1997.

         Crescent Real Estate Equities Company Consolidated Statements of
         Operations for the years ended December 31, 1998, 1997 and 1996.

         Crescent Real Estate Equities Company Consolidated Statements of
         Shareholders' Equity for the years ended December 31, 1998, 1997 and
         1996.

         Crescent Real Estate Equities Company Consolidated Statements of Cash
         Flows for the years ended December 31, 1998, 1997 and 1996.

         Crescent Real Estate Equities Company Notes to Financial Statements.

(a)(2)  Financial Statement Schedules

         Schedule III - Crescent Real Estate Equities Company Consolidated Real
         Estate Investments and Accumulated Depreciation at December 31, 1998.

         All other schedules have been omitted either because they are not
         applicable or because the required information has been disclosed in
         the Financial Statements and related notes included in the consolidated
         and combined statements.





                                       91

<PAGE>   93



(a)(3)  Exhibits

     EXHIBIT                            
     NUMBER       DESCRIPTION OF EXHIBIT

       3.01       Restated Declaration of Trust of Crescent Real Estate Equities
                  Company (filed as Exhibit No. 4.01 to the Registrant's
                  Registration Statement on Form S-3 (File No. 333-21905) (the
                  "1997 S-3") and incorporated herein by reference)

       3.02       Amended and Restated Bylaws of Crescent Real Estate Equities
                  Company, as amended (filed as Exhibit No. 3.02 to the
                  Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended September 30, 1998 (the "1998 3Q 10-Q") and
                  incorporated herein by reference

       4.01       Form of Common Share Certificate (filed as Exhibit No. 4.03 to
                  the 1997 S-3 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 (filed as Exhibit 4.07 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997 (the "1997 10-K") 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 Series B Convertible Preferred
                  Shares of the Registrant (filed as Exhibit 4.01 to the
                  Registrant's Current Report on Form 8-K dated June 29, 1998
                  and filed June 30, 1998 and incorporated herein by reference)

       4.05       Form of Certificate of Series B Convertible Preferred Shares
                  (filed as Exhibit 4.05 to the Registrant's Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 1998 (the "1998 2Q
                  10-Q") and incorporated herein by reference)

       4.06       Indenture, dated as of September 22, 1997, between Crescent
                  Real Estate Equities Limited Partnership and State Street Bank
                  and Trust Company of Missouri, N.A. (filed as Exhibit No.
                  4.01 to the Registration Statement on Form S-4 (File No.
                  333-42293) of Crescent Real Estate Equities Limited
                  Partnership (the "Form S-4") and incorporated herein by
                  reference)

       4.07       6-5/8% Note due 2002 (filed as Exhibit No. 4.07 to the 1998 2Q
                  10-Q and incorporated herein by reference)

       4.08       7-1/8% Note due 2007 (filed as Exhibit No. 4.08 to the 1998 2Q
                  10-Q and incorporated herein by reference)

       4.09       Purchase Agreement, dated as of August 11, 1997, between
                  Crescent Real Estate Equities Company, UBS Securities
                  (Portfolio), LLC, and Union Bank of Switzerland, London Branch
                  (filed as Exhibit No. 4.01 to the Registrant's Current Report
                  on Form 8-K dated August 11, 1997 and filed August 13, 1997
                  and incorporated herein by reference)



                                       92

<PAGE>   94



      EXHIBIT                            
      NUMBER      DESCRIPTION OF EXHIBIT

       10.01      Second Amended and Restated Agreement of Limited Partnership
                  of Crescent Real Estate Equities Limited Partnership, dated as
                  of November 1, 1997, as amended (filed herewith)

       10.02      Noncompetition of Richard E. Rainwater, as assigned to 
                  Crescent Real Estate Equities Limited Partnership on May 5, 
                  1994 (filed as Exhibit 10.02 to the 1997 10-K and incorporated
                  herein by reference)

       10.03      Noncompetition Agreement of John C. Goff, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994 (filed as Exhibit 10.03 to the 1997 10-K and incorporated
                  herein by reference)

       10.04      Noncompetition Agreement of Gerald W. Haddock, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994 (filed as Exhibit 10.04 to the 1997 10-K and incorporated
                  herein by reference)

       10.05      Employment Agreement with John C. Goff, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994, and as further amended (filed as Exhibit 10.05 to the
                  1997 10-K and incorporated herein by reference)

       10.06      Amendment No. 5 to the Goff Employment Agreement, dated March
                  10, 1998 (filed as Exhibit 10.29 to the Form S-4 and
                  incorporated herein by reference)

       10.07      Employment Agreement of Gerald W. Haddock, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994, and as further amended (filed as Exhibit 10.06 to the
                  1997 10-K and incorporated herein by reference)

       10.08      Amendment No. 4 to the Haddock Employment Agreement, dated
                  March 10, 1998 (filed as Exhibit 10.30 to the Form S-4 and
                  incorporated herein by reference)

       10.09      Amendment No. 5 to the Haddock Employment Agreement, dated
                  March 1, 1999 (filed herewith)

       10.10      Form of Officers' and Trust Managers' Indemnification
                  Agreement as entered into between the Registrant and each of
                  its executive officers and trust managers (filed as Exhibit
                  No. 10.07 to the Form S-4 and incorporated herein by
                  reference)

       10.11      Crescent Real Estate Equities Company 1994 Stock Incentive
                  Plan (filed as Exhibit No. 10.07 to the Registrant's
                  Registration Statement on Form S-11 (File No. 33-75188) (the
                  "Form S-11") and incorporated herein by reference)

       10.12      Crescent Real Estate Equities, Ltd. First Amended and Restated
                  401(k) Plan, as amended (filed herewith)

       10.13      Second Amended and Restated 1995 Crescent Real Estate Equities
                  Company Stock Incentive Plan (filed as Exhibit 10.13 to the
                  Form S-4 and incorporated herein by reference)


                                       93

<PAGE>   95


       EXHIBIT                            
       NUMBER     DESCRIPTION OF EXHIBIT

       10.14      Amended and Restated 1995 Crescent Real Estate Equities
                  Limited Partnership Unit Incentive Plan (filed as Exhibit
                  99.01 to the Registrant's Registration Statement on Form S-8
                  (File No. 333-3452 and incorporated herein by reference))

       10.15      1996 Crescent Real Estate Equities Limited Partnership Unit
                  Incentive Plan (filed as Exhibit 10.01 to the Registrant's
                  Current Report on Form 8-K dated and filed September 27, 1996
                  and incorporated herein by reference)

       10.16      Master Lease Agreement, dated June 16, 1997, as amended,
                  between Crescent Real Estate Funding VII, L.P. and Charter
                  Behavioral Health Systems, LLC and its subsidiaries, relating
                  to the Magellan Facilities (filed as Exhibit 10.27 to the 1997
                  10-K and incorporated herein by reference)

       10.17      Fifth Amended and Restated Revolving Credit Agreement, dated
                  June 30, 1998, among Crescent Real Estate Limited Partnership,
                  BankBoston, N.A. and the other banks named therein (filed as
                  Exhibit 10.17 to the 1998 2Q 10-Q and incorporated herein by
                  reference)

       10.18      Intercompany Agreement, dated June 3, 1997, between Crescent
                  Real Estate Equities Limited Partnership and Crescent
                  Operating, Inc. (filed as Exhibit 10.2 to the Registration
                  Statement on Form S-1 (File No. 333-25223) of Crescent
                  Operating, Inc. and incorporated herein by reference)

       10.19      Form of Registration Rights, Lock-Up and Pledge Agreement
                  (filed as Exhibit No. 10.05 to the Form S-11 and incorporated
                  herein by reference)

       12.01      Statement Regarding Computation of Ratios of Earnings to Fixed
                  Charges and Preferred Shares Dividends (filed herewith)

       21.01      List of Subsidiaries (filed herewith)

       23.01      Consent of Arthur Andersen LLP (filed herewith)

       27.01      Financial Data Schedule (filed herewith)

(b)      Reports on Form 8-K

                  Form 8-K dated and filed November 24, 1998, for the purpose of
         filing under Item 7 - Financial Statements, Pro Forma Financial
         Information and Exhibits, certain exhibits in connection with the
         Company's issuance of 1,852,162 common shares to UBS.

                  Form 8-K/A dated April 17, 1998, and filed November 24, 1998,
         restating under Item 5 - Other Events, certain factors that may be
         relevant to the Company's forward looking statements.

(c)      Exhibits

         See Item 14(a)(3) above.
                                       94

<PAGE>   96


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1999.

                                 CRESCENT REAL ESTATE EQUITIES COMPANY
                                               (Registrant)

                                 By  /s/ Gerald W. Haddock
                                     ------------------------------------------
                                         Gerald W. Haddock
                                         President and Chief Executive Officer

                                   SIGNATURES

         Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity and on the dates indicated.

<TABLE>
<CAPTION>


          SIGNATURE                                TITLE                                   DATE
          ---------                                -----                                   ----
<S>                                 <C>                                                   <C>
/s/   Richard E. Rainwater          Trust Manager and Chairman of the Board               3/26/99
-------------------------------
      Richard E. Rainwater

/s/   John C. Goff                  Trust Manager and Vice Chairman of the Board          3/26/99
-------------------------------
      John C. Goff

/s/   Gerald W. Haddock             Trust Manager, President and Chief Executive          3/26/99
-------------------------------     Officer (Principal Executive Officer)
      Gerald W. Haddock             

/s/   Jerry R. Crenshaw  Jr.        Controller and Interim Co-Chief                       3/26/99
-------------------------------     Financial Officer (Principal Accounting
      Jerry R. Crenshaw Jr.         Officer)
                                    

/s/   Bruce A. Picker               Vice President, Treasurer and Interim Co-Chief        3/26/99
-------------------------------     Financial Officer (Principal Financial Officer)
      Bruce A. Picker               

                                    Trust Manager
-------------------------------
      Anthony M. Frank

/s/   Morton H. Meyerson            Trust Manager                                         3/26/99
-------------------------------
      Morton H. Meyerson

/s/   William F. Quinn              Trust Manager                                         3/26/99
-------------------------------
      William F. Quinn

/s/   Paul E. Rowsey, III           Trust Manager                                         3/26/99
-------------------------------
      Paul E. Rowsey, III

/s/   Melvin Zuckerman              Trust Manager                                         3/26/99
-------------------------------
      Melvin Zuckerman
</TABLE>



                                       95
<PAGE>   97
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

     EXHIBIT                            
     NUMBER       DESCRIPTION OF EXHIBIT
     ------       ----------------------

<S>               <C> 
       3.01       Restated Declaration of Trust of Crescent Real Estate Equities
                  Company (filed as Exhibit No. 4.01 to the Registrant's
                  Registration Statement on Form S-3 (File No. 333-21905) (the
                  "1997 S-3") and incorporated herein by reference)

       3.02       Amended and Restated Bylaws of Crescent Real Estate Equities
                  Company, as amended (filed as Exhibit No. 3.02 to the
                  Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended September 30, 1998 (the "1998 3Q 10-Q") and
                  incorporated herein by reference)

       4.01       Form of Common Share Certificate (filed as Exhibit No. 4.03 to
                  the 1997 S-3 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 (filed as Exhibit 4.07 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997 (the "1997 10-K") 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 Series B Convertible Preferred
                  Shares of the Registrant (filed as Exhibit 4.01 to the
                  Registrant's Current Report on Form 8-K dated June 29, 1998
                  and filed June 30, 1998 and incorporated herein by reference)

       4.05       Form of Certificate of Series B Convertible Preferred Shares
                  (filed as Exhibit 4.05 to the Registrant's Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 1998 (the "1998 2Q
                  10-Q") and incorporated herein by reference)

       4.06       Indenture, dated as of September 22, 1997, between Crescent
                  Real Estate Equities Limited Partnership and State Street Bank
                  and Trust Company of Missouri, N.A. (filed as Exhibit No.
                  4.01 to the Registration Statement on Form S-4 (File No.
                  333-42293) of Crescent Real Estate Equities Limited
                  Partnership (the "Form S-4") and incorporated herein by
                  reference)

       4.07       6-5/8% Note due 2002 (filed as Exhibit No. 4.07 to the 1998 
                  2Q 10-Q and incorporated herein by reference)

       4.08       7-1/8% Note due 2007 (filed as Exhibit No. 4.08 to the 1998 
                  2Q 10-Q and incorporated herein by reference)

       4.09       Purchase Agreement, dated as of August 11, 1997, between
                  Crescent Real Estate Equities Company, UBS Securities
                  (Portfolio), LLC, and Union Bank of Switzerland, London Branch
                  (filed as Exhibit No. 4.01 to the Registrant's Current Report
                  on Form 8-K dated August 11, 1997 and filed August 13, 1997
                  and incorporated herein by reference)
</TABLE>




<PAGE>   98

<TABLE>
<CAPTION>


      EXHIBIT                            
      NUMBER      DESCRIPTION OF EXHIBIT
      -------     ----------------------

<S>               <C> 
       10.01      Second Amended and Restated Agreement of Limited Partnership
                  of Crescent Real Estate Equities Limited Partnership, dated as
                  of November 1, 1997, as amended (filed herewith)

       10.02      Noncompetition of Richard E. Rainwater, as assigned to 
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994 (filed as Exhibit 10.02 to the 1997 10-K and incorporated
                  herein by reference)

       10.03      Noncompetition Agreement of John C. Goff, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994 (filed as Exhibit 10.03 to the 1997 10-K and incorporated
                  herein by reference)

       10.04      Noncompetition Agreement of Gerald W. Haddock, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994 (filed as Exhibit 10.04 to the 1997 10-K and incorporated
                  herein by reference)

       10.05      Employment Agreement with John C. Goff, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994, and as further amended (filed as Exhibit 10.05 to the
                  1997 10-K and incorporated herein by reference)

       10.06      Amendment No. 5 to the Goff Employment Agreement, dated March
                  10, 1998 (filed as Exhibit 10.29 to the Form S-4 and
                  incorporated herein by reference)

       10.07      Employment Agreement of Gerald W. Haddock, as assigned to
                  Crescent Real Estate Equities Limited Partnership on May 5,
                  1994, and as further amended (filed as Exhibit 10.06 to the
                  1997 10-K and incorporated herein by reference)

       10.08      Amendment No. 4 to the Haddock Employment Agreement, dated
                  March 10, 1998 (filed as Exhibit 10.30 to the Form S-4 and
                  incorporated herein by reference)

       10.09      Amendment No. 5 to the Haddock Employment Agreement, dated
                  March 1, 1999 (filed herewith)

       10.10      Form of Officers' and Trust Managers' Indemnification
                  Agreement as entered into between the Registrant and each of
                  its executive officers and trust managers (filed as Exhibit
                  No. 10.07 to the Form S-4 and incorporated herein by
                  reference)

       10.11      Crescent Real Estate Equities Company 1994 Stock Incentive
                  Plan (filed as Exhibit No. 10.07 to the Registrant's
                  Registration Statement on Form S-11 (File No. 33-75188) (the
                  "Form S-11") and incorporated herein by reference)

       10.12      Crescent Real Estate Equities, Ltd. First Amended and Restated
                  401(k) Plan, as amended (filed herewith)

       10.13      Second Amended and Restated 1995 Crescent Real Estate Equities
                  Company Stock Incentive Plan (filed as Exhibit 10.13 to the
                  Form S-4 and incorporated herein by reference)
</TABLE>




<PAGE>   99

<TABLE>
<CAPTION>


       EXHIBIT                            
       NUMBER     DESCRIPTION OF EXHIBIT
       -------    ----------------------

<S>               <C>
       10.14      Amended and Restated 1995 Crescent Real Estate Equities
                  Limited Partnership Unit Incentive Plan (filed as Exhibit
                  99.01 to the Registrant's Registration Statement on Form S-8
                  (File No. 333-3452 and incorporated herein by reference)

       10.15      1996 Crescent Real Estate Equities Limited Partnership Unit
                  Incentive Plan (filed as Exhibit 10.01 to the Registrant's
                  Current Report on Form 8-K dated and filed September 27, 1996
                  and incorporated herein by reference)

       10.16      Master Lease Agreement, dated June 16, 1997, as amended,
                  between Crescent Real Estate Funding VII, L.P. and Charter
                  Behavioral Health Systems, LLC and its subsidiaries, relating
                  to the Magellan Facilities (filed as Exhibit 10.27 to the 
                  1997 10-K and incorporated herein by reference)

       10.17      Fifth Amended and Restated Revolving Credit Agreement, dated
                  June 30, 1998, among Crescent Real Estate Limited Partnership,
                  BankBoston, N.A. and the other banks named therein (filed as
                  Exhibit 10.17 to the 1998 2Q 10-Q and incorporated herein by
                  reference)

       10.18      Intercompany Agreement, dated June 3, 1997, between Crescent
                  Real Estate Equities Limited Partnership and Crescent
                  Operating, Inc. (filed as Exhibit 10.2 to the Registration
                  Statement on Form S-1 (File No. 333-25223) of Crescent
                  Operating, Inc. and incorporated herein by reference)

       10.19      Form of Registration Rights, Lock-Up and Pledge Agreement
                  (filed as Exhibit No. 10.05 to the Form S-11 and incorporated
                  herein by reference)

       12.01      Statement Regarding Computation of Ratios of Earnings to Fixed
                  Charges and Preferred Shares Dividends (filed herewith)

       21.01      List of Subsidiaries (filed herewith)

       23.01      Consent of Arthur Andersen LLP (filed herewith)

       27.01      Financial Data Schedule (filed herewith)
</TABLE>