<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 333-42293


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

<TABLE>
<S>                                                                             <C>       
                         TEXAS                                                              75-2531304
(State or other jurisdiction of incorporation or organization)                 (I.R.S. Employer Identification Number)
</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: None
        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past ninety (90) days. YES X  NO 
                                                           ---    ----

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

The aggregate market value of the 6,503,431 units of partnership interest of
the registrant held by non-affiliates of the registrant (based on the closing
price on the New York Stock Exchange of $20 13/16 for a common share of
beneficial interest of Crescent Real Estate Equities Company, for which units
of partnership interest of the registrant may be exchanged on a one-for-two
basis) on March 26, 1999 was approximately $271 million.



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                               TABLE OF CONTENTS
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                                                                                                             PAGE
                                    PART I.

<S>         <C>                                                                                              <C>
Item 1.     Business......................................................................................       2
Item 2.     Properties....................................................................................      15
Item 3.     Legal Proceedings.............................................................................      26
Item 4.     Submission of Matters to a Vote of Security Holders...........................................      28

                                    PART II.

Item 5.     Market for Registrant's Common Equity and Related Shareholder Matters.........................      28
Item 6.     Selected Financial Data.......................................................................      30
Item 7.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations.....................................................................      31
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk....................................      53
Item 8.     Financial Statements and Supplementary Data...................................................      55
Item 9.     Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure........................................................      90

                                   PART III.

Item 10.    Directors and Executive Officers of the General Partner of the Registrant.....................      90
Item 11.    Executive Compensation........................................................................      94
Item 12.    Security Ownership of Certain Beneficial Owners and Management................................     100
Item 13.    Certain Relationships and Related Transactions................................................     102

                                    PART IV.

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................     107
</TABLE>

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                                     PART I


ITEM 1.  BUSINESS


                           THE OPERATING PARTNERSHIP

STRUCTURE

         Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP," together with its direct and indirect interests in
limited partnerships, the "Operating Partnership"), was formed under the terms
of the Limited Partnership Agreement dated February 9, 1994. The Operating
Partnership is controlled by Crescent Real Estate Equities Company, a Texas
real estate investment trust (the "Company"), through the Company's ownership
of all of the outstanding stock of Crescent Real Estate Equities, Ltd., a
Delaware corporation ("CREE, Ltd."), which owns an approximate 1% general
partner interest in the Operating Partnership. In addition, the Company owns an
approximate 89% limited partner interest in the Operating Partnership, with the
remaining approximate 10% limited partner interest (equivalent, for purposes of
this presentation, to 6,545,528 units of partnership interest) held by other
partners. The Operating Partnership owns substantially all of the economic
interest directly or indirectly of seven single purpose limited partnerships
(all formed for the purpose of obtaining securitized debt), with the remaining
interests owned indirectly by the Company through seven separate corporations,
each of which is a wholly owned subsidiary of CREE, Ltd. and a general partner
of one of the seven limited partnerships.

         All of the limited partners of the Operating Partnership other than
the Company own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or
"unit of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, the Company's
approximate 89% limited partner interest has been treated as equivalent, for
purposes of this report, to 61,654,947 units, and the remaining approximate 10%
limited partner interest has been treated as equivalent, for purposes of this
report, to 6,545,528 units.

ASSETS, OPERATIONS AND INDUSTRY SEGMENTS


         As of December 31, 1998, the Operating Partnership'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.


         Within these segments, the Operating Partnership, 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 

                                      -2-

<PAGE>   4


             "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 Operating
             Partnership'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 Operating Partnership'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 Operating Partnership's restructuring of its investment in
             the Refrigerated Storage Segment, effective March 12, 1999. As a
             result of this restructuring, the Operating Partnership 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 COI.


         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.

                  BUSINESS OBJECTIVES AND OPERATING STRATEGIES

         The Operating Partnership's investment objectives are to provide
stable cash flow available for quarterly distributions and to increase funds
from operations, and the underlying value, of the Operating Partnership and,
thereby, of the Company over time through the Operating Partnership's
operational and investment activities.

         In response to the challenging market conditions of 1998, management
has renewed its focus on the fundamentals of the Operating Partnership'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 Operating
Partnership continues to reinvest in new developments within this Segment.


         Management believes that, as the Operating Partnership 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 Operating Partnership will continue
to focus on growth in revenues from its existing Property portfolio.


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         The Operating Partnership 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 Operating Partnership's portfolio
             of Office Properties as occupancy and rental rates increase with
             the continued recovery of the markets and submarkets in which the
             Operating Partnership has invested;

         o   achieving a high tenant retention rate at the Operating
             Partnership'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 Operating
             Partnership 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 Operating Partnership 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 Operating Partnership will continue
to employ the corporate, transactional and financial skills of its management
team to assess investment opportunities. The Operating Partnership 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 Operating Partnership 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 Operating Partnership will focus on office properties which
satisfy these criteria and which are located in the Operating Partnership's
core office markets and submarkets. Consistent with its investment strategies,
the Operating Partnership also will consider innovative real estate investments
that offer superior returns on its capital investment.

         Finally, the Operating Partnership 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
Operating Partnership's core business segments.

                                   EMPLOYEES

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

                             ENVIRONMENTAL MATTERS


         The Operating Partnership 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;


                                      -4-
<PAGE>   6


         o   Federal Clean Air Act; and

         o   Toxic Substances Control Act.

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

         Under 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 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 Operating Partnership of
any non-compliance, liability or other claims in connection with any of the
Operating Partnership's Properties. Prior to the Operating Partnership's
acquisition of its Properties, independent environmental consultants conducted
or updated Phase I environmental 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

         The Operating Partnership directly or indirectly 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 Operating Partnership, 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 Operating
Partnership provides management and leasing services for the majority of its
Office and Retail Properties.

         See Item 2. Properties for more information about the Operating
Partnership'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 the Operating Partnership and the Properties owned by such
subsidiaries.

MARKET INFORMATION

         The Office and Retail Properties reflect the Operating Partnership's
strategy of investing in premier assets within markets that have significant
potential for rental growth. In selecting the Office and Retail Properties, the
Operating Partnership 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 Operating Partnership 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 


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significant concentration of retailing alternatives; and cultural centers,
entertainment attractions and recreational facilities. Other factors the
Operating Partnership 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 Operating Partnership's
Office and Retail Properties are located primarily in Dallas/Fort Worth and
Houston, Texas.

         Within its selected submarkets, the Operating Partnership has focused
on premier locations that management believes are able to attract and retain
the highest quality tenants and command premium rents. 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 Operating Partnership
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.

         The Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 Operating
Partnership 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 OPERATING
                              PARTNERSHIP 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 Operating Partnership applies a well-defined leasing strategy in
order to capture the potential rental growth in the Operating Partnership's
portfolio of Office Properties as occupancy and rental rates increase with the
continued recovery of the markets and the submarkets in which the Company has
invested. The Operating Partnership'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. 


                                      -6-
<PAGE>   8


In calculating replacement cost rental rates, management relies on available
third-party data and its own estimates of construction costs (including
materials and labor in a particular market) and assumes replacement cost rental
rates are achieved at a 95% occupancy level. The Operating Partnership believes
that the difference between the two rates is a useful measure of the additional
revenue that the Operating Partnership may be able to obtain from a property,
because the difference should represent the amount by which rental rates would
be required to increase in order to justify construction of new properties. For
the Operating Partnership's Office Properties, the 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 Operating Partnership'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 Operating Partnership has been successful in
renewing or re-leasing office space in these markets at rental rates
significantly above the expiring rental rates.

COMPETITION

         The Operating Partnership believes that it does not have any direct
competition for its Office Properties considered as a group. The Operating
Partnership's Office Properties, primarily Class A properties located within
the Southwest, individually compete against a wide range of property owners and
developers, including property management companies and REITs, 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 Operating Partnership'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 Operating Partnership offers its tenants, together with its
active preventive maintenance program and superior building locations within
markets, enhance the Operating Partnership's ability to attract and retain
tenants for its Office Properties. In addition, on a weighted average basis,
the Operating Partnership owns 18% of the Class A office space in the 30
submarkets in which the Operating Partnership owns Class A office properties,
and 9% of the Class B office space in the five submarkets in which the
Operating Partnership owns Class B office properties. Management believes that
ownership of a significant percentage of office space in a particular market
offers the Operating Partnership the opportunity to reduce property operating
expenses that the Operating Partnership and its tenants pay, enhancing the
Operating Partnership's ability to attract and retain tenants and potentially
resulting in increases in Operating Partnership net revenues. For example,
during 1998, the Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership
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.


                                      -7-
<PAGE>   9


         WASHINGTON HARBOUR. On February 25, 1998, the Operating Partnership
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 Operating Partnership 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 Operating Partnership 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 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 Operating
Partnership and Reckson, entered into a revised agreement and plan of merger
(the "Revised Tower Merger Agreement") that superseded a 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 Operating Partnership'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
Operating Partnership. If Metropolitan does not redeem the preferred interest
within the two-year period, the Operating Partnership 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 per share.

         In connection with the Revised Tower Merger Agreement, the Operating
Partnership 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 Operating Partnership
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 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 Operating Partnership 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.


                                      -8-
<PAGE>   10


         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 Operating
Partnership's Hotel Properties.

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 revenue per available room
("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>                         
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 Operating Partnership'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,


                                      -9-
<PAGE>   11


including national hotel chains and local owners. The Operating Partnership
believes, however, that its destination health and fitness resorts are unique
properties that do not have direct competitors. In addition, the Operating
Partnership 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 Operating Partnership
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 Austin
Hotel is leased to HCD Austin Corporation, an unrelated third party, and COI
has agreed to provide limited asset management services for the Property.

         SONOMA GOLF COURSE. On October 13, 1998, the Operating Partnership
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 Operating Partnership simultaneously entered into a 10-year lease
of the property with COI. The Operating Partnership believes that the golf
course will enhance the amenities provided to the Sonoma Mission Inn & Spa
guests.

                        RESIDENTIAL DEVELOPMENT SEGMENT

OWNERSHIP STRUCTURE

         The Operating Partnership 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 Operating
Partnership's Residential Development Properties.

COMPETITION

         The Operating Partnership's Residential Development Properties compete
against a variety of other housing alternatives in each of their respective
areas. These alternatives include other planned developments, pre-existing
single-family 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., representing the Operating
Partnership'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.


                                      -10-

<PAGE>   12


                          REFRIGERATED STORAGE SEGMENT

ORIGINAL OWNERSHIP STRUCTURE

         Prior to the restructuring of its investment in the Refrigerated
Storage Properties in March 1999, the Operating Partnership, 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 Investments" below). Vornado owned a 60%
interest in the Refrigerated Storage Partnerships, and COI owned a 2% indirect
interest in the Refrigerated Storage Partnerships.

         In order to permit the Company to satisfy certain REIT qualification
requirements, the Operating Partnership (which is not permitted to operate the
Refrigerated Storage Properties because of the status of the Company 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 Operating
Partnership's Refrigerated Storage Properties.

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 Operating Partnership'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 Operating Partnership, 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 

                                      -11-
<PAGE>   13


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 Operating
Partnership 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 COI and Vornado. The partnership agreement for each of the Refrigerated
Storage Partnerships provides for a buy-sell arrangement upon a failure of COI
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 Operating Partnership 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 Operating Partnership 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
Operating Partnership also granted COI an option to require the Operating
Partnership 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 Operating Partnership, adversely affect the status of the Company as a
REIT for an aggregate price, payable by the Operating Partnership, of
approximately $3.3 million.

         In connection with these transactions, the Operating Partnership made
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

                                     -12-

<PAGE>   14


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 Operating Partnership 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 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
Operating Partnership believes that customers generally will select a
refrigerated storage facility based upon the types of services available,
service performance and price.

                         BEHAVIORAL HEALTHCARE SEGMENT

OWNERSHIP STRUCTURE

         On June 17, 1997, the Operating Partnership 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 Operating Partnership 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 Operating Partnership. 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 Operating Partnership 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 Operating Partnership
for the first five months of CBHS's 1999 fiscal year.

         See Item 2. Properties for more information about the Operating
Partnership'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 

                                     -13-

<PAGE>   15


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 Properties 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.

         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 and 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 Operating Partnership 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's business, financial condition and results of operations.


                                     -14-
<PAGE>   16


ITEM 2.  PROPERTIES

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

                               OFFICE PROPERTIES

         The Operating Partnership's Office Properties are located primarily in
Dallas/Fort Worth and Houston, Texas. As of March 26, 1999, the Operating
Partnership'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 Operating Partnership'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 Operating
Partnership's total Office and Retail Segment rental revenues for 1998.

<TABLE>
<CAPTION>

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


                                      -15-
<PAGE>   17
<TABLE>
<CAPTION>

                                                                                                                   WEIGHTED
                                                                                                                    AVERAGE
                                                                                                                  FULL-SERVICE
                                                                                         NET                         RENTAL
                                                                                       RENTABLE                     RATE PER
                                       NO. OF                                YEAR        AREA     PERCENT          LEASED SQ.
    STATE, CITY, PROPERTY            PROPERTIES         SUBMARKET          COMPLETED   (SQ. FT.)    LEASED           FT.(1)
------------------------------------ ---------- -------------------------- ----------- ----------  -----------     -----------
<S>                                   <C>       <C>                         <C>         <C>       <C>       <C>   
   HOUSTON
     Greenway Plaza Office                
     Portfolio ......................     10     Richmond-Buffalo Speedway   1969-1982   4,286,277            92%    $  16.15
     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
                                       -----                                            ----------         -----     --------
COLORADO
   DENVER
     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
                                       -----                                            ----------         -----     --------
</TABLE>



                                      -16-

<PAGE>   18


<TABLE>
<CAPTION>

                                                                                                          WEIGHTED
                                                                                                           AVERAGE
                                                                                                         FULL-SERVICE
                                                                                    NET                    RENTAL
                                                                                  RENTABLE                RATE PER
                                  NO. OF                                YEAR        AREA     PERCENT     LEASED SQ.
    STATE, CITY, PROPERTY       PROPERTIES         SUBMARKET          COMPLETED   (SQ. FT.)    LEASED      FT.(1)
------------------------------- ---------- -------------------------- ----------- ---------- ----------- ------------
<S>                             <C>        <C>                        <C>         <C>        <C>         <C>   
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 Operating Partnership has a 49.5% limited partner interest and a 0.5%
     general partner interest in the partnership that owns Bank One Center.

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

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

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

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

(10) The weighted average full-service rental rate per square foot calculated
     based on base rent payable for Operating Partnership Office Properties as
     of December 31, 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.





                                      -17-
<PAGE>   19





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

<TABLE>
<CAPTION>



                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                   PERCENT                          
                                                                   PERCENT OF     LEASED AT           OFFICE        
                                                      TOTAL          TOTAL        OPERATING          SUBMARKET      
                                       NUMBER       OPERATING      OPERATING      PARTNERSHIP         PERCENT       
                                         OF        PARTNERSHIP    PARTNERSHIP       OFFICE             LEASE/       
     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%
                                     ----------    -----------    -----------     -----------        -----------

FLORIDA
  MIAMI
    CBD .........................             1        782,686              2%             81%(6)             90%
    South Dade/Kendall ..........             2        472,236              1              91                 94
                                     ----------    -----------    -----------     -----------        -----------

    Subtotal/Weighted Average ...             3      1,254,922              3%             85%                90%
                                     ----------    -----------    -----------     -----------        -----------

ARIZONA
  PHOENIX
    Downtown/CBD ................             1        476,373              1%             94%(6)             92%
    Camelback Corridor ..........             1         86,451              0              83                 95
                                     ----------    -----------    -----------     -----------        -----------

    Subtotal/Weighted Average ...             2        562,824              1%             93%                94%
                                     ----------    -----------    -----------     -----------        -----------

WASHINGTON, D.C .................
  WASHINGTON, D.C ...............
    Georgetown ..................             2        536,206              2%             93%                97%
                                     ----------    -----------    -----------     -----------        -----------

<CAPTION>





                                                                                 WEIGHTED  
                                                                                  AVERAGE  
                                                    WEIGHTED                     OPERATING 
                                                    AVERAGE       OPERATING     PARTNERSHIP
                                      OPERATING      QUOTED      PARTNERSHIP      FULL-    
                                     PARTNERSHIP     MARKET         QUOTED       SERVICE   
                                      SHARE OF       RENTAL         RENTAL        RENTAL   
                                       OFFICE       RATE PER       RATE PER      RATE PER  
                                      SUBMARKET       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
                                     -----------     --------    -----------    -----------

FLORIDA
  MIAMI
    CBD .........................             23%    $  28.30    $     28.50    $     23.68
    South Dade/Kendall ..........            100        23.19          23.19          21.02
                                     -----------     --------    -----------    -----------

                                
    Subtotal/Weighted Average ...             33%    $  26.38    $     26.50    $     22.59
                                     -----------     --------    -----------    -----------

ARIZONA
  PHOENIX
    Downtown/CBD ................             27%    $  23.38    $     23.00    $     23.25
    Camelback Corridor ..........              2        26.48          22.00          21.53
                                     -----------     --------    -----------    -----------

                                
    Subtotal/Weighted Average ...             11%    $  23.86    $     22.85    $     23.01
                                     -----------     --------    -----------    -----------

WASHINGTON, D.C .................
  WASHINGTON, D.C ...............
    Georgetown ..................            100%    $  36.66    $     36.66    $     35.84
                                     -----------     --------    -----------    -----------
</TABLE>














                                      -18-
<PAGE>   20


<TABLE>
<CAPTION>


                                                                                                                
                                                                                                  PERCENT          
                                                                                  PERCENT OF     LEASED AT         
                                                                      TOTAL          TOTAL       OPERATING         
                                                      NUMBER        OPERATING      OPERATING     PARTNERSHIP       
                                                        OF         PARTNERSHIP    PARTNERSHIP       OFFICE          
     STATE, CITY, SUBMARKET                          PROPERTIES       NRA(1)         NRA(1)       PROPERTIES        
----------------------------------------------       ----------    -----------    -----------     -----------
<S>                                                  <C>           <C>            <C>             <C>
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)
                                                     ===========    ===========    ===========     ===========
<CAPTION>



                                                                                                                  WEIGHTED  
                                                                                                                  AVERAGE  
                                                                                   WEIGHTED                       OPERATING 
                                                                                   AVERAGE       OPERATING       PARTNERSHIP
                                                                   OPERATING        QUOTED      PARTNERSHIP        FULL-    
                                                   OFFICE         PARTNERSHIP       MARKET         QUOTED         SERVICE   
                                                  SUBMARKET        SHARE OF         RENTAL         RENTAL         RENTAL   
                                                   PERCENT          OFFICE         RATE PER       RATE PER        RATE PER  
                                                    LEASE/         SUBMARKET        SQUARE        SQUARE          SQUARE   
     STATE, CITY, SUBMARKET                       OCCUPIED(2)      NRA(1)(2)      FOOT(2)(3)       FOOT(4)        FOOT(5)  
-----------------------------------------------   -----------     -----------     -----------    -----------    -----------

<S>                                               <C>             <C>             <C>            <C>           <C>
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 Operating Partnership (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 Operating Partnership Office
     Properties in the submarket.

(4)  For Office Properties, represents weighted average rental rates per square
     foot quoted by the Operating Partnership as of December 31, 1998, based on
     total net rentable square feet of Operating Partnership 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 Operating Partnership's Office
     Properties will be leased.














                                      -19-
<PAGE>   21

(5)  Calculated based on base rent payable for Operating Partnership 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 Operating
     Partnership 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
     Operating Partnership's submarkets would have been 94%. The total percent
     leased at the Operating Partnership'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 Operating Partnership 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 Operating Partnership's Office
Properties, based on information supplied to the Operating Partnership 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 Operating Partnership'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.





                                      -20-
<PAGE>   22


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 Operating Partnership'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.


TOTAL OFFICE PROPERTIES

<TABLE>
<CAPTION>

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

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

<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 GAAP and including
     adjustments for expenses payable by or reimbursable from tenants based on
     current levels.












                                      -21-
<PAGE>   23


HOUSTON OFFICE PROPERTIES

<TABLE>
<CAPTION>


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

<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 GAAP and including
     adjustments for expenses payable by or reimbursable from tenants based on
     current levels.


                                RETAIL PROPERTIES


         The Operating Partnership 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 Operating Partnership 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.




                                      -22-
<PAGE>   24




                                HOTEL PROPERTIES


HOTEL PROPERTIES TABLES


         The following table sets forth certain information for the years ended
December 31, 1998 and 1997, about the Operating Partnership'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>
<CAPTION>

                                                                                                                          
                                                                                                                    
                                                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                                                           -------------------------------
                                                                                 AVERAGE                                 
                                                                                OCCUPANCY          AVERAGE            REVENUE PER
                                                          YEAR                     RATE           DAILY RATE       AVAILABLE 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
                                                                  =======    =====     ===      =====    =====     =====    =====


DESTINATION HEALTH & FITNESS RESORTS:                             Guest Nights
                                                                  ------------

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,
     the Operating Partnership 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 Operating
Partnership'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.








                                      -23-
<PAGE>   25


<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 Operating Partnership 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 Operating Partnership 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.


                                      -24-
<PAGE>   26

                                        
                       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    Average
                     Residential                       Residential    Total    Lots/Units  Lots/Units Closed
  Residential        Development                       Development    Lots/    Developed    Closed    Sale Price  Range of Proposed 
  Development        Properties  Type of               Corporation's  Units      Since      Since      Per Lot/      Sale Prices
 Corporation(1)        (RDP)     RDP(2)  Location      Ownership %   Planned   Inception  Inception    Unit($)    Per Lot/Unit($)(4)
-----------------    ---------   -----   --------      ------------  -------   ---------  ---------   ----------  ------------------
<S>                 <C>         <C>     <C>            <C>          <C>        <C>        <C>         <C>         <C>
Desert Mountain      Desert       SF    Scottsdale,AZ      93.0%      2,486       2,050      1,777      430,000    150,000-2,500,000
Development         Mountain                                        -------     -------    -------
Corp.

The Woodlands         The         SF    The Woodlands,     42.5%     38,313      20,063     18,730       50,371      14,700-500,000
Land Company       Woodlands                  TX                    -------     -------    -------
Inc.

Crescent          The Reserve     SF      Frisco, CO       60.0%        134(5)      134        128       95,000      60,000-165,000
Development        at Frisco
Management Corp.

                     Villa        TH       Avon, CO        30.0%         27(5)       27         14      905,000    515,000-1,700,000
                    Montane
                   Townhomes

                     Villa        TS       Avon, CO        30.0%         38(5)       38         32       60,000       18,000-150,000
                  Montane Club

                   Villas at      TH       Avon, CO        30.0%         10          10          9    2,070,000            2,995,000
                  Beaver Creek

                  Deer Trail      SFH      Avon, CO        60.0%         16(5)       --         --          N/A  2,560,000-3,325,000

                    Buckhorn      TH       Avon, CO        60.0%         24(5)        4          2    1,088,000    945,000-1,850,000
                   Townhomes

                 Bear Paw Lodge   CO       Avon, CO        60.0%         53(5)       --         --          N/A  1,495,000-1,895,000
                                                                    -------     -------    -------
                     

        Total Crescent Development Management Corp.                     302         213        185
                                                                    -------     -------    -------

Mira Vista         Mira Vista     SF    Fort Worth, TX    100.0%        710         677        559       97,000       50,000-265,000
Development                                   
Corp.
                      The         SF   Breckenridge, CO    12.3%        750         270        245      143,000        55,00-250,000
                   Highlands                                        -------     -------    -------
                                                                      1,460         947        804
                                                                    -------     -------    -------
       Total Mira Vista Development Corp.

Houston Area      Falcon Point    SF      Houston, TX     100.0%      1,205         556        375       31,000        22,000-60,000
Development                                                         -------     ------     -------
Corp.
                  Spring Lakes    SF      Houston, TX     100.0%        536          93         35       31,000        22,000-33,000
                                                                    -------     -------    -------


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

            Total                                                    44,302      23,922     21,906
                                                                    =======     =======    =======
</TABLE>

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

(1)  The Operating Partnership 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 Operating Partnership's ownership
     period.











                                      -25-
<PAGE>   27

(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 $0.5 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).


                        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.


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;






                                      -26-
<PAGE>   28

         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.


         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.











                                      -27-
<PAGE>   29


         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.


                                     PART II



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


MARKET INFORMATION AND DISTRIBUTIONS


         There is no established public trading market for the Registrant's
limited partner interests, including the associated units ("Units"). The
following table sets forth the cash distributions paid per Unit during each
quarter of fiscal years 1997 and 1998. Comparable cash distributions are
expected in the future. As of March 26, 1999, there were 55 record holders of
Units. The Company and CREE, Ltd. do not own Units.


<TABLE>
<CAPTION>


        QUARTER                    1998                  1997
         ENDED:               DISTRIBUTIONS         DISTRIBUTIONS
-------------------------    -----------------    -------------------

<S>                          <C>                  <C>  
March 31                            $0.76                $0.61
June 30                              0.76                 0.61(1)
September 30                         1.10                 0.76
December 31                          1.10                 0.76
</TABLE>

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

(1) In addition to the regular quarterly distribution, the Operating
    Partnership made a one-time distribution of shares of the common stock of
    COI valued at $0.99 per share, which were distributed to the partners of
    the Operating Partnership on a pro rata basis, in a spin-off effective June
    12, 1997.

SALES OF UNREGISTERED SECURITIES


         In connection with the acquisition of real estate, the Operating
Partnership from time to time issues Units to sellers of real estate in
reliance on exemptions from registration under the Securities Act of 1933, as
amended (the "Act"). In connection with acquisitions in 1996, 1997 and 1998,
the Operating Partnership issued 291,852 Units in offerings exempt from the
registration requirements of the Act as set forth below:

         o     On March 2, 1998, the Operating Partnership issued 125,155 Units
               to an unaffiliated third party as consideration for its purchase
               of the property and assets, including providing noncompetition
               agreements, specified in that certain Asset Contribution
               Agreement, dated as of October 7, 1996, as amended on December
               31, 1997, and March 2, 1998.








                                      -28-
<PAGE>   30

         o     On April 27, 1998, the Operating Partnership issued 107,407 Units
               to unaffiliated third parties as partial consideration for its
               purchase of contract rights pursuant to that certain Agreement of
               Sale, dated May 30, 1997, by and between Rosewood Georgetown
               Joint Venture, a Texas joint venture, as seller, and Lano
               International, Inc., a Delaware corporation, and Armada/Hoffler
               Holding Company, a Virginia corporation, as purchaser.

         o     On June 1, 1998, the Operating Partnership issued 58,244 Units to
               unaffiliated third parties as consideration for its purchase of
               certain assets pursuant to that certain Asset Purchase Agreement,
               dated as of the 25th day of March, 1998, among the Operating
               Partnership, Freezer Services-West Point, Inc., Freezer
               Services-Texarkana, Inc., and certain other parties.

         o     On June 30, 1998, the Operating Partnership issued 1,046 Units to
               an unaffiliated third party pursuant to that certain Consultant
               Unit Agreement, dated August 15, 1995, between Texas Greenbrier
               Associates, Inc. and the Operating Partnership.


         The Operating Partnership exercised reasonable care to assure that
each of the offerees of Units was an "accredited investor" under Rule 501 of
the Act and that the investors were not purchasing the Units with a view to
their distribution. Specifically, the Operating Partnership relied on the
exemptions provided by Section 4(2) of the Act or Rule 506 under the Act.


         Each of the Units is exchangeable into common shares of the Company on
a one-for-two basis at the option of the holder. In case of an attempted
exchange, the Company may elect to pay to the converting holder the cash value
of the common shares to be received upon exchange instead of delivering such
shares.



                                      -29-
<PAGE>   31
ITEM 6.  SELECTED FINANCIAL DATA

         The following table sets forth certain financial information for the
Operating Partnership on a consolidated historical basis and for the Rainwater
Property Group (the Operating Partnership'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 Operating Partnership. 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 LIMITED PARTNERSHIP
                   CONSOLIDATED HISTORICAL FINANCIAL DATA AND
                            RAINWATER PROPERTY GROUP
                       COMBINED HISTORICAL FINANCIAL DATA
                  (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)


<TABLE>
<CAPTION>

                                                                                                                              
                                                              OPERATING PARTNERSHIP                                           
                                          ----------------------------------------------------------------------------------- 

                                                                                                      
                                                                                                              For the Period
                                                                                                               from May 5,    
                                                               Year Ended December 31,                           1994 to      
                                          -----------------------------------------------------------------      December 31, 
                                                1998              1997            1996             1995             1994      
                                                ----              ----            ----             ----       --------------- 

<S>                                       <C>              <C>              <C>              <C>              <C>             
OPERATING DATA:
Total revenue ........................    $    698,343     $    447,373     $    208,861     $    129,960     $     50,343    
Operating income (loss) ..............         143,893          111,281           44,101           30,858           10,864    
Income (loss) before minority
    interests and extraordinary
    item .............................         183,210          135,024           47,951           36,358           12,595    
 Basic Earnings Per unit of
    partnership interest:
    Income before extraordinary
    item .............................    $       2.52     $       2.50     $       1.44     $       1.32     $        .56    
    Net income .......................            2.52             2.50             1.39             1.32              .52    
Diluted Earnings Per unit of
    partnership interest:
    Income before extraordinary
    item .............................    $       2.42     $       2.41     $       1.41     $       1.30     $        .56    
    Net income .......................            2.42             2.41             1.36             1.30              .52    

BALANCE SHEET DATA
     (AT PERIOD END)
 Total assets ........................    $  5,045,949     $  4,182,875     $  1,733,540     $    965,232     $    538,348    
 Total debt ..........................       2,318,156        1,710,124          667,808          444,528          194,642    
 Total partners' capital .............       2,551,624        2,317,353          988,005          479,517          328,448    
OTHER DATA:
 Funds from Operations
     Before minority interests(1) ....    $    360,148     $    214,396     $     87,616     $     64,475     $     32,723    
Cash distribution declared per
    unit of partnership interest .....    $       3.72     $       2.74     $       2.32     $       2.10     $       1.30    
Weighted average
    units of partnership interest
    outstanding - basic ..............      66,214,702       53,417,789       32,342,421       27,091,093       22,498,858    
Weighted average
    units of partnership interest ....      70,194,031       55,486,729       32,932,758       27,249,845       22,519,920    
    outstanding - diluted ............
Cash flow provided by
 (used in)
    Operating activities .............    $    277,092     $    211,550     $     77,384     $     64,877     $     21,614    
    Investing activities .............        (798,007)      (2,294,766)        (513,033)        (421,306)        (260,666)   
    Financing activities .............         564,680        2,123,744          444,315          343,079          265,608    


<CAPTION>


                                        RAINWATER PROPERTY
                                        GROUP (PREDECESSOR)
                                        -------------------

                                              
                                              
                                         For the Period
                                         from January 1,
                                          1994 to May 4,
                                             1994   
                                         ---------------

OPERATING DATA:
Total revenue ........................  $     21,185
Operating income (loss) ..............        (1,599)
Income (loss) before minority
    interests and extraordinary
    item .............................        (1,599)
 Basic Earnings Per unit of
    partnership interest:
    Income before extraordinary
    item .............................           N/A
    Net income .......................           N/A
Diluted Earnings Per unit of
    partnership interest:
    Income before extraordinary
    item .............................           N/A
    Net income .......................           N/A

BALANCE SHEET DATA
     (AT PERIOD END)
 Total assets ........................           N/A
 Total debt ..........................           N/A
 Total partners' capital .............           N/A
OTHER DATA:
 Funds from Operations
     Before minority interests(1) ....           N/A
Cash distribution declared per
    unit of partnership interest .....           N/A
Weighted average
    units of partnership interest
    outstanding - basic ..............           N/A
Weighted average
    units of partnership interest ....           N/A
    outstanding - diluted ............
Cash flow provided by
 (used in)
    Operating activities .............  $      2,455
    Investing activities .............        (2,379)
    Financing activities .............       (21,310)
</TABLE>




NOTES:

 (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.








                                      -30-
<PAGE>   32

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 in this report. Historical results
and percentage relationships set forth in "Selected Financial Data" included in
Item 6, the "Financial Statements and Supplementary Data" included in Item 8 and
this section should not be taken as indicative of future operations of the
Operating Partnership or 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 Form 10-K.

         The limited partnership agreement of the Operating Partnership
acknowledges that all of the Company's operating expenses are incurred for the
benefit of the Operating Partnership and provides that the Operating Partnership
shall reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.

         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 Operating Partnership believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Operating Partnership's actual results could differ materially from those 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 Operating Partnership's principal tenants compete; changes in the
financial condition of existing tenants; the Operating Partnership's ability to
timely lease unoccupied square footage and timely release occupied square
footage upon expiration; the Operating Partnership'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 Operating
Partnership, the possibility that the Operating Partnership'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 Operating
Partnership and the fact that interest rates under the Credit Facility and
certain of the Operating Partnership's other financing arrangements may
increase; the concentration of a significant percentage of the Operating
Partnership's assets in Texas; the existence of complex regulations relating to
the Company's status as a REIT 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 Operating
Partnership'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 Operating Partnership's and 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
Operating Partnership 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









                                      -31-
<PAGE>   33


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 operating expenses paid by the Operating
Partnership) 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 be taken into account under GAAP and including adjustments for the
tenant's share of expenses payable by or reimbursed to the Operating Partnership
("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 $0.83 and $0.61 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 7% 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 Operating Partnership 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 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"), 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 Operating Partnership has recently made a long-term commitment
to fund an additional $50 million to fund new projects in CDMC.








                                      -32-
<PAGE>   34

         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.

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
Operating Partnership 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 Operating Partnership received rental payments of $42.8
million from CBHS as required under its lease with CBHS. The Operating
Partnership 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 Operating Partnership for the first five months
of CBHS's 1999 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 Operating Partnership 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 non owner changes in
equity). As a result of the adoption of SFAS No. 130, comprehensive income has
been presented as part of the statement of partners' capital. During the year
ended December 31, 1998, the Operating Partnership held securities classified as
available-for-sale which had unrealized losses during the period of $5 million.
Prior to 1998, the Operating Partnership's comprehensive income was not material
to the Operating Partnership'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 Operating Partnership's 1998 financial statements.

         Beginning with the fiscal year ended December 31, 1998, the Operating
Partnership 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).











                                      -33-
<PAGE>   35

         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 Operating Partnership's financial statements.



                                      -34-
<PAGE>   36



                              RESULTS OF OPERATIONS

         The following table sets forth the Operating Partnership'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
Operating Partnership'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                                          (0.2%)        (0.3%)        (0.7%)
                                                           --------      --------      --------

INCOME BEFORE EXTRAORDINARY ITEM                               26.0%         29.9%         22.2%

   Extraordinary item                                            --            --          (0.7%)
                                                           --------      --------      --------

NET INCOME                                                     26.0%         29.9%         21.5%

PREFERRED UNIT DIVIDENDS                                       (1.7%)          --            --

FORWARD SHARE PURCHASE
   AGREEMENT RETURN                                            (0.4%)          --            --
                                                           --------      --------      --------

NET INCOME AVAILABLE TO PARTNERS                               23.9%         29.9%         21.5%
                                                           ========      ========      ========
</TABLE>



                                      -35-
<PAGE>   37

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.










                                      -36-
<PAGE>   38

         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 Operating Partnership 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 Operating Partnership 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 the 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 Operating Partnership'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 Operating Partnership holds an effective 95%
                  economic interest).








                                      -37-
<PAGE>   39

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, the proceeds of which were
                  contributed to the Operating Partnership by the Company in
                  exchange for a corresponding increase in the Company's limited
                  partner interest in the Operating Partnership.

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:











                                      -38-
<PAGE>   40


            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

            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 Operating Partnership'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 Operating Partnership as a result of
the acquisition of additional Properties and to incentive compensation paid to
CREE, Ltd.'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.








                                      -39-
<PAGE>   41

                         LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents were $109.8 million and $66.1 million at
December 31, 1998 and December 31, 1997, respectively. This 66.1% increase is
attributable to $564.7 million and $277.1 million of cash provided by financing
and operating activities, respectively, offset by $798.0 million used in
investing activities.

FINANCING ACTIVITIES

         The Operating Partnership'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 contributed to the Operating Partnership from the
                  Company's February 1998 offering of Series A convertible
                  cumulative preferred shares (the "February 1998 Preferred
                  Offering") of $191.2 million;

            o     net proceeds contributed to the Operating Partnership from the
                  Company's June 1998 offering of Series B convertible preferred
                  shares (the "June 1998 Preferred Offering") of $224.8 million;

            o     net proceeds contributed to the Operating Partnership from the
                  Company's 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.

          Net proceeds of the February 1998 Preferred Offering, the June 1998
Preferred Offering and the April 1998 Unit Investment Trust Offering were
contributed to the Operating Partnership by the Company for a corresponding
increase in the Company's limited partner interest in the Operating Partnership.

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

            o     distributions paid to unitholders of $220.6 million;

            o     distributions paid to preferred unitholders of $11.7 million;

            o     debt financing costs of $9.6 million;

            o     capital distributions paid to minority interest partners of
                  $2.9 million; and

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

OPERATING ACTIVITIES

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

            o     inflows from Property operations of $269.9 million;

            o     inflows from minority interests of $1.5 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 Operating Partnership utilized $798.0 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;





                                      -40-
<PAGE>   42

            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     $27.2 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.

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. In connection with the issuances of
securities pursuant to the October Shelf Registration Statement, the Company
contributes the net proceeds of these issuances to the Operating Partnership for
its use in exchange for an increase in its limited partner interest in the
Operating Partnership.

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 0.6119 common shares per Series A Preferred Share based on
the original offering price), subject to adjustment in certain circumstances. In
connection with the February 1998 Preferred Offering, the Operating Partnership
created a comparable class of preferred units (the "Class A Units") which are
owned by the Company. Net proceeds contributed to the Operating Partnership from
the February 1998 Preferred Offering after underwriting discounts of $8 million
and other offering costs of $750,000 were approximately $191.3 million resulting
in a corresponding increase in the Company's limited partner interest in the
Operating Partnership. The net proceeds from the February 1998 Preferred
Offering were used by the Operating Partnership to repay borrowings under the
Credit Facility. Dividends on the Series A Preferred Shares and the Class A
Units 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 and Class A Unit, or $0.42 per share and
Class A Unit per quarter.

         On June 30, 1998, the Company completed the June 1998 Preferred
Offering of 6,948,734 Series B convertible preferred shares (the "Series B
Preferred Shares") at $32.28 per share to The Prudential Insurance Company of
America and certain of its affiliates for aggregate total offering proceeds of
approximately $225.0 million. In connection with the June 1998 Preferred
Offering, the Operating Partnership created a comparable class of preferred
units (the "Class B Units") which are owned by the Company. The proceeds, net of
professional fees, contributed to the Operating Partnership from the offering
were approximately $224.8 million resulting in a corresponding increase in the
Company's limited partner interest in the Operating Partnership. The proceeds,
net of professional fees, from the June 1998 Preferred Offering were used by the
Operating Partnership to repay approximately $170 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







                                      -41-
<PAGE>   43


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"). The Class B Units were simultaneously
converted into an additional limited partner interest held by the Company. 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 of the
Series B Preferred Shares into the Company's common shares. In connection with
the issuance of these additional common shares, the Company will receive an
additional limited partnership interest.

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 contributed to the Operating Partnership from the April 1998
Unit Investment Trust Offering were approximately $43.9 million resulting in a
corresponding increase in the Company's limited partner interest in the
Operating Partnership. 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
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. If the Company fulfills its settlement obligations in cash, the Operating
Partnership will repurchase a portion of the Company's limited partner interest
for an amount approximately equal to the cash required to settle the Company's
obligations under the Forward Share Purchase Agreement. Settlement of the
Company's obligations in cash will decrease the Operating Partnership's
liquidity and result in an increase in the Company's net income per common share
and unit and net book value per common share and unit. 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 









                                      -42-
<PAGE>   44

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. If the Company issues additional common shares, the Company will
receive an additional limited partner interest. If UBS delivers common shares to
the Company, the Operating Partnership will repurchase a portion of the
Company's limited partner interest.

         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 shares, and the Company
would have received an additional limited partner interest in the Operating
Partnership. 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. Correspondingly, the Operating Partnership's net
income per unit and net book value per unit would have remained unchanged at
$2.42 and $34.17, respectively. On February 18, 1999, the Company delivered cash
collateral of $14.7 million in lieu of the Company's 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
elect to issue additional common shares in substitution for the cash collateral
at any time in the future.

         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. In connection with the issuance of
additional common shares, the Company will receive an additional limited partner
interest, which will result in a reduction of the Operating Partnership's net
income per unit and net book value per unit.

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 contributed to the Operating Partnership 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 or the Operating Partnership's net income per unit
or net book value per unit.








                                      -43-
<PAGE>   45

         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 in exchange for the
Operating Partnership's issuance of a $209.3 million promissory note (the
"Merrill Lynch Note") due December 14, 1998. In connection with this
transaction, the Operating Partnership repurchased a portion of the limited
partner interest held by the Company in the Operating Partnership for $209.3
million. 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 Operating
Partnership and Merrill Lynch modified the Merrill Lynch Note. In connection
with the modification, (i) the Operating Partnership 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
Operating Partnership 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 Casinos, Inc. 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.

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 limited owned equally
by the Operating Partnership 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 Operating Partnership
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 (which includes a
release of the Company's affiliates) provides for the dismissal of Tower's suit








                                      -44-
<PAGE>   46


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 Operating Partnership to
Metropolitan have been met, but the Operating Partnership fails to fully fund
its $75 million capital contribution to Metropolitan. The Company's release of
Tower (which includes a release by the Company's affiliates) 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 Operating Partnership 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 to
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"). Under the proposed rights offering by the Company and
the proposed rights offering by the Operating Partnership, the Company's
shareholders and the Operating Partnership's unitholders would have received
rights to purchase the Company's common shares and the Operating Partnership's
units at an exercise price of $22 per common share and $44 per unit in a
aggregation amount of approximately $215 million. On December 16, 1998, in view
of the 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 Operating Partnership has an additional $75
million capital commitment due in the second quarter of 1999 relating to the
Revised Tower Merger Agreement. The Operating Partnership expects to fund this
obligation through cash flow provided by operating activities and additional
borrowings.

LIQUIDITY REQUIREMENTS

         The Operating Partnership 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 Operating Partnership currently intends to use the net
proceeds in connection with the Company's settlement of the UBS Forward Share
Purchase Agreement. The second component is the $184 million Merrill Lynch Note
maturing in 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 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 Operating Partnership intends to refinance these Notes prior
to maturity but does not currently expect to obtain additional loan proceeds in
connection with the refinancing.

         The Operating Partnership expects to meet its other short-term
liquidity requirements primarily through cash flow provided by operating
activities. The Operating Partnership 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 Operating Partnership's cash flow from
operating activities is not sufficient to finance non-recurring capital
expenditures, the Operating Partnership expects to finance such activities with
available cash reserves or, as described above, additional debt financing. The
Operating Partnership also anticipates that it will fund any investments during
the next 12 months primarily with additional debt financing.











                                      -45-
<PAGE>   47


         The Operating Partnership 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 Operating
Partnership's long-term liquidity requirements consisted primarily of maturities
under the Operating Partnership's fixed and variable rate debt.

         Debt and equity financing alternatives currently available to the
Operating Partnership to satisfy its liquidity requirements and commitments for
material capital expenditures include additional proceeds from the refinancing
of existing secured and unsecured debt, obtaining additional debt secured by
existing investment properties or by investment property acquisitions or
developments, issuances of Operating Partnership units to existing holders or in
exchange for contributions of investment properties and issuances by the Company
of common and/or preferred shares.

                           DEBT FINANCING ARRANGEMENTS

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

<TABLE>
<CAPTION>
 
                                                                   INTEREST                                 BALANCE
                                                                     RATE                                 OUTSTANDING
                                                  MAXIMUM             AT            EXPIRATION                 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>


                                      -46-
<PAGE>   48



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 Operating
        Partnership is required to remit, in addition to the monthly debt
        service payment, excess property cash flow, as defined, to be applied
        first against principal until the note is paid in full and thereafter,
        against accrued excess interest, as defined. It is the Operating
        Partnership's intention to repay the note in full at such time (August
        2007) by making a final payment of approximately $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 Operating Partnership
        is required to remit, in addition to the monthly debt service payment,
        excess property cash flow, as defined, to be applied first against
        principal until the note is paid in full and thereafter, against accrued
        excess interest, as defined. It is the Operating Partnership's intention
        to repay the note in full at such time (March 2006) by making a final
        payment of approximately $154 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 Operating Partnership 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 Operating Partnership 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
        Operating Partnership 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 Operating Partnership 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 Operating
        Partnership 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 Operating Partnership 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 Operating Partnership
        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 Operating Partnership'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 Operating
        Partnership 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 Operating Partnership and Merrill Lynch
        modified the note. In connection with the modification, the Operating
        Partnership 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








                                      -47-
<PAGE>   49



        initial rate of 200 basis points above the 30-day LIBOR rate. In
        connection with this extension, the Operating Partnership 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
        Operating Partnership 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 Operating Partnership 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 SEC 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 Operating
        Partnership 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 Operating Partnership's
        Properties.

(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 loan, the Operating Partnership 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
        Operating Partnership's borrowing capacity under the Credit Facility is
        limited to $660 million. The Credit Facility requires the Operating
        Partnership to maintain compliance with a number of customary financial
        and other covenants on an ongoing basis, including leverage ratios 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 Operating Partnership, 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership is required to maintain as stipulated
by the Operating Partnership's debt arrangements and calculated as described
above is 1.5. In addition, the Operating Partnership's Credit Facility requires
a debt service coverage ratio (which is calculated in a different manner) of
2.5. Under this calculation, the Operating Partnership'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 Operating Partnership 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, 










                                      -48-
<PAGE>   50


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 Operating Partnership's operating
performance, or to cash flow from operating activities determined in accordance
with GAAP as a measure of either liquidity or the Operating Partnership's
ability to make distributions. The Operating Partnership 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 Operating Partnership
believes that in order to facilitate a clear understanding of the consolidated
historical operating results of the Operating Partnership, FFO should be
considered in conjunction with the Operating Partnership's net income (loss) and
cash flows as reported in the consolidated financial statements and notes
thereto. However, the Operating Partnership'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 Operating Partnership.


                       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                                                         (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 unit 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.



                                      -49-
<PAGE>   51

          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 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                           (6,121)        34,336
  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 unit dividends                                           11,700             --
  Non-cash compensation                                                 174            172
                                                                  ---------      ---------
Net cash provided by operating activities                         $ 277,092      $ 211,550
                                                                  =========      =========
</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 Operating Partnership'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.

<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).


                                      -50-
<PAGE>   52

         Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Operating
Partnership's Property portfolio. The Operating Partnership 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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership's year 2000 readiness
consists of a comprehensive review of IT and non-IT systems at the Operating
Partnership's principal executive offices and at the Operating Partnership's
Properties to identify any systems that are date sensitive and, accordingly,
could have potential year 2000 problems.

         The Operating Partnership 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 Operating Partnership 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
Operating Partnership'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 Operating
Partnership has not identified any significant problem areas and it believes
that the mission-critical systems, 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.


                                      -51-
<PAGE>   53


         For non-IT systems, the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership believes that the greatest exposure lies with
third parties, such as its tenants, vendors, financial institutions and the
Company's transfer agent. The Operating Partnership 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 Operating Partnership's Properties. If any of
these third parties are unable to meet their obligations to the Operating
Partnership 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
Operating Partnership. Although the Operating Partnership 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 Operating Partnership'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 Operating Partnership without significant additional costs to
the Operating Partnership. 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 Operating Partnership
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 Operating Partnership'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 Operating Partnership's
financial condition or results of operations given current vendor estimates for
complete remediation for non-IT systems.

         The Operating Partnership 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 Operating Partnership has made in addressing the Operating
Partnership's year 2000 issues and its plan and timeline to complete its
compliance program, at this time, the Operating Partnership does not foresee
significant risks associated with the Operating Partnership's year 2000
compliance. Management does not believe that the year 2000 issue will pose
significant problems in 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 Operating Partnership's financial condition or results of
operations. Management believes that the year 2000 risks to the Operating
Partnership'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
Operating Partnership'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 Operating Partnership Properties.
In addition, management believes that the Operating Partnership has sufficient
time to correct those system problems within its control before the year 2000.
Because the Operating Partnership's major source of income is rental payments
under long-term leases, a failure of the Operating Partnership's
mission-critical IT systems is not expected to have a material adverse effect on
the Operating Partnership's financial condition or results of operations. Even
if the Operating Partnership were to experience problems with its IT systems,
the payment of rent under the leases would not be excused. In addition, the
Operating Partnership 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 Operating Partnership is still evaluating the status of its
systems and those of third parties with which it conducts business, the
Operating Partnership has not yet developed a comprehensive contingency plan,
and it is 


                                      -52-
<PAGE>   54

very difficult to identify "the most reasonably likely worst-case scenario" at
this time. As the Operating Partnership identifies significant risks related to
the Operating Partnership's year 2000 compliance, or if the Operating
Partnership's year 2000 compliance program's progress deviates substantially
from the anticipated timeline, the Operating Partnership will develop
appropriate contingency plans.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Operating Partnership's use of financial instruments, such as debt
instruments, and the Company's forward share purchase agreement (the "Forward
Share Purchase Agreement") with affiliates of the predecessor of UBS AG ("UBS")
subject the Operating Partnership to market risk which may affect the Operating
Partnership's future earnings and cash flows as well as the fair value of its
assets. Market risk generally refers to the risk of loss from changes in
interest rates and market prices. The Operating Partnership manages its market
risk by attempting to match anticipated inflow of cash from its operating,
investing and financing activities with anticipated outflow of cash to fund debt
payments, distributions to partners, investments, capital expenditures and other
cash requirements. The Operating Partnership 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 Operating Partnership's interest rate risk is most sensitive to
fluctuations in interest rates on its short-term variable rate debt. The
Operating Partnership generally does not use financial instruments to hedge
interest rate risk. The Operating Partnership 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 12, 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 and
the Operating Partnership's net income per unit and net book value per unit. If
the Company issues


                                      -53-
<PAGE>   55


additional common shares to settle the Forward Share Purchase Agreement, it will
receive an additional limited partner interest in the Operating Partnership.

         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 Operating
Partnership 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 $0.5 million. Conversely, if the 90-day LIBOR rate
decreases by 10%, the settlement amount will decrease by approximately $0.5
million. Settlement of the Forward Share Purchase Agreement in cash will reduce
the Operating Partnership's cash flows. If the Company fulfills its settlement
obligations in cash, the Operating Partnership will repurchase a portion of the
Company's limited partner interest for an amount approximately equal to the cash
required to settle the Company's obligations under the Forward Share Purchase
Agreement.

MARKET PRICE RISK

         The Forward Share Purchase Agreement is subject to market rate risk
because changes in the closing share price of 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, and the Company will receive an
additional limited partner interest in the Operating Partnership equal in value
to $9,358. If the market price of the common shares increases by 10% from the
$23 per share closing price of the common shares on December 31, 1998, UBS will
return to the Company 511,117 common shares by the final settlement date of
August 12, 1999. If UBS returns such number of common shares to the Company, the
Operating Partnership will repurchase a portion of the Company's limited partner
interest in the Operating Partnership equal in value to $11,755,691. 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 and of the Operating
Partnership's net income per unit and net book value per unit. A change in the
market price will not affect the amount required to be paid to settle the
Forward Share Purchase Agreement in cash.


                                      -54-
<PAGE>   56


ITEM 8.  FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                        PAGE
                                                                                                        ----
<S>                                                                                                      <C>
Report of Independent Public Accountants..............................................................   56

Consolidated Balance Sheets of Crescent Real Estate Equities Limited Partnership at December 31,
1998 and 1997.........................................................................................   57

Consolidated Statements of Operations of Crescent Real Estate Equities Limited Partnership for
the years ended December 31, 1998, 1997 and 1996......................................................   58

Consolidated Statements of Partners' Capital of Crescent Real Estate Equities Limited Partnership
for the years ended December 31, 1998, 1997 and 1996..................................................   59

Consolidated Statements of Cash Flows of Crescent Real Estate Equities Limited Partnership for
the years ended December 31, 1998, 1997 and 1996......................................................   60

Notes to Financial Statements.........................................................................   61

Schedule III Consolidated Real Estate Investments and Accumulated Depreciation .......................   85
</TABLE>


                                      -55-
<PAGE>   57


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Trust Managers of Crescent Real Estate Equities Limited
Partnership:

We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Limited Partnership and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, partners' capital
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 Partnership'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
Limited Partnership 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)


                                      -56-
<PAGE>   58


                CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
                                 (NOTES 1 AND 2)

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                           1998            1997
                                                                       -----------      -----------
<S>                                                                    <C>              <C>        
ASSETS:
   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                                               109,828           66,063
   Restricted cash and cash equivalents                                     46,841           41,528
   Accounts receivable, net                                                 32,585           30,049
   Deferred rent receivable                                                 73,635           39,588
   Investments in real estate mortgages and equity
       of unconsolidated companies                                         743,516          601,770
   Notes receivable, net                                                   187,063          159,843
   Other assets, net                                                       110,566           99,098
                                                                       -----------      -----------
               Total assets                                            $ 5,045,949      $ 4,182,875
                                                                       ===========      ===========

LIABILITIES:
   Borrowings under Credit Facility                                    $   660,000      $   350,000
   Notes payable                                                         1,658,156        1,360,124
   Accounts payable, accrued expenses and other liabilities                149,442          127,220
                                                                       -----------      -----------
              Total liabilities                                          2,467,598        1,837,344
                                                                       -----------      -----------

MINORITY INTERESTS:                                                         26,727           28,178

PARTNERS' CAPITAL:
   Series A Preferred Units, 8,000,000 Units issued and
       outstanding at December 31, 1998                                    200,000               --
  Units of Partnership Interests, 68,823,252 and 65,386,026 issued
      and outstanding at December 31, 1998 and 1997, respectively:
         General partner - outstanding 622,777 and 589,890                   3,815            4,324
         Limited partners' - outstanding 68,200,475 and 64,796,136       2,352,846        2,313,029
  Accumulated other comprehensive income                                    (5,037)              --
                                                                       -----------      -----------
              Total partners' capital                                    2,551,624        2,317,353
                                                                       -----------      -----------
              Total liabilities and partners' capital                  $ 5,045,949      $ 4,182,875
                                                                       ===========      ===========
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      -57-
<PAGE>   59


                CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER UNIT 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                                                (1,499)        (1,434)        (1,482)
                                                                   ---------      ---------      ---------

INCOME BEFORE EXTRAORDINARY ITEM                                     181,711        133,590         46,469
    Extraordinary item                                                    --             --         (1,599)
                                                                   ---------      ---------      ---------

NET INCOME                                                           181,711        133,590         44,870

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

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

NET INCOME AVAILABLE TO PARTNERS                                   $ 166,695      $ 133,590      $  44,870
                                                                   =========      =========      =========

BASIC EARNINGS PER UNIT DATA:
    Income before extraordinary item                               $    2.52      $    2.50      $    1.44
    Extraordinary item                                                    --             --          (0.05)
                                                                   ---------      ---------      ---------
    Net income                                                     $    2.52      $    2.50      $    1.39
                                                                   =========      =========      =========

DILUTED EARNINGS PER UNIT DATA:
    Income before extraordinary item                               $    2.42      $    2.41      $    1.41
    Extraordinary item                                                    --             --          (0.05)
                                                                   ---------      ---------      ---------
    Net income                                                     $    2.42      $    2.41      $    1.36
                                                                   =========      =========      =========
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      -58-
<PAGE>   60


                CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)
                                 (NOTES 1 AND 2)
<TABLE>
<CAPTION>
                                                           ACCUMULATED                                              
                                             PREFERRED        OTHER         LIMITED       GENERAL         TOTAL
                                             PARTNERS'    COMPREHENSIVE    PARTNERS'     PARTNER'S      PARTNERS'
                                              CAPITAL         INCOME        CAPITAL       CAPITAL        CAPITAL
                                             ---------      ---------       ---------     ---------     ---------
<S>                                          <C>            <C>             <C>           <C>           <C>      
Partners' capital, December 31, 1995         $      --      $      --       $ 474,717     $   4,800     $ 479,517

Contributions                                       --             --         535,428            --       535,428
Contribution of notes receivable                    --             --           1,557            --         1,557
Distributions                                       --             --         (72,633)         (734)      (73,367)
Net Income                                          --             --          44,421           449        44,870
                                             ---------      ---------       ---------     ---------     ---------

Partners' capital, December 31, 1996         $      --      $      --       $ 983,490     $   4,515     $ 988,005
                                             =========      =========       =========     =========     =========

Contributions                                       --             --       1,348,054            --     1,348,054
Contribution of notes receivable                    --             --             413            --           413
Distributions                                       --             --        (139,395)       (1,408)     (140,803)
Distribution of Crescent Operating Inc.             --             --         (11,788)         (119)      (11,907)
shares
Net Income                                          --             --         132,254         1,336       133,590
                                             ---------      ---------       ---------     ---------     ---------

Partners' capital, December 31, 1997         $      --      $      --       $2,313,028    $   4,324     $2,317,352
                                             =========      =========       ==========    =========     ==========

Contributions                                  200,000             --         299,436            --       499,436
Distributions                                       --             --        (218,649)       (2,209)     (220,858)
Net Income                                          --             --         168,311         1,700       170,011
Settlement of equity swap agreement                 --             --        (209,299)           --      (209,299)
Forward Share Purchase Agreement                    --             --              19            --            19
Accumulated other comprehensive income              --         (5,037)             --            --        (5,037)
                                             ---------      ----------      ---------     ---------     ---------

Partners' capital, December 31, 1998         $ 200,000      $  (5,037)      $2,352,846    $   3,815     $2,551,624
                                             =========      ==========      ==========    =========     ==========
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.



                                      -59-
<PAGE>   61


                CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
                      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                                                   $   181,711      $   133,590      $    44,870
   Adjustments to reconcile net income to
       net cash provided by operating activities:
           Depreciation and amortization                            124,568           77,925           43,347
           Extraordinary item                                            --               --            1,599
           Minority interests                                         1,499            1,434            1,482
           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                           (2,536)         (14,719)          (8,324)
           Increase in deferred rent receivable                     (34,047)         (23,371)          (6,210)
           Increase in other assets                                 (22,646)         (29,286)            (388)
           Increase in restricted cash and cash                      (3,161)            (417)         (15,537)
equivalents
           Increase in accounts payable, accrued
expenses and other liabilities                                       22,222           78,758           16,756
                                                                -----------      -----------      -----------
              Net cash provided by operating activities             277,092          211,550           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                   (2,152)          (4,229)             842
equivalents
   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                                     (27,220)        (128,124)         (10,913)
   Decrease (increase) in escrow deposits - acquisition of
       investment properties                                          5,760           (5,600)             140
                                                                -----------      -----------      -----------
           Net cash used in investing activities                   (798,007)      (2,294,766)        (513,033)
                                                                -----------      -----------      -----------
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
   Capital contributions to the Operating Partnership               457,717        1,346,713          458,017
   Distributions from the Operating Partnership                    (232,318)        (152,708)         (73,367)
                                                                -----------      -----------      -----------
           Net cash provided by financing activities                564,680        2,123,744          444,315
                                                                -----------      -----------      -----------

INCREASE IN CASH AND CASH EQUIVALENTS                                43,765           40,528            8,666
CASH AND CASH EQUIVALENTS,
   Beginning of period                                               66,063           25,535           16,869
                                                                -----------      -----------      -----------
CASH AND CASH EQUIVALENTS,
   End of period                                                $   109,828      $    66,063      $    25,535
                                                                ===========      ===========      ===========
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      -60-
<PAGE>   62


                CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
                          NOTES TO FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)

1.   ORGANIZATION AND BASIS OF PRESENTATION:

ORGANIZATION

         Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP," together with its direct and indirect interests in
limited partnerships, the "Operating Partnership") was formed under the terms of
the Limited Partnership Agreement dated February 9, 1994. The Operating
Partnership is controlled by Crescent Real Estate Equities Company, a Texas real
estate investment trust (the "Company"), through the Company's ownership of all
of the outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware
corporation ("CREE, Ltd."), which owns an approximate 1% general partner
interest in the Operating Partnership. In addition, the Company owns an
approximate 89% limited partner interest in the Operating Partnership, with the
remaining approximate 10% limited partner interest held by other partners. The
Operating Partnership owns substantially all of the economic interest directly
or indirectly of seven single purpose limited partnerships (all formed for the
purpose of obtaining securitized debt), with the remaining interests owned
indirectly by the Company through seven separate corporations, each of which is
a wholly owned subsidiary of CREE, Ltd. and a general partner of one of the
seven limited partnerships.

         All of the limited partners of the Operating Partnership other than the
Company own, in addition to limited partner interests, units. Each unit entitles
the holder to exchange the unit (and the related limited partner interest) for
two common shares of the Company or, at the Company's option, an equivalent
amount of cash. For purposes of this report, the term "unit" or "unit of
partnership interest" refers to the limited partner interest and, if applicable,
related units held by a limited partner. Accordingly, the Company's approximate
89% limited partner interest has been treated as equivalent, for purposes of
this report, to 61,654,947 units, and the remaining approximate 10% limited
partner interest has been treated as equivalent, for purposes of this report, to
6,545,528 units.

         As of December 31, 1998, the Operating Partnership 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 (collectively
referred to as the "Retail Properties"), 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 Operating Partnership owned through
two subsidiaries (the "Crescent Subsidiaries") 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 Operating Partnership 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.

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


                                      -61-
<PAGE>   63

         The following table sets forth, by subsidiary, the Properties such
subsidiaries owned 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
("Funding II")                    Square 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 Operating
Partnership include all direct and indirect subsidiary entities. The equity
interests in those direct and indirect subsidiaries the Operating Partnership
does not own are reflected as minority interests. All significant intercompany
balances and transactions have been eliminated.

         Certain amounts in prior 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 and unitholders 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 Operating Partnership does not expect to recover its carrying costs,
the Operating Partnership reduces its carrying costs to fair value. No such
reductions have occurred to date.



                                      -62-
<PAGE>   64

CONCENTRATION OF REAL ESTATE INVESTMENTS

         The majority of the Operating Partnership'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 Operating Partnership'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 the total net rentable square feet
in the segment, and the Houston Office and Retail Properties accounted for the
remaining approximate 33%. As a result of the geographic concentration, the
operations of the Operating Partnership could be adversely affected by a
recession or general economic downturn in the areas where these properties are
located.

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.

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
affiliates of the predecessor of UBS AG ("UBS") and an equity swap agreement
with Merrill Lynch International ("Merrill Lynch") as further discussed in Note
10, Partners' Capital.

         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 in exchange for
the Operating Partnership's issuance of 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. In connection with this
transaction, the Operating Partnership repurchased a portion of the limited
partner interest held by the Company in the Operating Partnership for $209,299.

         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.

         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
Operating Partnership'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



                                      -63-
<PAGE>   65

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 Operating Partnership, 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 Operating Partnership cannot, consistent with the
Company's 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 Operating Partnership 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 Operating Partnership 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
auditor's 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 Operating Partnership for the first five months of CBHS's 1999 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

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

EARNINGS PER UNIT OF PARTNERSHIP INTEREST

         Beginning with the year ended December 31, 1997, the Operating
Partnership 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.



                                      -64-
<PAGE>   66

<TABLE>
<CAPTION>
                                                                      FOR THE YEAR ENDED DECEMBER 31,
                                        -------------------------------------------------------------------------------------------
                                                    1998                              1997                           1996
                                        -----------------------------   -----------------------------  ----------------------------
                                                  Wtd. Avg. Per Unit              Wtd. Avg.  Per Unit            Wtd. Avg. Per Unit
                                          Income   Units     Amount      Income     Units     Amount    Income    Units     Amount
                                        --------  --------  --------    --------  ---------  --------  --------  --------- --------
<S>                                     <C>        <C>      <C>         <C>        <C>        <C>      <C>       <C>        <C>
Basic EPS -
Net income available to partners        $166,695   66,214   $  2.52     $133,590   53,418     $  2.50  $ 44,870  32,342     $  1.39
                                                            =======                           =======                       ======= 
Effect of dilutive
securities:
     Unit options                             --    1,952                     --    2,069                    --    590
     Preferred units                          --    1,739                     --       --                    --     --
     Equity swap                              --       92                     --       --                    --     --
      agreement
     Forward share purchase
      agreement                            3,316      197                     --       --                    --     --
                                        --------   ------               --------   ------              --------  -----
Diluted EPS -
Net income available to partners        $170,011   70,194   $  2.42     $133,590   55,487     $  2.41  $ 44,870  32,932     $  1.36
                                        ========   ======   =======     ========   ======     =======  ========  ======     =======
</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.

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 an
   investment                                                                         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 and extension                                                      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 Operating Partnership 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



                                      -65-
<PAGE>   67

SFAS No. 130, comprehensive income has been presented as part of the statement
of partners' capital. During the year ended December 31, 1998, the Operating
Partnership held securities classified as available-for-sale which had
unrealized losses during the period of $5,037. Prior to 1998, the Operating
Partnership's comprehensive income was not material to the Operating
Partnership'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 Operating Partnership's 1998 financial statements.

         Beginning with the fiscal year ended December 31, 1998, the Operating
Partnership adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," which establishes 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, 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 Operating Partnership's 1998 financial statements.

3. SEGMENT REPORTING

         The Operating Partnership has adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" for the year ended December
31, 1998. The Operating Partnership 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 Operating Partnership
based on property type for making operating decisions and assessing performance.

         The Operating Partnership 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 Operating Partnership
considers FFO an appropriate measure of performance of an equity REIT, and
therefore for the operating segments contained therein. However, the Operating
Partnership's measure of FFO may not be comparable to similarly titled measures
of other REIT's because these REITs may not apply the definition of FFO in the
same manner as the Operating Partnership.



                                      -66-
<PAGE>   68



         Selected financial information related to each segment for the years
         ended December 31, 1998, 1997 and 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 unit dividends                                             (11,700)                 --                  --
         Interest income 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                                                        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 unit 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                                                     424,253             310,834              92,334
                                                                          -----------         -----------         -----------
      TOTAL IDENTIFIABLE ASSETS                                           $ 5,045,949         $ 4,182,875         $ 1,733,540
                                                                          ===========         ===========         ===========
</TABLE>



                                      -67-
<PAGE>   69


         COI and CBHS are the Operating Partnership's largest single lessees 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 Operating Partnership'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 Operating Partnership's ownership in
significant unconsolidated companies:

<TABLE>
<CAPTION>
                                                                                    OPERATING PARTNERSHIP'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                   42.5%
                                                           properties)
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 Operating Partnership 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.



                                      -68-
<PAGE>   70




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 (loss) ......................        $ 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 ............................................         43,993            38,309
                                                        ---------         ---------
                                                          158,912           130,398
Less - Accumulated amortization ..................        (48,346)          (31,300)
                                                        ---------         ---------
                                                        $ 110,566         $  99,098
                                                        =========         =========
</TABLE>



                                      -69-
<PAGE>   71

6. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:


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

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                            --------------------------------
                                                                                                1998              1997
                                                                                                ----              ----
<S>                                                                                         <C>                  <C>
SECURED DEBT

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                   --
</TABLE>



                                      -70-
<PAGE>   72

<TABLE>
<S>                                                                                            <C>                   <C>          
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

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

(3)      On December 14, 1998, the Operating Partnership and Merrill Lynch
         modified the note. In connection with the modification, (i) the
         Operating Partnership made a payment of $25,000 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. In connection with this extension, the
         Operating Partnership paid an extension fee of $1,800.

(4)      In March 2006, the interest rate increases, and the Operating
         Partnership is required to remit, in addition to the monthly debt
         service payment, excess property cash flow, as defined, to be applied
         first against principal until the note is paid in full and thereafter,
         against accrued excess



                                      -71-
<PAGE>   73

         interest, as defined. It is the Operating Partnership's intention to
         repay the note in full at such time (March 2006) by making a final
         payment of approximately $154,000.

(5)      The Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 the short-term BankBoston term note, the Operating Partnership
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
Operating Partnership's borrowing capacity under the Credit Facility is limited
to $660,000. The Credit Facility requires the Operating Partnership to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios 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
Operating Partnership was in compliance with all covenants. As of December 31,
1998, the interest rate was 6.44%.

7. RENTALS UNDER OPERATING LEASES:

         The Operating Partnership 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>


                                      -72-
<PAGE>   74

-----------------------
         Generally, the office and retail leases also require that tenants
reimburse the Operating Partnership 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 Operating Partnership 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 Operating Partnership has eleven Properties located on land that is
subject to long-term ground leases which expire between 2001 and 2080. The
Operating Partnership also leases parking spaces in a parking garage adjacent to
one of its Properties pursuant to a lease expiring in 2021. Lease expense
associated with these leases during each of the three years ended December 31,
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).



                                      -73-
<PAGE>   75

         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 Operating Partnership 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 Operating Partnership
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 (which includes a release of
the Company's affiliates) 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 Operating Partnership to Metropolitan have been met,
but the Operating Partnership fails to fully fund its $75,000 capital
contribution to Metropolitan. The Company's release of Tower (which includes a
release by the Company's affiliates) 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 Operating Partnership 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 Operating Partnership.

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



                                      -74-
<PAGE>   76

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 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 to               Options to             Options 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
                  -------------------------------------------------     ---------------------------
                     Number                                                 Number
                  Outstanding at   Wtd. Avg. Years        Wtd. Avg.     Exercisable at    Wtd. Avg.
   Range of          12/31/98          Remaining           Exercise        12/31/98        Exercise
Exercise Prices      (000)         Before Expiration        Price           (000)           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, 1997 and 1996 and changes during the years then ended is presented in
the table below (assumes each unit is exchanged for two common shares):




                                      -75-
<PAGE>   77




                         1996 UNIT INCENTIVE OPTION PLAN

<TABLE>
<CAPTION>
                                                        1998                         1997                       1996
                                             -------------------------     -----------------------    ----------------------
                                                Shares                       Shares                     Shares
                                             Underlying                    Underlying                 Underlying   
                                                Unit         Wtd. Avg.        Unit       Wtd. Avg.       Unit      Wtd. Avg.
                                               Options        Exercise      Options       Exercise      Options     Exercise
                                                (000)          Price          (000)       Price          (000)       Price  
                                             ----------      ---------     ----------    ---------    ----------   ---------
<S>                                          <C>             <C>           <C>           <C>          <C>          <C>  
Outstanding as of January 1                    4,000          $  18          4,000          $  18          --        $  18
Granted                                           --             --             --             --       4,000           --
Exercised                                         --             --             --             --          --           --
Forfeited                                         --             --             --             --          --           --
Expired                                           --             --             --             --          --           --
                                               -----          -----          -----          -----       -----        -----
Outstanding/Wtd. Avg. as of December 31        4,000          $  18          4,000          $  18       4,000        $  18
                                               -----          -----          -----          -----       -----        -----
Exercisable/Wtd. Avg. as of December 31        1,857          $  18          1,429          $  18       1,000        $  18
</TABLE>


STOCK OPTION AND UNIT PLANS

         The Operating Partnership 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 Operating Partnership's net income and earnings per unit 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>        
Net income                    $   166,695    $   161,226    $   133,590     $   130,691    $    44,870     $    38,809

Basic earnings per
unit of partnership
interest                      $      2.52    $      2.43    $      2.50     $      2.45    $      1.39     $      1.20

Diluted earnings per
unit of partnership
interest                      $      2.42    $      2.34    $      2.41     $      2.36    $      1.36     $      1.18
</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%.

10. PARTNERS' CAPITAL:

         In connection with its issuances of securities, the Company contributes
the net proceeds of these issuances to the Operating Partnership for its use in
exchange for an increase in its limited partner interest in the Operating
Partnership.


                                      -76-
<PAGE>   78

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 0.6119 common share per Series A Preferred
Share based on the original offering price), subject to adjustment in certain
circumstances. In connection with the February 1998 Preferred Offering, the
Operating Partnership created a comparable class of preferred units (the "Class
A Units") which are owned by the Company. Net proceeds contributed to the
Operating Partnership from the February 1998 Preferred Offering after
underwriting discounts of $8,000 and other offering costs of $750 were
approximately $191,250 resulting in a corresponding increase in the Company's
limited partner interest in the Operating Partnership. The net proceeds from the
February 1998 Preferred Offering were used by the Operating Partnership to repay
borrowings under the Credit Facility. Dividends on the Series A Preferred Shares
and Class A Units 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 and Class A Unit, or $.42 per share
and Class A Unit 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 (the
"Series B Preferred Shares") at $32.38 per share to The Prudential Insurance
Company of America and certain of its affiliates for aggregate total offering
proceeds of approximately $225,000. In connection with the June 1998 Preferred
Offering, the Operating Partnership created a comparable class of preferred
units (the "Class B Units") which are owned by the Company. The proceeds, net of
professional fees, contributed to the Operating Partnership from the offering
were approximately $224,750 resulting in a corresponding increase in the
Company's limited partner interest in the Operating Partnership. The proceeds,
net of professional fees, from the June 1998 Preferred Offering were used by the
Operating Partnership 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. The Class B Units were
simultaneously converted into an additional limited partner interest held by the
Company. (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 contributed to the
Operating Partnership from the April 1998 Unit Investment Trust Offering were
approximately $43,959 resulting in a corresponding increase in the Company's
limited partner interest in the Operating Partnership. 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 the Operating Partnership 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 Operating Partnership 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



                                      -77-
<PAGE>   79

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 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. If the Company issues additional common shares,
the Company will receive an additional limited partner interest. If UBS delivers
common shares to the Company, the Operating Partnership will repurchase a
portion of the Company's limited partner interest.

         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 shares and the Company would
have received an additional limited partner interest in the Operating
Partnership. 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. Correspondingly, the Operating Partnership's net
income per unit and net book value per unit would have remained unchanged at
$2.42 and $34.17, respectively. (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. In connection with the issuance of
additional common shares, the Company will receive an additional limited partner
interest, which will result in a reduction of the Operating Partnership's net
income per unit and net book value per unit.

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
contributed to the Operating Partnership 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



                                      -78-
<PAGE>   80


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 or the Operating Partnership's net income per unit or net book
value per unit.

         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 in exchange for the
Operating Partnership's issuance of a $209,299 promissory note (the "Merrill
Lynch Note") due December 14, 1998. In connection with this transaction, the
Operating Partnership repurchased a portion of the limited partner interest held
by the Company in the Operating Partnership for $209,299. 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 Operating Partnership and Merrill
Lynch modified the Merrill Lynch Note. In connection with the modification, (i)
the Operating Partnership 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 Operating Partnership paid an
extension fee of $1,800.

DISTRIBUTIONS

Units and Common Shares

         The distribution to partners paid for the year ended December 31, 1997,
was $140,801.

         The distribution to partners paid for the year ended December 31, 1998,
was $220,618.

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

<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 Units and Preferred Shares

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

         For the year ended December 31, 1998, the Operating Partnership paid
cash distributions of $11,700 to the Company as the sole holder of Series A
preferred units.

         Following is the income tax status of dividends paid by the Company and
distributions paid by the Operating Partnership during the years ended December
31, 1998 and 1997 to preferred shareholders and unitholders:

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

11. MINORITY INTEREST:

         Minority interest represents 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 



                                      -79-
<PAGE>   81

Partnership increases. During 1998 and 1997, 143,396 and 66,706 units,
respectively, were exchanged for common shares of the Company.

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 Operating Partnership and to perform the Intercompany Agreement
between COI and the Operating Partnership, 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 Operating Partnership and COI have
the opportunity to participate in the benefits of both the real estate
investments of the Operating Partnership (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 Operating Partnership was first given the
opportunity, but elected not to pursue such activities or investments.
       
         In connection with the formation and capitalization of COI, the
Operating Partnership provided to COI approximately $50,000 in the form of cash
contributions and loans to be used by COI to acquire certain assets. The
Operating Partnership 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 Operating Partnership.

13. ACQUISITIONS AND INVESTMENTS:

OFFICE AND HOTEL PROPERTIES

         During 1998, the Operating Partnership 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 Operating Partnership funded these acquisitions through borrowings under the
Credit Facility and borrowings under short-term notes with BankBoston.

<TABLE>
<CAPTION>
                                                                                                                        Office
                                                                                                                       Property
                                                                                                                          Net
                                                               Operating                                               Rentable
                                                              Partnership'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.



                                      -80-
<PAGE>   82

         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 Properties
and the associated operations from Carmar Group, Inc. for approximately
$163,000. The Operating Partnership'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 Operating Partnership'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 superseded 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 Operating Partnership'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 Operating Partnership. If Metropolitan does
not redeem the preferred interest upon expiration of the two-year period, the
Operating Partnership 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 Operating
Partnership 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.

<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 partners .........................         153,101         132,519


Basic Earnings Per Unit of Partnership
Interest:
    Net income ...........................................        $   2.23        $   1.93


Diluted Earnings Per Unit of
Partnership's Interest:
  Net income .............................................        $   2.17        $   1.87
</TABLE>



                                      -81-
<PAGE>   83

         The pro forma operating results combine the Operating Partnership'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 Operating
                  Partnership 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 Operating Partnership 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 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 increase 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 Operating Partnership 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 Operating
Partnership.

14. SUBSEQUENT EVENTS

         On February 18, 1999, the Company delivered cash collateral of $14,700
in lieu of the Company's 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



                                      -82-
<PAGE>   84

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 an interest
in 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 Operating
Partnership has no interest.

         In addition, in connection with the Restructuring and also effective in
March 1999, the Operating Partnership 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 Operating Partnership 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
Operating Partnership also granted COI an option to require the Operating
Partnership 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 Operating Partnership, adversely affect the status of the Company as a
REIT, for an aggregate price, payable by the Operating Partnership, of
approximately $3,300.

         In connection with these transactions, the Operating Partnership made 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. In connection with the issuance of these additional
common shares, the Company will receive an additional limited partner interest.

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 ...............................             (400)             (406)             (199)             (494)
Net income applicable to partners - basic ........           45,179            44,497            29,221            47,798
Net income applicable to partners - diluted ......           45,179            44,497            29,221            51,114

Per unit data:
   Basic earnings per unit .......................              .69               .67               .44               .72

   Diluted earnings per unit .....................              .67               .64               .42               .69
</TABLE>



                                      -83-
<PAGE>   85

<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 ...............................             (416)             (386)             (390)             (242)
Net income .......................................           19,829            28,800            34,445            50,516

Per unit data:
   Basic earnings per unit .......................              .48               .56               .61               .85
   Diluted earnings per unit .....................              .45               .54               .59               .83
</TABLE>



                                      -84-



<PAGE>   86
                                  SCHEDULE III
                CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
        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>




                                      -85-
<PAGE>   87

<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>




                                      -86-
<PAGE>   88


<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>


                                      -87-
<PAGE>   89


<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>



                                      -88-
<PAGE>   90
<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>

(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>

                                      -89-
<PAGE>   91


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


         Not Applicable.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER OF REGISTRANT


         The Operating Partnership is controlled by the Company through the
Company's ownership of all of the outstanding stock of CREE, Ltd., which is the
sole general partner of the Operating Partnership and owns a 1% general partner
interest in the Operating Partnership. In addition, the Company owns an
approximately 89% limited partner interest in the Operating Partnership. The
remaining limited partner interests are owned by senior members of management of
the Company and CREE, Ltd. and certain outside investors. Set forth below is
information with respect to the sole director and the executive officers of
CREE, Ltd. and certain trust managers and the executive officers of the Company.

<TABLE>
<CAPTION>

                                            TERM
            NAME                           EXPIRES     AGE                      POSITION
            ----                           -------     ---                      --------

<S>                                         <C>         <C>   <C>
Richard E. Rainwater................        2000        54    Chairman of the Board of Trust Managers of the Company and 
                                                                  Member of the Strategic Planning Committee of CREE, Ltd.

John C. Goff........................        1999        43    Vice Chairman of the Board of Trust Managers of the Company and 
                                                                  Member of the Strategic Planning Committee of CREE, Ltd.

Gerald W. Haddock...................        1998        51    President and Chief Executive Officer of the Company and CREE, 
                                                                  Ltd., Trust Manager of the Company, sole
                                                                  Director of CREE, Ltd. and Member of the Strategic
                                                                  Planning Committee of CREE, Ltd.

Jack I. Tompkins....................         N/A        53    Executive Vice President and Chief Financial Officer of CREE, Ltd.

Sanjay Varma........................         N/A        45    Executive Vice President, Chief of Corporate Operations of 
                                                                  the Company and CREE, Ltd.

David M. Dean.......................         N/A        38    Senior Vice President, Law and Secretary of the Company and 
                                                                  CREE, Ltd.

James M. Eidson, Jr.................         N/A        44    Senior Vice President, Acquisitions of CREE, Ltd.

Alan D. Friedman....................         N/A        45    President of Development and Private Equity of CREE, Ltd.

William D. Miller...................         N/A        40    Senior Vice President, Asset Management of the Company 
                                                                  and CREE, Ltd.

Joseph D. Ambrose, III..............         N/A        48    Vice President, Human Resources Development/Administration of 
                                                                  CREE, Ltd.

Jerry R. Crenshaw, Jr...............         N/A        35    Vice President, Controller of CREE, Ltd.

Barry L. Gruebbel...................         N/A        44    Vice President, Property Management of CREE, Ltd.

Howard W. Lovett....................         N/A        42    Vice President, Corporate Leasing of CREE, Ltd.

Jane B. Page........................         N/A        39    Vice President, Houston Region Asset Management of CREE, Ltd.

Bruce A. Picker.....................         N/A        34    Vice President and Treasurer of the Company and CREE, Ltd.

John L. Zogg, Jr....................         N/A        35    Vice President, Leasing and Marketing of CREE, Ltd.
</TABLE>



                                      -90-
<PAGE>   92

MANAGEMENT OF THE OPERATING PARTNERSHIP


         The following is a summary of the experience of management of the
Operating Partnership.


         Richard E. Rainwater has been an independent investor since 1986. From
1970 to 1986, he served as the chief investment advisor to the Bass family,
whose overall wealth increased dramatically during his tenure. During that time,
Mr. Rainwater was principally responsible for numerous major corporate and real
estate acquisitions and dispositions. Immediately after beginning his
independent investment activities, he founded ENSCO International Incorporated
("ENSCO"), an oil field service and offshore drilling company, in 1986.
Additionally, in 1987 he co-founded Columbia Hospital Corporation, and in 1989
participated in a management-led buy out of HCA-Hospital Corporation of America.
In 1992, Mr. Rainwater co-founded Mid Ocean Limited, a provider of casualty
re-insurance. In February 1994, he assisted in the merger of Columbia Hospital
Corporation and HCA-Hospital Corporation of America that created Columbia/HCA
Healthcare Corporation. Mr. Rainwater serves as a director of Pioneer Natural
Resources ("Pioneer"), one of the largest oil and gas companies in the United
States. In 1996, Mr. Rainwater led a recapitalization of Mesa, Inc. (Pioneer's
predecessor), and a partnership that Mr. Rainwater controls became a major
shareholder in July 1996. Mr. Rainwater also serves as chairman of the board of
directors of COI. Mr. Rainwater is a graduate of the University of Texas at
Austin and the Graduate School of Business at Stanford University. Mr. Rainwater
has served as the Chairman of the Board of Trust Managers since the Company's
inception in 1994.

         John C. Goff is the managing director of Goff Moore Strategic Partners,
L.P., a private investment partnership that serves as the primary investment
vehicle for its principals, including Mr. Rainwater and his family. Mr. Goff
joined Mr. Rainwater shortly after he began Rainwater, Inc. as an independent
investor in 1986. From 1987 to 1994, Mr. Goff was vice president of Rainwater,
Inc., serving as a senior investment advisor and principal. Mr. Goff is on the
board of Gainsco, Inc., a publicly traded property and casualty insurance
company; The Staubach Company, one of the nation's largest tenant representation
firms; and Texas Capital Bancshares, Inc., a national bank. Mr. Goff served as
chairman of CBHS from 1997 to 1998, and he has served as vice chairman of the
board of directors of COI since its inception in June 1997. From 1981 to 1987,
Mr. Goff worked for KPMG Peat Marwick, and prior to that Mr. Goff worked for
Century Development Corporation, a major office developer and property
management company. Mr. Goff is a graduate of the University of Texas and is a
Certified Public Accountant. Mr. Goff served as Chief Executive Officer and as a
trust manager from the Company's inception in 1994 through December 19, 1996,
when he became Vice Chairman of the Board of Trust Managers.

         Gerald W. Haddock, prior to joining the Company, was a vice president
of Rainwater, Inc. from 1990 to 1994, and he was the lead transactional attorney
for Mr. Rainwater from 1986 to 1994. During this period, Mr. Haddock was in the
private practice of law, pursuant to which, among other things, he served as
primary outside legal counsel to, and investor with, Mr. Rainwater and as
primary outside legal counsel to Rainwater, Inc. Mr. Haddock currently is a
member of the board of directors of ENSCO, of which he was one of the three
founding directors. Mr. Haddock is the president, chief executive officer and a
director of COI. Mr. Haddock earned both Bachelor of Business Administration and
Juris Doctor degrees from Baylor University. He also holds a Master of Laws
degree in taxation from New York University and has served as the chairman of
the Tax Section of the State Bar of Texas. From the Company's inception in 1994
through December 19, 1996, Mr. Haddock served as President and Chief Operating
Officer and as a trust manager. Since December 19, 1996, Mr. Haddock has served
as President and Chief Executive Officer and a trust manager of the Company.

         Jack I. Tompkins, prior to joining the Company, served as chairman of
Automotive Realty Trust Company of America from its inception in 1997 until its
sale to Capital Automotive REIT in January 1999. Prior to that time, Mr.
Tompkins served at Enron Corp. in various capacities, including chief financial
officer and senior vice president, chief information, administrative &
accounting officer, from 1988 until October 1996. Mr. Tompkins also served as a
member of Enron's Executive Management Committee. Mr. Tompkins has served as
managing director of Equity Advisors, L.L.C., formed to engage primarily in the
business of promoting consolidation and initial public offering transactions for
groups of companies in large fragmented industries. Mr. Tompkins began his
career with Arthur Young & Company, serving three years before joining Arthur
Andersen LLP, where he was elected to become partner in 1981. Mr. Tompkins
currently serves on the board of directors of Michael Petroleum


                                      -91-
<PAGE>   93


Corporation and the Star of Hope Mission for the homeless. Mr. Tompkins received
a Bachelor of Business degree in accounting and a Masters of Business
Administration degree from Baylor University. Mr. Tompkins joined the Company in
April 1999 as Executive Vice President and Chief Financial Officer.

         Sanjay Varma began his association with the Company in 1995 as the
majority owner of Rosestar Management, LLC, which was the lessee for several
Company-owned hotels and as an advisor to the Operating Partnership for
hospitality-related acquisitions. Mr. Varma subsequently became the president of
the hospitality division of COI. Prior to his association with the Company in
1995, Mr. Varma served as executive vice president of Walt Disney Company, where
he worked for eight years. In 1986, Mr. Varma worked for the Bass Group and was
assigned to the Walt Disney Company as a consultant to direct the growth of
their resorts division worldwide. From 1978-1986, he worked for Marriott Hotels
and Resorts as area vice president of food and beverage and was responsible for
the operation of 60 hotels. Mr. Varma began his career in 1972 with the Oberoi
Hotels in Asia and the Middle East. He received a degree in hotel administration
from the Jean Drouant School in Paris, France and completed the Advanced
Management Program at the Harvard Business School. Mr. Varma has served as
Executive Vice President, Chief of Corporate Operations since he joined the
Company in August 1998.

         David M. Dean, prior to joining the Company, was an attorney for
Burlington Northern Railroad Company from 1992 to 1994, and he served as
Assistant General Counsel in 1994. At Burlington Northern, he was responsible
for the majority of that company's transactional and general corporate legal
work. Mr. Dean was previously engaged in the private practice of law from 1986
to 1990 with Kelly, Hart & Hallman, and from 1990 to 1992 with Jackson & Walker,
L.L.P., where he worked primarily with Mr. Haddock on acquisition, financing and
venture capital transactions for Mr. Rainwater and related investor groups. Mr.
Dean graduated with honors from Texas A&M University with Bachelor of Arts
degrees in English and philosophy in 1983. He also holds a Juris Doctor degree
and a Master of Laws degree in taxation from Southern Methodist University
School of Law. Mr. Dean has served as Senior Vice President, Law, and Secretary
since August 1994.

         James M. Eidson, Jr. has twenty years of experience in the commercial
real estate business. Prior to joining the Company, he owned an investment
company, specializing in investment grade commercial properties, from 1992 to
1994. From 1989 to 1992, Mr. Eidson was associated with CB Commercial Real
Estate Group, Inc. as a senior investment specialist in its investment grade
commercial property group. From 1982 to 1989, Mr. Eidson owned a real estate
company, through which he provided brokerage and investment services for
individuals and large corporate investors and made investments in commercial
properties for his own account. Mr. Eidson gained his early experience in real
estate acquisitions, dispositions, leasing, marketing and consulting while
serving as a broker and investment specialist for three years with Hank
Dickerson & Company. He is a former professional football player and played with
the Dallas Cowboys from 1976 through 1978. Mr. Eidson holds a Bachelor of
Science degree from Mississippi State University and a Master of Business
Administration degree from Southern Methodist University. Mr. Eidson has served
as Senior Vice President, Acquisitions, since May 1995.

         Alan D. Friedman has more than twenty years of development and
acquisition experience in the commercial real estate business. Since 1990, Mr.
Friedman has owned an advisory company, Trisept, Inc. through which he provided
acquisition and development services for commercial properties to clients, which
included the Company. From 1980 to 1990, Mr. Friedman was an operating partner
at Lincoln Property, where he had direct responsibility for developing,
financing, marketing and managing more than three million square feet of
projects in Dallas/Fort Worth. These same projects received national recognition
for landscaping, lighting and energy management, as well as five building of the
year awards from the Building Owners and Managers Association ("BOMA"). Other
career experience includes working as a marketing executive with Centre
Development and as a banking officer at First National Bank of Dallas. Mr.
Friedman is a member of ULI, serves on the North Texas Board of the NAIOP and is
a trustee at Texas Christian University. A graduate of the University of Texas
with a degree in finance, Mr. Friedman has served as President of Development
and Private Equity since he joined the Company in July 1998.

         William D. Miller, prior to joining the Company, served as vice
president, legal affairs of the Texas Rangers major league baseball club,
beginning in March 1994. Mr. Miller was also a member of the senior management
of the Rangers and certain partnerships affiliated with the Rangers. In
addition, Mr. Miller functioned as the primary lawyer responsible for the
Rangers' interest in the development of The Ballpark in Arlington project. Prior
to joining the Rangers, Mr. Miller practiced law at Jackson & Walker, L.L.P.
from September 1986, was the 


                                      -92-
<PAGE>   94


lead real estate lawyer for Mr. Rainwater, Rainwater, Inc. and Mr. Haddock, and
was instrumental in the formation transactions of the Company. Mr. Miller
received his Bachelor of Science degree with first honors in commerce and
engineering sciences from Drexel University, and he received his Juris Doctor
degree with honors from the University of Texas School of Law. Mr. Miller served
as Senior Vice President, Administration from the time he joined the Company in
May 1997 until November 1998, when he became Senior Vice President, Asset
Management.

         Joseph D. Ambrose, III, prior to joining the Company, served as vice
president of CRC Environmental Risk Management, Inc., an environmental and risk
management consulting firm, from 1993 to 1994. He was responsible for major
client development, development of new risk management initiatives and human
resources. From 1990 to 1993, Mr. Ambrose was a vice president of American Real
Estate Group ("AREG"), a liquidating real estate company, where he managed the
environmental, insurance and other risks associated with the disposition of a
nationwide real estate portfolio. Prior to joining AREG, he was president of
Ambrose Properties, Inc., which acquired and developed oil and gas and real
estate properties. Mr. Ambrose graduated from Texas Christian University with a
Bachelor of Business Administration degree in management and received his Juris
Doctor and Master of Business Administration degrees from Southern Methodist
University. Mr. Ambrose joined the Company in 1994 and served as Vice President,
Administration, from June 1995 to October 1998, when he became Vice President,
Human Resources Development/Administration.

         Jerry R. Crenshaw, Jr. was the controller of Carrington Laboratories,
Inc., a pharmaceutical and medical device company, from 1991 until February
1994. From 1986 until 1991, Mr. Crenshaw was an audit senior in the real estate
services group of Arthur Andersen LLP. Mr. Crenshaw holds a Bachelor of Business
Administration degree in accounting from Baylor University and is a Certified
Public Accountant. Mr. Crenshaw has served as Controller since the Company's
inception in 1994 and has been a Vice President since March 1997. Mr. Crenshaw
also served as Interim Co-Chief Financial Officer from August 1998 until April
1999.

         Barry L. Gruebbel, prior to joining the Company, was involved with the
property and asset management of more than 10 million square feet of Class A
office, retail, industrial and multi-family real estate in Texas and New Mexico
as the vice president of property management with Hines Industrial from 1982 to
1986, as the vice president of property management with Southland Investment
Properties from 1986 to 1990, and most recently as the director of property
management at The Crescent for Rosewood Property Company from 1990 until
formation of the Company. Mr. Gruebbel is a Certified Property Manager and is
currently active in the real estate organizations of the Institute of Real
Estate Management and BOMA. Mr. Gruebbel received a Bachelor of Business
Administration degree in real estate from the University of Texas at Arlington.
Mr. Gruebbel has been with the Company since its inception and became Vice
President, Property Management, in February 1997.

         Howard W. Lovett, prior to joining the Company, was president of The
Gaineswood Company, a private investment company specializing in real estate and
venture capital investments, from January 1989 to August 1995. Previously, Mr.
Lovett was vice president of Morgan & Company, a Houston-based real estate
development company, where he was responsible for income property acquisitions
and the acquisition, development and management of Wildcat Ranch, an exclusive
residential development outside Aspen, Colorado. Mr. Lovett graduated from
Carleton College with a Bachelor of Arts degree in English. He also holds a
Master of Business Administration degree from Harvard University. Mr. Lovett has
served as Vice President, Corporate Leasing, since June 1996.

         Jane Page, prior to joining the Company, was employed by Metropolitan
Life Real Estate Investments and held positions of director of corporate
property management and regional asset manager, responsible for managing and
leasing a 12-million square foot, high-grade institutional portfolio in Houston,
Austin and New Orleans. Ms. Page's fourteen-year tenure at MetLife also included
membership on MetLife's Investment Committee, which reviewed and approved all
significant transactions on a national basis. Ms. Page serves on the boards of
the Greater Houston Partnership, Central Houston, Inc. and the Downtown Houston
Management District. Ms. Page graduated with a Bachelor of Arts degree from
Point Loma College in San Diego and with a Master of Business Administration
degree from the University of San Francisco. She also holds CCIM and CPM
designations. Ms. Page served as Director of Asset Management, Houston Region
from the time she joined the Company in January 1988 until December 1998, when
she became Vice President, Houston Region Asset Management.


                                      -93-
<PAGE>   95


         Bruce A. Picker, prior to joining the Company, worked for Rainwater,
Inc. from 1990 to 1994 as the partnership controller of its first major real
estate acquisition. Previously, Mr. Picker was a senior accountant for Arthur
Andersen LLP in its audit department from 1986 to 1989. Mr. Picker holds a
Bachelor of Business Administration degree in accounting from Harding University
and is a Certified Public Accountant. Mr. Picker has served as the Treasurer
since July 1994, and as a Vice President since June 1996. Mr. Picker also served
as Interim Co-Chief Financial Officer from August 1998 until April 1999.

         John L. Zogg, Jr. served as vice president of the commercial real
estate group of Rosewood Property Company, responsible for marketing and leasing
office space in the Dallas and Denver areas from January 1989 to May 1994. For
three years prior to joining Rosewood Property Company, Mr. Zogg worked as
marketing manager of Gerald D. Hines Interests, responsible for office leasing
in the Dallas metropolitan area. He graduated from the University of Texas at
Austin with a Bachelor of Arts degree in economics and holds a Master of
Business Administration degree from the University of Dallas. Mr. Zogg has
served as Vice President, Leasing and Marketing, since May 1994.


ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

         The following table sets forth the annual and long-term compensation
paid or awarded to the chief executive officer and the four most highly
compensated executive officers of CREE, Ltd. for the years ended December 31,
1998, 1997 and 1996, respectively. As a result of the Company's UPREIT
structure, no employees are compensated by the Company, but are compensated by
CREE, Ltd. Neither the Operating Partnership nor the Company has granted any
stock appreciation rights ("SARs"). The Operating Partnership has issued units
of partnership interest (the "Units"). Unless otherwise indicated, each Unit is
exchangeable (the "Exchange Rights") for two common shares of beneficial
interest of the Company ("Common Shares") or, at the election of the Company,
cash equal to the then-current fair market value of the Common Shares for which
each Unit is exchangeable.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                ANNUAL COMPENSATION                     LONG-TERM COMPENSATION
                                   --------------------------------------------  ------------------------------------
                                                                                            AWARDS            PAYOUTS
                                                                                 --------------------------   -------
                                                                     OTHER       RESTRICTED     SECURITIES                ALL OTHER
       NAME AND                                                     ANNUAL         STOCK        UNDERLYING     LTIP    COMPENSATION
  PRINCIPAL POSITION      YEAR     SALARY ($)     BONUS ($)    COMPENSATION ($)   AWARDS ($)    OPTIONS (#)   PAYOUTS     ($) (1)
-----------------------   ----     ---------     ---------     ----------------  -----------    -----------   -------  -------------
<S>                       <C>      <C>           <C>           <C>               <C>            <C>           <C>      <C>  
Gerald W. Haddock         1998       416,153       300,000        58,535 (2)          --         1,000,000       --        1,690
   President and Chief    1997       380,772       500,000        56,553 (2)          --            --           --        1,600
   Executive Officer      1996       286,165     1,500,000            --              --         2,000,000(3)    --          960

James M. Eidson, Jr.      1998       182,067       110,000            --              --            30,000       --        1,690
   Senior Vice            1997       168,865       200,000            --              --            80,000(4)    --        1,600
   President,             1996       138,740       331,000            --              --           210,000       --          960
   Acquisitions           

David M. Dean             1998       182,067        80,000            --              --            79,500       --        1,211
   Senior Vice            1997       169,375       150,000            --              --            80,000(4)    --        1,600
   President,             1996       141,300        81,000            --              --           120,000       --          960
   Law, and Secretary     

William D. Miller         1998       182,067        80,000            --              --            12,500       --        1,628
   Senior Vice            1997       112,404(5)     69,300            --              --           140,000(6)    --        1,600
   President,             1996         --            --               --              --                --       --           --
   Asset Management       

John L. Zogg, Jr.         1998       143,884        80,000            --              --           112,500       --        1,690
   Vice President,        1997       113,848       106,875            --              --            30,000(4)    --        1,600
   Leasing                1996       102,938        80,000            --              --             7,500       --          935
   and Marketing          
</TABLE>


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

(1)  All amounts in this column represent matching contributions that CREE, Ltd.
     made to the individual's Crescent Real Estate Equities, Ltd. 401(k) Plan
     account.

(2)  Amount represents salaries and benefits that the Company paid for two
     personal accountants for Mr. Haddock.


                                      -94-
<PAGE>   96


(3)  Amount represents the number of Common Shares that may be issued following
     (i) exercise of Unit Options for Units on a one-for-one basis, and (ii)
     exchange of Units for Common Shares on the basis of two Common Shares for
     each Unit.

(4)  Amount represents Common Shares underlying Stock Options granted in March
     1998 based on the individual's performance in 1997.

(5)  This amount represents salary paid to Mr. Miller for the period between May
     1, 1997, the date he joined the Company, until the end of 1997. Mr.
     Miller's annualized salary for 1997 was $175,000.

(6)  Amount includes 20,000 Common Shares underlying Stock Options granted in
     March 1998 based on Mr. Miller's performance in 1997.


OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1998

         The following table provides certain information regarding options
granted to the named executive officers for the year ended December 31, 1998.
Neither Operating Partnership nor the Company has granted any SARs.

<TABLE>
<CAPTION>
                                                        INDIVIDUAL GRANTS
                                  -------------------------------------------------------------            POTENTIAL   
                                   NUMBER OF      % OF TOTAL                                            ASSUMED ANNUAL
                                  SECURITIES       OPTIONS                                              RATES OF STOCK
                                  UNDERLYING      GRANTED TO        EXERCISE                          PRICE APPRECIATION  
                                    OPTIONS      EMPLOYEES IN       OF BASE         EXPIRATION      FOR OPTION TERM ($)(1)
         NAME                      GRANTED (#)   FISCAL YEAR     PRICE ($/SH.)        DATE              5%         10%
------------------------------    ------------  -------------    -------------     ------------     ----------  ----------
                                                                                                        (IN THOUSANDS)
<S>                               <C>                <C>             <C>                   <C>       <C>          <C>   
Gerald W. Haddock ...........     1,000,000(2)       48.02           31.125           June 2008      19,574       49,605
 
John L. Zogg, Jr ............        12,500(2)        0.60           31.125           June 2008         245          620  
                                    100,000(3)        4.80           22.125        October 2008       1,391        3,526  
                                                                                                                      
David M. Dean ...............        79,750(2)        3.83           31.125           June 2008       1,561        3,956  
                                                                                                                      
James M. Eidson, Jr .........        30,000(2)        1.44           31.125           June 2008         587        1,488  
                                                                                                                      
William D. Miller ...........        12,500(2)        0.60           31.125           June 2008         245          620  
                                                                     
</TABLE>
------------------------ 

(1)  Potential Realizable Value is the change in share price of securities
     underlying options granted, based on the assumed annual growth rates shown
     over their 10-year option term. For example, a 5% growth rate, compounded
     annually, for Mr. Haddock's grant results in a share price of $50.70 per
     share, and a 10% growth rate, compounded annually, results in a share price
     of $80.73 per share. These potential realizable values are listed to comply
     with the regulations of the Commission, and the Operating Partnership
     cannot predict whether these values will be achieved. Actual gains, if any,
     on stock option exercise are dependent on the future performance of the
     Common Shares.

(2)  Vest in equal one-fifth installments on June 12, 1999, 2000, 2001, 2002 and
     2003.

(3)  Vest in equal one-fifth installments on October 19, 1999, 2000, 2001, 2002
     and 2003.

AGGREGATED OPTION EXERCISES DURING 1998 AND OPTION VALUES AT DECEMBER 31, 1998

         The following table provides information about option exercises by the
named executive officers during the year ended December 31, 1998, and options
held by each of them at December 31, 1998. Neither the Operating Partnership nor
the Company has granted any SARs.

<TABLE>
<CAPTION>
                                                                NUMBER OF SECURITIES
                                                                UNDERLYING UNEXERCISED            VALUE OF UNEXERCISED   
                                                                     OPTIONS AT                   IN-THE-MONEY OPTIONS    
                                   SHARES                          FISCAL YEAR END (#)         AT FISCAL YEAR END ($) (1)
                                ACQUIRED ON      VALUE       -----------------------------    -----------------------------
         NAME                   EXERCISE (#)  REALIZED ($)   EXERCISABLE     UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
-----------------------------   -----------   -----------    -----------     -------------    -----------     -------------
                                                                                                      (IN THOUSANDS)
<S>                             <C>           <C>            <C>               <C>               <C>                <C>  
Gerald W. Haddock ...........            --            --      1,581,042(2)      2,071,430(3)      11,259             5,826
John L. Zogg, Jr ............            --            --         38,600           181,400            280               340
David M. Dean ...............            --            --        123,600           258,700            718               282
James M. Eidson, Jr .........         3,900        44,769        104,100           275,900            348               565
William D. Miller ...........            --            --         24,000           128,500             --                --
</TABLE>

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

(1)  Market value of securities underlying in-the-money options based on the
     closing price of the Common Shares on December 31, 1998 (the last trading
     day of the fiscal year) on the New York Stock Exchange of $23.00, minus
     exercise price.


                                      -95-
<PAGE>   97

(2)  The number of securities underlying exercisable but unexercised options
     includes 928,570 Common Shares that may be issued following (i) exercise of
     Unit Options for Units on a one-for-one basis, and (ii) exchange of Units
     for Common Shares on the basis of two Common Shares for each Unit.

(3)  The number of securities underlying unexercised and unexercised options
     includes 1,071,430 Common Shares that may be issued following (i) vesting
     of Unit Options, (ii) exercise of Unit Options for Units on a one-for-one
     basis, and (iii) the exchange of Units for Common Shares on the basis of
     two Common Shares for each Unit.

EMPLOYMENT AGREEMENTS

    As part of the transactions in connection with formation of the Company, the
Operating Partnership assumed employment agreements between Rainwater, Inc. and
each of John C. Goff and Gerald W. Haddock (the "Employment Agreements"). Such
Employment Agreements require that Messrs. Goff and Haddock enter into the
Noncompetition Agreements described below. See "Agreements Not to Compete"
below. The Operating Partnership takes action with respect to the Employment
Agreements through the Board of Directors of CREE, Ltd. The sole member of the
Board of Directors is Mr. Haddock. The Employment Agreements for Messrs. Goff
and Haddock initially provided that each of them receive annual compensation of
$160,000 per annum. On July 1, 1995, the Operating Partnership increased the
salary for each of Messrs. Goff and Haddock to $240,000 per annum. On March 5,
1996, the Operating Partnership increased the salary for each of Messrs. Goff
and Haddock to $300,000 per annum, and on March 3, 1997, to $400,000 per annum.
On June 23, 1997, Mr. Goff agreed to a reduction in his salary from the
Operating Partnership to $100,000 per annum to reflect his agreement to devote a
significant amount of his time to his duties as chairman of CBHS. On March 9,
1998, the Operating Partnership increased the salary for each of Messrs. Goff
and Haddock by 5% per annum, to $105,000 per annum for Mr. Goff and to $420,000
per annum for Mr. Haddock. On March 1, 1999, the Operating Partnership increased
the salary for Mr. Haddock to $500,000 per annum. The term of each of the
Employment Agreements expires on April 14, 2000, subject to automatic renewal
for one-year terms unless terminated by the Operating Partnership or Messrs.
Goff or Haddock, as the case may be. The salaries under the Employment
Agreements, which are not subject to a cap, may be increased at the discretion
of the Operating Partnership, although, at the request of CREE, Ltd., the
Executive Compensation Committee of the Company has reviewed and ratified all
such increases in salaries. The Operating Partnership similarly determines
bonuses under the Employment Agreements, although CREE, Ltd., on behalf of the
Operating Partnership, has asked the Executive Compensation Committee to review
and ratify all such bonuses.

AGREEMENTS NOT TO COMPETE

    The Operating Partnership is dependent on the services of Richard E.
Rainwater, John C. Goff and Gerald W. Haddock. Mr. Rainwater serves as Chairman
of the Board of Trust Managers of the Company but has no employment agreement
with the Company and, therefore, is not obligated to remain with the Company for
any specified term. In connection with the initial public offering of the
Company's Common Shares in May 1994 (the "Initial Offering"), each of Messrs.
Rainwater, Goff and Haddock entered into a Noncompetition Agreement with the
Company that restricts him from engaging in certain real estate related
activities during specified periods of time. The restrictions that Mr.
Rainwater's Noncompetition Agreement imposes will terminate one year after the
later to occur of (i) the date on which Mr. Rainwater ceases to serve as a trust
manager of the Company, and (ii) the date on which Mr. Rainwater's beneficial
ownership of the Company (including Common Shares and Units) first represents
less than a 2.5% ownership interest in the Company. The restrictions that Mr.
Goff's and Mr. Haddock's Noncompetition Agreements impose will terminate one
year after the subject individual first ceases to be a trust manager or an
executive officer of the Company. The Noncompetition Agreements do not, among
other things, prohibit Messrs. Rainwater, Goff and Haddock from engaging in
certain activities in which they were engaged at the time of formation of the
Company in 1994 or from making certain passive real estate investments.

    In 1996, Sanjay Varma became an advisor to the Operating Partnership
pursuant to an Advisory Agreement among the Operating Partnership, Mr. Varma,
Johanna Varma, Mr. Varma's spouse, and The Varma Group, Inc. (as amended,
"Advisory Agreement"). Pursuant to the Advisory Agreement, Mr. Varma, who
subsequently became an employee of CREE, Ltd. and Executive Vice President,
Chief of Corporate Operations of the Company and CREE, Ltd. in August 1998,
agreed to provide services in connection with the Operating Partnership's
acquisition and operation of hotels, resorts, restaurants, health spas and other
public hospitality businesses ("Advisory Services"). Under the Advisory
Agreement, Mr. Varma agrees to provide Advisory Services solely to the Operating
Partnership and not to invest in or otherwise participate for his own benefit in
the acquisition of any real estate interest. The restrictions that the Advisory
Agreement imposes will terminate on July 31, 2001. The Advisory Agreement does
not, among other things, prohibit Mr. Varma from (i) engaging in activities in
which he was engaged at the time of


                                      -96-
<PAGE>   98

executing the Advisory Agreement, (ii) investing in real estate interests in,
and management contracts for, hotels and resort properties that the Operating
Partnership or its affiliates own, or (iii) making certain co-investments in
acquisitions that the Operating Partnership or its affiliates make.


                 REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

    Gerald W. Haddock, as the sole member of the Board of Directors of CREE,
Ltd., determines the compensation of the officers of CREE, Ltd. The compensation
of the executive officers, at the request of Mr. Haddock, is reviewed and
ratified by the Executive Compensation Committee of the Company.

    The Company's Executive Compensation Committee is comprised of Mr. Morton
H. Meyerson and Mr. Paul E. Rowsey, III, two independent trust managers of the
Company. A majority of the full Board of Trust Managers select members of the
Executive Compensation Committee. As described above, CREE, Ltd., on behalf of
the Operating Partnership, asks the Executive Compensation Committee to review
and ratify all salary increases and bonus determinations under the Employment
Agreements and its other employment arrangements.

    Compensation Philosophy and Objectives. The Executive Compensation Committee
of the Company determines the compensation for the Company's executive officers
and administers the stock incentive and other compensation plans that the
Company adopts. In addition, the Executive Compensation Committee, acting for
the Company in its capacity as the sole stockholder of the General Partner,
reviews and ratifies, where appropriate, decisions of the board of directors of
the General Partner with respect to the compensation of the executive officers
of the General Partner.

    The philosophy of the Company's compensation program is to employ, retain
and reward executives capable of leading the Company in achieving its business
objectives. These objectives include enhancing shareholder value, maximizing
financial performance, preserving a strong financial posture, increasing the
Company's assets and positioning its assets and business in geographic markets
offering long-term growth opportunities. The accomplishment of these objectives
is measured against the conditions characterizing the industry within which the
Company and the Operating Partnership operate. In implementing the Company's
compensation program, it generally is the policy of the Executive Compensation
Committee to seek to qualify executive compensation for deductibility by the
Company for purposes of Section 162(m) of the Internal Revenue Code to the
extent that such policy is consistent with the Company's overall objectives and
executive compensation policy.

    Executive Officer Compensation. In addition to their regular salary, the
executive officers of the General Partner may be compensated in the form of cash
bonus awards and Restricted Stock grants and Stock Options under the 1995
Crescent Real Estate Equities, Inc. Stock Incentive Plan. Executive officers of
the General Partner are eligible to participate, on the same basis as other
employees, in the employer matching provision of the profit sharing plan that
the General Partner established, whereby employees may save for their future
retirement on a tax-deferred basis through the Section 401(k) savings feature of
the plan, with the General Partner contributing an additional percentage of the
amount each employee saves. Such executive officers are also eligible to
participate in the other employee benefit and welfare plans that the General
Partner maintains on the same terms as non-executive personnel who meet
applicable eligibility criteria, subject to any legal limitations on the amounts
that may be contributed or the benefits that may be payable under such plans.

    Performance of the Company and the Operating Partnership in light of
conditions characterizing the REIT industry generally was a key consideration in
the deliberations of the Executive Compensation Committee regarding executive
compensation for 1998. The Executive Compensation Committee recognizes that
share price is one measure of performance, but also that other factors,
including industry business conditions and the Company's success in achieving
short-term and long-term goals and objectives, must be evaluated in arriving at
a meaningful analysis of performance. Accordingly, the Executive Compensation
Committee also gave consideration to the Company's achievement of specified
business objectives when reviewing 1998 executive officer compensation. An
additional objective of the Executive Compensation Committee has been to reward
executive officers with equity compensation in addition to salary, in keeping
with the Company's overall compensation philosophy of placing equity in the
hands of its employees in an effort to further instill shareholder
considerations and values in the actions of all employees and executive
officers.



                                      -97-
<PAGE>   99

    Base Salary. The 1998 base annual salaries of the Vice Chairman of the Board
of Trust Managers (the "Vice Chairman") and the President and Chief Executive
Officer (the "CEO") were based upon employment contracts between such officers
and the Operating Partnership. In March 1997, the General Partner approved, and
the Board of Trust Managers of the Company ratified, an increase from the
$300,000 annual salary provided in each such contract to $400,000 per annum for
each of the Vice Chairman and CEO. On June 23, 1997, Mr. Goff agreed to a
reduction in his salary from the Operating Partnership to $100,000 per annum to
reflect his agreement to devote a significant amount of his time to his duties
as chairman of CBHS. On March 9, 1998, the General Partner approved, and the
Executive Compensation Committee ratified, a 5% increase for each of the Vice
Chairman and CEO to $105,000 per annum for the Vice Chairman and $420,000 per
annum for the CEO. On March 1, 1999, the General Partner approved, and the
Executive Compensation Committee ratified, an increase for the CEO to $500,000
per annum. Each of these employment agreements, which provides for bonuses to be
determined by the board of directors of the General Partner, expires in April
2000, subject to automatic renewal for successive one-year periods unless
terminated by the Operating Partnership or Messrs. Goff or Haddock, as the case
may be. The 1998 compensation paid to the other executive officers of the
General Partner was based upon a salary structure administered for consistency
for each position relative to its authority and responsibility and in comparison
to industry peers.

    Annual Incentive. The General Partner paid cash bonuses to its executive
officers and other key personnel in recognition of the Company's strong
performance within its industry and increased return to shareholders, as well as
the substantial personal contributions to the aggressive acquisition strategies
of the Operating Partnership. Both of these developments have a significant
impact on the Company's profitability and long-term performance. For a
discussion of the bonus paid to the CEO, see "Vice Chairman and CEO
Compensation" below.

    Long-Term Incentive. Stock Options were used in 1998 to reward and
incentivize executive officers and other key personnel and to retain them
through the potential of capital gains and equity buildup in the Company. The
Executive Compensation Committee determined the number of Stock Options granted
based upon its evaluation of performance criteria mentioned above, along with
the Executive Compensation Committee's subjective evaluation of each executive's
ability to influence the Company's long-term growth and profitability. All Stock
Options were issued at a price not less than the market price of the Common
Shares on the date of grant. Because the value of the Stock Option should, over
time, bear a direct relationship to the Company's share price, the Executive
Compensation Committee believes the award of Stock Options represents an
effective incentive to create value for the shareholders. During 1998, the
Executive Compensation Committee granted Stock Options to purchase 1,949,500
Common Shares to twelve persons who currently serve as officers of the Company,
the General Partner, or both.

    Vice Chairman and CEO Compensation. On March 1, 1999, the Executive
Compensation Committee and the Board of Trust Managers approved and ratified the
authorization by the General Partner of a cash bonus in the amount of $300,000
to the CEO. In approving such bonus, the Executive Compensation Committee gave
substantial weight to the critical contributions that the CEO made to the
Company's historical performance and to planning and implementing the
positioning of the Company to take advantage of growth opportunities when
changes in market conditions permit. The Company has completed more than $4.6
billion in acquisitions since the Initial Offering in 1994 and has increased its
quarterly distributions by approximately 137.8% since the Initial Offering. The
Executive Compensation Committee also noted that the stock price has increased
from $12.50 per share since the Initial Offering to $21.375 at the time of the
approval of the bonus on March 1, 1999. Further, total return to shareholders
(consisting of appreciation in share price and distributions paid) increased by
139.5% from the Initial Offering through December 31, 1998. The Executive
Compensation Committee also considered the amount and nature of compensation
paid to similarly situated executives at other major office REITs and at other
companies in the Dallas-Fort Worth area.

    On July 16, 1996, the Executive Compensation Committee and the Board of
Trust Managers of the Company granted Unit Options to acquire 1,000,000 Units to
the CEO. The Unit Plan provided for a seven-year vesting period and accelerated
vesting of 250,000 Unit Options in the event the fair market value of the Common
Shares equaled or exceeded $25.00 for each of ten consecutive trading days
(determined based on the closing price on each such day), which it did on
January 7, 1997. Effective March 9, 1998, the Executive  Compensation Committee
of the Company, which consists of Messrs. Meyerson and Rowsey, amended the
vesting schedule of the CEO's Unit Options to provide for (i) the vesting of
107,143 Unit Options per year for the remainder of the term of such Unit Option,
(ii) accelerated vesting of 250,000 Unit Options at the time that the Fair
Market Value of the Common Shares first equals or exceeds $50.00 per Common
Share, and (iii) accelerated vesting of all remaining unvested 


                                      -98-
<PAGE>   100


Unit Options at the time that the Fair Market Value of the Common Shares first
equals or exceeds $60.00 per Common Share. The Fair Market Value of the Common
Shares is defined as the average closing price of the Common Shares for the
preceding ten consecutive trading days. The closing price of the Common Shares
on the date of amendment of the vesting schedule was $35.3125. The Executive
Compensation Committee believes that the exercise price, vesting provisions and
other terms of the Unit Options provide a strong link between the future value
of the Unit Options and the long-term value of the Common Shares, which will
provide further incentives for the Vice Chairman and CEO to establish financial
and operational objectives designed to further increase the value of the
Company.


                                       EXECUTIVE COMPENSATION COMMITTEE

                                       Morton H. Meyerson
                                       Paul E. Rowsey, III


           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    Messrs. Meyerson and Rowsey, who are the sole members of the Executive
Compensation Committee of the Board of Trust Managers of the Company, have
borrowed certain funds from the Operating Partnership in connection with the
exercise of Stock Options, as described in "Certain Relationships and Related
Transactions" below.

    In addition, Messrs. Rainwater, Goff and Haddock are executive officers and
trust managers of the Company and members of the board of directors of COI. For
1998, the full board of directors of COI, upon recommendation by its
compensation committee (comprised of Carl Thorne and Mr. Rowsey), made all COI
compensation decisions (other than compensation of Mr. Haddock, who serves as
the president and chief executive officer of COI).



                                      -99-
<PAGE>   101


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         The following table sets forth the beneficial ownership of Common
Shares for (i) each shareholder of the Company who beneficially owns more than
5% of the Common Shares; (ii) the sole director of CREE, Ltd. And each named
executive officer of the Company or CREE, Ltd.; and (iii) the sole director of
CREE, Ltd. And the executive officers of the Company or CREE, Ltd. As a group.
Unless otherwise indicated in the footnotes, all Common Shares, Preferred Shares
and all Units are owned directly by the listed beneficial owner.

                        BENEFICIAL OWNERSHIP (1)

<TABLE>
<CAPTION>
NAME AND ADDRESS OF              COMMON                     PERCENT OF
BENEFICIAL OWNER (2)             SHARES (3)(4)(5)         COMMON SHARES (6)
--------------------             ----------------         -----------------
<S>                              <C>                      <C>   
Richard E. Rainwater.........          12,548,142(7)            9.5%  
John C. Goff.................           2,706,095(8)            2.1%  
Gerald W. Haddock............           2,246,078(9)            1.8%  
David M. Dean................              80,204(10)             *   
James M. Eidson, Jr..........             140,208(11)             *   
William D. Miller............              55,560                 *   
John L. Zogg. Jr.............              60,055(12)             *   
Prudential Insurance                                                  
Company of America...........          16,030,725(13)           12.9% 
   751 Broad Street                                                   
   Newark, New Jersey                                                 
   07102-3777                                                         
FMR Corp.....................           8,186,201(14)           6.6%  
  82 Devonshire Street                                                
  Boston, Massachusetts                                         
  07102-377
Cohen & Steers Capital
Management, Inc. ............           6,454,400(15)           5.2%
   757 Third Avenue              
   New York, New York
   10017
Director and Executive          
Officers as a
Group  (16 persons) .........          18,553,211(7)(8)        14.2%
                                  (9)(10)(11)(12)(16)
</TABLE>

----------

*    Less than 1%.

(1)  All information is as of April 14, 1999 unless otherwise indicated. The
     number of Common Shares beneficially owned is reported on the basis of
     regulations of the Securities and Exchange Commission (the "Commission")
     governing the determination of beneficial ownership of securities.
     Accordingly, the number of Common Shares a person beneficially owns
     includes (i) the number of Common Shares that such person has the right to
     acquire within 60 days of April 14, 1999 upon the exercise of options to
     purchase Common Shares ("Stock Options") granted pursuant to the 1994
     Crescent Real Estate Equities, Inc. Stock Incentive Plan (the "1994 Plan")
     and the 1995 Crescent Real Estate Equities, Inc. Stock Incentive Plan (as
     amended, the "1995 Plan"), (ii) the number of Common Shares that may be
     issued upon exchange of partnership units of the Operating Partnership
     ("Units") that such person owns for Common Shares, with such exchange made
     on the basis of two Common Shares for each Unit exchanged (assuming the
     Company elects to issue Common Shares rather than pay cash upon such
     exchange), and (iii) the number of Common Shares that may be issued upon
     exercise of options (the "Unit Options") granted under the 1996 Crescent
     Real Estate Equities Limited Partnership Unit Incentive Plan (the "Unit
     Plan") to purchase Units and the subsequent exchange of such Units for
     Common Shares, with such exchange made on the basis of two Common Shares
     for each Unit exchanged (assuming the Company elects to issue Common Shares
     rather than pay cash upon such exchange). In addition, the number of Common
     Shares a person beneficially owns is deemed to include the number of Common
     Shares issuable upon exchange of the Company's 6 3/4% Series A Convertible
     Cumulative Preferred Shares, each of which is currently convertible into
     .6119 Common Shares (the "Preferred Shares"). As of April 14, 1999, none of
     the persons listed in the Beneficial Ownership table, other than FMR Corp.,
     and no executive officer not listed in the table, beneficially owned any
     Preferred Shares.

(2)  Unless otherwise indicated, the address of each beneficial owner is 777
     Main Street, Suite 2100, Fort Worth, Texas 76102.

(3)  The number of Common Shares the following persons beneficially own includes
     the number of Common Shares indicated due to the vesting of unexercised
     Stock Options, as follows: Richard E. Rainwater -- 1,165,624; Gerald W.
     Haddock -- 1,731,042; David M. Dean -- 75,778; James M. Eidson, Jr. --
     138,100; William D. Miller -- 54,500; John L. Zogg, Jr. --53,300; and
     Director and Executive Officers as a Group --5,634,148.


                                     -100-
<PAGE>   102

(4)  The number of Common Shares the following persons beneficially own includes
     the number of Common Shares owned indirectly through participation in the
     General Partner's 401(k) Plan as of December 31, 1998, as follows: Gerald
     W. Haddock -- 2,198; John L. Zogg, Jr. -- 1,755; David M. Dean -- 1,262;
     James M. Eidson, Jr. -- 770; William D. Miller -- 713; and Director and
     Executive Officers as a Group -- 14,453.

(5)  The number of Common Shares the following persons beneficially own includes
     the number of Common Shares that may be issued upon exchange of Units that
     such person owns, as follows: Richard E. Rainwater -- 6,808,818; Gerald W.
     Haddock -- 512,838; and Director and Executive Officers as a Group --
     8,148,602.

(6)  The percentage of Common Shares a person beneficially owns assumes that (i)
     as to any person listed in the Beneficial Ownership table, all Stock
     Options exercisable within 60 days of April 14, 1999 are exercised, all
     Unit Options exercisable within 60 days of April 14, 1999 are exercised and
     the Units so acquired are subsequently exchanged for Common Shares, all
     Units are exchanged for Common Shares, and all Preferred Shares are
     exchanged for Common Shares, and (ii) as to all other persons, no Stock
     Options or Unit Options are exercised, no Units are exchanged for Common
     Shares, and no Preferred Shares are exchanged for Common Shares.

(7)  The number of Common Shares that Mr. Rainwater beneficially owns includes
     460,000 Common Shares and 4,180 Common Shares that may be issued upon
     exchange of Units that Darla Moore, Mr. Rainwater's spouse, owns. Mr.
     Rainwater disclaims beneficial ownership of such Common Shares. In
     addition, the number of Common Shares that Mr. Rainwater beneficially owns
     includes 2,206,374 Common Shares and 6,335,564 Common Shares that may be
     issued upon exchange of Units that Mr. Rainwater owns indirectly, including
     (i) 12,346 Common Shares and 49,506 Common Shares that may be issued upon
     exchange of Units owned by Rainwater, Inc., a Texas corporation, of which
     Mr. Rainwater is the sole director and owner, (ii) 2,425,836 Common Shares
     that may be issued upon exchange of Units owned by Rainwater Investor
     Partners, Ltd., a Texas limited partnership, of which Rainwater, Inc. is
     the sole general partner, (iii) 555,424 Common Shares that may be issued
     upon exchange of Units owned by Rainwater RainAm Investors, L.P., a Texas
     limited partnership, of which Rainwater, Inc. is the sole general partner,
     (iv) 3,304,798 Common Shares that may be issued upon exchange of Units
     owned by Office Towers LLC, a Nevada limited liability company, of which
     Mr. Rainwater and Rainwater, Inc. own an aggregate 100% interest, and (v)
     2,194,028 Common Shares owned by the Richard E. Rainwater 1995 Charitable
     Remainder Unitrust No. 1, of which Mr. Rainwater is the sole trustee and
     85% beneficiary.

(8)  The number of Units that Mr. Goff beneficially owns includes (i) 152,560
     Common Shares that may be issued upon exchange of Units that the Goff
     Family, L.P., a Delaware limited partnership, owns, and (ii) 928,570 Common
     Shares that may be issued upon exchange of Units due to the vesting of Unit
     Options. Mr. Goff disclaims beneficial ownership of the Common Shares that
     may be issued upon exchange of Units that the Goff Family, L.P. owns in
     excess of his pecuniary interest in such Units.

(9)  The number of Common Shares that Mr. Haddock beneficially owns includes (i)
     101,706 Common Shares that may be issued upon exchange of Units owned by
     Haddock Family, L.P., a Delaware limited partnership, of which Mr. Haddock
     is the general partner, (ii) 928,570 Common Shares that may be issued upon
     exchange of Units due to the vesting of Unit Options, and (iii) 2,000
     Common Shares that may be issued upon exchange of Units that Mr. Haddock's
     spouse owns. Mr. Haddock disclaims beneficial ownership of the Common
     Shares that may be issued upon exchange of Units that the Haddock Family,
     L.P. owns in excess of his pecuniary interest in such Units, and he
     disclaims beneficial ownership of the Common Shares that may be issued upon
     exchange of Units that his spouse owns.

(10) The number of Common Shares that Mr. Dean beneficially owns includes 664
     Restricted Shares, which will vest (i.e., the restrictions will lapse) in
     June 2000. Mr. Dean has sole voting power with respect to these Restricted
     Shares.

(11) The number of Common Shares that Mr. Eidson beneficially owns includes
     1,338 Common Shares that trusts established for the benefit of Mr. Eidson's
     minor children own. Mr. Eidson disclaims beneficial ownership of such
     Common Shares.

(12) The number of Common Shares that Mr. Zogg beneficially owns includes 1,000
     Common Shares that Mr. Zogg's minor children own. Mr. Zogg disclaims
     beneficial ownership of such Common Shares..

(13) As reported in The Prudential Insurance Company of America ("Prudential")
     Schedule 13G/A ("Prudential Schedule 13G/A") dated February 12, 1999,
     Prudential beneficially owns 16,018,369 Common Shares. Prudential holds
     4,767,551 of the 16,018,369 Common Shares for the benefit of its general
     account and has sole voting and dispositive power as to such Common Shares.
     Prudential holds 11,250,818 of the 16,018,369 Common Shares for its own
     benefit or for the benefit of its clients by its separate accounts,
     externally managed accounts, registered investment companies, subsidiaries
     and/or other affiliates and has shared voting and dispositive power as to
     such Common Shares. All information presented above relating to Prudential
     is based solely on the Prudential Schedule 13G/A. In addition, the Company
     subsequently issued an additional 12,356 Common Shares to Prudential in
     connection with the conversion by Prudential, on behalf of its general
     account and certain funds that affiliates of Prudential advise, of the
     Company's Series B Convertible Preferred Shares.



                                     -101-
<PAGE>   103
 (14)  As reported in the FMR Corp. Schedule 13G/A ("FMR Corp. Schedule 13G/A")
      dated February 1, 1999, Fidelity Management & Research Company
      ("Fidelity"), a registered investment adviser and a wholly owned
      subsidiary of FMR Corp., beneficially owns 7,590,834 Common Shares, none
      of which it has the power to vote. The number of Common Shares that
      Fidelity Management beneficially owns includes 156,034 Common Shares
      resulting from the assumed conversion of 255,000 Preferred Shares. In
      addition to such 7,590,834 Common Shares, Fidelity Management Trust
      Company ("Fidelity Management"), a wholly owned subsidiary of FMR Corp.,
      beneficially owns 595,366 Common Shares, each of which it has the sole
      power to vote. The number of Common Shares that Fidelity Management
      beneficially owns includes 85,666 Common Shares resulting from the assumed
      conversion of 55,000 Preferred Shares. Fidelity beneficially owns
      7,590,834 Common Shares as a result of serving as investment adviser to
      various registered investment companies (the "Funds"). Each of (i) Edward
      C. Johnson III, chairman of FMR Corp., (ii) Abigail P. Johnson, a director
      of FMR Corp., (iii) FMR Corp., through its control of Fidelity, and (iv)
      the Funds, has sole power to dispose of such 7,590,834 Common Shares that
      the Funds own. Neither FMR Corp., Edward C. Johnson III nor Abigail
      Johnson has the sole power to vote or direct the voting of the Common
      Shares that the Funds own, which power resides with the Funds' boards of
      trustees. Fidelity carries out voting of the Common Shares under written
      guidelines that the Funds' boards of trustees establish. Fidelity
      Management beneficially owns 595,366 Common Shares as a result of its
      serving as investment manager of certain institutional accounts. Each of
      Edward C. Johnson III, Abigail Johnson and FMR Corp., through its control
      of Fidelity Management, has sole dispositive power over such 595,366
      Common Shares, sole voting power over 563,466 Common Shares and no voting
      power over 31,900 Common Shares that the institutional accounts own. All
      information presented herein relating to FMR Corp., Fidelity and Fidelity
      Management is based solely on the FMR Corp. Schedule 13G/A.

(15) As reported in the Cohen & Steers Capital Management, Inc. ("Cohen &
     Steers") Schedule 13G/A ("Cohen & Steers Schedule 13G/A") dated February 8,
     1999, Cohen & Steers beneficially owns 6,454,400 Common Shares. Cohen &
     Steers has the sole power to dispose of all such 6,454,400 Common Shares
     and the sole power to vote 5,540,000 of such Common Shares. All information
     presented herein relating to Cohen & Steers is based solely on the Cohen &
     Steers Schedule 13G/A.

(16) The number of shares that the trust managers and executive officers as a
     group beneficially own includes an aggregate of 1,392 Restricted Shares
     that two executive officers other than Mr. Dean hold. Such Restricted
     Shares will vest (i.e., the restrictions will lapse) in June 2000. Such
     executive officers have sole voting power with respect to their respective
     Restricted Shares


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    For purposes of the discussion in this Item 13, the term "Company" includes,
unless the context otherwise requires, the Operating Partnership and the other
subsidiaries of the Company, in addition to the Company.

    In July 1996, in connection with the acquisition of Canyon Ranch-Tucson, the
Operating Partnership obtained from Mr. Zuckerman, who subsequently became a
trust manager of the Company in November 1996, and Jerrold Cohen an option (the
"Option") to acquire, in three equal installments, up to 30% of a management
company to be formed by Messrs. Zuckerman and Cohen for the licensing and use of
the "Canyon Ranch" name in locations and for services and products beyond Canyon
Ranch-Tucson and Canyon Ranch-Lenox. In July, 1998, the Operating Partnership
assigned the Option to CRL Investments, Inc. ("CRL"), a company owned 95% by the
Operating Partnership and 5% (representing 100% of the voting securities of CRL)
by COI. In connection with formation of CRL, the Operating Partnership
contributed $0.95 million and COI contributed $50,500. CRL exercised the first
installment of the Option by paying $1 million to obtain a 10% economic interest
in CR License, LLC ("CR License"), the management company that Messrs. Zuckerman
and Cohen formed. CRL has the opportunity during the next two years to pay an
additional $5 million to obtain an additional 20% interest in CR License.
Contemporaneously, CRL acquired a 50% interest in CR Las Vegas LLC, an entity
that will operate and be the lessee of a Canyon Ranch day spa in the Venetian
Hotel in Las Vegas. Through CRL and CR License, the Operating Partnership has an
effective 52.25% economic interest in the Canyon Ranch day spa project. To
enable CRL to exercise future options with respect to CR License and to fund its
obligations to partnerships such as CR Las Vegas, the Operating Partnership
extended to CRL a $7 million credit facility ("CRL Facility"), which bears
interest at 12% per annum and matures August 1, 2003. The Operating Partnership
has committed to invest $8 million in equity in CRL. During the first quarter of
1999, the Operating Partnership and COI made an equity contribution in CRL, on a
pro rata basis, in the amount of $2.33 million, and CRL borrowed $2.33 million
from the Operating Partnership under the CRL Facility. Substantially all of
these amounts have been contributed to CR Las Vegas. The amount outstanding
under the CRL Facility is $2.33 million.

    Effective March 14, 1996, March 14, 1997 and March 30, 1998, the Company
loaned to Mr. Meyerson, an independent trust manager of the Company, $187,425,
$45,311 and $45,297, respectively, on a recourse basis, pursuant to the 1994
Plan and the 1995 Plan. Mr. Meyerson used the proceeds of the first loan, with
$75.00 in cash, to acquire 15,000 Common Shares pursuant to the exercise of
15,000 Stock Options that were granted to him on May 5, 1994 under the 1994
Plan. Mr. Meyerson used the proceeds of the second loan, together with $14.00 in
cash, to acquire 2,800 Common Shares pursuant to the exercise of 2,800 Stock
Options that were granted to him on March 14, 1996 under the 1995 Plan. Mr.
Meyerson used the proceeds of the third loan, together with $28.00 in cash, to
acquire 2,800 Common Shares pursuant to the exercise of 2,800 Stock Options that
were granted to him on March 14, 1996 under the 1995 Plan. In April 1999, Mr.
Meyerson assigned his loans, the 7,500 Units and the 5,600 Common Shares
securing these loans to Big Bend III Investments L.P. ("Big Bend"), of which Mr.
Meyerson is a 49.5% limited partner, and of which a corporation that Mr.
Meyerson wholly owns is a 1% general partner.


                                     -102-
<PAGE>   104

    Effective July 17, 1996, February 2, 1998 and June 12, 1998, the Company
loaned to Mr. Frank, an independent trust manager of the Company, $187,425,
$45,298 and $120,869 respectively, on a recourse basis, pursuant to the 1994
Plan and the 1995 Plan. Mr. Frank used the proceeds of the first loan, together
with $75.00 in cash, to acquire 15,000 Common Shares pursuant to the exercise of
15,000 Stock Options that were granted to him on May 5, 1994 under the 1994
Plan. Mr. Frank used the proceeds of his second loan, together with $28.00 in
cash, to acquire 2,800 Common Shares pursuant to the exercise of 2,800 Stock
Options that were granted to him on March 14, 1996 under the 1995 Plan. Mr.
Frank used the proceeds of the third loan, together with $56.00 in cash, to
acquire 5,600 Common Shares pursuant to the exercise of 2,800 Stock Options that
were granted to him on March 14, 1996 under the 1995 Plan and 2,800 Stock
Options that were granted to him on June 9, 1997 under the 1995 Plan.

    Effective June 10, 1997, the Company loaned to Mr. Rowsey, an independent
trust manager of the Company, $419,997 on a recourse basis, pursuant to the 1994
Plan and the 1995 Plan. Mr. Rowsey used the proceeds of his loan, together with
$328.00 in cash, to acquire 30,000 Common Shares pursuant to the exercise of
30,000 Stock Options that were granted to him on May 5, 1994 under the 1994
Plan, and 2,800 Common Shares pursuant to the exercise of 2,800 Stock Options
that were granted to him on March 14, 1996 under the 1995 Plan.

    Each of the loans made to Messrs. Meyerson, Frank or Rowsey bears interest
at a fixed annual rate equal to the distribution yield on the Common Shares as
of March 14, 1996, March 14, 1997 and March 30, 1998 (for the respective loans
originally made to Mr. Meyerson), July 17, 1996, February 2, 1998 and June 12,
1998 (for Mr. Frank's respective loans), and June 10, 1997 (for Mr. Rowsey's
loan), in each case, the effective date of the applicable loan. Each loan is
payable, interest only, on a quarterly basis from distributions paid with
respect to such Common Shares, with a final payment of all accrued and unpaid
interest, plus the entire original principal balance, due on March 14, 2001,
March 14, 2002 and March 30, 2003 (for the respective loans originally made to
Mr. Meyerson), on July 17, 2001, February 2, 2003 and June 12, 2003 (for Mr.
Frank's respective loans), and on June 10, 2002 (for Mr. Rowsey's loan). The
loans originally made to Mr. Meyerson are secured by 7,500 Units, 2,800 Common
Shares and 2,800 Common Shares, respectively, that Big Bend owns; Mr. Frank's
loans are secured by 15,000 Common Shares, 2,800 Common Shares and 5,600 Common
Shares, respectively, that Mr. Frank owns; and Mr. Rowsey's loan is secured by
32,800 Common Shares that Mr. Rowsey owns. As of December 31, 1998, accrued
interest in the aggregate amount of $8,286 was outstanding on the loans
originally made to Mr. Meyerson, accrued interest in the aggregate amount of
$8,375 was outstanding on Mr. Frank's loans, and accrued interest in the amount
of $9,718 was outstanding on Mr. Rowsey's loan.

    In April 1997, the Company established COI to be the lessee and operator of
certain assets to be acquired by the Company and to perform the Intercompany
Agreement, pursuant to which each party agreed to provide the other with rights
to participate in certain transactions. Messrs. Rainwater and Goff are,
respectively, the Chairman of the Board and the Vice Chairman of the Board of
both the Company and COI, and Mr. Haddock serves as the President, Chief
Executive Officer and a member of the Board of the Company, COI and the General
Partner. Messrs. Frank and Rowsey are members of the Board of the Company and of
COI. As of April 14, 1999, Messrs. Rainwater, Goff and Haddock owned an
aggregate approximately 17.7% of the outstanding common stock of COI through
their ownership of 1,647,026 shares of COI common stock and 456,713 shares
underlying vested stock options.

    In connection with the formation and capitalization of COI, the Company
contributed $14.1 million to COI and loaned approximately $35.9 million to COI
pursuant to a five-year loan (the "COI Term Loan"), which bears interest at 12%
per annum and is collateralized by a lien on certain assets that COI now owns or
may acquire in the future. Also in connection with COI's formation, the Company
established a $20.4 million line of credit (the "Line of Credit"), which bears
interest at 12% per annum. The Line of Credit was amended in August 1998 to
increase the amount available to $30.4 million. The Line of Credit is
cross-defaulted and cross-collateralized with the COI Term Loan and matures no
later than June 2007. As of December 31, 1998, the outstanding principal balance
on the COI Term Loan was approximately $24.22 million, and accrued interest was
approximately $0.50 million. As of December 31, 1998, the outstanding principal
balance on the Line of Credit was $27.7 million, with accrued interest of
approximately $18,500. In March 1999, COI made a principal payment of $13.2
million, which represented a permanent reduction of the amount available under
the Line of Credit to $17.2 million.

    In connection with the acquisition by COI, effective July 31, 1997, of the
companies that leased certain Crescent-owned hotel properties, COI acquired 100%
of an entity that has outstanding debt under notes of approximately $2.4


                                     -103-
<PAGE>   105

million and $0.65 million (collectively, the "CR Notes") payable to the Company
in connection with acquisition of Canyon Ranch-Tucson. The CR Notes bear
interest at a rate of 10.75% per annum, are secured by deeds of trust for
certain real and personal property and mature in August 2003. The aggregate
outstanding balance at December 31, 1998 on the CR Notes was approximately $2.24
million. In addition, in connection with this transaction, COI acquired 100% of
an entity that has outstanding debt under a promissory note of approximately
$0.19 million (the "Sonoma Note") payable to the Company in connection with
acquisition of Sonoma Mission Inn & Spa. The Sonoma Note bears interest at a
rate of 7.5% per annum and matures in November 2006. The outstanding balance of
the Sonoma Note at December 31, 1998 was approximately $ 0.19 million.

    In connection with COI's acquisition on September 22, 1997 of a two-thirds
interest in the joint venture that owns the Houston Center Athletic Club and a
$5.0 million note receivable from the joint venture, the Company made a loan to
COI of $0.8 million ("Houston Center Note"), which bears interest at 8.5% per
annum. The Houston Center Note is secured by COI's interest in the joint venture
and matures on September 22, 2002. As of December 15, 1998, the outstanding
balance of the Houston Center Note was approximately $0.64 million.

    Until September 1998, Messrs. Haddock and Goff owned, collectively, 66.67%
of the voting securities (representing approximately 6.67% of the outstanding
stock) of Crescent Development Management Corp., a Delaware corporation
("CDMC"), and they, together with Harry Frampton (collectively, the "CDMC
Holders"), comprised CDMC's board of directors. The Operating Partnership owns
90% of the outstanding stock (all of which is nonvoting) of CDMC. Effective
September 11, 1998, the CDMC Holders entered into a partnership agreement (the
"Partnership Agreement") with COI to form COPI Colorado, L.P., a Delaware
limited partnership ("COPI Colorado"). As of September 22, 1998, each CDMC
Holder contributed to COPI Colorado all of his shares of CDMC voting stock
(collectively, the "CDMC Shares") in exchange for an approximately 16.67%
limited partner interest in COPI Colorado. Prior thereto, COI had contributed to
COPI Colorado $9.0 million in cash in exchange for a 50% general partner
interest in COPI Colorado. As a result, COI owns a 50% managing interest in COPI
Colorado, and the CDMC Holders own a 50% investment interest in COPI Colorado.
COI funded its contribution to COPI Colorado using the proceeds from a $9
million term loan from the Operating Partnership ("COPI Colorado Note"). The
COPI Colorado Note bears interest at 12% per annum, with interest payable
quarterly, and matures in May 2002. The COPI Colorado Note is secured by COI's
general partner interest in COPI Colorado and is cross-collateralized and
cross-defaulted with COI's other borrowings from the Operating Partnership. As
of December 31, 1998, the COPI Colorado Note had an outstanding principal
balance of $9 million and accrued interest of $183,000.

    As of December 31, 1998, three credit facilities that the Operating
Partnership extended to CDMC were outstanding: (i) a $40.2 million line of
credit due August 31, 2004 and bearing interest at the rate of 11.5% per annum
("CDMC Credit Facility"), (ii) a $3.1 million note payable to the Operating
Partnership maturing June 2005 and bearing interest at the rate of 12% per
annum; and (iii) a $22.9 million credit facility due January 2003 and bearing
interest at 12% per annum. The aggregate outstanding balance of those facilities
as of December 31, 1998 is $53.58 million, and they are cross-defaulted and
cross-collateralized with CDMC's interests in the real estate development
companies and resort management company in which the loan proceeds have been
invested. Effective January 1, 1999, the Operating Partnership and CDMC entered
into a modification of the CDMC Credit Facility, increasing the size of the
credit facility from $40.2 million to $48.2 million, but restricting the use of
advances to specified existing real estate development projects. The Operating
Partnership extended an additional credit facility to CDMC dated January 1, 1999
in the amount of $40 million to fund certain future real estate development
projects. This facility bears interest at 11.5% per annum and matures December
31, 2006. Additionally, the Operating Partnership guarantees approximately $3
million of mortgage loan indebtedness of a general partnership in which CDMC's
wholly-owned subsidiary holds a nonmanaging minority interest; the Operating
Partnership made that guaranty in consideration, in part, for an option from
CDMC's subsidiary to purchase its interest in that partnership.

    Messrs. Haddock and Goff own in the aggregate a 5% economic interest
(representing all of the voting common stock) in DBL Holdings, Inc. ("DBL"), and
the Company owns all of the nonvoting common stock (representing a 95% economic
interest) in DBL. In connection with DBL's purchase of a 12.39% limited partner
interest (the "Mavericks Interest") in the partnership that owns the Dallas
Mavericks, the Operating Partnership loaned $10.08 million to DBL pursuant to a
loan agreement and related term note (the "DBL Mavericks Loan"). The DBL
Mavericks Loan bears interest at the rate of 12% per annum and matures June
2002. Generally, interest under the DBL Mavericks Loan is payable quarterly to
the extent of cash flow derived from all sources other than DBL-CBO, Inc., 


                                     -104-
<PAGE>   106


DBL's newly-formed wholly-owned subsidiary ("DBL-CBO"). On December 31, 1998,
the outstanding principal balance of the DBL Mavericks Loan, was $11.77 million,
and outstanding interest was approximately $0.56 million. The DBL Mavericks Loan
agreement prohibits pledges of the Mavericks Interest.

    On March 31, 1999, DBL-CBO acquired a $5.97 million aggregate principal
amount of Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Islands
limited liability company (the "Juniper Notes"). DBL-CBO obtained the funds to
purchase the Juniper Notes by selling all of the equity interest in DBL-CBO (the
"Equity Interest") to DBL for $6 million. DBL, in turn, obtained the purchase
price for the Equity Interest pursuant to a $6 million loan agreement and
related term note (the "DBL Juniper Loan") from the Operating Partnership that
is secured by the Equity Interest. The DBL Juniper Loan matures April 2011 and
accrues interest at the rate of 12% per annum. Generally, interest under the DBL
Juniper Loan is payable quarterly to the extent of cash flow derived from
DBL-CBO. Under the DBL Juniper Loan agreement, DBL has agreed (i) to prepay the
DBL Juniper Loan to the extent of any prepayment of the Juniper Notes, (ii) to
cause DBL-CBO to distribute to DBL, in its capacity as DBL-CBO's sole
shareholder, substantially all of the interest payments that DBL-CBO receives on
the Juniper Notes, and (iii) to cause DBL-CBO not to engage in any business
activity other than acquiring and holding the Juniper Notes.

    In 1997, COI and Magellan Health Services, Inc. ("Magellan") formed CBHS to
operate 90 behavioral healthcare facilities (the "Behavioral Healthcare
Facilities") that the Company acquired in 1997 from a subsidiary of Magellan.
Until November 1998, Mr. Goff served as chairman of the CBHS governing board.
Mr. Rainwater, either directly or indirectly, owns 2,457,278 shares of Magellan,
and approximately 1,212,483 warrants to purchase Magellan's common stock.
Messrs. Goff and Haddock and the Company also own, directly or indirectly,
shares or warrants to acquire shares of Magellan common stock. COI and Magellan
each own a 50% interest in CBHS. CBHS leases the Behavioral Healthcare
Facilities from the Company pursuant to a lease with an initial 12-year term
(subject to four, five-year renewal options at fair market rates) for annual
base rent of approximately $42.8 million (received during 1998), increasing
annually at a 5% compounded annual rate. The lease provides for CBHS to pay base
rent of approximately $45.0 million during 1999.

    CBHS, Magellan and the Company entered into a letter agreement dated
November 10, 1998, in which the Company agreed to use the proceeds in excess of
$4.4 million from the sale of certain Behavioral Healthcare Facilities that the
Company owns ("Aggregate Sales Proceeds") to purchase certain behavioral
healthcare facilities that Magellan owns. The Company currently has received
outstanding offers to buy two of the Company facilities, the sale of either
would cause the Aggregate Sales Proceeds to exceed $4.4 million and trigger the
Company's purchase obligation.

    Darla D. Moore is married to Mr. Rainwater and is a director of Magellan. As
part of the arrangements pursuant to which Mr. Rainwater acquired securities of
Magellan, an affiliate of Mr. Rainwater has the right to designate a nominee
acceptable to Magellan for election as a director of Magellan for so long as Mr.
Rainwater and his affiliates continue to beneficially own a specified minimum
number of shares of Magellan common stock. Mr. Rainwater's affiliate proposed
Ms. Moore as its nominee for director, and the Magellan board elected Ms.
Moore as director on February 22, 1996.

    Effective March 12, 1999, the Company, Vornado Realty Trust ("Vornado"),
affiliated entities that owned or operated approximately 101 refrigerated
storage properties (the "Refrigerated Storage Properties") and COI restructured
their investment in the Refrigerated Storage Properties (the "Restructuring").
In the Restructuring, the affiliated entities that owned any portion of the
business operations of the Refrigerated Storage Properties sold their ownership
to a newly formed partnership (the "Refrigerated Storage Operating
Partnership"), of which Vornado Operating L.P. owns 60% and a newly formed
subsidiary of COI owns 40%, 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. 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 tenth 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.


                                     -105-
<PAGE>   107

    In addition, in connection with the Restructuring, and also effective March
12, 1999, the Company purchased from COI an additional 4% nonvoting interest in
the two subsidiaries of the Company that have an indirect interest in the
Refrigerated Storage Properties for an aggregate purchase price of $13.2
million. As a result, the economic interest of the Company in each of the two
subsidiaries increased from 95% to 99%, which increased the Company's indirect
ownership interest in the Refrigerated Storage Properties from 38% to 39.6%, and
the economic interest of COI in the two subsidiaries decreased from 5% to 1%,
which decreased COI's indirect ownership interest in the Refrigerated Storage
Properties from 2% to 0.4%. The Company also granted COI an option to require
the Company to purchase COI's remaining 1% interest in both or either of the two
subsidiaries at such time as the purchase would not, in the opinion of counsel
to the Company, adversely affect the status of the Company as a REIT for an
aggregate price, payable by the Company, of approximately $3.4 million. In
connection with the Restructuring, 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, all of which was outstanding as of April 14, 1999.

    On April 24, 1998, the Company and COI acquired a 94.9% economic interest
and a 5% economic interest, respectively, in Corporate Arena Associates, Inc.
("CAA"). CAA owns an undivided 6.19% interest in certain acreage on which the
multi-purpose sports arena (the "Arena") is to be built in Dallas, Texas for the
Dallas Stars, a National Hockey League club, and the Dallas Mavericks, a
National Basketball Association club, as well as in the Arena. The common stock
that the Company owns in CAA is nonvoting. The common stock that COI owns in CAA
is also nonvoting; however, COI has limited consent rights under a Shareholders
Agreement among the three shareholders executed in connection with the
transaction. As of March 31, 1999, the Company's total contribution to CAA was
$3.43 million. On September 16, 1998, the Company and COI acquired a 9.9%
interest and a 2.6051% interest, respectively, as limited partners in
Hillwood/1642, Ltd. ("Hillwood"), a partnership that owns certain acreage
surrounding the Arena that may be developed for commercial purposes. As of March
31, 1999, the Company's contribution to Hillwood was $3.95 million.

    As of December 31, 1998, the Company owned nine hotel and resort properties
(collectively, the "Hotel Properties") that the Company leased to subsidiaries
of COI (the "Hotel Lessees") pursuant to nine separate leases ("Hotel Leases").
Under the Hotel Leases, each having an initial term of ten years, the Hotel
Lessees assumed the rights and obligations of the property owner under any
related management agreement with the hotel operators, as well as the obligation
to pay all property taxes and other charges against the property. Each of the
Hotel Leases provides for the respective Hotel Lessee to pay (i) base rent, with
periodic rent increases, if applicable, and (ii) percentage rent based on a
percentage of gross revenues, room revenues, food and beverage revenues, or a
combination thereof, if applicable, above a specified amount. The Hotel Lessees
paid an aggregate of approximately $52.19 million in base and percentage rent
under the Hotel Leases to the Company during the year ended December 31, 1998.
The Hotel Leases entitle the Company to receive an aggregate amount of $37.44
million for base rent, in addition to amounts for percentage rent, from the
Hotel Lessees during 1999.

    In addition to the Hotel Properties, the Company owns the Renaissance
Houston Hotel and is negotiating an agreement with a Marriott affiliate to
manage the Renaissance Houston Hotel, in which case it is expected that (i) the
Company will terminate its lease with the current tenant of the hotel, and (ii)
a subsidiary of COI would become the tenant of Renaissance Houston Hotel under a
lease with terms comparable to those of the Hotel Leases described above ("COI
Subsidiary Lease"). It is anticipated that the COI Subsidiary Lease will require
annual base rent payments in the amount of $1.1 million for the first year of
the COI Subsidiary Lease, to increase to $6 million during the ten-year term, in
addition to percentage rent.

    COI executed a Master Guaranty and other guaranties pursuant to which COI
unconditionally guarantees payment and performance under the Hotel Leases by the
Hotel Lessee solely from COI's hotel and resort related assets and income
streams. COI provided the Master Guaranty in exchange for the Company's
agreement to eliminate from the Hotel Leases certain net worth requirements and
cash distribution limitations applicable to the Hotel Lessees.

    In early 1998, Mr. Rainwater proposed to purchase an undeveloped residential
lot located at Canyon Ranch-Tucson (the "Lot") from the Operating Partnership at
a price equal to the fair market value of the Lot. Arthur Andersen LLP appraised
the Lot and determined its market value to be $275,000. 



                                     -106-
<PAGE>   108


Mr. Rainwater closed on the purchase of the Lot on March 8, 1999, and paid
$275,000 for the Lot. The Audit Committee confirmed and ratified this
transaction.

    Alan D. Friedman became an employee and President of Development and Private
Equity of the General Partner on July 17, 1998. Prior to that time, Trisept,
Inc., of which Mr. Friedman owns 100% of the stock, performed consulting
services for the Operating Partnership. The amounts paid for the services that
Trisept, Inc. performed for the Operating Partnership from January 1, 1998
through July 16, 1998 totaled approximately $385,500.

    Management believes that the foregoing transactions are on terms no less
favorable than those that could have been obtained in comparable transactions
with unaffiliated parties.


                                     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 Limited Partnership Consolidated Balance
         Sheets at December 31, 1998 and 1997.

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

         Crescent Real Estate Equities Limited Partnership Consolidated
         Statements of Partners' Capital for the years ended December 31, 1998,
         1997 and 1996.

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

         Crescent Real Estate Equities Limited Partnership Notes to Financial
         Statements.

(a)(2)  Financial Statement Schedules

         Schedule III - Crescent Real Estate Equities Limited Partnership
         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.

(a)(3)  Exhibits


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBIT
-------                            ----------------------
<S>            <C>                                           

3.01           Second Amended and Restated Agreement of Limited Partnership of
               the Registrant, dated as of November 1, 1997, as amended (filed
               as Exhibit 10.01 to the Annual Report on Form 10-K for the fiscal
               year ended December 31, 1998 (the "Company 1998 10-K") of
               Crescent Real Estate Equities Company (the "Company") and
               incorporated herein by reference)
</TABLE>


                                     -107-
<PAGE>   109


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBIT
-------                            ----------------------
<S>            <C>                                           

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

4.02           Restated Declaration of Trust of the Company (filed as Exhibit
               4.01 to the Registration Statement on Form S-3 (File No.
               333-21905) of the Company and incorporated herein by reference)

4.03           Amended and Restated Bylaws of the Company, as amended (filed as
               Exhibit 3.02 to the Quarterly Report on Form 10-Q for the fiscal
               quarter ended September 30, 1998 (the "Company 3Q 10-Q") of the
               Company and incorporated herein by reference)

4.04           6-5/8% Note due 2002 of the Registrant (filed as Exhibit No. 4.07
               to the Quarterly Report on Form 10-Q for the fiscal quarter ended
               June 30, 1998 (the "Company 2Q 10-Q") of the Company and
               incorporated herein by reference)

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

10.01          Noncompetition Agreement of Richard E. Rainwater, as assigned to
               the Registrant on May 5, 1994 (filed as Exhibit 10.02 to the
               Annual Report on Form 10-K for the Fiscal year ended December 31,
               1997 (the "Company 1997 10-K") of the Company and incorporated
               herein by reference)

10.02          Noncompetition Agreement of John C. Goff, as assigned to the
               Registrant on May 5, 1994 (filed as Exhibit 10.03 to the Company
               1997 10-K and incorporated herein by reference)

10.03          Noncompetition Agreement of Gerald W. Haddock, as assigned to the
               Registrant on May 5, 1994 (filed as Exhibit 10.04 to the Company
               1997 10-K and incorporated herein by reference)

10.04          Employment Agreement of John C. Goff, as assigned to the
               Registrant on May 5, 1997, and as further amended (the "Goff
               Employment Agreement") (filed as Exhibit 10.05 to the Company
               1997 10-K and incorporated herein by reference)

10.05          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)

10.06          Employment Agreement of Gerald W. Haddock, as assigned to the
               Registrant on May 5, 1994, and as further amended (the "Haddock
               Employment Agreement") (filed as Exhibit 10.06 to the Company
               1997 10-K and incorporated herein by reference)

10.07          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)
</TABLE>


                                     -108-
<PAGE>   110


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBIT
-------                            ----------------------
<S>            <C>                                           
10.08          Amendment No. 5 to the Haddock Employment Agreement, dated March
               1, 1999 (filed as Exhibit 10.09 to the Company 1998 10-K and
               incorporated herein by reference)

10.09          Form of Officer's and Trust Managers' Indemnification Agreement
               as entered into between the Company and each of its executive
               officers and trust managers (filed as Exhibit 10.07 to the Form
               S-4 and incorporated herein by reference)

10.10          Crescent Real Estate Equities Company 1994 Stock Incentive Plan
               (filed as Exhibit 10.07 to the Registration Statement on Form
               S-11 (File No. 33-75188) of the Company and incorporated by
               reference)

10.11          Crescent Real Estate Equities, Ltd. First Amended and Restated
               401(k) Plan, as amended (filed as Exhibit 10.12 to the Company
               1998 10-K and incorporated herein by reference)

10.12          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)

10.13          Amended and Restated 1995 Crescent Real Estate Equities Limited
               Partnership Unit Incentive Plan (filed as Exhibit 99.01 to the
               Registration Statement on Form S-8 (File No. 333-3452) of the
               Company and incorporated herein by reference)

10.14          1996 Crescent Real Estate Equities Limited Partnership Unit
               Incentive Plan (filed as Exhibit 10.01 to the Current Report on
               Form 8-K dated and filed September 27, 1996 of the Company and
               incorporated herein by reference)

10.15          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
               Behavioral Healthcare Properties (filed as Exhibit 10.27 to the
               Company 1997 10-K and incorporated herein by reference)

10.16          Fifth Amended and Restated Revolving Credit Agreement, dated June
               30, 1998 among the Registrant, BankBoston, N.A. and the other
               banks named therein (filed as Exhibit 10.17 to the Company 2Q
               10-Q and incorporated herein by reference)

10.18          Intercompany Agreement, dated June 3, 1997, between the
               Registrant 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)

12.01          Statement Regarding Computation of Ratios of Earnings to Fixed
               Charges and Preferred Share Dividends (filed herewith)

21.01          List of Subsidiaries (filed herewith)

27.01          Financial Data Schedule (filed herewith)
</TABLE>


                                     -109-
<PAGE>   111

(b)      Reports on Form 8-K

              None.

(c)      Exhibits

              See Item 14(a)(3) above.



                                     -110-
<PAGE>   112


                                   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 15th day of
April, 1999.


                                  CRESCENT REAL ESTATE EQUITIES LIMITED
                                  PARTNERSHIP


                                  By:  CRESCENT REAL ESTATE EQUITIES, LTD., its
                                       General Partner


                                  By:  /s/ GERALD W. HADDOCK    
                                       -----------------------------------------
                                           Gerald W. Haddock
                                           President and Chief Executive Officer


         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/ Gerald W. Haddock         Sole Director, President and       April 15, 1999
------------------------      Chief Executive Officer of     
    Gerald W. Haddock         CREE, Ltd. (Principal Executive
                              Officer)                       
                              

/s/ Jack I. Tompkins          Executive Vice President and       April 15, 1999
------------------------      Chief Financial Officer of     
    Jack I. Tompkins          CREE, Ltd. (Principal Financial
                              and Accounting Officer)        
</TABLE>


    SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
   SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
             SECURITIES PURSUANT TO SECTION 12 OF THE EXCHANGE ACT

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


                                     -111-
<PAGE>   113


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBIT
-------                            ----------------------
<S>            <C>                                           

3.01           Second Amended and Restated Agreement of Limited Partnership of
               the Registrant, dated as of November 1, 1997, as amended (filed
               as Exhibit 10.01 to the Annual Report on Form 10-K for the fiscal
               year ended December 31, 1998 (the "Company 1998 10-K") of
               Crescent Real Estate Equities Company (the "Company") and
               incorporated herein by reference)

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

4.02           Restated Declaration of Trust of the Company (filed as Exhibit
               4.01 to the Registration Statement on Form S-3 (File No.
               333-21905) of the Company and incorporated herein by reference)

4.03           Amended and Restated Bylaws of the Company, as amended (filed as
               Exhibit 3.02 to the Quarterly Report on Form 10-Q for the fiscal
               quarter ended September 30, 1998 (the "Company 3Q 10-Q") of the
               Company and incorporated herein by reference)

4.04           6-5/8% Note due 2002 of the Registrant (filed as Exhibit No. 4.07
               to the Quarterly Report on Form 10-Q for the fiscal quarter ended
               June 30, 1998 (the "Company 2Q 10-Q") of the Company and
               incorporated herein by reference)

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

10.01          Noncompetition Agreement of Richard E. Rainwater, as assigned to
               the Registrant on May 5, 1994 (filed as Exhibit 10.02 to the
               Annual Report on Form 10-K for the Fiscal year ended December 31,
               1997 (the "Company 1997 10-K") of the Company and incorporated
               herein by reference)

10.02          Noncompetition Agreement of John C. Goff, as assigned to the
               Registrant on May 5, 1994 (filed as Exhibit 10.03 to the Company
               1997 10-K and incorporated herein by reference)

10.03          Noncompetition Agreement of Gerald W. Haddock, as assigned to the
               Registrant on May 5, 1994 (filed as Exhibit 10.04 to the Company
               1997 10-K and incorporated herein by reference)

10.04          Employment Agreement of John C. Goff, as assigned to the
               Registrant on May 5, 1997, and as further amended (the "Goff
               Employment Agreement") (filed as Exhibit 10.05 to the Company
               1997 10-K and incorporated herein by reference)

10.05          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)

10.06          Employment Agreement of Gerald W. Haddock, as assigned to the
               Registrant on May 5, 1994, and as further amended (the "Haddock
               Employment Agreement") (filed as Exhibit 10.06 to the Company
               1997 10-K and incorporated herein by reference)
</TABLE>


<PAGE>   114


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBIT
-------                            ----------------------
<S>            <C>                                           
10.07          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)

10.08          Amendment No. 5 to the Haddock Employment Agreement, dated March
               1, 1999 (filed as Exhibit 10.09 to the Company 1998 10-K and
               incorporated herein by reference)

10.09          Form of Officer's and Trust Managers' Indemnification Agreement
               as entered into between the Company and each of its executive
               officers and trust managers (filed as Exhibit 10.07 to the Form
               S-4 and incorporated herein by reference)

10.10          Crescent Real Estate Equities Company 1994 Stock Incentive Plan
               (filed as Exhibit 10.07 to the Registration Statement on Form
               S-11 (File No. 33-75188) of the Company and incorporated by
               reference)

10.11          Crescent Real Estate Equities, Ltd. First Amended and Restated
               401(k) Plan, as amended (filed as Exhibit 10.12 to the Company
               1998 10-K and incorporated herein by reference)

10.12          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)

10.13          Amended and Restated 1995 Crescent Real Estate Equities Limited
               Partnership Unit Incentive Plan (filed as Exhibit 99.01 to the
               Registration Statement on Form S-8 (File No. 333-3452) of the
               Company and incorporated herein by reference)

10.14          1996 Crescent Real Estate Equities Limited Partnership Unit
               Incentive Plan (filed as Exhibit 10.01 to the Current Report on
               Form 8-K dated and filed September 27, 1996 of the Company and
               incorporated herein by reference)

10.15          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
               Behavioral Healthcare Properties (filed as Exhibit 10.27 to the
               Company 1997 10-K and incorporated herein by reference)

10.16          Fifth Amended and Restated Revolving Credit Agreement, dated June
               30, 1998 among the Registrant, BankBoston, N.A. and the other
               banks named therein (filed as Exhibit 10.17 to the Company 2Q
               10-Q and incorporated herein by reference)

10.18          Intercompany Agreement, dated June 3, 1997, between the
               Registrant 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)
</TABLE>


<PAGE>   115


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBIT
-------                            ----------------------
<S>            <C>                                           

12.01          Statement Regarding Computation of Ratios of Earnings to Fixed
               Charges and Preferred Share Dividends (filed herewith)

21.01          List of Subsidiaries (filed herewith)

27.01          Financial Data Schedule (filed herewith)
</TABLE>