<PAGE>   1




                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q


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

         For the quarterly period ended June 30, 1998

                                       OR

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


                         Commission file number 0-22725

                            CRESCENT OPERATING, INC.
          -----------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                 Delaware                            75-2701931
  --------------------------------------   ---------------------------------
     (State or other jurisdiction of      (I.R.S. Employer Identification No.)
      incorporation or organization)

    306 West 7th Street, Suite 1025
           Fort Worth, Texas                            76102
  -------------------------------------    ---------------------------------
(Address of principal executive offices)              (Zip Code)

        Registrant's telephone number, including area code (817) 339-1020


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 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 90 days.

                                YES [ X ] NO [ ]


Number of shares of Common Stock, $.01 par value, outstanding as of August 10,
1998: 11,399,377

<PAGE>   2




                            CRESCENT OPERATING, INC.
                                    FORM 10-Q
                                TABLE OF CONTENTS



                         PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>         <C>                                                             <C>
Item 1.     Financial Statements:

            Consolidated Balance Sheets...................................... 3

            Consolidated Statements of Operations............................ 4

            Consolidated Statements of Cash Flows............................ 6

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

Item 2.     Management's Discussion and Analysis of Financial
               Condition and Results of Operations...........................14

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.......25


                          PART II - OTHER INFORMATION


Item 1.     Legal Proceedings................................................26

Item 2.     Changes in Securities and Use of Proceeds........................26

Item 3.     Defaults Upon Senior Securities..................................26

Item 4.     Submission of Matters to a Vote of Security Holders..............26

Item 5.     Other Information................................................26

Item 6.     Exhibits and Reports on Form 8-K.................................26
</TABLE>

                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS

                            CRESCENT OPERATING, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                  June 30, 1998    December 31, 1997
                                                                                  -------------      -------------
                                                                                   (Unaudited)          (Audited)
                                     ASSETS                                     
<S>                                                                               <C>                <C>          
CURRENT ASSETS                                                                  
  Cash and cash equivalents                                                       $  26,835,281      $  43,401,132
  Accounts receivable, net                                                           23,699,971         17,099,165
  Inventories                                                                        12,172,563         10,125,075
  Notes receivable                                                                    5,603,178          8,454,059
  Real estate held for sale                                                          41,122,941         43,200,000
  Prepaid expenses and other current assets                                           3,833,154          4,714,827
                                                                                  -------------      -------------
     Total current assets                                                           113,267,088        126,994,258
                                                                                  -------------      -------------
                                                                                
PROPERTY AND EQUIPMENT, NET                                                         107,173,834         90,979,033
                                                                                  -------------      -------------
                                                                                
INVESTMENTS                                                                         294,366,058        219,675,214
                                                                                  -------------      -------------
OTHER ASSETS                                                                    
  Real estate                                                                        67,422,103         70,827,584
  Notes receivable                                                                   17,443,780         35,343,319
  Goodwill, net of accumulated amortization of                                  
      $7,089,865 and $4,211,964 in 1998 and 1997, respectively                       35,108,486         35,777,368
  Other assets                                                                        6,959,746          4,786,559
                                                                                  -------------      -------------
     Total other assets                                                             126,934,115        146,734,830
                                                                                  -------------      -------------
                                                                                
TOTAL ASSETS                                                                      $ 641,741,095      $ 584,383,335
                                                                                  =============      =============
                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                 
                                                                                
CURRENT LIABILITIES                                                             
  Accounts payable and accrued expenses                                           $  42,130,610      $  49,320,732
  Accounts payable - CEI                                                              6,868,761          6,588,606
  Current portion of long-term debt - CEI                                             1,520,182         24,084,587
  Current portion of long-term debt                                                   7,730,201         18,759,349
  Deferred revenue                                                                    5,367,057          4,712,227
                                                                                  -------------      -------------
     Total current liabilities                                                       63,616,811        103,465,501

LONG-TERM DEBT-CEI, NET OF CURRENT PORTION                                          190,837,244        207,798,563
LONG-TERM DEBT, NET OF CURRENT PORTION                                               32,750,255          7,486,378
OTHER LIABILITIES                                                               
  Deferred revenue                                                                   29,859,365         17,477,576
  Other                                                                               5,892,032          2,648,879
                                                                                  -------------      -------------
     Total liabilities                                                              322,955,707        338,876,897
                                                                                  -------------      -------------
                                                                                
MINORITY INTERESTS                                                                  322,634,510        253,566,622
                                                                                  -------------      -------------
SHAREHOLDERS' EQUITY (DEFICIT)                                                  
Preferred stock, $.01 par value, 10,000,000 shares authorized,                  
       no shares issued or outstanding                                                       --                 --
Common stock, $.01 par value, 22,500,000 shares authorized, 11,398,091 and      
       11,211,094 shares issued and outstanding in 1998 and 1997, respectively          113,980            112,111
Additional paid-in capital                                                           17,663,544         14,255,423
Deferred compensation on restricted shares                                             (225,312)          (262,500)
Retained deficit                                                                    (21,401,334)       (22,165,218
                                                                                  -------------      -------------
     Total shareholders' equity (deficit)                                            (3,849,122)        (8,060,184)
                                                                                  -------------      -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                              $ 641,741,095      $ 584,383,335
                                                                                  =============      =============
                                                                                
</TABLE>


         See accompanying notes to the consolidated financial statements

                                        3
<PAGE>   4
                            CRESCENT OPERATING, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                                                        Carter-Crowley Asset
                                                         Crescent Operating, Inc.        Group (Predecessor)
                                                     --------------------------------      -------------
                                                     For the Three   For the period from For the Period from
                                                     Months Ended       May 9, 1997 to     April 1, 1997
                                                     June 30, 1998      June 30, 1997      to May 8, 1997
                                                     -------------      -------------      -------------
<S>                                                  <C>                <C>                <C>          
REVENUES
   Equipment sales & leasing                         $  11,558,220      $   1,707,580      $   1,617,765
   Hospitality                                          53,102,725                 --                 --
   Land development                                     42,148,417                 --                 --
                                                     -------------      -------------      -------------

      Total revenues                                   106,809,362          1,707,580          1,617,765
                                                     -------------      -------------      -------------

OPERATING EXPENSES
   Equipment sales & leasing direct expenses            10,839,969          1,424,882          1,598,756
   Hospitality direct expenses                          39,063,189                 --                 --
   Hospitality properties rent - CEI                    12,191,351                 --                 --
   Land development direct expenses                     40,494,318                 --                 --
   General and administrative expenses                     815,361                 --                 --
                                                     -------------      -------------      -------------

      Total operating expenses                         103,404,188          1,424,882          1,598,756
                                                     -------------      -------------      -------------
INCOME FROM OPERATIONS                                   3,405,174            282,698             19,009
                                                     -------------      -------------      -------------
INVESTMENT INCOME (LOSS)                                 8,605,677           (399,000)                --
                                                     -------------      -------------      -------------
OTHER (INCOME) EXPENSE
   Interest expense                                      3,425,904            308,825             22,114
   Interest income                                        (983,393)            (3,888)            (3,167)
   Other                                                    24,313           (159,261)            (3,517)
                                                     -------------      -------------      -------------

      Total other (income) expense                       2,466,824            145,676             15,430
                                                     -------------      -------------      -------------
INCOME (LOSS) BEFORE MINORITY
    INTERESTS AND INCOME TAXES                           9,544,027           (261,978)             3,579
MINORITY INTERESTS                                      (3,403,659)                --                 --
                                                     -------------      -------------      -------------
INCOME (LOSS) BEFORE INCOME TAXES                        6,140,368           (261,978)             3,579

INCOME TAX (PROVISION) BENEFIT                          (4,197,913)                --             (1,254)
                                                     -------------      -------------      -------------
NET INCOME (LOSS)                                    $   1,942,455      $    (261,978)     $       2,325
                                                     =============      =============      =============
EARNINGS (LOSS) PER SHARE
   Basic                                             $        0.17      $       (0.02)
                                                     =============      =============
   Diluted                                           $        0.16      $       (0.02)
                                                     =============      =============

WEIGHTED AVERAGE SHARES OUTSTANDING
   Basic                                                11,327,601         11,025,547
                                                     =============      =============
   Diluted                                              12,133,300         11,025,547
                                                     =============      =============
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                        4



<PAGE>   5
                            CRESCENT OPERATING, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



<TABLE>
<CAPTION>

                                                                                        Carter-Crowley Asset
                                                         Crescent Operating, Inc.        Group (Predecessor)
                                                     --------------------------------      -------------
                                                     For the Six     For the period from For the Period from
                                                     Months Ended       May 9, 1997 to     January 1, 1997
                                                     June 30, 1998      June 30, 1997      to May 8, 1997
                                                     -------------      -------------      -------------
<S>                                                  <C>                <C>                <C>          
REVENUES
   Equipment sales & leasing                         $  19,538,876      $   1,707,580      $   4,657,260
   Hospitality                                         111,367,899                 --                 --
   Land development                                     73,279,739                 --                 --
                                                     -------------      -------------      -------------

      Total revenues                                   204,186,514          1,707,580          4,657,260
                                                     -------------      -------------      -------------

OPERATING EXPENSES
   Equipment sales & leasing direct expenses            18,451,255          1,424,882          4,499,145
   Hospitality direct expenses                          80,411,943                 --                 --
   Hospitality properties rent - CEI                    24,516,088                 --                 --
   Land development direct expenses                     72,321,625                 --                 --
   General and administrative expenses                   1,139,038                 --                 --
                                                     -------------      -------------      -------------

      Total operating expenses                         196,839,949          1,424,882          4,499,145
                                                     -------------      -------------      -------------

INCOME FROM OPERATIONS                                   7,346,565            282,698            158,115
                                                     -------------      -------------      -------------

INVESTMENT INCOME (LOSS)                                 6,650,024           (399,000)                --
                                                     -------------      -------------      -------------

OTHER (INCOME) EXPENSE
   Interest expense                                      7,251,423            308,825            135,367
   Interest income                                      (2,215,871)            (3,888)           (12,885)
   Other                                                    37,483           (159,261)            (3,459)
                                                     -------------      -------------      -------------

      Total other (income) expense                       5,073,035            145,676            119,023
                                                     -------------      -------------      -------------
INCOME (LOSS) BEFORE MINORITY
    INTERESTS AND INCOME TAXES                           8,923,554           (261,978)            39,092

MINORITY INTERESTS                                      (3,890,368)                --                 --
                                                     -------------      -------------      -------------

INCOME (LOSS) BEFORE INCOME TAXES                        5,033,186           (261,978)            39,092

INCOME TAX (PROVISION) BENEFIT                          (4,269,302)                --            (13,682)
                                                     -------------      -------------      -------------

NET INCOME (LOSS)                                    $     763,884      $    (261,978)     $      25,410
                                                     =============      =============      =============

EARNINGS (LOSS) PER SHARE
   Basic                                             $        0.07      $       (0.02)
                                                     =============      =============
   Diluted                                           $        0.06      $       (0.02)
                                                     =============      =============
WEIGHTED AVERAGE SHARES OUTSTANDING
   Basic                                                11,271,023         11,025,547
                                                     =============      =============
   Diluted                                              12,080,623         11,025,547
                                                     =============      =============

</TABLE>

        See accompanying notes to the consolidated financial statements.



                                        5



<PAGE>   6
                            CRESCENT OPERATING, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                
                                                                                                               Carter-Crowley Asset
                                                                                  Crescent Operating, Inc.      Group (Predecessor)
                                                                               ------------------------------      ------------
                                                                               Six Months    For the period from For the period from
                                                                                  Ended         May 9, 1997 to   January 1, 1997 to
                                                                              June 30, 1998     June 30, 1997      May 8, 1997
                                                                               ------------      ------------      ------------
<S>                                                                            <C>               <C>               <C>         

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                          $    763,884      $   (261,978)     $     25,410
    Adjustments to reconcile net income (loss)
      to net cash provided by (used in) operating activities:
        Depreciation                                                              6,287,829             3,518           747,503
        Amortization                                                              2,877,901                --                --
        Provision for deferred income taxes                                       1,051,095                --                --
        Investment (income) loss                                                 (6,650,024)          399,000                --
        Minority interests                                                        3,890,368                --                --
        Deferred compensation                                                        37,187                --                --
        Gain on sale of property and equipment                                     (199,417)               --          (133,607)
        Gain on sale of partnership                                                      --          (150,000)               --
        Net proceeds from sale of real estate                                     5,482,540                --                --
        Changes in assets and liabilities:
            Accounts receivable                                                  (6,125,030)          (62,194)          152,231
            Inventories                                                          (1,878,883)         (364,857)          115,403
            Prepaid expenses and current assets                                    (670,381)          208,552          (125,205)
            Other assets                                                           (161,787)               --                --
            Accounts payable and accrued expenses                                (6,680,915)          112,000           197,384
            Accounts payable - CEI                                                  280,155                --                --
            Deferred revenue, current and noncurrent                             13,951,406                --                --
                                                                               ------------      ------------      ------------
                 Net cash provided by (used in) operating activities             12,255,928          (115,959)          979,119
                                                                               ------------      ------------      ------------

 CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of business interests, net of cash acquired                       (6,841,674)               --                --
   Acquisition of business interests by minority interests                      (66,615,023)               --                --
   Purchases of property and equipment                                          (14,177,358)       (1,857,421)               --
   Proceeds from sale of property and equipment                                   1,390,861            79,177           309,890
   Net proceeds from sale and collection of notes receivable                     21,155,492                --                --
   Net proceeds from (investment in) Hicks-Muse                                   4,509,621          (689,175)       (1,870,636)
   Investment in CBHS                                                                    --        (7,500,000)               --
   Purchase of Magellan warrants                                                         --       (12,500,000)               --
   Dividends received                                                             4,250,000                --                --
                                                                               ------------      ------------      ------------
                 Net cash used in investing activities                          (56,328,081)      (22,467,419)       (1,560,746)
                                                                               ------------      ------------      ------------

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds of long-term debt                                                    12,464,080                --           408,320
   Payments on long-term debt                                                    (3,448,069)               --          (848,310)
   Proceeds of long-term debt - CEI                                               1,992,193        35,825,000                --
   Payments on long-term debt - CEI                                             (42,314,637)       (9,920,000)               --
   Capital contributions by minority interests                                   66,425,023                --                --
   Distributions to minority interests                                           (7,632,364)               --                --
   Other                                                                             20,074        (2,280,000)        1,164,967
                                                                               ------------      ------------      ------------
                 Net cash provided by financing activities                       27,506,300        23,625,000           724,977
                                                                               ------------      ------------      ------------

 NET (DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                                             (16,565,853)        1,041,622           143,350

 CASH AND CASH EQUIVALENTS,
   BEGINNING OF PERIOD                                                           43,401,134           165,685            22,335
                                                                               ------------      ------------      ------------
 CASH AND CASH EQUIVALENTS,
   END OF PERIOD                                                               $ 26,835,281      $  1,207,307      $    165,685
                                                                               ============      ============      ============
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                        6
<PAGE>   7



                            CRESCENT OPERATING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.    ORGANIZATION:

Crescent Operating, Inc. ("Crescent Operating" or the "Company") was formed on
April 1, 1997, by Crescent Real Estate Equities Company ("Crescent Equities" or
"CEI") and its subsidiary Crescent Real Estate Equities Limited Partnership
("Crescent Partnership") to be the lessee and operator of certain assets owned
or to be acquired by Crescent Partnership and to perform an agreement (the
"Intercompany Agreement") between Crescent Operating and Crescent Partnership,
pursuant to which each has agreed to provide the other with rights to
participate in certain transactions. The Company also engages in other business
enterprises not related to Crescent Equities or the Intercompany Agreement,
such as the equipment sales and leasing segment. Effective June 12, 1997,
Crescent Equities distributed shares of Crescent Operating common stock to
shareholders of Crescent Equities and unit holders of Crescent Partnership and
became a public company. Crescent Operating's common stock is listed on the
NASDAQ National Market under the symbol "COPI". Unless the context otherwise
requires, the terms "Crescent Operating", the "Company", "Crescent Equities",
"CEI" and "Crescent Partnership" include the subsidiaries of each and, in the
case of "CEI" and "Crescent Equities" includes "Crescent Partnership."

Crescent Operating is a diversified management company that currently operates
in five business segments: Hospitality, Land Development, Equipment Sales and
Leasing, Healthcare and Refrigerated Warehousing. Within these segments,
Crescent Operating does business throughout the United States.

2.    BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the audited financial statements and related footnotes of the Company for
the fiscal year ended December 31, 1997 included in the Company's Form 10-K. In
management's opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements have been included and all significant intercompany
balances and transactions have been eliminated. Certain prior period information
has been reclassified to conform to current period presentation. Due to
acquisitions and seasonal fluctuations, operating results for interim periods
reflected are not necessarily indicative of the results that may be expected for
a full fiscal year.

Crescent Machinery Company ("Crescent Machinery", formerly known as Moody-Day,
Inc.), Rosestar Management LLC ("RoseStar"), COI Hotel Group, Inc. ("COI
Hotel"), and WOCOI Investment Company ("WOCOI"), which are wholly-owned
subsidiaries of Crescent Operating, are consolidated. The Company owns 5% of
each of Woodlands Land Company, Inc. ("LandCo"), Desert Mountain Development
Corporation ("Desert Mountain Development"), Crescent CS Holdings Corporation
("CS I") and Crescent CS Holdings II Corporation ("CS II"). The Company's 5%
interests represent 100% of the voting stock of these entities, and therefore,
these entities are consolidated into Crescent Operating and the remaining 95% is
reported as minority interests. The Company's investment in Hicks Muse Tate &
Furst Equity Fund II, L.P. ("Hicks-Muse") is shown at cost and the Company's 50%
interest in Charter Behavioral Health Systems, LLC ("CBHS") is shown on the
equity method of accounting.

The combined financial statements of the "Predecessor" were prepared on the
basis that the Predecessor is a combination of Moody-Day, Inc. ("Moody-Day") and
Hicks-Muse (collectively, the "Carter-Crowley Asset Group"). As the Company did
not have any activity prior to May 9, 1997, the data included relating to the
periods in 1997 prior to May 9, is only with regard to the Predecessor. The
assets of the Carter-Crowley Asset Group were adjusted at May 9, 1997 to reflect
the purchase price allocation.



                                       7
<PAGE>   8

3.    RECENT DEVELOPMENTS:

HOSPITALITY

On February 4, 1998, Ventana Inn closed its operations due to a landslide that
washed out Highway 1, the major access road to the property. The Ventana Inn
re-opened on May 1, 1998. The Company has filed a claim for losses totaling $1.3
million under its business interruption insurance policy. Hospitality revenues
for the quarter ended June 30, 1998 include $450,000 in insurance proceeds
received in July 1998 relating to the claim. The Company cannot predict the
outcome of the entire claim and accordingly, has not accrued for estimated
insurance proceeds above what has been received. The Company anticipates that
the claim will be settled during the third quarter of 1998.

LAND DEVELOPMENT

Effective August 12, 1998, Crescent Operating entered into a binding letter of
intent with Gerald W. Haddock, John C. Goff, and Harry Frampton to acquire their
10% interest in Crescent Development Management Corp. ("CDMC"). The 10% interest
represents 100% of the voting common stock of CDMC. The acquisition price of $9
million will be paid in common stock of Crescent Operating valued at $13.00 per
share, unless Crescent Operating common stock's average closing sale price on
NASDAQ exceeds $17.00 per share for any period of ten consecutive trading days
prior to consummation of the transaction in which case the shares would be
valued at $15.00 per share. The remaining 90% of CDMC is currently owned by
Crescent Partnership, which owns nonvoting securities only. CDMC is principally
engaged in investing in partnerships and other entities that directly or
indirectly through other entities participate in development and management of
resort, residential and vacation home real properties and ancillary supporting
services principally in Colorado. The transaction will be dependent on
negotiation and execution of definitive acquisition documents containing
customary terms acceptable to all parties, satisfactory results of due diligence
investigations, approval by the Company's board, receipt of necessary approvals
and other conditions; in addition, Messrs. Haddock, Goff and Frampton will not
be obligated to exchange their CDMC stock if Crescent Operating common stock's
average closing sale price on NASDAQ is less than $7.00 per share for the ten
consecutive trading days immediately prior to the transaction's closing date.

EQUIPMENT SALES AND LEASING

Effective July 31, 1998, the Company acquired all of the stock of Harvey
Equipment Center, Inc. ("Harvey"), a company which is engaged in equipment
sales, leasing and servicing, located in Van Wert, Ohio. The purchase
price of approximately $8.4 million was comprised of $2.7 million in cash, the
issuance of notes payable by Crescent Operating in the amount of $1.2 million
and the assumption of $4.5 million of liabilities. The $1.2 million notes bear
interest at 8.0% per annum and are payable in eight semi-annual installments of
principal and interest of $.18 million. The transaction was treated as a
purchase for accounting purposes and accordingly the results of operations will
be included in the Company's financial statements from the date of acquisition.

Effective July 1, 1998, the Company acquired all of the stock of Western
Traction Company ("Western Traction"), a company that is engaged in equipment
sales, leasing and servicing, with locations in Sacramento, California, Union
City, California, Fresno, California, Sparks, Nevada and Honolulu, Hawaii. The
purchase price of approximately $52.0 million was comprised of $6.5 million in
cash, the issuance of a note payable by Crescent Operating in the amount of $7.5
million and the assumption of liabilities of $38 million. The $7.5 million note
bears interest at 8.5% per annum and is payable in 18 monthly installments of
principal and interest of $.45 million. The transaction was treated as a
purchase for accounting purposes and accordingly the results of operations will
be included in the Company's financial statements from the date of acquisition.

Effective June 8, 1998, the Company acquired all of the stock of Machinery,
Inc., a company that is engaged in equipment sales, leasing and servicing, with
locations in Tulsa and Oklahoma City, Oklahoma. The purchase price of
approximately $2.8 million was comprised of $.6 million in cash, the issuance of
38,170 shares of Crescent Operating common stock and the assumption of $1.5
million of liabilities. The transaction was treated as a purchase for accounting
purposes and accordingly the results of operations have been included in the
Company's financial statements since the date of acquisition.

Effective April 30, 1998, the Company acquired certain assets of Central Texas
Equipment Co. ("Central Texas"), a company which is engaged in equipment sales,
leasing and servicing, located in Austin, Texas. The purchase price of
approximately $9.7 million was comprised of $3.0 million in cash, the issuance
of 128,551 shares of Crescent Operating common stock and the assumption of $4.1
million of liabilities. The transaction was treated as a purchase







                                       8
<PAGE>   9

for accounting purposes and accordingly the results of operations have been
included in the Company's financial statements since the date of acquisition.

With the completion of the Harvey, Western Traction, Machinery, Inc. and Central
Texas acquisitions, Crescent Machinery has 14 locations in Texas, California,
Nevada, Oklahoma, Ohio and Hawaii.

HEALTHCARE

Effective March 3, 1998, the Company signed a definitive agreement (the "Equity
Purchase Agreement") to acquire the 50% membership interest in CBHS currently
owned by Magellan CBHS Holdings, Inc., formerly Charter Behavioral Health
Systems, Inc. ("CBHS Holdings"). Also effective March 3, 1998, CBHS signed a
definitive agreement (the "Purchase Agreement") to acquire from Magellan Health
Services, Inc. ("Magellan") and certain direct and indirect subsidiaries of
Magellan, equity interests in certain entities, intellectual property rights,
including the "Charter" name and 800-CHARTER telephone number, and the assets of
certain staff model clinics. The Company signed a support agreement (the
"Support Agreement"), dated as of March 3, 1998, pursuant to which the Company
agreed to assist CBHS in obtaining the funds required to consummate the
transactions contemplated by the Purchase Agreement and to pay a $5 million
break up fee in the event that such transactions were not consummated or the
Purchase Agreement was terminated as a result of CBHS' failure to obtain the
required funds.

   
The closing of the transactions contemplated by the Equity Purchase Agreement
and the Purchase Agreement, which was originally scheduled for July 1998, was 
subject to certain conditions which have not been met and are unlikely to be
satisfied in the near term. Consequently, as of August 12, 1998, the Company and
Magellan currently are engaged in negotiations to restructure the transactions
which are the subject of the above-referenced agreements. No new definitive
agreements have yet been reached in respect of the purchase and sale of any
portion of the interest in CBHS currently owned by CBHS Holdings or the equity
interests and assets currently owned by Magellan and its subsidiaries. Because
conditions to the Company's obligations under the Equity Purchase Agreement and
the Support Agreement have not been met, the Company believes it is under no
obligation to pay the $5 million break up fee to Magellan.
    

REFRIGERATED WAREHOUSING

On June 1, 1998, Americold Logistics, a group of companies in which Crescent 
Operating owns a 2% indirect interest, acquired nine refrigerated storage
properties from Freezer Services, Inc. for approximately $134 million which
required a capital contribution from Crescent Operating of $2.3 million. On July
1, 1998, Americold Logistics acquired five refrigerated storage properties from
Carmar Group for approximately $158 million which required a capital
contribution from Crescent Operating of $2.7 million. These properties contain
approximately 90 million cubic feet of refrigerated storage space.

In April 1998, Americold Logistics refinanced its $607 million secured and
unsecured debt with a weighted average rate of approximately 12% with a $550
million non-recourse, ten-year loan secured by 58 refrigerated storage
properties with an interest rate of 6.89% which required a capital contribution
from Crescent Operating of $1.5 million.

OTHER

As previously announced by Crescent Equities, Crescent Equities entered into an
Agreement and Plan of Merger, dated January 16, 1998, as amended, (the "Station
Merger Agreement"), with Station Casinos, Inc. ("Station"), pursuant to which
Station would merge with and into Crescent Equities (the "Station Merger"). As
previously announced by the Company, the Company anticipated that certain
operating assets and employees of Station would be transferred to a limited
liability company (the "Station LLC") immediately prior to the Station Merger
and that the Company would be offered the opportunity to acquire a substantial
interest in the Station LLC. As of August 11, 1998, each of Crescent Equities
and Station had filed actions against the other in connection with the proposed
Station Merger and Crescent Equities had announced that it sent a notice to
Station terminating the Station Merger Agreement. The action filed by Crescent
Equities seeks, among other things, a declaratory judgement that alleged
breaches by Station under the Station Merger Agreement excuse Crescent Equities
from any further obligations under the Station Merger Agreement. As a
consequence, the Company does not believe that it is likely that it will have an
opportunity to acquire an interest in Station LLC.

On June 26, 1998, the Company filed with the Securities and Exchange Commission
a registration statement on Form S-4 (the "Shelf Registration Statement") for
the offering, in connection with directly negotiated acquisitions of businesses,
assets or securities, from time to time, in one or more series, separately or
together, of (i) shares of the Company's common stock, par value $0.01 per
share, (ii) shares of the Company's preferred stock, par value $0.01 per share
and (iii) warrants exercisable for the Company's common stock. The Shelf
Registration Statement, which became effective on July 21, 1998, is intended to
facilitate the issuance by the Company of registered securities in connection
with future acquisitions of businesses, assets or securities where a portion of
the consideration is paid in the form of Company securities. The Company may
offer up to $30 million of securities under the Shelf Registration Statement in
amounts, at prices and on terms to be determined by the Company and the owners
or controlling persons of the businesses, assets or securities to be acquired.
As of August 13, 1998, the Company has not made any offerings of securities
under the Shelf Registration Statement.

4. LONG-TERM DEBT:

Following is a summary of the Company's debt financing:

<TABLE>
<CAPTION>
                                                                                       June 30,            December 31, 
                                                                                         1998                  1997   
                                                                                 ---------------------  ----------------------
<S>                                                                                  <C>                     <C>         
      LONG-TERM DEBT - CORPORATE AND WHOLLY-OWNED SUBSIDIARIES

      Note payable to Crescent Partnership due May 2002, bears interest at 12%
      payable quarterly, collateralized, to the extent not prohibited by
      pre-existing arrangements, by a first lien on the assets which the Company
      now owns or may acquire in the
      future (Crescent Operating).........................................           $ 26,776,720            $ 25,980,000
</TABLE>





                                       9
<PAGE>   10

<TABLE>

<S>                                                                                          <C>                     <C>       
     Equipment notes payable to finance companies due 1998 through 2003 with
     monthly principal and interest payments, bear interest from 8.5% to 10.5%,
     collateralized by equipment (Crescent Machinery)..................................        22,302,585             11,245,727

     Line of credit in the amount of $20.4 million payable to Crescent
     Partnership due the later of May 2002 or five years after the last draw
     (in no event shall the maturity date be later than June 2007), bears
     interest at 12% payable quarterly, collateralized, to the extent not
     prohibited by pre-existing arrangements, by first lien on the assets which
     the Company now owns or may acquire in the future. The Company is in              
     negotiations to increase the amount of the line of credit 
     (Crescent Operating)..............................................................        15,717,193             13,725,000

     Line of credit in the amount of $15.0 million payable to NationsBank due
     August 1999, interest payable monthly at LIBOR plus 1% (6.66% and 6.88% at
     June 30, 1998 and December 31, 1997, respectively)   (Crescent Operating).........        15,000,000             15,000,000

      Note payable to Crescent Partnership maturing August 2003, bears interest
      at 10.75%, principal and interest payable monthly, collateralized by a
      deed of trust for certain property and real property (RoseStar)..................         1,914,256              2,052,482

      Note payable to Crescent Partnership due September 1998, bears interest at
      8.5% payable monthly, collateralized by the Houston Center Athletic Club
      Venture ("HCAC") $5.0 million note receivable (COI Hotel)........................         1,000,000              1,000,000

      Note payable to Crescent Partnership maturing September 2002, bears
      interest at 8.5%, principal and interest payable monthly,
      collateralized by the Company's 2/3 interest in HCAC (COI Hotel).................           712,695                789,820

      Note payable to Crescent Partnership maturing August 2003, bears interest
      at 10.75%, principal and interest payable monthly, collateralized by a
      deed of trust in certain real property and certain personal 
      property (RoseStar) .............................................................           517,532                554,850

      Note payable to Crescent Partnership due November 2006, bears interest at 
      7.5% payable annually (RoseStar).................................................           190,964                190,964
                                                                                             ------------           ------------

           Total debt - Corporate and Wholly-Owned Subsidiaries                                84,131,945             70,538,843
                                                                                             ------------           ------------
</TABLE>







                                       10
<PAGE>   11



<TABLE>


      LONG-TERM DEBT - NON WHOLLY-OWNED SUBSIDIARIES
<S>                                                                                         <C>                     <C>           
      Senior note payable to Crescent Partnership maturing December 2005, bears
      interest at 10%, payments payable quarterly commencing January 15, 1998
      based on sales proceeds from Desert Mountain Properties, LP ("DMPLP"),
      collateralized by land, improvements and equipment owned by 
      DMPLP (DMPLP)................................................................           85,528,066             110,000,000

      Junior note payable to Crescent Partnership maturing December 2010, bears
      interest at 14%, payments payable quarterly commencing January 15, 1998
      based on sales proceeds from DMPLP, collateralized by land, improvements
      and equipment owned by DMPLP (DMPLP).........................................           60,000,000              60,000,000

      Line of credit in the amount of $35 million payable to National Bank of
      Arizona due May 1999, bears interest at rates from prime to prime plus 1% (8.5% at
      June 30, 1998) payable monthly, collateralized by certain land owned by DMPLP, deeds
      of trusts on lots sold and home construction (DMPLP).........................            3,077,871                       -

      Notes payable to Crescent Partnership maturing August 1998, bears interest
      at the prime rate plus 1%, principal and interest payable monthly based on
      lot note receipts collateralized by deeds of trust on lots owned by 
      DMPLP (DMPLP)................................................................                    -              17,590,034

      Other (DMPLP)................................................................              100,000                       -
                                                                                          --------------          --------------
           Total debt - Non Wholly-Owned Subsidiaries..............................          148,705,937             187,590,034
                                                                                          --------------          --------------
           Total long term debt....................................................       $  232,837,882          $  258,128,877
                                                                                          ==============          ==============


      Current portion of long term debt - CEI......................................       $    1,520,182          $   24,084,587

      Current portion of long term debt............................................            7,730,201              18,759,349

      Long term debt - CEI, net of current portion.................................          190,837,244             207,798,563

      Long term debt, net of current portion.......................................           32,750,255               7,486,378
                                                                                          --------------          --------------
                                                                                          $  232,837,882          $  258,128,877
                                                                                          ==============          ==============
</TABLE>





                                       11
<PAGE>   12


5.    INVESTMENTS:

Investments consisted of the following:

<TABLE>
<CAPTION>
                                                                                June 30,               December 31,
                                                                                  1998                    1997
                                                                            -----------------       -----------------
<S>                                                                         <C>                      <C>           
      Investment in Magellan warrants.....................................  $    12,500,000          $   12,500,000
      Investment in CBHS..................................................                -               5,390,000
      Investment in The Woodlands Land Development Company, L.P...........       39,775,753              31,403,893
      Investment in The Woodlands Operating Company, L.P..................        1,255,398                 597,498
      Investment in Refrigerated Warehousing partnerships.................      234,386,003             161,850,800
      Investment in HCAC..................................................      ( 1,486,176)             (1,513,923)
      Investment in Hicks-Muse............................................        7,841,102               9,446,946
      Investment in Corporate Arena Associates, Inc.......................           93,978                       -
                                                                            ---------------          --------------
                                                                            $   294,366,058          $  219,675,214
                                                                            ===============          ==============
</TABLE>

Investment income (loss) net of minority interests consisted of the following:

                                                 
<TABLE>
<CAPTION>
                                                                                                   Six months Ended            
                                                                                                    June 30, 1998
                                                                                                  ------------------
<S>                                                                                                <C>               
      Equity in loss of CBHS...................................................................... $      (5,390,000)
      Equity in income of The Woodlands Land Development Company, L.P.............................        10,047,000
      Equity in income of The Woodlands Operating Company, L.P....................................           657,900
      Equity in loss of Refrigerated Warehousing partnerships.....................................        (1,596,400)
      Equity in income of HCAC....................................................................            27,747
      Hicks-Muse income...........................................................................         2,903,777
                                                                                                   -----------------
                                                                                                   $       6,650,024
                                                                                                   =================
</TABLE>

A summary of financial information for the Company's investment in CBHS has been
provided as it represents a significant unconsolidated investment.

<TABLE>
<CAPTION>
                                                                                                           CBHS
                                                                                                     -----------------
                                                                                                      Six months Ended
                                                                                                        June 30,1998
                                                                                                     -----------------

<S>                                                                                                   <C>           
      Net revenue.................................................................................    $  377,331,000

      Operating expenses .........................................................................      (335,717,000)
      Franchise Fees..............................................................................       (39,150,000)
      Rent expense - cash.........................................................................       (21,238,000)
      Rent expense - non-cash.....................................................................        (6,809,000)
      Loss on sale of Springwood hospital.........................................................        (2,019,000)
      Depreciation and amortization...............................................................        (2,884,000)
      Interest expense, net.......................................................................        (2,605,000)
                                                                                                      --------------

           Net loss...............................................................................    $  (33,091,000)
                                                                                                      ==============

      Equity in loss of unconsolidated subsidiary (1).............................................    $   (5,390,000)
                                                                                                      ==============
</TABLE>


    (1)  Losses related to CBHS have been recognized by the Company up to the
         amount of the Company's investment.

<TABLE>
<CAPTION>
                                                                                                           CBHS
                                                                                                     ----------------
                                                                                                       June 30, 1998
                                                                                                     ----------------
<S>                                                                                                  <C>            
      Current assets..............................................................................   $   156,385,000
      Property and equipment, net.................................................................        14,917,000
      Other noncurrent assets.....................................................................        10,211,000
                                                                                                     ---------------

           Total assets...........................................................................   $   181,513,000
                                                                                                     ===============

      Current liabilities.........................................................................   $   112,681,000
      Long-term debt..............................................................................        65,000,000
      Other noncurrent liabilities................................................................        28,889,000
      Members' capital............................................................................       (25,057,000)
                                                                                                     ---------------

           Total liabilities and members' capital.................................................   $   181,513,000
                                                                                                     ===============
</TABLE>






                                       12
<PAGE>   13
6.    EARNINGS PER SHARE:

Effective December 1997, the Company adopted SFAS No. 128, "Earnings Per Share"
("EPS"), which supersedes APB No. 15 for periods ending after December 15, 1997.
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share. Primary EPS and Fully Diluted EPS are replaced by Basic EPS
and Diluted EPS, respectively. 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
stock were exercised or converted into common stock.

<TABLE>
<CAPTION>

                                   For the three months                For the six months                 For the period from
                                   ended June 30, 1998                 ended June 30, 1998             May 9, 1997 to June 30, 1997
                            ---------------------------------    --------------------------------  -------------------------------
                               Income   Wtd. Avg.  Per Share      Income   Wtd. Avg.   Per Share    Income  Wtd. Avg.  Per Share 
                               (Loss)    Shares       Amt         (Loss)     Shares       Amt       (Loss)    Shares      Amt
                            ---------------------------------    --------------------------------  -------------------------------
<S>                         <C>          <C>         <C>         <C>        <C>          <C>        <C>         <C>        <C>    
BASIC EPS -
Net income available
to common shareholders      $ 1,942,455  11,327,601  $  0.17     $ 763,884  11,271,023   $ 0.07     $ (261,978) 11,025,547 $(0.02)
                                                     =======                             ======                            =======
                                          
EFFECT OF
DILUTIVE SECURITIES:                                                                                                         
Stock Options                               779,481                            780,095                                       
Warrants                                     26,218                             29,505                                       
                                         ----------                         ----------                                       
DILUTED EPS -
Net income available
to common shareholders      $ 1,942,455  12,133,300  $ 0.16      $ 763,844  12,080,623   $ 0.06     $(261,978)  11,025,547 $(0.02)
                                                     ======                              ======                            =======
</TABLE>

The Company had 882,303 stock options and 282,508 warrants outstanding as of
June 30, 1998. Earnings per share for the Predecessor is not meaningful as the
capital structure of the Predecessor was not comparable to that of the Company.

7.    INCOME TAXES:

The Company's effective tax rate differs from the federal statutory income tax
rate due primarily to non wholly-owned subsidiaries, which are consolidated in
the Company's financial statements. The taxes related to the minority interests
in such entities are included in the income tax provision (benefit) on the
Company's statements of operations. The table below shows the reconciliation of
the federal statutory income tax rate to the effective tax rate.

<TABLE>
<CAPTION>
                                                                     For the three  months     For the six months
                                                                     ended June 30, 1998       ended June 30, 1998
                                                                     ---------------------     -------------------
<S>                                                                                 <C>                     <C>
Federal statutory income tax rate................................                   35.0%                   35.0%
Tax provision related to minority interests......................                   28.1                    45.1
Other............................................................                    5.3                     4.7
                                                                     ---------------------     -------------------
     Effective tax rate..........................................                   68.4%                   84.8%
                                                                     =====================     ===================

</TABLE>



                                       13
<PAGE>   14

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

This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: investment considerations,
such as the effect of economic, demographic, competitive and other conditions in
the market area on cash flows and values, and the relatively high levels of debt
maintained by the Company and its ability to generate revenues sufficient to
meet debt service payments and other operating expenses; financing risks, such
as the continued availability of equity and debt financing that may be necessary
or desirable for expansion or continued operations of the Company and its
investments, the Company's ability to service existing debt, the possibility
that the Company's outstanding debt (which require so-called "balloon" payments
of principal) may be refinanced at higher interest rates or otherwise on terms
less favorable to the Company; and business and investment risks, including the
underperformance or non-performance of its existing business investments, the
inability of the Company to identify or pursue suitable business or investment
opportunities, the impact of changes in the industries in which the Company's
businesses and investments operate and economic demographic and other
competitive conditions affecting such industries, including Hospitality, Land
Development, Equipment Sales and Leasing, Healthcare and Refrigerated
Warehousing. Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Company undertakes no obligation to update
these forward-looking statements to reflect any future events or circumstances.

OVERVIEW

Crescent Operating, Inc. ("Crescent Operating" or the "Company"), a Delaware
corporation, was formed on April 1, 1997, by Crescent Real Estate Equities
Company ("Crescent Equities" or "CEI") and its subsidiary Crescent Real Estate
Equities Limited Partnership ("Crescent Partnership"). The Company was formed to
be the lessee and operator of certain assets to be acquired by Crescent
Partnership and to perform an agreement (the "Intercompany Agreement") between
Crescent Operating and Crescent Partnership, pursuant to which each has agreed
to provide the other with rights to participate in certain transactions. The
Company also engages in other business enterprises not related to Crescent
Equities or the Intercompany Agreement, such as the equipment sales and leasing
segment. Effective June 12, 1997, Crescent Equities distributed shares of
Crescent Operating common stock to shareholders of Crescent Equities and unit
holders of Crescent Partnership and became a public company. Crescent
Operating's common stock is listed on the NASDAQ National Market under the
symbol "COPI". Unless the context otherwise requires, the terms "Crescent
Operating", the "Company", "Crescent Equities", "CEI" and "Crescent Partnership"
include the subsidiaries of each and, in the case of "CEI" and "Crescent
Equities" includes "Crescent Partnership".

The Company's operations began on May 9, 1997 with the purchase from
Carter-Crowley Properties, Inc. ("Carter-Crowley") of 100% of the common stock
of Moody-Day, Inc. ("Moody-Day"), an equipment sales, leasing and servicing
company which subsequently changed its corporate name to Crescent Machinery
Company ("Crescent Machinery"), and a limited partner interest in Hicks Muse
Tate & Furst Equity Fund II, LP, a private venture capital fund ("Hicks-Muse",
and together with Moody-Day, the "Carter-Crowley Asset Group"). This Quarterly
Report on Form 10-Q was prepared on the basis that the Carter-Crowley Asset
Group is the "Predecessor". As Crescent Operating did not have any activity
prior to May 9, 1997, the data included relating to periods prior to May 9, 1997
is only with regard to the Predecessor.

As of June 30, 1998, Crescent Operating's assets and operations were composed of
five business segments: (i) Hospitality, (ii) Land Development, (iii) Equipment
Sales and Leasing, (iv) Healthcare and (v) Refrigerated Warehousing. Within
these segments, the Company, through various entities, owned the following
(collectively referred to as the "Assets" as of such date):

o     THE HOSPITALITY SEGMENT consisted of (i) 100% of RoseStar Management LLC
     ("RoseStar"), which, directly or indirectly through its subsidiaries, is
     the lessee of the Denver Marriott City Center, the Hyatt Regency Beaver
     Creek, the Hyatt Regency Albuquerque, Canyon Ranch-Tucson, Canyon
     Ranch-Lenox, the Ventana Inn and the Sonoma Mission Inn and Spa and (ii)
     100% of the common stock of COI Hotel Group, Inc. ("COI Hotel"), which is
     the lessee of the Four Seasons Hotel in Houston, Texas and the Austin Omni
     Hotel (the later is subleased to an unrelated party) and has a two-thirds
     interest in the Houston Center Athletic Club Venture.




                                       14
<PAGE>   15


o    THE LAND DEVELOPMENT SEGMENT consisted of (i) a 5% economic interest in
     Desert Mountain Development Corporation, the general partner of a
     partnership that owns a master planned, luxury residential and recreational
     community in northern Scottsdale, Arizona, (ii) a 42.5% general partner
     interest in The Woodlands Operating Company, L.P., which provides
     management, advisory, landscaping and maintenance services to The
     Woodlands, Texas and (iii) a 2.125% economic interest in The Woodlands Land
     Development Company L.P., which owns approximately 9,000 acres for
     commercial and residential development as well as a realty office, an
     athletic center, and interests in both a title company and a mortgage
     company.

o    THE EQUIPMENT SALES AND LEASING SEGMENT consisted of 100% of the common
     stock of Crescent Machinery, a construction equipment sales, leasing and
     service company which has 14 locations in six states.

o    THE HEALTHCARE SEGMENT consisted of a 50% member interest in Charter
     Behavioral Health Systems, LLC ("CBHS"), a limited liability company which
     operates approximately 90 behavioral healthcare facilities. See "Recent
     Developments - Healthcare".

o    THE REFRIGERATED WAREHOUSING SEGMENT consisted of an indirect 2% interest
     in each of two corporations (collectively referred to as "Americold
     Logistics"), that currently own and operate 89 refrigerated storage
     properties with an aggregate storage capacity of approximately 419 million
     cubic feet. On July 1, 1998, Americold Logistics acquired an additional
     five refrigerated storage properties with an aggregate storage capacity of
     61 million cubic feet.

STRATEGY

Crescent Operating's strategy is to increase shareholder value through the
development of an independent, diversified management company. While the Company
has obtained several of the Assets and may continue to obtain future assets
through the Intercompany Agreement with Crescent Partnership, it intends to
pursue additional and similar opportunities with Crescent Equities or others in
the future. The additional opportunities Crescent Operating may pursue may be
unrelated to a business in which Crescent Equities is then engaged or may be
acquired separately, not through the Intercompany Agreement, such as the
equipment sales and leasing business. Crescent Operating's management is
currently assessing other real estate related activities which would complement
its diverse holdings.

By utilizing professional managers with experience in the individual businesses
it owns, Crescent Operating works to improve the margins of those businesses and
thereby improve its return. In most of the transactions with Crescent
Partnership, where Crescent Operating's ownership comes through a lessee
relationship, the profit after rent paid to Crescent Partnership is Crescent
Operating's. Due to the low entry cost to Crescent Operating and the ability to
improve profit margins, the effect on the rate of return to Crescent Operating
could be substantial. Another advantage that Crescent Operating gains through
the Intercompany Agreement is the ability to have access to numerous
acquisitions without the burden of an acquisition staff, and the ability to
participate in large acquisitions that otherwise would not be available to
Crescent Operating. In these acquisitions, Crescent Partnership performs all the
research and the due diligence and, where it elects to participate, Crescent
Operating pays only its proportionate share of the acquisition costs.

Crescent Operating allows investors the opportunity to invest in the operational
side of certain Crescent Equities transactions. Crescent Operating intends to
continue to evaluate and, where beneficial to Crescent Operating, enter into
transactions offered by Crescent Partnership under the Intercompany Agreement.
All acquisitions under the Intercompany Agreement are approved by a committee of
Crescent Operating directors independent of Crescent Equities.




                                       15
<PAGE>   16





RECENT DEVELOPMENTS

HOSPITALITY

On February 4, 1998, Ventana Inn closed its operations due to a landslide that
washed out Highway 1, the major access road to the property. The Ventana Inn
re-opened on May 1, 1998. The Company has filed a claim for losses totaling $1.3
million, under its business interruption insurance policy. Hospitality revenues
for the quarter ended June 30, 1998 include $450,000 in insurance proceeds
received in July 1998 relating to the claim. The Company cannot predict the
outcome of the entire claim and accordingly, has not accrued for estimated
insurance proceeds above what has been received. The Company anticipates that
the final claim will be settled during the third quarter of 1998.

LAND DEVELOPMENT

Effective August 12, 1998, Crescent Operating entered into a binding letter of
intent with Gerald W. Haddock, John C. Goff, and Harry Frampton to acquire their
10% interest in Crescent Development Management Corp. ("CDMC"). The 10% interest
represents 100% of the voting common stock of CDMC. The acquisition price of $9
million will be paid in common stock of Crescent Operating valued at $13.00 per
share, unless Crescent Operating common stock's average closing sale price on
NASDAQ exceeds $17.00 per share for any period of ten consecutive trading days
prior to consummation of the transaction, in which case the shares would be
valued at $15.00 per share. The remaining 90% of CDMC is currently owned by
Crescent Partnership, which owns nonvoting securities only.  CDMC is principally
engaged in investing in partnerships and other entities that directly or
indirectly through other entities participate in development and management of
resort, residential and vacation home real properties and ancillary supporting
services principally in Colorado. The transaction will be dependent on
negotiation and execution of definitive acquisition documents containing
customary terms acceptable to all parties, satisfactory results of due diligence
investigations, approval by the Company's board, receipt of necessary approvals
and other conditions; in addition, Messrs. Haddock, Goff and Frampton will not
be obligated to exchange their CDMC stock if Crescent Operating common stock's
average closing sale price on NASDAQ is less than $7.00 per share for the ten
consecutive trading days immediately prior to the transaction's closing date.

EQUIPMENT SALES AND LEASING

The Company has determined that it can rapidly expand the equipment sales and
leasing business it acquired initially through Moody-Day. Historically, the
construction equipment business has been owned and operated primarily by
individuals in a localized area. Crescent Operating believes that it can
consolidate many of these businesses at attractive multiples and gain
significant improvement through purchasing and operating efficiencies. The
Company is establishing regional centers through acquisitions of dealers with
successful operations and experienced management. The Company has focused its
acquisition efforts on dealerships to allow access to equipment at the most
competitive prices, have factory trained service personnel and provide parts and
warranty service for equipment purchased directly by end users or other rental
businesses. The Company also believes that increased revenue and margins can be
achieved through the expansion of the leasing/rental component of the businesses
and through its relationship with Crescent Equities in its development of its
real estate properties.

Effective July 31, 1998, the Company acquired all of the stock of Harvey
Equipment Center, Inc. ("Harvey"), a company which is engaged in equipment
sales, leasing and servicing, located in Van Wert, Ohio. The purchase price of
approximately $8.4 million was comprised of $2.7 million in cash, the issuance
of notes payable by Crescent Operating in the amount of $1.2 million and the
assumption of $4.5 million of liabilities. The $1.2 million notes bear interest
at 8.0% per annum and are payable in eight semi-annual installments of principal
and interest of $.18 million. The transaction was treated as a purchase for
accounting purposes and accordingly the results of operations will be included
in the Company's financial statements from the date of acquisition.

Effective July 1, 1998, the Company acquired all of the stock of Western
Traction Company ("Western Traction"), a company that is engaged in equipment
sales, leasing and servicing, with locations in Sacramento, California, Union
City, California, Fresno, California, Sparks, Nevada and Honolulu, Hawaii. The
purchase price of approximately $52.0 million was comprised of $6.5 million in
cash, the issuance of a note payable by Crescent Operating in the amount of $7.5
million and the assumption of liabilities of $38 million. The $7.5 million note
bears interest at 8.5% per annum and is payable in 18 monthly installments of
principal and interest of $.45 million. The transaction was treated as a
purchase for accounting purposes and accordingly the results of operations will
be included in the Company's financial statements from the date of acquisition.






                                       16
<PAGE>   17

Effective June 8, 1998, the Company acquired all of the stock of Machinery,
Inc., a company that is engaged in equipment sales, leasing and servicing, with
locations in Tulsa and Oklahoma City, Oklahoma. The purchase price of
approximately $2.8 million was comprised of $.6 million in cash, the issuance of
38,170 shares of Crescent Operating common stock and the assumption of $1.5
million of liabilities. The transaction was treated as a purchase for accounting
purposes and accordingly the results of operations have been included in the
Company's financial statements since the date of acquisition.

Effective April 30, 1998, the Company acquired certain assets of Central Texas
Equipment Co. ("Central Texas"), a company which is engaged in equipment sales,
leasing and servicing, located in Austin, Texas. The purchase price of
approximately $9.7 million was comprised of $3.0 million in cash, the issuance
of 128,551 shares of Crescent Operating common stock and the assumption of $4.1
million of liabilities. The transaction was treated as a purchase for accounting
purposes and accordingly the results of operations have been included in the
Company's financial statements since the date of acquisition.

With the completion of the Harvey, Western Traction, Machinery, Inc. and Central
Texas acquisitions, Crescent Machinery has 14 locations in Texas, California,
Nevada, Oklahoma, Ohio and Hawaii.

Assuming the acquisitions of Harvey, Western Traction, Machinery, Inc. and
Central Texas had been consummated on January 1, 1998, pro forma revenues and
earnings before interest expense, net, income taxes, depreciation and
amortization ("EBITDA") for Crescent Operating for the six months ended June 30,
1998 were $240,387,289 and $14,548,741, respectively.

EBITDA is calculated based on the Company's ownership percentage of the EBITDA
components. EBITDA represents earnings before interest, income taxes,
depreciation and amortization.  Amounts are calculated based on the Company's
ownership percentage of the EBITDA components.  Management believes that EBITDA
can be a meaningful measure of the Company's operating performance, cash
generation and ability to service debt.  However, EBITDA should not be
considered as an alternative to either: (i) net earnings (determined in
accordance with GAAP); (ii) operating cash flow (determined in accordance with
GAAP); or (iii) liquidity.  There can be no assurance that the Company's
calculation of EBITDA is comparable to similarly titled items reported by other
companies. 

HEALTHCARE

Effective March 3, 1998, the Company signed a definitive agreement (the "Equity
Purchase Agreement") to acquire the 50% membership interest in CBHS currently
owned by Magellan CBHS Holdings, Inc., formerly Charter Behavioral Health
Systems, Inc. ("CBHS Holdings"). Also effective March 3, 1998, CBHS signed a
definitive agreement (the "Purchase Agreement") to acquire from Magellan Health
Services, Inc. ("Magellan") and certain direct and indirect subsidiaries of
Magellan, equity interests in certain entities, intellectual property rights,
including the "Charter" name and 800-CHARTER telephone number, and the assets of
certain staff model clinics. The Company signed a support agreement (the
"Support Agreement"), dated as of March 3, 1998, pursuant to which the Company
agreed to assist CBHS in obtaining the funds required to consummate the
transactions contemplated by the Purchase Agreement and to pay a $5 million
break up fee in the event that such transactions were not consummated or the
Purchase Agreement was terminated as a result of CBHS' failure to obtain the
required funds.



                                       17
<PAGE>   18


The closing of the transactions contemplated by the Equity Purchase Agreement
and the Purchase Agreement, which was originally scheduled for July 1998, was
subject to certain conditions which have not been met and are unlikely to be
satisfied in the near term. Consequently, as of August 12, 1998, the Company and
Magellan currently are engaged in negotiations to restructure the transactions
which are the subject of the above-referenced agreements. No new definitive
agreements have yet been reached in respect of the purchase and sale of any
portion of the interest in CBHS currently owned by CBHS Holdings or the equity
interests and assets currently owned by Magellan and its subsidiaries. Because
conditions to the Company's obligations under the Equity Purchase Agreement and
the Support Agreement have not been met, the Company believes it is under no
obligation to pay the $5 million break up fee to Magellan.


REFRIGERATED WAREHOUSING

On June 1, 1998, Americold Logistics, a group of companies in which Crescent
Operating owns a 2% indirect interest, acquired nine refrigerated storage
properties from Freezer Services, Inc. for approximately $134 million which
required a capital contribution from Crescent Operating of $2.3 million. On July
1, 1998, Americold Logistics acquired five refrigerated storage properties from
Carmar Group for approximately $158 million which required a capital
contribution from Crescent Operating of $2.7 million. These properties contain
approximately 90 million cubic feet of refrigerated storage space.

In April 1998, Americold Logistics refinanced its $607 million secured and
unsecured debt with a weighted average rate of approximately 12% with a $550
million non-recourse, ten year loan secured by 58 refrigerated storage
properties with an interest rate of 6.89% which required a capital contribution
from Crescent Operating of $1.5 million.

OTHER

As previously announced by Crescent Equities, Crescent Equities entered into an
Agreement and Plan of Merger, dated January 16, 1998, as amended, (the "Station
Merger Agreement"), with Station Casinos, Inc. ("Station"), pursuant to which
Station would merge with and into Crescent Equities (the "Station Merger"). As
previously announced by the Company, the Company anticipated that certain
operating assets and employees of Station would be transferred to a limited
liability company (the "Station LLC") immediately prior to the Station Merger
and that the Company would be offered the opportunity to acquire a substantial
interest in the Station LLC. As of August 11, 1998, each of Crescent Equities
and Station had filed actions against the other in connection with the proposed
Station Merger and Crescent Equities had announced that it sent a notice to
Station terminating the Station Merger Agreement. The action filed by Crescent
Equities seeks, among other things, a declaratory judgement that alleged
breaches by Station under the Station Merger Agreement excuse Crescent Equities
from any further obligations under the Station Merger Agreement. As a
consequence, the Company does not believe that it is likely that it will have an
opportunity to acquire an interest in Station LLC.

On June 26, 1998, the Company filed with the Securities and Exchange Commission
a registration statement on Form S-4 (the "Shelf Registration Statement") for
the offering, in connection with directly negotiated acquisitions of businesses,
assets or securities, from time to time, in one or more series, separately or
together, of (i) shares of the Company's common stock, par value $0.01 per
share, (ii) shares of the Company's preferred stock, par value $0.01 per share
and (iii) warrants exercisable for the Company's common stock. The Shelf
Registration Statement, which became effective on July 21, 1998, is intended to
facilitate the issuance by the Company of registered securities in connection
with future acquisitions of businesses, assets or securities where a portion of
the consideration is paid in the form of Company securities. The Company may
offer up to $30 million of securities under the Shelf Registration Statement in
amounts, at prices and on terms to be determined by the Company and the owners
or controlling persons of the businesses, assets or securities to be acquired.
As of August 13, 1998, the Company has not made any offerings of securities
under the Shelf Registration Statement.


                                       18
<PAGE>   19


                         SEGMENT FINANCIAL INFORMATION


The following is a summary of Crescent Operating's financial information
reported by segment as of and for the three months ended June 30, 1998:


<TABLE>
<CAPTION>

                                                                                         EQUIPMENT
                                                                        LAND               SALES
                                                  HOSPITALITY        DEVELOPMENT         AND LEASING   HEALTHCARE
                                                ---------------    --------------    ----------------  -----------

<S>                                             <C>                <C>                <C>                <C>
Revenues ...................................    $  53,102,725      $  42,148,417      $  11,558,220      $     --

Operating expenses .........................       51,254,540         40,494,318         10,839,969            --
                                                -------------      -------------      -------------       --------
Income (loss) from operations ..............        1,848,185          1,654,099            718,251            --
                                                -------------      -------------      -------------       --------
Investment income (loss) ...................           27,747          7,081,775                 --            --
Other (income) expense
                                                -------------      -------------      -------------       --------
        Interest expense ...................           99,581          1,450,401            431,084            --
        Interest income ....................          (99,672)          (853,957)           (25,976)           --
        Other ..............................               --                 --             25,613            --
                                                -------------      -------------      -------------       --------
Total other (income) expense ...............              (91)           596,444            430,721            --
                                                -------------      -------------      -------------       --------
Income (loss) before minority
        interest and income taxes ..........        1,876,023          8,139,430            287,530            --
Minority interest ..........................               --         (4,310,092)                --            --
                                                -------------      -------------      -------------       --------
Income (loss) before taxes .................        1,876,023          3,829,338            287,530            --
Income tax (provision) .....................         (750,409)        (3,234,517)          (115,011)           --
                                                -------------      -------------      -------------       --------
Net income (loss) ..........................    $   1,125,614      $     594,821      $     172,519      $     --
                                                =============      =============      =============      =========
 Net income (loss) per share, basic ........    $        0.10      $        0.05      $        0.02      $     --
                                                =============      =============      =============      =========
 Net income (loss) per share, diluted ......    $        0.09      $        0.05      $        0.01      $     --
                                                =============      =============      =============      =========
EBITDA Calculation: (1)
        Net income (loss) ..................    $   1,125,614      $     594,821      $     172,519      $     --
         Interest expense, net .............              (91)            41,874            405,108            --
        Income tax provision (benefit)......          750,409            395,614            115,011            --
        Depreciation and amortization ......          191,202            154,306          1,358,802            --
                                                -------------      -------------      -------------       --------
EBITDA .....................................    $   2,067,134      $   1,186,615      $   2,051,440      $     --
                                                =============      =============      =============      =========
</TABLE>


<TABLE>
<CAPTION>
                                                     REFRIGERATED
                                                      WAREHOUSING            OTHER            TOTAL
                                                    ---------------    ----------------- --------------
<S>                                                <C>                <C>                <C>
Revenues ...................................       $        --        $        --        $ 106,809,362

Operating expenses .........................              30,940            784,421        103,404,188
                                                   -------------      -------------      -------------
Income (loss) from operations ..............             (30,940)          (784,421)         3,405,174
                                                   -------------      -------------      -------------
Investment income (loss) ...................            (933,200)         2,429,355          8,605,677
                                                   -------------      -------------      -------------
Other (income) expense
        Interest expense ...................                --            1,444,838          3,425,904
        Interest income ....................                --               (3,788)          (983,393)
        Other ..............................                --               (1,300)            24,313
                                                   -------------      -------------      -------------
Total other (income) expense ...............                --            1,439,750          2,466,824
                                                   -------------      -------------      -------------
Income (loss) before minority
        interest and income taxes ..........            (964,140)           205,184          9,544,027
Minority interest ..........................             906,433               --           (3,403,659)
Income (loss) before taxes .................             (57,707)           205,184          6,140,368
                                                   -------------      -------------      -------------
Income tax (provision) .....................                --              (97,976)        (4,197,913)
                                                   -------------      -------------      -------------
Net income (loss) ..........................       $     (57,707)     $     107,208      $   1,942,455
                                                   =============      =============      =============
 Net income (loss) per share, basic ........       $       (0.01)     $        0.01      $        0.17
                                                   =============      =============      =============
 Net income (loss) per share, diluted ......       $       (0.00)     $        0.01      $        0.16
                                                   =============      =============      =============
EBITDA Calculation: (1)
        Net income (loss) ..................       $     (57,707)     $     107,208      $   1,942,455
         Interest expense, net .............             215,500          1,441,050          2,103,441
        Income tax provision (benefit)......             (24,020)            97,976          1,334,990
        Depreciation and amortization ......             338,740               --            2,043,050
                                                   -------------      -------------      -------------
EBITDA .....................................       $     472,513      $   1,646,234      $   7,423,936
                                                   =============      =============      =============
</TABLE>



(1) EBITDA represents earnings before interest, income taxes, depreciation and
    amortization. Amounts are calculated based on the Company's ownership
    percentage of the EBITDA components. Management believes that EBITDA can be
    a meaningful measure of the Company's operating performance, cash generation
    and ability to service debt. However, EBITDA should not be considered as an
    alternative to either: (i) net earnings (determined in accordance with
    GAAP); (ii) operating cash flow (determined in accordance with GAAP); or
    (iii) liquidity. There can be no assurance that the Company's calculation of
    EBITDA is comparable to similarly titled items reported by other companies.





                                       19
<PAGE>   20


                         SEGMENT FINANCIAL INFORMATION


The following is a summary of Crescent Operating's financial information
reported by segment as of and for the six months ended June 30, 1998:



<TABLE>
<CAPTION>
                                                                                         Equipment
                                                                        Land               Sales
                                                   Hospitality       Development         and Leasing        Healthcare
                                                  -------------      -------------      -------------      ------------- 
<S>                                               <C>                <C>                <C>                <C>        
Revenues ....................................     $ 111,367,899      $  73,279,739      $  19,538,876      $        --

Operating expenses ..........................       104,928,031         72,321,625         18,451,255               --
                                                  -------------      -------------      -------------      ------------- 
Income (loss) from operations ...............         6,439,868            958,114          1,087,621               --
                                                  -------------      -------------      -------------      ------------- 
Investment income (loss) ....................            27,747         10,704,900               --           (5,390,000)
                                                  -------------      -------------      -------------      ------------- 
Other (income) expense
    Interest expense ........................           198,353          3,457,317            700,849               --
    Interest income .........................          (136,728)        (2,041,021)           (33,498)              --
    Other ...................................              --                 --               38,783               --
                                                  -------------      -------------      -------------      ------------- 
Total other (income) expense ................            61,625          1,416,296            706,134               --
                                                  -------------      -------------      -------------      ------------- 
Income (loss) before minority
    interest and income taxes ...............         6,405,990         10,246,718            381,487         (5,390,000)
Minority interest ...........................              --           (5,432,803)              --                 --
                                                  -------------      -------------      -------------      ------------- 
Income (loss) before taxes ..................         6,405,990          4,813,915            381,487         (5,390,000)
Income tax (provision) ......................        (2,562,396)        (4,129,220)          (152,594)         2,156,000
                                                  -------------      -------------      -------------      ------------- 
Net income (loss) ...........................     $   3,843,594      $     684,695      $     228,893      $  (3,234,000)
                                                  =============      =============      =============      ============= 
Net income (loss) per share, basic ..........     $        0.34      $        0.06      $        0.02      $       (0.28)
                                                  =============      =============      =============      ============= 
Net income (loss) per share, diluted ........     $        0.32      $        0.06      $        0.02      $       (0.27)
                                                  =============      =============      =============      ============= 

EBITDA Calculation: (1)
    Net income (loss) .......................     $   3,843,594      $     684,695      $     228,893      $  (3,234,000)
    Interest expense, net ...................            61,625            107,947            667,351            431,000
    Income tax provision (benefit) ..........         2,562,396            457,956            152,594         (2,156,000)
    Depreciation and amortization ...........           382,404            281,046          2,467,421            475,500
                                                  -------------      -------------      -------------      ------------- 
EBITDA ......................................     $   6,850,019      $   1,531,644      $   3,516,259      $  (4,483,500)
                                                  =============      =============      =============      ============= 



<CAPTION>
                                                        REFRIGERATED                               
                                                        WAREHOUSING          OTHER               TOTAL              
                                                       -------------      -------------      -------------
<S>                                                    <C>                <C>                <C>          
Revenues .........................................     $        --        $        --        $ 204,186,514

Operating expenses ...............................            37,216          1,101,822        196,839,949
                                                       -------------      -------------      -------------
Income (loss) from operations ....................           (37,216)        (1,101,822)         7,346,565
                                                       -------------      -------------      -------------
Investment income (loss) .........................        (1,596,400)         2,903,777          6,650,024
                                                       -------------      -------------      -------------
Other (income) expense
    Interest expense .............................              --            2,894,904          7,251,423
    Interest income ..............................              --               (4,624)        (2,215,871)
    Other ........................................              --               (1,300)            37,483
                                                       -------------      -------------      -------------
Total other (income) expense .....................              --            2,888,980          5,073,035
                                                       -------------      -------------      -------------
Income (loss) before minority
    interest and income taxes ....................        (1,633,616)        (1,087,025)         8,923,554
Minority interest ................................         1,542,435               --           (3,890,368)
                                                       -------------      -------------      -------------
Income (loss) before taxes .......................           (91,181)        (1,087,025)         5,033,186
Income tax (provision) ...........................              --              418,908         (4,269,302)
                                                       -------------      -------------      -------------
Net income (loss) ................................     $     (91,181)     $    (668,117)     $     763,884
                                                       =============      =============      =============

Net income (loss) per share, basic ...............     $       (0.01)     $       (0.06)     $        0.07
                                                       =============      =============      =============

Net income (loss) per share, diluted .............     $       (0.01)     $       (0.06)     $        0.06
                                                       =============      =============      =============

EBITDA Calculation: (1)
    Net income (loss) ............................     $     (91,181)     $    (668,117)     $     763,884
    Interest expense, net ........................           462,920          2,890,280          4,621,123
    Income tax provision (benefit) ...............           (44,620)          (418,908)           553,418
    Depreciation and amortization ................           662,400               --        $   4,268,771
                                                       -------------      -------------      -------------
EBITDA ...........................................     $     989,519      $   1,803,255         10,207,196
                                                       =============      =============      =============
</TABLE>

(1)  EBITDA represents earnings before interest, income taxes, depreciation and
     amortization. Amounts are calculated based on the Company's ownership
     percentage of the EBITDA components. Management believes that EBITDA can be
     a meaningful measure of the Company's operating performance, cash
     generation and ability to service debt. However, EBITDA should not be
     considered as an alternative to either: (i) net earnings (determined in
     accordance with GAAP); (ii) operating cash flow (determined in accordance
     with GAAP); or (iii) liquidity. There can be no assurance that the
     Company's calculation of EBITDA is comparable to similarly titled items
     reported by other companies.

                                       20

<PAGE>   21


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997

On May 9, 1997, the Company acquired the Carter-Crowley Asset Group. The
Company's financial statements have been prepared on the basis that the
"Predecessor" consists of the Carter-Crowley Asset Group. As the Company did not
have any activities until May 9, 1997, the comparative data relating to the
three months ended June 30, 1997 is only with regard to the Predecessor from
April 1, 1997 to May 8, 1997 and the Company from May 9, 1997 to June 30, 1997.

EQUIPMENT SALES AND LEASING

Equipment sales and leasing revenues increased approximately $8.2 million or
247.6% to $11.6 million for the three months ended June 30, 1998, compared to
$3.3 million for the three months ended June 30, 1997. Approximately $6.8
million of this increase relates to the Company's purchases of Preco Machinery
Sales, Inc. ("Preco") which was effective as of December 1, 1997, Central Texas
which was effective as of April 30, 1998 and Machinery, Inc. which was effective
as of June 8, 1998. The remaining increase in revenues relates to growth of
equipment sales and leasing at locations owned by the Company prior to the
acquisitions. Equipment sales and leasing direct expenses increased $7.8 million
or 258.5% to $10.8 million for the three months ended June 30, 1998, compared to
$3.0 million for the three months ended June 30, 1997. Approximately $6.5
million of this increase relates to the Company's acquisitions. The remaining
increase in operating expenses relates to the additional costs incurred as a
result of the increase in equipment sales and lease revenue.

HOSPITALITY

Hospitality revenues represent RoseStar and COI Hotel revenues. As the Company
was not involved in the Hospitality segment prior to July 31, 1997, hospitality
revenues of $53.1 million for the three months ended June 30, 1998 represent
100% of the increase over the three months ended June 30, 1997. Hospitality
direct expenses, which represent costs incurred by the full-service hotels, as
well as destination, health and fitness resorts and Hospitality properties rent
paid to Crescent Equities were also not incurred prior to July 31, 1997 and
represent 100% of the increase over the prior year. Such costs are attributable
to the acquisition and operation of RoseStar and COI Hotel.

LAND DEVELOPMENT

Land development revenues represent revenues from Desert Mountain Properties
L.P. ("Desert Mountain Properties") prior to the elimination of the 95% minority
interest. As the Company was not involved in the Land Development segment prior
to July 31, 1997, land development revenues of $42.1 million for the three
months ended June 30, 1998 represent a 100% increase over the three months ended
June 30, 1997. Land development direct expenses represent operating costs
incurred by Desert Mountain Properties prior to the elimination of the 95%
minority interest. As the Company was not involved in the Land Development
segment prior to July 31, 1997, land development direct expenses of $40.5
million for the three months ended June 30, 1998 represent a 100% increase over
the three months ended June 30, 1997.

HEALTHCARE

As of June 30, 1998, the Company had made total equity and debt contributions of
$25.0 million to CBHS, including $17.5 million in redeemable preferred
interests. For financial reporting purposes, the amount of losses the Company
has recognized with respect to its investment in CBHS has been limited to the
balance of the investment in CBHS. The Company's investment in CBHS was zero as
of June 30, 1998 and the Company recognized no loss on its investment in CBHS
for the three months ended June 30, 1998. The Company recognized losses of $.4
million on its investment in CBHS for the same period in 1997. CBHS's operating
losses have been caused primarily by downward trends in the average length of
stay and net revenue per equivalent patient day, which management believes to be
consistent



                                       21
<PAGE>   22

with the general deterioration in the behavioral healthcare industry and by
certain fixed expenses, including annual rental obligations to a subsidiary of
Crescent Partnership of approximately $56 million and annual franchise fees of
approximately $78 million to an affiliate of CBHS Holdings. See "Recent
Developments - Healthcare."

OTHER

General and administrative expenses of $.8 million for the three months ended
June 30, 1998 consisted of corporate expenses such as legal and accounting
costs, insurance costs and corporate salaries. This amount represents a $.8 or
100% increase over the three months ended June 30, 1997 reflecting the fact that
the Company was newly formed during the second quarter of 1997.

Investment income of $8.6 million for the three months ended June 30, 1998
consisted primarily of investment income from Hicks-Muse of $2.4 million and
equity in income of Landevco of $6.5 million, offset by equity in losses of the
Refrigerated Warehousing segment of $.9 million. The investment loss for the
three months ended June 30, 1997 of $.4 million represents the Company's share
of losses from CBHS for this period.

Interest expense of $3.4 million for the three months ended June 30, 1998
consisted primarily of interest expense of $1.5 million for the Land Development
segment, interest expense of $.4 million for the Equipment Sales and Leasing
segment and interest expense at the corporate level of $1.5 million. This amount
represents a $3.1 million or 935% increase over the three months ended June 30,
1997 due to acquisitions resulting in higher debt balances in the current
period.

Interest income of $1.0 million relates primarily to the Land Development
segment. Interest income for the three months ended June 30, 1997 represents
interest income attributable to Moody-Day.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1997

On May 9, 1997, the Company acquired the Carter-Crowley Asset Group. The
Company's financial statements have been prepared on the basis that the
"Predecessor" consists of the Carter-Crowley Asset Group. As the Company did not
have any activities until May 9, 1997, the comparative data relating to the six
months ended June 30, 1997 is only with regard to the Predecessor from January
1, 1997 to May 8, 1997 and the Company from May 9, 1997 to June 30, 1997.

EQUIPMENT SALES AND LEASING

Equipment sales and leasing revenues increased approximately $13.2 million or
207% to $19.5 million for the six months ended June 30, 1998, compared to $6.4
million for the six months ended June 30, 1997. Approximately $11.1 million of
this increase relates to the Company's purchases of Preco, which was effective
as of December 1, 1997, Central Texas, which was effective as of April 30, 1998,
and Machinery, Inc. which was effective as of June 8, 1998. The remaining
increase in revenues relates to growth of equipment sales and leasing at
locations owned by the Company prior to the acquisitions. Equipment sales and
leasing direct expenses increased $12.5 million or 211.5% to $18.5 million for
the six months ended June 30, 1998, compared to $5.9 million for the six months
ended June 30, 1997. Approximately $10.7 million of this increase relates to the
Company's acquisitions. The remaining increase in operating expenses relates to
the additional costs incurred as a result of the increase in equipment sales and
lease revenue.

HOSPITALITY

Hospitality revenues represent RoseStar and COI Hotel revenues. As the Company
was not involved in the Hospitality segment prior to July 31, 1997, hospitality
revenues of $111.4 million for the six months ended June 30, 1998 represent 100%
of the increase over the six months ended June 30, 1997. Hospitality direct
expenses, which represent costs incurred by the full-service hotels, as well as
destination, health and fitness resorts and Hospitality properties rent paid to
Crescent Equities, are new expenses for the six


                                       22

<PAGE>   23

months ended June 30, 1998. Such costs are attributable to the acquisition and
operation of RoseStar and COI Hotel.

LAND DEVELOPMENT

Land development revenues represent revenues from Desert Mountain Properties
prior to the elimination of the 95% minority interest. As the Company was not
involved in the Land Development segment prior to July 31, 1997, land
development revenues of $73.3 million for the six months ended June 30, 1998
represent a 100% increase over the six months ended June 30, 1997. Land
development direct expenses represent operating costs incurred by Desert
Mountain Properties prior to the elimination of the 95% minority interest. As
the Company was not involved in the Land Development segment prior to July 31,
1997, land development direct expenses of $72.3 million for the three months
ended June 30, 1998 represent a 100% increase over the three months ended June
30, 1997.

HEALTHCARE

As of June 30, 1998, the Company had made total equity and debt contributions of
$25.0 million to CBHS, including $17.5 million in redeemable preferred
interests. For financial reporting purposes, the amount of losses the Company
has recognized with respect to its investment in CBHS has been limited to the
balance of the investment in CBHS. The Company's investment in CBHS was zero as
of June 30, 1998 and the Company recognized a $5.4 million loss on its
investment in CBHS for the six months ended June 30, 1998. The Company
recognized losses of $.4 million on its investment in CBHS for the same period
in 1997. CBHS's operating losses have been caused primarily by downward trends
in the average length of stay and net revenue per equivalent patient day, which
management believes to be consistent with the general deterioration in the
behavioral healthcare industry and by certain fixed expenses, including annual
rental obligations to a subsidiary of Crescent Partnership of approximately $56
million and annual franchise fees of approximately $78 million to an affiliate
of CBHS Holdings. See "Recent Developments - Healthcare."

OTHER

General and administrative expenses of $1.1 million for the six months ended
June 30, 1998 consisted of corporate expenses such as legal and accounting
costs, insurance costs and corporate salaries. This amount represents a $1.1 or
100% increase over the six months ended June 30, 1997 reflecting the fact that
the Company was newly formed during the second quarter of 1997.

Investment income of $6.7 million for the six months ended June 30, 1998
consisted primarily of investment income from Hicks-Muse of $2.9 million and
equity in income of Landevco of $10.0 million, offset by equity in losses of
CBHS of $5.4 million (see "Healthcare" above) and equity in losses of the
Refrigerated Warehousing segment of $1.6 million. The investment loss for the
six months ended June 30, 1997 of $.4 million represents the Company's share of
losses from CBHS for this period.

Interest expense of $7.3 million for the six months ended June 30, 1998
consisted primarily of interest expense of $.2 million for the Hospitality
segment, interest expense of $3.5 million for the Land Development segment,
interest expense of $.7 million for the Equipment Sales and Leasing Segment and
interest expense at the corporate level of $2.9 million. This amount represents
a $6.8 million increase over the six months ended June 30, 1997 due to
acquisitions resulting in higher debt balances in the current period.

Interest income of $2.2 million relates primarily to the Land Development
segment. Interest income for the six months ended June 30, 1997 represents
interest income attributable to Moody-Day. 



                                       23
<PAGE>   24





LIQUIDITY AND CAPITAL RESOURCES

The Company currently generates adequate cash flows to support the operations of
each of its segments although, the Company currently has pending acquisitions
and future opportunities for which it does not yet have adequate financing,
including transactions involving Crescent Machinery, CBHS (see "Recent
Developments -- Healthcare"), Hicks-Muse and the Mavericks/Stars arena
and adjacent development opportunities. Management is considering an equity
offering, various financing alternatives with Crescent Equities and Crescent
Partnership, additional bank financing, and other private equity financing
possibilities. Crescent Operating anticipates that it will be able to obtain
adequate financing to capitalize on pending and identified future business and
investment opportunities, although there can be no assurances that adequate
financing will be obtained at a cost of capital acceptable to the Company.

Net cash flows provided by operating activities for the six months ended June
30, 1998 were $12.3 million compared with the net cash provided by operating
activities of $.9 million for the six months ended June 30, 1997. Increases in
cash related to the $12.3 million of cash provided by operating activities for
the six months ended June 30, 1998 were the current year income of $.8 million,
$9.2 million of depreciation and amortization, $14.0 million of deferred
revenue, $6 million of proceeds from the sale of real estate and $3.9 million of
minority interests. Offsetting cash increases were outflows related to cash used
as a result of an increase in accounts receivable and inventories of $8.0
million, a decrease in accounts payable and accrued expenses of $6.7 million and
investment income of $6.7 million.

Net cash flows used in investing activities for the six months ended June 30,
1998 were $56.3 million compared with the net cash used in investing activities
of $24 million for the six months ended June 30, 1997. Significant components of
the $56.3 million of cash used in investing activities for the six months ended
June 30, 1998 were cash used for the acquisition of business interests of $73.5
million and purchases of property and equipment of $14.2 million offset by cash
received from the collection and sales of notes receivable of $21.2 million,
cash received from Hicks-Muse of $4.5 million and dividends received of $4.3
million.

Net cash flows provided by financing activities for the six months ended June
30, 1998 were $27.5 million compared with the net cash provided by financing
activities of $24.3 million for the six months ended June 30, 1997. Significant
components of the $27.5 million of cash provided by financing activities for the
six months ended June 30, 1998 were cash used for the payments of long-term debt
of $45.8 million, offset by net contributions by minority interests of $58.8
million and cash received of $14.4 million from the issuance of long term debt.

In connection with the formation and capitalization of Crescent Operating in the
second quarter of 1997, Crescent Operating received approximately $14.1 million
in cash from Crescent Partnership and Crescent Partnership loaned Crescent
Operating approximately $35.9 million pursuant to a five-year term loan,
maturing on May 8, 2002, of which approximately $26.8 million was outstanding as
of June 30, 1998. The loan is a recourse loan that is collateralized, to the
extent not prohibited by pre-existing arrangements, by a first lien on the
assets which the Company now owns or may acquire in the future. The loan bears
interest at the rate of 12% per annum, compounded annually, and interest that
accrues is added into the principal balance of the loan throughout the term of
the debt. The Company also obtained a $20.4 million line of credit from Crescent
Partnership in connection with its formation and capitalization. Advances under
the line of credit bear interest at the same rate as the term loan. The line of
credit is payable on an interest-only basis during its term, which expires on
the later of (i) May 21, 2002 or (ii) five years after the last draw under the
line of credit (in no event shall the maturity date be later than June 2007).
Draws may be made under the line of credit until June 22, 2002. The line of
credit is a recourse obligation and amounts outstanding thereunder are
collateralized, to the extent not prohibited by pre-existing arrangements, by a
first lien on the assets which the Company now owns or may acquire in the
future. As of June 30, 1998, $15.7 million was outstanding under the line of
credit. The Company is currently in negotiations to increase the amount
available for borrowing under this line of credit and Crescent Partnership has
approved an increase to the line of credit of at least $3 million.

In August 1997, the Company obtained a $15.0 million short-term unsecured bank
line of credit from NationsBank. The line of credit is due in August 1999 and
bears interest at LIBOR plus 1%. The $15.0 million available under the line of
credit from NationsBank was fully drawn as of June 30, 1998.



                                       24
<PAGE>   25


As a part of the acquisition of a two-thirds interest in the Houston Center
Athletic Club Venture ("HCAC") and a related $5.0 million note, the Company
borrowed $1.8 million in the form of two notes (one for $1.0 million and the
other for $.8 million) from Crescent Partnership at an interest rate of 8.5% per
annum. The $1.0 million note, which is secured by the $5.0 million note the
Company purchased as part of the transaction is payable on an interest-only
basis through its maturity on September 21, 1998. Interest on the $1.0 million
note is payable monthly. The $.8 million note is collateralized by the
two-thirds interest in HCAC and matures September 22, 2002. Monthly principal
and interest payments on the $.8 million loan commenced in November 1997.

Desert Mountain Properties also has a credit agreement with Crescent Partnership
pursuant to which Crescent Partnership has advanced funds to Desert Mountain
Properties through a "Junior Note", a "Senior Note" and a "Lot Sales Note". The
Junior Note evidences a $60.0 million advance from Crescent Partnership to
Desert Mountain Properties and accrues interest at 14% per annum. The Senior
Note evidences a $110.0 million advance from Crescent Partnership to Desert
Mountain Properties and accrues interest at 10% per annum. The principal and
interest on both the Junior Note and the Senior Note are payable in quarterly
installments, based on proceeds from the operations of Desert Mountain
Properties. The Lot Sales Note bore interest at an annual rate equal to the
prime rate plus 1%, and was payable in monthly installments based on the
previous month's proceeds obtained by Desert Mountain Properties from other land
note receivables. During the first quarter of 1998, Desert Mountain properties
sold approximately $19.7 million of notes receivable on a non-recourse basis to
the National Bank of Arizona. The proceeds of such sale were used to pay off the
Lot Sales Note. As of June 30, 1998, the outstanding balances on the Junior
Note, Senior Note, and line of credit were $60.0 million, $85.5 million and $0
million, respectively.

Desert Mountain Properties entered into a $35 million credit facility with
National Bank of Arizona in May 1998. The facility is comprised of (i) a $25
million line of credit available for vertical financing related to new home
construction and bears an annual interest rate of prime and (ii) a $10 million
line of credit available for borrowings against certain notes receivable issued
by Desert Mountain Properties and bears an annual interest rate of prime plus
1%. The credit facility is due in May 1999 with interest payable monthly,
collateralized by land owned by Desert Mountain Properties, deeds of trust on
lots sold and home construction. As of June 30, 1998, the outstanding balance on
the line of credit with National Bank of Arizona was $3.1 million.

Crescent Machinery has various equipment notes payable to finance companies
which are collateralized by the equipment financed. The notes are payable in
monthly principal and interest payments and bear interest at 8.5% to 10% per
annum. These notes mature between 1998 and 2003. As of June 30, 1998, the
outstanding balance on these equipment notes was $22.3 million.

MODIFICATION OF COMPUTER SOFTWARE FOR THE YEAR 2000

The Company is currently evaluating its equipment for use in the Year 2000. Work
plans detailing the tasks and resources required to insure that equipment is
Year 2000 compliant are currently being developed and in many cases are already
being implemented or Year 2000 compliant systems have been installed. CBHS
expects to spend $1 million in the aggregate during fiscal 1998 and fiscal 1999
to modify internal use software. The Company does not anticipate incurring any
other significant costs to make its equipment Year 2000 compliant. Costs
associated with modifying equipment to be Year 2000 compliant are charged to
expense as incurred.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable



                                       25
<PAGE>   26




                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

Not Applicable

ITEM 2.  CHANGE IN SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

(a) The Company held its first annual meeting of stockholders on June 8, 1998.

(b) Proxies for the meeting were solicited pursuant to Section 14(a) of the
    Securities and Exchange Act of 1934. There was no solicitation in opposition
    to management's solicitation. All of management's nominees for director were
    elected.

(c) At the annual meeting, stockholders voted for the election of Gerald W.
    Haddock and Carl F. Thorne, incumbent directors, to each serve an additional
    three-year term as a director:

          Name                  For          Authority Withheld
          ----                  ---          ------------------
        Gerald W. Haddock     9,621,170           35,302   
        Carl F. Thorne        9,617,980           38,492

Stockholders also voted to approve the Company's 1997 Management Stock Incentive
Plan. 5,688,105 shares were voted for the Plan; 1,173,405 shares were voted
against the Plan; and 23,705 shares abstained from voting; and 2,771,259 shares
represent broker non-votes. Stockholders also voted to ratify the appointment of
Ernst & Young LLP as the independent auditors for the Company for the year
ending December 31, 1998. 9,644,295 shares were voted in favor of ratification;
7,937 shares were voted against ratification; and 4,240 shares abstained from
voting.

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)       Exhibits

         Exhibit Number         Description of Exhibits
         -------------------    ------------------------------------------------

         3.1*                   First Amended and Restated Certificate of
                                Incorporation

         3.2*                   First Amended and Restated Bylaws

         3.3                    Amendment of Article V of First Amended and
                                Restated Bylaws

         4.1*                   Specimen stock certificate

         4.2*                   Preferred Share Purchase Rights Plan

         10.1*                  Amended Stock Incentive Plan

         10.2                   Intercompany Agreement between Crescent
                                Operating, Inc. and Crescent Real Estate
                                Equities Limited Partnership (filed as Exhibit
                                10.2 to the Quarterly Report on Form 10-Q for
                                the Quarter Ended June 30, 1997 of Crescent
                                Operating, Inc. and incorporated herein by
                                reference)

         10.3                   Amended and Restated Operating Agreement of
                                Charter Behavioral Health Systems, LLC (filed as
                                Exhibit 10.3 to the Quarterly Report on Form
                                10-Q of Crescent Operating, Inc. for the Quarter
                                Ended June 30, 1997 and incorporated herein by
                                reference.)

         10.5**                 Amended and Restated Credit and Security
                                Agreement, dated as of May 30, 1997, between
                                Crescent Real Estate Equities Limited
                                Partnership and Crescent Operating, Inc.,
                                together with related Note

         10.6**                 Line of Credit and Security Agreement, dated as
                                of May 21, 1997, between Crescent Real Estate
                                Equities Limited Partnership and Crescent
                                Operating, Inc., together with related Line of
                                Credit Note

         10.7*                  Acquisition Agreement, dated as of February 10,
                                1997, between Crescent Real Estate Equities
                                Limited Partnership and Carter-Crowley
                                Properties, Inc.


         10.10**                Security Agreement dated September 22, 1997
                                between COI Hotel Group, Inc., as debtor, and
                                Crescent Real Estate Equities Limited
                                Partnership, as lender, together with related $1
                                million promissory note




                                       26
<PAGE>   27


         10.11**                Security Agreement dated September 22, 1997
                                between COI Hotel Group, Inc., as debtor, and
                                Crescent Real Estate Equities Limited
                                Partnership, as lender, together with related
                                $800,000 promissory note

         10.12**                Amended and Restated Asset Management dated
                                August 31, 1997, to be effective July 31, 1997,
                                between Wine Country Hotel, LLC and The Varma
                                Group, Inc.

         10.13**                Amended and Restated Asset Management Agreement
                                dated August 31, 1997, to be effective July 31,
                                1997, between RoseStar Southwest, LLC and The
                                Varma Group, Inc.

         10.14**                Amended and Restated Asset Management Agreement
                                dated August 31, 1997, to be effective July 31,
                                1997, between RoseStar Management LLC and The
                                Varma Group, Inc.

         10.15**                Agreement for Financial Services dated July 1,
                                1997, between Crescent Real Estate Equities
                                Company and Petroleum Financial, Inc.

         10.16**                Credit Agreement dated August 27, 1997, between
                                Crescent Operating, Inc. and NationsBank of
                                Texas, N.A. together with related $15.0 million
                                promissory note

         10.17**                Support Agreement dated August 27, 1997, between
                                Richard E. Rainwater, John Goff and Gerald
                                Haddock in favor of Crescent Real Estate
                                Equities Company and NationsBank of Texas, N.A.

         10.18***               1997 Crescent Operating, Inc. Management Stock
                                Incentive Plan

         10.19***               Memorandum of Agreement executed November 16,
                                1997, among Charter Behavioral Health Systems,
                                LLC, Charter Behavioral Health Systems, Inc. and
                                Crescent Operating, Inc.

         10.20***               Purchase Agreement dated August 31, 1997, by and
                                among Crescent Operating, Inc., RoseStar
                                Management LLC, Gerald W. Haddock, John C. Goff
                                and Sanjay Varma

         10.21***               Stock Purchase Agreement dated August 31, 1997,
                                by and among Crescent Operating, Inc., Gerald W.
                                Haddock, John C. Goff and Sanjay Varma

         10.22                  Amended and Restated Lease Agreement, dated June
                                30, 1995 between Crescent Real Estate Equities
                                Limited Partnership and RoseStar Management LLC,
                                relating to the Denver Marriott City Center
                                (filed as Exhibit 10.17 to the Annual Report on
                                Form 10-K of Crescent Real Estate Equities
                                Company for the Fiscal Year Ended December 31,
                                1995 (the "1995 10-K") and incorporated herein
                                by reference)

         10.23                  Lease Agreement, dated December 19, 1995 between
                                Crescent Real Estate Equities Limited
                                Partnership and RoseStar Management LLC,
                                relating to the Hyatt Regency Albuquerque (filed
                                as Exhibit 10.16 to the 1995 10-K and
                                incorporated herein by reference)

         10.24                  Form of Amended and Restated Lease Agreement,
                                dated January 1, 1996, among Crescent Real
                                Estate Equities Limited Partnership, Mogul
                                Management, LLC and RoseStar Management LLC,
                                relating to the Hyatt Regency Beaver Creek
                                (filed as Exhibit 10.12 to the 1995 10-K and
                                incorporated herein by reference)

         10.25                  Lease Agreement, dated July 26, 1996, between
                                Canyon Ranch, Inc. and Canyon Ranch Leasing,
                                L.L.C., assigned by Canyon Ranch, Inc. to
                                Crescent Real Estate Equities Limited
                                Partnership pursuant to the Assignment and
                                Assumption Agreement of Master Lease, dated July
                                26, 1996 (filed as Exhibit 10.24 to the
                                Quarterly Report on Form 10-Q/A of Crescent Real
                                Estate Equities Company for the Quarter Ended
                                June 30, 1997 (the "June 1997 10-Q") and
                                incorporated herein by reference)



                                       27
<PAGE>   28
         10.26                  Lease Agreement, dated November 18, 1996 between
                                Crescent Real Estate Equities Limited
                                Partnership and Wine Country Hotel, LLC (filed a
                                Exhibit 10.25 to the Annual Report on Form 10-K
                                of Crescent Real Estate Equities Company for the
                                Fiscal Year Ended December 31, 1996 and
                                incorporated herein by reference)

         10.27                  Lease Agreement, dated December 11, 1996,
                                between Canyon Ranch-Bellefontaine Associates,
                                L.P. and Vintage Resorts, L.L.C., as assigned by
                                Canyon Ranch-Bellefontaine Associates, L.P. to
                                Crescent Real Estate Funding VI, L.P. pursuant
                                to the Assignment and Assumption Agreement of
                                Master Lease, dated December 11, 1996 (filed as
                                Exhibit 10.26 to the June 1997 10-Q and
                                incorporated herein by reference)

         10.28                  Master Lease Agreement, dated June 16, 1997,
                                between Crescent Real Estate Funding VII, L.P.
                                and Charter Behavioral Health Systems, LLC and
                                its subsidiaries, relating to the Facilities
                                (filed as Exhibit 10.27 to the June 1997 10-Q
                                and incorporated herein by reference)

         10.29***               Form of Indemnification Agreement

         10.30***               Purchase Agreement, dated as of September 29,
                                1997, between Crescent Operating, Inc. and
                                Crescent Real Estate Equities Limited
                                Partnership, relating to the purchase of Desert
                                Mountain Development Corporation

         10.31****              Lease Agreement dated December 19, 1997, between
                                Crescent Real Estate Equities Limited
                                Partnership, as Lessor, and Wine Country Hotel,
                                as Lessee, for lease of Ventana Inn

         10.32****              Lease Agreement dated September 22, 1997,
                                between Crescent Real Estate Equities Limited
                                Partnership, as lessor, and COI Hotel Group,
                                Inc., as lessee, for lease of Four Seasons
                                Hotel, Houston

         10.33****              Asset Purchase Agreement dated December 19,
                                1997, among Crescent Operating, Inc. Preco
                                Machinery Sales, Inc., and certain individual
                                Preco shareholders

         10.34****              Asset Purchase Agreement dated April 30, 1998,
                                among Crescent Operating, Inc., Central Texas
                                Equipment Company, and certain individual
                                Central Texas shareholders

         10.35****              Credit Agreement dated August 29, 1997 between
                                Crescent Real Estate Equities Limited
                                Partnership, as lender, and Desert Mountain
                                Properties Limited Partnership, as borrower,
                                together with related Senior Note, Junior Note
                                and deed of trust

         10.36****              Buy-Out Agreement dated April 24, 1998, between
                                Crescent Operating, Inc. and Crescent Real
                                Estate Equities Limited Partnership

         10.37                  Stock Acquisition Agreement and Plan of Merger
                                dated June 4, 1998, among Machinery, Inc.,
                                Oklahoma Machinery, Inc., Crescent Machinery
                                Company, Crescent Operating, Inc. and
                                certain individual Machinery shareholders

         10.38                  Master Revolving Line of Credit Loan Agreement
                                (Borrowing Base and Warehouse) dated May 14,
                                1998, between Desert Mountain Properties Limited
                                Partnership and National Bank of Arizona

         10.39                  1997 Management Stock Incentive Plan 

         27                     Financial Data Schedule

         *                      Incorporated by Reference to the Company's
                                registration statement on Form S-1 dated July
                                12, 1997

         **                     Incorporated by Reference to the Company's
                                September 30, 1997 Form 10-Q

         ***                    Incorporated by Reference to the Company's
                                Annual Report on Form 10-K for the year ended
                                December 31, 1997

         ****                   Incorporated by reference to the Company's
                                March 31, 1998 Form 10-Q 

           
        (b)        Reports on Form 8-K

        Not Applicable


                                       28
<PAGE>   29




                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 14th day of August, 1998.

                              CRESCENT OPERATING, INC.
                              (Registrant)


                              By  /s/ Gerald W. Haddock
                                  ---------------------------------------
                                  Gerald W. Haddock, President and Chief
                                  Executive Officer and Director (Principal
                                  Executive Officer)


                              By  /s/ Richard P. Knight
                                  ----------------------------------------
                                  Richard P. Knight, Chief Financial Officer
                                  (Principal Financial and Accounting Officer)








                                       29
<PAGE>   30




                                 EXHIBIT INDEX


         Exhibit Number         Description of Exhibits
         -------------------    ------------------------------------------------

         3.1*                   First Amended and Restated Certificate of
                                Incorporation

         3.2*                   First Amended and Restated Bylaws

         3.3                    Amendment of Article V of First Amended and
                                Restated Bylaws

         4.1*                   Specimen stock certificate

         4.2*                   Preferred Share Purchase Rights Plan

         10.1*                  Amended Stock Incentive Plan

         10.2                   Intercompany Agreement between Crescent
                                Operating, Inc. and Crescent Real Estate
                                Equities Limited Partnership (filed as Exhibit
                                10.2 to the Quarterly Report on Form 10-Q for
                                the Quarter Ended June 30, 1997 of Crescent
                                Operating, Inc. and incorporated herein by
                                reference)

         10.3                   Amended and Restated Operating Agreement of
                                Charter Behavioral Health Systems, LLC (filed as
                                Exhibit 10.3 to the Quarterly Report on Form
                                10-Q of Crescent Operating, Inc. for the Quarter
                                Ended June 30, 1997 and incorporated herein by
                                reference.)

         10.5**                 Amended and Restated Credit and Security
                                Agreement, dated as of May 30, 1997, between
                                Crescent Real Estate Equities Limited
                                Partnership and Crescent Operating, Inc.,
                                together with related Note

         10.6**                 Line of Credit and Security Agreement, dated as
                                of May 21, 1997, between Crescent Real Estate
                                Equities Limited Partnership and Crescent
                                Operating, Inc., together with related Line of
                                Credit Note

         10.7*                  Acquisition Agreement, dated as of February 10,
                                1997, between Crescent Real Estate Equities
                                Limited Partnership and Carter-Crowley
                                Properties, Inc.


         10.10**                Security Agreement dated September 22, 1997
                                between COI Hotel Group, Inc., as debtor, and
                                Crescent Real Estate Equities Limited
                                Partnership, as lender, together with related $1
                                million promissory note
<PAGE>   31


         10.11**                Security Agreement dated September 22, 1997
                                between COI Hotel Group, Inc., as debtor, and
                                Crescent Real Estate Equities Limited
                                Partnership, as lender, together with related
                                $800,000 promissory note

         10.12**                Amended and Restated Asset Management dated
                                August 31, 1997, to be effective July 31, 1997,
                                between Wine Country Hotel, LLC and The Varma
                                Group, Inc.

         10.13**                Amended and Restated Asset Management Agreement
                                dated August 31, 1997, to be effective July 31,
                                1997, between RoseStar Southwest, LLC and The
                                Varma Group, Inc.

         10.14**                Amended and Restated Asset Management Agreement
                                dated August 31, 1997, to be effective July 31,
                                1997, between RoseStar Management LLC and The
                                Varma Group, Inc.

         10.15**                Agreement for Financial Services dated July 1,
                                1997, between Crescent Real Estate Equities
                                Company and Petroleum Financial, Inc.

         10.16**                Credit Agreement dated August 27, 1997, between
                                Crescent Operating, Inc. and NationsBank of
                                Texas, N.A. together with related $15.0 million
                                promissory note

         10.17**                Support Agreement dated August 27, 1997, between
                                Richard E. Rainwater, John Goff and Gerald
                                Haddock in favor of Crescent Real Estate
                                Equities Company and NationsBank of Texas, N.A.

         10.18***               1997 Crescent Operating, Inc. Management Stock
                                Incentive Plan

         10.19***               Memorandum of Agreement executed November 16,
                                1997, among Charter Behavioral Health Systems,
                                LLC, Charter Behavioral Health Systems, Inc. and
                                Crescent Operating, Inc.

         10.20***               Purchase Agreement dated August 31, 1997, by and
                                among Crescent Operating, Inc., RoseStar
                                Management LLC, Gerald W. Haddock, John C. Goff
                                and Sanjay Varma

         10.21***               Stock Purchase Agreement dated August 31, 1997,
                                by and among Crescent Operating, Inc., Gerald W.
                                Haddock, John C. Goff and Sanjay Varma

         10.22                  Amended and Restated Lease Agreement, dated June
                                30, 1995 between Crescent Real Estate Equities
                                Limited Partnership and RoseStar Management LLC,
                                relating to the Denver Marriott City Center
                                (filed as Exhibit 10.17 to the Annual Report on
                                Form 10-K of Crescent Real Estate Equities
                                Company for the Fiscal Year Ended December 31,
                                1995 (the "1995 10-K") and incorporated herein
                                by reference)

         10.23                  Lease Agreement, dated December 19, 1995 between
                                Crescent Real Estate Equities Limited
                                Partnership and RoseStar Management LLC,
                                relating to the Hyatt Regency Albuquerque (filed
                                as Exhibit 10.16 to the 1995 10-K and
                                incorporated herein by reference)

         10.24                  Form of Amended and Restated Lease Agreement,
                                dated January 1, 1996, among Crescent Real
                                Estate Equities Limited Partnership, Mogul
                                Management, LLC and RoseStar Management LLC,
                                relating to the Hyatt Regency Beaver Creek
                                (filed as Exhibit 10.12 to the 1995 10-K and
                                incorporated herein by reference)

         10.25                  Lease Agreement, dated July 26, 1996, between
                                Canyon Ranch, Inc. and Canyon Ranch Leasing,
                                L.L.C., assigned by Canyon Ranch, Inc. to
                                Crescent Real Estate Equities Limited
                                Partnership pursuant to the Assignment and
                                Assumption Agreement of Master Lease, dated July
                                26, 1996 (filed as Exhibit 10.24 to the
                                Quarterly Report on Form 10-Q/A of Crescent Real
                                Estate Equities Company for the Quarter Ended
                                June 30, 1997 (the "June 1997 10-Q") and
                                incorporated herein by reference)


<PAGE>   32
         10.26                  Lease Agreement, dated November 18, 1996 between
                                Crescent Real Estate Equities Limited
                                Partnership and Wine Country Hotel, LLC (filed a
                                Exhibit 10.25 to the Annual Report on Form 10-K
                                of Crescent Real Estate Equities Company for the
                                Fiscal Year Ended December 31, 1996 and
                                incorporated herein by reference)

         10.27                  Lease Agreement, dated December 11, 1996,
                                between Canyon Ranch-Bellefontaine Associates,
                                L.P. and Vintage Resorts, L.L.C., as assigned by
                                Canyon Ranch-Bellefontaine Associates, L.P. to
                                Crescent Real Estate Funding VI, L.P. pursuant
                                to the Assignment and Assumption Agreement of
                                Master Lease, dated December 11, 1996 (filed as
                                Exhibit 10.26 to the June 1997 10-Q and
                                incorporated herein by reference)

         10.28                  Master Lease Agreement, dated June 16, 1997,
                                between Crescent Real Estate Funding VII, L.P.
                                and Charter Behavioral Health Systems, LLC and
                                its subsidiaries, relating to the Facilities
                                (filed as Exhibit 10.27 to the June 1997 10-Q
                                and incorporated herein by reference)

         10.29***               Form of Indemnification Agreement

         10.30***               Purchase Agreement, dated as of September 29,
                                1997, between Crescent Operating, Inc. and
                                Crescent Real Estate Equities Limited
                                Partnership, relating to the purchase of Desert
                                Mountain Development Corporation

         10.31****              Lease Agreement dated December 19, 1997, between
                                Crescent Real Estate Equities Limited
                                Partnership, as Lessor, and Wine Country Hotel,
                                as Lessee, for lease of Ventana Inn

         10.32****              Lease Agreement dated September 22, 1997,
                                between Crescent Real Estate Equities Limited
                                Partnership, as lessor, and COI Hotel Group,
                                Inc., as lessee, for lease of Four Seasons
                                Hotel, Houston

         10.33****              Asset Purchase Agreement dated December 19,
                                1997, among Crescent Operating, Inc. Preco
                                Machinery Sales, Inc., and certain individual
                                Preco shareholders

         10.34****              Asset Purchase Agreement dated April 30, 1998,
                                among Crescent Operating, Inc., Central Texas
                                Equipment Company, and certain individual
                                Central Texas shareholders

         10.35****              Credit Agreement dated August 29, 1997 between
                                Crescent Real Estate Equities Limited
                                Partnership, as lender, and Desert Mountain
                                Properties Limited Partnership, as borrower,
                                together with related Senior Note, Junior Note
                                and deed of trust

         10.36****              Buy-Out Agreement dated April 24, 1998, between
                                Crescent Operating, Inc. and Crescent Real
                                Estate Equities Limited Partnership

         10.37                  Stock Acquisition Agreement and Plan of Merger
                                dated June 4, 1998, among Machinery, Inc.,
                                Oklahoma Machinery, Inc., Crescent Machinery
                                Company, Crescent Operating, Inc. and
                                certain individual Machinery shareholders

         10.38                  Master Revolving Line of Credit Loan Agreement
                                (Borrowing Base and Warehouse) dated May 14,
                                1998, between Desert Mountain Properties Limited
                                Partnership and National Bank of Arizona

         10.39                  1997 Management Stock Incentive Plan 

         27                     Financial Data Schedule



<PAGE>   33
         *                      Incorporated by Reference to the Company's
                                registration statement on Form S-1 dated July
                                12, 1997

         **                     Incorporated by Reference to the Company's
                                September 30, 1997 Form 10-Q

         ***                    Incorporated by Reference to the Company's
                                Annual Report on Form 10-K for the year ended
                                December 31, 1997

         ****                   Incorporated by reference to the Company's
                                March 31, 1998 Form 10-Q 

           
        (b)        Reports on Form 8-K

        Not Applicable