<PAGE>
                                  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 March 31, 2002

                                       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)

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

    777 Taylor Street, Suite 1050
           Fort Worth, Texas                                          76102
----------------------------------------           ----------------------------------------
(Address of principal executive offices)                            (Zip Code)
</Table>

        Registrant's telephone number, including area code (817) 339-2200


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, $0.01 par value, outstanding as of May 31,
2002: 10,828,497

<PAGE>




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



                         PART I - FINANCIAL INFORMATION

<Table>
<Caption>
                                                                                                              Page
                                                                                                              ----
<S>                                                                                                           <C>
Item 1.       Financial Statements:

              Consolidated Balance Sheets (Unaudited)..........................................................3

              Consolidated Statements of Operations (Unaudited)................................................4

              Consolidated Statement of Changes in Shareholders' Deficit (Unaudited)...........................5

              Consolidated Statements of Cash Flows (Unaudited)................................................6

              Notes to Consolidated Financial Statements (Unaudited)...........................................7

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations...........17

Item 3.       Quantitative and Qualitative Disclosures About Market Risk......................................29

                           PART II - OTHER INFORMATION

Item 1.       Legal Proceedings...............................................................................29

Item 2.       Change in Securities and Use of Proceeds........................................................30

Item 3.       Defaults Upon Senior Securities.................................................................30

Item 4.       Submission of Matters to a Vote of Security Holders.............................................31

Item 5.       Other Information...............................................................................31

Item 6.       Exhibits and Reports on Form 8-K................................................................31
</Table>



                                       2

<PAGE>
                            CRESCENT OPERATING, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (AMOUNTS IN THOUSANDS, UNAUDITED)


<Table>
<Caption>
                                                                             March 31, 2002   December 31, 2001
                                                                             --------------   -----------------
                                                                                                 (See Note 1)
<S>                                                                          <C>              <C>

                                   ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                                    $     4,907      $       492
  Accounts receivable, net                                                          11,915           14,581
  Inventories                                                                       13,552           18,965
  Notes receivable                                                                      57               58
  Prepaid expenses and other current assets                                          1,076            1,875
  Current assets to be transferred pursuant to Settlement Agreement                     --           94,161
                                                                               -----------      -----------
     Total current assets                                                           31,507          130,132
                                                                               -----------      -----------

PROPERTY AND EQUIPMENT, NET                                                         56,933           70,094

INVESTMENTS                                                                          3,581            4,833

OTHER ASSETS
  Deferred tax assets                                                                7,521           24,715
  Other assets                                                                         124              636
  Long-term assets to be transferred pursuant to Settlement Agreement                   --          714,994
                                                                               -----------      -----------
     Total other assets                                                              7,645          740,345
                                                                               -----------      -----------

TOTAL ASSETS                                                                   $    99,666      $   945,404
                                                                               ===========      ===========

                    LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES
  Accounts payable and accrued expenses                                        $    15,343      $    15,525
  Accounts payable and accrued expenses - CEI                                       31,758           48,875
  Current portion of long-term debt - CEI                                           33,753           69,634
  Current portion of long-term debt                                                 86,074          101,870
  Deferred revenue                                                                     436              641
  Current liabilities to be transferred pursuant to Settlement Agreement                --          553,212
                                                                               -----------      -----------
     Total current liabilities                                                     167,364          789,757

LONG-TERM DEBT - CEI, NET OF CURRENT PORTION                                         1,254              549

LONG-TERM DEBT, NET OF CURRENT PORTION                                                  --              790

LONG-TERM LIABILITIES TO BE LIQUIDATED PURSUANT TO SETTLEMENT AGREEMENT                 --           88,807
                                                                               -----------      -----------

     Total liabilities                                                             168,618          879,903
                                                                               -----------      -----------

MINORITY INTERESTS TO BE TRANSFERRED PURSUANT TO SETTLEMENT AGREEMENT                   --          158,889

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT
Preferred stock, $.01 par value, 10,000 shares authorized,
        no shares issued or outstanding                                                 --               --
Common stock, $.01 par value, 22,500 shares authorized,
      11,490 shares issued                                                             115              115
Additional paid-in capital                                                          17,781           17,781
Accumulated other comprehensive loss                                                (1,436)          (1,436)
Accumulated deficit                                                                (82,828)        (105,542)
Treasury stock at cost, 662 and 1,103 shares, respectively                          (2,584)          (4,306)
                                                                               -----------      -----------
     Total shareholders' deficit                                                   (68,952)         (93,388)
                                                                               -----------      -----------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                    $    99,666      $   945,404
                                                                               ===========      ===========
</Table>


         See accompanying notes to the consolidated financial statements.



                                       3

<PAGE>

                            CRESCENT OPERATING, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
            (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)


<Table>
<Caption>
                                                                       For the                 For the
                                                                  Three Months Ended     Three Months Ended
                                                                     March 31, 2002        March 31, 2001
                                                                  ------------------     ------------------
                                                                                             (See Note 1)
<S>                                                               <C>                    <C>
 REVENUES
 Equipment sales & leasing                                            $     15,929           $     29,540
                                                                      ------------           ------------

       Total revenues                                                       15,929                 29,540
                                                                      ------------           ------------

 OPERATING EXPENSES
 Equipment sales & leasing                                                  19,005                 30,820
 Corporate general and administrative                                        1,245                    455
 Impairment of assets                                                           34                     --
                                                                      ------------           ------------

 Total operating expenses                                                   20,284                 31,275
                                                                      ------------           ------------

 LOSS FROM OPERATIONS                                                       (4,355)                (1,735)

 INVESTMENT (LOSS) INCOME                                                     (546)                 4,421

 EQUITY IN LOSS OF
 UNCONSOLIDATED SUBSIDIARIES                                                  (706)                (1,341)

 OTHER EXPENSE (INCOME)
 Interest expense                                                            2,331                  4,578
 Interest income                                                                (4)                    --
 Other                                                                         282                     94
                                                                      ------------           ------------

 Total other expense                                                         2,609                  4,672
                                                                      ------------           ------------

 LOSS FROM OPERATIONS BEFORE INCOME TAXES                                   (8,216)                (3,327)

 INCOME TAX BENEFIT                                                         (1,358)                (3,040)
                                                                      ------------           ------------

 LOSS FROM CONTINUING OPERATIONS                                            (6,858)                  (287)

 DISCONTINUED OPERATIONS (NOTE 3)
 INCOME FROM OPERATIONS OF DISCONTINUED
 HOSPITALITY  AND LAND DEVELOPMENT SEGMENTS
 (LESS APPLICABLE INCOME TAX EXPENSE OF $2,507 AND $856 AND
  MINORITY INTERESTS OF $1,897 AND $2,088)                                   3,279                    676

 GAIN ON  DISPOSAL OF HOSPITALITY AND LAND DEVELOPMENT
 SEGMENTS (LESS APPLICABLE INCOME TAX EXPENSE
 OF $17,529)                                                                26,293                     --
                                                                      ------------           ------------

 INCOME FROM DISCONTINUED OPERATIONS                                        29,572                    676

 INCOME BEFORE ACCOUNTING CHANGE                                            22,714                    389

 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                            --                 (9,509)
                                                                      ------------           ------------

 NET INCOME (LOSS)                                                    $     22,714           $     (9,120)
                                                                      ============           ============

 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

 Loss before discontinued operations and accounting change            $      (0.66)          $      (0.03)
 Discontinued operations                                                      2.85                   0.07
 Change in accounting principle                                                 --                  (0.92)
                                                                      ------------           ------------

    Net earnings (loss) per share                                     $       2.19           $      (0.88)
                                                                      ============           ============
</Table>


         See accompanying notes to the consolidated financial statements.



                                       4

<PAGE>

                            CRESCENT OPERATING, INC.
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
                        (AMOUNTS IN THOUSANDS, UNAUDITED)


<Table>
<Caption>

                                         Common stock                 Treasury stock           Additional
                                 ---------------------------   ----------------------------      paid-in
                                    Shares          Amount        Shares          Amount         capital
                                 ------------   ------------   ------------    ------------    ------------
<S>                              <C>            <C>            <C>             <C>             <C>
DECEMBER 31, 2001                      11,490   $        115         (1,103)   $     (4,306)   $     17,781

Comprehensive income (loss):

     Net income                            --             --             --              --              --


Comprehensive income (loss)

Issuance of treasury stock                 --             --            441           1,722              --
                                 ------------   ------------   ------------    ------------    ------------
MARCH 31, 2002                         11,490   $        115           (662)   $     (2,584)   $     17,781
                                 ============   ============   ============    ============    ============
<Caption>

                                  Accumulated
                                    other
                                 comprehensive    Accumulated
                                 income (loss)      deficit          Total
                                 -------------   ------------    ------------
<S>                              <C>             <C>             <C>
DECEMBER 31, 2001                $     (1,436)   $   (105,542)   $    (93,388)

Comprehensive income (loss):

     Net income                            --          22,714          22,714
                                                                 ------------

Comprehensive income (loss)                                            22,714

Issuance of treasury stock                 --              --           1,722
                                 ------------    ------------    ------------
MARCH 31, 2002                   $     (1,436)   $    (82,828)   $    (68,952)
                                 ============    ============    ============
</Table>

 See accompanying notes to the consolidated financial statements.



                                       5



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


<Table>
<Caption>
                                                                                            For the                 For the
                                                                                       Three Months Ended      Three Months Ended
                                                                                         March 31, 2002          March 31, 2001
                                                                                       -------------------     ------------------
                                                                                                                  (See Note 1)

<S>                                                                                    <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                                         $ 22,714              $ (9,120)
   Adjustments to reconcile net income (loss)
     to net cash provided by (used in) operating activities:
       Depreciation                                                                             3,277                 4,705
       Amortization                                                                                --                   126
       Provision for deferred income taxes                                                     17,194                (6,512)
       Equity in loss of unconsolidated subsidiaries                                              706                 1,341
       Investment loss (income) of Magellan warrants                                              546                (4,421)
       Impairment of assets                                                                        34                    --
       Cumulative effect of change in accounting principle                                         --                 9,509
       Minority interests                                                                       1,897                 2,088
       Gain on sale of property and equipment                                                    (185)                 (388)
       Gain on discontinued operations                                                        (43,822)                   --
       Net current assets (liabilities) of discontinued operations                               (795)              (30,878)
       Changes in assets and liabilities, net of effects from transfers:
           Accounts receivable                                                                 10,473                 2,519
           Inventories                                                                          5,883                 2,041
           Prepaid expenses and current assets                                                   (346)                 (576)
           Other assets                                                                        (1,587)                  (32)
           Accounts payable and accrued expenses                                                   (2)                 (665)
           Accounts payable and accrued expenses - CEI                                          1,348                 1,686
           Deferred revenue, current and noncurrent                                              (205)                 (234)
           Other liabilities                                                                       --                    (7)
                                                                                             --------              --------
                Net cash provided by (used in) operating activities                            17,130               (28,818)
                                                                                             --------              --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Disposition of business interests, net of cash surrendered                                  (15,792)                   --
  Purchases of property and equipment                                                             (31)               (5,229)
  Proceeds from sale of property and equipment                                                  2,329                 3,276
  Net investing activities of discontinued operations                                             (81)              (16,328)
                                                                                             --------              --------
                Net cash used in investing activities                                         (13,575)              (18,281)
                                                                                             --------              --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds of long-term debt                                                                    1,626                10,550
  Payments on long-term debt                                                                  (16,054)              (21,309)
  Proceeds of long-term debt - CEI                                                              2,004                    --
  Net financing activities of discontinued operations                                             (87)               40,923
                                                                                             --------              --------
                Net cash (used in) provided by financing activities                           (12,511)               30,164
                                                                                             --------              --------

NET DECREASE  IN CASH AND CASH EQUIVALENTS                                                     (8,956)              (16,935)

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                                          13,863                62,078
                                                                                             --------              --------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                                     $  4,907              $ 45,143
                                                                                             ========              ========

SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
  Accounts receivable for property and equipment returned
  to vendor                                                                                  $ (7,640)             $     --
                                                                                             ========              ========
</Table>


    See accompanying notes to the consolidated financial statements.



                                       6
<PAGE>


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


1. ORGANIZATION AND BASIS OF PRESENTATION:

Crescent Operating, Inc. was formed on April 1, 1997 by Crescent Real Estate
Equities Company ("CEI", "Crescent Real Estate" or "Crescent Equities") and its
subsidiary Crescent Real Estate Equities Limited Partnership ("Crescent
Partnership"). Effective June 12, 1997, CEI distributed shares of Crescent
Operating, Inc. common stock to shareholders of CEI and unit holders of Crescent
Partnership of record on May 30, 1997.

Crescent Operating, Inc. ("Crescent Operating" or the "Company") is a
diversified management company that, through various subsidiaries and affiliates
(collectively with Crescent Operating), operates primarily in two business
segments: Equipment Sales and Leasing and Temperature Controlled Logistics.
Prior to February 14, 2002 the Company operated two other business segments:
Hospitality, and Land Development. Crescent Operating's segments either do or
have done business throughout the United States.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) 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 GAAP for complete financial statements.
These financial statements should be read in conjunction with the audited
consolidated financial statements and related footnotes of the Company for the
fiscal year ended December 31, 2001 included in the Company's Form 10-K, as well
as, in conjunction with the Company's previously filed Form 10-Qs. The Company's
consolidated financial statements included in its 2001 Annual Report on Form
10-K included an auditors report which expressed substantial doubt about the
Company's ability to continue to operate as a going concern. In management's
opinion, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated 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 seasonal
fluctuations, operating results for interim periods are not necessarily
indicative of the results that may be expected for a full fiscal year.

The financial results of the Company primarily include the following (see Note
2):

     o    Subsidiaries which are wholly owned and consolidated:

          *    Crescent Machinery Company ("Crescent Machinery");

          *    Rosestar Management LLC ("Rosestar") through February 14, 2002;
               and

          *    COI Hotel Group, Inc. ("COI Hotel") through February 14, 2002.

     o    Subsidiaries which are not wholly owned but the Company controlled
          through February 14, 2002 and therefore consolidates ("Controlled
          Subsidiaries"):

          *    A 5% economic interest, representing 100% of the voting common
               stock, in:

               -    The Woodlands Land Company, Inc. ("LandCo") which has a
                    52.5% general partner interest (49.5% through November 2001)
                    in The Woodlands Land Development Company, L.P.
                    ("Landevco");

               -    Desert Mountain Development Corporation ("Desert Mountain
                    Development") which consolidates its 93% general partner
                    interest in Desert Mountain Properties Limited Partnership
                    ("DMPLP"); and

               -    CRL Investments, Inc. ("CRL"), which beneficially owns 65%
                    of CR Las Vegas, LLC ("CR Las Vegas") and 30% of CR License,
                    LLC ("CR License").



                                       7

<PAGE>



          *    A 60% general partner interest in COPI Colorado, L.P. ("COPI
               Colorado") which owns 10% of Crescent Resort Development, Inc.
               ("CRDI"), formerly Crescent Development Management Corp.
               ("CDMC"). The 10% interest in CRDI represents 100% of the voting
               stock, and therefore, CRDI is consolidated into COPI Colorado.

     o    Subsidiaries which the Company reports on the equity method of
          accounting:

          *    A 52.5% interest in The Woodlands Operating Company, L.P.
               ("Woodlands Operating" or "TWOC") which is controlled by a four
               member committee of which the Company controls two positions,
               through March 22, 2002;

          *    A 40% interest in Vornado Crescent Logistics Operating
               Partnership ("AmeriCold Logistics")

The December 31, 2001 and March 31, 2001 financial statements have been restated
to show discontinued operations pursuant to the Settlement Agreement.

2. RECENT DEVELOPMENTS:

BACKGROUND OF SETTLEMENT AGREEMENT

On February 6, 2002, Crescent Machinery Company - comprising the Company's
Equipment Sales and Leasing segment - filed a voluntary petition in bankruptcy.
On February 14, 2002, Crescent Operating entered into the Settlement Agreement
with Crescent Real Estate, pursuant to which the Company's interests in the Land
Development and Hospitality segments were transferred to Crescent Partnership in
partial satisfaction of the indebtedness owing from Crescent Operating. The
Company agreed to transfer the assets of its Temperature Controlled Logistics
segment in the future in connection with the satisfaction of its indebtedness to
Bank of America. The Settlement Agreement also requires the filing of a
prepackaged bankruptcy plan for Crescent Operating. This bankruptcy plan effects
the orderly termination of Crescent Operating's business. Substantially all of
Crescent Operating's assets are encumbered by liens in favor of Crescent
Partnership. Crescent Operating is in default in its obligations to Crescent
Real Estate. The Settlement Agreement also provides Crescent Operating with
funds to satisfy its creditors' claims and gives Crescent Operating stockholders
the opportunity to receive common shares of Crescent Real Estate.

SETTLEMENT AGREEMENT

On February 14, 2002, Crescent Operating entered into a Settlement Agreement
with Crescent Real Estate. The Settlement Agreement also provided the basis for
Crescent Operating to file a prepackaged bankruptcy plan that the Company
believes will provide for a limited recovery to its stockholders. Pursuant to
the Settlement Agreement, Crescent Operating has transferred the following
assets to Crescent Real Estate:

     o    all of its hotel operations, in lieu of foreclosure, on February 14,
          2002 in exchange for a $23.6 million reduction in its rent obligations
          to Crescent Real Estate;

     o    all of its land development interests, through a strict foreclosure,
          on February 14, 2002, and March 22, 2002, in exchange for a $40.1
          million reduction of its debt obligations to Crescent Real Estate.

In addition, the Settlement Agreement provides as follows:

     o    Crescent Real Estate will make sufficient funds available to Crescent
          Operating to pay all of Crescent Operating's creditors, other than
          Crescent Real Estate, in full and to cover the expenses of
          implementing the Settlement Agreement and seeking to confirm the
          bankruptcy plan. To facilitate repayment of $15.0 million, plus
          interest, owed to Bank of America, Crescent Real Estate has allowed
          Crescent Operating to secure the Bank of America debt with a pledge of
          Crescent Operating's interest in AmeriCold Logistics, LLC. The
          bankruptcy plan contemplates that the AmeriCold Logistics interest
          will be purchased by a Crescent Real Estate affiliate for a sufficient
          amount to repay the Bank of America debt.



                                       8

<PAGE>

     o    If Crescent Operating's stockholders approve the bankruptcy plan at a
          special meeting of stockholders called for that purpose, Crescent Real
          Estate will issue common shares of Crescent Equities to the Crescent
          Operating stockholders pursuant to the formula contained in the
          bankruptcy plan. If the stockholders of Crescent Operating do NOT
          accept the bankruptcy plan, they will not receive a distribution of
          common shares of Crescent Real Estate. If the total amount of claims
          and expenses paid by Crescent Real Estate in connection with the
          Crescent Operating bankruptcy and reorganization transactions equals
          or exceeds $16.0 million, the stockholders of Crescent Operating will
          receive no common shares of Crescent Real Estate and will not be
          entitled to reconsider their approval of the bankruptcy plan. Crescent
          Operating stockholders receiving Crescent Real Estate shares will be
          deemed to have released all claims they may have against Crescent
          Operating and Crescent Real Estate and those acting on their behalf
          that arose before the effective date of the plan. If the Crescent
          Operating stockholders do not approve the Crescent Operating
          bankruptcy plan, Crescent Operating will still seek to have that
          bankruptcy plan confirmed by the bankruptcy court. If the bankruptcy
          court confirms the plan, Crescent Operating stockholders will not
          receive common shares of Crescent Equities and will still cease to be
          stockholders of Crescent Operating on the date the plan becomes
          effective.

     o    Crescent Operating will cancel all outstanding shares of its common
          stock.

     o    Pursuant to both the Settlement Agreement and the bankruptcy plan,
          Crescent Operating will transfer the remaining assets of Crescent
          Operating at the direction of Crescent Real Estate.

ADDITIONAL RECENT EVENTS

Effective December 31, 2001, the Company, in connection with extending the
maturity of its $15.0 million loan from Bank of America from December 31, 2001
to August 15, 2002, agreed to modify the loan from an unsecured to a secured
credit facility. The Company, with the consent of Crescent Partnership which
agreed to subordinate its security interest in the Company's 40% interest in
AmeriCold Logistics, pledged all of its interest in AmeriCold Logistics to Bank
of America to secure the loan.

Effective February 13, 2002, all of the directors of Crescent Operating, other
than Jeffrey L. Stevens, who became the sole director of Crescent Operating,
resigned. The four directors who resigned continue to serve as trust managers of
Crescent Real Estate. In addition, two of these directors, Richard E. Rainwater
and John C. Goff, also served as officers of both Crescent Operating and
Crescent Real Estate. Mr. Rainwater continues to serve as Chairman of the Board
of Crescent Real Estate and Mr. Goff continues to serve as Vice Chairman of the
Board and Chief Executive Officer of Crescent Real Estate. Both resigned from
their executive officer positions with Crescent Operating effective February 13,
2002. The directors and officers who resigned determined that resignation was
advisable and in the interest of the Crescent Operating stockholders in order to
avoid potential conflicts of interest and the appearance of impropriety.

TEMPERATURE CONTROLLED LOGISTICS

On January 23, 2002, the leases with Temperature Controlled Logistics
Partnerships were restructured to consolidate four of the non-encumbered leases
into one non-encumbered lease. The restructuring did not affect total
contractual rent due under the combined leases.

3. DISCONTINUED OPERATIONS

Pursuant to the Settlement Agreement discussed in Note 2, Crescent Operating has
transferred the following assets to Crescent Real Estate:

     o    all of its hotel operations, in lieu of foreclosure, on February 14,
          2002 in exchange for a $23.6 million reduction in its rent obligations
          to Crescent Real Estate;

     o    all of its land development interests, through a strict foreclosure,
          on February 14, 2002, and March 22, 2002, in exchange for a $40.1
          million reduction of its debt obligations to Crescent Real Estate.



                                       9

<PAGE>

As a result of these transfers, the Company recognized Income from Discontinued
Operations of $3.3 million, net of a $2.2 million income tax expense, related to
its Hospitality segment and $0.3 million income tax expense, related to its Land
Development segment. The gain associated with the discontinuance of the
operations from these segments and the reduction of the Company's rent and debt
obligations is $26.3 million, net of a $17.5 million income tax expense.

The carrying amounts of the major classes of asset and liabilities for the
Hospitality and Land Development segments as of the transfer date, February 14,
2002, were:

<Table>
<Caption>
                                        Hospitality   Land Development     Total
                                        -----------   ----------------  ----------
<S>                                     <C>             <C>             <C>

(in thousands)
Current Assets ....................     $   38,466      $   60,744      $   99,210
Long-Term Assets ..................         12,607         663,030         675,637

Current Liabilities ...............         43,978         483,562         527,540
Long-Term Liabilities .............          4,750          70,549          75,299

</Table>

4. INVESTMENTS:

Investments consisted of the following (amounts in thousands):

<Table>
<Caption>
                                                                   March 31, 2002  December 31, 2001
                                                                   --------------  -----------------
<S>                                                                <C>             <C>

 Investment in Landevco .........................................     $       --     $   43,577
 Investment in Magellan warrants ................................          3,581          4,127
 Investment in CRDI projects ....................................             --          8,124
 Investment in CR License .......................................             --          5,012
 Investment in CR Las Vegas .....................................             --            450
 Investment in AmeriCold Logistics ..............................             --            706
                                                                      ----------     ----------
                                                                      $    3,581     $   61,996
 Less assets to be transferred pursuant to the Settlement
 Agreement ......................................................             --        (57,163)
                                                                      ----------     ----------
                                                                      $    3,581     $    4,833
                                                                      ==========     ==========
</Table>

Investment (loss) income consisted of the following (amounts in thousands):

<Table>
<Caption>
                                                                 Three months ended   Three months ended
                                                                   March 31, 2002       March 31, 2001
                                                                 ------------------   ------------------
<S>                                                              <C>                  <C>

Change in fair value of Magellan warrants .......................     $     (546)         $    4,421
</Table>

Equity in earnings (loss) of unconsolidated subsidiaries consisted of the
following (amounts in thousands):

<Table>
<Caption>
                                                                     Three months ended  Three months ended
                                                                        March 31, 2002      March 31, 2001
                                                                     ------------------  ------------------
<S>                                                                  <C>                 <C>

 Equity in income of Landevco ......................................     $       --        $    2,933
 Equity in income of TWOC ..........................................             --             1,050
 Equity in income of CRDI projects .................................             --               280
 Equity in loss of CRL .............................................             --            (2,217)
 Equity in loss of AmeriCold Logistics .............................           (706)           (1,341)
                                                                         ----------        ----------
                                                                               (706)              705
  Less equity in loss of entities to be transferred pursuant to
  Settlement Agreement .............................................             --            (2,046)
                                                                         ----------        ----------

                                                                         $     (706)       $   (1,341)
                                                                         ==========        ==========
</Table>



                                       10

<PAGE>

5. INTANGIBLE ASSETS:

Intangible assets consisted of the following (amounts in thousands):

<Table>
<Caption>
                                                                      March 31, 2002   December 31, 2001
                                                                      --------------   -----------------
<S>                                                                   <C>              <C>

    Goodwill, net - COPI Colorado ..................................     $       --       $   14,664
    Membership intangible, net - DMPLP .............................             --           27,488
                                                                         ----------       ----------
                                                                                 --           42,152
    Less assets to be transferred pursuant to the Settlement
    Agreement ......................................................             --          (42,152)
                                                                         ----------       ----------
                                                                         $       --       $       --
                                                                         ==========       ==========
</Table>

6. LONG-TERM DEBT:

The Company's long-term debt facilities are composed of (i) corporate and wholly
owned debt, and (ii) non wholly owned debt. Corporate and wholly owned debt
relates to debt facilities at the Crescent Operating level or owed by entities
which are owned 100% by Crescent Operating. Non wholly owned debt represents
non-recourse debt owed by entities which are consolidated in the Company's
financial statements but are not 100% owned by the Company; the Company's
economic investment in these entities is 6% or less. The non wholly owned debt
is secured by the operations of each individual subsidiary and is not guaranteed
by Crescent Operating. Following is a summary of the Company's debt financing
(amounts in thousands):

<Table>
<Caption>
                                                                               March 31, 2002   December 31, 2001
                                                                               --------------   -----------------
<S>                                                                            <C>              <C>
LONG-TERM DEBT - CORPORATE AND WHOLLY OWNED SUBSIDIARIES

Equipment notes payable to finance companies, bear interest from 4.5% to
9.5%, due 2001 through 2011 (Crescent Machinery)
(in default) ...............................................................     $   67,726     $   80,683

Floor plan debt payable, three to twelve month terms at 0%
interest (Crescent Machinery) (in default) .................................          3,348          4,190

Line of credit in the amount of $15.0 million payable to Bank of America,
interest at the banks prime rate, 4.75% at March 31, 2002, due
August 2002 (COPI) .........................................................         15,000         15,000

Line of credit payable to Crescent Partnership, interest at 9%,
due May 2002 (COPI)(in default) ............................................          9,552         22,025

Line of credit payable to Crescent Partnership, interest at
12%, due May 2002 or five years after the last draw (COPI)(in
default) ...................................................................          8,495         20,205

Note payable to Crescent Partnership, interest at 12%, due
through May 2002  (COPI)(in default) .......................................          6,827         16,238

Note payable to Crescent Partnership, interest at 12%, due May
2002 (COPI)(in default) ....................................................          4,445         10,572

Notes payable to the Crescent Partnership (previously the sellers of
equipment companies), weighted average interest of 7.6% at March 31, 2002
and December 31, 2001, due 2002 through 2003 (COPI) ........................          2,628          2,787

Notes payable to Crescent Partnership, interest at 2.75%, due
February 2003 (COPI) .......................................................          2,004             --
</Table>



                                       11

<PAGE>

<Table>
<Caption>
                                                                               March 31, 2002   December 31, 2001
                                                                               --------------   -----------------
<S>                                                                            <C>              <C>

Notes payable to Crescent Partnership, weighted average interest of 10.2%
at March 31, 2002 and December 31, 2001, due
2003 through 2006 (Rosestar) ...............................................          1,056          1,143
                                                                                 ----------     ----------

       Total debt - corporate and wholly owned subsidiaries ................        121,081        172,843
                                                                                 ----------     ----------

LONG-TERM DEBT - NON WHOLLY OWNED SUBSIDIARIES

Construction loans for various East West Resort Development
projects, interest at 4.4% to 11.3%, due through 2003 (CRDI) ...............             --        136,620

Line of credit in the amount of $100.0 million payable to Crescent
Partnership, interest at 11.5%, due September 2008
(CRDI) .....................................................................             --         72,250

Junior note payable to Crescent Partnership, interest at 14%,
due December 2010 (DMPLP) ..................................................             --         59,000

Line of credit in the amount of $56.2 million payable to
Crescent Partnership, interest at 11.5%, due August 2004 (CRDI) ............             --         48,354

Line of credit in the amount of $70.0 million payable to
Crescent Partnership, interest at 11.5%, due December 2006 .................             --         36,571
(CRDI)

Line of credit in the amount of $50.0 million payable to National Bank of
Arizona, interest at prime to prime plus 1%,
due November 2003 (DMPLP) ..................................................             --         29,910

Line of credit in the amount of $40.0 million payable to
Crescent Partnership, interest at 11.5%, due December 2006 .................             --         23,396
(DMPLP)

Line of credit in the amount of $7.0 million payable to
Crescent Partnership, interest at 12%, due August 2003 (CRL) ...............             --          7,000

Note payable to Crescent Partnership maturing December 2002,
interest at 10% (DMPLP) ....................................................             --          1,000

Term note in the amount of $0.2 million payable to Crescent
Partnership, interest at 12%, due August 2003 (CRL) ........................             --            166
                                                                                 ----------     ----------

          Total debt - non wholly owned subsidiaries .......................             --        414,267
                                                                                 ----------     ----------

          Total long-term debt .............................................     $  121,081     $  587,110
                                                                                 ==========     ==========

Current portion of long-term debt - CEI ....................................     $   33,753     $   69,634

Current portion of long-term debt ..........................................         86,074        101,870

Long-term debt - CEI, net of current portion ...............................          1,254            549

Long-term debt, net of current portion .....................................             --            790

Current and Long-term debt of assets to be disposed of pursuant
to the Settlement Agreement ................................................             --        414,267
                                                                                 ----------     ----------

          Total debt .......................................................     $  121,081     $  587,110
                                                                                 ==========     ==========
</Table>



                                       12
<PAGE>

Due to its bankruptcy filing and to non-payment of required principal payments,
Crescent Machinery is currently in default on its Equipment Financing Notes. On
February 6, 2002, Crescent Machinery Company filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Fort
Worth, Texas. Outstanding principal amounts under default by Crescent Machinery
totaled $71.1 million at March 31, 2002.

On February 13, 2002, the Company received notice from Crescent Partnership that
it was in default on the 1997 Term Loan, the 1997 Revolving Loan, the AmeriCold
Loan and the COPI Colorado Loan. On February 14, 2002, pursuant to the
Settlement Agreement, Crescent Partnership foreclosed on certain collateral
securing such loans, which had the effect of reducing the aggregate indebtedness
from $76.2 million to $36.1 million.

7. OTHER LIABILITIES:

Other liabilities consisted of the following (in thousands):

<Table>
<Caption>
                                                                 March 31, 2002   December 31, 2001
                                                                 --------------   -----------------
<S>                                                              <C>              <C>

   Deferred revenue ..........................................     $       --       $   71,330
   Straight line hospitality rent adjustment .................             --            4,750
   Other .....................................................             --           12,725
                                                                   ----------       ----------
                                                                           --           88,805
  Less liabilities to be transferred pursuant to the Settlement
  Agreement ..................................................             --          (88,805)
                                                                   ----------       ----------
                                                                   $       --       $       --
                                                                   ==========       ==========
</Table>

8. EARNINGS PER SHARE:

Earnings per share ("EPS") is calculated as follows (in thousands, except per
share data):

<Table>
<Caption>
                                             Three months ended March 31, 2002              Three months ended March 31, 2001
                                         ------------------------------------------     -----------------------------------------
                                              Net          Wtd Avg.      Per Share           Net          Wtd. Avg.     Per Share
                                         Income (Loss)      Shares         Amount       Income (Loss)      Shares        Amount
                                         -------------     --------      ----------     -------------     ---------     ----------
<S>                                      <C>               <C>           <C>            <C>               <C>           <C>
 Basic EPS ..........................     $   (6,858)         10,387     $    (0.66)     $     (287)         10,340     $    (0.03)

 Effect of Dilutive Securities:
 Stock Options ......................             --              --                             --              --
                                          ----------          ------     ----------      ----------          ------     ----------
 Diluted EPS before
 discontinued operations and
 accounting change ..................         (6,858)         10,387          (0.66)           (287)         10,340          (0.03)

 Discontinued Operations ............         29,572          10,387           2.85             676          10,340           0.07

 Accounting Change ..................             --          10,387             --          (9,509)         10,340          (0.92)
                                          ----------          ------     ----------      ----------          ------     ----------
 Diluted EPS ........................     $   22,714          10,387     $     2.19      $   (9,120)         10,340     $    (0.88)
                                          ==========          ======     ==========      ==========          ======     ==========
</Table>

The Company had 1,270,624 and 1,319,834 options for its common stock outstanding
at March 31, 2002 and 2001, respectively, which were not included in the
calculation of diluted EPS as they were anti-dilutive.



                                       13

<PAGE>

9. INCOME TAXES:

The table below shows the reconciliation of the federal statutory income tax
rate to the effective tax rate for income from continuing operations.

<Table>
<Caption>
                                                            Three months ended  Three months ended
                                                               March 31, 2002     March 31, 2001
                                                            ------------------  ------------------
<S>                                                         <C>                 <C>
     Federal statutory income tax rate ...................         35.0%              35.0%
     State income taxes, net of federal tax benefit ......          5.0                5.0
     Minority interests ..................................        (2.26)            (201.8)
     Change in valuation allowance .......................         4.55             (603.2)
     Other, net ..........................................          .87               22.5
                                                               --------           --------
         Effective tax rate ..............................        43.16%            (742.5)%
                                                               ========           ========
</Table>

Provision (benefit) for income taxes is comprised of the following:

<Table>
<Caption>
                                                            Three months ended  Three months ended
                                                               March 31, 2002    March 31, 2001
                                                             --------------    --------------
<S>                                                          <C>               <C>

Income from continuing operations
     Deferred ............................................     $   (1,358)     $   (3,040)

Discontinued operations
   From Operations
     Deferred ............................................     $    2,507      $      856

   Gain on disposal of discontinued operations
     Current .............................................     $      176      $       --
     Deferred ............................................         17,353              --
                                                              ----------      ----------
     Total ...............................................     $   17,529      $       --
                                                               ==========      ==========
</Table>

The Company generally provides for taxes using a 40% effective rate on the
Company's share of income or loss. The Company increased its valuation allowance
related to its consolidated tax group by $1.9 million in the first quarter of
2002 to offset a portion of the deferred tax assets for which the ultimate
realization in future years is uncertain. Management believes that the remaining
deferred tax asset will be realized due to tax planning strategies associated
with the Settlement Agreement (see Note 2).

10. BUSINESS SEGMENT INFORMATION:

Crescent Operating's assets and operations are located entirely within the
United States and are comprised primarily of two business segments: (i)
Equipment Sales and Leasing and (ii) Temperature Controlled Logistics. The
Company, previously operated in the Hospitality and Land Development segments.
Pursuant to the Settlement Agreement, the Company transferred all of its
interests in the Hospitality and Land Development segments to Crescent Equities
on February 14, 2002 (see Note 2). In addition to these two business segments,
the Company has grouped its investment in Magellan warrants, interest expense on
corporate debt and general corporate overhead costs such as legal and accounting
costs, insurance costs and corporate salaries as "Other" for segment reporting
purposes. The Company uses net income as the measure of segment profit or loss.
Business segment information is summarized as follows (in thousands):

<Table>
<Caption>
                                                                                       Three months ended
                                                                                 ------------------------------
                                                                                 March 31, 2002  March 31, 2001
                                                                                 --------------  --------------
<S>                                                                              <C>             <C>

Revenues:
   Equipment Sales and Leasing ...............................................     $   15,929      $   29,540
                                                                                   ----------      ----------
   Total revenues ............................................................     $   15,929      $   29,540
                                                                                   ==========      ==========

Net (loss) income from continuing operations:
   Equipment Sales and Leasing ...............................................     $   (3,976)     $   (2,401)
   Temperature Controlled Logistics ..........................................           (423)           (815)
   Other .....................................................................         (2,459)          2,929
                                                                                   ----------      ----------
   Total net (loss) from continuing operations ...............................     $   (6,858)     $     (287)
                                                                                   ==========      ==========
</Table>



                                       14

<PAGE>

<Table>
<Caption>
                                                                                March 31, 2002  December 31, 2001
                                                                                --------------  -----------------
<S>                                                                              <C>             <C>

Identifiable assets:
   Equipment Sales and Leasing ...............................................     $   85,170      $   93,647
   Temperature Controlled Logistics ..........................................          5,591           6,015
   Hospitality ...............................................................        (12,390)         40,416
   Land Development ..........................................................             --         761,984
   Other .....................................................................         21,295          43,342
                                                                                   ----------      ----------
   Total identifiable assets .................................................     $   99,666      $  945,404
                                                                                   ==========      ==========
</Table>

11. LITIGATION:

Charter Behavioral Health Systems, LLC ("CBHS") became the subject of Chapter 11
bankruptcy proceedings by filing a voluntary petition on February 16, 2000, in
United States Bankruptcy Court for the District of Delaware. Although CBHS is
not a subsidiary of Crescent Operating, Crescent Operating did own a majority
(90%) economic interest in CBHS, until December 29, 2000.

As a result of the liquidation of CBHS through bankruptcy, the equity investment
in CBHS became worthless. On December 29, 2000, as part of Crescent Operating's
tax planning, Crescent Operating sold its 25% common interest and its 100%
preferred membership interest in CBHS, and COPI CBHS Holdings sold its 65%
common interest in CBHS to The Rockwood Financial Group, Inc. for a nominal sum.

Crescent Operating held no funded or liquidated claims against the estate of
CBHS. Crescent Operating filed proofs of claim against CBHS as a protective
matter for potential indemnification or contribution for third party lawsuits
and claims where Crescent Operating is a named defendant with CBHS, such as
lawsuits based upon alleged WARN Act violations purported to have been committed
by CBHS and/or its subsidiaries in closing behavioral health care facilities in
1999 and 2000. The only such lawsuits that have been brought against Crescent
Operating arise from WARN Act claims. In connection with a settlement entered
into among Crescent Operating, CBHS, the WARN Act plaintiffs, and others,
Crescent Operating's indemnification and contribution claims against CBHS based
on such lawsuits have been resolved. No other claims or lawsuits have been
asserted against Crescent Operating that would give rise to indemnification or
contribution claims by Crescent Operating against CBHS. In the event that, prior
to the bar date for asserting claims against Crescent Operating in its
bankruptcy case, no other claims or lawsuits are asserted against Crescent
Operating that would give rise to indemnification or contribution claims by
Crescent Operating against CBHS, Crescent Operating's claims for indemnification
or contribution in the CBHS case will be disallowed. If any such lawsuits or
claims are brought, Crescent Operating will pursue its indemnification and
contribution claims in the CBHS case as appropriate.

To date, several lawsuits, all of which seek class action certification, have
been filed against CBHS alleging violations of the WARN Act in the closing of
certain healthcare facilities in 1999 and 2000. Of those lawsuits, three also
named Crescent Operating as a defendant, but all three of those suits have since
been dismissed. An additional suit seeking similar relief was also filed against
Crescent Operating and Crescent Partnership, as well as CBHS.

A global Stipulation of Settlement of all WARN matters has been reached and
filed with the United States District Court and Bankruptcy Court for the
District of Delaware by the WARN Act claimants, CBHS, Crescent Operating,
Crescent Partnership and the Creditors Committee in the CBHS case. The
settlement was approved by the District Court by order dated March 18, 2002. As
it applies to Crescent Operating, the settlement provides that either Crescent
Operating or Crescent Partnership was required to deposit into escrow $500,000
for the benefit of the WARN Act claimants and, upon the settlement becoming
final, Crescent Operating will receive a complete release for all WARN Act
claims and any other claims in the CBHS case other than potential claims from
those CBHS employees who have opted out of the settlement. It appears that a
maximum of three such employees have opted out and none have made claims against
Crescent Operating to date. Crescent Partnership has paid the $500,000 into



                                       15

<PAGE>

escrow. This payment will not be included as an expense for the purposes of
calculating the aggregate value of the Crescent Real Estate shares to be
distributed to the Crescent Operating shareholders.

In accordance with an agreement between Gerald Haddock and Crescent Operating,
COPI Colorado redeemed the limited partnership interest of Mr. Haddock, Crescent
Operating's former Chief Executive Officer and President, in January 2000. COPI
Colorado paid Mr. Haddock approximately $2.6 million for his approximate 16.67%
limited partner interest (determined from an independent appraisal of the value
of COPI Colorado). Mr. Haddock challenged the valuation performed by the
independent appraiser and the procedures followed by Crescent Operating with
respect to the redemption and valuation process. On February 7, 2001, Crescent
Operating filed a lawsuit in the 141st Judicial Court of Tarrant County, Texas
seeking a declaratory judgment to assist in resolution of Crescent Operating's
dispute with Mr. Haddock. The parties settled their dispute, and the lawsuit was
dismissed effective as of January 2, 2002.

The Company is a party to legal actions related to certain of its investments.
Material losses related to such cases have not been deemed probable by
management after consultation with outside counsel, and no financial statement
accruals have been made. Based on the status of the cases, the Company is unable
to determine a range of possible losses, if any, that might be incurred in
connection with this litigation. The Company believes it is not probable that
the ultimate resolution of this litigation will have a material adverse effect
on its financial position and results of operations.

12. RECENT ACCOUNTING PRONOUNCEMENTS:

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company applied the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter 2002.

In August 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. It
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 retains
the fundamental provisions of SFAS No. 121 for recognition and measurement of
the impairment of long-lived assets to be held and used and measurement of the
long-lived assets to be disposed of by sale, but broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company adopted SFAS No. 144 on
January 1, 2002 and it did not have a material impact on their results of
operations or financial position; however, due to the Settlement Agreement
discussed in this Item 1, the Hospitality and Land Development segments are
presented as discontinued operations.

In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. In
general, SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under Statement 4. While gains or
losses from extinguishments of debt for fiscal years beginning after May 15,
2002 shall not be reported as extraordinary items unless the extinguishment
qualifies as an extraordinary item under the provisions of APB Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, management has elected to adopt SFAS No. 145 early. The
impact of adopting SFAS No. 145 resulted in a gain on disposal of discontinued
operations of $26.3 million, net of applicable income tax expense of $17.5
million.



                                       16

<PAGE>


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

The financial statements include all adjustments which management believes are
necessary to reflect a fair statement of the financial results for the interim
periods presented. All such adjustments are of a normal and recurring nature.
The information contained in this Item 2 should also be read in conjunction with
the more detailed information included in the Company's Form 10-K for the year
ended December 31, 2001. Capitalized terms used but not otherwise defined in
this Item 2 have the meanings given to them in the notes to the financial
statements included in Item 1.

Although Crescent Operating 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 the Company expects to
achieve. The financial results of the business segments for the three months
ended March 31, 2002 should not affect the ultimate distribution of Crescent
Real Estate shares pursuant to the Settlement Agreement. The Company's
consolidated financial statements included in the Annual Report on Form 10-K for
the year ended December 31, 2001, included an auditors report which expressed
substantial doubt about the Company's ability to continue to operate as a going
concern. Some of the other factors that might cause material variation from the
expectations reflected in the forward-looking statements include:

     o    the current inability of Crescent Operating to pay its deferred rent
          obligations to Crescent Real Estate Equities Limited Partnership
          ("Crescent Partnership"), the operating partnership of Crescent Real
          Estate Equities Company ("Crescent Equities", "Crescent Real Estate"
          or "CEI");

     o    the ability of Crescent Operating to generate income from the assets
          remaining after the transfers of its hospitality and land development
          businesses pursuant to the Settlement Agreement;

     o    the Company's inability to complete the transactions contemplated by
          the February 14, 2002 Settlement Agreement with Crescent Partnership,
          including but not limited to, holding a shareholders' meeting to
          approve the prepackaged bankruptcy plan contemplated by the Settlement
          Agreement; obtaining shareholder approval for that plan; or filing
          that plan in the form contemplated;

     o    failure of Crescent Equities to provide assistance and funding to the
          Company of substantially all the costs of performing the steps
          required under the Settlement Agreement for implementation of the
          prepackaged bankruptcy plan, which funding is expected to provide for
          the preparation of a proxy statement for a shareholders' meeting to
          approve the prepackaged bankruptcy plan, the solicitation of proxies
          for that meeting, and all other expenses associated therewith; the
          expenses of operating the Company from the date of the Settlement
          Agreement through the commencement of the prepackaged bankruptcy; and
          the settlement or satisfaction of all of the Company's known
          creditors;

     o    the Company's inability, after the commencement of bankruptcy
          proceedings, to control the course or outcome of the proceedings or
          its business operations, as federal bankruptcy law places the ultimate
          control over the bankrupt debtor into the discretion of the bankruptcy
          court;

     o    the unpredictable nature of course or outcome of Crescent Machinery
          Company's bankruptcy proceedings;

     o    even if the prepackaged bankruptcy plan is confirmed as contemplated,
          the Company will not have the ability to control the issuance of CEI
          common shares to Crescent Operating stockholders, following
          confirmation of the prepackaged bankruptcy plan;

     o    the Company's inability to make any forecast regarding shareholders'
          recovery in bankruptcy if the prepackaged bankruptcy plan is not
          approved by the shareholders prior to the Company's filing for
          bankruptcy protection, as the Company's debts far exceed its assets,
          and its creditors, including CEI, may not be paid in full, and,
          consequently, it is probable that if the stockholders do not approve
          the prepackaged



                                       17

<PAGE>

          bankruptcy plan, the stockholders would receive no distributions with
          respect to their share ownership in the Company;

     o    the Company's inability to sell its interest in the tenant of the
          AmeriCold temperature controlled logistics properties to a new entity
          that will be owned by the CEI shareholders, proceeds of which sale
          would be applied by the Company to the repayment of the Company's
          $15.0 million obligation to Bank of America;

     o    the high levels of debt that the Company maintains and the Company's
          current inability to generate revenue sufficient to meet debt service
          payments, other obligations and operating expenses;

     o    the availability of the financing that likely will be necessary to
          maintain the Company's operations and investments;

     o    the current and continuing underperformance or non-performance of the
          Company's existing business investments;

     o    the Company's inability to reach an agreement with its creditors which
          may result in the Company losing control of its remaining assets or
          operations or both either through foreclosure or bankruptcy;

     o    any unfavorable resolution of issues that relate to the bankruptcy
          petition of Charter Behavioral Health Systems, LLC ("CBHS"),
          including, but not limited to, judgments against the Company in
          respect of lawsuits instituted in connection with the closure of
          certain CBHS facilities prior to CBHS's filing bankruptcy;

     o    the impact of changes in the industries in which the Company's
          businesses and investments operate (including equipment sales and
          leasing and temperature controlled logistics) and the economic,
          demographic and other competitive conditions affecting those
          industries, the Company's cash flows and the value of the Company's
          investments, and

     o    the impact of terrorism acts on the industries in which the Company's
          businesses and investments operate (including equipment sales and
          leasing and temperature controlled logistics).

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

                                    OVERVIEW

Crescent Operating is a diversified management company that, through various
subsidiaries and affiliates, currently operates primarily in two business
segments: Equipment Sales and Leasing and Temperature Controlled Logistics.
Prior to February 14, 2002, the Company operated in two other business segments:
Land Development and Hospitality. As Crescent Operating only operated these two
segments for one and one-half months there is no detail regarding their
operations. At March 31, 2002, the Company owns or owned the following:

o    THE EQUIPMENT SALES AND LEASING SEGMENT consisting of a wholly owned
     interest in Crescent Machinery Company and its subsidiary ("Crescent
     Machinery"), a construction equipment sales, leasing and service company
     with 12 locations in four states.

o    THE TEMPERATURE CONTROLLED LOGISTICS SEGMENT consisting of a 40% interest
     in the operations of Vornado Crescent Logistics Operating Partnership
     ("AmeriCold Logistics"), which currently operates 100 refrigerated storage
     properties with an aggregate storage capacity of approximately 525 million
     cubic feet.



                                       18

<PAGE>

BACKGROUND OF SETTLEMENT AGREEMENT

On February 6, 2002, Crescent Machinery Company - comprising the Company's
Equipment Sales and Leasing segment - filed a voluntary petition in bankruptcy.
On February 14, 2002, Crescent Operating entered into the Settlement Agreement
with Crescent Real Estate, pursuant to which the Company's interests in the Land
Development and Hospitality segments were transferred to Crescent Partnership in
partial satisfaction of the indebtedness owing from Crescent Operating. The
Company agreed to transfer the assets of its Temperature Controlled Logistics
segment in the future in connection with the satisfaction of its indebtedness to
Bank of America. The Settlement Agreement also requires the filing of a
prepackaged bankruptcy plan for Crescent Operating. This bankruptcy plan effects
the orderly termination of Crescent Operating's business. Substantially all of
Crescent Operating's assets are encumbered by liens in favor of Crescent
Partnership. Crescent Operating is in default in its obligations to Crescent
Real Estate. The Settlement Agreement also provides Crescent Operating with
funds to satisfy its creditors' claims and gives Crescent Operating stockholders
the opportunity to receive common shares of Crescent Real Estate.

SETTLEMENT AGREEMENT

On February 14, 2002, Crescent Operating entered into a Settlement Agreement
with Crescent Real Estate. The Settlement Agreement also provided the basis for
Crescent Operating to file a prepackaged bankruptcy plan that the Company
believes will provide for a limited recovery to its stockholders. Pursuant to
the Settlement Agreement, Crescent Operating has transferred the following
assets to Crescent Real Estate:

     o    all of its hotel operations, in lieu of foreclosure, on February 14,
          2002 in exchange for a $23.6 million reduction in its rent obligations
          to Crescent Real Estate;

     o    all of its land development interests, through a strict foreclosure,
          on February 14, 2002, and March 22, 2002, in exchange for a $40.1
          million reduction of its debt obligations to Crescent Real Estate.

     In addition, the Settlement Agreement provides as follows:

     o    Crescent Real Estate will make sufficient funds available to Crescent
          Operating to pay all of Crescent Operating's creditors, other than
          Crescent Real Estate, in full and to cover the expenses of
          implementing the Settlement Agreement and seeking to confirm the
          bankruptcy plan. To facilitate repayment of $15.0 million, plus
          interest, owed to Bank of America, Crescent Real Estate has allowed
          Crescent Operating to secure the Bank of America debt with a pledge of
          Crescent Operating's interest in AmeriCold Logistics, LLC. The
          bankruptcy plan contemplates that the AmeriCold Logistics interest
          will be purchased by a Crescent Real Estate affiliate for a sufficient
          amount to repay the Bank of America debt.

     o    If Crescent Operating's stockholders approve the bankruptcy plan at a
          special meeting of stockholders called for that purpose, Crescent Real
          Estate will issue common shares of Crescent Equities to the Crescent
          Operating stockholders pursuant to the formula contained in the
          bankruptcy plan. If the stockholders of Crescent Operating do NOT
          accept the bankruptcy plan, they will not receive a distribution of
          common shares of Crescent Real Estate. If the total amount of claims
          and expenses paid by Crescent Real Estate in connection with the
          Crescent Operating bankruptcy and reorganization transactions equals
          or exceeds $16.0 million, the stockholders of Crescent Operating will
          receive no common shares of Crescent Real Estate and will not be
          entitled to reconsider their approval of the bankruptcy plan. Crescent
          Operating stockholders receiving Crescent Real Estate shares will be
          deemed to have released all claims they may have against Crescent
          Operating and Crescent Real Estate and those acting on their behalf
          that arose before the effective date of the plan. If the Crescent
          Operating stockholders do not approve the Crescent Operating
          bankruptcy plan, Crescent Operating will still seek to have that
          bankruptcy plan confirmed by the bankruptcy court. If the bankruptcy
          court confirms the plan, Crescent Operating stockholders will not
          receive common shares of Crescent Equities and will still cease to be
          stockholders of Crescent Operating on the date the plan becomes
          effective.

     o    Crescent Operating will cancel all outstanding shares of its common
          stock.



                                       19

<PAGE>

     o    Pursuant to both the Settlement Agreement and the bankruptcy plan,
          Crescent Operating will transfer the remaining assets of Crescent
          Operating at the direction of Crescent Real Estate.

A copy of the Settlement Agreement is attached as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed March 1, 2002, with the Securities and Exchange
Commission ("SEC"); that report is available at the SEC's website at
www.sec.gov. The Settlement Agreement and the mutual releases executed in
connection with the Settlement Agreement, including Crescent Operating's release
of all claims it may have against Crescent Real Estate, are enforceable
regardless of whether the plan is approved by Crescent Operating's stockholders
or confirmed by the bankruptcy court.

                       EQUIPMENT SALES AND LEASING SEGMENT

OVERVIEW

Crescent Machinery is engaged in the sale, leasing and service of construction
equipment and accessories to the construction industry located primarily in four
states as of March 31, 2002. Historically, construction equipment businesses
have been owned and operated primarily by individuals in a localized area.
Crescent Machinery has consolidated some of these businesses in order to gain
improvements in purchasing and operating efficiencies. All of the Crescent
Machinery locations represent major lines of equipment. This differentiates
Crescent Machinery from some of its pure rent-to-rent competition. Crescent
Machinery's locations offer new and used equipment for sale and rent, have
factory trained service personnel, and provide parts and warranty service.

Like many companies serving the construction industries, Crescent Machinery was
affected in 2001 by multiple factors impacting the industry. These factors
include excess inventories of machines available for sale or rental, severe
price competition, a slowdown in many construction markets, the reduction in the
number of new projects, the general recessionary economy, and the continued
negative effects following the terrorist attacks of September 11, 2001.

Beginning in the second quarter of 2001, Crescent Machinery's business plan
focused on right-sizing the business and creating liquidity. This plan included
the reduction of operating costs and excess or underutilized assets. As of March
31, 2002, Crescent Machinery had reduced its inventory and rental fleet by
approximately $12.8 million since December 31, 2001 and implemented actions to
reduce expenses of approximately $5.0 million on an annualized basis. Crescent
Machinery also closed its branches in Beaumont, Texas, Van Wert, Ohio and
Franklin, Indiana in 2001. At March 31, 2002, Crescent Machinery operated 12
branches in four states.

Crescent Machinery's downsized refocus was implemented under the leadership of
Crescent Machinery's new chief executive, Eric E. Anderson, who joined Crescent
Machinery in July 2001. Mr. Anderson comes to Crescent Machinery immediately
from serving as interim chief operating officer of a company in a turnaround
situation in an unrelated industry. Mr. Anderson's previous experience also
includes serving as chairman and chief executive officer of Aviall, Inc. (NYSE:
AVL), a publicly traded aerospace distribution company, where he was
instrumental in a successful turnaround in 1996.

In reviewing the markets it serves, Crescent Machinery made the initial decision
to focus Crescent Machinery Company in the Texas and Oklahoma markets. Crescent
Machinery operated eight locations in these states, and believed its experience
with its customer base and the suppliers represented in these markets gave it a
strong position. With its decision to downsize to an eight location company in
Texas and Oklahoma, Crescent Machinery began to sell or close its branch
operations in California, Nevada and Hawaii.

As part of that business plan, Crescent Machinery continued reviewing key
factors to its business, including the business mix between the sale of
equipment and various rental and service programs; evaluating the suppliers
Crescent Machinery used or may add in the future to maximize the equipment
solutions Crescent Machinery offered



                                       20

<PAGE>

its customers; standardizing best practices across all branch locations; and
implementing new compensation programs that directly linked pay to performance.

An essential part of Crescent Machinery's plan involved restructuring its
existing lines of credit to provide debt service relief. Crescent Machinery
defaulted on certain major loans from commercial institutions due to Crescent
Machinery's decision not to pay the principal portion of payment installments
due from September through December 2001 in the total amount of approximately
$6.4 million. Outstanding principal amounts under default by Crescent Machinery
totaled $71.1 million at March 31, 2002. Crescent Machinery's lenders did not
exercise remedies available for Crescent Machinery's payment default. Crescent
Machinery did reach an agreement with one of its lenders to take back the
equipment it had financed and limit Crescent Machinery's exposure to shortfall
on the sale of the equipment to $500,000. The lender further agreed to finance
the $500,000 over three years at 1% over prime interest rate. Completion of the
return of equipment under this agreement would eliminate approximately $11.5
million of indebtedness of Crescent Machinery.

Crescent Machinery was unable to reach satisfactory agreements with other
lenders, however, and on February 6, 2002, Crescent Machinery Company filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court for the Northern District of Texas in Fort Worth, Texas.
Crescent Machinery intends to continue its normal operations in the sale, rental
and servicing of construction equipment, while attempting to reorganize and
restructure its debt to emerge a financially stronger and more competitive
business. Crescent Machinery plans to continue with business as usual during
this process, but certain locations will be evaluated and may be sold or closed
to improve efficiency. Crescent Machinery has already moved to close four of its
West Coast branches immediately and, subject to Bankruptcy Court approval, plans
to close all its locations outside of Texas and Oklahoma in 2002.

In addition to its equity claim as the sole shareholder of Crescent Machinery,
Crescent Operating is a creditor of Crescent Machinery, holding a $10.0 million
principal amount note receivable from Crescent Machinery.

The Company is unable to predict as of the date of the filing of this Quarterly
Report whether Crescent Machinery will be able to successfully reorganize its
debt and operations, or what the treatment of creditors of Crescent Machinery
and the Company, as the sole shareholder of Crescent Machinery and as a
creditor, will be under any proposed plan of reorganization of Crescent
Machinery. The payment rights and other entitlements of pre-petition creditors
of Crescent Machinery (including the Company) and the Company, as Crescent
Machinery's sole shareholder, may be substantially altered by any plan of
reorganization confirmed by the Court. Under a plan, pre-petition creditors may
receive less than 100% of the face value of their claims, and the ownership
interest of the Company in Crescent Machinery may be substantially diluted or
cancelled in whole or in part. Crescent Operating does not anticipate receiving
any distribution in the Crescent Machinery bankruptcy case. Crescent Machinery's
bankruptcy schedules reflect that the value of Crescent Machinery's assets is
less than the amount of debt. As a result, it is likely that if Crescent
Machinery is reorganized, the equity in reorganized Crescent Machinery will be
distributed to its creditors and potential new investors not to Crescent
Operating.

There can be no assurance given that a plan of reorganization of Crescent
Machinery will be approved by the creditors, or that the Bankruptcy Court will
confirm any such plan. If a plan of reorganization is not confirmed by the
Bankruptcy Court, there can be no assurance that Crescent Machinery will have
sufficient funds to continue as a going concern, to restructure its debt on
acceptable terms or continue its operations. If such a plan is not confirmed by
the Bankruptcy Court, Crescent Machinery may be forced to liquidate its assets
under Chapter 7 of the U.S. Bankruptcy Code and to cease operations, in which
case it is unlikely that the Company would realize any significant value for its
ownership interest in Crescent Machinery.



                                       21

<PAGE>


OPERATIONAL STATISTICS

<Table>
<Caption>
                                           Three months ended March 31,
                                           ----------------------------
                                              2002               2001
                                           --------            --------
<S>                                        <C>                 <C>

Revenue:
   New and used equipment ...........            40%                 49%
   Rental equipment .................            38%                 30%
   Parts, service and supplies ......            22%                 21%
                                           --------            --------
Total revenue .......................           100%                100%

Expenses:
   Cost of sales:
        New and used equipment ......            91%                 88%
        Rental equipment ............            74%                 75%
        Parts, service and supplies .            62%                 63%
                                           --------            --------
   Total cost of sales ..............            79%                 79%

   Gross profit .....................            21%                 21%

   Operating expenses ...............            41%                 25%
                                           --------            --------

Loss from operations ................           (19%)                (4%)
                                           ========            ========
</Table>

Equipment sales and leasing revenue decreased $13.6 million, or 46.1%, to $15.9
million for the three months ended March 31, 2002, compared with $29.5 million
for the three months ended March 31, 2001. Net operating loss for the three
months ended March 31, 2002 was $3.1 million as compared with net loss of $1.3
million for the three months ended March 31, 2001. The Company believes that the
results for the quarter ended March 31, 2002 are not necessarily indicative of
the operating results expected for the full year, due to the seasonality of the
business. Historically, revenue is lower in the first quarter due to the effect
of the winter season on the construction industry.

                    TEMPERATURE CONTROLLED LOGISTICS SEGMENT

RECENT DEVELOPMENTS

On January 23, 2002, the leases with Temperature Controlled Logistics
Partnerships were restructured to consolidate four of the non-encumbered leases
into one non-encumbered lease. The restructuring did not affect total
contractual rent due under the combined leases.

Effective December 31, 2001, the Company, in connection with extending the
maturity of its $15.0 million loan from Bank of America from December 31, 2001
to August 15, 2002, agreed to modify the loan from an unsecured to a secured
credit facility. The Company, with the consent of Crescent Partnership which
agreed to subordinate its security interest in the Company's 40% interest in
AmeriCold Logistics, pledged all of its interest in AmeriCold Logistics to Bank
of America to secure the loan.



                                       22

<PAGE>

OPERATIONAL INFORMATION

The following table shows the location and size of facility for each of the
properties operated by AmeriCold Logistics as of March 31, 2002:

<Table>
<Caption>
                                           Total Cubic                                                  Total Cubic
                        Number of            Footage                                 Number of            Footage
    State              Properties         (in millions)             State            Properties         (in millions)
--------------         ----------         -------------         --------------       ----------         -------------
<S>                    <C>                <C>                   <C>                  <C>                <C>
Alabama                      5                  10.8            Missouri(1)                2                  46.8
Arizona                      1                   2.9            Nebraska                   2                   4.4
Arkansas                     6                  33.1            New York                   1                  11.8
California                   12                 49.8            North Carolina             3                  10.0
Colorado                     1                   2.8            Ohio                       1                   5.5
Florida                      5                   7.5            Oklahoma                   2                   2.1
Georgia                      8                  49.5            Oregon                     6                  40.4
Idaho                        2                  18.7            Pennsylvania               4                  50.8
Illinois                     2                  11.6            South Carolina             1                   1.6
Indiana                      1                   9.1            South Dakota               2                   6.3
Iowa                         2                  12.5            Tennessee                  3                  10.6
Kansas                       2                   5.0            Texas                      4                  27.2
Kentucky                     1                   2.7            Utah                       1                   8.6
Maine                        1                   1.8            Virginia                   2                   8.7
Massachusetts                5                  10.5            Washington                 6                  28.7
Minnesota                    1                   5.9            Wisconsin                  3                  17.4
Mississippi                  1                   4.7            Canada                     1                   4.8
                                                                                      -------               ------
                                                                Total                     100                524.6
                                                                                      =======               ======
</Table>

(1)  Includes one underground facility of approximately 33.1 million cubic feet.

                                OTHER INVESTMENTS

MAGELLAN WARRANTS

In connection with the transaction in which Crescent Operating acquired its 50%
membership interest in CBHS, the Company purchased, for $12.5 million, warrants
to acquire 1,283,311 shares of Magellan common stock for an exercise price of
$30.00 per share. The Magellan warrants are exercisable in varying increments
over the period which began on May 31, 1998 and ends on May 31, 2009. Prior to
January 1, 2001, the fair value of theses warrants, using the Black-Scholes
pricing model, would be determined and the resulting difference between the cost
and the estimated fair value of the warrants was included in the consolidated
financial statements as accumulated comprehensive income (loss) for the period
ended. As of January 1, 2001, the Company was required to adopt SFAS No. 133, as
amended by SFAS No. 138. Upon adoption, the Company was required to record the
net accumulated comprehensive loss related to its investment in Magellan
warrants as a charge in the statement of operations. Based on the value of the
warrants on December 31, 2000, the Company expensed $9.5 million on January 1,
2001 as a cumulative effect of change in accounting principle. From January 1,
2001 forward, the Company recorded changes in the fair value of these warrants
in the statement of operations as investment income (loss). For the three months
ended March 31, 2002, the Company recorded changes in the fair value of these
warrants, as calculated using the Black-Scholes pricing model, as investment
loss of $0.5 million in the Company's statement of operations.

Crescent Operating transferred the Magellan warrants to Crescent Machinery
Company in 1999 as a contribution to capital. With the commencement of Crescent
Machinery's bankruptcy proceedings, the Magellan warrants became part of
Crescent Machinery's estate, subject to the claims of creditors.

For additional financial information related to the Company's business segments,
see the Company's notes to the consolidated financial statements.



                                       23

<PAGE>

                          SEGMENT FINANCIAL INFORMATION
                        (AMOUNTS IN THOUSANDS, UNAUDITED)

The following is a summary of Crescent Operating's financial information
reported by segment for the three months ended March 31, 2002:


<Table>
<Caption>
                                                            EQUIPMENT        TEMPERATURE
                                                              SALES          CONTROLLED
                                                           AND LEASING        LOGISTICS         OTHER             TOTAL
                                                           -----------       ----------       ----------       ----------
<S>                                                        <C>               <C>              <C>              <C>
Revenues .............................................      $   15,929       $       --       $       --       $   15,929

Operating expenses ...................................          19,005               --            1,279           20,284
                                                            ----------       ----------       ----------       ----------
Loss from operations .................................          (3,076)              --           (1,279)          (4,355)
Investment loss ......................................              --               --             (546)            (546)
Equity in losses of unconsolidated subsidiaries ......              --             (706)              --             (706)
Other (income) expense
      Interest expense ...............................             816               --            1,515            2,331
      Interest income ................................              (1)              --               (3)              (4)
      Other ..........................................              85               --              197              282
                                                            ----------       ----------       ----------       ----------
Total other expense ..................................             900               --            1,709            2,609
                                                            ----------       ----------       ----------       ----------
Loss from operations before income taxes .............          (3,976)            (706)          (3,534)          (8,216)
Income tax provision (benefit) .......................              --             (283)          (1,075)          (1,358)
                                                            ----------       ----------       ----------       ----------
Loss from continuing operations ......................      $   (3,976)      $     (423)      $   (2,459)      $   (6,858)
                                                            ==========       ==========       ==========       ==========
</Table>



                                       24

<PAGE>


RESULTS OF OPERATIONS FOR THE THREE ENDED MARCH 31, 2002, COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2001

REVENUES

Total revenue, which consists of equipment sales and leasing revenue, decreased
$13.6 million, or 46.1%, to $15.9 million for the three months ended March 31,
2002, compared with $29.5 million for the three months ended March 31, 2001.
Significant components of the decrease were:

o    a net decrease of $8.1 million in new and used equipment sales for the
     three months ended March 31, 2002 as compared to the corresponding period
     in 2001 primarily due to the slowing economy and the closing of four branch
     locations;

o    a decrease of $2.5 million in parts, service and supplies revenue for the
     three months ended March 31, 2002 as compared to the corresponding period
     in 2001 primarily due to decreased demand for maintenance and repair work;
     and

o    a decrease of $2.9 million in rental revenue for the three months ended
     March 31, 2002 as compared to the corresponding period in 2001 primarily
     due to the slowing economy and the closing of four branch locations.

OPERATING EXPENSES

Total operating expenses decreased $11.0 million, or 35.1%, to $20.3 million for
the three months ended March 31, 2002, compared with $31.3 million for the three
months ended March 31, 2001. The decrease in total operating expenses is
attributable to the factors discussed in the following paragraphs.

Equipment Sales and Leasing Segment

Equipment sales and leasing expenses decreased $11.8 million, or 38.3%, to $19.0
million for the three months ended March 31, 2002, compared with $30.8 million
for the three months ended March 31, 2001. Significant components of the
decrease were:

o    a decrease of $6.9 million in new and used equipment expenses for the three
     months ended March 31, 2002 as compared to the corresponding period in 2001
     primarily due to the inventory reduction plan of the Company whereby a
     significant amount of inventory was sold through auctions resulting in
     unfavorable pricing and a disproportional amount of expenses as compared to
     revenue;

o    a 33%, or $2.3 million decrease in rental expenses for the three months
     ended March 31, 2002 as compared to the corresponding period in 2001
     primarily due to the 33% decrease in rental revenue;

o    a decrease of $1.0 million in general and administrative expenses for the
     three months ended March 31, 2002 as compared to the corresponding period
     in 2001 primarily due to costs associated with the reduction of four branch
     locations; and

o    a decrease of $1.6 million in parts, service and supplies expenses for the
     three months ended March 31, 2002 as compared to the corresponding period
     in 2001 primarily as a result of a decrease in parts, service and supplies
     revenue for the same period.

Corporate General and Administrative Expenses

Corporate general and administrative expenses totaled $1.2 million for the three
months ended March 31, 2002, respectively, as compared to $0.5 million for the
three months ended March 31, 2001. The increase related to increases in general
corporate overhead costs, such as legal and accounting costs, primarily due to
the Settlement Agreement and the proposed prepackaged bankruptcy.



                                       25

<PAGE>

INVESTMENT INCOME (LOSS)

Investment income (loss) decreased $4.9 million or 111.4%, to $(0.5) million for
the three months ended March 31, 2002, compared with income of $4.4 million for
the three months ended March 31, 2001, due to the decrease in the fair value of
the Company's Magellan warrants compared with income of $4.4 million for the
corresponding period in 2001.

EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED SUBSIDIARIES

Equity in earnings (loss) of unconsolidated subsidiaries decreased $1.4 million
or 200%, to $(0.7) million for the three months ended March 31, 2002, compared
with income of $0.7 million for the three months ended March 31, 2001.
Significant components of the decrease were:

o    a decrease in equity in income of Landevco in the amount of $2.9 million
     primarily due to the disposition of the land development segment pursuant
     to the settlement agreement;

o    a decrease in equity in income of TWOC in the amount of $1.0 million due to
     the disposition of the land development segment;

o    a decrease in equity in income of CRDI projects in the amount of $0.3
     million due to the disposition of the land development segment; partially
     offset by

o    a decrease in equity in loss of CRL in the amount of $2.2 million due to
     the disposition of the hospitality segment pursuant to the settlement
     agreement;

o    a decrease in equity in loss of AmeriCold Logistics in the amount of $0.6
     million.

OTHER (INCOME) EXPENSE

Other (income) expense decreased $2.1 million, or 44.6%, to $2.6 million for the
three months ended March 31, 2002, compared with $4.7 million for the three
months ended March 31, 2001. Significant components of the decrease were:

o    a net decrease in interest expense of $2.3 million; partially offset by

o    recording of an allowance for bad debt of $0.2 million related to certain
     assets disposed of in the Settlement Agreement.

INCOME TAX PROVISION (BENEFIT)

Income tax benefit of $1.4 million for the three months ended March 31, 2002
represents a decrease of $1.6 million from the benefit provided for the three
months ended March 31, 2001. Income tax provision attributable to discontinued
operations was comprised of a $2.2 million expense for the Hospitality segment
and a $0.3 million expense for the Land Development segment. Income tax
provision of $17.5 was attributable to the gain from the disposal of
discontinued operations resulting primarily from the cancellation of corporate
level indebtedness pursuant to the Settlement Agreement.

The Company generally provides for taxes using a 40% effective rate on the
Company's share of income or loss. Management continues to evaluate its ability
to realize the deferred tax assets quarterly by assessing the need for a
valuation allowance. An inability of the Company to execute business plans for
certain of the company's segments could affect the ultimate realization of the
deferred tax assets.



                                       26

<PAGE>

MINORITY INTERESTS

Minority interests were eliminated as a result of the assignment of the Land
Development and Hospitality segments to Crescent Equities pursuant to the
Settlement Agreement .

DISCONTINUED OPERATIONS

Pursuant to the Settlement Agreement, the Company's transferred its interests in
the Hospitality and Land Development segments as of February 14, 2002 and March
22, 2002. The Company realized income from discontinued operations after
minority interest of $3.3 million, net of a $2.2 million income tax expense,
related to the Hospitality segment, and a $0.3 million income tax expense,
related to the Land Development segment for the period ending February 14, 2002.
The gain on disposal of discontinued operations was $26.3 million, net of an
$17.5 million income tax expense.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Cumulative effect of change in accounting principle decreased $9.5 million, or
100%, for the three months ended March 31, 2002 as compared to the corresponding
period in 2001. The change from the prior period was due to the prior year's
adoption of SFAS No. 133 on January 1, 2001, whereby the Company realized a $9.5
million loss related to its investment in Magellan warrants, calculated as the
difference between the original cost of the Magellan warrants of $12.5 million
and their estimated fair value at December 31, 2001, $3.0 million, as calculated
using the Black-Scholes pricing model.

LIQUIDITY AND CAPITAL RESOURCES

Recognizing that cash flow from its assets would not provide the Company with
adequate capital to meet its requirements during 2000 and 2001, the Company,
during the first quarter of 2000, extended certain payment obligations by
reaching agreements with Crescent Equities to defer until February 2001 payments
on certain of Crescent Operating's obligations to Crescent Equities otherwise
scheduled to be made in 2000. During 2001, the Company and Crescent Partnership
agreed to modify certain debt agreements, subject to the consummation of the
Restructuring Proposal, to (i) defer principal and interest payments until the
earlier of December 31, 2001 or the close of the transaction contemplated by the
Purchase Agreement and (ii) cease the accrual of interest on certain debt
instruments as of May 1, 2001. Because the transactions contemplated by the
Purchase Agreement were not consummated, the condition was not met, and the
modifications became ineffective. In addition, in August 2001, November 2001 and
again in March 2002, with an effective date of December 2001, the Company
modified the due date of its line of credit with Bank of America to be August
15, 2002.

In addition, the recession, magnified by the September 11, 2001 terrorist
attacks, has placed significant pressure on Crescent Operating's ability to meet
its obligations as they come due. Consequently, Crescent Operating and its
operating units have defaulted in the payment of their obligations owed to
Crescent Real Estate and Crescent Partnership. Based upon current and reasonably
forecasted operating results, Crescent Operating will not be able to pay all of
its obligations as they come due. In addition, the Company's auditors report
included on the consolidated financial statements included in the Company's
Annual Report on Form 10-K expressed substantial doubt about the Company's
ability to continue to operate as a going concern.

In February 2002, Crescent Operating was notified by Crescent Real Estate that
the Company's obligations to Crescent Real Estate were in default. Moreover,
Crescent Real Estate announced that it would seek to enforce collection by
foreclosure or otherwise of its claims against Crescent Operating and its
operating units as quickly as possible. Crescent Operating was unable to repay
the debts to Crescent Real Estate as to which a default had been declared.
Crescent Operating did not have sufficient liquidity to pay its liabilities on a
current basis. In light of these factors, Crescent Operating entered into a
Settlement Agreement with Crescent Real Estate. See - Note 2 - Recent
Developments - Settlement Agreement.



                                       27


<PAGE>

The Settlement Agreement significantly restricts Crescent Operating's ability to
access capital resources. Among other things, the Settlement Agreement limits
Crescent Operating's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restrictive payments. Based on these
restrictions in the Settlement Agreement and Crescent Operating's current
financial condition, it is unlikely that Crescent Operating would have access to
any third-party financing. In connection with the Settlement Agreement, Crescent
Real Estate did provide Crescent Operating with a $3.2 million facility to
provide liquidity during the pendency of the bankruptcy case. Pursuant to this
facility, Crescent Real Estate will fund only Crescent Operating's out-of-pocket
operating expenses during the bankruptcy. Even with this financing, it is
unlikely that Crescent Operating will be able to fund its working capital
requirements.

Interest payments and rent payments accrued but deferred as of March 31, 2002
totaled approximately $7.4 million and $23.7 million, respectively.

CASH FLOWS

Cash and cash equivalents include amounts from all consolidated subsidiaries,
including subsidiaries not wholly owned. Changes, therefore, do not necessarily
represent increases or decreases in cash directly available to the Company.

Cash and cash equivalents were $4.9 million and $13.9 million at March 31, 2002
and December 31, 2001, respectively (see Note 1). The 64.7% decrease is
attributable to $13.6 million and $12.5 million of cash used in investing and
financing activities, respectively, partially offset by $17.1 million of cash
provided by operating activities.

OPERATING ACTIVITIES

Net cash flows provided by operating activities for the three months ended March
31, 2002 were $17.1 million compared with net cash used in operating activities
of $28.8 million for the three months ended March 31, 2001. The Company's inflow
of cash provided by operating activities of $17.1 million was primarily
attributable to inflows from:

o    net income of $22.7 million;

o    a decrease in accounts receivable of $10.5 million;

o    a decrease in inventories of $5.9 million; and

o    an increase in accounts payable and accrued expenses - CEI of $1.3 million.

The inflow of cash provided by operating activities was partially offset by
outflows from:

o    an increase in other assets of $1.6 million; and

o    an increase in prepaid expenses and current assets of $0.3 million .

INVESTING ACTIVITIES

Net cash flows used in investing activities for the three months ended March 31,
2002 were $13.6 million compared with net cash used in investing activities of
$18.3 million for the three months ended March 31, 2001. The Company's outflow
of cash used in investing activities of $13.6 million was primarily attributable
to outflows from:

o    disposition of business interests, net of cash transferred of $15.8
     million.

The outflow of cash used in investing activities was partially offset by inflows
from:

o    net proceeds from the sale of property and equipment of $2.3 million.



                                       28
<PAGE>

FINANCING ACTIVITIES

Net cash flows used in financing activities for the three months ended March 31,
2002 were $12.5 million compared with net cash provided by financing activities
of $30.2 million for the three months ended March 31, 2001. The Company's
outflow of cash used in financing activities of $12.5 million was primarily
attributable to outflow from:

o    payments of all long-term debt of $16.1 million.

The outflow of cash provided by financing activities was partially offset by
inflows from:

o    proceeds of all long-term debt of $3.6 million.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since December 31, 2001, there have been no material changes to the information
regarding market risk as set forth in the Company's Form 10-K for the year ended
December 31, 2001.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

CBHS became the subject of Chapter 11 bankruptcy proceedings by filing a
voluntary petition on February 16, 2000, in United States Bankruptcy Court for
the District of Delaware. Although CBHS is not a subsidiary of Crescent
Operating, Crescent Operating did own a majority (90%) economic interest in
CBHS, until December 29, 2000.

As a result of the liquidation of CBHS through bankruptcy, the equity investment
in CBHS became worthless. On December 29, 2000, as part of Crescent Operating's
tax planning, Crescent Operating sold its 25% common interest and its 100%
preferred membership interest in CBHS, and COPI CBHS Holdings sold its 65%
common interest in CBHS to The Rockwood Financial Group, Inc. for a nominal sum.

Crescent Operating held no funded or liquidated claims against the estate of
CBHS. Crescent Operating filed proofs of claim against CBHS as a protective
matter for potential indemnification or contribution for third party lawsuits
and claims where Crescent Operating is a named defendant with CBHS, such as
lawsuits based upon alleged WARN Act violations purported to have been committed
by CBHS and/or its subsidiaries in closing behavioral health care facilities in
1999 and 2000. The only such lawsuits that have been brought against Crescent
Operating arise from WARN Act claims. In connection with a settlement entered
into among Crescent Operating, CBHS, the WARN Act plaintiffs, and others,
Crescent Operating's indemnification and contribution claims against CBHS based
on such lawsuits have been resolved. No other claims or lawsuits have been
asserted against Crescent Operating that would give rise to indemnification or
contribution claims by Crescent Operating against CBHS. In the event that, prior
to the bar date for asserting claims against Crescent Operating in its
bankruptcy case, no other claims or lawsuits are asserted against Crescent
Operating that would give rise to indemnification or contribution claims by
Crescent Operating against CBHS, Crescent Operating's claims for indemnification
or contribution in the CBHS case will be disallowed. If any such lawsuits or
claims are brought, Crescent Operating will pursue its indemnification and
contribution claims in the CBHS case as appropriate.

To date, several lawsuits, all of which seek class action certification, have
been filed against CBHS alleging violations of the WARN Act in the closing of
certain healthcare facilities in 1999 and 2000. Of those lawsuits, three also
named Crescent Operating as a defendant, but all three of those suits have since
been dismissed. An additional suit seeking similar relief was also filed against
Crescent Operating and Crescent Partnership, as well as CBHS.



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A global Stipulation of Settlement of all WARN matters has been reached and
filed with the United States District Court and Bankruptcy Court for the
District of Delaware by the WARN Act claimants, CBHS, Crescent Operating,
Crescent Partnership and the Creditors Committee in the CBHS case. The
settlement was approved by the District Court by order dated March 18, 2002. As
it applies to Crescent Operating, the settlement provides that either Crescent
Operating or Crescent Partnership was required to deposit into escrow $500,000
for the benefit of the WARN Act claimants and, upon the settlement becoming
final, Crescent Operating will receive a complete release for all WARN Act
claims and any other claims in the CBHS case other than potential claims from
those CBHS employees who have opted out of the settlement. It appears that a
maximum of three such employees have opted out and none have made claims against
Crescent Operating to date. Crescent Partnership has paid the $500,000 into
escrow. This payment will not be included as an expense for the purposes of
calculating the aggregate value of the Crescent Real Estate shares to be
distributed to the Crescent Operating shareholders.

In accordance with an agreement between Gerald Haddock and Crescent Operating,
COPI Colorado redeemed the limited partnership interest of Mr. Haddock, Crescent
Operating's former Chief Executive Officer and President, in January 2000. COPI
Colorado paid Mr. Haddock approximately $2.6 million for his approximate 16.67%
limited partner interest (determined from an independent appraisal of the value
of COPI Colorado). Mr. Haddock challenged the valuation performed by the
independent appraiser and the procedures followed by Crescent Operating with
respect to the redemption and valuation process. On February 7, 2001, Crescent
Operating filed a lawsuit in the 141st Judicial Court of Tarrant County, Texas
seeking a declaratory judgment to assist in resolution of Crescent Operating's
dispute with Mr. Haddock. The parties settled their dispute, and the lawsuit was
dismissed effective as of January 2, 2002.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Prior to filing a voluntary petition in bankruptcy on February 6, 2002, Crescent
Machinery was in default on certain major loans from commercial institutions due
to Crescent Machinery's decision not to pay the principal portion of payment
installments due since September 2001. Outstanding principal amounts under
payment default by Crescent Machinery totaled $71.1 million at March 31, 2002.
Prior to the commencement of bankruptcy proceedings, Crescent Machinery's
lenders did not exercise remedies available for Crescent Machinery's payment
default, and Crescent Machinery and those lenders engaged in negotiations about
the defaults and about modifying certain terms, including payment obligations,
of the existing credit lines. Crescent Machinery did reach an agreement with one
of its lenders to take back the equipment it had financed and limit Crescent
Machinery's exposure to shortfall on the sale of the equipment to $500,000. The
lender further agreed to finance the $500,000 over three years at 1% over prime
interest rate. Completion of the return of equipment under this agreement would
eliminate approximately $11.5 million of indebtedness of Crescent Machinery.

Crescent Machinery was unable to reach satisfactory agreements with other
lenders, however, and on February 6, 2002, Crescent Machinery Company filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court for the Northern District of Texas in Fort Worth, Texas.

Effective October 31, 2001, Crescent Operating amended its four loan agreements
with Crescent Partnership - the 1997 Term Loan, the 1997 Revolving Loan, the
AmeriCold Loan, and the COPI Colorado Loan - to further extend payment of
interest and principal payments otherwise due in 2000 and 2001 to the earlier of
December 31, 2002 and the closing of the transactions contemplated by the
agreement for the purchase and sale of assets and stock dated June 28, 2001,
between the Company and Crescent Partnership (the "Sale Agreement"). The
transactions contemplated by the Sale Agreement did not close in 2001 and
Crescent Partnership terminated the Sale Agreement on January 23, 2002. Crescent
Operating made no payments on the loans. Crescent Operating was in payment
default on all four loans. On February 13, 2002, Crescent Partnership delivered
default notices to Crescent Operating relating to approximately $76.2 million of
principal and accrued interest due to Crescent Partnership under the four loans.



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<PAGE>

In addition, until February 2002, Crescent Operating's subsidiaries in the
hospitality business segment leased from Crescent Partnership or its affiliates,
hotel and resort properties. With the consent of Crescent Partnership, the
lessees had accrued but deferred payment of rent on the leases for those
properties, the payment of which was guaranteed by Crescent Operating to the
extent of cash generated by the hospitality business segment. Following the
termination of the Sale Agreement on January 23, 2002, Crescent Partnership on
February 13, 2002, delivered default notices to the Company relating to
approximately $49.0 million of unpaid rent.

On February 14, 2002, Crescent Operating entered into the Settlement Agreement
with Crescent Real Estate, pursuant to which the Company's interests in the Land
Development and Hospitality segments were transferred to Crescent Partnership in
partial satisfaction of the indebtedness owing from Crescent Operating (see Note
2).

Pursuant to the Settlement Agreement, Crescent Operating has transferred the
following assets to Crescent Real Estate:

o    all of its hotel operations, in lieu of foreclosure, on February 14, 2002
     in exchange for a $23.6 million reduction in its rent obligations to
     Crescent Real Estate;

o    all of its land development interests, through a strict foreclosure, on
     February 14, 2002, and March 22, 2002, in exchange for a $40.1 million
     reduction of its debt obligations to Crescent Real Estate.

The aggregate outstanding amounts under default by the Company owed to Crescent
Real Estate as of March 31, 2002 totaled $60.5 million, comprised of $23.8
million of deferred rent obligations and $36.7 million of accrued interest and
principal.

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

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  A complete exhibit listing is on file with the Securities and Exchange
     Commission.

(b)  Reports on Form 8-K

On February 22, 2002, Crescent Operating amended its current report on Form 8-K
filed July 16, 2001, to report under Item 9 (Regulation FD Disclosure) the
announcement of the termination of the Company's Sale Agreement and Securities
Purchase Agreement with Crescent Partnership.

On March 1, 2002, Crescent Operating filed a current report on Form 8-K to
report under Item 2 (Acquisition or Disposition of Assets) the disposition of
its Land Development and Hospitality segments to Crescent Partnership pursuant
to the Settlement Agreement. Crescent Operating undertook in that report to file
the required financial statements at a subsequent date by amendment.



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<PAGE>



                                   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 10th day of June, 2002.

                                  CRESCENT OPERATING, INC.
                                  (Registrant)




                                  By   /s/ Jeffrey L. Stevens
                                    -------------------------------------------
                                    Jeffrey L. Stevens
                                    President, Chief Executive Officer,
                                    Chief Financial and Accounting Officer and
                                    Sole Director



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