<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

         For the fiscal year ended December 31, 1999

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

     306 West 7th Street, Suite 1000
            Fort Worth, Texas                                76102
----------------------------------------     ------------------------------------
(Address of principal executive offices)                  (Zip Code)
</TABLE>

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

Securities registered pursuant to Section 12(b) of the Act:  None

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

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of class)

                         Preferred Share Purchase Rights
                         -------------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
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 [ ]

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

The aggregate market value of the 9,050,453 shares of $0.01 par value common
stock held by non-affiliates of the registrant on March 28, 2000 was $28.9
million based upon the closing price of $3.19 on The Nasdaq Stock Market.

Number of shares of Common Stock outstanding as of March 28, 2000:  11,414,963

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for registrant's 1999 Annual Meeting of Shareholders to be held in
June 2000 are incorporated by reference into Part III of this Form 10-K.


<PAGE>   2

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>        <C>                                                                                                 <C>
                                                      PART I.

Item 1.    Business.......................................................................................       3
Item 2.    Properties.....................................................................................      21
Item 3.    Legal Proceedings..............................................................................      22
Item 4.    Submission of Matters to a Vote of Security Holders............................................      22


                                                     PART II.

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters..........................      23
Item 6.    Selected Financial Data........................................................................      24
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations......................................................................      24
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.....................................      35
Item 8     Financial Statements and Supplementary Data....................................................      35
Item 9.    Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure.........................................................      35


                                                     PART III.

Item 10.   Directors and Executive Officers of the Registrant.............................................      36
Item 11.   Executive Compensation.........................................................................      36
Item 12.   Security Ownership of Certain Beneficial Owners and Management.................................      36
Item 13.   Certain Relationships and Related Transactions.................................................      36


                                                     PART IV.

Item 14.    Exhibits, Financial Statements Schedules, and Reports on Form 8-K.............................      37
</TABLE>


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This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those the Company expects to achieve. Some of the factors that might cause
such a difference include (i) the impact of changes in the industries in which
the Company's businesses and investments operate (including equipment sales and
leasing, hospitality, temperature controlled logistics and land development) and
the economic, demographic and other competitive conditions affecting those
industries, the Company's cash flows and the value of the Company's investments,
(ii) the relatively high levels of debt that the Company maintains and the
Company's ability to generate revenue sufficient to meet debt service payments
and other operating expenses, (iii) the possibility that the Company's
outstanding debt (some of which requires so-called "balloon" payments of
principal) may be refinanced at higher interest rates or otherwise on terms less
favorable to the Company, (iv) the availability of equity and debt financing
that may be necessary or advantageous to expand or maintain the Company's
operations and investments, (v) the underperformance or non-performance of the
Company's existing business investments, (vi) any resolution of issues that
relate to the bankruptcy petition of Charter Behavioral Health Systems, LLC
("CBHS") that is unfavorable to the Company, 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' filing bankruptcy,
(vii) the Company's inability to identify or pursue suitable business or
investment opportunities, (viii) the high levels of debt and rental payments
that certain of the Company's investments are subject to make the earnings of
those investments extremely sensitive to changes in operations or business
activity and (ix) the effect of the REIT Modernization Act upon future
opportunities under the Intercompany Agreement with Crescent Equities. Given
these uncertainties, readers are cautioned not to place undue reliance on such
statements. The Company is not obligated to update these forward-looking
statements to reflect any future events or circumstances.

                                     PART I
ITEM 1.  BUSINESS
                                   THE COMPANY

Crescent Operating, Inc. ("Crescent Operating" or the "Company"), a Delaware
corporation, was formed on April 1, 1997, by Crescent Real Estate Equities
Company ("Crescent Equities" or "CEI") and its subsidiary Crescent Real Estate
Equities Limited Partnership ("Crescent Partnership"). Effective June 12, 1997
Crescent Equities distributed shares of Crescent Operating common stock to
shareholders of Crescent Equities and unit holders of Crescent Partnership, and,
on that date, Crescent Operating became a public company. Crescent Operating was
formed to be the lessee and operator of certain assets owned or to be acquired
by Crescent Partnership. The relationship between the Company and Crescent
Partnership is governed by the "Intercompany Agreement" which provides the
Company and Crescent Partnership with rights to participate in certain
transactions. The Company also engages in other business enterprises not related
to Crescent Equities or the Intercompany Agreement, such as the Equipment Sales
and Leasing segment. Unless the context otherwise requires, the terms "Crescent
Operating", "the Company", "Crescent Equities", "CEI" and "Crescent Partnership"
include the subsidiaries of each and, in the case of "CEI" and "Crescent
Equities", includes "Crescent Partnership".

On December 17, 1999, President Clinton signed into law the REIT Modernization
Act which will become effective after December 31, 2000, and contains a
provision that would permit real estate investments trusts ("REITS"), such as
Crescent Equities, to own and operate certain types of investments that are
currently owned and operated by Crescent Operating. The REIT Modernization Act
is expected to reduce the number of business opportunities that Crescent
Equities would otherwise offer to the Company pursuant to the Intercompany
Agreement. Crescent Equities has expressed an interest in certain of the
investments currently owned or operated by the Company that the REIT
Modernization Act would allow Crescent Equities to own or operate. Crescent
Operating is exploring alternatives with Crescent Equities regarding a potential
future transaction with respect to certain of the Company's assets. See
Transactions with Crescent Partnership for further discussions of the
Intercompany Agreement.

On October 25, 1999, the Company received notice from The Nasdaq-Amex Market
Group (the "Nasdaq") that, for the 30 consecutive trading days preceding such
date, the Company's common stock failed to maintain a closing bid price of
greater than or equal to $5.00 per share, the minimum closing bid price required
for continued listing under


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<PAGE>   4
the Nasdaq National Market System ("NMS") maintenance standard applicable to the
Company. On March 3, 2000, the Company had a hearing before a Nasdaq panel to
determine whether the Company will be permitted to maintain its NMS listing.
Pending the outcome of the hearing, the Company's common stock will continue to
be listed for trading on NMS. In the event of an unfavorable outcome of the
hearing, the Company intends to apply for listing on the Nasdaq SmallCap Market.
While the Company believes it satisfies the requirements for listing on the
Nasdaq SmallCap Market, there can be no assurances that Nasdaq will approve
listing of the Company's shares on such market.

Crescent Operating, through various subsidiaries and affiliates, has assets and
operations comprising four business segments: (i) Equipment Sales and Leasing,
(ii) Hospitality, (iii) Temperature Controlled Logistics (formerly Refrigerated
Warehousing) and (iv) Land Development. Within these segments the Company owned
the following for all or some portion of 1999:

o    THE EQUIPMENT SALES AND LEASING SEGMENT consisted of a wholly owned
     interest in Crescent Machinery Company, a construction equipment sales,
     leasing and service company with 18 locations in seven states.

o    THE HOSPITALITY SEGMENT consisted of (i) the Company's lessee interests in
     the Denver Marriott City Center, the Hyatt Regency Beaver Creek, the Hyatt
     Regency Albuquerque, Canyon Ranch-Tucson, Canyon Ranch-Lenox, the Ventana
     Inn and Spa, the Sonoma Mission Inn and Spa (including the Sonoma Mission
     Inn Golf and Country Club), the Four Seasons Hotel in Houston, Texas and
     the Renaissance Hotel in Houston, Texas (collectively, the "Hospitality
     Properties"), (ii) a two-thirds interest in the Houston Center Athletic
     Club Venture (see Hospitality Segment - Recent Developments) and (iii) a 5%
     economic interest in CRL Investments, Inc. ("CRL"), which has an investment
     in the Canyon Ranch Day Spa in the Venetian Hotel in Las Vegas, Nevada and
     participates in the future use of the "Canyon Ranch" name.

o    THE TEMPERATURE CONTROLLED LOGISTICS SEGMENT consisted primarily of a 40%
     interest in the operations of Vornado Crescent Logistics Operating
     Partnership ("AmeriCold Logistics"), which currently operates 104
     refrigerated storage properties with an aggregate storage capacity of
     approximately 519.2 million cubic feet, and a 1% interest in Crescent CS
     Holdings Corporation ("CS I") and Crescent CS Holdings II Corporation ("CS
     II", and together with CS I, the "Temperature Controlled Logistics
     Partnerships").

o    THE LAND DEVELOPMENT SEGMENT consisted of (i) a 4.65% economic interest in
     Desert Mountain, a master planned, luxury residential and recreational
     community in northern Scottsdale, Arizona, (ii) a 42.5% general partner
     interest in The Woodlands Operating Company, L.P. ("Woodlands Operating"),
     (iii) a 2.125% economic interest in The Woodlands Land Development Company
     L.P. ("Landevco"), (iv) a 50% economic interest in COPI Colorado, LP ("COPI
     Colorado"), a company that has a 10% economic interest in Crescent
     Development Management Corp. ("CDMC") and (v) a 5% economic interest in an
     entity which owns a 6.19% interest in the construction and operation of a
     new multipurpose entertainment and sports center (the "Arena Project") in
     downtown Dallas, Texas as well as a 2.6% economic interest in
     Hillwood/1642, Ltd. See Land Development Segment - Recent Developments.

The Company has previously written-off its entire investment and has no
obligation or commitment to fund CBHS ongoing operations. As a result of the
write-off, and irrespective of the transactions described in Note 3 to the
Company's financial statements, the Company does not anticipate that it will
recognize any additional CBHS losses for accounting purposes. The Company does
incur costs of ownership related to the CBHS investment, such as legal and
accounting costs, and COPI Healthcare incurs costs related to due diligence on
the assets it has offered to purchase out of bankruptcy. See Other Investments -
Charter Behavioral Health Systems, LLC -  Recent Developments. Because the
Company has written-off its CBHS investment and did not recognize income or loss
from CBHS in 1999, the Company no longer reports its operations related to CBHS
as a separate segment.


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<PAGE>   5

                          SEGMENT FINANCIAL INFORMATION
                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

The following is a summary of Crescent Operating's financial information
reported by segment for the year ended December 31, 1999:


<TABLE>
<CAPTION>
                                                       EQUIPMENT                TEMPERATURE
                                                         SALES                   CONTROLLED    LAND
                                                      AND LEASING   HOSPITALITY  LOGISTICS   DEVELOPMENT    OTHER         TOTAL
                                                      -----------   ----------- -----------  -----------  ---------     ---------
<S>                                                   <C>           <C>         <C>          <C>          <C>           <C>
Revenues ......................................        $ 136,343     $ 246,763   $      --    $ 334,881   $      --     $ 717,987

Operating expenses ............................          131,606       245,477           2      324,432       2,603       704,120
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Income (loss) from operations .................            4,737         1,286          (2)      10,449      (2,603)       13,867
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Investment income (loss) ......................               --          (851)     (2,275)      23,825         240        20,939
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Other (income) expense
     Interest expense .........................            6,841           738          --       14,767       8,429        30,775
     Interest income ..........................              (94)         (120)         --       (3,441)       (391)       (4,046)
     Other ....................................              287            --          --         (156)         --           131
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Total other (income) expense ..................            7,034           618          --       11,170       8,038        26,860
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Income (loss) before income
     taxes and minority interest ..............           (2,297)         (183)     (2,277)      23,104     (10,401)        7,946
Income tax provision (benefit) ................           (1,081)          (50)       (911)       7,293      (8,722)       (3,471)
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Income (loss) before minority interests........           (1,216)         (133)     (1,366)      15,811      (1,679)       11,417
Minority interests ............................               --           932          --      (15,044)         --       (14,112)
                                                       ---------     ---------   ---------    ---------   ---------     ---------
Net income (loss) .............................        $  (1,216)    $     799   $  (1,366)   $     767   $  (1,679)    $  (2,695)
                                                       =========     =========   =========    =========   =========     =========

Net income (loss) per share, basic ............        $   (0.12)    $    0.08   $   (0.13)   $    0.07   $   (0.16)    $   (0.26)
                                                       =========     =========   =========    =========   =========     =========

Net income (loss) per share, diluted ..........        $   (0.12)    $    0.08   $   (0.13)   $    0.07   $   (0.16)    $   (0.26)
                                                       =========     =========   =========    =========   =========     =========

EBITDA Calculation: (1)
     Net income (loss) ........................        $  (1,216)    $     799   $  (1,366)   $     767   $  (1,679)    $  (2,695)
     Interest expense, net ....................            6,747           162         541          557       8,038        16,045
     Income tax provision (benefit) ...........           (1,081)          571      (1,045)         700      (8,722)       (9,577)
     Depreciation and amortization ............           15,041         1,087       2,487        1,466        (133)       19,948
                                                       ---------     ---------   ---------    ---------   ---------     ---------
EBITDA ........................................        $  19,491     $   2,619   $     617    $   3,490   $  (2,496)    $  23,721
                                                       =========     =========   =========    =========   =========     =========
</TABLE>


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


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                           EQUIPMENT SALES AND LEASING

OVERVIEW

Crescent Machinery is engaged in the sale, leasing and service of construction
equipment and accessories to the construction and utility industries located
primarily in seven states. The Company has dramatically expanded the equipment
sales and leasing business it acquired in 1997. Historically, construction
equipment businesses have been owned and operated primarily by individuals in a
localized area. Crescent Operating has consolidated some of these businesses in
order to gain improvement through purchasing and operating efficiencies. All of
the Crescent Machinery locations are registered equipment dealers representing
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.

The management of Crescent Machinery is focused on increasing the rental and
leasing components of Crescent Machinery's business, which management believes
have the potential to generate higher profit margins while maintaining the sales
and service aspects of the dealership. Management believes that Crescent
Machinery's status as an equipment dealer affords it a competitive advantage
because Crescent Machinery is able to stock rental and leasing equipment at
reduced costs that are offered only to equipment dealers and national accounts.
Additionally, dealerships have significant advantages over rental yards in down
cycles that occur in the industry. In down cycles, contractors will retain their
equipment longer, and as a consequence, additional service and parts, which are
provided by dealerships, are required. The growth of rental fleet, while
positioning Crescent Machinery to compete more effectively in its markets, has
resulted in, and during the foreseeable future is likely to result in, increased
depreciation and interest expense.

Crescent Machinery's operations are seasonal, and adverse weather conditions,
such as extended periods of precipitation, could adversely affect its
operations. The months of June through October typically have the greatest
positive impact and the months of December, January and February typically have
the greatest negative impact on the Company's consolidated results.

Crescent Machinery competes with various large and small companies. Crescent
Machinery believes that the principal competitive factors in its markets for
sale and rental of the construction equipment and accessories it offers are
availability of requested equipment, competitive pricing, product features,
parts and service. Crescent Machinery's products and services are marketed
directly by its sales force.

Crescent Machinery's acquisition efforts are limited by access to capital to
fund acquisitions and by the Company's depressed stock prices, which adversely
affects the ability of Crescent Machinery to use the Company's stock as
consideration in acquisitions. Crescent Operating opened a new start-up location
in Fort Worth, Texas in August 1999 and the Company believes that it has other
opportunities to open new start-up locations in proximity to its current
operations and to expand its business with limited capital requirements.

RECENT DEVELOPMENTS

Effective March 4, 1999, the Company acquired certain assets of Westco Tractor &
Equipment, Inc. ("Westco"), a company engaged in equipment sales, leasing and
servicing, located in Santa Rosa, California. The purchase price of
approximately $2.6 million was comprised of $0.5 million cash and the assumption
of liabilities of $2.1 million.

Effective July 1, 1999, the Company acquired all of the stock of E. L. Lester
and Company ("Lester"), a company engaged in equipment sales, leasing and
servicing, located in Houston, Texas. Lester specializes in the sales and rental
of 8 to 300-ton conventional and hydraulic cranes to highway, building and
industrial contractors. The purchase price of approximately $17.2 million was
comprised of $8.9 million cash, the issuance of notes payable by Crescent
Operating in the amount of $6.0 million and the assumption of liabilities of
$2.3 million.

Effective July 1, 1999, the Company acquired all of the stock of Solveson Crane
Rental, Inc. ("Solveson"), a company engaged in equipment sales, leasing and
servicing, located in Tracy, California. Solveson specializes in


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the rental of 40 to 90-ton rough terrain cranes to highway, building and
industrial contractors. The purchase price of approximately $7.3 million was
comprised of $3.0 million cash and the assumption of liabilities of $4.3
million.

On August 1, 1999, Crescent Machinery opened a new location located in Fort
Worth, Texas. This location offers new equipment sales, equipment rental, parts
and services. A full assortment of rental equipment is available and products
from JCB, Ingersoll Rand, Terex Cranes, Target and Pioneer are available for new
equipment sales.

With the completion of the Lester, Solveson, and Westco acquisitions, and the
opening of the new location in Fort Worth, Texas, Crescent Machinery has 18
locations in Texas, California, Nevada, Oklahoma, Ohio, Indiana and Hawaii.

OPERATIONAL STATISTICS

<TABLE>
<CAPTION>
                                                           For The Year Ended December 31,
                                               -------------------------------------------------------
                                               1999           1998        1997        1996        1995
                                               ----           ----        ----        ----        ----
<S>                                            <C>            <C>         <C>         <C>         <C>
Revenue:
   New and used equipment sales ........         60%            64%         51%         55%         58%
   Rental equipment ....................         21%(1)         20%         34%         28%         24%
   Parts and service ...................         19%            16%         15%         17%         18%
                                                ---            ---         ---         ---         ---
       Total revenue ...................        100%           100%        100%        100%        100%
                                                ===            ===         ===         ===         ===
</TABLE>

     (1) Same store rental equipment revenue grew 26% from 1999 to 1998.

MARKET INFORMATION

According to survey's conducted by The CIT Group, it is expected that over 25%
more contractors will turn to distributors for their rental needs during 2000 as
compared to 1999. Top items in demand for rent are backhoes, loaders, excavating
equipment and cranes. Crescent Machinery has all such equipment available for
rent or purchase at each of its locations.

Additionally, Crescent Machinery is beginning to realize an increase in highway
construction-related business partially as a result of the Transportation Equity
Act for the 21st Century ("TEA-21"). TEA-21 provides for record federal highway
program funding of $173 billion over the next five years, which represents a 40%
increase over previous funding levels. In Texas and California, the states in
which Crescent Machinery is most active, the percentage increase in federal
funding for highway programs over previous levels is 60% and 45%, respectively.


                                   HOSPITALITY

OVERVIEW

The Hospitality segment generally consists of the operations of the Hospitality
Properties. Each of such properties is owned by Crescent Partnership or its
affiliates and all are leased to subsidiaries of the Company under long term
leases. In addition to these properties, the Company also has other investments
in CRL and, until January 2000, the Houston Center Athletic Club Venture
("HCAC").

The Hospitality Properties are comprised of unique luxury resorts, luxury
business and convention hotels and destination health and fitness resorts and
make up a small portion of the hospitality industry. Because Crescent Operating,
for the most part, relies on third-party operators such as Marriott, Hyatt and
Four Seasons, the Company enjoys the advantage of the third-party operators'
nationwide advertising, reservation services and strong management.

The Company has limited the potential impact of downturns in the hospitality
industry on the Company by limiting Crescent Operating's guarantee of rent
payments. The Company's guarantee related to rent payments is limited to


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<PAGE>   8

cash generated by the Hospitality segment, i.e. cash flows from segments other
than Hospitality would not be used to fund rent payments in the event cash flows
of the Hospitality Properties were less than scheduled rent payments.

The individual Hospitality Properties are affected by seasonality; however, the
seasonal fluctuations are varied and are determined by both location and the
nature of the business conducted on the property. The effects of seasonality of
the Hospitality Properties are generally offsetting; however, March and October
have the greatest positive impact and November through January have the greatest
negative impact on the Company's consolidated results.

The Company's Hospitality Properties in Denver, Albuquerque and Houston are
business and convention center hotels that compete against other similar hotels
in their markets. The Company believes, however, that its destination health and
fitness resorts are unique properties that have very limited competition. In
addition, the Company believes that the other remaining Hospitality Properties
experience limited or no direct competition due to their high replacement costs
and unique concepts or locations. The Hospitality Properties do compete, to a
limited extent, against business class hotels or middle-market resorts in their
geographic areas, as well as against luxury resorts nationwide and around the
world.

The Company has a 5% economic interest, representing all of the voting stock of
CRL. CRL has a 20% economic interest in CR License LLC ("CR License"), the
entity which owns the rights to the future use of the "Canyon Ranch" name. CRL
has the opportunity through July of 2000 to pay $3.0 million to obtain an
additional 10% interest in CR License. CRL also has an effective 60% economic
interest in the Canyon Ranch Spa Club located in the Venetian Hotel in Las
Vegas. The Canyon Ranch Spa Club opened in June 1999 and is the first project to
expand the franchise value of the "Canyon Ranch" name.

RECENT DEVELOPMENTS

Effective January 31, 2000, HCAC sold substantially all of its assets to an
unrelated party. Through a wholly owned subsidiary, the Company received
proceeds from the sale of $2.4 million resulting in an approximate $1.5 million
gain which will be recognized by Crescent Operating in the first quarter of
2000.

In February 2000, Crescent Operating and its hospitality subsidiaries entered
into a Master Asset Management and Administrative Services Agreement and
property management agreements with Sonoma Management Company ("SMC") to manage
the Company's hotel properties (excluding Canyon Ranch - Lenox, Canyon Ranch -
Tucson and the Hyatt Regency Beaver Creek). At the same time, the Company's
hospitality subsidiaries accepted assignment from the owners of the Sonoma
Mission Inn and Spa, the Sonoma Mission Inn Golf and Country Club and the
Ventana Inn and Spa of its property management agreements with Sonoma Management
Company. The principles of Sonoma Management Company are Sanjay and Johanna
Varma and Crescent Equities is an equity owner in Sonoma Management Company.

HOTELS AND DESTINATION HEALTH AND FITNESS RESORTS

The hotels and destination health and fitness resorts operated by the Company
are as follows:

     o    Hyatt Regency Beaver Creek;

     o    Denver Marriott City Center;

     o    Hyatt Regency Albuquerque;

     o    Sonoma Mission Inn and Spa;

     o    Four Seasons Hotel Houston;

     o    Ventana Inn and Spa;

     o    Renaissance Houston Hotel;

     o    Canyon Ranch-Tucson; and

     o    Canyon Ranch-Lenox.


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<PAGE>   9

Crescent Partnership has committed over $40 million towards capital projects at
certain of the Hospitality Properties to further enhance the guests' experience.
The projects include:

     o    30 new suites at the Sonoma Mission Inn and Spa which are expected to
          be completed during the second quarter of 2000 and the spa expansion,
          which was completed in December 1999;

     o    renovation of the guestrooms and common areas at the Four Seasons
          Hotel in Houston which are expected to be completed during the third
          quarter of 2000;

     o    renovation of the Renaissance Hotel in Houston which is expected to be
          completed during the third quarter of 2000; and

     o    four new suites and a new spa which were completed at the Ventana Inn
          and Spa during September 1999.

Certain of the above projects generate increased rent and the related
construction of the projects causes a temporary reduction in the average daily
rate of the hotel due to the negative impact on the guests' experience during
construction.

Each of the Hospitality Properties is under lease with Crescent Equities, with
terms that expire from December 2004 to June 2009 and generally provide for (i)
base rent, with periodic rent increases, (ii) percentage rent based on a
percentage of gross hotel revenues less food and beverage revenues above a
specified amount and (iii) a percentage of gross food and beverage revenues
above a specified amount. Under the leases, the Company's subsidiaries have
assumed the rights and obligations of the property owner under the respective
management agreement with the hotel operators (including the property management
agreements with Sonoma Management Company for Sonoma Mission Inn and Spa, Sonoma
Mission Inn Golf and Country Club and Ventana Inn and Spa), as well as the
obligation to pay all property taxes and other charges against the property. As
part of each of the lease agreements for eight of the Hospitality Properties,
Crescent Equities has agreed to fund all capital expenditures relating to
furniture, fixtures and equipment reserves required under the applicable
management agreements. The only exception is Canyon Ranch-Tucson, in which
instance the Company owns all furniture, fixtures and equipment associated with
the property and will fund all related capital expenditures.

All of the Company's properties, except for the Sonoma Mission Inn and Spa,
Sonoma Mission Inn Golf and Country Club and the Ventana Inn and Spa, are
managed by third party operators. Through 1999, Sonoma Mission Inn and Spa,
Sonoma Mission Inn Golf and Country Club and the Ventana Inn and Spa were
managed by the Company with asset management oversight provided by The Varma
Group. Crescent Operating, through its subsidiaries, had asset management
agreements (the "Asset Management Agreements") with The Varma Group through
1999, such that The Varma Group was the exclusive asset manager of the Company's
Hospitality Properties. Johanna Varma is a principal of The Varma Group and was
President of the Hospitality division of the Company until February 2000.

As consideration for its services under the Asset Management Agreements, which
became cancelable by the Company on January 30, 2000 and were terminated
effective February 1, 2000, The Varma Group received an annual base fee in 1999
of approximately $0.7 million, plus annual cost of living adjustments for its
asset management services related to the Hyatt Albuquerque, the Hyatt Beaver
Creek, Sonoma Mission Inn and Spa and the Denver City Center Marriott. In
addition, The Varma Group was reimbursed for its costs incurred in providing
asset management to the other Hospitality Properties.


                                       9
<PAGE>   10

OPERATIONAL STATISTICS

The following table sets forth certain information about the Hospitality
Properties, excluding the Sonoma Mission Inn Golf and Country Club, HCAC and
CRL, for the years ended December 31, 1999 and 1998. The information below is
based on available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox,
which are destination health and fitness resorts that measure performance based
on available guest nights.

<TABLE>
<CAPTION>
                                                                                          For the year ended December 31,
                                                                                 ------------------------------------------------
                                                                                    Average          Average           Revenue
                                                                                   Occupancy          Daily              Per
                                                                                      Rate             Rate        Available Room
                                                                                 --------------    ------------    --------------
                                   Location          Lease Expiration  Rooms     1999      1998    1999    1998    1999      1998
                                   --------          ----------------  -----
<S>                                <C>               <C>               <C>       <C>       <C>     <C>     <C>     <C>       <C>
UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center...     Denver, CO           June 2005        613      80%      80%     $124    $124    $ 99      $100
Hyatt Regency Albuquerque.....     Albuquerque, NM    December 2005      395      66       69       106     103      70        71
Four Seasons Hotel Houston....     Houston, TX       September 2007      399      66       65       197     181     129       118
Renaissance Houston...........     Houston, TX          June 2009        389      63       67        94      93      59        62
                                                                       -----      --       --      ----    ----    ----      ----
    Total/Weighted Average                                             1,796      70%      71%     $130    $125    $ 91      $ 89
                                                                       =====      ==       ==      ====    ====    ====      ====

LUXURY RESORTS AND SPAS:
Hyatt Regency Beaver Creek....     Avon, CO           December 2004      276(1)   72%      69%     $244    $233    $175      $162
Sonoma Mission Inn & Spa......     Sonoma, CA        October 2006(8)     178(2)   79       82       225     235     179       194
Ventana Inn & Spa.............     Big Sur, CA        December 2007       62      78       63(3)    388     387     302       245(3)
                                                                       -----      --       --      ----    ----    ----      ----
    Total/Weighted Average                                               516      75%      73%     $255    $249    $191      $183
                                                                       =====      ==       ==      ====    ====    ====      ====

                                                                        Guest
                                                                        Nights
DESTINATION FITNESS RESORTS                                             ------
 AND SPAS:
Canyon Ranch-Tucson...........     Tucson, AZ           July 2006        250(4)
Canyon Ranch-Lenox............     Lenox, MA          December 2006      212(4)
                                                                         ---      --       --      ----    ----    ----      ----
    Total/Weighted Average                                               462      87%(5)   86%(5)  $543(6) $508(6) $451(7)   $422(7)
                                                                         ===      ==       ==      ====    ====    ====      ====
GRAND TOTAL/WEIGHTED AVERAGE                                                      74%      74%     $222    $212    $170      $162
                                                                                  ==       ==      ====    ====    ====      ====
</TABLE>

(1)  In 1998, the number of rooms was reduced to 276 due to 19 rooms being
     converted into a 20,000 square foot spa.

(2)  In February 1999, 20 rooms were taken out of commission during the
     construction of the spa, which is part of an approximately $20 million
     expansion scheduled to be completed in April 2000. The expansion will also
     include the construction of 30 additional guest rooms. Rates were
     discounted during the construction period, which resulted in a lower
     average daily rate and revenue per available room in 1999, as compared to
     1998.

(3)  Average occupancy and REVPAR decreased from the prior period due to the
     closing of the Ventana Inn and Spa for approximately three months as a
     result of the major access road leading to the property being washed out.

(4)  Represents available guest nights, which is the maximum number of guests
     that the resort can accommodate per night.

(5)  Represents the number of paying and complimentary guests for the period,
     divided by the maximum number of available guest nights for the period.

(6)  Represents the average daily "all-inclusive" guest package charges for the
     period, divided by the average daily number of paying guests for the
     period.

(7)  Represents the total "all-inclusive" guest package charges for the period,
     divided by the maximum number of available guest nights for the period.

(8)  The lease related to the Sonoma Mission Inn Golf and Country Club expires
     in October 2008.



                                       10
<PAGE>   11

MARKET INFORMATION

The following is derived from various industry sources. Average hotel room
rental rates grew 4.0%, 4.4%, 6.2% and 6.3%, in 1999, 1998, 1997, and 1996,
respectively. Within the luxury and upscale segments of the industry, average
room rental rates increased approximately 3.3% from 1998 to 1999.

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



                                       11
<PAGE>   12

                        TEMPERATURE CONTROLLED LOGISTICS

OVERVIEW

The Temperature Controlled Logistics segment consisted primarily of a 40%
interest in the operations of AmeriCold Logistics, and a 1% interest in the
Temperature Controlled Logistics Partnerships. AmeriCold Logistics,
headquartered in Atlanta, Georgia, has 6,900 employees and operates 104
temperature controlled storage facilities nationwide with an aggregate of
approximately 519 million cubic feet of refrigerated, frozen and dry storage
space. Of the 104 warehouses, AmeriCold Logistics leases 89 temperature
controlled facilities with an aggregate of approximately 428 million cubic feet
from the Temperature Controlled Logistics Partnerships, and manages 15
additional facilities containing approximately 91 million cubic feet of space.
AmeriCold Logistics provides the frozen food industry with refrigerated storage
and transportation management services.

AmeriCold Logistics entered into leases covering the refrigerated storage
facilities used in its business. The leases, which commenced in March 1999,
generally have a 15-year term with two five-year renewal options and provide for
the payment of fixed base rent and percentage rent based on revenues AmeriCold
Logistics receives from its customers. Fixed base rent is approximately $130
million per annum through 2003, $132.0 million per annum from 2004 through 2008
and $133.0 million per annum from 2009 through 2014. Percentage rent for each
lease is based on a specified percentage of revenues in excess of a specified
base amount. The aggregate base revenue amount under five of the six leases is
approximately $321.0 million and the weighted average percentage rate is
approximately 36% for the initial five-year period, approximately 39% for the
period from 2004 through 2008 and approximately 41% for the period from 2009
through February 28, 2014. The aggregate base revenue amount under the sixth
lease is approximately $32.0 million and the percentage rate is 24% for the
initial two-year period, 37.5% for the period from 2002 through 2006, 40% from
2007 through 2011 and 41% from 2012 through February 28, 2014. AmeriCold
Logistics recognized $135.8 million of rent expense from March 11, 1999
(acquisition date) through December 31, 1999. AmeriCold Logistics is required to
pay for all costs arising from the operation, maintenance and repair of the
properties, including all real estate taxes and assessments, utility charges,
permit fees and insurance premiums, as well as property capital expenditures in
excess of $5.0 million annually. AmeriCold Logistics has the right to defer the
payment of 15% of the fixed base rent and all percentage rent for up to three
years beginning on March 11, 1999 to the extent that available cash, as defined
in the leases, is insufficient to pay such rent. AmeriCold Logistics deferred
$5.4 million of rent payments for the period ending December 31, 1999.

Under the terms of the partnership agreement for AmeriCold Logistics, Vornado
Operating, Inc.("Vornado Operating") has the right to make all decisions
relating to the management and operations of AmeriCold Logistics other than
certain major decisions that require the approval of both the Company and
Vornado Operating. Vornado Operating must obtain Crescent Operating's approval
for specified matters involving AmeriCold Logistics, including approval of the
annual budget, requiring specified capital contributions, entering into
specified new leases or amending existing leases, selling or acquiring specified
assets and any sale, liquidation or merger of AmeriCold Logistics. If the
partners fail to reach agreement on certain matters prior to October 30, 2000,
Vornado Operating will be entitled to buy Crescent Operating's interest in the
partnership at cost plus 10% per annum return. If the partners fail to reach an
agreement on such matters during the period from November 1, 2000 through
October 30, 2007, Vornado Operating may set a price at which it commits to
either buy Crescent Operating's investment, or sell its own, and Crescent
Operating will decide whether to buy or sell at that price. If the partners fail
to reach agreement on such matters after October 30, 2007, either party may set
a price at which it commits to either buy the other party's investment, or sell
its own, and the other party will decide whether to buy or sell at that price.
Neither partner may transfer its rights or interest in the partnership without
the consent of the other partner. The partnership will continue for a term
through October 30, 2027, except as the partners may otherwise agree.


                                       12
<PAGE>   13

RECENT DEVELOPMENTS

Effective March 12, 1999, the Company sold 80% of its 5% interest in the
Temperature Controlled Logistics Partnerships to Crescent Partnership for $13.2
million and received the right to require Crescent Partnership to purchase the
remaining 20% for approximately $3.4 million at any time during the next two
years, subject to compliance with certain regulatory matters. This 5% interest
represented a 2% interest in various corporations and limited liability
companies owned by the Temperature Controlled Logistics Partnerships. Crescent
Operating, through a wholly owned limited liability company, then became a 40%
partner of AmeriCold Logistics, a newly formed partnership, the remaining 60% of
which is owned by Vornado Operating. This transaction required a capital
contribution of approximately $15.5 million from Crescent Operating. As a result
of the restructuring transaction, the operations formerly associated with the
Temperature Controlled Logistics Partnerships are now conducted by AmeriCold
Logistics. Also a result of the transaction, Crescent Operating no longer
consolidates, for financial reporting purposes, the Temperature Controlled
Logistics Partnerships, which has resulted in a decrease for accounting purposes
in the investment in the Temperature Controlled Logistics Partnerships of
approximately $291 million.

The Company expects to form a new business venture with Vornado Operating on
terms and conditions similar to the Company's existing partnership arrangements
with Vornado Operating. The venture, which is to be named Transportal Network
("Transportal"), would pursue a business-to-business internet opportunity
relating to the Temperature Controlled Logistics business. The Company expects
Transportal to provide routing and load management services and to facilitate
related purchases over the internet to independent truckers, shippers and
receivers to enable them to increase efficiency. The Company's share of start-up
costs for Transportal, which relate to market research, creating a business plan
and related matters, was $0.4 million for the year ended December 31, 1999.
These costs are included in the Company's consolidated statement of operations
as "Investment Income (Loss)" for the year ended December 31, 1999. Although
Transportal has not commenced operations or finalized its business plan, the
Company expects Transportal to incur significant future losses and to require
significant equity investments. The Company anticipates that it may have to
dilute its ownership in Transportal to fund its share of Transportal's cash
needs, which may be in excess of $2.0 million. Transportal is actively seeking
additional equity investments from third parties, including venture capital
firms. Early stage internet companies, such as Transportal, with new and
unproven business models frequently encounter financial and other significant
business risks and there can be no assurance that Transportal will be a
successful business venture.

MARKET INFORMATION

Refrigerated storage facilities are comprised of production and distribution
facilities. Production facilities typically serve one or a small number of
customers, generally food processors, located nearby. These customers store
large quantities of processed or partially processed products in the facility
until they are shipped to the next stage of production or distribution.
Distribution facilities primarily warehouse a wide variety of customers'
finished products until future shipment to end-users. Each distribution facility
primarily services the surrounding regional market. AmeriCold Logistics offers
transportation management services including freight routing, dispatching,
freight rate negotiation, backhaul coordination and distribution channel
assessment. AmeriCold Logistics' temperature controlled logistics expertise and
access to both frozen food storage facilities and distribution channels enable
its customers to respond quickly and efficiently to time-sensitive orders from
distributors and retailers. Additionally, AmeriCold Logistics mines limestone at
two of its locations.

Customers of AmeriCold Logistics consist primarily of national, regional and
local frozen food manufacturers, distributors, retailers and food service
organizations including Con-Agra, Inc., H.J. Heinz & Co., McCain Foods,
Pillsbury, Sara Lee, Philip Morris, J.R. Simplot, Farmland Industries and
Unilever. AmeriCold Logistics is the largest operator of public refrigerated
storage space in the country in terms of public storage space operated. The
Company believes that AmeriCold Logistics does not have any competitors of
comparable size, however, there is competition that is national, regional and
local in nature. Breadth of service, facility locations, customer mix, warehouse
size, service performance and price are major competitive factors.


                                       13
<PAGE>   14

OPERATIONAL INFORMATION

The following table shows the location and size of facility for each of the
properties operated by AmeriCold Logistics as of December 31, 1999:

<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                      6                12.3            Missouri(1)                2                  37.9
Arizona                      1                 2.9            Nebraska                   2                   4.4
Arkansas                     6                33.1            New Jersey                 1                   2.7
California                  13                53.4            New York                   1                  11.8
Colorado                     2                 3.4            North Carolina             3                   8.5
Florida                      5                 7.5            Oklahoma                   2                   2.1
Georgia                      7                44.5            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                  4                  13.0
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                6                15.2            Washington                 6                  28.7
Minnesota                    1                 5.9            Wisconsin                  3                  17.4
Mississippi                  1                 4.7            Canada                     1                   4.8
                                                                                        ---                -----
                                                              Total                     104                519.2
                                                                                        ===                =====
</TABLE>

(1)  Missouri has one underground facility. This underground facility
     approximates 33.1 million cubic feet.


                                LAND DEVELOPMENT

OVERVIEW

The Land Development segment consisted primarily of:

     o    a 4.65% economic interest in Desert Mountain, a master planned, luxury
          residential and recreational community in northern Scottsdale,
          Arizona;

     o    a 42.5% general partner interest in Woodlands Operating, which
          provides management, advisory, landscaping and maintenance services to
          The Woodlands, Texas and is the lessee of The Woodlands Resort and
          Conference Center;

     o    a 2.125% economic interest in Landevco, which owns approximately 7,500
          acres for commercial and residential development as well as a realty
          office, an athletic center, and interests in both a title company and
          a mortgage company;

     o    a 50% economic interest in COPI Colorado, a company that has a 10%
          economic interest in CDMC, which invests in entities that develop or
          manage residential and resort properties (primarily in Colorado) and
          provides support services to such properties.

The Land Development segment competes against a variety of other housing
alternatives including other planned developments, homes, condominiums and
townhouses. The Company believes that Desert Mountain, The Woodlands and the
entities in which CDMC has investments possess certain features that provide
competitive advantages to these developments. Both Desert Mountain and The
Woodlands have golf courses where major tournaments are played, The Tradition
and The Shell Houston Open, respectively, as well as clubhouses, multiple golf
courses and other amenities.


                                       14
<PAGE>   15

The Woodlands is unique among developments in the Houston area because it
functions as a self-contained community. Desert Mountain does not have any
significant direct competitors due in part to the high-end amenities that it
offers. The Company believes that the entities in which CDMC has investments do
not have any direct competitors because the locations of the projects are
unique, the land is limited and the entities in which CDMC has investments own
most of the land in each location. Management believes that these attributes
help to distinguish Desert Mountain, The Woodlands and the entities in which
CDMC has investments from their competition. The Woodlands could be adversely
affected by downturns in the Houston economy. Management believes that Desert
Mountain and the most significant investments made by CDMC are not directly
affected by their local economies, as they are luxury developments and most of
the purchases are not made by local residents.

RECENT DEVELOPMENTS

The Woodlands Operating partnership agreement provides that distributions are to
be made to partners in accordance with specified payout percentages which change
based upon whether certain established cumulative preferred returns have been
earned. As cumulative preferred returns reach certain thresholds, distributions
to the Company increase from 42.5% to 49.5% and then from 49.5% to 52.5%.
Beginning in 2000, both the 42.5% and the 49.5% thresholds have been met;
therefore, the payout percentage to the Company has increased to 52.5%.

On May 29, 1999, legislation was passed that would keep The Woodlands as an
unincorporated area free from annexation from Houston for a period of at least
twelve years. Also during 1999, Anadarko Petroleum commenced construction of its
new 32 story headquarters in The Woodlands, and the $24.0 million, 1.25-mile
waterway in The Woodlands is under construction and anticipated to be completed
in early 2001. In addition, the new Carlton Woods Country Club, featuring an
18-hole Jack Nicklaus signature golf course is under construction in The
Woodland's first gated community.

In accordance with an agreement between Gerald Haddock and the Company, Mr.
Haddock, the Company's former Chief Executive Officer and President, had his
limited partnership interest in COPI Colorado redeemed by COPI Colorado 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 reserved the right to
challenge the valuation performed by the independent appraiser. As a result of
the redemption of Mr. Haddock's interest, the Company has an approximate 58%
interest in COPI Colorado.

On April 29, 1999, a partnership in which CDMC has a 64% economic interest
finalized the purchase of Riverfront Park (previously known as "The Commons"), a
master planned residential development on 23 acres in the Central Platte Valley
near downtown Denver, Colorado, for approximately $25.0 million. The development
of Riverfront Park is expected to begin in the spring of 2000. The first phase
will consist of condominiums and lofts with prices ranging from $0.2 million to
$2.5 million. The acreage is in close proximity to several major entertainment
and recreational facilities, including, Coors Field (home to the Major League
Baseball's Colorado Rockies), Elitch Gardens (an amusement park), the new Pepsi
Center (home to the National Hockey League's Colorado Avalanche and the National
Basketball Association's Denver Nuggets) and the new downtown Commons Park. An
adjacent 28 acres is expected to be commercially developed by another company,
thus providing a major mixed-use community adjacent to the lower downtown area
of Denver.

On August 27, 1999 and October 27, 1999, the Company sold its investments in
Hillwood and Corporate Arena, respectively, for an aggregate sales price of
approximately $1.4 million. Together, the sales resulted in an approximate $0.2
million gain in 1999.

DESERT MOUNTAIN

Desert Mountain includes The Desert Mountain Club, a private golf, tennis and
fitness club which serves over 2,100 members and offers five Jack Nicklaus
signature 18-hole golf courses and four clubhouses. One of these courses is
Cochise, the site of the Senior PGA Tour's The Tradition golf tournament. Lyle
Anderson, the original developer of Desert Mountain, provides advisory services
in connection with the operation and development of Desert Mountain. Pursuant to
the terms of a limited partnership agreement, Desert Mountain Development
Corporation ("Desert Mountain Development") is entitled to receive 93% of the
net cash flow of Desert Mountain after certain payments


                                       15
<PAGE>   16

to the sole limited partner, Sonora Partners Mountain Partnership which owns the
remaining 7% interest, have been made.

THE WOODLANDS OPERATING COMPANY

The Woodlands, an approximately 27,000-acre master-planned residential and
commercial community located approximately 27 miles north of Houston, Texas,
includes a shopping mall, retail centers, office buildings, a conference center
and country club and other amenities. The Greater Houston Builders Association
chose The Woodlands as its 1999 Developer of the Year.

Woodlands Operating was formed to provide management, advisory, landscaping and
maintenance services to entities affiliated with Crescent Operating and Crescent
Equities as well as to third parties. Pursuant to the terms of service
agreements, Woodlands Operating performs general management, landscaping and
maintenance, construction, design, sales, promotional and other marketing
services for certain properties in which Crescent Equities owns a direct or
indirect interest. In addition, Woodlands Operating monitors certain of the real
estate investments of, and provides advice regarding real estate and development
issues to, such entities. As compensation for its management and advisory
services, Woodlands Operating is paid a monthly advisory fee in an amount equal
to 3% of all costs and expenses incurred by Woodlands Operating in providing
such services. As compensation for its landscaping and maintenance services,
Woodlands Operating receives a monthly fee in an amount equal to 5% of the cost
per month of performing the required landscaping and maintenance services. Each
service agreement provides for an initial term of at least 12 months (subject to
earlier termination under certain circumstances) and will be renewed
automatically, unless terminated by either party upon giving prior notice as
specified in each agreement.

Woodlands Operating also leases The Woodlands Conference Center and Country
Club, a 364-room executive conference center with a private golf and tennis club
serving approximately 1,800 members and offering 81 holes of golf, and certain
related assets (the "Conference Center") from The Woodlands Commercial
Properties Company, L.P. ("Woodlands Commercial"), a partnership, the interests
of which are owned by Crescent Equities and certain Morgan Stanley Group funds.
Woodlands Operating leases the Conference Center on a triple net basis and will
pay base rent in the amount of $0.75 million per month during the eight-year
term of the lease. The lease also provides for the payment of percentage rent
for each calendar year in which gross receipts from the operation of the
Conference Center exceed certain amounts.

THE WOODLANDS LAND COMPANY, INC.

The Company owns all of the voting stock representing a 5% economic interest, of
The Woodlands Land Company, Inc. ("LandCo"), a residential and commercial
development corporation which was formerly wholly owned by Crescent Partnership.
LandCo holds a 42.5% general partner interest in, and is the managing general
partner of, Landevco, a Texas limited partnership in which certain Morgan
Stanley funds hold a 57.5% limited partner interest. LandCo's general partner
interest in Landevco is subject to adjustment to up to 52.5%, in the event
Landevco achieves certain levels of profitability and the Morgan Stanley funds
receive certain rates of return on their investment in Landevco. Landevco
primarily owns (i) approximately 5,400 acres of land capable of supporting the
development of more than 15,500 lots for single-family homes, (ii) approximately
2,000 acres capable of supporting more than 16.6 million net rentable square
feet of commercial development, (iii) a realty office, (iv) contract rights
relating to the operation of its property, (v) an athletic center and (vi) a 50%
interest in a title company.

CRESCENT DEVELOPMENT MANAGEMENT CORP.

CDMC's investments include direct and indirect economic interests that vary from
18% to 70% in the following: (i) two residential and commercial developments and
eight residential developments in Colorado; (ii) a Texaco gasoline station and
ancillary auto repair facility, car wash and convenience store in Colorado;
(iii) a timeshare development in Colorado; (iv) a real estate company that
markets and sells timeshare interests; (v) a real estate company that
specializes in the management of resort properties in Colorado, Utah, South
Carolina and Montana; (vi) two transportation companies that provide
approximately 80% of the airport shuttle service to Colorado resort areas; and
(vii) an interest in a partnership that owns an interest in the Ritz Carlton
Hotel in Palm Beach, Florida.


                                       16
<PAGE>   17

Effective September 11, 1998, the Company and Gerald W. Haddock, John C. Goff
and Harry H. Frampton, III (collectively, the "CDMC Sellers") entered into a
partnership agreement (the "Partnership Agreement") to form COPI Colorado. COPI
Colorado's purpose is to hold and manage the voting stock of CDMC (and,
consequently, to manage CDMC) and to invest in shares of Crescent Operating
common stock. In September, 1998, the Company contributed to COPI Colorado $9.0
million in cash in exchange for a 50% general partner interest in COPI Colorado,
and each CDMC Seller contributed to COPI Colorado approximately 667 shares of
CDMC voting stock, which the CDMC Sellers owned individually, in exchange for an
approximately 16.67% limited partner interest in COPI Colorado; as a result and
until January 2000, the Company owned a 50% managing interest in COPI Colorado
and the CDMC Sellers collectively owned a 50% investment interest in COPI
Colorado. See Land Development - Recent Developments. The operating results of
CDMC since September 30, 1998 have been included in the consolidated results of
the Company.

As of March 30, 2000, COPI Colorado had purchased approximately 1.1 million
shares of Crescent Operating common stock at a total purchase price of $4.3
million. The average price paid for such shares, excluding brokers' commissions,
was $3.88 per share.

OPERATIONAL STATISTICS

The following table sets forth certain information as of December 31, 1999
relating to the residential development properties.


<TABLE>
<CAPTION>
                                                     Total          Total           Average
                                       Total       Lots/Units     Lots/Units        Closed
                                       Lots/        Developed       Closed        Sale Price
                                       Units         Since          Since          Per Lot/         Range of Proposed
  Land Development                    Planned      Inception      Inception          Unit (1)     Sale Prices Per Lot(2)
  ----------------                    -------      ---------      ---------       -----------     ----------------------
<S>                                   <C>          <C>            <C>             <C>             <C>
  Desert Mountain............          2,665          2,265          1,980        $ 480,000       $375,000-$3,000,000(3)
  The Woodlands..............         36,385         22,240         20,721        $  48,131          $13,600-$500,000
  CDMC.......................          2,283            227            216             N/A          $23,000-$4,075,000
                                      ------         ------         ------

  Total Land Development.....         41,333         24,732         22,917
                                      ======         ======         ======
</TABLE>

(1)  Based on lots/units closed during the Company's ownership period.

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

(3)  Includes golf membership, which for 1999, is $175,000.


                               OTHER INVESTMENTS

CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC

OVERVIEW

CBHS is the largest provider of behavioral health care treatment in the United
States and currently operates 37 behavioral health care facilities in 21 states.
CBHS also operates outpatient clinics in several states and provides management
services for about 15 behavioral health care treatment programs in general acute
care hospitals in eight states. Many of CBHS' facilities offer a continuum of
care including, inpatient hospitalization, partial hospitalization, intensive
outpatient services, and, in some markets, residential treatment services.

The CBHS facilities provide structured and intensive treatment programs for
mental health and alcohol and drug dependency disorders in children, adolescents
and adults. The specialization of programs enables the clinical staff to provide
care that is specific to the patients' needs and facilitates monitoring of
patients' progress. A typical treatment program at a CBHS facility integrates
physicians and other healthcare professionals through structured activities,
patient testing, adjunctive therapies, group therapy, individual therapy and
educational programs. Treatment programs typically include one or more types of
treatment settings. For those patients who do not have a personal psychiatrist
or other specialist, the hospital refers the patient to a member of its medical
staff.


                                       17
<PAGE>   18

The Company has written-off its entire investment and has no obligation or
commitment to fund CBHS' ongoing operations. As a result of the write-off, and
irrespective of the transactions described in Note 3 to the Company's financial
statements, the Company does not anticipate that it will recognize any
additional losses from its investment in CBHS. Because the Company has
written-off its CBHS investment and it is unlikely that the Company will
recognize any material income from CBHS in the near future due to the operating
losses currently being incurred by CBHS, the Company no longer reports its
operations related to CBHS as a separate segment.

RECENT DEVELOPMENTS

On September 9, 1999, Crescent Operating, Magellan Health Services, Inc.
("Magellan"), Crescent Partnership and CBHS completed a recapitalization of CBHS
and restructuring of the relationships among the parties. In connection with the
restructuring, Magellan transferred its remaining hospital-based assets
(including Charter Advantage, Charter Franchise Services, LLC, the call center
assets, the Charter name and related intellectual property and certain other
assets) to CBHS, and released CBHS from all accrued and future franchise fees.
As a result of the transfer, Magellan is no longer obligated to provide
franchise services to CBHS. Magellan also transferred 80% of its CBHS common
membership interest and all of its CBHS preferred membership interest to CBHS,
leaving Magellan with a 10% common membership interest. Simultaneously, Crescent
Operating reorganized its holdings leaving Crescent Operating with a 25% common
membership interest and 100% of the preferred membership interest in CBHS, and a
limited partnership controlled by individual officers of Crescent Operating and
in which Crescent Operating owns 100% of the economic interests, with a 65%
common membership interest in CBHS. Prior to the restructuring, Crescent
Operating and Magellan each held a 50% common membership interest, and a 50%
preferred membership interest in CBHS.

In connection with the restructuring, Magellan, CBHS, Crescent Partnership and
Crescent Operating also provided each other with mutual releases of all claims
and disputes against each other (including, but not limited to, claims related
to the operation of CBHS and agreements in respect of the purchase and sale of
certain assets), with certain specified exceptions, and Crescent Partnership
deferred the August 1999 rent due from CBHS to the last four months of 1999. In
addition, in connection with the settlement and mutual release of claims between
Magellan and Crescent Operating, $2.5 million that had been held in escrow was
released to Crescent Operating.

In the fourth quarter of 1999, CBHS began significant downsizing, including the
closure of 18 facilities in 1999 and 33 facilities in January 2000. The purpose
of the downsizing is to close unprofitable facilities and eliminate overhead so
that the remaining 37 facilities currently operating could be refinanced or
sold. As a result of the downsizing, the Company anticipates that CBHS' annual
revenues would be reduced from approximately $720 million to approximately $320
million. Closure of these facilities resulted in the filing by terminated
employees of several lawsuits against CBHS for alleged violation of the Worker
Adjustment and Retraining Notification Act ("WARN Act"). See Item III - Legal
Proceedings.

The reader's attention is directed to the end of this discussion about CBHS,
where information is given to the effect that COPI Healthcare does not expect to
close the acquisition of CBHS's core business assets under the asset purchase
agreement described below because the conditions to COPI Healthcare's obligation
to close are not expected to be fulfilled.

Despite the downsizing of its operations, CBHS' operating results and cash flow
were not improved sufficiently to support its current and long-term obligations.
On February 16, 2000, CBHS petitioned for relief under Chapter 11 of the United
States Bankruptcy Code. Under the protection of the bankruptcy court, CBHS
intends to sell and liquidate, in a controlled fashion, all of its ongoing
business. In conjunction with the filing by CBHS of the bankruptcy petition,
COPI Healthcare, Inc. ("COPI Healthcare"), a wholly owned subsidiary of Crescent
Operating, entered into an agreement with CBHS for the acquisition by COPI
Healthcare of CBHS' core business ("Asset Purchase Agreement"), which consists
of the assets used in the operation of 37 behavioral healthcare facilities for
$24.5 million. The bankruptcy court could seek other bids for these assets from
other interested parties and there is no assurance that COPI Healthcare's bid
will be successful or that the conditions contained in its offer can be
satisfied.


                                       18
<PAGE>   19
The closing of the transactions contemplated by the Asset Purchase Agreement is
subject to bankruptcy court approval and other conditions, including among
others, the conditions that (i) from February 16, 2000, through the date of the
closing of the transactions described in the Asset Purchase Agreement, CBHS will
have generated sufficient Earnings Before Interest Taxes Depreciation
Amortization and Rent to cover $1.7 million per month of corporate overhead and
$1.67 million per month of rent, (ii) COPI Healthcare will have obtained, as of
the closing date, a loan agreement or credit facility, on terms acceptable to
COPI Healthcare, for a working capital line of credit in the minimum amount of
$40 million, (iii) various federal and state governmental agencies will have
granted comprehensive releases to COPI Healthcare, Crescent Operating and
Crescent Equities with respect to matters pertaining to CBHS prior to the
acquisition and (iv) all contracts pertaining to operation of the assets that
COPI Healthcare desires to assume shall have been assigned to it, with all
breaches of those contracts cured, and COPI Healthcare shall have entered into
acceptable leases of the facility properties. The Asset Purchase Agreement may
be terminated at any time prior to the closing in the event that (i) the
Bankruptcy Court fails to approve the Asset Purchase Agreement, (ii) certain of
the conditions to closing set forth in the Asset Purchase Agreement are not met,
or (iii) there is a material breach of the Asset Purchase Agreement that is not
cured within 10 days. As part of the resolution of all matters that may arise in
connection with the bankruptcy of CBHS, and under certain circumstances,
Crescent Equities has indicated a willingness to negotiate and, if successful,
enter into an amended master lease or a new lease with any qualified,
credit-worthy bidder who purchases the core business of CBHS, including COPI
Healthcare.

The Company has received a written commitment from Bank of America to make
available to COPI Healthcare $25.0 million to finance the purchase of the core
business of CBHS. Based upon preliminary discussions between the Company and
Bank of America, the Company anticipates that it will issue a one-year note, at
an annual interest rate equal to the 30-day LIBOR plus 1.0%, which will be
secured by all of the assets of COPI Healthcare (whether currently existing or
acquired subsequent to the date of the note) and all of the stock or other
interests of Crescent Operating in COPI Healthcare. Richard Rainwater, Chairman
of the Board of Directors and a significant shareholder of the Company, has
agreed to guarantee (the "Guarantee") the borrowing in an amount not to exceed
$25.0 million. The Guarantee is subject to certain specified conditions,
including (i) the execution by COPI Healthcare of loan documents in respect of
the $25.0 million loan that are reasonably satisfactory to Mr. Rainwater, (ii)
the inclusion of provisions in the loan documents permitting Mr. Rainwater to
acquire COPI Healthcare's $25.0 million debt to Bank of America in the event of
a default under the loan documents, (iii) the acquisition by COPI Healthcare of
the core assets of CBHS on substantially the terms as provided in the Asset
Purchase Agreement, (iv) the execution by COPI Healthcare of an agreement to
reimburse to Mr. Rainwater all amounts funded by him pursuant to the Guarantee,
on terms that are reasonably satisfactory to Mr. Rainwater and that provide that
any such amounts funded be secured by collateral, (v) CBHS' obtaining a working
capital line of credit from a financial institution in the minimum amount of $40
million, and (vi) the payment by COPI Healthcare to Mr. Rainwater of a fee in
the amount of $0.9 million upon the making of the Guarantee. The amount of the
fee to be paid to Mr. Rainwater upon issuance of the Guaranty is based upon a
range of reasonable fees calculated by an outside consulting firm at the request
of the Company's Board of Directors. The Guarantee will expire in the event the
transactions contemplated by the Asset Purchase Agreement are not closed on or
before April 16, 2000. If COPI Healthcare is successful in acquiring the core
business of CBHS, the Company will then seek to retire the $25.0 million
facility through the sale of equity in COPI Healthcare or Crescent Operating to
existing Crescent Operating shareholders.

On March 27, 2000, COPI Healthcare notified CBHS that because it appears that
not all of the conditions to its obligation to consummate the acquisition under
the Asset Purchase Agreement appear likely to be met before the agreement
terminates by its own terms on April 16, 2000, COPI Healthcare does not expect
to close the acquisition under the Asset Purchase Agreement.

MARKET INFORMATION

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


                                       19
<PAGE>   20

In an era of cost-containment and the reduction of dollars available for care,
behavioral healthcare providers have focused attention on developing treatment
approaches that respond to payors' increasing demands for shorter stays, lower
costs, and expanded access to care. Changes in the mix of services, the prices
of services, and the intensity of service are all part of this response. These
changes have also been bolstered by a rapidly expanding science base, improved
medications management, and the growing availability of non-hospital treatment
settings in more and more communities that help to make it possible to manage
complex and severe illnesses in less intensive treatment settings. One of the
effects that the behavioral healthcare industry is experiencing is an increasing
percentage of non-inpatient care.

Due to these changes in the behavioral healthcare industry, a hospital's
position relative to its competitors may be affected by its ability to obtain
contracts with HMOs, PPOs and other managed care plans for the provision of
health care services. Although such contracts generally provide for discounted
services, pre-admission certification and concurrent length of stay reviews,
they also provide a strong patient referral base. The importance of entering
into contracts with HMOs, PPOs and other managed care companies varies from
market to market and depends upon the market strength of the particular managed
care company.

HICKS MUSE TATE & FURST EQUITY FUND II, LP

On March 31, 1999, the Company sold its investment in Hicks-Muse Tate & Furst
II, LP ("Hicks-Muse") for $8.1 million to an unrelated party. The sale resulted
in a $0.3 million gain which was recognized in the first quarter of 1999. All of
the sales proceeds were applied against the Company's indebtedness to Crescent
Partnership.

MAGELLAN WARRANTS

In connection with the transaction in which the Company acquired its initial 50%
membership interest in CBHS in 1997, the Company purchased, for $12.5 million,
warrants to acquire 1,283,311 shares of Magellan common stock for an exercise
price of $30 per share. The Magellan warrants are exercisable in varying
increments beginning on May 31, 1998 and ending on May 31, 2009. Management has
written down its investment in the warrants based on the estimated fair value of
the warrants of $2.4 million at December 31, 1999, using the Black-Scholes
pricing model.


                     TRANSACTIONS WITH CRESCENT PARTNERSHIP

Historically, Crescent Operating generally has been involved with Crescent
Equities in two types of transactions: "LESSEE TRANSACTIONS" and "CONTROLLED
SUBSIDIARY TRANSACTIONS".

     o    LESSEE TRANSACTIONS are those in which Crescent Operating enters into
          a transaction to lease and operate real property that is owned by
          Crescent Partnership but which cannot be operated by Crescent
          Partnership due to Crescent Equities status as a REIT. Lessee
          Transactions include the Company's leases of Hospitality Properties.

     o    CONTROLLED SUBSIDIARY TRANSACTIONS are those in which Crescent
          Operating invests alongside Crescent Partnership in acquisitions where
          Crescent Operating owns all of the voting stock, and Crescent
          Partnership owns all of the non-voting stock of a corporate
          acquisition vehicle which in turn acquires a target business which
          cannot be operated by Crescent Partnership due to Crescent Equities'
          status as a REIT. The voting stock represents the controlling interest
          of the entity being purchased, and due to its status as a REIT,
          Crescent Equities cannot hold a controlling interest in such entities.
          Controlled Subsidiary Transactions include investments in CRL, Desert
          Mountain, Landco, and the Temperature Controlled Logistics
          Partnerships.


                                       20
<PAGE>   21

Crescent Operating and Crescent Partnership have entered into the Intercompany
Agreement to provide each other with rights to participate in the types of
transactions mentioned above. The Intercompany Agreement provides, subject to
certain terms, that Crescent Partnership will provide Crescent Operating with a
right of first refusal to become the lessee of any real property acquired by
Crescent Partnership if Crescent Partnership determines that, consistent with
Crescent Equities' status as a REIT, it is required to enter into a "master"
lease arrangement. Crescent Operating's right of first refusal under the
Intercompany Agreement is conditioned upon the ability of Crescent Operating and
Crescent Partnership to negotiate a mutually satisfactory lease arrangement and
the determination of Crescent Partnership, in its sole discretion, that Crescent
Operating is qualified to be the lessee. In general, a master lease arrangement
is an arrangement pursuant to which an entire property or project (or a group of
related properties or projects) is leased to a single lessee. If a mutually
satisfactory agreement cannot be reached within a 30-day period (or such longer
period to which Crescent Operating and Crescent Partnership may agree), Crescent
Partnership may offer the opportunity to others.

Under the Intercompany Agreement, Crescent Operating has agreed not to acquire
or make (i) investments in real estate which, for purposes of the Intercompany
Agreement, includes the provision of services related to real estate and
investment in hotel properties, real estate mortgages, real estate derivatives
or entities that invest in real estate assets or (ii) any other investments that
may be structured in a manner that qualifies under the federal income tax
requirements applicable to REITs. Crescent Operating has agreed to notify
Crescent Partnership of, and make available to Crescent Partnership, investment
opportunities developed by Crescent Operating, or of which Crescent Operating
becomes aware but is unable or unwilling to pursue.

The Company anticipates that the REIT Modernization Act will have a significant
effect on the Intercompany Agreement in 2001. On December 17, 1999, President
Clinton signed into law the REIT Modernization Act which will become effective
after December 31, 2000, and contains a provision that would permit REITS, such
as Crescent Equities, to own and operate certain types of investments that are
currently owned and operated by Crescent Operating. The REIT Modernization Act
is expected to reduce the number of business opportunities that Crescent
Equities would otherwise offer to the Company pursuant to the Intercompany
Agreement. Crescent Equities has expressed an interest in certain of the
investments currently owned or operated by the Company that the REIT
Modernization Act would allow Crescent Equities to own or operate. Crescent
Operating is exploring alternatives with Crescent Equities regarding a potential
future transaction with respect to certain of the Company's assets.


                                    EMPLOYEES

As of December 31, 1999, Crescent Operating and the following consolidated
subsidiaries had the number of employees indicated below:

<TABLE>
<S>                                                     <C>
Crescent Operating-corporate.................              13
Equipment Sales and Leasing segment..........             432
Hospitality segment..........................             750
Land Development segment.....................             644
                                                        -----

                                                        1,839
                                                        =====
</TABLE>

The Company has excluded employees of CBHS, Woodlands Operating, Landevco and
AmeriCold Logistics, as these subsidiaries represent equity investments for
financial reporting purposes.

ITEM 2. PROPERTIES

At December 31, 1999, the Company, through its subsidiary, Crescent Machinery,
owned fee simple interests in three properties. The properties are located in
Dallas, Austin and Houston, Texas. The Company, directly or indirectly, also
held leasehold interests in certain facilities, including the Hospitality
Properties (collectively, the "Leased Properties"). Additionally, CHBS leases
its hospital facilities. Management believes that each of the


                                       21
<PAGE>   22

owned and the Leased Properties is adequately maintained and suitable for use in
its respective capacity. The Company or certain of its subsidiaries has entered
into lease agreements in respect of the Leased Properties, pursuant to which
each respective lessee is responsible for routine maintenance of the subject
property.

ITEM 3. 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 does own a majority (90%) economic interest in
CBHS. Crescent Operating's claims against the estate of CBHS include (i) its
interests as a direct and indirect equity holder of CBHS and (ii) and its claim
for indemnification or contribution against 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.
To date Crescent Operating has not filed a proof of claim against CBHS with
regard to any of these claims but would expect to file proofs of claim prior to
the bar date.

Another claimant in the CBHS bankruptcy is expected to be Crescent Partnership
(either individually, or together with its parent, Crescent Equities), which is
the owner of certain facilities leased to and operated by CBHS and its
subsidiaries and is also the secured lender of $10 million to CBHS. CBHS has an
arrearage on its lease payments owed to Crescent Partnership accrued prior to
the commencement of bankruptcy. While the claims of Crescent Partnership against
CBHS are not necessarily adverse to the interests of Crescent Operating, the
interests of Crescent Partnership are separate, distinguishable and at least
nominally in conflict with the competing interests and claims of all other
interested parties in the bankruptcy, including Crescent Operating. To the
Company's knowledge, none of the directors, officers or security holders of
Crescent Operating has, in his or its individual capacity, an interest adverse
to Crescent Operating in connection with the CBHS bankruptcy; however, in their
capacities as directors, officers and/or security holders of Crescent
Partnership or Crescent Equities, certain persons may be deemed to hold
interests adverse to the Company's interest in connection with the CBHS
bankruptcy.

To date, four 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. All of those lawsuits also name Crescent Operating as a
defendant. Under the automatic stay provisions of federal bankruptcy law,
lawsuits against CBHS or its subsidiaries would be stayed unless otherwise
directed by the bankruptcy court, but the lawsuits against other defendants,
including Crescent Operating, would not be stayed automatically. It is
anticipated that those suits may be stayed because CBHS and its subsidiaries are
indispensable parties. The Company anticipates that other similar lawsuits may
be filed due to the closing of other facilities. With respect to the pending
suits and possible future claims against Crescent Operating based on the closure
by CBHS of facilities in 1999 and 2000, the Company believes that such actions
are without basis under the WARN Act and should be dismissed; however, no
assurance can be given that Crescent Operating will prevail.

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

No matter was submitted to a vote of security holders during the fourth quarter
of the Registrant's fiscal year ended December 31, 1999.


                                       22
<PAGE>   23

                                     PART II

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

Effective June 12, 1997, shares of the Company's common stock were distributed
to shareholders of Crescent Equities and unit holders of Crescent Partnership of
record on May 30, 1997. For Crescent Equities shareholders, the distribution was
made on the basis of one share of Crescent Operating common stock for every 10
common shares of beneficial interest of Crescent Equities held on the record
date, and for limited partners of Crescent Partnership, the distribution was
made on the basis of one share of Crescent Operating common stock for every 5
units of limited partnership interest held on the record date. The Company's
common stock, $0.01 par value per share, began trading on the OTC Bulletin Board
on June 13, 1997. Effective September 8, 1997, the Company's common stock was
listed on the NASDAQ National Market under the symbol "COPI".

The following table reflects the high and low bid prices of the common stock for
each calendar quarter indicated.

<TABLE>
<CAPTION>
                   1999                           HIGH             LOW
                   ----                         --------         -------
<S>                                             <C>              <C>
March 31................................        $  5.25          $  3.06
June 30.................................        $  7.63          $  3.25
September 30............................        $  7.13          $  4.00
December 31.............................        $  4.63          $  2.25
</TABLE>


<TABLE>
<CAPTION>
                   1998                           HIGH             LOW
                   ----                         --------         -------
<S>                                             <C>              <C>
March 31................................        $  25.00         $ 18.19
June 30.................................        $  24.50         $ 16.50
September 30............................        $  17.13         $  3.50
December 31.............................        $   6.88         $  2.78
</TABLE>


On October 25, 1999, the Company received notice from Nasdaq that, for the 30
consecutive trading days preceding such date, the Company's common stock failed
to maintain a closing bid price of greater than or equal to $5.00 per share,
the minimum closing bid price required for continued listing under NMS
maintenance standard applicable to the Company. On March 3, 2000, the Company
had a hearing before a Nasdaq panel to determine whether the Company will be
permitted to maintain its NMS listing. Pending the outcome of the hearing, the
Company's common stock will continue to be listed for trading on NMS. In the
event of an unfavorable outcome of the hearing, the Company believes it would
be able to apply for listing on the Nasdaq SmallCap Market. While the Company
believes it satisfies the requirements for listing on the Nasdaq SmallCap
Market, there can be no assurances that Nasdaq will approve listing of the
Company's shares on such market.

As of March 28, 2000, there were approximately 252 holders of record of the
common stock of Crescent Operating.


                                       23
<PAGE>   24

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain summary historical financial information
for the Company and for the Predecessor. For purposes of this table, the
Predecessor consists of Moody-Day and Hicks-Muse. The following information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and the Financial
Statements and Supplementary Data included in Item 8.

<TABLE>
<CAPTION>
                                                                            (Dollars In Thousands)
                                         ------------------------------------------------------------------------------------------
                                                     Crescent Operating, Inc.                  Carter-Crowley Asset Group
                                                                                                      (Predecessor)
                                         ----------------------------------------------  ------------------------------------------
                                                                                         For the Period
                                                                       For the Period        From            For the Year Ended
                                                                            From          January 1,              December 31,
                                                                         May 9, 1997         1997       ---------------------------
                                              1999            1998    December 31, 1997  to May 8, 1997    1996            1995
                                         ------------    ------------ -----------------  ------------   ------------   ------------
<S>                                      <C>             <C>             <C>             <C>            <C>            <C>
Operating Data:
   Revenues ...........................  $    717,987    $    493,248    $    156,882    $      4,657   $     10,394   $      9,147
   Income (loss) from Operations ......        13,867           9,886            (993)            158            109             89
   Net income (loss) ..................        (2,695)          1,141         (22,165)             25           (111)            79
   Income (loss) per share-basic
      and diluted .....................          (.26)            .10           (2.00)           --             --             --

Balance Sheet Data:
   Total assets .......................  $    795,653    $    937,333    $    602,083    $     17,483   $     13,230
   Total debt .........................       421,874         371,139         258,129           5,405          3,121
   Total shareholders' equity (deficit)       (20,522)        (16,068)         (8,060)         10,925          9,358
</TABLE>


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

OVERVIEW

The following discussion should be read in conjunction with the "Selected
Financial Data" and the financial statements and notes thereto, appearing
elsewhere in this report. Historical results and percentage relationships set
forth in "Selected Financial Data" should not be taken as indicative of future
operations of the Company.

The following table sets forth financial data for the Company and the
Predecessor. The year ended December 31, 1997 includes operations of the
Predecessor from January 1, 1997 through May 8, 1997, and the operations of the
Company from May 9, 1997 through December 31, 1997. The years ended December 31,
1998 and 1999 include only the operations of the Company.

<TABLE>
<CAPTION>
                                                   For the         For the         For the
                                                 Year Ended      Year Ended      Year Ended
(In thousands)                                  December 31,    December 31,    December 31,
                                                    1999             1998           1997
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
REVENUES
  Equipment sales & leasing                     $    136,343    $     85,365    $     15,175
  Hospitality                                        246,763         229,491          79,468
  Land development                                   334,881         178,392          66,896
                                                ------------    ------------    ------------

     Total revenues                                  717,987         493,248         161,539
                                                ------------    ------------    ------------

OPERATING EXPENSES
  Equipment sales & leasing                          131,606          79,011          14,282
  Hospitality                                        191,465         170,556          62,542
  Hospitality properties rent                         54,012          52,276          16,694
  Land development                                   324,432         178,372          67,095
  Corporate general and administrative                 2,605           3,147           1,761
                                                ------------    ------------    ------------

     Total operating expenses                        704,120         483,362         162,374
                                                ------------    ------------    ------------
</TABLE>



                                       24
<PAGE>   25

<TABLE>
<S>                                             <C>             <C>             <C>
INCOME (LOSS) FROM OPERATIONS                         13,867           9,886            (835)
                                                ------------    ------------    ------------

INVESTMENT INCOME (LOSS)                              20,939          27,684         (16,423)
                                                ------------    ------------    ------------

OTHER (INCOME) EXPENSE
  Interest expense                                    30,775          18,262           5,616
  Interest income                                     (4,046)         (3,876)         (1,764)
  Other                                                  131             182            (162)
                                                ------------    ------------    ------------

     Total other (income) expense                     26,860          14,568           3,690
                                                ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES
    AND MINORITY INTERESTS                             7,946          23,002         (20,948)

INCOME TAX PROVISION (BENEFIT)                        (3,471)          5,521             626
                                                ------------    ------------    ------------

INCOME (LOSS) BEFORE MINORITY INTERESTS               11,417          17,481         (21,574)

MINORITY INTERESTS                                   (14,112)        (16,340)           (566)
                                                ------------    ------------    ------------

NET INCOME (LOSS)                               $     (2,695)   $      1,141    $    (22,140)
                                                ============    ============    ============
</TABLE>

YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

REVENUES

Total revenue increased $224.8 million, or 45.6%, to $718.0 million for the year
ended December 31, 1999, compared with $493.2 million for the year ended
December 31, 1998. The increase in total revenue is attributable to the
following:

Equipment Sales and Leasing Segment

Equipment sales and leasing revenue increased $51.0 million, or 59.7% to $136.4
million, for the year ended December 31, 1999, compared with $85.4 million for
the year ended December 31, 1998. Significant components of the overall increase
were:

o    the Company's acquisitions since January 1, 1998 and the opening of a new
     location on August 1, 1999, resulting in incremental revenue of $46.1
     million during the year ended December 31, 1999; and

o    same store revenue increased $4.9 million for the year ended December 31,
     1999, as compared to the prior year primarily due to increased rental
     revenue.


Hospitality Segment

Hospitality revenue increased $17.3 million, or 7.5%, to $246.8 million for the
year ended December 31, 1999, compared with $229.5 million for the year ended
December 31, 1998. Significant components of the overall increase were:

o    revenue derived from the operations of the Sonoma Mission Inn Golf and
     Country Club, which was not leased by the Company until October 1998, and
     the Renaissance Hotel, which was not leased by the Company until June 1999;
     offset by the elimination of the Austin Omni Hotel rental income, resulting
     from the termination of the lease effective December 31, 1998;





                                       25
<PAGE>   26

o    revenue derived from the newly constructed Allegria Spa at the Hyatt
     Regency Beaver Creek, which conducted operations for the full year ended
     December 31, 1999, as compared to only four months during the year ended
     December 31, 1998; and

o    increased rates at certain of the Hospitality Properties resulted in higher
     revenues during 1999 as compared to the corresponding period in 1998;
     partially offset by

o    decreased revenues at Sonoma Mission Inn and Spa due to lower occupancy and
     average daily rate caused by construction at the property which
     necessitated taking 20 rooms out of inventory during 1999.

Land Development Segment

Land Development revenue, which represents revenue from Desert Mountain
Development and COPI Colorado prior to the elimination of the Minority
Interests, increased $156.5 million, or 87.7%, to $334.9 million for the year
ended December 31, 1999, compared with $178.4 million for the year ended
December 31, 1998. Significant components of the overall increase were:

o    revenues of COPI Colorado, which the Company did not include during the
     first nine months of 1998, and which resulted in incremental revenues of
     $136.1 million for the year ended December 31, 1999; and

o    a $20.4 million increase in revenue from Desert Mountain Development during
     the year ended December 31, 1999. The increase for the year can be
     attributed to overall higher sales prices for lots as compared to the prior
     year.

OPERATING EXPENSES

Total operating expenses increased $220.7 million, or 45.7%, to $704.1 million
for the year ended December 31, 1999, compared with $483.4 million for the year
ended December 31, 1998. The increase in operating expenses is attributable to
the following:

Equipment Sales and Leasing Segment

Equipment sales and leasing expenses increased $52.6 million, or 66.6%, to
$131.6 million for the year ended December 31, 1999, compared with $79.0 million
for the year ended December 31, 1998. Significant components of the overall
increase were:

o    the Company's acquisitions since January 1, 1998 and the opening of a new
     location on August 1, 1999, resulting in incremental operating expenses of
     $45.8 million during year ended December 31, 1999; and

o    increased costs of $6.8 million incurred during the year ended December 31,
     1999, due mainly to an increase in rental inventory that is not
     attributable to acquisitions resulting in increased depreciation expense.
     Additionally, operating expenses were incurred during 1999 related to the
     implementation of a new computer system, integration of acquisitions as
     well as various costs incurred on acquisitions which did not come to
     fruition. Management anticipates that certain of these integration costs
     should not recur during 2000.

Hospitality Segment

Hospitality expenses increased $22.7 million, or 10.2%, to $245.5 million for
the year ended December 31, 1999, compared with $222.8 million for the year
ended December 31, 1998. Significant components of the overall increase were:

o    rent and expenses associated with the Sonoma Mission Inn Golf and Country
     Club which was not leased by the Company until October 1998, and the
     Renaissance Hotel, which was not leased by the Company until June 1999;

o    additional rent for the year ended December 31, 1999, resulting from
     increased revenue generated by the Hospitality Properties, partially offset
     by a decrease in rent for the year ended December 31, 1999, due to the
     termination of the lease of the Austin Omni Hotel effective December 31,
     1998;



                                       26
<PAGE>   27

o    rent and expenses associated with the newly constructed Allegria Spa at the
     Hyatt Regency Beaver Creek, which was leased for only four months for the
     period ended December 31, 1998; and

o    additional rent associated with capital projects at the Hospitality
     Properties that were incurred during the year ended December 31, 1999.


Land Development Segment

Land development expenses, which primarily represent operating costs incurred by
Desert Mountain Development and COPI Colorado prior to the elimination of the
Minority Interests, increased $146.0 million, or 81.8%, to $324.4 million for
the year ended December 31, 1999, compared with $178.4 million for the year
ended December 31, 1998. Significant components of the overall increase were:

o    operating expenses of COPI Colorado, which the Company did not include
     during the first nine months of 1998, and which resulted in incremental
     expenses of $123.5 million during the year ended December 31, 1999; and

o    a $22.3 million increase in expenses incurred by Desert Mountain
     Development during the year ended December 31, 1999. The increase is
     primarily attributable to overall higher development costs associated with
     selling higher value lots as compared to the prior year.

Corporate General and Administrative Expenses

Corporate general and administrative expenses, totaling $2.6 million for the
year ended December 31, 1999, were comparable with such costs for the year
ended December 31, 1998. These expenses consisted of general corporate overhead
costs, such as legal and accounting costs, insurance costs and corporate
salaries.

INVESTMENT INCOME

Investment income decreased $6.8 million or 24.5%, to $20.9 million for the year
ended December 31, 1999, compared with $27.7 million for the year ended December
31, 1998. Significant components of the overall decrease were:

o    equity in loss of AmeriCold Logistics in the amount of $3.7 million due to
     the acquisition of AmeriCold Logistics in March 1999;

o    a decrease in income of the Temperature Controlled Logistics Partnerships
     in the amount of $3.6 million due to the fact that the Company no longer
     consolidates the Temperature Controlled Logistics Partnerships as a result
     of the restructuring of the Temperature Controlled Logistics segment;

o    a decrease in investment income from Hicks-Muse in the amount of $3.2
     million as a result of the Company's sale of its investment in Hicks-Muse
     in March 1999;

o    a decrease in equity in income of CDMC projects in the amount of $2.1
     million; and

o    equity in loss of CR Las Vegas, LLC in the amount of $1.1 million due to
     the pre-opening expenses related to the opening of the Venetian Spa in Las
     Vegas in June 1999; partially offset by

o    no losses associated with CBHS for 1999 because the investment in CBHS was
     written off during 1998, as compared to $5.4 million of losses recognized
     in the prior year; and

o    the gain on sale of 80% of the Company's interest in the Temperature
     Controlled Logistics Partnerships in the amount of $1.5 million.



                                       27
<PAGE>   28

OTHER (INCOME) EXPENSE

Other (income) expense increased $12.3 million, or 84.2%, to $26.9 million for
the year ended December 31, 1999, compared with $14.6 million for the year ended
December 31, 1998. The increase is primarily attributable to an increase in
interest expense in the amount of $12.5 million for the year ended December 31,
1999, resulting from:

o    an increase in outstanding indebtedness in connection with acquisitions;

o    the inclusion of interest expense of COPI Colorado (in the amount of $6.7
     million, for the first nine months of 1999) in the Company's operating
     results (operations of CDMC for the first nine months of 1998 were not
     included during the prior year); partially offset by

o    a decrease in interest expense of approximately $1.1 million at Desert
     Mountain Development due to decreased indebtedness.

MINORITY INTERESTS

Minority interests decreased $2.2 million, or 13.5%, to $14.1 million for the
year ended December 31, 1999, compared to $16.3 million for the year ended
December 31, 1998. Minority Interests consist of the non-voting interests in the
Land Development segment and in CRL Investments.

INCOME TAX PROVISION (BENEFIT)

Income tax benefit of $3.5 million for the year ended December 31, 1999
represents a change of $9.0 million from the year ended December 31, 1998.
Income tax benefit consisted of a $8.7 million benefit at the corporate level, a
$1.1 million benefit for the Equipment Sales and Leasing segment, a $0.9 million
benefit for the Temperature Controlled Logistics segment, and a $0.1 million
benefit for the Hospitality segment, offset by a $7.3 million provision for the
Land Development segment.

The Company generally provides for taxes using a 40% effective rate on the
Company's share of income or loss. Additionally, for the year ended December 31,
1999, the Company released $4.2 million of its net deferred tax asset valuation
allowance, based on 1999 transactions and expected future taxable income.
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.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

REVENUES

Total revenue increased $331.7 million, or 205.4% to $493.2 million, for the
year ended December 31, 1998, compared with $161.5 million for the year ended
December 31, 1997. The increase in total revenue is attributable to the factors
discussed in the following paragraphs.

Equipment Sales and Leasing Segment

Equipment sales and leasing revenues represent revenues from Crescent Machinery.
Equipment Sales and Leasing revenues increased approximately $70.2 million, or
461.8%, to $85.4 million for the year ended December 31, 1998, compared to $15.2
million for the year ended December 31, 1997. Significant components of the
overall increase were:

o    approximately $65.4 million of the increase over the prior year relates to
     the Company's acquisitions of Preco, which was effective as of December 1,
     1997, Central Texas, which was effective as of April 30, 1998, Machinery,
     Inc., which was effective as of June 8, 1998, Western Traction, which was
     effective as of July 1,




                                       28
<PAGE>   29

     1998, Harvey, Inc., which was effective as of July 31, 1998 and 4-K, which
     was effective as of July 31, 1998; and

o    same store revenues increased $4.8 million for the year ended December 31,
     1998, as compared to the same period in the prior year, primarily as a
     result of increased rental revenue.

Hospitality Segment

Hospitality revenues represent revenues from Hospitality Properties leases.
Hospitality revenues increased approximately $150.0 million, or 188.7%, to
$229.5 million for the year ended December 31, 1998, compared to $79.5 million
for the year ended December 31, 1997. The increase over the prior period is
primarily due to the fact that the Company was not involved in the Hospitality
segment prior to July 31, 1997.

Land Development Segment

Land development revenues represent revenues from Desert Mountain Development
and COPI Colorado prior to the elimination of the 95% minority interest. Land
Development revenues of $178.4 million for the year ended December 31, 1998
represent a $111.5 million, or 166.7%, increase over the year ended December 31,
1997 revenues of $66.9 million. Significant components of the overall increase
were:

o    revenues of COPI Colorado, which the Company did not include prior to
     September 30, 1998, and which resulted in incremental revenues of $11.2
     million for the year ended December 31, 1998; and

o    revenues of Desert Mountain Development, of which the Company did not
     include prior to September 29, 1997, and which resulted in incremental
     revenues of $93.5 million for the year ended December 31, 1998.

OPERATING EXPENSES

Total operating expenses increased $321.0 million, or 197.7%, to $483.4 million
for the year ended December 31, 1998, compared with $162.4 million for the year
ended December 31, 1997. The increase in operating expenses is attributable to
the factors discussed in the following paragraphs.

Equipment Sales and Leasing Segment

Equipment sales and leasing expenses increased $64.7 million to $79.0 million
for the year ended December 31, 1998, compared to $14.3 million for the year
ended December 31, 1997. Significant components of the overall increase were:

o    approximately $62.2 million of the increase for the year ended December 31,
     1998 relates to the Company's acquisitions in 1998; and

o    the remaining increase relates to the additional costs incurred as a result
     of the increase in equipment sales and leasing revenue.

Hospitality Segment

Hospitality expenses represent costs incurred by the full-service hotels, as
well as by the destination, health and fitness resorts and Hospitality
Properties rent paid to Crescent Equities. Hospitality expenses increased $143.6
million, or 181.3%, to $222.8 million for the year ended December 31, 1998,
compared to $79.2 million for the year ended December 31, 1997. The increase of
Hospitality expenses over the prior period amount is due to the fact that
Crescent Operating was not involved in the Hospitality segment until July 31,
1997.






                                       29
<PAGE>   30

Land Development Segment

Land development expenses represent operating costs incurred by Desert Mountain
Development and COPI Colorado prior to the elimination of the 95% minority
interest. Land Development expenses of $178.4 million for the year ended
December 31, 1998, represent a $111.3 million, or 165.9%, increase over the year
ended December 31, 1997 Land Development direct expenses of $67.1 million.
Significant components of the overall increase were:

o    operating expenses of COPI Colorado, which the Company did not include
     prior to September 30, 1998, and which resulted in incremental expenses of
     $11.8 million for the year ended December 31, 1998; and

o    operating expenses of Desert Mountain Development, which the Company did
     not include prior to September 29, 1997, and which resulted in incremental
     expenses of $97.3 million for the year ended December 31, 1998.

Corporate General and Administrative Expenses

Corporate general and administrative expenses of $3.1 million for the year ended
December 31, 1998, consists of general corporate overhead costs such as legal
and accounting costs, insurance costs and corporate salaries. The increase in
general and administrative expenses of $1.3 million over the year ended December
31, 1997 is due to additional costs incurred as a result of the substantial
growth of the Company since the prior year as well as 1998 being the first full
year of operations.

INVESTMENT INCOME (LOSS)

Investment income increased $44.1 million, or 268.9%, to $27.7 million for the
year ended December 31, 1998, compared to a loss of $16.4 million for the year
ended December 31, 1997. The overall increase in investment income over the
prior year is due to the Company owning the majority of its investments for less
than half of the year in 1997, as well as the fact that the CBHS investment was
written off in early 1998 resulting in no further losses being recognized in
connection with CBHS in 1998. Significant components of the overall increase
were:

o    an increase in investment income from Hicks-Muse in the amount of $2.5
     million;

o    an increase in equity in income of Landevco in the amount of $16.8 million;

o    an increase in equity in income of Woodlands Operating in the amount of
     $1.0 million;

o    equity in income of CDMC projects in the amount of $5.6 million;

o    equity in income of the Temperature Controlled Logistics Partnerships in
     the amount of $4.0 million; and

o    decreased equity in losses of CBHS in the amount of $14.2 million.

OTHER (INCOME) EXPENSE

Other (income) expense increased $10.9 million, or 294.6%, to $14.6 million for
year ended December 31, 1998, compared to $3.7 million for the year ended
December 31, 1997. Significant components of the overall increase were:

o    an increase in interest expense in the amount of $12.6 million due
     primarily to increased debt levels at Crescent Operating and Crescent
     Machinery as a result of acquisitions late in 1997 and in 1998, as well as
     the inclusion of a full year of interest for Desert Mountain Development in
     1998 as compared to only three months in 1997; partially offset by

o    an increase in interest income in the amount of $2.1 million due primarily
     to interest income from lot sale notes receivable at Desert Mountain
     Development and interest income on the notes receivable from Landevco
     neither of which was acquired until September 29, 1997.



                                       30
<PAGE>   31

MINORITY INTERESTS

Minority interests of approximately $16.3 million for the year ended December
31, 1998 consisted primarily of the 95% minority interest in the Temperature
Controlled Logistics and the Land Development segments. The increase of $15.8
million over the year ended December 31, 1997 amount of $0.6 million is due to
the acquisitions of the Temperature Controlled Logistics and Land Development
segments occurring in October 1997 and September 1997, respectively.

INCOME TAX (PROVISION) BENEFIT

Income tax provision of approximately $5.5 million for the year ended December
31, 1998 consisted of a $2.7 million tax provision for the Hospitality segment,
a $7.4 million tax provision for the Land Development segment and a $1.5 million
tax provision for the Equipment Sales and Leasing segment, offset by a $2.2
million benefit for the Healthcare segment and a $4.1 million benefit at the
corporate level. The Company generally provides for taxes using an assumed 40%
effective rate on the Company's share of income or loss. The effective rate
presented in the statement of operations is skewed primarily due to the minority
interests in the Company's operations.

LIQUIDITY AND CAPITAL RESOURCES

Recognizing that cash flow from its assets would not be likely to provide the
Company with adequate capital to meet its requirements during 2000, the Company
during the first quarter of 2000 extended certain payment obligations by
reaching agreements with Crescent Equities to defer until 2001 payments on
certain of Crescent Operating's obligations to Crescent Equities otherwise
scheduled to be made in 2000. With these agreements, the Company believes that
it will be able to meet its capital requirements during 2000 with the recurring
cash flow of its assets.

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 $39.0 million and $42.8 million at December 31,
1999 and December 31, 1998, respectively. The 8.9% decrease is attributable to
$9.4 million and $34.5 million of cash used in operating and investing
activities, respectively, offset by $40.1 million of cash provided by financing
activities.

OPERATING ACTIVITIES

Net cash flows used in operating activities for the year ended December 31, 1999
were $9.4 million compared with the net cash provided by operating activities
of $36.1 million and $45.6 million for the years ended December 31, 1998 and
1997, respectively. The Company's outflow of cash used in operating activities
of $9.4 million was primarily attributable to outflows from:

o    net loss of $2.7 million;

o    a decrease in deferred income taxes of $24.6 million;

o    equity in income from unconsolidated subsidiaries of $19.0 million;

o    an increase in real estate of $40.6 million; and

o    increases in accounts receivable of $13.1 million.

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

o    non-cash depreciation and amortization of $33.7 million;

o    increases in accounts payable and accrued expenses of $17.9 million; and

o    increases in deferred revenue of $36.5 million.




                                       31
<PAGE>   32

INVESTING ACTIVITIES

Net cash flows used in investing activities for the year ended December 31, 1999
were $34.5 million compared with the net cash used in investing activities of
$121.7 million and $66.7 million for the years ended December 31, 1998 and 1997,
respectively. The Company's outflow of cash used in investing activities of
$34.5 million was primarily attributable to outflows from:

o    acquisitions of business interests of $28.5 million;

o    acquisitions of business interests by Controlled Subsidiaries of $3.8
     million;

o    purchases of property and equipment of $79.5 million;

o    contributions to investments of Controlled Subsidiaries of $11.9 million.

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

o    proceeds from the sale of investments of $23.5 million;

o    proceeds from the sale of property and equipment of $30.5 million;

o    net proceeds from sale and collection of notes receivable of $8.3 million;
     and

o    distributions from investments of Controlled Subsidiaries of $24.0
     million.

FINANCING ACTIVITIES

Net cash flows provided by financing activities for the year ended December 31,
1999 were $40.1 million compared with the net cash provided by financing
activities of $85.1 million and $64.7 million for the years ended December 31,
1998 and 1997, respectively. The Company's inflow of cash provided by financing
activities of $40.1 million was primarily attributable to inflows from:

o    proceeds of all long-term debt of $343.4 million; and

o    capital contributions attributable to Minority Interests of $35.5 million.

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

o    payments of all long-term debt of $313.5 million; and

o    distributions to Minority Interests of $20.8 million.



                                       32
<PAGE>   33
FINANCING ATTRIBUTABLE TO CORPORATE AND WHOLLY OWNED SUBSIDIARIES

In August 1999, the Company renewed its $15.0 million unsecured bank line of
credit from Bank of America. The line of credit bears interest at the LIBOR rate
plus 1% per annum, payable monthly and all principal and unpaid interest on the
line of credit will be payable in August 2001. The $15.0 million available under
the line of credit from Bank of America was fully drawn as of December 31, 1999.

Effective March 12, 1999, the Company agreed to make a permanent reduction in
its $30.4 million 12% line of credit with Crescent Partnership commensurate with
the proceeds from the sale of 80% of the Company's 2% interest in the
Temperature Controlled Logistics Partnerships. On March 12, 1999, the Company
received $13.2 million of proceeds and correspondingly permanently reduced the
availability under the line of credit from $30.4 million to $17.2 million. The
line of credit bears interest at the rate of 12% per annum, compounded
quarterly, payable on an interest-only basis during its term, which expires on
the later of (i) May 21, 2002 or (ii) five years after the last draw under the
line of credit (in no event shall the maturity date be later than June 2007).
Draws may be made under the line of credit until June 22, 2002. The line of
credit is a recourse obligation and amounts outstanding thereunder are
collateralized, to the extent not prohibited by pre-existing arrangements, by a
first lien on the assets which the Company now owns or may acquire in the
future. The line of credit is cross-collateralized and cross-defaulted with the
Company's other borrowings from Crescent Partnership. As of December 31, 1999,
$17.2 million was outstanding under the line of credit.

Also effective March 12, 1999, the Company obtained from Crescent Partnership a
$19.5 million term note bearing interest at a rate of 9% per annum. The term
note is payable on an interest-only basis during its term, which expires in May
2002. The note is cross-collateralized and cross-defaulted with the Company's
other borrowings from Crescent Partnership. Upon inception of this line of
credit, the Company immediately borrowed the full $19.5 million with which it
contributed approximately $15.5 million in connection with the formation of
AmeriCold Logistics and used the remaining $4.0 million of proceeds to reduce
the amount outstanding under the 12% line of credit with Crescent Partnership.
As of December 31, 1999, $19.5 million was outstanding under the line of credit.

The Company funded its contribution to COPI Colorado using the proceeds from a
$9 million term loan from Crescent Partnership. The loan bears interest at 12%
per annum, with interest payable quarterly and the full original principal
amount of $9.0 million, together with any accrued but unpaid interest, payable
in May 2002. The Company's interest in COPI Colorado secures the loan, which is
cross-collateralized and cross-defaulted with the Company's other borrowings
from Crescent Partnership. As of December 31, 1999, $9.0 million was outstanding
under the line of credit.

As a part of the acquisition of a two-thirds interest in the HCAC, the Company
borrowed $0.8 million from Crescent Partnership at an interest rate of 8.5% per
annum. The $0.8 million note was collateralized by the two-thirds interest in
HCAC. Monthly principal and interest payments on the $0.8 million loan commenced
in November 1997. As of December 31, 1999, there was $0.5 million outstanding on
the $0.8 million note; the note was paid in full in January 2000 upon the sale
by HCAC of its assets.

Crescent Machinery has various equipment notes payable and floor plan notes
under credit facilities which are collateralized by the equipment financed. The
equipment notes are payable in monthly principal and interest payments and bear
interest at 6.0% to 10.9% per annum and mature between 2000 and 2007. The floor
plan notes do not bear interest, do not require monthly principal or interest
payments and generally have terms ranging from three to twelve months. As of
December 31, 1999, the outstanding balance on the equipment notes was $102.5
million and on the floor plan notes was $21.5 million.

In connection with the formation and capitalization of Crescent Operating in the
second quarter of 1997, Crescent Operating received approximately $14.1 million
in cash from Crescent Partnership and Crescent Partnership loaned Crescent
Operating approximately $35.9 million pursuant to a five-year term loan,
maturing on May 8, 2002, of which approximately $13.8 million was outstanding as
of December 31, 1999. The loan is a recourse loan that is collateralized, to the
extent not prohibited by pre-existing arrangements, by a first lien on the
assets which the Company now owns or may acquire in the future. The loan bears
interest at the rate of 12% per annum, compounded quarterly, with required
quarterly principal and interest payments limited by quarterly cash flow of the
Company as defined in the applicable credit agreement.



                                       33
<PAGE>   34

FINANCING ATTRIBUTABLE TO NON WHOLLY OWNED SUBSIDIARIES

Desert Mountain Properties also has a credit agreement with Crescent Partnership
pursuant to which Crescent Partnership has advanced funds to Desert Mountain
Properties through a "Junior Note" and a "Senior Note". The Junior Note
evidences a $60.0 million advance from Crescent Partnership to Desert Mountain
Properties and accrues interest at 14% per annum. The Senior Note evidences a
$110.0 million advance from Crescent Partnership to Desert Mountain Properties
and accrues interest at 10% per annum. The principal and interest on both the
Junior Note and the Senior Note are payable in quarterly installments, based on
proceeds from the operations of Desert Mountain Properties. As of December 31,
1999, the outstanding balances of the Junior Note and Senior Note were $60.0
million and $6.1 million, respectively.

Desert Mountain Properties entered into a $45 million credit facility with
National Bank of Arizona in May 1998. The facility is comprised of (i) a $35
million line of credit available for vertical financing related to new home
construction and bears an annual interest at the prime rate and (ii) a $10
million line of credit available for borrowings against certain notes receivable
issued by Desert Mountain Properties and bears an annual interest rate of prime
plus 1%. The credit facility expires June 2000 with interest payable monthly,
collateralized by land owned by Desert Mountain Properties, deeds of trust on
lots sold and home construction. As of December 31, 1999, the outstanding
balance on the line of credit with National Bank of Arizona was $13.8 million.

CDMC has three lines of credit with Crescent Partnership, one of which was
increased from $40.2 million to $48.2 million effective January 1, 1999 and then
from $48.2 million to $56.2 million in December 1999. The line of credit bears
interest at 11.5% per annum, compounded annually. Principal and interest
payments are due as distributions from projects are received, as defined by the
applicable agreement. The line of credit is due August 2004. As of December
1999, $49.4 million was outstanding on the $56.2 million line of credit. The
second line of credit of $22.9 million (which by mutual agreement of borrower
and lender was effectively converted into a term loan of $16.4 million) bears
interest at 12.0% per annum, compounded annually. Principal and interest
payments are due as distributions from projects are received, as defined by the
applicable agreement. The line of credit is due January 2003. As of December 31,
1999, $16.4 million was outstanding on the $22.9 million line of credit. The
third line of credit with Crescent Partnership for $40.0 million bears interest
at 11.5% per annum. Principal and interest payments are due as distributions are
received, as defined by the applicable credit agreement. The line of credit is
due December 2006. As of December 31, 1999, $14.5 million was outstanding on the
$40.0 million line of credit. The lines of credit are collateralized by CDMC's
interests in East West Resort Development partnerships, East West Resorts, LLC
and other CDMC property. CDMC also has a term loan with Crescent Partnership for
$3.1 million maturing June 2005. The note bears interest at 12%, with interest
payable quarterly and principal payable annually in accordance with an
increasing schedule. The note is collateralized by CDMC's interests in East West
Resorts, LLC, the East West Development partnerships and CDMC's other property.
As of December 31, 1999, $2.6 million was outstanding on the $3.1 million term
note. Generally, CDMC's loans with Crescent Partnership are cross-collateralized
and cross-defaulted.

The operating entities in which CDMC invests have various construction loans for
East West projects which are collateralized by deeds of trust, security
agreements and a first lien on the assets conveyed. The notes are payable in
monthly principal and interest payments and bear interest at 8.0% to 13.9% per
annum. The notes mature between 2000 and 2005. As of December 31, 1999, the
outstanding balance on these construction notes was $45.0 million in the
aggregate.

CRL has a line of credit with Crescent Partnership in the amount of $7.0 million
bearing interest at a rate of 12% per annum. The line of credit is due August
2003. The principal and interest are payable as CRL receives distributions
pursuant to the CR License Operating Agreement and the CR Las Vegas Operating
Agreement. As of December 31, 1999, $5.7 million was outstanding under the line
of credit.




                                       34
<PAGE>   35

YEAR 2000 ISSUES

The Company, along with an independent firm, assessed information technology
systems (such as accounting systems and network operating systems) and
non-information technology systems (such as microcontrollers). As the assessment
phase was completed at each of the locations, the Company implemented a
modification phase to address any issues discovered in the assessment phase. The
modification phase was followed by a testing phase to determine that the
appropriate corrective action had been taken. The testing phase was completed
successfully in advance of December 31, 1999.

Through the date of this Form 10-K, the Company has experienced no material
unresolved problems related to the Year 2000, including the changeover from
December 31, 1999 to January 1, 2000, and the leap day, February 29, 2000. In
addition, none of the Company's major suppliers has failed to meet its
obligations as a result of Year 2000. The Company's share of total costs
associated with its Year 2000 compliance efforts was less than $1.0 million.

The Company will continue to monitor its information technology systems and
non-information technology systems, through the middle of the Year 2000, to
ensure that any latent Year 2000 issues that may arise are promptly addressed.
The Company does not anticipate any additional material expenditures related to
Year 2000 compliance.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has fixed and variable rate notes payable and lines of credit which
are subject to market risk related to changes in interest rates. The Company
manages its market risk by attempting to match anticipated inflow of cash from
its operating, investing and financing activities with anticipated outflow of
cash to fund debt payments, investments and other cash requirements. The Company
does not use derivative financial instruments to manage interest rate risk.

As of December 31, 1999, the Company had amounts outstanding under variable rate
notes payable and lines of credit totaling $128.4 million, with a weighted
average interest rate of 9.0% per annum. A hypothetical 10% increase in the
weighted average interest rate on the Company's variable rate notes and lines of
credit would cause a $1.2 million increase in interest expense and a decrease in
the Company's earnings and cash flows of $0.9 million, based on the amount of
variable rate debt outstanding as of December 31, 1999. In the event that
interest rates increase significantly and the Company continues to have
significant amounts outstanding under variable rate notes and credit lines,
depending upon market conditions, the Company may be able to substitute fixed
rate notes for some of its variable rate notes and credit lines to minimize its
exposure to interest rate risk. There can be no assurance, however, that any
such substitution could be arranged on terms that are satisfactory to the
Company.

As of December 31, 1999, the Company had amounts outstanding under fixed rate
notes payable and lines of credit totaling $293.4 million, with a weighted
average interest rate of 10.5% per annum. In the event that interest rates
decrease significantly, and market interest rates are substantially lower than
the rates on the Company's fixed rate notes and credit lines, the Company would
be able to reduce interest expense if it were able to prepay and/or refinance
these instruments. There can be no assurance, however, that the Company would be
able to prepay or refinance its debt on terms that are satisfactory to the
Company in a declining interest rate environment.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information with respect to this Item is contained in the Company's Consolidated
Financial Statements as indicated in the Index on Page F-1 of this Annual Report
on Form 10-K, and is incorporated herein by reference.

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

None




                                       35
<PAGE>   36

                                    PART III

Certain information required by Part III is omitted from this report in that the
Company will file a definitive proxy statement with the Securities and Exchange
Commission (the "Commission") pursuant to Regulation 14A ("Proxy Statement") not
later than 120 days after the end of the fiscal year covered by this report, and
certain information to be included therein is incorporated herein by reference.
Only those sections of the Proxy Statement which specifically address the items
set forth herein are incorporated by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 2000.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 2000.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 2000.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 2000.





                                       36
<PAGE>   37

                                     PART IV

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

(a)  Documents filed as part of the Annual Report on Form 10-K:

     1.   Financial Statements

          Information with respect to this Item is contained on pages F-1 to
          F-82 of this Annual Report on Form 10-K.

     2.   Financial Statement Schedules

          Information with respect to this Item is listed on page F-1 of this
          Annual Report on Form 10-K.

     3.   Exhibits

          EXHIBIT
          NUMBER               DESCRIPTION OF EXHIBITS
          ------               -----------------------

            3.1         First Amended and Restated Certificate of Incorporation
                        (filed as Exhibit 3.3 to the Company's registration
                        statement on Form S-1 dated July 12, 1997 ("Form S-1")
                        and incorporated by reference herein)

            3.2         First Amended and Restated Bylaws (filed as Exhibit 3.4
                        to Form S-1 and incorporated by reference herein)

            3.3         Amendment of Article V of First Amended and Restated
                        Bylaws (filed as Exhibit 3.3 to the Company's June 30,
                        1998 Form 10-Q ("June 30, 1998 Form 10-Q") and
                        incorporated by reference herein)

            3.4         Repeal of Amendment of Article V of First Amended and
                        Restated Bylaws (filed as Exhibit 3.4 to the Company's
                        September 30, 1998 Form 10-Q ("September 30, 1998 Form
                        10-Q") and incorporated by reference herein)

            4.1         Specimen stock certificate (filed as Exhibit 4.1 to Form
                        S-1 and incorporated by reference herein)

            4.2         Preferred Share Purchase Rights Plan (filed as Exhibit
                        4.2 to Form S-1 and incorporated by reference herein)

            4.3         First Amendment to Preferred Share Purchase Rights
                        Agreement dated as of September 25, 1998, between
                        Crescent Operating, Inc. and Bank Boston, N.A., as
                        Rights Agent (filed as Exhibit 4.3 to September 30, 1998
                        Form 10-Q and incorporated by reference herein)

            4.4         Second Amendment to Preferred Share Purchase Rights
                        Agreement dated as of March 4, 1999, between Crescent
                        Operating, Inc. and Bank Boston, N.A., as Rights Agent
                        (filed as Exhibit 4.4 to March 31, 1999 Form 10-Q
                        ("March 31, 1999 Form 10-Q") and incorporated by
                        reference herein)

            10.1        Amended Stock Incentive Plan (filed as Exhibit 10.1 to
                        Form S-1 and incorporated by reference herein)




                                       37
<PAGE>   38

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

            10.3        Amended and Restated Operating Agreement of Charter
                        Behavioral Health Systems, LLC (filed as Exhibit 10.3 to
                        June 30, 1997 Form 10-Q and incorporated by reference
                        herein)

            10.5        Amended and Restated Credit and Security Agreement,
                        dated as of May 30, 1997, between Crescent Real Estate
                        Equities Limited Partnership and Crescent Operating,
                        Inc., together with related Note (filed as Exhibit 10.5
                        to the Company's September 30, 1997 Form 10-Q
                        ("September 30, 1997 Form 10-Q") and incorporated by
                        reference herein)

            10.6        Line of Credit and Security Agreement, dated as of May
                        21, 1997, between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc., together with
                        related Line of Credit Note (filed as Exhibit 10.6 to
                        September 30, 1997 Form 10-Q and incorporated by
                        reference herein)

            10.7        Acquisition Agreement, dated as of February 10, 1997,
                        between Crescent Real Estate Equities Limited
                        Partnership and Carter-Crowley Properties, Inc. (filed
                        as Exhibit 10.7 to Form S-1 and incorporated by
                        reference herein)

            10.10       Security Agreement dated September 22, 1997 between COI
                        Hotel Group, Inc., as debtor, and Crescent Real Estate
                        Equities Limited Partnership, as lender, together with
                        related $1 million promissory note (filed as Exhibit
                        10.10 to September 30, 1997 Form 10-Q and incorporated
                        by reference herein)

            10.11       Security Agreement dated September 22, 1997 between COI
                        Hotel Group, Inc., as debtor, and Crescent Real Estate
                        Equities Limited Partnership, as lender, together with
                        related $800,000 promissory note (filed as Exhibit 10.11
                        to September 30, 1997 Form 10-Q and incorporated by
                        reference herein)

            10.12       Amended and Restated Asset Management dated August 31,
                        1997, to be effective July 31, 1997, between Wine
                        Country Hotel, LLC and The Varma Group, Inc. (filed as
                        Exhibit 10.12 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)

            10.13       Amended and Restated Asset Management Agreement dated
                        August 31, 1997, to be effective July 31, 1997, between
                        RoseStar Southwest, LLC and The Varma Group, Inc. (filed
                        as Exhibit 10.13 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)

            10.14       Amended and Restated Asset Management Agreement dated
                        August 31, 1997, to be effective July 31, 1997, between
                        RoseStar Management LLC and The Varma Group, Inc. (filed
                        as Exhibit 10.14 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)

            10.15       Agreement for Financial Services dated July 1, 1997,
                        between Crescent Real Estate Equities Company and
                        Petroleum Financial, Inc. (filed as Exhibit 10.15 to
                        September 30, 1997 Form 10-Q and incorporated by
                        reference herein)

            10.16       Credit Agreement dated August 27, 1997, between Crescent
                        Operating, Inc. and NationsBank of Texas, N.A. together
                        with related $15.0 million promissory note (filed as
                        Exhibit 10.16 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)


                                       38
<PAGE>   39

            10.17       Support Agreement dated August 27, 1997, between Richard
                        E. Rainwater, John Goff and Gerald Haddock in favor of
                        Crescent Real Estate Equities Company and NationsBank of
                        Texas, N.A. (filed as Exhibit 10.17 to September 30,
                        1997 Form 10-Q and incorporated by reference herein)

            10.18       1997 Crescent Operating, Inc. Management Stock Incentive
                        Plan (filed as Exhibit 10.18 to the Company's Annual
                        Report on Form 10-K for the year ended December 31, 1997
                        ("December 31, 1997 Form 10-K") and incorporated by
                        reference herein)

            10.19       Memorandum of Agreement executed November 16, 1997,
                        among Charter Behavioral Health Systems, LLC, Charter
                        Behavioral Health Systems, Inc. and Crescent Operating,
                        Inc. (filed as Exhibit 10.19 to December 31, 1997 Form
                        10-K and incorporated by reference herein)

            10.20       Purchase Agreement dated August 31, 1997, by and among
                        Crescent Operating, Inc., RoseStar Management LLC,
                        Gerald W. Haddock, John C. Goff and Sanjay Varma (filed
                        as Exhibit 10.20 to December 31, 1997 Form 10-K and
                        incorporated by reference herein)

            10.21       Stock Purchase Agreement dated August 31, 1997, by and
                        among Crescent Operating, Inc., Gerald W. Haddock, John
                        C. Goff and Sanjay Varma (filed as Exhibit 10.21 to
                        December 31, 1997 Form 10-K and incorporated by
                        reference herein)

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

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

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

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

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

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





                                       39
<PAGE>   40

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

            10.29       Form of Indemnification Agreement (filed as Exhibit
                        10.29 to December 31, 1997 Form 10-K and incorporated by
                        reference herein)

            10.30       Purchase Agreement, dated as of September 29, 1997,
                        between Crescent Operating, Inc. and Crescent Real
                        Estate Equities Limited Partnership, relating to the
                        purchase of Desert Mountain Development Corporation
                        (filed as Exhibit 10.30 to December 31, 1997 Form 10-K
                        and incorporated by reference herein)

            10.31       Lease Agreement dated December 19, 1997, between
                        Crescent Real Estate Equities Limited Partnership, as
                        Lessor, and Wine Country Hotel, as Lessee, for lease of
                        Ventana Inn (filed as Exhibit 10.31 to the Company's
                        March 31, 1998 Form 10-Q ("March 31, 1998 Form 10-Q")
                        and incorporated by reference herein)

            10.32       Lease Agreement dated September 22, 1997, between
                        Crescent Real Estate Equities Limited Partnership, as
                        Lessor, and COI Hotel Group, Inc., as lessee, for lease
                        of Four Seasons Hotel, Houston (filed as Exhibit 10.32
                        to March 31, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.33       Asset Purchase Agreement dated December 19, 1997, among
                        Crescent Operating, Inc., Preco Machinery Sales, Inc.,
                        and certain individual Preco shareholders (filed as
                        Exhibit 10.33 to March 31, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.34       Asset Purchase Agreement dated April 30, 1998, among
                        Crescent Operating, Inc., Central Texas Equipment
                        Company, and certain individual Central Texas
                        shareholders (filed as Exhibit 10.34 to March 31, 1998
                        Form 10-Q and incorporated by reference herein)

            10.35       Credit Agreement dated August 29, 1997 between Crescent
                        Real Estate Equities Limited Partnership, as lender, and
                        Desert Mountain Properties Limited Partnership, as
                        borrower, together with related Senior Note, Junior Note
                        and deed of trust (filed as Exhibit 10.35 to March 31,
                        1998 Form 10-Q and incorporated by reference herein)

            10.36       Buy-Out Agreement dated April 24, 1998, between Crescent
                        Operating, Inc. and Crescent Real Estate Equities
                        Limited Partnership (filed as Exhibit 10.36 to March 31,
                        1998 Form 10-Q and incorporated by reference herein)

            10.37       Stock Acquisition Agreement and Plan of Merger dated
                        June 4, 1998, among Machinery, Inc., Oklahoma Machinery,
                        Inc., Crescent Machinery Company, Crescent Operating,
                        Inc. and certain individual Machinery shareholders
                        (filed as Exhibit 10.37 to June 30, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.38       Master Revolving Line of Credit Loan Agreement
                        (Borrowing Base and Warehouse) dated May 14, 1998,
                        between Desert Mountain Properties Limited Partnership
                        and National Bank of Arizona (filed as Exhibit 10.38 to
                        June 30, 1998 Form 10-Q and incorporated by reference
                        herein)

            10.39       1997 Management Stock Incentive Plan (filed as Exhibit
                        10.39 to June 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.40       Credit and Security Agreement, dated as of September 21,
                        1998, between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc., together with
                        related Note (filed as Exhibit 10.40 to September 30,
                        1998 Form 10-Q and incorporated by reference herein)



                                       40
<PAGE>   41

            10.41       First Amendment to Amended and Restated Pledge
                        Agreement, dated as of September 21, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed as Exhibit 10.41 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.42       First Amendment to Line of Credit and Security
                        Agreement, dated as of August 11, 1998, between Crescent
                        Real Estate Equities Limited Partnership and Crescent
                        Operating, Inc., together with related Note (filed as
                        Exhibit 10.42 to September 30, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.43       First Amendment to Amended and Restated Credit and
                        Security Agreement, dated as of August 11, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed as Exhibit 10.43 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.44       Second Amendment to Amended and Restated Credit and
                        Security Agreement, dated as of September 21, 1998,
                        between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc. (filed as
                        Exhibit 10.44 to September 30, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.45       Second Amendment to Line of Credit and Security
                        Agreement, dated as of September 21, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed as Exhibit 10.45 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.46       Agreement of Limited Partnership of COPI Colorado, L.P.
                        (filed as Exhibit 10.1 to that Schedule 13D Statement
                        dated September 28, 1998, filed by COPI Colorado, L.P.,
                        Crescent Operating, Inc., Gerald W. Haddock, John C.
                        Goff and Harry H. Frampton, III, and incorporated by
                        reference herein)

            10.47       Contribution Agreement effective as of September 11,
                        1998, by and among Crescent Operating, Inc., Gerald W.
                        Haddock, John C. Goff and Harry H. Frampton, III (filed
                        as Exhibit 10.2 to that Schedule 13D Statement dated
                        September 28, 1998, filed by COPI Colorado, L.P.,
                        Crescent Operating, Inc., Gerald W. Haddock, John C.
                        Goff and Harry H. Frampton, III, and incorporated by
                        reference herein)

            10.48       Agreement Regarding Schedules and Other Matters made as
                        of September 11, 1998, by and among Crescent Operating,
                        Inc., Gerald W. Haddock, John C. Goff and Harry H.
                        Frampton, III (filed as Exhibit 10.3 to that Schedule
                        13D Statement dated September 28, 1998, filed by COPI
                        Colorado, L.P., Crescent Operating Inc., Gerald W.
                        Haddock, John C. Goff and Harry H. Frampton, III, and
                        incorporated by reference herein)

            10.49       Stock Purchase Agreement dated as of August 7, 1998 by
                        and among Western Traction Company, The Carlston Family
                        Trust, Ronald D. Carlston and Crescent Operating, Inc.
                        (filed as Exhibit 10.49 to September 30, 1998 Form 10-Q
                        and incorporated by reference herein)

            10.50       Stock Purchase Agreement dated as of July 31, 1998 by
                        and among Harvey Equipment Center, Inc., L and H Leasing
                        Company, William J. Harvey, Roy E. Harvey, Jr., Betty J.
                        Harvey and Crescent Operating, Inc. (filed as Exhibit
                        10.50 to September 30, 1998 Form 10-Q and incorporated
                        by reference herein)

            10.51       Credit Agreement dated as of July 28, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        CRL Investments, Inc., together with the related Note
                        (filed as Exhibit 10.51 to September 30, 1998 Form 10-Q
                        and incorporated by reference herein)

            10.52       Security Agreement dated as of July 28, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        CRL Investments, Inc. (filed as Exhibit 10.52 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)




                                       41
<PAGE>   42

            10.53       First Amendment to Credit Agreement effective as of
                        August 27, 1998, among Crescent Operating, Inc.,
                        NationsBank, N. A., and the Support Parties identified
                        therein (filed as Exhibit 10.53 to September 30, 1998
                        Form 10-Q and incorporated by reference herein)

            10.54       Lease Agreement dated as of October 13, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Wine Country Golf Club, Inc., relating to Sonoma Golf
                        Club (filed as Exhibit 10.54 to September 30, 1998 Form
                        10-Q and incorporated by reference herein)

            10.55       First Amendment to Lease Agreement effective December
                        31, 1998, between Canyon Ranch Leasing, L.L.C., and
                        Crescent Real Estate Equities Limited Partnership,
                        relating to Canyon Ranch - Tucson (filed as Exhibit
                        10.55 to the Company's Annual Report on Form 10-K for
                        the year ended December 31, 1998 ("December 31, 1998
                        Form 10-K") and incorporated by reference herein)

            10.56       First Amendment to Lease Agreement effective April 1,
                        1996; Second Amendment to Lease Agreement effective
                        November 22, 1996; Third Amendment to Lease Agreement
                        effective August 12, 1998; and Fourth Amendment to Lease
                        Agreement effective December 31, 1998 between RoseStar
                        Southwest, LLC, and Crescent Real Estate Funding II
                        L.P., relating to Hyatt Regency Albuquerque (filed as
                        Exhibit 10.56 to December 31, 1998 Form 10-K and
                        incorporated by reference herein)

            10.57       First Amendment to Lease Agreement effective December
                        31, 1998, between Wine Country Hotel, LLC, and Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Sonoma Mission Inn & Spa (filed as Exhibit 10.57 to
                        December 31, 1998 Form 10-K and incorporated by
                        reference herein)

            10.58       First Amendment to Amended and Restated Lease Agreement
                        effective December 31, 1998, between RoseStar
                        Management, LLC, and Crescent Real Estate Equities
                        Limited Partnership, relating to Marriott City Center,
                        Denver (filed as Exhibit 10.58 to December 31, 1998 Form
                        10-K and incorporated by reference herein)

            10.59       First Amendment to Lease Agreement effective December
                        31, 1998, between Wine Country Hotel, LLC, and Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Ventana Inn (filed as Exhibit 10.59 to December 31, 1998
                        Form 10-K and incorporated by reference herein)

            10.60       First Amendment to Amended and Restated Lease Agreement
                        effective April 1, 1996 and Second Amendment to Amended
                        and Restated Lease Agreement effective December 31,
                        1998, between RoseStar Southwest, LLC, and Crescent Real
                        Estate Funding II, L.P., relating to Hyatt Regency
                        Beaver Creek (filed as Exhibit 10.60 to December 31,
                        1998 Form 10-K and incorporated by reference herein)

            10.61       First Amendment to Lease Agreement effective December
                        31, 1998, between COI Hotel Group, Inc. and Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Four Seasons - Houston (filed as Exhibit 10.61 to
                        December 31, 1998 Form 10-K and incorporated by
                        reference herein)

            10.62       First Amendment to Lease Agreement effective December
                        31, 1998, between Wine Country Hotel, LLC and Crescent
                        Real Estate Funding VI, L.P., relating to Canyon Ranch -
                        Lenox (filed as Exhibit 10.62 to March 31, 1999 Form
                        10-Q and incorporated by reference herein)

            10.63       Master Guaranty effective December 31, 1998, by Crescent
                        Operating, Inc. for the benefit of Crescent Real Estate
                        Equities Limited Partnership, Crescent Real Estate
                        Funding II, L.P., and Crescent Real Estate Funding VI,
                        L.P., relating to leases for Hyatt Regency Albuquerque,
                        Hyatt Regency Beaver Creek, Canyon Ranch-Lenox, Sonoma
                        Mission Inn & Spa, Canyon Ranch - Tucson, and Marriott
                        City Center Denver (filed as Exhibit 10.63 to December
                        31, 1998 Form 10-K and incorporated by reference herein)




                                       42
<PAGE>   43

            10.64       Guaranty of Lease effective December 19, 1997, by
                        Crescent Operating, Inc. for the benefit of Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Ventana Inn (filed as Exhibit 10.64 to December 31, 1998
                        Form 10-K and incorporated by reference herein)

            10.65       Amended and Restated Guaranty of Lease effective
                        December 31, 1998, by Crescent Operating, Inc. for the
                        benefit of Crescent Real Estate Equities Limited
                        Partnership, relating to Four Seasons Hotel - Houston
                        (filed as Exhibit 10.65 to December 31, 1998 Form 10-K
                        and incorporated by reference herein)

            10.66       Amended and Restated Guaranty of Lease effective
                        December 31, 1998, by Crescent Operating, Inc. for the
                        benefit of Crescent Real Estate Equities Limited
                        Partnership, relating to Sonoma Golf Club (filed as
                        Exhibit 10.66 to December 31, 1998 Form 10-K and
                        incorporated by reference herein)

            10.67       Credit Agreement dated August 11, 1995, between Crescent
                        Development Management Corp., as borrower, and Crescent
                        Real Estate Equities Limited Partnership, as lender;
                        First Amendment to Credit Agreement dated as of April
                        15, 1997; Second Amendment to Credit Agreement dated as
                        of May 8, 1998; and related Note and Security Agreement
                        (filed as Exhibit 10.67 to December 31, 1998 Form 10-K
                        and incorporated by reference herein)

            10.68       Credit Agreement dated January 1, 1998, between Crescent
                        Development Management Corp., as borrower, and Crescent
                        Real Estate Equities Limited Partnership, as lender, and
                        related Note and Security Agreement (filed as Exhibit
                        10.68 to December 31, 1998 Form 10-K and incorporated by
                        reference herein)

            10.69       $3,100,000 Note dated February 29, 1996, made by
                        Crescent Development Management Corp. payable to
                        Crescent Real Estate Equities Limited Partnership (filed
                        as Exhibit 10.69 to December 31, 1998 Form 10-K and
                        incorporated by reference herein)

            10.70       Credit Agreement dated January 1, 1999, between Crescent
                        Development Management Corp., as borrower, and Crescent
                        Real Estate Equities Limited Partnership, as lender, and
                        related Line of Credit Note and Security Agreement
                        (filed as Exhibit 10.70 to March 31, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.71       Amended and Restated Credit Agreement dated January 1,
                        1999, between Crescent Development Management Corp., as
                        borrower, and Crescent Real Estate Equities Limited
                        Partnership, as lender, and related Line of Credit Note
                        and Amended and Restated Security Agreement (filed as
                        Exhibit 10.71 to March 31, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.72       Purchase Agreement dated March 12, 1999, between
                        Crescent Operating, Inc. and Crescent Real Estate
                        Equities Limited Partnership, relating to sale of
                        interests in Crescent CS Holdings Corp., and Crescent CS
                        Holdings II Corp., and related Put Agreement of same
                        date (filed as Exhibit 10.72 to March 31, 1999 Form 10-Q
                        and incorporated by reference herein)

            10.73       Second Amendment to Lease Agreement effective April 1,
                        1999, between Wine Country Hotel, LLC, and Crescent Real
                        Estate Funding VI, L.P., relating to Canyon Ranch-Lenox
                        (filed as Exhibit 10.73 to March 31, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.74       Master Revolving Line of Credit Loan Agreement
                        (Borrowing Base and Warehouse) dated May 14, 1998,
                        between Desert Mountain Properties Limited Partnership,
                        as borrower, and National Bank of Arizona, as lender;
                        Modification Agreement dated December 30, 1998; second
                        Modification Agreement dated March 31, 1999; and related
                        Promissory Note (Borrowing Base), Promissory Note
                        (Warehouse), Pledge Agreement, Deed of Trust, and
                        Amendment to Deed of Trust (filed as Exhibit 10.74 to
                        March 31, 1999 Form 10-Q and incorporated by reference
                        herein)




                                       43
<PAGE>   44
            10.75       Lease Agreement dated as of June 15, 1999, between
                        Crescent Real Estate Funding III, L.P. and COI Hotel
                        Group, Inc., relating to the Renaissance Houston Hotel
                        (filed as Exhibit 10.75 to June 30, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.76       Guaranty of Lease dated June 15, 1999, by Crescent
                        Operating, Inc. for the benefit of Crescent Real Estate
                        Funding III, L.P., relating to Renaissance Houston Hotel
                        (filed as Exhibit 10.76 to June 30, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.77       Asset Management Agreement dated as of January 1, 1999,
                        between Crescent Real Estate Equities Limited
                        Partnership and COI Hotel Group, Inc., relating to the
                        Omni Austin Hotel (filed as Exhibit 10.77 to June 30,
                        1999 Form 10-Q and incorporated by reference herein)

            10.78       Agreement dated June 11, 1999, by and between Gerald W.
                        Haddock and Crescent Operating, Inc. and its
                        subsidiaries and affiliates (filed as Exhibit 10.78 to
                        June 30, 1999 Form 10-Q and incorporated by reference
                        herein)

            10.79       Stock Purchase Agreement dated as of July 15, 1999, by
                        and among E. L. Lester & Company, Incorporated, E. L.
                        Lester, Jr., Howard T. Tellepsen II, Karen Tellepsen,
                        Tom Tellepsen II, Linda Lester Griffen, Crescent
                        Operating, Inc. and Crescent Machinery Company (filed as
                        Exhibit 10.79 to the Company's September 30, 1999 Form
                        10-Q ("September 30, 1999 Form 10-Q") and incorporated
                        by reference herein)

            10.80       Stock Purchase Agreement dated as of July 8, 1999, by
                        and among Solveson Crane Rental, Inc., Solveson Family
                        Revocable Trust, and Crescent Machinery Company (filed
                        as Exhibit 10.80 to September 30, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.81       Second Amendment to Credit Agreement effective as of
                        August 27, 1999, among Crescent Operating, Inc., Bank of
                        America, N. A. (formerly NationsBank, N. A.), and the
                        Support Parties identified therein (filed as Exhibit
                        10.81 to September 30, 1999 Form 10-Q and incorporated
                        by reference herein)

            10.82       First Amendment to 1997 Crescent Operating, Inc.
                        Management Stock Incentive Plan (filed herewith)

            10.83       Form of Sales and Service Agreement between BLAW KNOX
                        Construction Equipment Corporation and certain of
                        Crescent Machinery Company and its subsidiaries (filed
                        herewith)

            10.84       Form of Heavy Equipment Distributor Agreement between
                        Compaction America, Inc. and certain of Crescent
                        Machinery Company and its subsidiaries (filed herewith)

            10.85       Form of Gradall Equipment Distributor Agreement between
                        The Gradall Company and certain of Crescent Machinery
                        Company and its subsidiaries (filed herewith)

            10.86       Form of Distributor Selling Agreement between
                        Ingersoll-Rand Company and certain of Crescent Machinery
                        Company and its subsidiaries (filed herewith)

            10.87       Form of JCB Dealership Agreement between JCB Inc. and
                        certain of Crescent Machinery Company and its
                        subsidiaries (filed herewith)

            10.88       Form of Distributor Agreement between LBX Company, LLC,
                        and certain of Crescent Machinery Company and its
                        subsidiaries (filed herewith)

            10.89       Form of Distributor Agreement between Liebherr
                        Construction Equipment Co. and certain of Crescent
                        Machinery Company and its subsidiaries (filed herewith)

            10.90       Form of Distributor Agreement between Link-Belt
                        Construction Equipment Company and certain of Crescent
                        Machinery Company and its subsidiaries (filed herewith)

            10.91       Form of Dealer Floor Plan Financing and Security
                        Agreement between General Electric Capital Corporation
                        and certain of Crescent Machinery Company and its
                        subsidiaries (filed herewith)

            10.92       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Crescent
                        Development Management Corp. (filed herewith)

            10.93       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Crescent CS
                        Holdings II Corp. (filed herewith)

            10.94       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Crescent CS
                        Holdings Corp. (filed herewith)

            10.95       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Desert
                        Mountain Development Corp. (filed herewith)

            10.96       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and The Woodlands
                        Land Company, Inc. (filed herewith)

            10.97       $19.5 Million Credit and Security Agreement effective as
                        of March 11, 1999, between Crescent Real Estate Equities
                        Limited Partnership and Crescent Operating, Inc. with
                        related Promissory Note (filed herewith)

            10.98       First Amendment to Credit and Security Agreement
                        effective as of March 11, 1999, between Crescent Real
                        Estate Equities Limited Partnership and Crescent
                        Operating, Inc. (filed herewith)

            10.99       Third Amendment to Amended and Restated Credit and
                        Security Agreement effective as of March 11, 1999,
                        between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc. (filed
                        herewith)

            10.100      Third Amendment to Line of Credit Credit and Security
                        Agreement effective as of March 11, 1999, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed herewith)

            10.101      Agreements for Wholesale Financing (with Addendum)
                        between Deutsche Financial Services Corporation and,
                        respectively, Western Traction Company, Machinery Inc.,
                        Solveson Crane Rentals Inc., Harvey Equipment Center
                        Inc., and Crescent Machinery Company, with Guarantees
                        (filed herewith)

            10.102      Master Security Agreements between Associates Commercial
                        Corporation and, respectively, Crescent Machinery
                        Company and Western Traction Company; Security Agreement
                        between Associates Commercial Corporation and Western
                        Traction Company; Addendum; and Continuing Guaranty by
                        Crescent Machinery Company (filed herewith)

            10.103      First Amendment to Amended and Restated Credit Agreement
                        dated as of December 20, 1999, between Crescent Real
                        Estate Equities Limited Partnership and Crescent
                        Development Management Corp. with related Line of Credit
                        Note and letter amendment to related security agreement
                        (filed herewith)

            21          List of Subsidiaries of Crescent Operating, Inc.

            23.1        Consent of Ernst & Young LLP

            23.2        Consent of Deloitte & Touche LLP

            23.3        Consent of Arthur Andersen LLP - Denver

            23.4        Consent of Arthur Andersen LLP - Atlanta

            23.5        Consent of Arthur Andersen LLP - Houston

            27          Financial Data Schedule

                                       44
<PAGE>   45
(b)  Reports on Form 8-K:

     No reports on Form 8-K were filed during the last quarter of the year ended
     December 31, 1999.


(c)  Exhibits Required by Item 601 of Regulation S-K:

     Exhibits required are listed under Item 14(a)(3).


(d)  Financial Statement Schedules Required by Regulation S-X:

     Information with respect to this Item is contained on Pages F-1 to F-82 of
     this Annual Report on Form 10-K.




                                       45
<PAGE>   46

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of March,
2000.


                                        CRESCENT OPERATING, INC.
                                        (Registrant)

                                        By          /s/ John C. Goff
                                          -------------------------------------
                                                      John C. Goff
                                          President and Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                 SIGNATURE                                       TITLE                              DATE
                 ---------                                       -----                              ----
<S>                                          <C>                                               <C>
   /s/   Richard E. Rainwater
-------------------------------------------  Chairman of the Board of Directors                March 30, 2000
          Richard E. Rainwater


   /s/   John C. Goff
-------------------------------------------  President, Chief Executive Officer, Vice          March 30, 2000
          John C. Goff                       Chairman of the Board of Directors
                                             (Principal Executive Officer)


   /s/   Jeffrey L. Stevens
-------------------------------------------  Executive Vice President, Chief Operating         March 30, 2000
         Jeffrey L. Stevens                  Officer and Director


   /s/   Richard P. Knight
-------------------------------------------  Vice President, Chief Financial Officer           March 30, 2000
         Richard P. Knight                   (Principal Financial and Accounting Officer)



   /s/   William A. Abney
-------------------------------------------  Director                                          March 30, 2000
         William A. Abney


   /s/   Anthony M. Frank
-------------------------------------------  Director                                          March 30, 2000
         Anthony M. Frank


   /s/   Paul E. Rowsey, III
-------------------------------------------  Director                                          March 30, 2000
         Paul E. Rowsey, III


   /s/   Carl F. Thorne
-------------------------------------------  Director                                          March 30, 2000
         Carl F. Thorne
</TABLE>



                                       46
<PAGE>   47

                            CRESCENT OPERATING, INC.
                          INDEX TO FINANCIAL STATEMENTS


The following Consolidated Financial Statements of the Registrant are submitted
herewith in response to Item 8 and Item 14(a)1:

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                           <C>
CRESCENT OPERATING, INC.

     Reports of Independent Auditors.....................................................................      F-2

     Consolidated Balance Sheets.........................................................................      F-7

     Consolidated Statements of Operations...............................................................      F-8

     Consolidated Statements of Changes in Shareholders' Equity (Deficit)................................      F-9

     Consolidated Statements of Cash Flows...............................................................     F-10

     Notes to Consolidated Financial Statements..........................................................     F-11

The following Consolidated Financial Statements are submitted herewith in
response to Rule 3-09 of Regulation S-X:

VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP

     Report of Independent Auditors.....................................................................      F-35

     Consolidated Balance Sheet.........................................................................      F-36

     Consolidated Statement of Operations...............................................................      F-37

     Consolidated Statement of Partners' Capital........................................................      F-38

     Consolidated Statement of Cash Flows...............................................................      F-39

     Notes to Consolidated Financial Statements.........................................................      F-40


CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC

     Report of Independent Public Accountants...........................................................      F-46

     Consolidated Balance Sheets........................................................................      F-47

     Consolidated Statements of Operations..............................................................      F-49

     Consolidated Statements of Changes in Members' Capital (Deficit)...................................      F-50

     Consolidated Statements of Cash Flows..............................................................      F-51

     Notes to Consolidated Financial Statements.........................................................      F-52

     The following financial statement schedule for Charter Behavioral Health
     Systems, LLC and its subsidiaries is submitted herewith in response to
     Item 14(a)2:

     Schedule II - Valuation and Qualifying Accounts - CBHS.............................................      F-62


THE WOODLANDS OPERATING COMPANY, L.P.


    Report of Independent Public Accountants............................................................      F-63

    Consolidated Balance Sheets.........................................................................      F-64

    Consolidated Statements of Earnings.................................................................      F-65

    Consolidated Statements of Changes in Partners' Equity..............................................      F-66

    Consolidated Statements of Cash Flows...............................................................      F-67

    Notes to Consolidated Financial Statements..........................................................      F-68



THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.


    Report of Independent Public Accountants............................................................      F-71

    Consolidated Balance Sheets.........................................................................      F-72

    Consolidated Statements of Earnings.................................................................      F-73

    Consolidated Statements of Changes in Partners' Equity..............................................      F-74

    Consolidated Statements of Cash Flows...............................................................      F-75

    Notes to Consolidated Financial Statements..........................................................      F-76

</TABLE>

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.


                                      F-1
<PAGE>   48



                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
Crescent Operating, Inc.

We have audited the accompanying consolidated balance sheets of Crescent
Operating, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the years then ended and the period from May 9, 1997 through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of The Woodlands Land Development Company, L.P., The Woodlands
Operating Company, L.P., Crescent Development Management Corporation or
Vornado Crescent Logistics Operating Partnership, which statements reflect total
assets constituting 34.9%, and total revenues constituting 19.2%, of the related
consolidated totals in 1999. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for The Woodlands Land Development Company, L.P., The Woodlands
Operating Company, L.P., Crescent Development Management Corporation and Vornado
Crescent Logistics Operating Partnership,  is based solely on the reports of the
other auditors.

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

In our opinion, based on our audits and, for 1999, the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Crescent Operating,
Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1999 and 1998 and the period from May 9, 1997 through December 31, 1997, in
conformity with accounting principles generally accepted in the United States.

                                                Ernst & Young LLP

Dallas, Texas
March 22, 2000


                                      F-2
<PAGE>   49


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
Crescent Operating, Inc.

We have audited the accompanying combined statements of operations, changes in
shareholder's equity, and cash flows of Carter-Crowley Asset Group as described
in Note 2 for the period from January 1, 1997 through May 8, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of operations and cash flows for the
period from January 1, 1997 through May 8, 1997 of Carter-Crowley Asset Group in
conformity with generally accepted accounting principles.


                                           ERNST & YOUNG LLP


Dallas, Texas
March 2, 1998

                                      F-3
<PAGE>   50
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Executive Committee of
The Woodlands Land Development Company, L.P.:

We have audited the accompanying balance sheets of The Woodlands Land
Development Company, L.P. as of December 31, 1999 and 1998 and the related
statements of earnings, changes in partners' equity and cash flows for the years
then ended (not included herein). These financial statements are the
responsibility of The Woodlands Land Development Company, L.P.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Woodlands Land Development
Company, L.P. as of December 31, 1999 and 1998 and the results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
January 14, 2000







                                      F-4
<PAGE>   51

                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Executive Committee of
The Woodlands Operating Company, L.P.:

We have audited the accompanying consolidated balance sheets of The Woodlands
Operating Company, L.P. and subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of earnings, changes in partners' equity
(deficit) and cash flows for the years then ended (not included herein). These
financial statements are the responsibility of The Woodlands Operating Company,
L.P.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Woodlands Operating
Company, L.P. and subsidiary as of December 31, 1999 and 1998 and the results of
its operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
January 14, 2000


                                      F-5
<PAGE>   52
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of
Crescent Development Management Corp.:

We have audited the accompanying consolidated balance sheets of CRESCENT
DEVELOPMENT MANAGEMENT CORP. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended (not
included herein). These financial statements and the schedules referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Crescent
Development Management Corp. and Subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. Schedules I through VII are presented for
purposes of additional analysis and are not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the consolidated financial statements taken as a whole.



ARTHUR ANDERSEN LLP

Denver, Colorado
January 28, 2000.


                                      F-6
<PAGE>   53


                            CRESCENT OPERATING, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                     December 31, 1999   December 31, 1998
                                                                     -----------------   -----------------
<S>                                                                  <C>                 <C>
                          ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                          $          39,017   $          42,810
  Accounts receivable, net                                                      51,638              35,544
  Inventories                                                                   47,442              34,203
  Notes receivable                                                               6,329               1,671
  Real estate                                                                  121,412             109,301
  Prepaid expenses and other current assets                                      8,385               5,837
                                                                     -----------------   -----------------
     Total current assets                                                      274,223             229,366
                                                                     -----------------   -----------------

PROPERTY AND EQUIPMENT, NET                                                    215,764             162,181
                                                                     -----------------   -----------------

INVESTMENTS                                                                     80,470             367,105
                                                                     -----------------   -----------------

OTHER ASSETS
  Real estate                                                                   83,147              68,809
  Notes receivable                                                              16,838              18,332
  Intangible assets, net                                                        92,077              82,513
  Deferred tax assets                                                           21,371               1,163
  Other assets                                                                  11,763               7,864
                                                                     -----------------   -----------------
     Total other assets                                                        225,196             178,681
                                                                     -----------------   -----------------

TOTAL ASSETS                                                         $         795,653   $         937,333
                                                                     =================   =================

      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable and accrued expenses                              $          80,396   $          64,749
  Accounts payable - CEI                                                         9,250               7,731
  Current portion of long-term debt - CEI                                        8,000               7,668
  Current portion of long-term debt                                             69,459              84,539
  Deferred revenue                                                              62,864              46,998
                                                                     -----------------   -----------------
     Total current liabilities                                                 229,969             211,685

LONG-TERM DEBT - CEI, NET OF CURRENT PORTION                                   208,744             220,944

LONG-TERM DEBT, NET OF CURRENT PORTION                                         135,671              57,988

OTHER LIABILITIES                                                               59,837              34,578
                                                                     -----------------   -----------------

     Total liabilities                                                         634,221             525,195
                                                                     -----------------   -----------------

MINORITY INTERESTS                                                             181,954             428,206
                                                                     -----------------   -----------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 10,000 shares authorized,
      no shares issued or outstanding                                               --                  --
Common stock, $.01 par value, 22,500 shares authorized,
      11,415 and  11,402 shares issued, respectively                               114                 114
Additional paid-in capital                                                      17,714              17,667
Deferred compensation on restricted shares                                        (198)               (210)
Accumulated comprehensive income (loss)                                        (10,127)             (9,763)
Retained deficit                                                               (23,719)            (21,024)
Treasury stock at cost, 1,103 and 700 shares, respectively                      (4,306)             (2,852)
                                                                     -----------------   -----------------
     Total shareholders' equity (deficit)                                      (20,522)            (16,068)
                                                                     -----------------   -----------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                 $         795,653   $         937,333
                                                                     =================   =================
</TABLE>

See accompanying notes to the consolidated financial statements.



                                      F-7
<PAGE>   54


                            CRESCENT OPERATING, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (Amounts in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                                            Carter-Crowley Asset
                                                                   Crescent Operating, Inc.                  Group (Predecessor)
                                               -----------------------------------------------------------  --------------------
                                                    For the             For the        For the period from  For the period from
                                                   Year Ended          Year Ended         May 9, 1997 to      January 1, 1997
                                               December 31, 1999   December 31, 1998   December 31, 1997      to May 8, 1997
                                               ------------------  ------------------  -------------------  --------------------
<S>                                            <C>                 <C>                 <C>                  <C>
 REVENUES
    Equipment sales & leasing                  $          136,343  $           85,365  $            10,518  $              4,657
    Hospitality                                           246,763             229,491               79,468                    --
    Land development                                      334,881             178,392               66,896                    --
                                               ------------------  ------------------  -------------------  --------------------

       Total revenues                                     717,987             493,248              156,882                 4,657
                                               ------------------  ------------------  -------------------  --------------------

 OPERATING EXPENSES
    Equipment sales & leasing                             131,606              79,011                9,783                 4,499
    Hospitality                                           191,465             170,556               62,542                    --
    Hospitality properties rent - CEI                      54,012              52,276               16,694                    --
    Land development                                      324,432             178,372               67,095                    --
    Corporate general and administrative                    2,605               3,147                1,761                    --
                                               ------------------  ------------------  -------------------  --------------------

       Total operating expenses                           704,120             483,362              157,875                 4,499
                                               ------------------  ------------------  -------------------  --------------------

 INCOME (LOSS) FROM OPERATIONS                             13,867               9,886                 (993)                  158
                                               ------------------  ------------------  -------------------  --------------------

 INVESTMENT INCOME (LOSS)                                  20,939              27,684              (16,423)                   --
                                               ------------------  ------------------  -------------------  --------------------

 OTHER (INCOME) EXPENSE
    Interest expense                                       30,775              18,262                5,481                   135
    Interest income                                        (4,046)             (3,876)              (1,751)                  (13)
    Other                                                     131                 182                 (159)                   (3)
                                               ------------------  ------------------  -------------------  --------------------

       Total other (income) expense                        26,860              14,568                3,571                   119
                                               ------------------  ------------------  -------------------  --------------------

 INCOME (LOSS) BEFORE INCOME TAXES
     AND MINORITY INTERESTS                                 7,946              23,002              (20,987)                   39

 INCOME TAX PROVISION (BENEFIT)                            (3,471)              5,521                  612                    14
                                               ------------------  ------------------  -------------------  --------------------

 INCOME (LOSS) BEFORE MINORITY INTERESTS                   11,417              17,481              (21,599)                   25

 MINORITY INTERESTS                                       (14,112)            (16,340)                (566)                   --
                                               ------------------  ------------------  -------------------  --------------------

 NET INCOME (LOSS)                             $           (2,695) $            1,141  $           (22,165) $                 25
                                               ==================  ==================  ===================  ====================

 EARNINGS (LOSS) PER SHARE
    Basic                                      $            (0.26) $             0.10  $            (2.00)
                                               ==================  ==================  ==================
    Diluted                                    $            (0.26) $             0.10  $            (2.00)
                                               ==================  ==================  ==================

 WEIGHTED AVERAGE SHARES OUTSTANDING
    Basic                                                  10,363              11,206              11,073
                                               ==================  ==================  ==================
    Diluted                                                10,363              11,943              11,073
                                               ==================  ==================  ==================
</TABLE>

          See accompanying notes to the consolidated financial statements.


                                      F-8
<PAGE>   55


                            CRESCENT OPERATING, INC.
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                                                                       Deferred
                                                       Common stock           Treasury stock                         compensation
                                                  ----------------------   ----------------------     Additional     on restricted
                                                   Shares       Amount      Shares       Amount     paid-in capital     shares
                                                  ---------   ----------   ---------   ----------   ---------------  -------------
<S>                                               <C>         <C>          <C>         <C>          <C>              <C>
BALANCE at December 31, 1996, (Predecessor)              13   $       13          --   $       --   $        14,550  $          --

Contributed capital                                      --           --          --           --             6,023             --

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

BALANCE at May 8, 1997, (Predecessor)                    13           13          --           --            20,573             --

Formation transactions                               11,013           97          --           --            (8,963)            --

Stock options exercised                                  45            1          --           --                44             --

Common stock issued for acquisitions                    130            1          --           --             2,339             --

Issuance of restricted common stock                      10           --          --           --               262           (262)

Net loss                                                 --           --          --           --                --             --
                                                  ---------   ----------   ---------   ----------   ---------------  -------------

BALANCE at December 31, 1997                         11,211          112          --           --            14,255           (262)


Comprehensive income (loss):

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

     Unrealized loss on Magellan warrants                --           --          --           --                --             --



Comprehensive income (loss)

Stock options exercised                                  24           --          --           --                23             --

Common stock issued for acquisitions                    167            2          --           --             3,389             --

Amortization of restricted common stock                  --           --          --           --                --             52

Purchase of treasury stock                               --           --        (700)      (2,852)               --             --
                                                  ---------   ----------   ---------   ----------   ---------------  -------------

BALANCE at December 31, 1998                         11,402          114        (700)      (2,852)           17,667           (210)



Comprehensive income (loss):

     Net loss                                            --           --          --           --                --             --

     Unrealized loss on Magellan warrants                --           --          --           --                --             --



Comprehensive income (loss)

Stock options exercised                                   7           --          --           --                 7             --

Issuance of restricted common stock                       6           --          --           --                40            (40)

Amortization of restricted common stock                  --           --          --           --                --             52

Purchase of treasury stock                               --           --        (403)      (1,454)               --             --
                                                  ---------   ----------   ---------   ----------   ---------------  -------------

BALANCE at December 31, 1999                         11,415   $      114      (1,103)  $   (4,306)  $        17,714  $        (198)
                                                  =========   ==========   =========   ==========   ===============  =============

<CAPTION>
                                               Accumulated
                                              comprehensive     Retained
                                              income (loss)     deficit        Total
                                             ---------------   ----------    ---------
BALANCE at December 31, 1996, (Predecessor)  $            --   $   (3,637)   $  10,926

Contributed capital                                       --           --        6,023

Net income                                                --           25           25
                                             ---------------   ----------    ---------
BALANCE at May 8, 1997, (Predecessor)                     --       (3,612)      16,974

Formation transactions                                    --        3,612       (5,254)

Stock options exercised                                   --           --           45

Common stock issued for acquisitions                      --           --        2,340

Issuance of restricted common stock                       --           --           --

Net loss                                                  --      (22,165)     (22,165)
                                             ---------------   ----------    ---------
BALANCE at December 31, 1997                              --      (22,165)      (8,060)
                                                                             ---------

Comprehensive income (loss):

     Net income                                           --        1,141        1,141

     Unrealized loss on Magellan warrants             (9,763)          --       (9,763)
                                                                             ---------
Comprehensive income (loss)                                                     (8,622)

Stock options exercised                                   --           --           23

Common stock issued for acquisitions                      --           --        3,391

Amortization of restricted common stock                   --           --           52

Purchase of treasury stock                                --           --       (2,852)
                                             ---------------   ----------    ---------
BALANCE at December 31, 1998                          (9,763)     (21,024)     (16,068)
                                                                             ---------

Comprehensive income (loss):

     Net loss                                             --       (2,695)      (2,695)

     Unrealized loss on Magellan warrants               (364)          --         (364)
                                                                             ---------
Comprehensive income (loss)                                                     (3,059)

Stock options exercised                                   --           --            7

Issuance of restricted common stock                       --           --           --

Amortization of restricted common stock                   --           --           52

Purchase of treasury stock                                --           --       (1,454)
                                             ---------------   ----------    ---------
BALANCE at December 31, 1999                 $       (10,127)  $  (23,719)   $ (20,522)
                                             ===============   ==========    =========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                      F-9
<PAGE>   56


                            CRESCENT OPERATING, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        Crescent Operating, Inc.
                                                                   -----------------------------------------------------------
                                                                        For the             For the        For the period from
                                                                       Year Ended          Year Ended         May 9, 1997 to
                                                                    December 31, 1999   December 31, 1998   December 31, 1997
                                                                   ------------------  ------------------  -------------------
<S>                                                                <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                               $           (2,695) $            1,141  $           (22,165)
   Adjustments to reconcile net income (loss)
     to net cash (used in) provided by operating activities:
       Depreciation                                                            21,388              13,675                3,575
       Amortization                                                            12,354               1,072                   83
       Provision for deferred income taxes                                    (24,636)             (2,916)                 523
       Equity in (income) losses of unconsolidated subsidiaries               (18,963)            (27,684)              17,011
       Minority interests in net losses                                        14,113              16,340                  566
       Gain on sale of property and equipment                                  (4,491)             (2,887)                (161)
       Gain on sale of investments                                             (2,308)                 --                 (110)
       Changes in assets and liabilities, net of
         effects from acquisitions:
           Accounts receivable                                                (13,075)             (4,684)              (2,219)
           Inventories                                                         (9,049)             (6,519)              (1,334)
           Prepaid expenses and current assets                                 (1,610)             (1,821)              (3,508)
           Real estate                                                        (40,646)             (4,272)              21,630
           Other assets                                                         2,451               1,781                   --
           Accounts payable and accrued expenses                               17,908                (847)              14,671
           Accounts payable - CEI                                               2,631                 800                3,980
           Deferred revenue, current and noncurrent                            36,452              49,093               10,050
           Other liabilities                                                      794               3,823                2,819
                                                                   ------------------  ------------------  -------------------
              Net cash (used in) provided by operating activities              (9,382)             36,095               45,411
                                                                   ------------------  ------------------  -------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of business interests, net of cash acquired                     (28,511)            (15,826)             (63,759)
  Acquisition of business interests by Controlled Subsidiaries,
    net of cash acquired                                                       (3,782)           (121,076)                  --
  Purchases of property and equipment                                         (79,476)            (43,471)             (13,951)
  Proceeds from sale of investments                                            23,540                  --                1,022
  Proceeds from sale of property and equipment                                 30,500               4,129               12,550
  Net proceeds from sale and collection of notes receivable                     8,322              30,602                   --
  Net distributions from investments                                            1,640               5,985                   --
  Distributions from investments of Controlled Subsidiaries                    23,962              17,915                   --
  Contributions to investments of Controlled Subsidiaries                     (11,851)                 --                   --
  Other                                                                         1,139                  --               (1,670)
                                                                   ------------------  ------------------  -------------------
                Net cash used in investing activities                         (34,517)           (121,742)             (65,808)
                                                                   ------------------  ------------------  -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds of long-term debt                                                  248,392             133,070               22,462
  Payments on long-term debt                                                 (206,173)            (89,772)                (920)
  Proceeds of long-term debt - CEI                                             95,033              44,259               65,058
  Payments on long-term debt - CEI                                           (107,321)            (99,962)             (34,568)
  Capital contributions by minority interests                                  35,517             120,430               14,100
  Distributions to minority interests                                         (20,759)            (20,666)              (2,380)
  Purchase of treasury stock                                                   (1,455)             (2,852)                  --
  Other                                                                        (3,128)                549                   45
                                                                   ------------------  ------------------  -------------------
                Net cash provided by financing activities                      40,106              85,056               63,797
                                                                   ------------------  ------------------  -------------------

NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                                             (3,793)               (591)              43,400

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                          42,810              43,401                    1
                                                                   ------------------  ------------------  -------------------

CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                    $           39,017  $           42,810  $            43,401
                                                                   ==================  ==================  ===================

<CAPTION>
                                                                     Carter-Crowley Asset
                                                                      Group (Predecessor)
                                                                     --------------------
                                                                      For the period from
                                                                        January 1, 1997
                                                                        to May 8, 1997
                                                                     --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                 $                 25
   Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
       Depreciation                                                                   494
       Amortization                                                                    --
       Provision for deferred income taxes                                             14
       Equity in (income) losses of unconsolidated subsidiaries                        --
       Minority interests in net losses                                                --
       Gain on sale of property and equipment                                          --
       Gain on sale of investments                                                     --
       Changes in assets and liabilities, net of
         effects from acquisitions:
           Accounts receivable                                                         22
           Inventories                                                               (562)
           Prepaid expenses and current assets                                        (47)
           Real estate                                                                 --
           Other assets                                                                --
           Accounts payable and accrued expenses                                      129
           Accounts payable - CEI                                                     212
           Deferred revenue, current and noncurrent                                    --
           Other liabilities                                                         (105)
                                                                     --------------------
                Net cash (used in) provided by operating activities                   182
                                                                     --------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of business interests, net of cash acquired                              --
  Acquisition of business interests by Controlled Subsidiaries                         --
  Purchases of property and equipment                                              (1,067)
  Proceeds from sale of investments                                                    --
  Proceeds from sale of property and equipment                                         --
  Net proceeds from sale and collection of notes receivable                            --
  Net distributions from investments                                                   --
  Distributions from investments of Controlled Subsidiaries                            --
  Contributions to investments of Controlled Subsidiaries                              --
  Other                                                                               146
                                                                     --------------------
                Net cash used in investing activities                                (921)
                                                                     --------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds of long-term debt                                                           --
  Payments on long-term debt                                                       (5,140)
  Proceeds of long-term debt - CEI                                                     --
  Payments on long-term debt - CEI                                                     --
  Capital contributions by minority interests                                       6,023
  Distributions to minority interests                                                  --
  Purchase of treasury stock                                                           --
  Other                                                                                --
                                                                     --------------------
                Net cash provided by financing activities                             883
                                                                     --------------------

NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                                                    144

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                                  22
                                                                     --------------------

CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                      $                166
                                                                     ====================
</TABLE>


        See accompanying notes to the consolidated financial statements.



                                      F-10
<PAGE>   57


                            CRESCENT OPERATING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION AND NATURE OF BUSINESS:

     Crescent Operating, Inc. ("Crescent Operating" or "COPI") was formed on
     April 1, 1997, by Crescent Real Estate Equities Company ("Crescent
     Equities" or "CEI") and its subsidiary Crescent Real Estate Equities
     Limited Partnership ("Crescent Partnership") to be the lessee and operator
     of certain assets owned or to be acquired by Crescent Partnership and
     perform an agreement ("Intercompany Agreement") between Crescent Operating
     and Crescent Partnership, pursuant to which each has agreed to provide the
     other with rights to participate in certain transactions. On May 8, 1997,
     Crescent Partnership contributed $14.1 million in cash to Crescent
     Operating. Effective June 12, 1997, Crescent Equities distributed shares of
     Crescent Operating common stock to shareholders of Crescent Equities and
     unit holders of Crescent Partnership of record on May 30, 1997.

     Crescent Operating is a diversified management company that, through
     various subsidiaries and affiliates (collectively with Crescent Operating,
     the "Company"), currently operates primarily in four business segments:
     Equipment Sales and Leasing, Hospitality, Temperature Controlled Logistics
     (formerly Refrigerated Warehousing) and Land Development. Through these
     segments, Crescent Operating does business throughout the United States.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements of Crescent Operating
     include the accounts of the Company and all subsidiaries controlled by the
     Company after elimination of material intercompany accounts and minority
     interests. Subsidiaries not controlled by the Company, but for which the
     Company has the ability to exercise significant influence, are accounted
     for on the equity method.

     The financial results of the Company include the following:

     o  Subsidiaries which are wholly owned and consolidated:
        o  Crescent Machinery Company ("Crescent Machinery");
        o  Rosestar Management LLC ("Rosestar"); and
        o  COI Hotel Group, Inc. ("COI Hotel").

     o  Subsidiaries which are not wholly owned but the Company controls and
        therefore consolidates ("Controlled Subsidiaries"):
        o  A 5% economic interest in:
           -  The Woodlands Land Company, Inc. ("LandCo") which has a 42.5%
              general partner interest 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 60% of CR
              Las Vegas, LLC ("CR Las Vegas") and 20% of CR License, LLC ("CR
              License").

        o  A 50% general partner interest in COPI Colorado, L.P. ("COPI
           Colorado") which owns 10% of Crescent Development Management Corp.
           ("CDMC"). The 10% interest in CDMC represents 100% of the voting
           stock, and therefore, CDMC is consolidated into COPI Colorado.

                                      F-11
<PAGE>   58


o    Subsidiaries which the Company reports on the equity method of accounting:
     o  A 42.5% interest in the Woodlands Operating Company, L.P. ("TWOC");
     o  A 40% interest in Vornado Crescent Logistics Operating Partnership
        ("AmeriCold Logistics");
     o  A direct 25% common membership interest in Charter Behavioral Health
        Systems, LLC ("CBHS");
     o  An indirect 65% common membership interest in CBHS held through a
        limited partner  interest in COPI CBHS Holdings, L.P.; and
     o  A 1% interest in each of Crescent CS Holdings Corporation ("CS I") and
        Crescent CS Holdings II Corporation ("CS II"), (collectively,
        "Temperature Controlled Logistics Partnerships").

The combined financial statements of the "Predecessor" include Moody-Day and
Hicks-Muse (collectively, the "Carter-Crowley Asset Group"). As the Company did
not have any activity prior to May 9, 1997, the data included relating to the
period in 1997 prior to May 9, 1997 is only with regard to the Predecessor.

USE OF ESTIMATES

The financial statements include estimates and assumptions made by management
that affect the carrying amounts of assets and liabilities, reported amounts of
revenues and expenses and the disclosure of contingent assets and liabilities.
Actual results may differ from these estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Cash of $12.1 million resides with
certain subsidiaries and restrictions limit transfers to the parent company.

INVENTORIES

Inventories consist of new and used equipment held for sale, equipment parts,
food, beverages and supplies, all of which are stated at the lower of cost or
market using the first-in, first-out (FIFO) or specific identification methods.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. The Company uses the straight-line
method of depreciation for financial statement purposes. The estimated useful
lives used in computing depreciation are as follows:

<TABLE>
<S>                                                        <C>
Land improvements...............................           10-15 years
Rental equipment................................            2-10 years
Building and improvements.......................              30 years
Transportation equipment........................             3-5 years
Furniture, fixtures, and other equipment........            5-10 years
</TABLE>

Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for renewals or betterments are capitalized. The cost of property
replaced, retired, or otherwise disposed of is removed from the asset account
along with the related accumulated depreciation.

Long-lived assets are evaluated when indications of impairment are present, and
provisions for possible losses are recorded when undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
value. The Company did not recognize any losses from impairment during 1997,
1998 or 1999.

REAL ESTATE

Real estate represents raw land, developed land, homes constructed or under
construction, repurchased lots, applicable capitalized interest, and applicable
capitalized general and administrative costs. Real estate is recorded at cost.


                                      F-12
<PAGE>   59


     Interest is capitalized based on the average yearly interest rate applied
     to cumulative capital expenditures for property under development.
     Approximately $13.7 million and $13.2 million of interest was capitalized
     for the years ended December 31, 1999 and 1998, respectively. Payroll and
     related costs associated with the development of a specific subdivision of
     land are capitalized. Once sales of property begin in a specific
     subdivision, capitalized costs are expensed as cost of sales.

     INTANGIBLE ASSETS

     Intangible assets consist of goodwill and membership intangibles. Goodwill
     represents the excess of the acquisition costs over the fair value of net
     identifiable assets of businesses acquired and is amortized on a
     straight-line basis over 6-30 years. Membership intangibles represent the
     purchase price values allocated to club memberships to be sold. Intangibles
     are evaluated periodically as events or circumstances indicate a possible
     inability to recover their carrying amounts. Such evaluation is based on
     various analyses, including cash flow and profitability projections. The
     analyses involve significant management judgment to evaluate the capacity
     of an acquired operation to perform within projections. Management believes
     that no significant impairment of goodwill or membership intangibles has
     occurred.

     DEFERRED COMPENSATION ON RESTRICTED SHARES

     Deferred compensation on restricted shares issued to employees is being
     amortized to expense over the vesting period.

     REVENUE RECOGNITION

     Revenues from equipment rentals under operating leases are recognized as
     the revenue becomes receivable according to the provisions of the lease.
     Revenues from full-service hotels and luxury health resorts are recognized
     as services are provided. Club initiation fees and membership conversion
     fees at Desert Mountain Development are deferred and recognized on a
     straight-line basis over the expected life of the membership. Deposits for
     future services are deferred and recognized as revenue in the period
     services are provided.

     MINORITY INTERESTS

     Minority Interests represent the non-voting common stock interests owned by
     shareholders in LandCo, Desert Mountain Development, COPI Colorado and
     CRL.

     INCOME TAXES

     Income taxes are provided for the tax effects of transactions reported in
     the financial statements and consist of taxes currently due plus deferred
     taxes related primarily to differences between the treatment of certain
     items for financial statement purposes and the treatment of those items for
     tax purposes. The deferred tax assets and liabilities represent the future
     tax return consequences of those differences, which will either be taxable
     or deductible when the assets and liabilities are recovered or settled.

     RECLASSIFICATIONS

     Certain prior year information has been reclassified to conform to current
     year presentation.

     STOCK BASED COMPENSATION

     The Company measures compensation costs associated with the issue of share
     options using the intrinsic method under which compensation costs related
     to share options issued pursuant to compensatory plans are measured based
     on the difference between the quoted market price of the shares at the
     measurement date (originally the date of grant) and the exercise price and
     charged to expense over the periods during which the grantee performs the
     related services. All share options issued to date by the Company have
     exercise prices equal to the market price of the shares at the dates of
     grant.


                                      F-13
<PAGE>   60


     RECENT ACCOUNTING PRONOUNCEMENTS

     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
     provides that all derivative instruments be recognized as either assets or
     liabilities depending on the rights or obligations under the contract and
     that all derivative instruments be measured at fair value. This
     pronouncement is effective for fiscal quarters and fiscal years beginning
     after June 15, 2000, and will require the Company to record the net
     comprehensive income or loss related to the Magellan warrants in the
     statement of operations as a reduction or addition to net income for the
     year ended December 31, 2001.

3.   ACQUISITIONS AND DISPOSITIONS:

     Initial Capitalization

     On May 9, 1997, the Company acquired (i) all of the stock of Moody-Day, a
     construction equipment sales, leasing and servicing company located in
     Dallas, Texas, (ii) a 1.21% interest in Hicks-Muse Tate & Furst II, LP
     ("Hicks-Muse"), a private venture capital fund and (iii) a 12.38% interest
     in Dallas Basketball Limited, a partnership that holds the National
     Basketball Association franchise for the Dallas Mavericks. The allocation
     of purchase price was approximately $4.1 million for Moody-Day,
     approximately $9.6 million for the Hicks-Muse interest and approximately
     $12.4 million for the interest in the Dallas Basketball partnership. The
     interest in the Dallas Basketball partnership was subsequently sold to
     Crescent Partnership for approximately $12.5 million.

     Equipment Sales & Leasing

     Effective December 1, 1997, Crescent Operating acquired certain assets of
     Preco Machinery Sales, Inc. ("Preco"), a company that is engaged in
     equipment sales, leasing and servicing, located in Houston, Texas. The
     purchase price of Preco was approximately $4 million and consisted of a
     cash payment of approximately $1.7 million and the issuance of 130,000
     restricted shares of Crescent Operating common stock. The transaction was
     structured such that Preco became a division of Crescent Machinery.

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

     Effective June 8, 1998, the Company acquired all of the stock of Machinery,
     Inc., a company that is engaged in equipment sales, leasing and servicing,
     with locations in Tulsa and Oklahoma City, Oklahoma. The purchase price of
     approximately $2.8 million was comprised of $0.6 million in cash, 38,170
     shares of Crescent Operating common stock and the assumption of $1.5
     million of liabilities.

     Effective July 1, 1998, the Company acquired all of the stock of Western
     Traction Company ("Western Traction"), a company that is engaged in
     equipment sales, leasing and servicing, with locations in Sacramento,
     California, Union City, California, Fresno, California, Sparks, Nevada and
     Honolulu, Hawaii. The purchase price of approximately $52.0 million was
     comprised of $6.5 million in cash, a note payable of $7.5 million and the
     assumption of liabilities of $38.0 million.

     Effective July 31, 1998, the Company acquired all of the stock of Harvey
     Equipment Center, Inc. ("Harvey"), a company which is engaged in equipment
     sales, leasing and servicing, located in Van Wert, Ohio. The purchase price
     of approximately $8.4 million was comprised of $2.7 million in cash, notes
     payable of $1.2 million and the assumption of $4.5 million of liabilities.

     Effective July 31, 1998, the Company acquired certain assets of 4-K
     Equipment Company ("4-K"), a company which is engaged in equipment sales,
     leasing and servicing, located in Franklin, Indiana. The purchase price of
     $0.2 million was comprised of $0.1 million in cash and the assumption of
     $0.1 million of liabilities.


                                      F-14
<PAGE>   61


     Effective March 4, 1999, the Company acquired certain assets of Westco
     Tractor & Equipment, Inc. ("Westco"), a company engaged in equipment sales,
     leasing and servicing, located in Santa Rosa, California. The purchase
     price of approximately $2.6 million was comprised of $0.5 million cash and
     the assumption of liabilities of $2.1 million.

     Effective July 1, 1999, the Company acquired all of the stock of E. L.
     Lester and Company ("Lester"), a company engaged in equipment sales,
     leasing and servicing, located in Houston, Texas. The purchase price of
     approximately $17.2 million was comprised of $8.9 million cash, the
     issuance of notes payable by Crescent Operating in the amount of $6.0
     million and the assumption of liabilities of $2.3 million.

     Effective July 1, 1999, the Company acquired all of the stock of Solveson
     Crane Rental, Inc. ("Solveson"), a company engaged in equipment sales,
     leasing and servicing, located in Tracy, California. The purchase price of
     approximately $7.3 million was comprised of $3.0 million cash and the
     assumption of liabilities of $4.3 million.

     Hospitality

     Effective July 31, 1997, Crescent Operating acquired for $2.0 million in
     cash the following assets: (i) 100% of the membership interests in Rosestar
     and (ii) all of the common stock, $.01 par value, of each of RSSW Corp. and
     RSCR Arizona Corp., affiliates of RoseStar. RoseStar and its subsidiaries
     are the lessees of 6 hotels owned by Crescent Equities or its affiliates.
     These hotels are the Denver Marriott City Center and the Hyatt Regency
     Beaver Creek in Colorado, the Hyatt Regency in Albuquerque, New Mexico,
     Canyon Ranch in Tucson, Arizona, Canyon Ranch in Lenox, Massachusetts and
     The Sonoma Mission Inn & Spa in California.

     On September 22, 1997, COI Hotel, became the lessee of the Four Seasons
     Hotel in Houston, Texas, which is owned by Crescent Equities. The lease is
     for a term of 10 years and provides for base rent and percentage rent.
     Additionally, on September 22, 1997, COI Hotel acquired for $2.4 million
     (i) a two-thirds interest in the Houston Center Athletic Club Venture
     ("HCAC"), a joint venture that owns the HCAC and (ii) a $5.0 million note
     receivable executed by the Houston Center Athletic Club Venture. The note
     bears interest at LIBOR plus one percent and interest is payable in arrears
     at the end of each twenty-eight (28) day period. The Company partially
     financed these transactions with proceeds of $1.8 million in loans from
     Crescent Partnership. The Company recorded the note on its books at its
     estimated fair value of $5.0 million. The note was collected during 1998.

     On January 23, 1998, a subsidiary of the Company signed a 10-year lease
     agreement with Crescent Partnership for the Austin Omni Hotel. The Austin
     Omni Hotel is a 314-room full-service hotel located approximately four
     blocks from the state capitol building in Austin, Texas. A subsidiary of
     the company and Crescent Partnership mutually agreed to terminate the
     Austin Omni Hotel lease effective December 31, 1998, and the Company
     received a $75,000 break-up fee in accordance with the terms of the lease.
     Effective January 1, 1999, the Company began providing limited asset
     management services related to the Austin Omni Hotel for $50,000 per year.

     Effective October 13, 1998, Wine Country Golf Club, Inc., a wholly-owned
     subsidiary of the Company, became the lessee of the Sonoma Golf Course in
     California, which is owned by Crescent Equities. This 18-hole championship
     golf course is a strategic amenity to the Sonoma Mission Inn and Spa, which
     will allow the Company to expand its marketing focus to the golf-oriented
     guest. The lease is for a term of 10 years and provides for base rent and
     percentage rent.

     Effective June 19, 1999, the Company entered into a lease with Crescent
     Real Estate Funding III, L.P. ("Funding III") for the 389-room Renaissance
     Hotel located in Houston, Texas. The lease is for a term of 10 years and
     provides for base rent and percentage rent. Under the lease, Funding III
     may terminate the lease, at its option, for a period of one year under
     certain conditions. The other terms of the lease are generally consistent
     with those in hospitality leases with Crescent Partnership.

     Effective July 27, 1998, to enable the Company to invest in the future use
     of the "Canyon Ranch" name, the Company contributed $50,500 to obtain a 5%
     economic interest, representing all of the voting stock, of CRL.
     Immediately following such contribution, CRL exercised its purchase option
     by


                                      F-15
<PAGE>   62


     paying $1 million to obtain a 10% economic interest in CR License.
     Contemporaneously, CRL acquired a 50% interest in CR Las Vegas LLC, an
     entity that built a Canyon Ranch day spa in the Venetian Hotel in Las Vegas
     which opened on June 20, 1999. On July 23, 1999, CRL exercised its option
     to purchase an additional 10% economic interest in CR License by paying
     $2.0 million, bringing CRL's total economic interest in CR License to 20%.
     CR License is the entity which owns the rights to the future use of the
     "Canyon Ranch" name. CRL has the opportunity prior to July 2000 to pay an
     additional $3.0 million to obtain an additional 10% interest in CR License.
     Through CRL and CR License, the Company has an effective 3.0% economic
     interest in the Canyon Ranch day spa project.

     Temperature Controlled Logistics

     Effective October 31, 1997, Crescent Operating acquired, from Crescent
     Partnership, for approximately $8.0 million, 100% of the voting stock,
     representing a 5% equity interest, of CS I and CS II. CS I holds a 40%
     general partner interest in Vornado Crescent Atlanta Partnership ("Atlanta
     Partnership"), which owns URS Logistics, Inc., a company that operates and
     manages public refrigerated warehouses in the continental United States. CS
     II holds a 40% general partner interest in Vornado Crescent Portland
     Partnership ("Portland Partnership"), which owns AmeriCold Corporation, a
     company providing integrated logistics services for the frozen food
     industry, consisting of warehousing and transportation. The Atlanta
     Partnership and the Portland Partnership represent the business venture
     among Crescent Operating, Crescent Equities and Vornado Realty Trust
     ("Vornado") which owns and operates public refrigerated warehouses.

     On June 1, 1998, the Temperature Controlled Logistics Partnerships,
     acquired nine refrigerated storage properties from Freezer Services, Inc.
     for approximately $134 million, which required a capital contribution from
     Crescent Operating of $2.3 million. On July 1, 1998, the Temperature
     Controlled Logistics Partnerships acquired five refrigerated storage
     properties from Carmar Group, Inc. for approximately $158 million, which
     required a capital contribution from Crescent Operating of $2.7 million.
     These properties contain approximately 90 million cubic feet of
     refrigerated storage space.

     Effective March 12, 1999, the Company sold 80% of its 5% interest in the
     Temperature Controlled Logistics Partnerships to Crescent Partnership for
     $13.2 million and received the right to require Crescent Partnership to
     purchase the remaining 20% for approximately $3.4 million at any time
     during the next two years, subject to compliance with certain regulatory
     matters. This 5% interest represented a 2% interest in various corporations
     and limited liability companies owned by the Temperature Controlled
     Logistics Partnerships. Crescent Operating, through a wholly owned limited
     liability company, then became a 40% partner of AmeriCold Logistics, a
     newly formed partnership, the remaining 60% of which is owned by Vornado
     Operating, Inc. ("Vornado Operating"). This transaction required a capital
     contribution of approximately $15.5 million from Crescent Operating. As a
     result of the restructuring transaction, the operations formerly associated
     with the Temperature Controlled Logistics Partnerships are now conducted by
     AmeriCold Logistics. Also a result of the transaction, Crescent Operating
     no longer consolidates, for financial reporting purposes, the Temperature
     Controlled Logistics Partnerships, which has resulted in a decrease for
     accounting purposes in the investment in the Temperature Controlled
     Logistics Partnerships of approximately $291 million.

     AmeriCold Logistics entered into leases covering the refrigerated storage
     facilities used in its business. The leases, which commenced in March 1999,
     generally have a 15-year term with two five-year renewal options and
     provide for the payment of fixed base rent and percentage rent based on
     revenues AmeriCold Logistics receives from its customers. Fixed base rent
     is approximately $130 million per annum through 2003, $132.0 million per
     annum from 2004 through 2008 and $133.0 million per annum from 2009 through
     2014. Percentage rent for each lease is based on a specified percentage of
     revenues in excess of a specified base amount. The aggregate base revenue
     amount under five of the six leases is approximately $321.0 million and the
     weighted average percentage rate is approximately 36% for the initial
     five-year period, approximately 39% for the period from 2004 through 2008
     and approximately 41% for the period from 2009 through February 28, 2014.
     The aggregate base revenue amount under the sixth lease is approximately
     $32.0 million and the percentage rate is 24% for the initial two-year
     period, 37.5% for the period from 2002 through 2006, 40% from 2007 through
     2011 and 41% from 2012 through February 28, 2014. AmeriCold Logistics
     recognized $135.8 million of rent expense from March 11, 1999 (acquisition
     date) through December 31, 1999. AmeriCold Logistics is required to pay for
     all costs arising from the operation, maintenance and repair of the
     properties, including all real estate taxes and


                                      F-16
<PAGE>   63


     assessments, utility charges, permit fees and insurance premiums, as well
     as property capital expenditures in excess of $5.0 million annually.
     AmeriCold Logistics has the right to defer the payment of 15% of the fixed
     base rent and all percentage rent for up to three years beginning on March
     11, 1999 to the extent that available cash, as defined in the leases, is
     insufficient to pay such rent. AmeriCold Logistics deferred
     $5.4 million of rent payments for the period ending December 31, 1999.

     Under the terms of the partnership agreement for AmeriCold Logistics,
     Vornado Operating has the right to make all decisions relating to the
     management and operations of AmeriCold Logistics other than certain major
     decisions that require the approval of both the Company and Vornado
     Operating. Vornado Operating must obtain Crescent Operating's approval for
     specified matters involving AmeriCold Logistics, including approval of the
     annual budget, requiring specified capital contributions, entering into
     specified new leases or amending existing leases, selling or acquiring
     specified assets and any sale, liquidation or merger of AmeriCold
     Logistics. If the partners fail to reach agreement on certain matters prior
     to October 30, 2000, Vornado Operating will be entitled to buy Crescent
     Operating's interest in the partnership at cost plus 10% per annum return.
     If the partners fail to reach an agreement on such matters during the
     period from November 1, 2000 through October 30, 2007, Vornado Operating
     may set a price at which it commits to either buy Crescent Operating's
     investment, or sell its own, and Crescent Operating will decide whether to
     buy or sell at that price. If the partners fail to reach agreement on such
     matters after October 30, 2007, either party may set a price at which it
     commits to either buy the other party's investment, or sell its own, and
     the other party will decide whether to buy or sell at that price. Neither
     partner may transfer its rights or interest in the partnership without the
     consent of the other partner. The partnership will continue for a term
     through October 30, 2027, except as the partners may otherwise agree.

     The Company expects to form a new business venture with Vornado Operating
     on terms and conditions similar to the Company's existing partnership
     arrangements with Vornado Operating. The venture, which is to be named
     Transportal Network ("Transportal"), would pursue a business-to-business
     internet opportunity relating to the Temperature Controlled Logistics
     business. The Company expects Transportal to provide routing and load
     management services and to facilitate related purchases over the internet
     to independent truckers, shippers and receivers to enable them to increase
     efficiency. The Company's share of start-up costs for Transportal, which
     relate to market research, creating a business plan and related matters,
     was $0.4 million for the year ended December 31, 1999. These costs are
     included in the Company's consolidated statement of operations as
     "Investment Income (Loss)" for the year ended December 31, 1999. Although
     Transportal has not commenced operations or finalized its business plan,
     the Company expects Transportal to incur significant future losses and to
     require significant equity investments. The Company anticipates that it may
     have to dilute its ownership in Transportal to fund its share of
     Transportal's cash needs, which may be in excess of $2.0 million.
     Transportal is actively seeking additional equity investments from third
     parties, including venture capital firms. Early stage internet companies,
     such as Transportal, with new and unproven business models frequently
     encounter financial and other significant business risks and there can be
     no assurance that Transportal will be a successful business venture.

     Land Development

     On July 31, 1997, Crescent Operating, through its newly-formed subsidiary,
     WOCOI, acquired for $0.4 million, a 42.5% general partner interest in The
     Woodlands Operating Company, L.P. ("Woodlands Operating"). Woodlands
     Operating was formed to provide management, advisory, landscaping and
     maintenance services to entities affiliated with the Company and Crescent
     Equities. Woodlands Operating is reimbursed for the costs it incurs plus a
     3% or 5% management fee, depending on the type of service provided. The
     acquisition of Woodlands Operating was part of a larger transaction
     pursuant to which Crescent Equities and Crescent Partnership, together with
     certain Morgan Stanley funds, acquired The Woodlands Corporation. The
     Woodlands Corporation is the principal owner, developer and operator of The
     Woodlands, an approximately 27,000-acre master-planned residential and
     commercial community located approximately 27 miles north of Houston,
     Texas. The Woodlands includes a shopping mall, retail centers, office
     buildings, conference center and country club and other amenities. WOCOI
     serves as the managing general partner of Woodlands Operating.

     On September 29, 1997, Crescent Operating acquired 100% of the voting
     stock, representing a 5% equity interest, of Desert Mountain Development
     for $2.2 million. Desert Mountain Development is the sole general


                                      F-17
<PAGE>   64


     partner of Desert Mountain Properties Limited Partnership ("DMPLP"). DMPLP
     owns Desert Mountain, a master planned, luxury residential and recreational
     community in northern Scottsdale, Arizona. DMPLP also owns and operates The
     Desert Mountain Club that offers five Jack Nicklaus signature 18 hole golf
     courses, including Cochise, site of the Senior PGA Tour's The Tradition
     tournament.

     On September 29, 1997, Crescent Operating acquired 100% of the voting
     stock, representing a 5% equity interest, of LandCo, for approximately $1.9
     million. LandCo is a residential development corporation which formerly was
     owned by Crescent Equities. LandCo holds a 42.5% general partner interest
     in, and is the managing general partner of, The Woodlands Land Development
     Company, L.P. ("Landevco"), which owns approximately 9,000 acres for
     commercial and residential development, a realty office, an athletic
     center, and interests in a title company and a mortgage company.

     Effective September 11, 1998, the Company and Gerald W. Haddock, John C.
     Goff and Harry H. Frampton, III (collectively, the "CDMC Sellers") entered
     into a partnership agreement (the "Partnership Agreement") to form COPI
     Colorado. COPI Colorado's purpose is to hold and manage the voting stock of
     CDMC (and, consequently, to manage CDMC) and to invest in shares of
     Crescent Operating common stock. In September, 1998, the Company
     contributed to COPI Colorado $9.0 million in cash in exchange for a 50%
     general partner interest in COPI Colorado, and each CDMC Seller contributed
     to COPI Colorado approximately 667 shares of CDMC voting stock, which the
     CDMC Sellers owned individually, in exchange for an approximately 16.67%
     limited partner interest in COPI Colorado; as a result and until January
     2000, the Company owned a 50% managing interest in COPI Colorado and the
     CDMC Sellers collectively owned a 50% investment interest in COPI Colorado.
     The operating results of CDMC since September 30, 1998 have been included
     in the consolidated results of the Company. CDMC's investments include
     direct and indirect economic interests that vary from 18% to 70% in the
     following: (i) two residential and commercial developments and eight
     residential developments in Colorado; (ii) a Texaco gasoline station and
     ancillary auto repair facility, car wash and convenience store in Colorado;
     (iii) a timeshare development in Colorado; (iv) a real estate company that
     markets and sells timeshare interests; (v) a real estate company that
     specializes in the management of resort properties in Colorado, Utah, South
     Carolina and Montana; (vi) two transportation companies that provide
     approximately 80% of the airport shuttle service to Colorado resort areas;
     and (vii) an interest in a partnership that owns an interest in the Ritz
     Carlton Hotel in Palm Beach, Florida. The operating results of CDMC from
     September 30, 1998 to December 31, 1999 have been included in the
     consolidated results of the Company.

     On April 29, 1999, a partnership in which CDMC has a 64% economic interest
     finalized the purchase of Riverfront Park (previously known as "The
     Commons"), a master planned residential development on 23 acres in the
     Central Platte Valley near downtown Denver, Colorado, for approximately
     $25.0 million. The development of Riverfront Park is expected to begin in
     the spring of 2000. The first phase will consist of condominiums and lofts
     with prices ranging from $0.2 million to $2.5 million. The acreage is in
     close proximity to several major entertainment and recreational facilities,
     including, Coors Field (home to the Major League Baseball's Colorado
     Rockies), Elitch Gardens (an amusement park), the new Pepsi Center (home to
     the National Hockey League's Colorado Avalanche and the National Basketball
     Association's Denver Nuggets) and the new downtown Commons Park. An
     adjacent 28 acres is expected to be commercially developed by another
     company, thus providing a major mixed-use community adjacent to the lower
     downtown area of Denver.

     On August 27, 1999 and October 27, 1999, the Company sold its investments
     in Hillwood and Corporate Arena, respectively, for an aggregate sales price
     of approximately $1.4 million. Together, the sales resulted in an
     approximate $0.2 million gain in 1999.

     Healthcare

     On June 17, 1997, Crescent Operating acquired, for $5.0 million, a 50%
     member interest in CBHS and issued warrants to acquire 282,508 shares of
     Crescent Operating common stock with an exercise price of $18.29 per share
     to Magellan Health Services, Inc. ("Magellan"). As required by CBHS'
     operating agreement, the Company contributed an additional $2.5 million to
     CBHS. CBHS operates approximately 90 behavioral healthcare facilities
     throughout the United States. Crescent Operating also purchased as part of
     this acquisition warrants to acquire 1,283,311 shares of Magellan common


                                      F-18
<PAGE>   65


     stock for $12.5 million. The exercise price of the Magellan warrants is $30
     per share, exercisable in varying increments beginning on May 31, 1998 and
     ending on May 31, 2009. In August and September of 1997, Crescent Operating
     made loans (evidenced by promissory notes) to CBHS in the aggregate
     principal amount of $17.5 million (the "Initial Amount"). On November 16,
     1997, effective September 30, 1997, each of the promissory notes was
     exchanged for cumulative redeemable preferred interests (the "Redeemable
     Preferred Interests") in CBHS. The Redeemable Preferred Interest entitles
     its holder to a preferred return on the profits of CBHS, which is to be
     calculated at the rate of 10% per annum of the Initial Amount, compounded
     monthly. CBHS, upon approval of at least 80% of the members of its
     Governing Board, may redeem all, but not less than all, of the Redeemable
     Preferred Interests, at its option, on or after April 1, 1998, for cash or
     promissory notes, or a combination thereof.

     On September 9, 1999, Crescent Operating, Magellan, Crescent Partnership
     and CBHS completed a recapitalization of CBHS and restructuring of the
     relationships among the parties. In connection with the restructuring,
     Magellan transferred its remaining hospital-based assets (including Charter
     Advantage, Charter Franchise Services, LLC, the call center assets, the
     Charter name and related intellectual property and certain other assets) to
     CBHS, and released CBHS from all accrued and future franchise fees. As a
     result of the transfer, Magellan is no longer obligated to provide
     franchise services to CBHS. Magellan also transferred 80% of its CBHS
     common membership interest and all of its CBHS preferred membership
     interest to CBHS, leaving Magellan with a 10% common membership interest.
     Simultaneously, Crescent Operating reorganized its holdings leaving
     Crescent Operating with a 25% common membership interest and 100% of the
     preferred membership interest in CBHS, and a limited partnership controlled
     by individual officers of Crescent Operating and in which Crescent
     Operating owns 100% of the economic interests, with a 65% common membership
     interest in CBHS. Prior to the restructuring, Crescent Operating and
     Magellan each held a 50% common membership interest, and a 50% preferred
     membership interest in CBHS.

     Other

     On March 31, 1999, the Company sold its investment in Hicks-Muse for $8.1
     million to an unrelated party. The sale resulted in a $0.3 million gain
     which was recognized in the first quarter of 1999. All of the sales
     proceeds were applied against the Company's indebtedness to Crescent
     Partnership.

     All of the acquisitions during 1998 and 1999 were accounted for as
     purchases and operations have been included in the consolidated financial
     statements of the Company from the date that management took over the
     operational control of the acquired entity.

4.   PROPERTY & EQUIPMENT, NET:

     Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, 1999    December 31, 1998
                                                       -----------------    -----------------
<S>                                                    <C>                  <C>
    Rental equipment (Crescent Machinery).........     $         115,022    $          71,409
    Land and improvements.........................                64,291               47,651
    Buildings and improvements....................                31,729               23,902
    Construction in progress (DMPLP)..............                 9,231               15,997
    Furniture, fixtures, and other equipment......                20,421               14,201
    Transportation equipment......................                 7,113                3,383
                                                       -----------------    -----------------
                                                                 247,807              176,543
    Less accumulated depreciation.................               (32,043)             (14,362)
                                                       -----------------    -----------------
                                                       $         215,764    $         162,181
                                                       =================    =================
</TABLE>


                                      F-19
<PAGE>   66


5.   INVESTMENTS:

     Investments consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                      December 31, 1999    December 31, 1998
                                                      -----------------    -----------------
<S>                                                   <C>                  <C>
    Investment in Landevco......................      $          41,186    $          37,880
    Investment in AmeriCold Logistics...........                 11,791                   --
    Investment in CDMC projects.................                 11,254               22,737
    Investment in CR Las Vegas..................                  8,356                   --
    Investment in Temperature Controlled
       Logistics Partnerships...................                  3,068              293,868
    Investment in CR License....................                  2,797                1,000
    Investment in Magellan warrants.............                  2,374                2,737
    Investment in HCAC..........................                    864                1,011
    Investment in Hicks-Muse....................                     --                7,802
    Investment in Corporate Arena ..............                     --                  901
    Investment in TWOC..........................                 (1,220)                (831)
                                                    -------------------    -----------------
                                                    $            80,470    $         367,105
                                                    ===================    =================
</TABLE>

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

<TABLE>
<CAPTION>
                                                      Year Ended           Year Ended          Year Ended
                                                  December 31, 1999     December 31, 1998    December 31, 1997
                                                  -----------------     -----------------    -----------------
<S>                                               <C>                   <C>                  <C>
    Equity in income of Landevco................  $          19,351     $          19,200    $           2,398
    Equity in income of CDMC Projects...........              3,431                 5,537                   --
    Gain on sale of CSI and CSII................              1,493                    --                   --
    Equity in income of TWOC....................                886                 1,121                  155
    Equity in income of Temperature
       Controlled Logistics Partnerships........                325                 3,961                   36
    Equity in income of HCAC....................                296                   130                    9
    Hicks-Muse income...........................                239                 3,125                  589
    Gain on sale of Corporate Arena.............                158                    --                   --
    Equity in loss of CBHS......................                 --                (5,390)             (19,610)
    Equity in loss of CR License................               (203)                   --                   --
    Equity in loss of Transportal Network.......               (395)                   --                   --
    Equity in loss of CR Las Vegas, LLC.........               (944)                   --                   --
    Equity in loss of AmeriCold Logistics.......             (3,698)                   --                   --
                                                  -----------------     -----------------    -----------------
                                                  $          20,939     $          27,684    $          16,423
                                                  =================     =================    =================
</TABLE>

A summary of financial information for the Company's investments in TWOC and
Landevco, each of which represents a significant unconsolidated investment, is
presented below (amounts in thousands).

<TABLE>
<CAPTION>
                                                      TWOC             Landevco
                                               -----------------  -----------------
                                                  Year Ended          Year Ended
                                               December 31, 1999  December 31, 1999
                                               -----------------  -----------------
<S>                                            <C>                <C>
     Revenues ..............................   $          74,635  $         130,859
     Gross profit ..........................   $           1,916  $          50,025
     Net income ............................   $           1,944  $          45,531

     Crescent Operating's share of
         equity in income of subsidiary.....   $             886  $             968
</TABLE>


<TABLE>
<CAPTION>
                                                      TWOC             Landevco
                                               -----------------  -----------------
                                               December 31, 1999  December 31, 1999
                                               -----------------  -----------------
<S>                                            <C>                <C>
Current assets...........................      $           9,826  $           1,714
Property and equipment, net..............                  2,109                 --
Real estate..............................                     --            375,663
Other noncurrent assets..................                  1,200             40,178
                                               -----------------  -----------------
  Total assets...........................      $          13,135  $         417,555
                                               =================  =================

Current liabilities......................      $          10,386  $          22,412
Long-term debt...........................                     --            288,588
Other noncurrent liabilities.............                  5,768              9,853
Partners' equity (deficit)...............                 (3,019)            96,702
                                               -----------------  -----------------
  Total liabilities and member/stock-
  holders equity.........................      $          13,135  $         417,555
                                               =================  =================
</TABLE>


                                      F-20
<PAGE>   67


6.  INTANGIBLE ASSETS:

    Intangible assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                December 31, 1999    December 31, 1998
                                                -----------------    -----------------
<S>                                             <C>                  <C>
    Goodwill, net - Crescent Machinery.......   $          13,925    $           7,757
    Goodwill, net - RoseStar.................               1,417                1,632
    Goodwill, net - COPI Colorado............              41,798               31,016
    Membership intangible, net - DMPLP.......              34,937               42,108
                                                -----------------    -----------------
                                                $          92,077    $          82,513
                                                =================    =================

    Accumulated amortization as of December 31, 1999 and 1998 was $30,151 and
    $17,386, respectively.
</TABLE>

7.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

     Accounts payable and accrued expenses consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                December 31, 1999    December 31, 1998
                                                -----------------    -----------------
<S>                                             <C>                  <C>
    Accounts payable.........................   $          36,141    $          26,225
    Accrued salaries and bonuses.............               8,752                9,088
    Accrued taxes............................              10,567                9,390
    Land development construction accrual....               6,966                6,526
    Accrued interest.........................               5,441                2,276
    Accrued transaction costs................                 419                2,189
    Deferred liabilities.....................               5,788                4,141
    Other accrued expenses...................               6,322                4,914
                                                -----------------    -----------------
                                                $          80,396    $          64,749
                                                =================    =================
</TABLE>

8.   OTHER LIABILITIES:

     Other liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                December 31, 1999    December 31, 1998
                                                -----------------    -----------------
<S>                                             <C>                  <C>
    Deferred revenue.........................   $          50,964    $          29,477
    Deferred hospitality rent................               4,698                3,808
    Other....................................               4,175                1,293
                                                -----------------    -----------------
                                                $          59,837    $          34,578
                                                =================    =================
</TABLE>

9.   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 5%
     or less. Following is a summary of the Company's debt financing (amounts in
     thousands):

<TABLE>
<CAPTION>
                                                                                          December 31, 1999   December 31, 1998
                                                                                          -----------------   -----------------
<S>                                                                                       <C>                 <C>
      LONG-TERM DEBT - CORPORATE AND WHOLLY OWNED SUBSIDIARIES

 Equipment notes payable to finance companies due 2000 through 2007,
 payments of principal and interest due monthly, bear interest from 6.0% to
 10.9%, collateralized by equipment
 (Crescent Machinery) ..................................................................  $         102,539   $         70,074
</TABLE>


                                      F-21
<PAGE>   68


<TABLE>
<S>                                                                                             <C>                <C>
 Floor  plan debt  payable,  three to twelve  month  terms at 0%
 interest (Crescent Machinery) .........................................................             21,556              7,958

 Line of credit in the amount of $19.5 million payable to Crescent
 Partnership due May 2002, bears interest at 9%, payments of interest only
 due quarterly, cross collateralized and cross-defaulted with the Company's
 other borrowing from Crescent Partnership (Crescent Operating) ........................             19,500                 --

 Line of credit in the amount of $17.2 million payable to Crescent
 Partnership due the later of May 2002 or five years after the last draw
 (in no event shall the maturity date be later than June 2007), bears
 interest at 12%, payments of interest only due quarterly, collateralized,
 to the extent not prohibited by pre-existing arrangements, by a first lien
 on the assets  which the  Company  now owns or may  acquire in the future
 (Crescent Operating) ..................................................................             17,200             27,733

 Note payable to Crescent Partnership due May 2002, bears interest at 12%,
 payments of principal and interest due quarterly, collateralized, to the
 extent not prohibited by pre-existing arrangements, by a first lien on the
 assets which the Company now owns or may acquire in the future (Crescent
 Operating) ............................................................................             13,824             24,223

 Line of credit in the amount of $15.0 million payable to Bank of America due
 August 2001, bears interest at LIBOR plus 1% (7.5% and 6.06% at December
 31, 1999 and December 31, 1998, respectively), payments of interest only
 due monthly (Crescent Operating) ......................................................             15,000             15,000

 Note payable to Crescent Partnership due May 2002, bears interest at 12%,
 payments of interest only due quarterly, collateralized by a first lien on
 the assets which the Company now owns or may acquire in the future
 (Crescent Operating) ..................................................................              9,000              9,000

 Notes  payable to the sellers of E. L.  Lester and Company due July 1, 2003,
 bear interest at 7.5%, payments of principal and interest due  semi-annually,
 collateralized by stock of Lester (Crescent Operating) ................................              5,345                 --

 Note payable to the sellers of Western Traction due March 31, 2000, bears
 interest at 8.5%, payments of principal and interest due monthly,
 collateralized by stock of Western Traction (Crescent Operating) ......................              1,008              5,511

 Note payable to Crescent Partnership maturing August 2003, bears interest
 at 10.75%, payments of principal and interest due monthly, collateralized
 by a deed of trust for certain personal property and certain real property
 (RoseStar) ............................................................................              1,483              1,770

 Notes payable to the sellers of Harvey Equipment due July 31, 2002, bear
 interest at 8%, payments of principal and interest due semi-annually
 (Crescent Operating) ..................................................................                902              1,159
</TABLE>


                                      F-22
<PAGE>   69


<TABLE>
<S>                                                                                             <C>                <C>
 Note payable to Crescent Partnership maturing September 2002, bears
 interest at 8.5%, payments of principal and interest due monthly,
 collateralized by the Company's 2/3 interest in HCAC (COI Hotel) ......................                496                632

 Note payable to Crescent Partnership maturing August 2003, bears interest
 at 10.75%, payments of principal and interest due monthly, collateralized
 by a deed of trust in certain real property and certain personal property
(RoseStar) .............................................................................                401                479

 Note payable to Crescent Partnership due November 2006, bears interest at
 7.5%, payments of interest only due annually (RoseStar) ...............................                191                197
                                                                                                -----------        -----------

      Total debt - corporate and wholly owned subsidiaries .............................            208,445            163,736
                                                                                                -----------        -----------

LONG-TERM DEBT - NON WHOLLY OWNED SUBSIDIARIES

Senior note payable to Crescent Partnership maturing December 2005, bears
interest at 10%, payments of principal and interest due quarterly based on
sales proceeds from DMPLP, collateralized by land, improvements and
equipment owned by DMPLP (DMPLP) .......................................................              6,100             50,717

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

Line of credit in the amount of $56.2 million payable to Crescent
Partnership due August 2004, bears interest at 11.5% with principal and
interest payments due as distributions from projects are received, as
defined by the applicable credit agreement, collateralized by CDMC's
interests in East West Resort Development partnerships, East West Resorts,
LLC, and other CDMC property (CDMC).....................................................             49,357             35,976

Construction loans for various East West Resort Development partnership
projects, maturing through 2005, bear interest from 7.75% to 13.9%, payments
of principal and interest or interest only payable monthly, collateralized by
deeds of trust, security agreements and a first lien on the related assets (CDMC).......             45,024             32,825

Line of credit in the amount of $22.9 million payable to Crescent
Partnership due January 2003, bears interest at 12%, principal and interest
payments due as distributions from projects are received, as defined by the
applicable credit agreement, collateralized by CDMC's interests in East
West Resort Development partnerships, East West Resorts LLC, and
other CDMC property (CDMC) .............................................................             16,418             15,035
</TABLE>


                                      F-23
<PAGE>   70


<TABLE>
<S>                                                                                             <C>                <C>
Line of credit in the amount of $40.0 million payable to Crescent
Partnership due December 2006, bears interest at 11.5% with principal
and interest payments due as distributions from projects are received, as
defined by the applicable credit agreement, collateralized by CDMC's
interests in East West Resort Development partnerships, East West Resorts
LLC, and other CDMC property (CDMC) ....................................................             14,459                 --

Line of credit in the amount of $45.0 million payable to National Bank of
Arizona due June 2000, bears interest at rates from prime to prime plus 1%
(8.5% to 9.5% and 7.75% to 8.75% at December 31, 1999 and 1998,
respectively), payments of interest only due monthly, collateralized by
certain land owned by DMPLP, deeds of trusts on lots sold and home
construction (DMPLP) ...................................................................             13,756             10,000

Line of credit in the amount of $7.0 million payable to Crescent
Partnership due August 2003, bears interest at 12% with principal and
interest payments due as distributions are received, collateralized by a
first lien on the assets which the Company now owns or may acquire in the
future (CRL)............................................................................              5,666                 --

Note payable to Crescent Partnership maturing June 2005, bears interest at
12%, with payments of interest only due quarterly and payments of principal
payable annually in accordance with an increasing amortization schedule,
collateralized by CDMC's interests in East West Resort Development
partnerships, East West Resorts LLC and other CDMC property (CDMC) .....................              2,649              2,850
                                                                                                -----------        -----------

          Total debt - non wholly owned subsidiaries ...................................            213,429            207,403
                                                                                                -----------        -----------

          Total long-term debt .........................................................        $   421,874        $   371,139
                                                                                                ===========        ===========

Current portion of long-term debt - CEI ................................................        $     8,000        $     7,668

Current portion of long-term debt ......................................................             69,459             84,539

Long-term debt - CEI, net of current portion ...........................................            208,744            220,944

Long-term debt, net of current portion .................................................            135,671             57,988
                                                                                                -----------        -----------

          Total long-term debt .........................................................        $   421,874        $   371,139
                                                                                                ===========        ===========
</TABLE>

    The weighted average interest rate on long-term debt at December 31, 1999
    was approximately 10.0%. Substantially all of the Company's assets are
    pledged as collateral under various debt agreements. Payment of dividends on
    Crescent Operating common stock is prohibited under certain of the debt
    agreements. The debt agreements contain certain reporting requirements and
    financial covenants, including requirements that the Company maintain
    certain financial ratios. As of December 31, 1999, the Company had complied
    with all debt covenants. In February 2000, the Company modified certain debt
    agreements with Crescent Equities extending the timing of principal and
    interest payments by one year.


                                      F-24
<PAGE>   71


    As of December 31, 1999, combined aggregate principal maturities of all
    long-term debt were as follows (in thousands):

<TABLE>
<S>                                        <C>
          2000...........................  $   77,459
          2001...........................      69,008
          2002...........................      84,858
          2003...........................      42,187
          2004...........................      73,062
          Thereafter.....................      75,300
                                           ----------
              Total                        $  421,874
                                           ==========
</TABLE>

10.  SHAREHOLDERS' EQUITY:

     Common Stock

     The Company's authorized capital stock consists of 10 million shares of
     preferred stock, par value $0.01 per share and 22.5 million shares of
     common stock, par value $0.01 per share. At December 31, 1999, there were
     11,414,963 shares of common stock issued and no shares of preferred stock
     issued.

     Preferred Share Purchase Rights

     The Board of Directors has adopted a rights plan that provides that each
     holder of Crescent Operating common stock also receives a right to purchase
     from the Company one-hundredth of a share of Series A Junior Preferred
     Stock, par value $0.01, at a price of $5 per share, subject to adjustment.
     These rights can only be exercised in certain events and are intended to
     provide the Company certain anti-takeover protection. The Company had
     reserved 225,000 shares of Series A Junior Preferred Stock for this plan.

     Warrants

     In conjunction with the acquisition of a 50% member interest in CBHS, the
     Company issued warrants to acquire 282,508 shares of Crescent Operating
     common stock at an exercise price of $18.29 per share.

     Treasury Stock

     As of December 31, 1999, COPI Colorado had purchased 1,102,530 shares of
     Crescent Operating common stock, which has been recorded as treasury stock,
     at a total purchase price of $4.3 million. The average price paid,
     including broker commissions, was $3.88 per share.

11.  STOCK OPTION PLANS:

     The Company has two stock incentive plans, the 1997 Amended Stock Incentive
     Plan (the "Amended Plan") and the 1997 Management Stock Incentive Plan (the
     "Management Plan").

     The Amended Plan, effective May 8, 1997, initially established the maximum
     number of options and/or shares of restricted stock that the Company may
     grant at 1.0 million shares. The maximum aggregate number of shares
     issuable under the Amended Plan shall increase automatically on January 1
     of each year by an amount equal to 8.5% of the increase in the number of
     shares of common stock outstanding since January 1 of the preceding year,
     subject to certain adjustment provisions. As of December 31, 1999, the
     number of shares the Company may have outstanding under the Amended Plan is
     1,016,183.

     On May 13, 1997, each holder of shares of restricted stock in Crescent
     Equities or options in Crescent Equities or Crescent Partnership was
     granted an equivalent number of shares of restricted stock or options in
     Crescent Operating, based on a ratio of one share of restricted stock or
     option to purchase Crescent Operating common stock for each 10 shares of
     restricted stock in Crescent Equities or options for Crescent Equities
     common shares, and one option to purchase Crescent Operating common stock
     for each 5 options for


                                      F-25
<PAGE>   72


     units in Crescent Partnership. Under the Amended Plan, the Company has
     granted 867,153 options and 10,000 restricted shares, net of forfeitures,
     through December 31, 1999.

     The Management Plan provides that the maximum number of options and/or
     shares of restricted stock that the Company may grant to employees,
     officers, directors or consultants is 1.0 million shares. Under the
     Management Plan, the Company has granted 554,000 options and 6,276
     restricted shares, net of forfeitures, through December 31, 1999.

     Under both Plans, options are granted at a price no less than the market
     value of the shares on the date of grant, vest over a period determined by
     the Board of Directors, and expire ten years from the date of grant. The
     Company has reserved 578,754 shares for future options, warrants and
     restricted shares.

     A summary of the stock option status of the Company's Amended and
     Management Plans as of December 31, 1999 and changes during the periods
     then ended is presented in the table below:

<TABLE>
<CAPTION>
                                                                     Weighted Average
                                                   Shares            Exercise Price
                                                ------------         ----------------
<S>                                             <C>                  <C>
Outstanding as of May 8, 1997 ..........                  --                       --
   Granted .............................             893,567         $           1.15
   Exercised ...........................             (45,489)        $           0.99
   Forfeited ...........................                (499)        $           0.99
   Expired .............................                  --                       --
                                                ------------         ----------------
Outstanding as of December 31, 1997 ....             847,579         $           1.16
   Granted .............................              60,600         $          20.42
   Exercised ...........................             (23,662)        $           0.99
   Forfeited ...........................             (20,173)        $           0.99
   Expired .............................                  --                       --
                                                ------------         ----------------
Outstanding as of December 31, 1998 ....             864,344         $           2.52
   Granted .............................             614,000         $           3.12
   Exercised ...........................              (7,210)        $            .99
   Forfeited ...........................            (126,342)        $           2.20
   Expired .............................                  --                       --
                                                ------------         ----------------
Outstanding as of December 31, 1999 ....           1,344,792         $           2.83
                                                ============         ================

Exercisable as of December 31, 1999 ....             629,433         $           1.81
</TABLE>



     Exercise prices, number of shares and the weighted-average remaining
     contractual life ("Average Life") at December 31, 1999 were as follows:

<TABLE>
<CAPTION>

                             Shares Outstanding               Shares Exercisable
                        -----------------------------      -----------------------
Exercise Price           Number          Average Life      Number     Average Life
----------------        ---------        ------------      -------    ------------
<S>                    <C>               <C>               <C>        <C>
$    0.99 - 5.44        1,274,192           7 years        613,313       5 years
$  15.50 - 20.50           70,600           8 years         16,120       8 years
</TABLE>

     The Company applies APB No. 25 in accounting for options granted pursuant
     to the Amended Plan and the Management Plan (collectively, the "Plans").
     Accordingly, no compensation cost has been recognized for the Plans. Had
     compensation cost for the Plans been determined based on the fair market
     value at the grant dates for awards under the Plans consistent with SFAS
     No. 123, the Company's net income (loss) and earnings (loss) per share
     would have been the following pro forma amounts. The following pro forma
     amounts may not be representative of the effects on reported net income for
     future years.






                                      F-26
<PAGE>   73


<TABLE>
<CAPTION>
                                            As Reported                 Proforma
                                            -----------   ------------------------------------
                                               1999          1999         1998         1997
                                            -----------   ----------   ----------   ----------
<S>                                         <C>           <C>          <C>          <C>
    Net income (loss) (in thousands)....    $    (2,695)  $   (3,004)  $      837   $  (22,258)
    Earnings (loss) per share...........    $     (0.26)  $    (0.29)  $     0.07   $    (2.01)
</TABLE>

     For the years ended December 31, 1999 and 1998, and the period ended
     December 31, 1997, the weighted average grant date fair value of each
     option granted was $2.29, $14.66 and $0.87, respectively.

     The fair value of each option was estimated at the date of grant using the
     Black-Scholes option-pricing model with the following weighted average
     assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates
     of 5.6%, 5.4% and 6.7%; expected volatility of 91.6%, 88.3% and 94.7%;
     expected dividend yields of 0%; expected lives of 5 years.

12.  EARNINGS PER SHARE:

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

<TABLE>
<CAPTION>
                                                                                                   For the period from
                                        Year ended                        Year ended                    May 9, 1997
                                     December 31, 1999                December 31, 1998            to December 31, 1997
                              ------------------------------   ------------------------------  ------------------------------
                                Net     Wtd. avg.  Per share      Net    Wtd. avg.  Per share    Net     Wtd. avg.  Per share
                               Income    shares      amount     Income    shares     Amount     Income     Shares     Amount
                              --------  ---------  ---------   --------  ---------  ---------  --------  ---------  ---------
<S>                           <C>       <C>        <C>         <C>       <C>        <C>        <C>       <C>        <C>
     Basic EPS.............   $ (2,695)    10,363  $   (0.26)  $  1,141     11,206  $    0.10  $(22,165)    11,073  $   (2.00)

     Effect of Dilutive
     Securities:
     Stock Options.........         --        --                     --        737                   --         --
                              -------- ---------               --------  ---------             --------  ---------


     Diluted EPS...........   $ (2,695)    10,363  $   (0.26)  $  1,141     11,943  $    0.10  $(22,165)    11,073  $   (2.00)
                              ========  =========  =========   ========  =========  =========  ========  =========  =========
</TABLE>

     The Company had 1,344,792, 70,600 and 847,579 options in 1999, 1998 and
     1997, respectively, which were not included in the calculation of diluted
     EPS as they were anti-dilutive. Earnings per share for the Predecessor is
     not meaningful as the capital structure of the Predecessor was not
     comparable to that of the Company.

13.  INCOME TAXES:

     The components of the Company's income tax provision (benefit) were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                    For the Period       For the Period
                                                                                        From                  From
                                            Year Ended           Year Ended         May 9, 1997 to       January 1, 1997
                                         December 31, 1999   December 31, 1998     December 31, 1997     To May 8, 1997
                                         -----------------   -----------------     -----------------     ---------------
<S>                                      <C>                 <C>                   <C>                   <C>
     Current:
        Federal.......................      $   18,706         $      6,543           $      79             $      --
        State.........................           2,459                  935                  10                    --
                                            ----------         ------------           ---------             ---------

                                                21,165                7,478                  89                    --
                                            ----------         ------------           ---------             ---------
     Deferred:
        Federal.......................         (21,556)              (1,712)                483                    14
        State.........................          (3,080)                (245)                 40                    --
                                            ----------         ------------           ---------             ---------
                                               (24,636)              (1,957)                523                    14
                                            ----------         ------------           ---------             ---------
         Total income tax
           provision (benefit)........      $   (3,471)        $      5,521           $     612             $      14
                                            ==========         ============           =========             =========
</TABLE>


                                      F-27
<PAGE>   74


     Reconciliations of the federal statutory income tax rate to the effective
tax rate were as follows:


<TABLE>
<CAPTION>
                                                                                    For the Period       For the Period
                                                                                        From                  From
                                            Year Ended           Year Ended         May 9, 1997 to       January 1, 1997
                                         December 31, 1999   December 31, 1998     December 31, 1997     To May 8, 1997
                                         -----------------   -----------------     -----------------     ---------------
<S>                                      <C>                 <C>                   <C>                   <C>
     Federal statutory income tax rate          35.0%              35.0%                (35.0%)                35.0%
     State income taxes, net of
        federal tax benefit...........           5.0                5.0                  (2.9)                   --
     Minority interests...............         (23.1)             (12.1)                   --                    --
     Change in valuation allowance....         (47.1)              (6.5)                 40.3                    --
     Net operating loss benefit.......          (8.5)                --                    --                    --
     Other, net.......................          (5.0)               2.6                   0.5                    --
                                         -----------------   -----------------     -----------------     ---------------
          Effective tax rate..........         (43.7)%             24.0%                  2.9%                 35.0%
                                         =================   =================     =================     ===============
</TABLE>

     Significant components of the Company's deferred tax assets and liabilities
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                             December 31,
                                                  ---------------------------------
                                                      1999                 1998
                                                  ------------         ------------
<S>                                               <C>                  <C>
Deferred tax assets:
   Equity in losses of subsidiaries ......        $      8,936         $         --
   Deferred revenue/rentals ..............              25,926               10,709
   Accrued expenses ......................                 814                  561
   Inventories ...........................                 794                  241
   Loss credit carryforwards .............               4,049               10,104
  Other ..................................                 132                  340
                                                  ------------         ------------
      Deferred tax assets ................              40,651               21,955
                                                  ------------         ------------

Deferred tax liabilities:
   Equity in earnings of subsidiaries ....                  --               (2,264)
   Prepaid expenses ......................              (1,048)              (1,073)
   Depreciable property and equipment ....              (8,326)              (3,643)
   Real estate ...........................              (9,086)              (8,956)
                                                  ------------         ------------
      Deferred tax liabilities ...........             (18,460)             (15,936)
                                                  ------------         ------------

Valuation allowance ......................                (406)              (4,156)
                                                  ------------         ------------
      Net deferred tax assets ............        $     21,785         $      1,863
                                                  ============         ============

Current deferred tax assets ..............        $        414         $        700
Noncurrent deferred tax assets ...........              21,371                1,163
                                                  ------------         ------------

      Net deferred tax assets ............        $     21,785         $      1,863
                                                  ============         ============
</TABLE>

At December 31, 1999, the Company had net operating loss carryforwards ("NOL")
of approximately $9.6 million, which will expire in years 2003 through 2019. A
portion of this NOL was acquired subject to restrictive tax limitations. In
1999, a tax law change occurred which allowed the company to realize a tax
benefit of $0.7 million associated with this NOL. The Company has reserved $0.4
million of the future available NOL due to the tax law limitations still in
effect. The Company also has a minimum tax credit of $0.3 million, which does
not expire. The Company released $4.2 million of its net deferred tax asset
valuation allowance, based on 1999 transactions and expected future taxable
income. In December 1999, the investments held by the Company that are
considered to be Controlled Subsidiary Transactions entered into agreements to
elect to become Taxable REIT Subsidiaries ("TRS") of Crescent Equities for
federal income tax reporting purposes effective January 1, 2001.


                                      F-28
<PAGE>   75


14.  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 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. Management estimates the fair value of the warrants, using
     the Black-Scholes pricing model, to be $2.4 million at December 31, 1999.
     As a result, the $10.1 million difference between the cost and the
     estimated fair value of the warrants has been included in the consolidated
     financial statements as other comprehensive income (loss).

15.  COMMITMENTS AND CONTINGENCIES:

     Lease Commitments

     The Hospitality segment leases nine hotel and resort properties (the
     "Hospitality Properties") from Crescent Equities. Generally, the leases are
     on a triple net basis during 120-month terms and expire from December 2004
     to October 2008. The leases provide for the payment to Crescent Partnership
     or its subsidiaries of (i) base rent, with periodic rent increases, (ii)
     percentage rent based on a percentage of gross room revenues above a
     specified amount, and (iii) a percentage of gross food and beverage
     revenues above a specified amount. Base rental expense under the leases is
     recognized on a straight-line basis over the terms of the respective
     leases. The Land Development segment leases office space, model homes,
     housekeeping and laundry facilities and certain equipment. The Equipment
     Sales and Leasing segment leases rental delivery and service trucks and
     land and buildings at various locations.

     Total lease expense for all segments during the periods ended December 31,
     1999, 1998 and 1997 was approximately $62.5 million, $55.4 million and
     $16.7 million, respectively. Included in lease expense was percentage rent
     for the Hospitality Properties for the periods ended December 31, 1999,
     1998 and 1997 of $14.7 million, $13.8 million and $4.6 million,
     respectively. Future minimum lease payments due under such leases as of
     December 31, 1999, were as follows (in thousands):


<TABLE>
<S>                                              <C>
               2000....................          $    51,778
               2001....................               52,557
               2002....................               52,226
               2003....................               52,440
               2004....................               52,965
               Thereafter..............              120,966
                                                 -----------
                                                 $   382,932
                                                 ===========
</TABLE>

     Contingencies

     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 does own a majority (90%) economic interest
     in CBHS. Crescent Operating's claims against the estate of CBHS include (i)
     its interests as a direct and indirect equity holder of CBHS and (ii) its
     claim for indemnification or contribution against 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. To date Crescent Operating has not filed a
     proof of claim against CBHS with regard to any of these claims but would
     expect to file proofs of claim prior to the bar date.


                                      F-29
<PAGE>   76

     To date, four 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. All of those lawsuits also name Crescent
     Operating as a defendant. Under the automatic stay provisions of federal
     bankruptcy law, lawsuits against CBHS or its subsidiaries would be stayed
     unless otherwise directed by the bankruptcy court, but the lawsuits against
     other defendants, including Crescent Operating, would not be stayed
     automatically. It is anticipated that those suits may be stayed because
     CBHS and its subsidiaries are indispensable parties. The Company
     anticipates that other similar lawsuits may be filed due to the closing of
     other facilities. With respect to the pending suits and possible future
     claims against Crescent Operating based on the closure by CBHS of
     facilities in 1999 and 2000, the Company believes that such actions are
     without basis under the WARN Act and should be dismissed; however, no
     assurance can be given that Crescent Operating will prevail.

16.  SUPPLEMENTAL CASH FLOW INFORMATION:

     Supplemental cash flow information is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31,
                                                          -------------------------------------
                                                            1999         1998           1997
                                                          --------    -----------    ----------
<S>                                                       <C>         <C>            <C>
    Interest paid, net of amounts capitalized...........  $ 27,422    $    23,360    $    2,574
                                                          ========    ===========    ==========
    Taxes paid (refunded)...............................  $ 24,755    $     4,345    $        4
                                                          ========    ===========    ==========

     Non-cash investing and financing activities:
        In conjunction with the acquisitions by the
        Company, liabilities were assumed as follows:
             Fair value of assets acquired..............  $ 43,178    $    84,892    $  597,075
             Stock issued for the acquisitions..........        --         (3,391)       (2,340)
             Notes payable issued for acquisitions......    (6,000)        (8,659)           --
             Cash paid for the acquisitions.............   (28,511)       (26,300)      (82,694)
                                                          --------    -----------    ----------
                 Liabilities assumed....................  $  8,667    $    46,542    $  512,041
                                                          ========    ===========    ==========
        Decrease in intangible and deferred income for
           amount associated with sales of club
           memberships..................................   $ 7,172     $   11,084     $    3,889
                                                          ========    ===========    ==========
</TABLE>




17.  FAIR VALUES OF FINANCIAL INSTRUMENTS:

     The carrying amount of cash and cash equivalents, accounts receivable,
     inventories, notes receivable, prepaid expenses and other current assets,
     and accounts payable and accrued expenses approximates fair value as of
     December 31, 1999 because of the short maturity of these instruments.
     Similarly, the carrying value of line of credit borrowings approximates
     fair value as of that date because the applicable interest rates fluctuate
     based on published market rates. In the opinion of management, the interest
     rates associated with the long-term debt approximates the market interest
     rates for this type of instrument, and as such, the carrying values
     approximate fair value at December 31, 1999.


                                      F-30
<PAGE>   77


18.  BUSINESS SEGMENT INFORMATION:

     Crescent Operating's assets and operations are located entirely within the
     United States and are comprised of four business segments: (i) Equipment
     Sales and Leasing, (ii) Hospitality, (iii) Temperature Controlled Logistics
     and (iv) Land Development. In addition to these four business segments, the
     Company has grouped its investment in Magellan warrants, investment in
     Hicks-Muse (sold in March 1999), investment in CBHS, 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 has written-off its entire
     investment and has no obligation or commitment to fund CBHS' ongoing
     operations. As a result of the write-off, and irrespective of the
     transactions described in Note 3 to the Company's financial statements, the
     Company does not anticipate that it will recognize any additional CBHS
     losses for accounting purposes. The Company does incur costs of ownership
     related to the CBHS investment, such as legal and accounting costs, and
     COPI Healthcare incurs costs related to due diligence on the assets it has
     offered to purchase out of bankruptcy. Because the Company has written-off
     its CBHS investment and did not recognize income or loss from CBHS in 1999,
     the Company no longer reports its operations related to CBHS as a separate
     segment. The Company uses net income as the measure of segment profit or
     loss.

     The Equipment Sales and Leasing segment is engaged in the sale, leasing and
     service of construction equipment and accessories to the construction and
     utility industries located primarily in seven states. Crescent Machinery's
     leasing activities consist principally of leasing construction equipment
     and accessories under various leases, which are primarily short-term
     operating leases.

     The Hospitality segment generally consists of the operations of the
     Hospitality Properties. Each of such properties is owned by Crescent
     Partnership or its affiliates and all are leased to subsidiaries of the
     Company under long term leases. In addition to these properties, the
     Company also has other investments in the HCAC and in CRL.

     The Temperature Controlled Logistics segment consists primarily of a 40%
     interest in the operations of Vornado Crescent Operations, LP. Prior to
     reorganization of this segment effective March 12, 1999, this segment
     consisted of a 2% economic interest in the operations of The Temperature
     Controlled Logistics Partnerships. The Temperature Controlled Logistics
     Partnerships are the largest operators of public refrigerated storage space
     in the country in terms of public storage space operated.

     The Land Development segment consists of (i) a 4.65% economic interest in
     Desert Mountain, a master planned, luxury residential and recreational
     community in northern Scottsdale, Arizona, (ii) a 42.5% general partner
     interest in Woodlands Operating, which provides management, advisory,
     landscaping and maintenance services to entities affiliated with Crescent
     Operating and Crescent Equities, (iii) a 2.125% economic interest in
     Landevco, which owns approximately 7,500 acres for commercial and
     residential development as well as a realty office, an athletic center, and
     interests in both a title company and a mortgage company and (iv) a 5%
     economic interest in CDMC, whose operations consist principally of
     investing in partnerships and other entities that directly or indirectly
     develop and manage residential and resort properties (primarily in
     Colorado) or provide services to such properties.

     Business segment information is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                               Crescent Operating, Inc.            Carter-Crowley Asset Group (Predecessor)
                                        --------------------------------------    -----------------------------------------
                                             For the              For the         For the Period from   For the Period from
                                            Year Ended          Year Ended           May 9, 1997 to     January 1, 1997 to
                                        December 31, 1999    December 31, 1998     December 31, 1997        May 8, 1997
                                        -----------------    -----------------    -------------------   -------------------
<S>                                     <C>                    <C>                <C>                   <C>
Revenues:
   Equipment Sales and Leasing.......   $         136,343      $        85,365    $            10,518   $             4,657
   Hospitality.......................             246,763              229,491                 79,468                    --
   Land Development..................             334,881              178,392                 66,896                    --
   Temperature Controlled Logistics..                  --                   --                     --                    --
   Other.............................                  --                   --                     --                    --
                                        -----------------    -----------------    -------------------   -------------------
   Total revenues....................   $         717,987    $         493,248    $           156,882   $             4,657
                                        =================    =================    ===================   ===================
</TABLE>


                                      F-31
<PAGE>   78


<TABLE>
<S>                                         <C>                  <C>                  <C>                   <C>
Income (loss) from operations:
   Equipment Sales and Leasing...........   $           4,737    $           6,354    $               735   $               158
   Hospitality...........................               1,286                6,659                    232                    --
   Land Development......................              10,449                   20                   (199)                   --
   Temperature Controlled Logistics......                  (2)                 (88)                    --                    --
   Other.................................              (2,603)              (3,059)                (1,761)                   --
                                            -----------------    -----------------    -------------------   -------------------
   Total income (loss) from operations...   $          13,867    $           9,886    $              (993)  $               158
                                            =================    =================    ===================   ===================

Depreciation and amortization:
   Equipment Sales and Leasing...........   $          15,041    $           8,222    $             1,892   $               494
   Hospitality...........................               1,023                  802                    347                    --
   Land Development......................              17,811                5,695                  1,419                    --
   Temperature Controlled Logistics......                  --                   10                     --                    --
   Other.................................                (133)                  18                     --                    --
                                            -----------------    -----------------    -------------------   -------------------
   Total depreciation and amortization...   $          33,742    $          14,747    $             3,658   $               494
                                            =================    =================    ===================   ===================

Investment income (loss)
   Equipment Sales and Leasing...........   $              --    $              --    $                --   $                --
   Hospitality...........................                (851)                 130                      9                    --
   Land Development......................              23,825               25,858                  2,553                    --
   Temperature Controlled Logistics......              (2,275)               3,961                     36                    --
   Other.................................                 240               (2,265)               (19,021)                   --
                                            -----------------    -----------------    -------------------   -------------------
   Total investment income (loss)........   $          20,939    $          27,684    $           (16,423)  $                --
                                            =================    =================    ===================   ===================

Interest expense, net:
   Equipment Sales and Leasing...........   $           6,747    $           2,942    $               155   $               122
   Hospitality...........................                 618                   54                     12                    --
   Land Development......................              11,326                4,335                  1,020                    --
   Temperature Controlled Logistics......                  --                   --                     --                    --
   Other.................................               8,038                7,055                  2,543                    --
                                            -----------------    -----------------    -------------------   -------------------
   Total interest expense, net...........   $          26,729    $          14,386    $             3,730   $               122
                                            =================    =================    ===================   ===================

Income tax expense (benefit)
   Equipment Sales and Leasing...........   $          (1,081)   $           1,539    $                65   $                14
   Hospitality...........................                 (50)               2,724                     91                    --
   Land Development......................               7,293                7,465                    675                    --
   Temperature Controlled Logistics......                (911)                  --                     --                    --
   Other.................................              (8,722)              (6,207)                  (219)                   --
                                            -----------------    -----------------    -------------------   -------------------
   Total income tax expense (benefit)....   $          (3,471)   $           5,521    $               612   $                14
                                            =================    =================    ===================   ===================

Capital expenditures:
   Equipment Sales and Leasing...........   $          58,107    $          28,607    $             8,645   $             1,067
   Hospitality...........................               2,388                1,635                  1,376                    --
   Land Development......................              18,930               13,183                  3,930                    --
   Temperature Controlled Logistics......                  --                   --                     --                    --
   Other.................................                  51                   46                     --                    --
                                            -----------------    -----------------    -------------------   -------------------
   Total capital expenditures............   $          79,476    $          43,471    $            13,951   $             1,067
                                            =================    =================    ===================   ===================

Investment in unconsolidated
subsidiaries:
   Equipment Sales and Leasing...........   $              --    $              --    $                --
   Hospitality...........................              12,017                2,011                 (2,561)
   Land Development......................              51,220               60,687                 32,001
   Temperature Controlled Logistics......              14,859              293,868                161,851
   Other.................................               2,374               10,539                 27,337
                                            -----------------    -----------------    -------------------
   Total investment in
          unconsolidated subsidiaries....   $          80,470    $         367,105    $           218,628
                                            =================    =================    ===================

Identifiable assets:
   Equipment Sales and Leasing...........   $         184,964    $         127,215    $            27,843
   Hospitality...........................              44,805               38,536                 37,552
   Land Development......................             535,911              464,634                345,979
   Temperature Controlled Logistics......              16,337              293,780                161,851
   Other.................................              13,636               13,168                 28,858
                                            -----------------    -----------------    -------------------
   Total identifiable assets.............   $         795,653    $         937,333    $           602,083
                                            =================    =================    ===================
</TABLE>


                                      F-32
<PAGE>   79


19.  RELATED PARTY TRANSACTIONS:

     INTERCOMPANY AGREEMENT

     Generally, Crescent Operating is involved with Crescent Equities in two
     types of transactions: "Lessee Transactions" and "Controlled Subsidiary
     Transactions". Lessee Transactions are those in which Crescent Operating
     enters into a transaction to lease and operate real property that is owned
     by Crescent Partnership but which cannot be operated by Crescent
     Partnership due to Crescent Equities status as a REIT. Controlled
     Subsidiary Transactions are those in which Crescent Operating invests
     alongside Crescent Partnership in acquisitions where Crescent Operating
     owns all of the voting stock, and Crescent Partnership owns all of the
     non-voting stock of a corporate acquisition vehicle which in turn acquires
     a target business which cannot be operated by Crescent Partnership due to
     Crescent Equities' status as a REIT. The voting stock represents the
     control of the entity being purchased and due to its status as a REIT,
     Crescent Equities cannot have such ownership.

     Crescent Operating and Crescent Partnership have entered into the
     Intercompany Agreement to provide each other with rights to participate in
     the types of transactions mentioned above. The Intercompany Agreement
     provides, subject to certain terms, that Crescent Partnership will provide
     Crescent Operating with a right of first refusal to become the lessee of
     any real property acquired by Crescent Partnership if Crescent Partnership
     determines that, consistent with Crescent Equities' status as a REIT, it is
     required to enter into a "master" lease arrangement. Crescent Operating's
     right of first refusal under the Intercompany Agreement is conditioned upon
     the ability of Crescent Operating and Crescent Partnership to negotiate a
     mutually satisfactory lease arrangement and the determination of Crescent
     Partnership, in its sole discretion, that Crescent Operating is qualified
     to be the lessee. In general, a master lease arrangement is an arrangement
     pursuant to which an entire property or project (or a group of related
     properties or projects) is leased to a single lessee. If a mutually
     satisfactory agreement cannot be reached within a 30-day period (or such
     longer period to which Crescent Operating and Crescent Partnership may
     agree), Crescent Partnership may offer the opportunity to others.

     Under the Intercompany Agreement, Crescent Operating has agreed not to
     acquire or make (i) investments in real estate which, for purposes of the
     Intercompany Agreement, includes the provision of services related to real
     estate and investment in hotel properties, real estate mortgages, real
     estate derivatives or entities that invest in real estate assets or (ii)
     any other investments that may be structured in a manner that qualifies
     under the federal income tax requirements applicable to REITs. Crescent
     Operating has agreed to notify Crescent Partnership of, and make available
     to Crescent Partnership, investment opportunities developed by Crescent
     Operating, or of which Crescent Operating becomes aware but is unable or
     unwilling to pursue.

     OTHER TRANSACTIONS

     The Company leases full service hotels and destination health and fitness
     resorts from Crescent Partnership, or other subsidiaries of Crescent
     Equities, under operating leases. Crescent Partnership has agreed to fund
     all capital expenditures relating to furniture, fixtures and equipment
     reserves required under applicable management agreements on all properties
     except for Canyon Ranch-Tucson. Total rent expense related to these leases
     totaled approximately $54.0 million for the year ended December 31, 1999.

     The Company has various debt instruments payable to Crescent Partnership
     with an aggregate amount outstanding at December 31, 1999 of $216.7
     million. See Note 9 for additional information.

     Included in notes receivable is a note from Landevco payable to Landco in
     the amount of $10.6 million as of December 31, 1999. The note bears
     interest at 15.0% per annum with quarterly interest payments and principal
     due upon maturity of July 2007. Interest income recognized for the year
     ended December 31, 1999 was $1.7 million.

20.  SUBSEQUENT EVENTS:

     Effective January 31, 2000, HCAC sold substantially all of its assets to an
     unrelated party. Through a wholly owned subsidiary, the Company received
     proceeds from the sale of $2.4 million resulting in an approximate $1.5
     million gain which will be recognized by Crescent Operating in the first
     quarter of 2000.

     In accordance with an agreement between Gerald Haddock and the Company, Mr.
     Haddock, the Company's former Chief Executive Officer and President, had
     his limited partnership interest in COPI Colorado redeemed


                                      F-33
<PAGE>   80
     by COPI Colorado 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 reserved the right to challenge the valuation
     performed by the independent appraiser. As a result of the redemption of
     Mr. Haddock's interest, the Company has an approximate 58% interest in COPI
     Colorado.

     In February 2000, Crescent Operating and its hospitality subsidiaries
     entered into a Master Asset Management and Administrative Services
     Agreement and property management agreements with Sonoma Management Company
     ("SMC") to manage the Company's hotel properties (excluding Canyon Ranch -
     Lenox, Canyon Ranch - Tucson and the Hyatt Regency Beaver Creek). At the
     same time, the Company's hospitality subsidiaries accepted assignment from
     the owners of the Sonoma Mission Inn and Spa, the Sonoma Mission Inn Golf
     and Country Club and the Ventana Inn and Spa of its property management
     agreements with Sonoma Management Company. The principles of Sonoma
     Management Company are Sanjay and Johanna Varma and Crescent Equities is an
     equity owner in Sonoma Management Company.

     On February 16, 2000, CBHS petitioned for relief under Chapter 11, of the
     United States Bankruptcy Code. Under the protection of the bankruptcy
     court, CBHS intends to sell and liquidate, in a controlled fashion, all of
     its ongoing business. In conjunction with the filing by CBHS of the
     bankruptcy petition, COPI Healthcare, Inc. ("COPI Healthcare"), a wholly
     owned subsidiary of Crescent Operating, entered into an agreement with CBHS
     for the acquisition by COPI Healthcare of CBHS' core business ("Asset
     Purchase Agreement"), which consists of the assets used in the operation of
     37 behavioral healthcare facilities for, $24.5 million. The bankruptcy
     court could seek other bids for these assets from other interested parties
     and there is no assurance that COPI Healthcare's bid will be successful or
     that the conditions contained in its offer can be satisfied.

     On March 27, 2000, COPI Healthcare notified CBHS that because it appears
     that not all of the conditions to its obligation to consummate the
     acquisition under the Asset Purchase Agreement appear likely to be met
     before the agreement terminates by its own terms on April 16, 2000, COPI
     Healthcare does not expect to close the acquisition under the Asset
     Purchase Agreement.

21.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

Amounts in thousands, except per share amounts:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31, 1999
                                                                -----------------------------------------------------
                                                                   First        Second        Third         Fourth
                                                                -----------   -----------   -----------   -----------
<S>                                                             <C>           <C>           <C>           <C>
Revenues ....................................................   $   136,748   $   173,393   $   175,602   $   232,244
Income (loss) from operations ...............................         4,295         8,751         2,946        (2,125)
Income (loss) before minority interests and income taxes ....         9,001         6,293        (2,282)       (5,066)
Minority interests ..........................................        (5,215)       (5,167)       (1,465)       (2,265)
Income tax provision (benefit) ..............................           372           972        (1,284)       (3,531)
Net income (loss) ...........................................         3,414           154        (2,463)       (3,800)
Basic income (loss) per share ...............................           .32           .01          (.24)         (.35)
Diluted income (loss) per share .............................           .31           .01          (.24)         (.34)
</TABLE>


<TABLE>
<CAPTION>
                                                                              Year Ended December 31, 1998
                                                                -----------------------------------------------------
                                                                   First        Second        Third         Fourth
                                                                -----------   -----------   -----------   -----------
<S>                                                             <C>           <C>           <C>           <C>
Revenues ....................................................   $    97,377   $   106,809   $   111,826   $   177,236
Income (loss) from operations ...............................         3,941         3,405        (2,695)        5,235
Income (loss) before minority interests and income taxes ....          (620)        9,544          (210)       14,288
Minority interests ..........................................          (487)       (3,404)       (1,021)      (11,428)
Income tax provision (benefit) ..............................            71         4,198        (1,321)        2,573
Net income (loss) ...........................................        (1,178)        1,942            90           287
Basic income (loss) per share ...............................          (.11)          .17           .01           .03
Diluted income (loss) per share .............................          (.11)          .16           .01           .04
</TABLE>


                                      F-34
<PAGE>   81


                          INDEPENDENT AUDITORS' REPORT



To the Partners
Vornado Crescent Logistics Operating Partnership and Subsidiary:

We have audited the accompanying consolidated balance sheet of Vornado Crescent
Logistics Operating Partnership and Subsidiary (the "Partnership") as of
December 31, 1999, and the related consolidated statements of operations,
partners' capital, and cash flows for the period from March 11, 1999 (date of
inception) to December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Vornado Crescent Logistics
Operating Partnership and Subsidiary at December 31, 1999, and its consolidated
results of operations and cash flows for the period from March 11, 1999 (date of
inception) to December 31, 1999 in conformity with generally accepted accounting
principles.

                                                DELOITTE & TOUCHE LLP


Atlanta, Georgia
March 2, 2000
(March 8, 2000 as to Note 6)


                                      F-35
<PAGE>   82


VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(amounts in thousands)
--------------------------------------------------------------------------------

<TABLE>
<S>                                                                         <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                 $   7,988
  Restricted cash                                                              16,887
  Trade accounts receivable, net of allowance for doubtful
     accounts of $2,036                                                        77,010
  Other current assets                                                          7,891
  Working capital to be collected on behalf of Real Estate Companies          (12,951)
                                                                            ---------
                                                                               96,825

PROPERTY, PLANT, AND EQUIPMENT:
  Land                                                                         18,442
  Buildings and improvements                                                    1,517
  Machinery and equipment                                                      33,127
                                                                            ---------
                                                                               53,086
  Less accumulated depreciation                                                (4,230)
                                                                            ---------
      Property, plant, and equipment, net                                      48,856

OTHER ASSETS                                                                    7,831
                                                                            ---------
                                                                            $ 153,512
                                                                            =========
LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:
  Accounts payable                                                          $  28,350
  Accrued expenses                                                             44,570
  Unearned revenue                                                              9,630
  Due to Real Estate Companies                                                 29,232
                                                                            ---------
      Total current liabilities                                               111,782

DEFERRED RENT OBLIGATIONS TO REAL ESTATE COMPANIES                              5,400

OTHER LIABILITIES                                                               6,851
                                                                            ---------
        Total liabilities                                                     124,033

COMMITMENTS

PARTNERS' CAPITAL                                                              29,479
                                                                            ---------
                                                                            $ 153,512
                                                                            =========
</TABLE>


  See notes to consolidated financial statements.


                                      F-36
<PAGE>   83


VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
(amounts in thousands)
--------------------------------------------------------------------------------



<TABLE>
<S>                                                        <C>
REVENUES                                                   $ 557,708

OPERATING EXPENSES:
  Cost of operations                                         399,615
  Rent expense on leases with Real Estate Companies          135,811
  General and administrative                                  26,542
  Depreciation and amortization                                4,789
                                                           ---------

      Total operating expenses                               566,757
                                                           ---------

OPERATING LOSS                                                (9,049)

OTHER INCOME (EXPENSE):
  Interest expense                                              (534)
  Other income                                                   339
                                                           ---------

NET LOSS                                                   $  (9,244)
                                                           =========
</TABLE>


See notes to consolidated financial statements.


                                      F-37
<PAGE>   84


VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP
AND SUBSIDIARY

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                          PARTNERS'         ACCUMULATED
                                           CAPITAL             DEFICIT            TOTAL
<S>                                      <C>                <C>                 <C>
Capital contribution                     $    38,723        $        --         $    38,723

  Net loss                                        --             (9,244)             (9,244)
                                         -----------        -----------         -----------

BALANCE - December 31, 1999              $    38,723        $    (9,244)        $    29,479
                                         ===========        ===========         ===========
</TABLE>


See notes to consolidated financial statements.


                                      F-38
<PAGE>   85


VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------


<TABLE>
<S>                                                              <C>
OPERATING ACTIVITIES:
  Net loss                                                       $ (9,244)
  Adjustments to reconcile net loss
    to net cash provided by operating activities:
    Provision for bad debts                                         1,685
    Depreciation and amortization                                   4,789
    Deferral of rent expense                                        5,400
    Gain on settlement and curtailment of benefit plan             (1,363)
  Changes in assets and liabilities, net of acquisitions:
      Trade accounts receivable                                       239
      Other assets                                                 (6,420)
      Accounts payable and accrued expenses                        (1,493)
      Due to Real Estate Companies                                 29,232
      Other liabilities                                             3,078
                                                                 --------

        Net cash provided by operating activities                  25,903

INVESTING ACTIVITIES:
  Purchase of non-real estate assets                              (38,723)
  Additions to property, plant, and equipment                      (9,666)
                                                                 --------

        Net cash used in investing activities                     (48,389)

FINANCING ACTIVITIES:
  Repayment of due to Real Estate Companies                        (8,249)
  Capital contributions                                            38,723
                                                                 --------

        Net cash provided by financing activities                  30,474
                                                                 --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                             7,988

CASH AND CASH EQUIVALENTS:
  Beginning of period                                                  --
                                                                 --------

  End of period                                                  $  7,988
                                                                 ========

SUPPLEMENTAL DISCLOSURES:
  Interest paid                                                  $    331
                                                                 ========

SUPPLEMENTAL INFORMATION ABOUT NONCASH
  ACTIVITIES:
  Liabilities assumed in connection with acquisition of
    non-real estate assets                                       $ 13,198
                                                                 ========
  Initial working capital to be collected on behalf of
    Real Estate Companies                                        $ 21,200
                                                                 ========
</TABLE>

See notes to consolidated financial statements.




                                      F-39
<PAGE>   86


VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND FOR THE PERIOD FROM
MARCH 11, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------


1.    ORGANIZATION AND BUSINESS

      Vornado Crescent Logistics Operating Partnership (the "Partnership") was
      formed on March 11, 1999. The Partnership holds its assets and conducts
      its business through its wholly owned subsidiary AmeriCold Logistics, LLC
      (collectively "AmeriCold Logistics"). AmeriCold Logistics, headquartered
      in Atlanta, Georgia, has 6,900 employees and operates 104 temperature
      controlled warehouse facilities nationwide with an aggregate of
      approximately 519 million cubic feet of refrigerated, frozen, and dry
      storage space. Of the 104 warehouses, AmeriCold Logistics leases 89
      temperature controlled warehouses with an aggregate of approximately 428
      million cubic feet and manages 15 additional warehouses containing
      approximately 91 million cubic feet of space. AmeriCold Logistics provides
      the frozen food industry with refrigerated warehousing and transportation
      management services. Refrigerated warehouses are comprised of production
      and distribution facilities. Production facilities typically serve one or
      a small number of customers, generally food processors, located nearby.
      These customers store large quantities of processed or partially processed
      products in the facility until they are shipped to the next stage of
      production or distribution. Distribution facilities primarily warehouse a
      wide variety of customers' finished products until future shipment to
      end-users. Each distribution facility primarily services the surrounding
      regional market. AmeriCold Logistics offers transportation management
      services including freight routing, dispatching, freight rate negotiation,
      backhaul coordination, and distribution channel assessment. AmeriCold
      Logistics temperature controlled logistics expertise and access to both
      frozen food warehouses and distribution channels enable its customers to
      respond quickly and efficiently to time-sensitive orders from distributors
      and retailers. Additionally, AmeriCold Logistics mines limestone at two of
      its locations.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation - The consolidated financial statements of the
      Partnership include the accounts of the Partnership and its subsidiary.
      The Partnership is owned 60% by Vornado Operating L.P. and 40% by COPI
      Cold Storage L.L.C. The partnership agreement provides that net income and
      losses are allocated to each partner's account in relation to their
      ownership interests. Subject to certain provisions, the Partnership
      continues for a term through October 2027. Management has made estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.

      Cash and Cash Equivalents - Cash and cash equivalents consist of highly
      liquid investments purchased with original maturities of three months or
      less.

      Restricted Cash - Cash restricted for uses related to payment of rent
      ($7,229 at December 31, 1999) and settlement of certain self-insured
      liabilities ($9,658 at December 31, 1999) is classified as restricted
      cash.

      Property, Plant, and Equipment - Depreciation and amortization are
      computed on the straight-line method over the estimated useful lives of
      the respective assets. Depreciation and amortization begin the month in
      which the asset is placed into service.



                                      F-40
<PAGE>   87


      Properties are reviewed for impairment if events or changes in
      circumstances indicate that the carrying amount of the property may not be
      recoverable. In such an event, a comparison is made of the current and
      projected operating cash flows of each such property into the foreseeable
      future on an undiscounted basis to the carrying amount of such property.
      Such carrying amount would be adjusted, if necessary, to estimated fair
      value to reflect an impairment in the value of the asset.

      Revenue Recognition - Revenues include storage, transportation and
      handling fees, and management fees for locations managed on behalf of
      third parties. Storage revenues are generally invoiced daily and are
      recognized as billed. Transportation fees and expenses are recognized upon
      tender of product to common carriers, which is not materially different
      than if such revenues and expenses were recognized upon delivery.
      Management fees are recognized at the conclusion of each period in which
      the Company is contractually entitled to such fees. Costs related to
      managed facilities are included in operating expenses. AmeriCold Logistics
      charges customers for both inbound and outbound handling in advance but
      defers the outbound handling revenue until the product has been shipped.
      Revenues from the sale of limestone are recognized upon delivery to
      customers.

      Income Taxes - AmeriCold Logistics has elected to be treated as a
      partnership for income tax purposes. Taxable income or loss of AmeriCold
      Logistics is reported in the income tax returns of the partners.
      Accordingly, no provision for income taxes is made in the financial
      statements of AmeriCold Logistics.

      Recently Issued Accounting Standards - In June 1998, the Financial
      Accounting Standards Board issued Statement of Financial Accounting
      Standards No. 133, Accounting for Derivative Instruments and Hedging
      Activities. This statement establishes accounting and reporting standards
      for derivative instruments, including certain derivative instruments
      embedded in other contracts, and for hedging activities. It is effective
      for all fiscal quarters of fiscal years beginning after June 15, 2000.
      Because the Company does not currently utilize derivatives or engage in
      significant hedging activities, management does not anticipate that
      implementation of this statement will have a material effect on the
      Company's financial statements.

3.    ACQUISITION

      In March 1999, AmeriCold Logistics purchased all of the non-real estate
      assets of a group of companies owned by Vornado Realty Trust and
      subsidiaries of Crescent Real Estate Equities Company and Crescent
      Operating, Inc. (the "Real Estate Companies").

      The purchase price of the non-real estate assets was $48.7 million
      including the assumption of approximately $10 million of liabilities
      assumed in connection with the closure of one of the warehouse facilities.
      In addition, the Company acquired capitalized leased assets and assumed
      $3.2 million of capitalized lease obligations as a result of the purchase.

      The purchase method of accounting was applied to this acquisition.
      Approximate fair values assigned to assets and liabilities acquired were
      as follows:

<TABLE>
<S>                                               <C>
        (amounts in thousands)
      Property, plant, and equipment              $  43,421
      Other assets                                    8,500
                                                  ---------
                                                     51,921
      Other liabilities                             (13,198)
                                                  ---------
                                                  $  38,723
                                                  =========
</TABLE>


      Results of operations are presented from the date of acquisition.


                                      F-41
<PAGE>   88


4.    ACCRUED EXPENSES

      Detail of accrued expense as of December 31, 1999 is as follows:


      (amounts in thousands)

<TABLE>
<S>                                                         <C>
      Accrued payroll and related expense                   $ 8,855
      Accrued employee retirement and other benefits          8,521
      Accrued workers' compensation                           7,961
      Other accrued expenses                                 19,233
                                                            -------

                                                            $44,570
                                                            =======
</TABLE>



5.    TRANSACTIONS WITH REAL ESTATE COMPANIES AND OWNERS

      Amounts due to Real Estate Companies at December 31, 1999 consist of
      current rent payable of $19,232,000 and current portion of deferred rent
      of $10,000,000 (of which $6,000,000 was paid in March 2000). Working
      capital to be collected on behalf of Real Estate Companies of $12,951,000
      has been classified as a reduction of these assets.

      During 1999, AmeriCold Logistics received a management fee of $201,000
      from the Real Estate Companies for administrative services performed.

      Included in other assets is a $952,000 receivable from the Partnership's
      owners for expenditures made on their behalf for a new business venture.

6.    LEASE COMMITMENTS

      AmeriCold Logistics entered into leases with the Real Estate Companies
      covering the warehouses used in this business. The leases, which commenced
      in March 1999, generally have a 15-year term with two five-year renewal
      options and provide for the payment of fixed base rent and percentage rent
      based on revenues AmeriCold Logistics receives from its customers. Fixed
      base rent is approximately $130 million per annum through 2003, $132
      million per annum from 2004 through 2008, and $133 million per annum from
      2009 through 2014. Percentage rent for each lease is based on a specified
      percentage of revenues in excess of a specified base amount. The aggregate
      base revenue amount under five of the six leases is approximately $321
      million, and the weighted average percentage rate is approximately 36% for
      the initial five-year period, approximately 39% for the period from 2004
      through 2008, and approximately 41% for the period from 2009 through
      February 28, 2014. The aggregate base revenue amount under the sixth lease
      is approximately $32 million, and the percentage rate is 24% for the
      initial two-year period, 37.5% for the period from 2002 through 2006, 40%
      from 2007 through 2011, and 41% from 2012 through February 28, 2014.

      AmeriCold Logistics has negotiated amendments to add four new properties,
      or expansions to existing properties, which were developed by the lessor
      during 1999. The aggregate rentals of the four new properties in the
      initial lease year is expected to be approximately $9,400,000.

      The fixed base rent for each of the two five-year renewal options is
      equal, generally, to the greater of the then fair market value rent and
      the fixed base rent for the immediately preceding lease year plus 5%.

      AmeriCold Logistics has the right to defer the payment of 15% of fixed
      base rent and all percentage rent for up to three years beginning in March
      1999 to the extent that available cash, as defined in the leases, is
      insufficient to pay such rent. Pursuant to the agreement, AmeriCold
      Logistics exercised its deferral rights and deferred approximately $15.4
      million in fixed and percentage rent. In March 2000, AmeriCold Logistics
      expects to pay $10.0 million of its deferred rent obligation (of which
      $6,000,000 was paid in March 2000).


                                      F-42
<PAGE>   89


      Accordingly, at December 31, 1999, AmeriCold Logistics has $10.0 million
      classified as current deferred rent payable and $5.4 million classified as
      deferred rent obligation.

      AmeriCold Logistics is also required to pay for all costs arising from the
      operation, maintenance and repair of the properties, including all real
      estate taxes and assessments, utility charges, permit fees, and insurance
      premiums, as well as property capital expenditures in excess of $5,000,000
      annually.

      AmeriCold Logistics also has operating lease agreements for equipment and
      other facilities. AmeriCold Logistics pays taxes, insurance, and
      maintenance costs on substantially all of the leased property. Lease terms
      generally range from 5 to 20 years with renewal or purchase options.

      At December 31, 1999, future minimum fixed lease payments under these
      leases with the Real Estate Companies and future minimum lease payments
      under operating leases other than leases with the Real Estate Companies
      are as follows:

       (amounts in thousands)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
                               REAL ESTATE         OTHER
                                COMPANIES          LESSORS           TOTAL
<S>                            <C>                <C>             <C>
2000                           $   129,275        $   6,354       $   135,629
2001                               129,277            5,870           135,147
2002                               129,417            4,846           134,263
2003                               129,403            3,958           133,361
2004                               131,562            3,158           134,720
Thereafter                       1,220,488            3,684         1,224,172
                               -----------        ---------       -----------

                               $ 1,869,422        $  27,870       $ 1,897,292
                               ===========        =========       ===========
</TABLE>


      Rent expense under all lease obligations for the period was $113,899,000
      for fixed rent and $26,780,000 for percentage rent.

7.    EMPLOYEE BENEFIT PLANS

      Defined Benefit Pension Plans - AmeriCold Logistics has defined benefit
      pension plans that cover substantially all employees, other than union
      employees covered by union pension plans under collective bargaining
      agreements. Benefits under AmeriCold Logistics' plans are based on years
      of credited service and compensation during the years preceding
      retirement, or on years of credited service and established monthly
      benefit levels.

      Postretirement Benefits Other Than Pensions - During 1999, AmeriCold
      Logistics settled and curtailed postretirement healthcare and life
      insurance benefits for a substantial portion of its employees. As a
      result, AmeriCold Logistics recorded a gain of approximately $1,363.

      Actuarial information regarding the defined benefit pension plans and
      postretirement benefits other than pensions as of December 31, 1999 is as
      follows:


                                      F-43
<PAGE>   90


<TABLE>
<CAPTION>
                                                                                 PENSION BENEFITS
                                                                         ---------------------------------
                                                                                                NATIONAL           OTHER
                                                                          RETIREMENT            SERVICE        POSTRETIREMENT
(amounts in  thousands)                                                  INCOME PLAN          RELATED PLAN        BENEFITS
<S>                                                                      <C>                  <C>                <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period                                $     33,052         $     11,653       $      7,150
Service cost                                                                    1,297                  254                147
Interest cost                                                                   2,461                  576                346
Actuarial (gain) loss                                                          (3,903)                 404               (320)
Curtailments                                                                       --                   --             (2,735)
Settlements                                                                        --                   --             (1,940)
Plan transfers                                                                  2,930               (2,930)                --
Plan amendments                                                                    --                   --               (664)
Benefits paid                                                                  (2,127)                (606)               (64)
                                                                         ------------         ------------       ------------

Benefit obligation at end of year                                        $     33,710         $      9,351       $      1,920
                                                                         ============         ============       ============

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period                         $     25,693         $     10,058       $         --
Actual return on plan assets                                                    3,364                1,060                 --
Employer contributions                                                             --                  967                 64
Plan transfers                                                                  1,844               (1,844)                --
Benefits paid                                                                  (2,127)                (606)               (64)
                                                                         ------------         ------------       ------------

Fair value of plan assets at end of year                                 $     28,774         $      9,635       $         --
                                                                         ============         ============       ============

Funded status                                                            $     (4,936)                 285       $     (1,920)
Unrecognized actuarial (gain) loss                                             (1,809)               1,409                 (2)
Unrecognized prior service cost                                                 1,338                  157               (648)
                                                                         ------------         ------------       ------------
(Accrued) prepaid benefit cost                                           $     (5,407)        $      1,851       $     (2,570)
                                                                         ============         ============       ============


Amounts recognized in the combined balance sheet consist of:
  Accrued benefit liability                                              $     (5,407)        $         --       $     (2,570)
  Prepaid asset                                                                    --                1,851                 --
                                                                         ------------         ------------       ------------
Net amount recognized                                                    $     (5,407)        $      1,851       $     (2,570)
                                                                         ============         ============       ============

Weighted-average assumptions as of December 31, 1999:
Discount rate                                                                    7.75%                7.75%              7.75%
Expected return                                                                  9.50%                9.50%               N/A
Rate of compensation increase                                                    4.00%                 N/A                N/A

</TABLE>


                                      F-44
<PAGE>   91




<TABLE>
<CAPTION>
                                                    PENSION BENEFITS
                                            ---------------------------------
                                                                   NATIONAL           OTHER
                                             RETIREMENT            SERVICE        POSTRETIREMENT
(amounts in  thousands)                     INCOME PLAN          RELATED PLAN        BENEFITS
<S>                                         <C>                  <C>                  <C>
COMPONENTS OF NET PERIODIC
  BENEFIT COST:
  Service cost                              $     1,297          $        254         $   147
  Interest cost                                   2,461                   576             346
  Expected return on plan assets                 (2,531)                 (820)             --
  Recognized net actuarial loss                     338                    18              67
  Amortization of prior service cost                104                     5             (56)
                                            -----------          ------------         -------

                                            $     1,669          $         33         $   504
                                            ===========          ============         =======
</TABLE>

      Assumed health care cost trend rates have a significant effect on the
      amounts reported for the health care plans. A one-percentage point change
      in assumed health care cost-trend rates would have the following effects
      (amounts in thousands):

<TABLE>
<CAPTION>
                                                                      ONE-PERCENTAGE        ONE-PERCENTAGE
                                                                      POINT INCREASE        POINT DECREASE
                                                                      ---------------      ----------------
<S>                                                                   <C>                  <C>
Effect on total of service and interest cost components                  $     25              $    (23)
</TABLE>


      Profit Sharing - AmeriCold Logistics has defined contribution employee
      benefit plans which cover all eligible employees. The plans also allow
      contributions by plan participants in accordance with Section 401(k) of
      the Internal Revenue Code. Profit sharing expense for the period ended
      December 31, 1999 was approximately $4,060,000.

      Deferred Compensation - AmeriCold Logistics has deferred compensation and
      supplemental retirement plan agreements with certain of its executives.
      The agreements provide for certain benefits at retirement or disability,
      and also provide for survivor benefits in the event of death of the
      employee. AmeriCold Logistics charges expense for the accretion of the
      liability each year.

      The net expense for all deferred compensation and supplemental retirement
      plans for the period was approximately $164,000.



                                      F-45



<PAGE>   92


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO THE MEMBERS OF
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC:

We have audited the accompanying consolidated balance sheets of Charter
Behavioral Health Systems, LLC (a Delaware limited liability corporation) and
subsidiaries as of September 30, 1997 and 1998, and the related consolidated
statements of operations, changes in members' capital (deficit) and cash flows
for the period June 17, 1997 to September 30, 1997 and for the year ended
September 30, 1998. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Charter Behavioral Health
Systems, LLC and subsidiaries as of September 30, 1997 and 1998, and the results
of their operations and their cash flows for the period June 17, 1997 to
September 30, 1997 and for the year ended September 30, 1998, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

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



                                             ARTHUR ANDERSEN LLP

ATLANTA, GEORGIA
DECEMBER 3, 1998
(except with respect to
the matters discussed in Note 13,
as to which date is March 30, 2000)







                                      F-46
<PAGE>   93

                     CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                    September 30,
                                                                                              ------------------------
                                                                                                1997            1998
                                                                                              ---------      ---------
<S>                                                                                           <C>            <C>

                                                             ASSETS

Current Assets:
       Cash, including cash equivalents of $15,477 in 1997 and $9,117 in 1998, at cost,
            which approximates market value .............................................     $  23,443      $  13,493
       Accounts receivable, less allowance for doubtful accounts
            of $17,605 in 1997 and $33,548 in 1998 ......................................       107,961        120,187
       Accounts receivable from Magellan ................................................         5,090           --
       Supplies .........................................................................         2,313          2,665
       Prepaid expenses .................................................................         9,385         10,538
       Other current assets .............................................................           345            236
                                                                                              ---------      ---------
            Total Current Assets ........................................................       148,537        147,119

Property and Equipment:
       Buildings and improvements .......................................................        11,879          9,616
       Equipment ........................................................................         7,121         11,924
                                                                                              ---------      ---------
                                                                                                 19,000         21,540
       Accumulated depreciation .........................................................          (662)        (2,916)
                                                                                              ---------      ---------
                                                                                                 18,338         18,624
       Construction in progress .........................................................            86          2,524
                                                                                              ---------      ---------
            Total Property and Equipment ................................................        18,424         21,148

Other Long-Term Assets ..................................................................         6,471          6,699

Goodwill, net of accumulated amortization of $3 in 1997 and $17 in 1998 .................           286            294

Deferred Financing Fees, net of accumulated amortization of $115 in 1997 and $513 in 1998         1,876          1,878
                                                                                              ---------      ---------

                                                                                              $ 175,594      $ 177,138
                                                                                              =========      =========
</TABLE>



          The accompanying Notes to Consolidated Financial Statements
           are an integral part of these consolidated balance sheets.





                                      F-47
<PAGE>   94


                     CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    September 30,
                                                                              ------------------------
                                                                                1997            1998
                                                                              ---------      ---------
<S>                                                                           <C>            <C>

                   LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)

Current Liabilities:
       Accounts payable .................................................     $  34,864      $  54,443
       Accounts payable to Magellan .....................................          --           36,857
       Accrued liabilities ..............................................        33,578         47,279
       Current maturities of long-term debt and capital lease obligations            55          2,800
                                                                              ---------      ---------
            Total Current Liabilities ...................................        68,497        141,379

Long-Term Debt and Capital Lease Obligations ............................        65,860         67,200

Reserve for Unpaid Claims ...............................................         2,686         10,812

Deferred Rent ...........................................................         3,956         17,054

Long-Term Obligations to Lessor .........................................           803          3,803

Minority Interest and Other Long-Term Liabilities .......................            36          3,768

Members' Capital (Deficit):
       Preferred interests ..............................................        35,000         35,000
       Common interests .................................................        15,000         15,000
       Accumulated  deficit .............................................       (16,244)      (116,878)
                                                                              ---------      ---------
            Total Members' Capital (Deficit) ............................        33,756        (66,878)
                                                                              ---------      ---------
                                                                              $ 175,594      $ 177,138
                                                                              =========      =========
</TABLE>


           The accompanying Notes to Consolidated Financial Statements
           are an integral part of these consolidated balance sheets.









                                      F-48
<PAGE>   95

                     CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                          106 Days Ended      Year Ended
                                                           September 30,      September 30,
                                                               1997                1998
                                                           -------------      -------------
<S>                                                        <C>                <C>
Net revenue ..........................................     $     213,730      $     730,447
                                                           -------------      -------------
Costs and expenses:
       Salaries, supplies and other operating expenses           170,619            606,628
       Franchise fees - Magellan .....................            22,739             78,584
       Crescent Lease expense ........................            16,919             56,133
       Bad debt expense ..............................            17,437             63,895
       Depreciation and amortization .................               668              5,693
       Interest, net .................................             1,592              5,263
       Unusual items .................................              --               11,125
                                                           -------------      -------------
                                                                 229,974            827,321
                                                           -------------      -------------
Loss before minority interest ........................           (16,244)           (96,874)
Minority interest ....................................              --                   41
                                                           -------------      -------------
Net loss .............................................           (16,244)           (96,915)
Preferred dividend requirement .......................              --                3,719
                                                           -------------      -------------
Net loss applicable to common members ................     $     (16,244)     $     100,634)
                                                           =============      =============

</TABLE>


           The accompanying Notes to Consolidated Financial Statements
             are an integral part of these consolidated statements.






                                      F-49
<PAGE>   96



                     CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
        CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' CAPITAL (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             106 DAYS ENDED      YEAR ENDED
                                                                              SEPTEMBER 30,     SEPTEMBER 30,
                                                                                  1997              1998
                                                                             -------------      -------------
<S>                                                                          <C>                <C>
Preferred Interests:
    Balance, beginning of period ......................................       $        --        $    35,000
    Issuance of cumulative redeemable preferred interests - Magellan ..            17,500               --
    Issuance of cumulative redeemable preferred interests - COI .......            17,500               --
                                                                            -------------      -------------
    Balance, end of period ............................................            35,000             35,000
                                                                            -------------      -------------

Common Interests:
    Balance, beginning of period ......................................              --               15,000
    Capital contribution - Magellan ...................................             7,500               --
    Capital contribution - COI ........................................             7,500               --
                                                                            -------------      -------------
    Balance, end of period ............................................            15,000             15,000
                                                                            -------------      -------------

Accumulated Deficit:
    Balance, beginning of period ......................................              --              (16,244)
    Net loss applicable to common members .............................           (16,244)          (100,634)
                                                                            -------------      -------------
    Balance, end of period ............................................           (16,244)          (116,878)
                                                                            -------------      -------------


Total Members' Capital (Deficit) ......................................     $      33,756      $     (66,878)
                                                                            =============      =============

</TABLE>


          The accompanying Notes to Consolidated Financial Statements
             are an integral part of these consolidated statements.



                                      F-50
<PAGE>   97


                     CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                   106 Days Ended       Year Ended
                                                                                    September 30,      September 30,
                                                                                         1997              1998
                                                                                    --------------     --------------
<S>                                                                                 <C>                <C>
Cash Flows From Operating Activities
       Net loss ...............................................................     $     (16,244)     $     (96,915)
                                                                                    -------------      -------------
         Adjustments to reconcile net loss to net cash used in operating
              activities:
         (Gain) loss on sale of businesses ....................................              (355)             2,688
         Depreciation and amortization ........................................               668              5,693
         Non-cash interest expense ............................................               115                398
         Cash flows from changes in assets and liabilities, net of effects from
              sales and acquisitions of businesses:
                 Accounts receivable, net .....................................           (98,504)            (5,318)
                 Accounts receivable/payable to Magellan ......................            (5,090)            41,947
                 Other current assets .........................................            (5,089)            (1,096)
                 Other long-term assets .......................................            (4,565)              (275)
                 Accounts payable and accrued liabilities .....................            53,791             30,848
                 Reserve for unpaid claims ....................................             2,686              8,126
                 Deferred rent ................................................             3,956             13,098
                 Minority interest, net of dividends paid .....................              --                  (25)
                 Other liabilities ............................................               800                 43
                                                                                    -------------      -------------
                 Total adjustments ............................................           (51,587)            96,127
                                                                                    -------------      -------------
                      Net cash used in operating activities ...................           (67,831)              (788)
                                                                                    -------------      -------------

Cash Flows From Investing Activities
       Capital expenditures ...................................................              (149)            (9,549)
       Purchase of information systems equipment from Magellan ................            (5,000)              --
       Purchase of net assets from Magellan ...................................           (11,288)              --
       Proceeds from sale of businesses, net of transaction costs .............              --                1,160
       Acquisition of businesses, net of cash acquired ........................              --               (5,327)
                                                                                    -------------      -------------
                      Net cash used in investing activities ...................           (16,437)           (13,716)
                                                                                    -------------      -------------

Cash Flows From Financing Activities
       Payments on debt and capital lease obligations .........................               (16)               (46)
       Proceeds from issuance of debt, net of issuance costs ..................            98,009              4,600
       Proceeds from capital contributions - Magellan .........................             2,218               --
       Proceeds from capital contributions - COI ..............................             7,500               --
                                                                                    -------------      -------------
                      Net cash provided by financing activities ...............           107,711              4,554
                                                                                    -------------      -------------

Net increase(decrease) in cash and cash equivalents ...........................            23,443             (9,950)
Cash and cash equivalents at beginning of period ..............................              --               23,443
                                                                                    -------------      -------------
Cash and cash equivalents at end of period ....................................     $      23,443      $      13,493
                                                                                    =============      =============
</TABLE>



          The accompanying Notes to Consolidated Financial Statements
             are an integral part of these consolidated statements.









                                      F-51
<PAGE>   98


                     CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1997 AND 1998



1. ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements of Charter Behavioral Health Systems, LLC
("CBHS" or the "Company"), a Delaware limited liability corporation, include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The Company provides behavioral healthcare services in the United States. The
Company's principal services include group and individual inpatient treatment,
day and partial hospitalization services, group and individual outpatient
treatment and residential services.

On June 17, 1997 the Company began operations pursuant to a series of
transactions (the "Crescent Transactions") between Magellan Health Services,
Inc. ("Magellan"), Crescent Real Estate Equities Limited Partnership
("Crescent") and Crescent Operating, Inc. ("COI"). The Crescent Transactions
provided for the following:

o    Magellan sold to Crescent 80 behavioral healthcare facilities (76 operating
     and four held for sale) ("Purchased Facilities") and related medical office
     buildings formerly operated by Magellan.

o    The Company operates the Purchased Facilities and the Contributed
     Facilities (defined below) (together the "Facilities"). The Company is
     owned equally by Magellan and COI.

o    Magellan contributed to the Company certain property and intangible rights
     used in connection with the Facilities with a net book value of
     approximately $5.0 million in exchange for its equity interest in CBHS. The
     property that was contributed by Magellan included five acute care
     psychiatric hospitals and other ancillary facilities that Magellan leased
     from third parties (together the "Contributed Facilities"). The Company
     also purchased certain assets from Magellan relating to Magellan's
     information systems subsidiary for $5.0 million.

o    COI contributed $5.0 million of cash as its initial equity investment in
     the Company.

o    CBHS entered into a service agreement with Magellan pursuant to which the
     Company manages Magellan's interest in certain joint ventures with
     unaffiliated third parties, including joint ventures that operate or manage
     ten behavioral healthcare facilities. Magellan is the general partner or
     managing entity of such joint ventures.

o    CBHS leased the Purchased Facilities from Crescent under an initial 12-year
     lease term with four renewal terms of five years each ("Crescent Lease").
     CBHS pays annual base rent to Crescent, which was initially $41.7 million
     and increases at 5% compounded annually (See Note 5).

o    CBHS and certain of its subsidiaries entered into franchise agreements with
     Magellan (the "Franchise Agreements") pursuant to which CBHS and such
     subsidiaries operate using the "CHARTER' name, services and protocols and
     pay Magellan annual franchise fees, subject to increase, of approximately
     $78.3 million (See Note 6). The franchise fees due Magellan are subordinate
     to the payment of rent due Crescent.

o    Both Magellan and COI contributed an additional $2.5 million in cash to the
     capital of CBHS. In addition, each made a commitment to loan CBHS up to
     $17.5 million each, for a period of five years. Such loans were made to
     CBHS by each for $17.5 million ("Member Loans") and, effective September
     30, 1997, were converted to cumulative redeemable preferred interests (See
     Note 8).



                                      F-52
<PAGE>   99

The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. As shown in the financial statements during
the 106 days ended September 30, 1997 and the year ended September 30, 1998, the
Company has incurred losses from operations, and therefore, the Company has a
significant accumulated deficit at September 30, 1998. The financial statements
do not include any adjustments relating to the recoverability and classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.

The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis. The
Company believes its cash flows and profitability are influenced by the cyclical
nature of the behavioral healthcare provider business, with a reduced demand for
certain services generally occurring during the first fiscal quarter around
major holidays and during the summer months comprising the fourth fiscal
quarter. Management has formulated and implemented a business plan to reduce
overhead and add new lines of business to improve the cash flows and the
profitability of the Company. Additionally, the Company is actively pursuing
additional sources of capital and/or borrowings.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

NET REVENUE

Net revenue is based on established billing rates, less estimated allowances for
patients covered by Medicare and other contractual reimbursement programs, and
discounts from established billing rates. Amounts received by the Company for
treatment of patients covered by Medicare and other contractual reimbursement
programs, which may be based on cost of services provided or predetermined
rates, are generally less than the established billing rates of the Company's
hospitals. Final determination of amounts earned under contractual reimbursement
programs is subject to review and audit by the applicable agencies. Net revenue
in fiscal 1998 included a charge of $0.7 million for the settlement and
adjustment of reimbursement issues related to the previous fiscal period.
Management believes that adequate provision has been made for any adjustments
that may result from such reviews.

ADVERTISING COSTS

The production costs of advertising are expensed as incurred. The Company does
not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which is amortized as utilized, and printed
media services. Advertising expense was approximately $6.4 million and $20.3
million for the 106 days ended September 30,1997 and for the year ended
September 30, 1998, respectively.

CHARITY CARE

The Company provides healthcare services without charge or at amounts less than
its established rates to patients who meet certain criteria under its charity
care policies. Because the Company does not pursue collection of amounts
determined to be charity care, they are not reported as revenue. For the 106
days ended September 30, 1997 and for the year ended September 30, 1998, the
Company provided, at its established billing rates, approximately $5.3 million
and $28.4 million, respectively, of such care.



                                      F-53
<PAGE>   100





INTEREST, NET

The Company records interest expense net of interest income. Interest income for
the 106 days ended September 30, 1997 and for the year ended September 30, 1998
was approximately $0.2 million and $0.3 million, respectively.

CASH AND CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid interest-bearing investments with
a maturity of three months or less when purchased, consisting primarily of money
market instruments.

CONCENTRATION OF CREDIT RISK

Accounts receivable from patient revenue subject the Company to a concentration
of credit risk with third-party payors that include insurance companies, managed
healthcare organizations and governmental entities. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific payors, historical trends and other information. Management believes
the allowance for doubtful accounts is adequate to provide for normal credit
losses.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for renewals and
improvements are charged to the property accounts. Replacements and maintenance
and repairs that do not improve or extend the lives of the respective assets are
expensed as incurred. Amortization of capital lease assets is included in
depreciation expense. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is generally three to ten years for
equipment. Leasehold improvements are amortized over the useful lives of the
related assets or the terms of the leases, whichever is shorter. Depreciation
and amortization expense was $0.7 million and $5.7 million for the 106 days
ended September 30, 1997 and for the year ended September 30, 1998,
respectively.

INTANGIBLE ASSETS

Intangible assets are composed principally of goodwill and deferred financing
costs. Goodwill represents the excess of the cost of businesses acquired over
the fair value of the net identifiable assets at the date of acquisition and is
amortized using the straight-line method over 25 years. Deferred financing costs
are the costs incurred by the Company to obtain and amend its credit agreement
(See Note 5) and are amortized over the term of the related agreement (five
years).

The Company continually monitors events and changes in circumstances which could
indicate that carrying amounts of intangible assets may not be recoverable. When
events or changes in circumstances are present that indicate that the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. No impairment losses on
intangible assets were recorded by the Company for the 106 days ended September
30, 1997 or for the year ended September 30, 1998.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company estimates that the carrying amounts of financial instruments
including cash and cash equivalents, accounts receivable and accounts payable
approximated their fair values as of the date of the balance sheets due to the
relatively short maturity of these instruments.



                                      F-54
<PAGE>   101





3.  ACQUISITIONS, JOINT VENTURES AND DIVESTITURES

ACQUISITIONS

On September 28, 1998, the Company acquired four inpatient behavioral healthcare
facilities, two related transitional care businesses and a behavioral healthcare
contract management business (collectively "Acquired Hospitals") from Ramsay
Health Care, Inc. The purchase price for the Acquired Hospitals was
approximately $5.3 million. The Company accounted for the acquisition using the
purchase method of accounting. The operating results of the Acquired Hospitals
are included in the Company's Consolidated Statements of Operations since the
date of acquisition.

JOINT VENTURES

Effective September 2, 1998, the Company entered into a hospital-based
behavioral healthcare joint venture ("Brentwood JV") with Brentwood Behavioral
Healthcare, LLC. The Company contributed certain assets from an existing
behavioral healthcare facility in Shreveport, Louisiana, to the joint venture in
exchange for its 50% interest in the Brentwood JV. The Company subsequently
closed its Shreveport, Louisiana, facility. The Company accounts for its
investment in the Brentwood JV using the equity method.

DIVESTITURES

On September 30, 1997, the Company sold the operations of a 60-bed behavioral
healthcare hospital in Sioux Falls, South Dakota, for $422,000. Proceeds from
the sale were not received until October 2, 1997. The transaction resulted in a
gain of $355,000.

4.  UNUSUAL ITEMS

The following table summarizes the unusual items recorded during the year ended
September 30, 1998 (in thousands):


<TABLE>
<CAPTION>

                                                             YEAR ENDED
                                                            SEPTEMBER 30,
                                                                1998
                                                         --------------------
<S>                                                      <C>
Purchase Terminations...........................         $              4,450
Severance.......................................                        3,002
Divestitures....................................                        2,688
Other...........................................                          985
                                                         --------------------
                                                         $             11,125
                                                         ====================

</TABLE>


PURCHASE TERMINATIONS

In the first quarter of fiscal 1998, the Company recorded a charge of
approximately $2.1 million related to expenses incurred in connection with a
terminated acquisition of an unrelated entity. In the fourth quarter of fiscal
1998, the Company recorded a charge of approximately $2.3 million related to
expenses incurred in connection with terminated transactions with Magellan and
COI that included (i) the purchase of Magellan's franchise operations relating
to the "CHARTER" system and certain other assets, (ii) termination of the
Franchise Agreements, (iii) the sale of Magellan's equity interest in CBHS to
COI and (iv) review of the potential to obtain new capital for the Company
(collectively the "Magellan Buyout"). See Note 12.

SEVERANCE

The Company recorded charges of approximately $3.0 million during fiscal 1998
related to severance and related benefits for employees who were terminated
during fiscal 1998 pursuant to planned overhead reductions.



                                      F-55
<PAGE>   102





DIVESTITURES

In June 1998, the Company sold a 77-bed behavioral healthcare facility in
Virginia for approximately $0.8 million which resulted in a loss of
approximately $2.7 million.

OTHER

In the fourth quarter of fiscal 1998, the Company accrued approximately $0.8
million for estimated expenses incurred in connection with the settlement of
various litigation matters. Also in the fourth quarter of fiscal 1998, the
Company closed and consolidated one behavioral health care operation in Texas
and recorded charges of approximately $0.2 million related to severance and
related benefits and closure costs.

5. LONG-TERM DEBT AND LEASE OBLIGATIONS

Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1997 and 1998 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30,
                                                          ------------------------------------------------
                                                                   1997                      1998
                                                          ---------------------       --------------------

Revolving Credit Agreement due through 2002
<S>                                                       <C>                         <C>
      (6.90234 % to 7.59375 %)......................      $             65,000        $            70,000
10.5%  Capital lease obligations....................                       915                         --
                                                          ---------------------       --------------------
                                                                        65,915                     70,000
      Less amounts due within one year..............                        55                      2,800
                                                          ---------------------       --------------------
                                                          $             65,860        $            67,200
                                                          =====================       ====================
</TABLE>

The aggregate scheduled maturities of long-term debt during the five years
subsequent to September 30, 1998 are as follows (in thousands): 1999--$2,800;
2000--$0; 2001--$0, 2002--$67,200; 2003--$0.

The Company's debt is carried at cost which approximates fair market value.

REVOLVING CREDIT AGREEMENTS

On June 17, 1997, the Company entered into a credit agreement (the "Revolving
Credit Agreement") with certain financial institutions for a five-year senior
secured revolving credit facility in an aggregate committed amount of $100
million. Effective September 30, 1998, the Revolving Credit Agreement was
amended to provide for, among other things, modification of financial covenant
levels and increases in interest rates.

The maximum amount allowed to be borrowed under the Revolving Credit Agreement
is based on a working capital calculation. At September 30, 1998, the Company
did not have any amounts available for borrowing under the Revolving Credit
Agreement. The Revolving Credit Agreement is secured by the tangible and
intangible personal property, including accounts receivable, owned by the
Company.

The loans outstanding under the Revolving Credit Agreement bear interest
(subject to certain potential adjustments) at a rate per annum equal to one,
two, three or six-month LIBOR plus 2.75% or the Alternative Base Rate ("ABR"),
as defined, plus 1.75%. Interest on ABR loans is payable at the end of each
fiscal quarter. Interest on LIBOR-based loans is payable at the end of their
respective terms, but at a minimum of every three months.


                                      F-56


<PAGE>   103




COVENANTS

The Revolving Credit Agreement contains a number of restrictive covenants which,
among other things, limit the ability of the Company and certain of its
subsidiaries to incur other indebtedness, engage in transactions with
affiliates, incur liens, make certain restricted payments, and enter into
certain business combinations. The Revolving Credit Agreement also requires the
Company to maintain certain specified financial ratios. The Company was in
compliance with all debt covenants under the Revolving Credit Agreement, as
amended, at September 30, 1998. Budget projections prepared by management for
the fiscal year ending September 30, 1999 estimate that the Company will be in
compliance with all debt covenants under the Revolving Credit Agreement, as
amended, during fiscal 1999. Management believes that its budget projections for
fiscal 1999 are reasonable and achievable, however, there can be no assurances
that such projections will be achieved. If the Company were to fail to achieve
such budget projections during fiscal 1999, the Company could become in
noncompliance with certain debt covenants resulting in an event of default under
the Revolving Credit Agreement.

CRESCENT LEASE

Effective June 17, 1997, the Company entered into an agreement to lease the
Purchased Facilities from Crescent under an initial 12-year lease term with four
renewal terms of five years each. The Crescent Lease requires the Company to pay
all maintenance, property tax and insurance costs.

The base rent for the first year of the initial term was $41.7 million and
increases at 5% compounded annually. The Company accounts for the Crescent Lease
as an operating lease and accordingly, records base rent expense on a
straight-line basis over the lease term. Effective December 1, 1997, Crescent
and the Company amended the Crescent Lease to delete the requirement for the
Company to pay an additional annual rent of $20.0 million. This amendment has no
impact on future commitments for the Company as it remains directly liable for
the capital expenditures and other obligations under the Crescent Lease which
were to be funded by the additional annual rent.

OTHER LEASES

The Company also leases certain of its operating facilities other than the
Purchased Facilities. The leases, which expire at various dates through 2027,
generally require the Company to pay all maintenance, property tax and insurance
costs.

In connection with the purchase of the Acquired Hospitals, CBHS entered into an
agreement to lease a behavioral healthcare facility under an initial eight-year
lease term with two renewal terms of four years each. The lease requires the
Company to pay all maintenance, property tax and insurance costs. The base rent
is $270,000, subject to increases for inflation. The Company accounts for the
lease as an operating lease.

At September 30, 1998, aggregate amounts of future minimum payments under
operating leases were as follows (in thousands): 1999-$49,225; 2000-$49,719;
2001-$50,562; 2002-$52,597; 2003-$54,972; subsequent to 2003-$367,948.

Rent expense for the 106 days ended September 30, 1997 and for the year ended
September 30, 1998 was $20.0 million and $67.4 million, respectively.

6.  FRANCHISE FEES - MAGELLAN

Effective June 17, 1997, the Company and certain of its subsidiaries entered
into franchise agreements with Magellan, pursuant to which CBHS and such
subsidiaries operate using the "CHARTER" name, services and protocols.
The franchise agreements provide, among other things, that:

o    Magellan agrees to use its commercially reasonable best efforts, subject to
     applicable law, to cause CBHS and such subsidiaries to have "preferred
     provider" status in connection with Magellan's managed behavioral
     healthcare business on a basis substantially consistent with existing
     agreements for such business.

                                      F-57

<PAGE>   104


o    Magellan agrees to operate or provide a toll free "800" telephone number
     and call center as a means of assisting customers to locate the places of
     business of franchisees.

o    Franchisees were granted a right to a defined territory to engage in the
     business of providing behavioral healthcare business, as defined.

o    Magellan will provide franchisees with the following assistance: (i)
     advertising and marketing assistance including consultation, access to
     media buying programs and access to broadcast and other advertising
     materials produced by Magellan from time to time for franchisees; (ii) risk
     management services, including risk financial planning, loss control and
     claims management; (iii) outcomes monitoring; (iv) national and regional
     contracting services; and (v) consultation by telephone or at the Magellan
     offices with respect to matters relating to the franchisee's business in
     which Magellan has expertise, including reimbursement, government
     relations, clinical strategies, regulatory matters, strategic planning and
     business development.

Franchise fees payable by the Company are the greater of (i) 78.3 million,
subject to increases for inflation; or (ii) $78.3 million, plus 3% of gross
revenues over $1 billion and not exceeding $1.2 billion and 5% of gross revenues
over $1.2 billion. Pursuant to a subordination agreement, franchise fees
generally are subordinated to base rent under the Crescent Lease and the 5%
annual increase.

The initial term of the franchise agreements is 12 years with four renewal terms
of five years each.

Pursuant to the provisions of the Franchise Agreements, the Company must pay
additional franchise fees to Magellan on management contract agreements entered
into during the term of the Franchise Agreements ("Managed Business"). Managed
Business franchise fees payable by the Company are 15% or 30% of the Managed
Business total fees less total direct costs for contract locations within or
outside of the Company's existing franchise territories, respectively. Managed
Business franchise fees expense was $0 and $0.3 million for the 106 days ended
September 30, 1997 and for the year ended September 30, 1998, respectively.

On December 22, 1997, Magellan and the Company entered into a management
agreement relating to the operation of the "call centers" formerly operated by
Magellan. The Company received $5.9 million as consideration for performing the
various obligations relating to the "call centers" for the 18-month period ended
June 21, 1999.

The Company has not made total monthly franchise fee payments to Magellan since
February 1998, and, as a result, is in default under the Franchise Agreements.
Franchise fee arrearages are approximately $38.0 million at September 30, 1998.
In addition to other remedies, whenever franchise fees are past due for any
reason in the amount of $6.0 million or more, Magellan has the right to prohibit
any incentive compensation to CBHS management and prohibit any vesting of CBHS
management equity. Whenever fees are past due in the amount of $18.0 million or
more, Magellan has the right to prohibit any salary increases for key personnel
of CBHS, prohibit any additional hiring by CBHS, and prohibit any new direct or
indirect hospital acquisitions or joint ventures participation. If franchise
fees are past due in an amount greater than $24.0 million, Magellan has the
right to require a 5% cutback on budgeted expenses under the then-current
approved CBHS annual budget, require monthly approval of expenditures of CBHS,
including capital and operating expenditures, and require the transfer of
control and management of CBHS and CBHS franchisees to Magellan.

During the fourth quarter of fiscal 1998, due to the franchise fee arrearages,
Magellan exercised its limited management rights under the franchise agreements
and, with CBHS's board of directors' support, made operational and management
changes at CBHS. Subsequent to September 30, 1998, Magellan notified the CBHS
board of directors that it was relinquishing its exercise of limited management
rights of CBHS.

7.  BENEFIT PLAN

The Company has a defined contribution retirement plan (the "401(k) Plan").
Employee participants can elect to voluntarily contribute up to 15% of their
compensation to the 401(k) Plan. The Company makes contributions to the 401(k)
Plan based on employee compensation and contributions. The Company makes a
discretionary contribution of 2% of each employee's compensation and matches 50%
of each employee's contribution up to 3% of their compensation.


                                      F-58

<PAGE>   105


During the year ended September 30, 1998, the Company made contributions of
approximately $2.7 million to the 401(k) Plan.

8.  CUMULATIVE REDEEMABLE PREFERRED INTERESTS

Effective September 30, 1997, Magellan and COI each agreed to exchange their
respective Member Loans for cumulative redeemable preferred interest ("Preferred
Interests") in the Company. The Preferred Interests are callable in whole at the
Company's option on or after April 1, 1998, at an amount equal to the initial
amount plus all accrued dividends thereon. Each holder of Preferred Interests
receives preferential allocation of the Company's profits computed at 10% per
annum on a cumulative basis, compounded monthly. In addition, each Preferred
Interests has a similar preferred position in the event of dissolution of the
Company. The Company recorded approximately $3.7 million in fiscal 1998 relating
to this dividend requirement, which is all unpaid and included in Other
Long-Term Liabilities at September 30, 1998.

9. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):


<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                    -------------------------------------
                                                           1997               1998
                                                    -----------------    ----------------
<S>                                                 <C>                  <C>
Salaries and wages...............................   $          18,220    $         20,334
Property taxes...................................               4,874               5,157
Interest.........................................                 333                 105
Other............................................              10,151              21,683
                                                    -----------------    ----------------
                                                    $          33,578    $         47,279
                                                    =================    ================
</TABLE>


10.   SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the 106 days ended September 30, 1997 and
for the year ended September 30, 1998 is as follows (in thousands):


<TABLE>
<CAPTION>
                                                                           106 DAYS ENDED            YEAR ENDED
                                                                            SEPTEMBER 30,           SEPTEMBER 30,
                                                                                1997                    1998
                                                                         -------------------      -----------------
<S>                                                                   <C>                      <C>
Interest paid........................................................ $               1,291    $             5,561
Exchange of debt for cumulative preferred interest - COI.............                17,500                     --
Exchange of debt for cumulative preferred interest - Magellan........                17,500                     --
Initial capital contribution from Magellan, primarily property and
     equipment less assumed liabilities .............................                 5,282                     --
Account receivable for the sale of facility..........................                   386                     --
Accrued dividend requirement on cumulative redeemable
     preferred interests.............................................                    --                  3,719
Capital lease obligation assigned with sale of facility..............                    --                    874
</TABLE>

11.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As part of the Crescent Transactions, (i) certain items of working capital were
purchased from Magellan, (ii) the Company agreed to collect Magellan's patient
accounts receivable outstanding as of the closing date for a fee of 5% of cash
collections and (iii) the Company agreed to manage Magellan's interest in
certain joint ventures for a management fee. Included in net revenues for the
106 days ended September 30, 1997 and for the year ended


                                      F-59

<PAGE>   106


September 30, 1998 are approximately $5.0 million and $2.0 million,
respectively, of these collection fee revenues and approximately $2.1 million
and $5.5 million, respectively, of these joint venture management fees.

 The Company had a net receivable from Magellan as of September 30, 1997 of
approximately $5.1 million and a net payable to Magellan as of September 30,
1998 of approximately $36.9 million. This receivable/payable results from (i)
amounts due for the management of Magellan's joint ventures as of September 30,
1997 and 1998, (ii) amounts due for the collection fees on Magellan's patient
account receivable as of September 30, 1997 and 1998, (iii) receivable for the
settlement of working capital related matters as of September 30, 1997 and 1998,
(iv) receivable for the reimbursement effect associated with the collection fees
as of September 30, 1997 and 1998 and (v) payable for the franchise fees as of
September 30, 1998.

Effective April 1, 1998, the Company entered into an agreement with Green Spring
Health Services, Inc. ("Green Spring"), a wholly-owned subsidiary of Magellan,
for managed mental health, substance abuse and employee assistance plan services
for the Company's employees. During fiscal 1998, the Company paid approximately
$0.1 million to Green Spring for these services.

John C. Goff was the Chairman of CBHS and the Vice Chairman of both Crescent and
COI. During fiscal 1998, the Company paid approximately $0.4 million to John
Goff for salary and related benefits. In November 1998, Mr. Goff resigned his
position on the CBHS board. Richard P. Knight, the Chief Financial Officer of
COI, was appointed to fill the vacancy on the CBHS board left by Mr. Goff's
resignation. Jeffrey L. Stevens of COI was subsequently elected Chairman of
CBHS.

12.  COMMITMENTS AND CONTINGENCIES

The Company carries general and professional liability insurance from an
unrelated commercial insurance carrier with a self insured retention of $1.5
million per occurrence and $8.0 million in the aggregate, on a claim made basis.
In addition, the Company has an umbrella policy with coverage up to $75.0
million per occurrence and in the aggregate.

Magellan and the predecessor to the Company's Orlando, Florida facility (the
"Orlando Facility") were named as defendants in a complaint entitled United
States of America ex rel. Francine M. Mettevis and Rhea Rowan v. Charter
Hospital of St. Louis, Inc. et al. The action was filed on November 6, 1994 as a
qui tam action in the United States District court for the Middle District of
Florida. Magellan, the Department of Justice, and the Company entered into a
settlement of the action in August 1998. Pursuant to the settlement agreement,
Magellan paid the government $4.75 million and the Company entered into a
Corporate Integrity Agreement for the Orlando Facility whereby the Orlando
Facility will be monitored for five years by the Department of Health and Human
Services ("HHS) and the Office of the Inspector General ("OIG") as well as a
concurrent reviewer. In the settlement agreement, the Company also agreed that
the Orlando Facility would not bill Medicare for the treatment of Medicare
patients for a period of 12 to 15 months beginning August 1, 1998 (the
"Non-Billing Period"). The Company intends to seek indemnification from Magellan
under the Crescent Transactions for all of the fees, costs, expenses and losses
it incurs in connection with the settlement agreement and the Corporate
Integrity Agreement. The Company has been reimbursed by Magellan for losses and
costs it has incurred through October 1998 which relate to the services provided
by the Orlando Facility to Medicare beneficiaries.

In connection with the Magellan Buyout, Magellan and COI entered into a Support
Agreement pursuant to which COI agreed, under certain conditions, to assist the
Company in obtaining the funds required to consummate the contemplated
transactions and to pay expenses incurred in obtaining such funds. On August 19,
1998, Magellan and COI each announced the termination of negotiations regarding
the Magellan Buyout. On November 5, 1998, Magellan notified COI that Magellan
believes COI owes CBHS $2.3 million for the reimbursement of expenses incurred
by the Company in connection with attempts to obtain financing for the
contemplated transactions. COI disputes this matter which will be sent to
arbitration. See Note 4.

In April 1998, following the death of a patient at the Company's Greensboro,
North Carolina facility ("Greensboro Facility"), the North Carolina Department
of Health and Human Services ("NC HHS") conducted a survey of that facility. On
April 14, 1998, the Greensboro Facility received notice that as a result of the
survey, NC HHS was recommending to the Health Care Financing Administration
("HCFA") that the Greensboro Facility be excluded


                                      F-60

<PAGE>   107


from participation in Medicare within 23 days. Similarly, on April 14, 1998,
the Greensboro Facility received notice that as a result of the survey, NC HHS
intended to revoke the Greensboro Facility's state license. In response to such
notices, the Company submitted a plan of correction and refutation of
deficiencies with HCFA and NC HHS, and NC HHS conducted a subsequent visit on
May 4 through May 6, 1998. On May 7, 1998, the Greensboro Facility received
notice from HCFA that based on the findings in the second visit, the date
scheduled for involuntary termination was extended to July 7, 1998. On June 5,
1998, the Greensboro Facility entered into a settlement agreement with NC HHS
which resolved all outstanding regulatory and operational issues with NC HHS
and HCFA arising from the patient's death. The local District Attorney's office
and the North Carolina Board of Nursing ("NCBN") have continued their separate
investigations into this incident. An indictment of one of the Greensboro
Facility's employees has been returned while the NCBN continues its
investigation. At this stage, it is not possible to predict whether any future
action will be taken against the Greensboro Facility or any of its other
employees involved in the patient's death, the likelihood of an unfavorable
outcome, or the amount of any potential loss associated with any such action.

The healthcare industry is subject to numerous laws and regulations. The
subjects of such laws and regulations include, but are not limited to, matters
such as licensure, accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and / or allegations concerning possible violations of fraud and
abuse and false claims statutes and regulations by healthcare providers.
Entities that are found to have violated these laws and regulations may be
excluded from participating in government healthcare programs, subjected to
fines or penalties or required to repay amounts received from the government for
previously billed patient services. The Office of the Inspector General of the
Department of Health and Human Services and the United States Department of
Justice and certain other governmental agencies are currently conducting
inquiries and / or investigations regarding the compliance by the Company and
certain of its subsidiaries with such laws and regulations. In addition, the
Company is also subject to or party to litigation, claims and civil suits
relating to its operations and business practices. In the opinion of management,
the Company has recorded reserves that are adequate to cover litigation, claims
or assessments that have been or may be asserted against the Company arising out
of such litigation, civil suits and governmental inquires. Furthermore,
management believes that the resolution of such litigation, civil suits and
governmental inquiries will not have a material adverse effect on the Company's
financial position or results of operations; however, there can be no assurance
in this regard.

13. SUBSEQUENT EVENT

Subsequent to September 30, 1998, the Company has continued to incur significant
losses from operations, is in default of its revolving credit and lease
agreements, and has a significant accumulated deficit. The Company has announced
plans to cease operations at a significant number of its facilities and to
reduce its personnel levels. On February 16, 2000, the Company filed a voluntary
bankruptcy petition in U.S. Bankruptcy Court in Wilmington, Delaware. These
financial statements do not reflect any activities since September 30, 1998,
including the impact relating to the bankruptcy filing.

Additionally, the United States Department of Justice has indicated that certain
of its ongoing inquiries are based on its belief that the federal government has
certain civil and administrative causes of action under the Civil False Claims
Act, the Civil Monetary Penalties Law, other federal statutes, and the common
law arising from the participation in federal health benefit programs of the
Company's psychiatric facilities nationwide. Although the ultimate outcome of
these inquiries cannot be determined, a material unfavorable outcome may have a
material adverse effect on the financial position or future operating results of
the Company.



                                      F-61



<PAGE>   108


                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                             ADDITIONS
                                                       -----------------------
                                                                  CHARGED TO
                                          BALANCE AT   CHARGED TO    OTHER                      BALANCE AT
                                          BEGINNING    COSTS AND   ACCOUNTS-     DEDUCTIONS-        END
            CLASSIFICATION                OF PERIOD     EXPENSE    DESCRIBE       DESCRIBE       OF PERIOD
            --------------                ---------     -------    --------       --------       ---------

<S>                                         <C>         <C>         <C>            <C>            <C>
106 days ended September 30, 1997:
        Allowance for doubtful accounts     $    --     $17,437     $    39(A)     $   843(B)     $17,605
                                                                        972(C)
                                            -------     -------     -------        -------        -------
                                            $    --     $17,437     $ 1,011        $   843        $17,605
                                            =======     =======     =======        =======        =======

Year ended September 30, 1998:
        Allowance for doubtful accounts     $17,605     $63,895     $ 4,035(A)     $51,987(B)     $33,548
                                            -------     -------     -------        -------        -------
                                            $17,605     $63,895     $ 4,035        $51,987        $33,548
                                            =======     =======     =======        =======        =======
</TABLE>


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

(A)  Recoveries of amounts previously charged to income.

(B)  Accounts written off.

(C)  Allowance for doubtful accounts assumed in purchase of net assets from
     Magellan.


                                      F-62

<PAGE>   109

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Executive Committee of
The Woodlands Operating Company, L.P.:


We have audited the accompanying consolidated balance sheets of The Woodlands
Operating Company, L.P. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, changes in partners' equity and
cash flows for the year ended December 31, 1998, and the period from July 31,
1997 (inception) to December 31, 1997. These financial statements are the
responsibility of The Woodlands Operating Company, L.P.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Woodlands Operating
Company, L.P. and subsidiary as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for the year ended December 31, 1998, and
the period from July 31, 1997 (inception), to December 31, 1997, in conformity
with generally accepted accounting principles.




ARTHUR ANDERSEN LLP

HOUSTON, TEXAS
JANUARY 15, 1999



                                      F-63
<PAGE>   110


              THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                    1998          1997
                                                  --------      --------
ASSETS
Current assets
<S>                                               <C>            <C>
    Cash and cash equivalents ...............     $  6,231      $  4,034
    Trade receivables .......................        4,713         5,084
    Inventory ...............................          933         1,213
    Other ...................................          336           341
                                                  --------      --------
                                                    12,213        10,672
Property and equipment, at cost less
    accumulated depreciation of $331 and $105        1,362         2,638
Other assets ................................        1,722            35
                                                  --------      --------
                                                  $ 15,297      $ 13,345
                                                  ========      ========

LIABILITIES AND EQUITY
Current liabilities
    Accounts payable ........................     $ 12,320      $  5,551
    Accrued liabilities .....................        1,815         4,175
                                                  --------      --------
                                                    14,135         9,726
Other liabilities ...........................        3,125         2,220
                                                  --------      --------
    Total liabilities .......................       17,260        11,946

Commitments and contingencies (Note 2)

Partners' equity (deficit) (Note 3) .........       (1,963)        1,399
                                                  --------      --------
                                                  $ 15,297      $ 13,345
                                                  ========      ========
</TABLE>


                             See accompanying Notes


                                      F-64

<PAGE>   111




              THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF EARNINGS
                    FOR THE YEAR ENDED DECEMBER 31, 1998 AND
       FOR THE PERIOD FROM JULY 31, 1997 (INCEPTION) TO DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                        1998          1997
                                                      --------      --------
<S>                                                   <C>           <C>
REVENUES
    Conference Center and Country Club operations     $ 47,609      $ 18,169
    Management fees and other ...................       27,151        11,476
                                                      --------      --------
                                                        74,760        29,645
                                                      --------      --------

OPERATING EXPENSES
    Conference Center and Country Club operations       46,162        18,121
    Operating, general and administrative .......       25,246        11,034
Depreciation and amortization ...................          751           105
                                                      --------      --------
                                                        72,159        29,260
                                                      --------      --------

OPERATING EARNINGS ..............................        2,601           385

OTHER (INCOME) EXPENSE ..........................          (37)           20
                                                      --------      --------

NET EARNINGS ....................................     $  2,638      $    365
                                                      ========      ========
</TABLE>

                             See accompanying Notes


                                      F-65

<PAGE>   112


              THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
                    FOR THE YEAR ENDED DECEMBER 31, 1998 AND
                        FOR THE PERIOD FROM JULY 31, 1997
                        (INCEPTION) TO DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                        WOCOI       MS/TWC
                                     Investment      Joint       MS/TWC,
                                       Company      Venture        Inc.        Total
                                       -------      -------      -------      -------
<S>                                    <C>          <C>          <C>          <C>
Balance, July 31, 1997 (Inception)     $   425      $   558      $    10      $   993
Contributions ....................          14           26            1           41
Net earnings .....................         155          206            4          365
                                       -------      -------      -------      -------
Balance, December 31, 1997 .......         594          790           15        1,399
Distributions ....................      (2,550)      (3,390)         (60)      (6,000)
Net earnings .....................       1,121        1,491           26        2,638
                                       -------      -------      -------      -------
Balance, December 31, 1998 .......     $  (835)     $(1,109)     $   (19)     $(1,963)
                                       =======      =======      =======      =======
</TABLE>

                             See accompanying Notes


                                      F-66


<PAGE>   113


              THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    FOR THE YEAR ENDED DECEMBER 31, 1998 AND
                FOR THE PERIOD FROM JULY 31, 1997 (INCEPTION) TO
                    DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                        1998         1997
                                                      -------      -------
<S>                                                   <C>          <C>
OPERATING ACTIVITIES
Net earnings ....................................     $ 2,638      $   365
Adjustments to reconcile net earnings  to
    cash provided by operating activities
      Depreciation and amortization .............         751          105
      Deferred Country Club initiation fees .....       2,062          776
      Other .....................................        (113)        (895)
                                                        5,338          351
      Changes in operating assets and liabilities
        Current assets ..........................         656       (1,190)
        Accounts payable ........................       6,769        4,216
        Accrued liabilities .....................      (2,360)         562
        Other assets ............................      (1,687)         (35)
                                                      -------      -------
Cash provided by operating activities ...........       8,716        3,904
                                                      -------      -------

INVESTING ACTIVITIES
Capital expenditures ............................        (519)        (148)
                                                      -------      -------

FINANCING ACTIVITIES
Contribution from partners ......................          --           41
Distributions to partners .......................      (6,000)          --
                                                      -------      -------
Cash provided by (used for) financing activities       (6,000)          41
                                                      -------      -------

INCREASE IN CASH AND CASH EQUIVALENTS ...........       2,197        3,797
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..       4,034          237
                                                      -------      -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........     $ 6,231      $ 4,034
                                                      =======      =======
</TABLE>


                             See accompanying Notes


                                      F-67


<PAGE>   114


              THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONTROL. The Woodlands Operating Company, L.P. ("Woodlands Operating"), The
Woodlands Land Development Company, L.P. ("Woodlands Development") and The
Woodlands Commercial Properties Company, L.P. ("Woodlands Commercial") are owned
by entities controlled by Crescent Real Estate Equities Limited Partnership or
Crescent Operating, Inc. (together "Crescent") and Morgan Stanley Real Estate
Fund II, L.P. ("Morgan Stanley"). Woodlands Development and Woodlands Commercial
are successors to The Woodlands Corporation. Prior to July 31, 1997, The
Woodlands Corporation was a wholly owned subsidiary of Mitchell Energy &
Development Corp. On July 31, 1997 The Woodlands Corporation was acquired by
Crescent and Morgan Stanley and merged into Woodlands Commercial, a Texas
limited partnership. Woodlands Commercial was then divided into two
partnerships: Woodlands Commercial and Woodlands Development. WECCR General
Partnership ("WECCR GP") is a subsidiary of Woodlands Operating. Woodlands
Operating manages assets owned by Woodlands Commercial and Woodlands
Development.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Woodlands Operating and WECCR GP. All significant transactions and
accounts are eliminated in consolidation.

BUSINESS. Woodlands Operating's activities are concentrated in The Woodlands, a
planned community located north of Houston, Texas. Consequently, these
operations and the associated credit risks may be affected, either positively or
negatively, by changes in economic conditions in this geographical area.
Woodlands Operating provides services to Woodlands Development and Woodlands
Commercial under management and advisory services agreements. These agreements
have an initial term ending December 31, 1998 and are automatically renewable on
an annual basis. Woodlands Development and Woodlands Commercial pay Woodlands
Operating an advisory fee equal 3% above cost. In addition, they reimburse
Woodlands Operating for all cost and expenses incurred on their behalf. For the
year ended December 31, 1998 and the period from July 31, 1997 (inception) to
December 31, 1997, Woodlands Operating recorded revenues of $11,050,000 and
$4,598,000 for services provided to Woodlands Development and $7,343,000 and
$4,235,000 for services provided to Woodlands Commercial.

WECCR GP leases The Woodlands Conference Center, Resort and Country Club ("the
Facilities") from Woodlands Commercial. This agreement has an eight-year term
ending July 31, 2005. WECCR GP operates the Facilities and pays Woodlands
Commercial a base rent of $750,000 per month and a quarterly percentage rent
based on the gross receipts of the Facilities. For the year ended December 31,
1998 and the period from July 31, 1997 (inception) to December 31, 1997, rent
under the lease agreement totaled $12,799,000 and $5,063,000.

DEPRECIATION. Depreciation of operating assets is provided on the straight-line
method over the estimated useful lives of the assets, which range from three to
ten years.

INCOME TAXES. No liability for Federal income taxes is included in the
accompanying financial statements since Woodlands Operating is not a tax-paying
entity and all income and expenses are reported by the partners for tax
reporting purposes.

The tax returns, the qualification of Woodlands Operating for tax purposes and
the amount of distributable partnership income or loss are subject to
examination by Federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.

STATEMENTS OF CASH FLOWS. Short-term investments with maturities of three months
or less are considered to be cash equivalents. There were no significant
non-cash investing or financing activities for the year ended December 31, 1998
or for the period from July 31, 1997 (inception) to December 31, 1997.


                                      F-68

<PAGE>   115


USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

2.  COMMITMENTS AND CONTINGENCIES

LEGAL ACTIONS. Woodlands Operating is a party to claims and legal actions
arising in the ordinary course of business and to recurring examinations by the
Internal Revenue Service and other regulatory agencies. Management believes,
after consultation with outside counsel, that adequate financial statement
accruals have been provided for all known litigation contingencies where losses
are deemed probable. Since the ultimate cost will depend on the outcomes of
these uncertainties, it is possible that additional future charges might be
required that would be significant to the operating results of a particular
period. Based on the status of the cases, Woodlands Operating is unable to
determine a range of such possible additional losses, if any, that might be
incurred in connection with this litigation. Woodlands Operating 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.

LEASES. Woodlands Operating has various facility and equipment lease agreements.
Rental expenses for operating leases for the year ended December 31, 1998 and
the period from July 31, 1997 (inception) to December 31, 1997 total $1,099,000
and $313,000. Minimum rentals for the five years subsequent to December 31, 1998
total approximately $724,000; $775,000; $756,000; $456,000 and $456,000.

INCENTIVE PLAN. Woodlands Operating instituted an incentive compensation plan
for certain employees effective January 1, 1998. The plan is unfunded and while
certain payments are made currently, a portion of the payment is deferred and
paid only upon the occurrence of certain future events. Woodlands Development
and Woodlands Commercial will reimburse any incentive plan payments made in the
future.

3.  PARTNERS' EQUITY

Crescent's entity in Woodlands Operating is WOCOI Investment Company. Morgan
Stanley's entities are MS/TWC Joint Venture and MS TWC, Inc. The partners'
percentage interests are summarized below:

<TABLE>
<CAPTION>
                                                         General       Limited
                                                         Partner       Partner
                                                         Interest      Interest
                                                         --------      --------
<S>                                                       <C>           <C>
     WOCOI Investment Company .........................   42.5%
     MS/TWC Joint Venture .............................                 56.5%
     MS TWC, Inc ......................................    1.0%
</TABLE>

The partnership agreement provides, among other things, the following:

(i) Woodlands Operating is governed by an Executive Committee composed of equal
representation from its respective general partners.

(ii) Net income and losses from operations are currently allocated so that
partners' capital accounts stand in the ratio of the percentage interest listed
above.

(iii) Distributions are made to partners based on specified payout percentages
and include cumulative preferred returns to Morgan Stanley's affiliates. The
payout percentage to Morgan Stanley's affiliates is 57.5% until the affiliates
receive distributions equal to their capital contributions and a 12% cumulative
preferred return compounded quarterly. Then, the payout percentage to Morgan
Stanley's affiliates is 50.5% until the affiliates receive distributions equal
to their capital contributions and an 18% cumulative preferred return compounded
quarterly. Thereafter the payout percentage to Morgan Stanley's affiliates is
47.5%.


                                      F-69


<PAGE>   116



(iv) Woodlands Operating will continue to exist until December 31, 2040 unless
terminated earlier due to specified events.

(v) No additional partners may be admitted to Woodlands Operating unless
specific conditions in the partnership agreements are met. Partnership interests
may be transferred to affiliates of Crescent or Morgan Stanley. Crescent has the
right of first refusal to buy the partnership interests of the Morgan Stanley
affiliates at the same terms and conditions offered to a third party purchaser,
or sell its affiliates' interests to the same third party purchaser.

(vi) Crescent and Morgan Stanley have the right to offer to purchase the other
partner's affiliates' partnership interests in the event of failure to make
specified capital contributions or a specified default by the other. Specified
defaults include bankruptcy, breach of partnership covenants, transfer of
partnership interests except as permitted by the partnership agreements, and
fraud or gross negligence.

4.  EMPLOYEE SAVINGS PLAN

Woodlands Operating has a 401(k) defined contribution plan that is available to
all full-time employees who meet specified service requirements. The plan is
administered by a third party. Contributions to the plan are based on a match of
employee contributions up to a certain limit. For the year ended December 31,
1998 and the period from July 31, 1997 (inception) to December 31, 1997
Woodlands Operating contributions totaled $582,000 and $240,000.

5.  YEAR 2000 COMPLIANCE (UNAUDITED)

Woodlands Operating utilizes and is dependent on computer systems to conduct its
business. These systems include hardware and software developed and maintained
by third parties and purchased software run on in-house networks. A third party
manages the in-house systems under a contractual arrangement. Woodlands
Operating is undertaking a project to determine whether its computer systems are
year 2000 compliant. The project plan has been reviewed by senior management and
involves an assessment of each software application and related hardware.
Vendors will be contacted to assess year 2000 compliance and determine what
corrective measures, if any, are needed. A plan has been developed to make the
necessary corrections, or take some alternative action. The plan is being
implemented and tested to ensure compliance. Systems that have the greatest
impact will be given a higher priority.

Management has not determined the final cost of its year 2000 readiness efforts
or the related potential impact on Woodlands Operating's results of operations.
There can be no assurance that there will not be an adverse impact on Woodlands
Operating's financial position or results of operations if Woodlands Operating's
systems or the systems of other companies on which Woodlands Operating relies
are not compliant in time. However, based on preliminary assessments management
believes the risk of such adverse impact is low.


                                      F-70


<PAGE>   117



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Executive Committee of
The Woodlands Land Development Company, L.P.:


We have audited the accompanying balance sheets of The Woodlands Land
Development Company, L.P., as of December 31, 1998 and 1997, and the related
statements of earnings, changes in partners' equity and cash flows for the year
ended December 31, 1998, and the period from July 31, 1997 (inception), to
December 31, 1997. These financial statements are the responsibility of The
Woodlands Operating Company, L.P.'s management as manager for The Woodlands Land
Development Company, L.P. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Woodlands Land Development
Company, L.P., as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998, and the
period from July 31, 1997 (inception), to December 31, 1997, in conformity with
generally accepted accounting principles.


ARTHUR ANDERSEN LLP

HOUSTON, TEXAS
JANUARY 15, 1999


                                      F-71


<PAGE>   118


                   THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
                                  BALANCE SHEETS
                            DECEMBER 31, 1998 AND 1997
                              (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                            1998         1997
                                                          --------     --------
<S>                                                       <C>          <C>
     ASSETS
      Current assets
          Cash and cash equivalents .................     $  2,785     $ 17,791
          Trade receivables .........................          147          117
          Other .....................................            6           37
                                                          --------     --------
                                                             2,938       17,945
      Notes and contracts receivable (Notes 2 and 10)       30,040       20,932
      Real estate (Notes 3 and 4) ...................      345,082      345,907
      Other assets, net .............................        2,008        3,863
                                                          --------     --------
                                                          $380,068     $388,647
                                                          ========     ========

     LIABILITIES AND EQUITY
      Liabilities
          Current liabilities
            Accounts payable ........................     $ 13,367     $ 10,157
            Accrued liabilities .....................        4,580        6,220
                                                          --------     --------
                                                            17,947       16,377
          Acquisition debt (Notes 5 and 10) .........      235,750      266,000
          Notes payable to partners (Notes 6 and 10)        25,000       25,000
          Other debt (Notes 5 and 10) ...............        3,405          892
          Other liabilities .........................        8,838        6,486
                                                          --------     --------
                                                           290,940      314,755
      Commitments and contingencies (Notes 4 and 7)

      Partners' equity (Note 9) .....................       89,128       73,892
                                                          --------     --------
                                                          $380,068     $388,647
                                                          ========     ========
</TABLE>


                             See accompanying Notes


                                      F-72


<PAGE>   119


                  THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
                             STATEMENTS OF EARNINGS
                    FOR THE YEAR ENDED DECEMBER 31, 1998 AND
                FOR THE PERIOD FROM JULY 31, 1997 (INCEPTION) TO
                    DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                    1998             1997
                                                 ---------        ---------
<S>                                              <C>              <C>
REVENUES
 Residential lot sales ......................    $  77,824        $  25,532
 Commercial land sales ......................       43,778            8,697
 Other (Notes 3 and 4) ......................       10,349            3,322
                                                 ---------        ---------
                                                   131,951           37,551
                                                 ---------        ---------
COST AND EXPENSES
 Residential lot cost of sales ..............       45,203           17,791
 Commercial land cost of sales ..............       17,533            4,361
 Operating expenses (Notes 8 and 11) ........       19,471            6,387
 Depreciation and amortization ..............          464               85
                                                 ---------        ---------
                                                    82,671           28,624
                                                 ---------        ---------
OPERATING EARNINGS ..........................       49,280            8,927
                                                 ---------        ---------

OTHER (INCOME) EXPENSE
 Interest expense (Notes 5 and 6) ...........       24,000           10,696
 Interest capitalized .......................      (22,106)          (9,170)
 Amortization of debt costs .................        1,243              575
 Other ......................................          329             (187)
                                                 ---------        ---------
                                                     3,466            1,914
                                                 ---------        ---------
EARNINGS BEFORE THE CUMULATIVE EFFECT OF A
    CHANGE IN ACCOUNTING PRINCIPLE ..........       45,814            7,013

CUMULATIVE EFFECT OF A CHANGE IN
    ACCOUNTING PRINCIPLE  (Note 12) .........          639               --
                                                 ---------        ---------

NET EARNINGS ................................    $  45,175        $   7,013
                                                 =========        =========
</TABLE>

                             See accompanying Notes


                                      F-73



<PAGE>   120

                  THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
                   STATEMENTS OF CHANGES IN PARTNERS' EQUITY
                    FOR THE YEAR ENDED DECEMBER 31, 1998 AND
                FOR THE PERIOD FROM JULY 31, 1997 (INCEPTION) TO
                    DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                        The
                                      Woodlands      MS/TWC
                                        Land          Joint        MS/TWC,
                                    Company, Inc.    Venture         Inc.         Total
                                       --------      --------      --------      --------
<S>                                    <C>           <C>           <C>           <C>
Balance, July 31, 1997 (Inception) ... $ 30,825      $ 40,353      $    714      $ 71,892
Contributions ........................    1,424         2,518            45         3,987
Distributions ........................   (3,825)       (5,085)          (90)       (9,000)
Net earnings .........................    2,981         3,962            70         7,013
                                       --------      --------      --------      --------
Balance, December 31, 1997 ...........   31,405        41,748           739        73,892
Contributions ........................    2,575         3,423            60         6,058
Distributions ........................  (15,299)      (20,338)         (360)      (35,997)
Net earnings .........................   19,199        25,524           452        45,175
                                       --------      --------      --------      --------
Balance, December 31, 1998 ........... $ 37,880      $ 50,357      $    891      $ 89,128
                                       ========      ========      ========      ========
</TABLE>


                             See accompanying Notes


                                      F-74

<PAGE>   121


                  THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P.
                            STATEMENTS OF CASH FLOWS
                    FOR THE YEAR ENDED DECEMBER 31, 1998 AND
                FOR THE PERIOD FROM JULY 31, 1997 (INCEPTION) TO
                    DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                   1998          1997
                                                                 --------      --------
<S>                                                              <C>           <C>
OPERATING ACTIVITIES
 Net earnings ..............................................     $ 45,175      $  7,013
 Adjustments to reconcile net earnings to
     cash provided by operating activities
       Cost of land sold ...................................       62,736        22,152
       Depreciation and amortization .......................          464            85
       Gain on sale of property ............................         (699)           --
       Partnership distributions less than earnings ........          (61)         (106)
       (Increase) decrease in notes and contracts receivable       (9,108)        3,371
       Other ...............................................       (4,697)       (3,074)
                                                                 --------      --------
                                                                   93,810        29,441
       Land development capital expenditures ...............      (50,035)      (14,098)
       Changes in operating assets and liabilities
         Current assets ....................................            1           319
         Accounts payable and accrued liabilities ..........        1,570         6,155
         Other assets ......................................        1,855          (413)
                                                                 --------      --------
 Cash provided by operating activities .....................       47,201        21,404
                                                                 --------      --------

INVESTING ACTIVITIES
 Acquisition of commercial property ........................      (10,100)           --
 Proceeds from sale of property ............................        4,819            --
                                                                 --------      --------
 Cash used for investing activities ........................       (5,281)           --
                                                                 --------      --------

FINANCING ACTIVITIES
 Contributions from partners ...............................        6,058         3,987
 Distributions to partners .................................      (35,997)       (9,000)
 Debt borrowings ...........................................        3,263            --
 Debt repayments ...........................................      (30,250)           --
                                                                 --------      --------
 Cash used for financing activities ........................      (56,926)       (5,013)
                                                                 --------      --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...........      (15,006)       16,391
CASH AND CASH EQUIVALENTS, beginning of period .............       17,791         1,400
                                                                 --------      --------
CASH AND CASH EQUIVALENTS, end of period ...................     $  2,785      $ 17,791
                                                                 ========      ========
</TABLE>

                             See accompanying Notes


                                      F-75

<PAGE>   122
              THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


CONTROL. The Woodlands Land Development Company, L.P. ("Woodlands Development"),
The Woodlands Commercial Properties Company, L.P. ("Woodlands Commercial"),
WECCR General Partnership ("WECCR GP"), and The Woodlands Operating Company,
L.P. ("Woodlands Operating") are owned by entities controlled by Crescent Real
Estate Equities Limited Partnership or Crescent Operating, Inc. (together
"Crescent") and Morgan Stanley Real Estate Fund II, L.P. ("Morgan Stanley").
Woodlands Development and Woodlands Commercial are successors to The Woodlands
Corporation. Prior to July 31, 1997, The Woodlands Corporation was a wholly
owned subsidiary of Mitchell Energy & Development Corp. On July 31, 1997 The
Woodlands Corporation was acquired by Crescent and Morgan Stanley and merged
into Woodlands Commercial, a Texas limited partnership. Woodlands Commercial was
then divided into two partnerships: Woodlands Commercial and Woodlands
Development. Woodlands Operating manages assets owned by Woodlands Development
as described in Note 8.

The following is a summary of the acquisition transaction on July 31, 1997 (in
thousands):


<TABLE>
<CAPTION>
                                                  Woodlands         Woodlands          WECCR         Woodlands         (memo only)
                                                 Development       Commercial           GP           Operating          Combined
                                                   --------          --------          -----          --------          --------

<S>                                                <C>               <C>               <C>            <C>               <C>
Initial capital contributions ...............      $ 71,892          $ 90,073          $  --          $    993          $162,958
Bank credit agreement borrowings (Note 5)....       266,000           103,000             --                --           369,000
Notes payable to partners (Note 6) ..........        25,000                --             --                --            25,000
                                                   --------          --------          -----          --------          --------
Acquisition funding sources .................      $362,892          $193,073          $  --          $    993          $556,958
                                                   ========          ========          =====          ========          ========
</TABLE>

BUSINESS. Woodlands Development's real estate activities are concentrated in The
Woodlands, a planned community located north of Houston, Texas. Consequently,
these operations and the associated credit risks may be affected, either
positively or negatively, by changes in economic conditions in this geographical
area. Activities associated with The Woodlands include residential and
commercial land sales and the construction of commercial buildings.

REAL ESTATE. Costs associated with the acquisition and development of real
estate, including holding costs consisting principally of interest and ad
valorem taxes, are capitalized as incurred. Capitalization of such holding costs
is limited to properties for which active development continues. Capitalization
ceases upon completion of a property or cessation of development activities.
Where practicable, capitalized costs are specifically assigned to individual
assets; otherwise, costs are allocated based on estimated values of the affected
assets.

LAND SALES. Earnings from sales of real estate are recognized when a third-party
buyer has made an adequate cash down payment and has attained the attributes of
ownership. Notes received in connection with land sales are discounted when the
stated purchase prices are significantly different from those that would have
resulted from similar cash transactions. The cost of land sold is generally
determined as a specific percentage of the sales revenues recognized for each
land development project. These percentages are based on total estimated
development costs and sales revenues for each project.

DEPRECIATION. Depreciation of operating assets is provided on the straight-line
method over the estimated useful lives of the assets, which range from three to
fifty years.


                                      F-76

<PAGE>   123


INCOME TAXES. No liability for Federal income taxes is included in the
accompanying financial statements since the Woodlands Development is not a
tax-paying entity and all income and expenses are reported by the partners for
tax reporting purposes.

The tax returns, the qualification of Woodlands Development for tax purposes and
the amount of distributable partnership income or loss are subject to
examination by Federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.

STATEMENTS OF CASH FLOWS. Short-term investments with maturities of three months
or less are considered to be cash equivalents. The reported amounts for proceeds
from issuance of debt and debt repayments exclude the impact of borrowings with
initial terms of three months or less. For the year ended December 31, 1998 and
for the period from July 31, 1997 (inception) to December 31, 1997, Woodlands
Development paid interest totaling $25,361,000 and $7,375,000 related to debt
described in Note 5.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

2.  NOTES AND CONTRACTS RECEIVABLE

Notes receivable are carried at cost, net of discounts. At December 31, 1998,
Woodlands Development had one note receivable with an outstanding balance of
$1,453,000 and utility district receivables totaling $28,587,000. The note
receivable has an 8.0% rate. Utility district receivables, the collection of
which is dependent on the ability of utility districts in The Woodlands to sell
bonds, have a market interest rate of approximately 5.0% at December 31, 1998.

3.  REAL ESTATE

The following is a summary of real estate at December 31, 1998 and 1997 (in
thousands):


<TABLE>
<CAPTION>
                                                  1998           1997
                                                --------       --------
<S>                                             <C>            <C>
Land ......................................     $329,398       $338,856
Commercial properties .....................       12,670          4,247
Equity investments (Note 4) ...............        2,641          2,634
Other assets ..............................          728            233
                                                --------       --------
                                                 345,437        345,970
Accumulated depreciation ..................        (355)           (63)
                                                --------       --------
                                                $345,082       $345,907
                                                ========       ========
</TABLE>

LAND. The principal land development is The Woodlands, a mixed-use,
master-planned community located north of Houston, Texas. Residential land is
divided into seven villages in various stages of development. Each village has
or is planned to contain a variety of housing, neighborhood retail centers,
schools, parks and other amenities. Woodlands Development controls the
development of the residential communities and produces finished lots for sale
to qualified builders. Housing is constructed in a wide choice of pricing and
product styles.

Commercial land is divided into distinct centers that serve or are planned to
serve as locations for office buildings, retail and entertainment facilities,
industrial and warehouse facilities, research and technology facilities, and
college and training facilities. Woodlands Development produces finished sites
for third parties and uses land for its own building development activities.


                                      F-77

<PAGE>   124


COMMERCIAL PROPERTIES. A commercial property owned by Woodlands Development is
leased to a third-party tenant. The lease term is five years. The lease is
accounted for under the operating method. Minimum future lease revenues from the
operating lease excludes contingent rentals that may be received. Tenant rents
include rent for noncancelable operating leases. Contingent rents include
pass-throughs of incremental operating costs. Other commercial properties are
under development at December 31, 1998. Summarized financial information for
commercial properties as of December 31, 1998 and for the year then ended
follows (in thousands):


<TABLE>
<S>                                                      <C>
Net book value of assets under operating leases ....     $12,327
                                                         =======

Revenue from tenants
   Tenant rent .....................................     $ 1,470
   Contingent rent .................................         155
                                                         -------

                                                         $ 1,625
                                                         =======
Minimum future lease revenues
    1999 ...........................................     $ 1,373
    2000 ...........................................       1,373
    2001 ...........................................       1,373
    2002 ...........................................       1,373
    2003 ...........................................         229
</TABLE>

4.  JOINT VENTURES AND PARTNERSHIPS

During 1998, Woodlands Development's principal partnership interests included
the following:


<TABLE>
<CAPTION>
                                                     Ownership     Nature of Operations
                                                   -------------   --------------------
<S>                                                     <C>        <C>
   Mitchell Mortgage Company, LLC.................      49%        Mortgage lending
   Stewart Title of Montgomery County, Inc. ......      50%        Title company
</TABLE>

Woodlands Development's net investment in each of these entities is included in
the real estate caption on the balance sheets and their share of these entities'
pretax earnings is included in revenues on the statements of earnings. A summary
of their net investment as of December 31, 1998 and their share of pre-tax
earnings for the year then ended follows (in thousands):


<TABLE>
<CAPTION>
                                                                     Equity in
                                                          Net         Pre-tax
                                                      Investment      Earnings
                                                     -------------- ------------

<S>                                                  <C>            <C>
Mitchell Mortgage Company, LLC ....................  $       1,261  $        472
Stewart Title of Montgomery County, Inc. ..........          1,380           583
                                                     -------------  ------------
                                                     $       2,641  $      1,055
</TABLE>                                             =============  ============


                                      F-78


<PAGE>   125




Summarized financial statement information for partnerships in which Woodlands
Development has an ownership interest at December 31, 1998 and for the year then
ended follows (in thousands):

<TABLE>
<S>                                                                    <C>
Assets ...........................................................     $66,730
Debt payable to third parties
   Woodlands Development's proportionate share (nonrecourse) ....       29,291
   Other parties' proportionate share ............................      30,487
Accounts payable and deferred credits ...........................        1,312
Owners' equity ..................................................        5,640

Revenues .........................................................      10,368

Operating earnings ...............................................       2,364
Pre-tax earnings .................................................       2,364
Woodlands Development's proportionate share
      of pre-tax  earnings .......................................       1,055
</TABLE>

5.  DEBT

A summary of Woodlands Development's outstanding debt at December 31, 1998 and
1997 follows (in thousands):

<TABLE>
<CAPTION>
                                                     1998             1997
                                                --------------   --------------
<S>                                             <C>              <C>
  Bank credit agreement ......................  $      235,750   $      266,000
  Mortgages payable, at an average
  interest rate of 7.8%  .....................           3,405              892
                                                --------------   --------------
                                                $      239,155   $      266,892
                                                ==============   ==============
</TABLE>

The bank credit agreement has a three year term expiring July 31, 2000 with two,
one-year extension options. The interest rate is based on the London Interbank
Offered Rate and averaged 8.1% for the year ended December 31, 1998. Interest is
paid monthly. The credit agreement contains certain restrictions which, among
other things, require the maintenance of specified financial ratios, restrict
indebtedness and sale, lease or transfer of assets, and limit the right of
Woodlands Development to merge with other companies and make distributions to
its partners. Certain assets of Woodlands Development including cash and
receivables secure the credit agreement. Mandatory debt maturities are
$11,875,000 in 1999 and $326,875,000 in 2000. They may be made by Woodlands
Development or Woodlands Commercial or both at their option. Additional
principal payments may be required if sufficient cash is available, and
additional prepayments can also be made at the discretion of Woodlands
Development.

The mortgages payable have debt maturities for the five years subsequent to
December 31, 1998 totaling $109,000; $140,000; $140,000; $151,000 and
$2,723,000.

6.  NOTES PAYABLE TO PARTNERS

Woodlands Development has notes payable to its partners totaling $25,000,000.
The notes bear interest at 15%. Interest is payable beginning in October 1998
and quarterly thereafter. All outstanding balances are due in 2007. These notes
are subordinate to the bank credit agreement and mortgages payable described
above.

7.  COMMITMENTS AND CONTINGENCIES

CONTINGENT LIABILITIES. At December 31, 1998, Woodlands Development had a
contingent liability of $2,086,000, consisting of a letter of credit.


                                      F-79

<PAGE>   126


LEASES. Rental expense for operating leases for the year ended December 31, 1998
and the period from July 31, 1997 (inception) to December 31, 1997 totaled
$14,000 and $4,000.

LEGAL ACTIONS. Legal actions have been brought or threatened against Woodlands
Development and third parties by various homeowners in The Woodlands related to
flooding in the North Houston area in October 1994. These claimants generally
are seeking reimbursements for property damages, but some are making claims for
deceptive trade practices or mental anguish. Woodlands Development contends that
it was not responsible for these damages, which it believes resulted from a
record, near 500-year flood and were not preventable with the exercise of
ordinary care and generally accepted drainage design, development and
maintenance.

Woodlands Development is also a party to other claims and legal actions arising
in the ordinary course of their business and to recurring examinations by the
Internal Revenue Service and other regulatory agencies.

Management believes, after consultation with outside counsel, that adequate
financial statement accruals have been provided for all known litigation
contingencies where losses are deemed probable. Since the ultimate cost will
depend on the outcomes of the uncertainties discussed in this note, it is
possible, however, that additional future charges might be required that would
be significant to the operating results of a particular period. Based on the
status of the cases, Woodlands Development is unable to determine a range of
such possible additional losses, if any, that might be incurred in connection
with this litigation. Woodlands Development believes it is not probable that the
ultimate resolution of this litigation will have a material adverse effect on
its financial position.

COUNTRY CLUB MEMBERSHIP. As of December 31, 1998, the Woodlands Development had
collected $765,000 for memberships to a new country club, which began
construction at the end of 1998. Because of certain conditions that had to be
satisfied, these funds were being held by Woodlands Development at the end of
the year. Subsequent to year-end, these conditions were satisfied and the funds
were recorded.

8.  RELATED PARTY TRANSACTIONS

Woodlands Operating provides services to Woodlands Development under management
and advisory services agreements. These agreements have an initial term ending
December 31, 1998 and are automatically renewable on an annual basis. Woodlands
Development pays Woodlands Operating an advisory fee equal to cost plus 3%. In
addition, Woodlands Development reimburses Woodlands Operating for all cost and
expenses incurred on their behalf. For the year ended December 31, 1998 and the
period from July 31, 1997 (inception) to December 31, 1997, Woodlands
Development recorded expenses of $11,050,000 and $4,598,000 for services
provided by Woodlands Operating.

9.  PARTNERS' EQUITY

Crescent's entity in Woodlands Development is The Woodlands Land Company, Inc.
Morgan Stanley's entities are MS/TWC Joint Venture and MS TWC, Inc. The
partners' percentage interests are summarized below:

<TABLE>
<CAPTION>
                                        General       Limited
                                        Partner       Partner
                                        Interest      Interest
                                        --------      --------

<S>                                      <C>           <C>
The Woodlands Land Company, Inc. ...     42.5%
MS/TWC Joint Venture ...............                   56.5%
MS TWC, Inc ........................      1.0%
</TABLE>

The partnership agreement provides, among other things, the following:

(i) Woodlands Development is governed by an Executive Committee composed of
equal representation from their respective general partners.

(ii) Net income and losses from operations are currently allocated so that
partners' capital accounts stand in the ratio of the percentage interest listed
above.


                                      F-80


<PAGE>   127


(iii) Distributions are made to partners based on specified payout percentages
and include cumulative preferred returns to Morgan Stanley's affiliates. The
payout percentage to Morgan Stanley's affiliates is 57.5% until the affiliates
receive distributions equal to their capital contributions and a 12% cumulative
preferred return compounded quarterly. Then, the payout percentage to Morgan
Stanley's affiliates is 50.5% until the affiliates receive distributions equal
to their capital contributions and an 18% cumulative preferred return compounded
quarterly. Thereafter the payout percentage to Morgan Stanley's affiliates is
47.5%.

(iv) Woodlands Development will continue to exist until December 31, 2040 unless
terminated earlier due to specified events.

(v) No additional partners may be admitted to Woodlands Development unless
specific conditions in the partnership agreements are met. Partnership interests
may be transferred to affiliates of Crescent or Morgan Stanley. Crescent has the
right of first refusal to buy the partnership interests of the Morgan Stanley
affiliates at the same terms and conditions offered to a third party purchaser,
or sell its affiliates' interests to the same third party purchaser.

(vi) Crescent and Morgan Stanley have the right to offer to purchase the other
partner's affiliates' partnership interests in the event of failure to make
specified capital contributions or a specified default by the other. Specified
defaults include bankruptcy, breach of partnership covenants, transfer of
partnership interests except as permitted by the partnership agreements, and
fraud or gross negligence.

10.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of Woodlands Development's
financial instruments as of December 31, 1998 follows (in thousands):

<TABLE>
<CAPTION>
                                                                           Carrying         Estimated Fair
                                                                            Amounts             Values
                                                                            --------           ----------
<S>                                                                         <C>                 <C>
              Notes and contracts receivable.............................   $ 30,040            $ 30,040
              Debt.......................................................    239,155             238,961
              Notes payable to partners..................................     25,000              33,280
</TABLE>

Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could be
made for similar maturities to borrowers with comparable credit ratings. Fair
values of fixed-rate, long-term debt were based on current interest rates
offered to Woodlands Development for debt with similar remaining maturities. For
floating-rate debt obligations, carrying amounts and fair values were assumed to
be equal because of the nature of these obligations. The carrying amounts of
Woodlands Development's other financial instruments approximate their fair
values.

11.  YEAR 2000 COMPLIANCE (UNAUDITED)

Woodlands Development utilizes and is dependent on computer systems to conduct
its business. These systems include hardware and software developed and
maintained by third parties and purchased software run on in-house networks. A
third party manages the in-house systems under a contractual arrangement.
Woodlands Development is undertaking a project to determine whether their
computer systems are year 2000 compliant. The project plan has been reviewed by
Woodlands Development's senior management and involves an assessment of each
software application and related hardware. Vendors will be contacted to assess
year 2000 compliance and determine what corrective measures, if any, are needed.
A plan has been developed to make the necessary corrections, or take some
alternative action. The plan is being implemented and tested to ensure
compliance. Systems that have the greatest impact will be given a higher
priority.

Management has not determined the final cost of its year 2000 readiness efforts
or the related potential impact on Woodlands Development's results of
operations. There can be no assurance that there will not be an adverse impact
on Woodlands Development's financial position or results of operations if
Woodlands Development's systems or


                                      F-81

<PAGE>   128



the systems of other companies on which the Woodlands Development relies are not
compliant in time. However, based on preliminary assessments management believes
the risk of such adverse impact is low.

12.  CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 1998 Woodlands Development changed its method of accounting
for organization costs to conform to Statement of Position 98-5 "Reporting on
the Costs of Start-Up Activities." In 1998 Woodlands Development expensed
previously capitalized costs that totaled $639,000.


                                      F-82

<PAGE>   129
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
          EXHIBIT
          NUMBER               DESCRIPTION OF EXHIBITS
          ------               -----------------------
<S>                    <C>
            3.1         First Amended and Restated Certificate of Incorporation
                        (filed as Exhibit 3.3 to the Company's registration
                        statement on Form S-1 dated July 12, 1997 ("Form S-1")
                        and incorporated by reference herein)

            3.2         First Amended and Restated Bylaws (filed as Exhibit 3.4
                        to Form S-1 and incorporated by reference herein)

            3.3         Amendment of Article V of First Amended and Restated
                        Bylaws (filed as Exhibit 3.3 to the Company's June 30,
                        1998 Form 10-Q ("June 30, 1998 Form 10-Q") and
                        incorporated by reference herein)

            3.4         Repeal of Amendment of Article V of First Amended and
                        Restated Bylaws (filed as Exhibit 3.4 to the Company's
                        September 30, 1998 Form 10-Q ("September 30, 1998 Form
                        10-Q") and incorporated by reference herein)

            4.1         Specimen stock certificate (filed as Exhibit 4.1 to Form
                        S-1 and incorporated by reference herein)

            4.2         Preferred Share Purchase Rights Plan (filed as Exhibit
                        4.2 to Form S-1 and incorporated by reference herein)

            4.3         First Amendment to Preferred Share Purchase Rights
                        Agreement dated as of September 25, 1998, between
                        Crescent Operating, Inc. and Bank Boston, N.A., as
                        Rights Agent (filed as Exhibit 4.3 to September 30, 1998
                        Form 10-Q and incorporated by reference herein)

            4.4         Second Amendment to Preferred Share Purchase Rights
                        Agreement dated as of March 4, 1999, between Crescent
                        Operating, Inc. and Bank Boston, N.A., as Rights Agent
                        (filed as Exhibit 4.4 to March 31, 1999 Form 10-Q
                        ("March 31, 1999 Form 10-Q") and incorporated by
                        reference herein)

            10.1        Amended Stock Incentive Plan (filed as Exhibit 10.1 to
                        Form S-1 and incorporated by reference herein)

</TABLE>




<PAGE>   130
<TABLE>
<S>                     <C>
            10.2        Intercompany Agreement between Crescent Operating, Inc.
                        and Crescent Real Estate Equities Limited Partnership
                        (filed as Exhibit 10.2 to the Company's Quarterly Report
                        on Form 10-Q for the Quarter Ended June 30, 1997 ("June
                        30, 1997 Form 10-Q") and incorporated by reference
                        herein)

            10.3        Amended and Restated Operating Agreement of Charter
                        Behavioral Health Systems, LLC (filed as Exhibit 10.3 to
                        June 30, 1997 Form 10-Q and incorporated by reference
                        herein)

            10.5        Amended and Restated Credit and Security Agreement,
                        dated as of May 30, 1997, between Crescent Real Estate
                        Equities Limited Partnership and Crescent Operating,
                        Inc., together with related Note (filed as Exhibit 10.5
                        to the Company's September 30, 1997 Form 10-Q
                        ("September 30, 1997 Form 10-Q") and incorporated by
                        reference herein)

            10.6        Line of Credit and Security Agreement, dated as of May
                        21, 1997, between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc., together with
                        related Line of Credit Note (filed as Exhibit 10.6 to
                        September 30, 1997 Form 10-Q and incorporated by
                        reference herein)

            10.7        Acquisition Agreement, dated as of February 10, 1997,
                        between Crescent Real Estate Equities Limited
                        Partnership and Carter-Crowley Properties, Inc. (filed
                        as Exhibit 10.7 to Form S-1 and incorporated by
                        reference herein)

            10.10       Security Agreement dated September 22, 1997 between COI
                        Hotel Group, Inc., as debtor, and Crescent Real Estate
                        Equities Limited Partnership, as lender, together with
                        related $1 million promissory note (filed as Exhibit
                        10.10 to September 30, 1997 Form 10-Q and incorporated
                        by reference herein)

            10.11       Security Agreement dated September 22, 1997 between COI
                        Hotel Group, Inc., as debtor, and Crescent Real Estate
                        Equities Limited Partnership, as lender, together with
                        related $800,000 promissory note (filed as Exhibit 10.11
                        to September 30, 1997 Form 10-Q and incorporated by
                        reference herein)

            10.12       Amended and Restated Asset Management dated August 31,
                        1997, to be effective July 31, 1997, between Wine
                        Country Hotel, LLC and The Varma Group, Inc. (filed as
                        Exhibit 10.12 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)

            10.13       Amended and Restated Asset Management Agreement dated
                        August 31, 1997, to be effective July 31, 1997, between
                        RoseStar Southwest, LLC and The Varma Group, Inc. (filed
                        as Exhibit 10.13 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)

            10.14       Amended and Restated Asset Management Agreement dated
                        August 31, 1997, to be effective July 31, 1997, between
                        RoseStar Management LLC and The Varma Group, Inc. (filed
                        as Exhibit 10.14 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)

            10.15       Agreement for Financial Services dated July 1, 1997,
                        between Crescent Real Estate Equities Company and
                        Petroleum Financial, Inc. (filed as Exhibit 10.15 to
                        September 30, 1997 Form 10-Q and incorporated by
                        reference herein)

            10.16       Credit Agreement dated August 27, 1997, between Crescent
                        Operating, Inc. and NationsBank of Texas, N.A. together
                        with related $15.0 million promissory note (filed as
                        Exhibit 10.16 to September 30, 1997 Form 10-Q and
                        incorporated by reference herein)
</TABLE>



<PAGE>   131
<TABLE>
<S>                     <C>
            10.17       Support Agreement dated August 27, 1997, between Richard
                        E. Rainwater, John Goff and Gerald Haddock in favor of
                        Crescent Real Estate Equities Company and NationsBank of
                        Texas, N.A. (filed as Exhibit 10.17 to September 30,
                        1997 Form 10-Q and incorporated by reference herein)

            10.18       1997 Crescent Operating, Inc. Management Stock Incentive
                        Plan (filed as Exhibit 10.18 to the Company's Annual
                        Report on Form 10-K for the year ended December 31, 1997
                        ("December 31, 1997 Form 10-K") and incorporated by
                        reference herein)

            10.19       Memorandum of Agreement executed November 16, 1997,
                        among Charter Behavioral Health Systems, LLC, Charter
                        Behavioral Health Systems, Inc. and Crescent Operating,
                        Inc. (filed as Exhibit 10.19 to December 31, 1997 Form
                        10-K and incorporated by reference herein)

            10.20       Purchase Agreement dated August 31, 1997, by and among
                        Crescent Operating, Inc., RoseStar Management LLC,
                        Gerald W. Haddock, John C. Goff and Sanjay Varma (filed
                        as Exhibit 10.20 to December 31, 1997 Form 10-K and
                        incorporated by reference herein)

            10.21       Stock Purchase Agreement dated August 31, 1997, by and
                        among Crescent Operating, Inc., Gerald W. Haddock, John
                        C. Goff and Sanjay Varma (filed as Exhibit 10.21 to
                        December 31, 1997 Form 10-K and incorporated by
                        reference herein)

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

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

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

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

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

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

</TABLE>




<PAGE>   132
<TABLE>

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

            10.29       Form of Indemnification Agreement (filed as Exhibit
                        10.29 to December 31, 1997 Form 10-K and incorporated by
                        reference herein)

            10.30       Purchase Agreement, dated as of September 29, 1997,
                        between Crescent Operating, Inc. and Crescent Real
                        Estate Equities Limited Partnership, relating to the
                        purchase of Desert Mountain Development Corporation
                        (filed as Exhibit 10.30 to December 31, 1997 Form 10-K
                        and incorporated by reference herein)

            10.31       Lease Agreement dated December 19, 1997, between
                        Crescent Real Estate Equities Limited Partnership, as
                        Lessor, and Wine Country Hotel, as Lessee, for lease of
                        Ventana Inn (filed as Exhibit 10.31 to the Company's
                        March 31, 1998 Form 10-Q ("March 31, 1998 Form 10-Q")
                        and incorporated by reference herein)

            10.32       Lease Agreement dated September 22, 1997, between
                        Crescent Real Estate Equities Limited Partnership, as
                        Lessor, and COI Hotel Group, Inc., as lessee, for lease
                        of Four Seasons Hotel, Houston (filed as Exhibit 10.32
                        to March 31, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.33       Asset Purchase Agreement dated December 19, 1997, among
                        Crescent Operating, Inc., Preco Machinery Sales, Inc.,
                        and certain individual Preco shareholders (filed as
                        Exhibit 10.33 to March 31, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.34       Asset Purchase Agreement dated April 30, 1998, among
                        Crescent Operating, Inc., Central Texas Equipment
                        Company, and certain individual Central Texas
                        shareholders (filed as Exhibit 10.34 to March 31, 1998
                        Form 10-Q and incorporated by reference herein)

            10.35       Credit Agreement dated August 29, 1997 between Crescent
                        Real Estate Equities Limited Partnership, as lender, and
                        Desert Mountain Properties Limited Partnership, as
                        borrower, together with related Senior Note, Junior Note
                        and deed of trust (filed as Exhibit 10.35 to March 31,
                        1998 Form 10-Q and incorporated by reference herein)

            10.36       Buy-Out Agreement dated April 24, 1998, between Crescent
                        Operating, Inc. and Crescent Real Estate Equities
                        Limited Partnership (filed as Exhibit 10.36 to March 31,
                        1998 Form 10-Q and incorporated by reference herein)

            10.37       Stock Acquisition Agreement and Plan of Merger dated
                        June 4, 1998, among Machinery, Inc., Oklahoma Machinery,
                        Inc., Crescent Machinery Company, Crescent Operating,
                        Inc. and certain individual Machinery shareholders
                        (filed as Exhibit 10.37 to June 30, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.38       Master Revolving Line of Credit Loan Agreement
                        (Borrowing Base and Warehouse) dated May 14, 1998,
                        between Desert Mountain Properties Limited Partnership
                        and National Bank of Arizona (filed as Exhibit 10.38 to
                        June 30, 1998 Form 10-Q and incorporated by reference
                        herein)

            10.39       1997 Management Stock Incentive Plan (filed as Exhibit
                        10.39 to June 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.40       Credit and Security Agreement, dated as of September 21,
                        1998, between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc., together with
                        related Note (filed as Exhibit 10.40 to September 30,
                        1998 Form 10-Q and incorporated by reference herein)

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            10.41       First Amendment to Amended and Restated Pledge
                        Agreement, dated as of September 21, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed as Exhibit 10.41 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.42       First Amendment to Line of Credit and Security
                        Agreement, dated as of August 11, 1998, between Crescent
                        Real Estate Equities Limited Partnership and Crescent
                        Operating, Inc., together with related Note (filed as
                        Exhibit 10.42 to September 30, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.43       First Amendment to Amended and Restated Credit and
                        Security Agreement, dated as of August 11, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed as Exhibit 10.43 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.44       Second Amendment to Amended and Restated Credit and
                        Security Agreement, dated as of September 21, 1998,
                        between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc. (filed as
                        Exhibit 10.44 to September 30, 1998 Form 10-Q and
                        incorporated by reference herein)

            10.45       Second Amendment to Line of Credit and Security
                        Agreement, dated as of September 21, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed as Exhibit 10.45 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

            10.46       Agreement of Limited Partnership of COPI Colorado, L.P.
                        (filed as Exhibit 10.1 to that Schedule 13D Statement
                        dated September 28, 1998, filed by COPI Colorado, L.P.,
                        Crescent Operating, Inc., Gerald W. Haddock, John C.
                        Goff and Harry H. Frampton, III, and incorporated by
                        reference herein)

            10.47       Contribution Agreement effective as of September 11,
                        1998, by and among Crescent Operating, Inc., Gerald W.
                        Haddock, John C. Goff and Harry H. Frampton, III (filed
                        as Exhibit 10.2 to that Schedule 13D Statement dated
                        September 28, 1998, filed by COPI Colorado, L.P.,
                        Crescent Operating, Inc., Gerald W. Haddock, John C.
                        Goff and Harry H. Frampton, III, and incorporated by
                        reference herein)

            10.48       Agreement Regarding Schedules and Other Matters made as
                        of September 11, 1998, by and among Crescent Operating,
                        Inc., Gerald W. Haddock, John C. Goff and Harry H.
                        Frampton, III (filed as Exhibit 10.3 to that Schedule
                        13D Statement dated September 28, 1998, filed by COPI
                        Colorado, L.P., Crescent Operating Inc., Gerald W.
                        Haddock, John C. Goff and Harry H. Frampton, III, and
                        incorporated by reference herein)

            10.49       Stock Purchase Agreement dated as of August 7, 1998 by
                        and among Western Traction Company, The Carlston Family
                        Trust, Ronald D. Carlston and Crescent Operating, Inc.
                        (filed as Exhibit 10.49 to September 30, 1998 Form 10-Q
                        and incorporated by reference herein)

            10.50       Stock Purchase Agreement dated as of July 31, 1998 by
                        and among Harvey Equipment Center, Inc., L and H Leasing
                        Company, William J. Harvey, Roy E. Harvey, Jr., Betty J.
                        Harvey and Crescent Operating, Inc. (filed as Exhibit
                        10.50 to September 30, 1998 Form 10-Q and incorporated
                        by reference herein)

            10.51       Credit Agreement dated as of July 28, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        CRL Investments, Inc., together with the related Note
                        (filed as Exhibit 10.51 to September 30, 1998 Form 10-Q
                        and incorporated by reference herein)

            10.52       Security Agreement dated as of July 28, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        CRL Investments, Inc. (filed as Exhibit 10.52 to
                        September 30, 1998 Form 10-Q and incorporated by
                        reference herein)

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<PAGE>   134
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            10.53       First Amendment to Credit Agreement effective as of
                        August 27, 1998, among Crescent Operating, Inc.,
                        NationsBank, N. A., and the Support Parties identified
                        therein (filed as Exhibit 10.53 to September 30, 1998
                        Form 10-Q and incorporated by reference herein)

            10.54       Lease Agreement dated as of October 13, 1998, between
                        Crescent Real Estate Equities Limited Partnership and
                        Wine Country Golf Club, Inc., relating to Sonoma Golf
                        Club (filed as Exhibit 10.54 to September 30, 1998 Form
                        10-Q and incorporated by reference herein)

            10.55       First Amendment to Lease Agreement effective December
                        31, 1998, between Canyon Ranch Leasing, L.L.C., and
                        Crescent Real Estate Equities Limited Partnership,
                        relating to Canyon Ranch - Tucson (filed as Exhibit
                        10.55 to the Company's Annual Report on Form 10-K for
                        the year ended December 31, 1998 ("December 31, 1998
                        Form 10-K") and incorporated by reference herein)

            10.56       First Amendment to Lease Agreement effective April 1,
                        1996; Second Amendment to Lease Agreement effective
                        November 22, 1996; Third Amendment to Lease Agreement
                        effective August 12, 1998; and Fourth Amendment to Lease
                        Agreement effective December 31, 1998 between RoseStar
                        Southwest, LLC, and Crescent Real Estate Funding II
                        L.P., relating to Hyatt Regency Albuquerque (filed as
                        Exhibit 10.56 to December 31, 1998 Form 10-K and
                        incorporated by reference herein)

            10.57       First Amendment to Lease Agreement effective December
                        31, 1998, between Wine Country Hotel, LLC, and Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Sonoma Mission Inn & Spa (filed as Exhibit 10.57 to
                        December 31, 1998 Form 10-K and incorporated by
                        reference herein)

            10.58       First Amendment to Amended and Restated Lease Agreement
                        effective December 31, 1998, between RoseStar
                        Management, LLC, and Crescent Real Estate Equities
                        Limited Partnership, relating to Marriott City Center,
                        Denver (filed as Exhibit 10.58 to December 31, 1998 Form
                        10-K and incorporated by reference herein)

            10.59       First Amendment to Lease Agreement effective December
                        31, 1998, between Wine Country Hotel, LLC, and Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Ventana Inn (filed as Exhibit 10.59 to December 31, 1998
                        Form 10-K and incorporated by reference herein)

            10.60       First Amendment to Amended and Restated Lease Agreement
                        effective April 1, 1996 and Second Amendment to Amended
                        and Restated Lease Agreement effective December 31,
                        1998, between RoseStar Southwest, LLC, and Crescent Real
                        Estate Funding II, L.P., relating to Hyatt Regency
                        Beaver Creek (filed as Exhibit 10.60 to December 31,
                        1998 Form 10-K and incorporated by reference herein)

            10.61       First Amendment to Lease Agreement effective December
                        31, 1998, between COI Hotel Group, Inc. and Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Four Seasons - Houston (filed as Exhibit 10.61 to
                        December 31, 1998 Form 10-K and incorporated by
                        reference herein)

            10.62       First Amendment to Lease Agreement effective December
                        31, 1998, between Wine Country Hotel, LLC and Crescent
                        Real Estate Funding VI, L.P., relating to Canyon Ranch -
                        Lenox (filed as Exhibit 10.62 to March 31, 1999 Form
                        10-Q and incorporated by reference herein)

            10.63       Master Guaranty effective December 31, 1998, by Crescent
                        Operating, Inc. for the benefit of Crescent Real Estate
                        Equities Limited Partnership, Crescent Real Estate
                        Funding II, L.P., and Crescent Real Estate Funding VI,
                        L.P., relating to leases for Hyatt Regency Albuquerque,
                        Hyatt Regency Beaver Creek, Canyon Ranch-Lenox, Sonoma
                        Mission Inn & Spa, Canyon Ranch - Tucson, and Marriott
                        City Center Denver (filed as Exhibit 10.63 to December
                        31, 1998 Form 10-K and incorporated by reference herein)
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<PAGE>   135
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            10.64       Guaranty of Lease effective December 19, 1997, by
                        Crescent Operating, Inc. for the benefit of Crescent
                        Real Estate Equities Limited Partnership, relating to
                        Ventana Inn (filed as Exhibit 10.64 to December 31, 1998
                        Form 10-K and incorporated by reference herein)

            10.65       Amended and Restated Guaranty of Lease effective
                        December 31, 1998, by Crescent Operating, Inc. for the
                        benefit of Crescent Real Estate Equities Limited
                        Partnership, relating to Four Seasons Hotel - Houston
                        (filed as Exhibit 10.65 to December 31, 1998 Form 10-K
                        and incorporated by reference herein)

            10.66       Amended and Restated Guaranty of Lease effective
                        December 31, 1998, by Crescent Operating, Inc. for the
                        benefit of Crescent Real Estate Equities Limited
                        Partnership, relating to Sonoma Golf Club (filed as
                        Exhibit 10.66 to December 31, 1998 Form 10-K and
                        incorporated by reference herein)

            10.67       Credit Agreement dated August 11, 1995, between Crescent
                        Development Management Corp., as borrower, and Crescent
                        Real Estate Equities Limited Partnership, as lender;
                        First Amendment to Credit Agreement dated as of April
                        15, 1997; Second Amendment to Credit Agreement dated as
                        of May 8, 1998; and related Note and Security Agreement
                        (filed as Exhibit 10.67 to December 31, 1998 Form 10-K
                        and incorporated by reference herein)

            10.68       Credit Agreement dated January 1, 1998, between Crescent
                        Development Management Corp., as borrower, and Crescent
                        Real Estate Equities Limited Partnership, as lender, and
                        related Note and Security Agreement (filed as Exhibit
                        10.68 to December 31, 1998 Form 10-K and incorporated by
                        reference herein)

            10.69       $3,100,000 Note dated February 29, 1996, made by
                        Crescent Development Management Corp. payable to
                        Crescent Real Estate Equities Limited Partnership (filed
                        as Exhibit 10.69 to December 31, 1998 Form 10-K and
                        incorporated by reference herein)

            10.70       Credit Agreement dated January 1, 1999, between Crescent
                        Development Management Corp., as borrower, and Crescent
                        Real Estate Equities Limited Partnership, as lender, and
                        related Line of Credit Note and Security Agreement
                        (filed as Exhibit 10.70 to March 31, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.71       Amended and Restated Credit Agreement dated January 1,
                        1999, between Crescent Development Management Corp., as
                        borrower, and Crescent Real Estate Equities Limited
                        Partnership, as lender, and related Line of Credit Note
                        and Amended and Restated Security Agreement (filed as
                        Exhibit 10.71 to March 31, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.72       Purchase Agreement dated March 12, 1999, between
                        Crescent Operating, Inc. and Crescent Real Estate
                        Equities Limited Partnership, relating to sale of
                        interests in Crescent CS Holdings Corp., and Crescent CS
                        Holdings II Corp., and related Put Agreement of same
                        date (filed as Exhibit 10.72 to March 31, 1999 Form 10-Q
                        and incorporated by reference herein)

            10.73       Second Amendment to Lease Agreement effective April 1,
                        1999, between Wine Country Hotel, LLC, and Crescent Real
                        Estate Funding VI, L.P., relating to Canyon Ranch-Lenox
                        (filed as Exhibit 10.73 to March 31, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.74       Master Revolving Line of Credit Loan Agreement
                        (Borrowing Base and Warehouse) dated May 14, 1998,
                        between Desert Mountain Properties Limited Partnership,
                        as borrower, and National Bank of Arizona, as lender;
                        Modification Agreement dated December 30, 1998; second
                        Modification Agreement dated March 31, 1999; and related
                        Promissory Note (Borrowing Base), Promissory Note
                        (Warehouse), Pledge Agreement, Deed of Trust, and
                        Amendment to Deed of Trust (filed as Exhibit 10.74 to
                        March 31, 1999 Form 10-Q and incorporated by reference
                        herein)
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<PAGE>   136
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            10.75       Lease Agreement dated as of June 15, 1999, between
                        Crescent Real Estate Funding III, L.P. and COI Hotel
                        Group, Inc., relating to the Renaissance Houston Hotel
                        (filed as Exhibit 10.75 to June 30, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.76       Guaranty of Lease dated June 15, 1999, by Crescent
                        Operating, Inc. for the benefit of Crescent Real Estate
                        Funding III, L.P., relating to Renaissance Houston Hotel
                        (filed as Exhibit 10.76 to June 30, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.77       Asset Management Agreement dated as of January 1, 1999,
                        between Crescent Real Estate Equities Limited
                        Partnership and COI Hotel Group, Inc., relating to the
                        Omni Austin Hotel (filed as Exhibit 10.77 to June 30,
                        1999 Form 10-Q and incorporated by reference herein)

            10.78       Agreement dated June 11, 1999, by and between Gerald W.
                        Haddock and Crescent Operating, Inc. and its
                        subsidiaries and affiliates (filed as Exhibit 10.78 to
                        June 30, 1999 Form 10-Q and incorporated by reference
                        herein)

            10.79       Stock Purchase Agreement dated as of July 15, 1999, by
                        and among E. L. Lester & Company, Incorporated, E. L.
                        Lester, Jr., Howard T. Tellepsen II, Karen Tellepsen,
                        Tom Tellepsen II, Linda Lester Griffen, Crescent
                        Operating, Inc. and Crescent Machinery Company (filed as
                        Exhibit 10.79 to the Company's September 30, 1999 Form
                        10-Q ("September 30, 1999 Form 10-Q") and incorporated
                        by reference herein)

            10.80       Stock Purchase Agreement dated as of July 8, 1999, by
                        and among Solveson Crane Rental, Inc., Solveson Family
                        Revocable Trust, and Crescent Machinery Company (filed
                        as Exhibit 10.80 to September 30, 1999 Form 10-Q and
                        incorporated by reference herein)

            10.81       Second Amendment to Credit Agreement effective as of
                        August 27, 1999, among Crescent Operating, Inc., Bank of
                        America, N. A. (formerly NationsBank, N. A.), and the
                        Support Parties identified therein (filed as Exhibit
                        10.81 to September 30, 1999 Form 10-Q and incorporated
                        by reference herein)

            10.82       First Amendment to 1997 Crescent Operating, Inc.
                        Management Stock Incentive Plan (filed herewith)

            10.83       Form of Sales and Service Agreement between BLAW KNOX
                        Construction Equipment Corporation and certain of
                        Crescent Machinery Company and its subsidiaries (filed
                        herewith)

            10.84       Form of Heavy Equipment Distributor Agreement between
                        Compaction America, Inc. and certain of Crescent
                        Machinery Company and its subsidiaries (filed herewith)

            10.85       Form of Gradall Equipment Distributor Agreement between
                        The Gradall Company and certain of Crescent Machinery
                        Company and its subsidiaries (filed herewith)

            10.86       Form of Distributor Selling Agreement between
                        Ingersoll-Rand Company and certain of Crescent Machinery
                        Company and its subsidiaries (filed herewith)

            10.87       Form of JCB Dealership Agreement between JCB Inc. and
                        certain of Crescent Machinery Company and its
                        subsidiaries (filed herewith)

            10.88       Form of Distributor Agreement between LBX Company, LLC,
                        and certain of Crescent Machinery Company and its
                        subsidiaries (filed herewith)

            10.89       Form of Distributor Agreement between Liebherr
                        Construction Equipment Co. and certain of Crescent
                        Machinery Company and its subsidiaries (filed herewith)

            10.90       Form of Distributor Agreement between Link-Belt
                        Construction Equipment Company and certain of Crescent
                        Machinery Company and its subsidiaries (filed herewith)

            10.91       Form of Dealer Floor Plan Financing and Security
                        Agreement between General Electric Capital Corporation
                        and certain of Crescent Machinery Company and its
                        subsidiaries (filed herewith)

            10.92       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Crescent
                        Development Management Corp. (filed herewith)

            10.93       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Crescent CS
                        Holdings II Corp. (filed herewith)

            10.94       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Crescent CS
                        Holdings Corp. (filed herewith)

            10.95       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and Desert
                        Mountain Development Corp. (filed herewith)

            10.96       Taxable REIT Subsidiary Election Agreement dated
                        December 17, 1999, among Crescent Real Estate Equities
                        Company, Crescent Real Estate Equities Limited
                        Partnership, Crescent Operating, Inc. and The Woodlands
                        Land Company, Inc. (filed herewith)

            10.97       $19.5 Million Credit and Security Agreement effective as
                        of March 11, 1999, between Crescent Real Estate Equities
                        Limited Partnership and Crescent Operating, Inc. with
                        related Promissory Note (filed herewith)

            10.98       First Amendment to Credit and Security Agreement
                        effective as of March 11, 1999, between Crescent Real
                        Estate Equities Limited Partnership and Crescent
                        Operating, Inc. (filed herewith)

            10.99       Third Amendment to Amended and Restated Credit and
                        Security Agreement effective as of March 11, 1999,
                        between Crescent Real Estate Equities Limited
                        Partnership and Crescent Operating, Inc. (filed
                        herewith)

            10.100      Third Amendment to Line of Credit Credit and Security
                        Agreement effective as of March 11, 1999, between
                        Crescent Real Estate Equities Limited Partnership and
                        Crescent Operating, Inc. (filed herewith)

            10.101      Agreements for Wholesale Financing (with Addendum)
                        between Deutsche Financial Services Corporation and,
                        respectively, Western Traction Company, Machinery Inc.,
                        Solveson Crane Rentals Inc., Harvey Equipment Center
                        Inc., and Crescent Machinery Company, with Guarantees
                        (filed herewith)

            10.102      Master Security Agreements between Associates Commercial
                        Corporation and, respectively, Crescent Machinery
                        Company and Western Traction Company; Security Agreement
                        between Associates Commercial Corporation and Western
                        Traction Company; Addendum; and Continuing Guaranty by
                        Crescent Machinery Company (filed herewith)

            10.103      First Amendment to Amended and Restated Credit Agreement
                        dated as of December 20, 1999, between Crescent Real
                        Estate Equities Limited Partnership and Crescent
                        Development Management Corp. with related Line of Credit
                        Note and letter amendment to related security agreement
                        (filed herewith)

            21          List of Subsidiaries of Crescent Operating, Inc.

            23.1        Consent of Ernst & Young LLP

            23.2        Consent of Deloitte & Touche LLP

            23.3        Consent of Arthur Andersen LLP - Denver

            23.4        Consent of Arthur Andersen LLP - Atlanta

            23.5        Consent of Arthur Andersen LLP - Houston

            27          Financial Data Schedule
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