CRESCENT OPERATING INC, 10-Q, 1998-05-15

CRESCENT OPERATING INC
10-Q, 1998-05-15
REAL ESTATE INVESTMENT TRUSTS

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

FORM 10-Q

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

For the quarterly period ended March 31, 1998

[ ] 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 1025
Fort Worth, Texas 76102
-------------------------------------------- ----------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>

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

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

YES [ X ] NO [ ]

Number of shares of Common Stock, $.01 par value, outstanding as of May 8, 1998:
11,231,019

<PAGE> 2

CRESCENT OPERATING, INC.
FORM 10-Q

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----

<S> <C> <C>
PART I - FINANCIAL INFORMATION
------------------------------

Item 1. Financial Statements:

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

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

Consolidated Statements of Cash Flows...................................................... 5

Notes to Consolidated Financial Statements................................................. 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 11

Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 18

PART II - OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings.......................................................................... 19

Item 2. Changes in Securities and Use of Proceeds.................................................. 19

Item 3. Defaults Upon Senior Securities............................................................ 19

Item 4. Submission of Matters to a Vote of Security Holders........................................ 19

Item 5. Other Information.......................................................................... 19

Item 6. Exhibits and Reports on Form 8-K........................................................... 19
</TABLE>

2
<PAGE> 3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CRESCENT OPERATING, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited) (Audited)

ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 32,192,608 $ 43,401,132
Accounts receivable, net 20,025,327 17,099,165
Inventories 13,850,250 10,125,075
Notes receivable 5,820,710 8,454,059
Real estate held for sale 41,503,000 43,200,000
Prepaid expenses and other current assets 7,591,345 4,714,827
------------- -------------
Total current assets 120,983,240 126,994,258
------------- -------------
PROPERTY AND EQUIPMENT, NET 91,023,370 90,979,033
------------- -------------

INVESTMENTS 216,734,258 219,675,214
------------- -------------

OTHER ASSETS

Real estate held for sale 68,045,231 70,827,584
Notes receivable 17,042,644 35,343,319
Goodwill, net of accumulated amortization of
$5,374,287 and $4,211,964 in 1998 and 1997, respectively 34,681,221 35,777,368
Other assets 4,983,399 4,786,559
------------- -------------

Total other assets 124,752,495 146,734,830
------------- -------------

TOTAL ASSETS $ 553,493,363 $ 584,383,335
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable and accrued expenses $ 39,611,424 $ 49,320,732
Accounts payable - CEI 8,433,386 6,588,606
Current portion of long-term debt - CEI 1,507,222 24,084,587
Current portion of long-term debt 19,063,647 18,759,349
Deferred revenue 3,497,321 4,712,227
------------- -------------
Total current liabilities 72,113,000 103,465,501

LONG-TERM DEBT-CEI, NET OF CURRENT PORTION 199,183,795 207,798,563

LONG-TERM DEBT, NET OF CURRENT PORTION 8,859,494 7,486,378

OTHER LIABILITIES 30,027,863 20,126,455
------------- -------------
Total liabilities 310,184,152 338,876,897
------------- -------------

MINORITY INTERESTS 252,511,899 253,566,622
------------- -------------

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 22,500,000 shares authorized, 11,223,219 and
11,211,094 shares issued and outstanding in 1998 and 1997, respectively 112,232 112,111
Additional paid-in capital 14,267,306 14,255,423
Deferred compensation on restricted shares (238,437) (262,500)
Retained deficit (23,343,789) (22,165,218)
------------- -------------
Total shareholders' equity (deficit) (9,202,688) (8,060,184)
------------- -------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 553,493,363 $ 584,383,335
============= =============
</TABLE>

See accompanying notes to the consolidated financial statements.

<PAGE> 4

CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Total revenues 97,377,152 3,039,495
------------ ------------

OPERATING EXPENSES
Equipment sales & leasing 7,611,286 2,900,389
Hospitality direct expenses 41,348,754 --
Hospitality properties rent - CEI 12,324,737 --
Land development direct expenses 31,780,433 --
General and administrative expenses 370,551 --
------------ ------------

Total operating expenses 93,435,761 2,900,389
------------ ------------

INCOME (LOSS) FROM OPERATIONS 3,941,391 139,106
------------ ------------

INVESTMENT (INCOME) LOSS 1,955,653 --
------------ ------------

OTHER (INCOME) EXPENSE
Interest expense 3,825,519 113,253
Interest income (1,232,478) (9,718)
Other 13,170 58
------------ ------------

Total other (income) expense 2,606,211 103,593
------------ ------------

INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES (620,473) 35,513

MINORITY INTERESTS (486,709) --
------------ ------------

INCOME (LOSS) BEFORE INCOME TAXES (1,107,182) 35,513

INCOME TAX (PROVISION) BENEFIT (71,389) (12,428)
------------ ------------

NET INCOME (LOSS) $ (1,178,571) $ 23,085
============ ============
NET LOSS PER SHARE -
BASIC AND DILUTED $ (0.11)
============

WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 11,213,816
============

</TABLE>

See accompanying notes to the consolidated financial statements.

<PAGE> 5

CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
Carter-Crowley Asset
Crescent Operating, Inc. Group (Predecessor)
------------------------ -------------------
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,178,571) $ 23,085
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation 2,328,319 504,225
Amortization 1,162,323 --
Provision for deferred income taxes (66,721) --
Equity in loss of unconsolidated subsidiaries 2,430,075 --
Minority interests 486,710 --
Deferred compensation 24,063 --
Gain on sale of property and equipment (29,733) (96,921)
Changes in assets and liabilities:
Accounts receivable (3,254,710) (683,390)
Inventories (3,731,416) 1,869
Prepaid expenses and current assets (1,485,552) (3,119)
Other assets (197,744)
Accounts payable and accrued expenses (8,915,689) 264,775
Accounts payable - CEI 1,844,780 --
Deferred revenue, current and noncurrent 7,224,137 --
------------ ------------
Net cash (used in) provided by operating activities (3,359,729) 10,524
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,954,221) (861,657)
Proceeds from sale of property and equipment 611,299 270,301
Proceeds from sale of real estate 4,479,353
Net proceeds from sale and collection of notes receivable 21,410,942
Other 444,698
------------ ------------
Net cash provided by (used in) investing activities 23,992,071 (591,356)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt 2,975,266 299,188
Payments on long-term debt (33,286,705) (841,339)
Distributions to minority interest (1,541,432) 1,164,967
Cash received on stock options exercised 12,005 --
Other -- 59,569

------------ ------------
Net cash (used in) provided by financing activities (31,840,866) 682,385
------------ ------------

NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (11,208,524) 101,553

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 43,401,132 22,335
------------ ------------

CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 32,192,608 $ 123,888
============ ============

</TABLE>

See accompanying notes to the consolidated financial statements.

<PAGE> 6

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

1. ORGANIZATION:

Crescent Operating, Inc. ("Crescent Operating", "COI" or the "Company") was
formed on April 1, 1997, by Crescent Real Estate Equities Company ("Crescent
Equities" or "CEI") and its subsidiary Crescent Real Estate Equities Limited
Partnership ("Crescent Partnership") to be the lessee and operator of certain
assets owned or to be acquired by Crescent Partnership and to perform an
agreement (the "Intercompany Agreement") between Crescent Operating and Crescent
Partnership, pursuant to which each has agreed to provide the other with rights
to participate in certain transactions. 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. 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 five
units of limited partnership interest held on the record date.

On June 12, 1997, Crescent Operating's registration statement was declared
effective and Crescent Operating became a public company. Crescent Operating
common stock was accepted for quotation on the OTC Bulletin Board and began
trading on a when-issued basis on June 13, 1997. On September 8, 1997, the
Company was listed on the NASDAQ National Market under the symbol "COPI".

2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:

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

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

6
<PAGE> 7

The combined financial statements of the "Predecessor" were prepared on the
basis that the Predecessor is a combination of 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, is only with regard to the Predecessor. The assets of the
Carter-Crowley Asset Group were adjusted at May 9, 1997 to reflect the purchase
price allocation.

The Company had 882,654 stock options and 282,508 warrants outstanding as of
March 31, 1998. Such stock options and warrants were not included in the loss
per share computations since they would have an antidilutive effect on loss per
share. Such stock options and warrants could potentially dilute income per share
in a future period. Earnings per share for the Predecessor is not meaningful as
the capital structure of the Predecessor was not comparable to that of the
Company.

3. RECENT DEVELOPMENTS:

On February 4, 1998, Ventana Inn closed its operations due to a land slide that
washed out Highway 1, the major access road to the property. The Ventana Inn
re-opened on May 1, 1998. Management has filed a claim for losses totaling $1.3
million which relate to the quarter ended March 31, 1998 under its business
interruption insurance policy. The claim for the month of April 1998 has not yet
been filed. Management cannot predict the outcome of this claim and accordingly,
has not accrued any estimated insurance proceeds in the accompanying financial
statements. Management anticipates that the claim will be settled during the
second quarter of 1998.

Effective April 30, 1998, the Company acquired certain assets of Central Texas
Equipment Co. ("Central Texas"), a company which is engaged in construction
sales, leasing and servicing, for a purchase price of approximately $9.7
million. The purchase price was comprised of $2.6 million in cash, the issuance
of 128,551 shares of Crescent Operating common stock and the assumption of $4.5
million of liabilities. The transaction was structured such that the assets of
Central Texas became a division of Crescent Machinery. With the completion of
this acquisition, Crescent Machinery has locations in Dallas, Houston, Austin,
San Antonio, Corpus Christi and Beaumont.

On March 25, 1998, the business ventures between Vornado Realty Trust and
companies owned by the Company and Crescent Partnership (Crescent Operating has
a net 2% interest in the ventures), entered into an agreement to acquire the
assets of Freezer Services, Inc. The purchase price of this proposed transaction
is $134 million, including the assumption of $22 million of indebtedness. There
can be no assurances that this proposed transaction will ultimately be
completed. If the transaction is consumated, it is likely that Vornado, the
ventures' manager, will request the partners to make, pro rata, additional
capital contributions to satisfy the equity price of the acquisition.

On March 25, 1998, the Company was offered by Crescent Partnership the
opportunity to acquire (i) an interest in a corporation (Corporate Arena
Associates, Inc.) that owns an undivided 6.19% interest in certain acreage on
which the multi-purpose sports arena is to be erected in Dallas, Texas for the
Dallas Stars, a National Hockey League club, and the Dallas Mavericks, a
National Basketball Association club, as well as in the sports arena and (ii) an
interest in a partnership that owns certain surrounding acreage that may be
developed for commercial purposes. In April 1998, the Company paid approximately
$.1 million for the purchase of its equity interest in Corporate Arena
Associates, Inc. As a condition to offering the Company the opportunities to
invest simultaneously with Crescent Partnership in Corporate Arena Associates,
Inc. and the partnership, Crescent Partnership required the Company to enter
into a Buy-Out Agreement under which the Company will be obligated to purchase
from Crescent Partnership its stock in that corporation, its interest in that
partnership, and any assets distributed to it by that corporation or
partnership, if and to the extent that ownership of such stock, partnership
interest or other assets would adversely affect or jeopardize the REIT status of
Crescent Equities. If Crescent Partnership determines that it must dispose of
any such property because of adverse REIT matters, it cannot sell the property
to any person other than the Company without the Company's consent. The
Company's obligation to purchase property put to it by Crescent Partnership is
subject, among other conditions, to Crescent Partnership providing seller
financing for up to 50% (and up to 80%, in the case of a partnership interest)
of the purchase price and consenting to additional third-party junior financing.
The Company cannot predict whether or not it is likely to become obligated to
perform under the Buy-Out Agreement.

<PAGE> 8

4. LONG-TERM DEBT:

Following is a summary of the Company's debt financing:
<TABLE>
<CAPTION>
March 31, 1998
---------------------
<S> <C>
LONG-TERM DEBT - CEI

Note payable to Crescent Partnership due May 2002, bears interest at 12% payable
quarterly, collateralized by a first lien on the assets which the
Company now owns or may acquire in the future.................................... $ 26,776,720

Line of credit in the amount of $20.4 million payable to Crescent Partnership
due the later of May 2002 or five years after the last draw, bears interest at
12% payable quarterly, collateralized by first lien on the assets which the
Company now owns or may acquire in the future.................................... 13,453,033

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

Senior note payable to Crescent Partnership maturing December 2005, bears
interest at 10%, payments payable quarterly commencing January 15, 1998 based
on sales proceeds from DMPLP, collateralized by land, improvements and
equipment at DMPLP............................................................... 96,002,991

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

Note payable to Crescent Partnership maturing August 2003, bears interest at 10.75%,
principal and interest payable monthly, collateralized by a deed of
trust for certain property and real property..................................... 1,984,498

Note payable to Crescent Partnership maturing September 2002, bears interest at
8.5%, principal and interest payable monthly, collateralized by the Company's 2/3
interest in HCAC................................................................. 746,315

Note payable to Crescent Partnership maturing August 2003, bears interest at 10.75%,
principal and interest payable monthly, collateralized by a deed of
trust in certain real property and certain personal property..................... 536,496

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

Total debt - CEI................................................................ 200,691,017

Less - current portion of long-term debt - CEI.................................. 1,507,222
-------------

Long-term debt - CEI............................................................. $ 199,183,795
=============
</TABLE>

8
<PAGE> 9

LONG-TERM DEBT - OTHER

<TABLE>
<CAPTION>
March 31, 1998
--------------------

<S> <C>
Line of credit in the amount of $15.0 million payable to NationsBank due August
1998, interest payable monthly at LIBOR plus 1%.................................. $ 15,000,000

Equipment notes payable to finance companies due 1998 through 2003 with monthly
principal and interest payments, bear interest from 8.5% to 10.5%,
collateralized by equipment...................................................... 12,923,141
---------------

Total debt - other............................................................... 27,923,141

Less - current portion of long-term debt - other................................. 19,063,647
---------------

Long-term debt - other........................................................... $ 8,859,494
===============
</TABLE>

5. INVESTMENTS:

Investments consisted of the following:

<TABLE>
<CAPTION>
March 31, 1998
--------------------

<S> <C>
Investment in Magellan warrants.................................................. $ 12,500,000
Investment in CBHS............................................................... -
Investment in The Woodlands Land Development Company, L.P........................ 34,987,068
Investment in The Woodlands Operating Company, L.P............................... 637,448
Investment in Vornado Crescent Atlanta Partnership............................... 72,937,200
Investment in Vornado Crescent Portland Partnership.............................. 88,250,400
Investment in HCAC............................................................... (1,513,923)
Investment in Hicks-Muse......................................................... 8,936,065
--------------

$ 216,734,258
===============
</TABLE>

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

<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1998
--------------------

<S> <C>
Equity in loss of CBHS........................................................... $ 5,390,000
Equity in income of The Woodlands Land Development Company, L.P.................. (3,583,175)
Equity in income of The Woodlands Operating Company, L.P......................... (39,950)
Equity in loss of Vornado Crescent Atlanta Partnership........................... 455,600
Equity in income of Vornado Crescent Portland Partnership........................ 207,600
Equity in income of HCAC......................................................... -
Hicks-Muse income................................................................ (474,422)
-----------------

$ 1,955,653
=================
</TABLE>

9
<PAGE> 10

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

<TABLE>
<CAPTION>
CBHS
--------------------
Three Months
Ended
March 31,1998
--------------------

<S> <C>
Net revenue...................................................................... $ 187,384,000

Operating expenses (1)........................................................... (200,278,000)
Interest expense, net............................................................ (1,305,000)
Income tax provision (benefit)................................................... -
---------------

Net loss.................................................................... $ (14,199,000)
===============

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

<TABLE>
<CAPTION>
CBHS
--------------------
March 31,1998
--------------------
<S> <C>
Current assets................................................................... $ 149,649,000
Property and equipment, net...................................................... 17,815,000
Other noncurrent assets.......................................................... 8,294,000
---------------

Total assets................................................................ $ 175,758,000
===============

Current liabilities.............................................................. $ 92,015,000
Long-term debt................................................................... 68,134,000
Other noncurrent liabilities..................................................... 20,835,000
Members' capital................................................................. (5,226,000)
----------------

Total liabilities and members' capital........................................... $ 175,758,000
================
</TABLE>

(1) Includes amounts such as: salaries, supplies and other operating expenses,
bad debt expense, franchise fees, management fees, depreciation and
amortization.

10
<PAGE> 11

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

This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: real estate investment
considerations, such as the effect of economic, demographic, competitive and
other conditions in the market area on cash flows and values, and the relatively
high levels of debt maintained by the Company and its ability to generate
revenues sufficient to meet debt service payments and other operating expenses;
financing risks, such as the continued availability of equity and debt financing
that may be necessary or desirable for expansion or continued operations of the
Company and its investments, the Company's ability to service existing debt, the
possibility that the Company's outstanding debt may be refinanced at higher
interest rates or otherwise on terms less favorable to the Company; and business
and investment risks, including the underperformance or non-performance of its
existing business investments, the inability of the Company to identify or
pursue suitable business or investment opportunities, the impact of changes in
the industries in which the Company's businesses and investments operate and
competitive conditions affecting such industries, including construction
equipment sales and leasing, hospitality, behavioral healthcare, land
development and refrigerated warehousing.

This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal and recurring nature.

Overview

Crescent Operating, Inc. ("Crescent Operating", "COI" or the "Company"), a
Delaware corporation, was formed on April 1, 1997, by Crescent Real Estate
Equities Company ("Crescent Equities" or "CEI") and its subsidiary Crescent Real
Estate Equities Limited Partnership ("Crescent Partnership"). The Company was
formed to be the lessee and operator of certain assets to be acquired by
Crescent Partnership and to perform an agreement (the "Intercompany Agreement")
between Crescent Operating and Crescent Partnership, pursuant to which each has
agreed to provide the other with rights to participate in certain transactions.
On June 12, 1997, Crescent Operating's registration statement was declared
effective and Crescent Operating became a public company. 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. 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 five
units of limited partnership interest held on the record date.

The Company's operations began on May 9, 1997 with the purchase from
Carter-Crowley Properties, Inc. ("Carter-Crowley") of 100% of the common stock
of Moody-Day, Inc. ("Moody-Day"), an equipment sales, leasing and servicing
company which subsequently changed its corporate name to Crescent Machinery
Company ("Crescent Machinery"), and a limited partner interest in Hicks Muse
Tate & Furst Equity Fund II, LP, a private venture capital fund ("Hicks-Muse",
and together with Moody-Day, the "Carter-Crowley Asset Group"). The Company also
acquired for approximately $12.4 million, a 12.38% limited partner interest in
Dallas Basketball Limited (the "DBL Interest"), the partnership that owns the
Dallas Mavericks. On June 11, 1997, the Company sold the DBL Interest, for
approximately $12.55 million, to a corporation wholly owned by Crescent
Partnership. This Quarterly Report on Form 10-Q was prepared on the basis that
the Carter-Crowley Asset Group is the "Predecessor". As Crescent Operating did
not have any activity prior to May 9, 1997, the data included relating to
periods prior to May 9, 1997 is only with regard to the Predecessor.

11
<PAGE> 12

As of March 31, 1998, Crescent Operating's assets were comprised of five
business segments: (i) Hospitality, (ii) Land Development, (iii) Equipment Sales
and Leasing, (iv) Healthcare and (v) Refrigerated Warehousing. Within these
segments, the Company, through various entities, owned the following
(collectively referred to as the "Assets"):

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

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

o THE EQUIPMENT SALES AND LEASING SEGMENT consisted of 100% of the common
stock of Crescent Machinery, a construction equipment sales, leasing and
service company.

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

o THE REFRIGERATED WAREHOUSING SEGMENT consisted of an indirect 2% interest
in both URS Logistics, Inc., a company that operates and manages public
refrigerated warehouses in the continental United States and Americold
Corporation, a company providing integrated logistics services consisting
of warehousing and transportation for the frozen food industry. Together,
URS Logistics, Inc. and Americold Corporation control over 394 million
cubic feet of refrigerated warehousing space.

Recent Developments

12
<PAGE> 13

On March 25, 1998, the business ventures between Vornado Realty Trust and
companies owned by the Company and Crescent Partnership (Crescent Operating has
a net 2% interest in the ventures), entered into an agreement to acquire the
assets of Freezer Services, Inc. The purchase price of this proposed
transaction is $134 million including the assumption of $22 million of
indebtedness. There can be no assurances that this proposed transaction will
ultimately be completed. If the transaction is consumated, it is likely that
Vornado, the ventures' manager, will request the partners to make, pro rata,
additional capital contributions to satisfy the equity price of the
acquisition.

On March 25, 1998, the Company was offered by Crescent Partnership the
opportunity to acquire (i) an interest in a corporation (Corporate Arena
Associates, Inc.) that owns an undivided 6.19% interest in certain acreage on
which the multi-purpose sports arena is to be erected in Dallas, Texas for the
Dallas Stars, a National Hockey League club, and the Dallas Mavericks, a
National Basketball Association club, as well as in the sports arena and (ii)
an interest in a partnership that owns certain surrounding acreage that may be
developed for commercial purposes. In April 1998, the Company paid
approximately $.1 million for the purchase of its equity interest in Corporate
Arena Associates, Inc. As a condition to offering the Company the opportunities
to invest simultaneously with Crescent Partnership in Corporate Arena
Associates, Inc. and the partnership, Crescent Partnership required the Company
to enter into a Buy-Out Agreement under which the Company will be obligated to
purchase from Crescent Partnership its stock in that corporation, its interest
in that partnership, and any assets distributed to it by that corporation or
partnership, if and to the extent that ownership of such stock, partnership
interest or other assets would adversely affect or jeopardize the REIT status
of Crescent Equities. If Crescent Partnership determines that it must dispose
of any such property because of adverse REIT matters, it cannot sell the
property to any person other than the Company without the Company's consent.
The Company's obligation to purchase property put to it by Crescent Partnership
is subject, among other conditions, to Crescent Partnership providing seller
financing for up to 50% (and up to 80%, in the case of a partnership interest)
of the purchase price and consenting to additional third-party junior
financing. The Company cannot predict whether or not it is likely to become
obligated to perform under the Buy-Out Agreement.

13
<PAGE> 14
SEGMENT FINANCIAL INFORMATION

The following is a summary of Crescent Operating's financial information
reported by segment as of and for the three months ended March 31, 1998:

<TABLE>
<CAPTION>
EQUIPMENT
LAND SALES REFRIGERATED
HOSPITALITY DEVELOPMENT AND LEASING HEALTHCARE WAREHOUSING
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 58,265,174 $ 31,131,322 $ 7,980,656 $ -- $ --

Operating expenses ................ 53,673,491 31,827,307 7,611,286 -- 6,276
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ..... 4,591,683 (695,985) 369,370 -- (6,276)
------------ ------------ ------------ ------------ ------------
Investment income (loss) .......... -- 3,623,125 -- (5,390,000) (663,200)
------------ ------------ ------------ ------------ ------------

Other (income) expense

Interest expense ............. 98,772 2,006,916 269,765 -- --

Interest income .............. (37,056) (1,187,064) (7,522)

Other ........................ -- -- 13,170 -- --
------------ ------------ ------------ ------------ ------------
Total other (income) expense ...... 61,716 819,852 275,413 -- --
------------ ------------ ------------ ------------ ------------

Income (loss) before minority
interest and income taxes .... 4,529,967 2,107,288 93,957 (5,390,000) (669,476)

Minority interest ................. -- (1,122,711) -- -- 636,002
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes ........ 4,529,967 984,577 93,957 (5,390,000) (33,474)

Income tax (provision) ............ (1,811,987) (894,703) (37,583) 2,156,000 --
------------ ------------ ------------ ------------ ------------

Net income (loss) ................. $ 2,717,980 $ 89,874 $ 56,374 $ (3,234,000) $ (33,474)
============ ============ ============ ============ ============

Net income (loss) per share,
basic and diluted ............ $ 0.24 $ 0.01 $ 0.01 $ (0.29) $ (0.01)
============ ============ ============ ============ ============

OTHER TOTAL
------------ ------------
<S> <C> <C>
Revenues .......................... $ -- $ 97,377,152

Operating expenses ................ 317,401 93,435,761
------------ ------------
Income (loss) from operations ..... (317,401) 3,941,391
------------ ------------
Investment income (loss) .......... 474,422 (1,955,653)
------------ ------------

Other (income) expense

Interest expense ............. 1,450,066 3,825,519

Interest income .............. (836) (1,232,478)

Other ........................ -- 13,170
------------ ------------
Total other (income) expense ...... 1,449,230 2,606,211
------------ ------------

Income (loss) before minority
interest and income taxes .... (1,292,209) (620,473)

Minority interest ................. -- (486,709)
------------ ------------
Income (loss) before taxes ........ (1,292,209) (1,107,182)

Income tax (provision) ............ 516,884 (71,389)
------------ ------------

Net income (loss) ................. $ (775,325) $ (1,178,571)
============ ============

Net income (loss) per share,
basic and diluted ............ $ (0.07) $ (0.11)
============ ============

</TABLE>

<PAGE> 15

Results of Operations for the Three Months Ended March 31, 1998, Compared to the
Three Months Ended March 31, 1997

On May 9, 1997, the Company acquired the Carter-Crowley Asset Group. The
Company's financial statements have been prepared on the basis that the
"Predecessor" consists of the Carter-Crowley Asset Group. As the Company did not
have any activities until May 9, 1997, the comparative data relating to the
three months ended March 31, 1997 is only with regard to the Predecessor.

EQUIPMENT SALES AND LEASING

Equipment sales and leasing revenues increased approximately $4.9 million or
162.6% to $8.0 million for the three months ended March 31, 1998, compared to
$3.0 million for the three months ended March 31, 1997. Approximately $4.3
million of this increase relates to the Company's purchase of Preco Machinery
Sales, Inc. ("Preco") which was effective as of December 1, 1997. The remaining
increase in revenues relates to growth of equipment rentals and leases at
locations existing prior to the purchase of Preco. Operating expenses for the
Equipment Sales and Leasing segment increased $4.7 million or 162.4% to $7.6
million for the three months ended March 31, 1998, compared to $2.9 million for
the three months ended March 31, 1997. Approximately $4.2 million of this
increase relates to the Company's purchase of Preco. The remaining increase in
operating expenses relates to the additional costs incurred as a result of the
increase in equipment rental and lease revenue.

HOSPITALITY

Hospitality revenues represent RoseStar and COI Hotel revenues. As the Company
was not involved in the Hospitality segment prior to July 31, 1997, hospitality
revenues of $58.3 million for the three months ended March 31, 1998 represent
100% of the increase over the three months ended March 31, 1997. Hospitality
direct expenses, which represent costs incurred by the full-service hotels, as
well as destination, health and fitness resorts and Hospitality Properties rent
paid to Crescent Partnership or other Crescent Equities subsidiaries, are new
expenses for the three months ended March 31, 1998. Such costs are attributable
to the acquisition and operation of RoseStar and the operations of COI Hotel.

LAND DEVELOPMENT

Land development revenues represent revenues from Desert Mountain Properties
L.P. ("Desert Mountain Properties") prior to the elimination of the 95% minority
interest. As the Company was not involved in the Land Development segment prior
to July 31, 1997, land development revenues of $31.1 million for the three
months ended March 31, 1998 represent a 100% increase over the three months
ended March 31, 1997. Land development direct expenses represent operating costs
incurred by Desert Mountain Properties prior to the elimination of the 95%
minority interest. As the Company was not involved in the Land Development
segment prior to July 31, 1997, land development direct expenses of $31.8
million for the three months ended March 31, 1998 represent a 100% increase over
the three months ended March 31, 1997.

HEALTHCARE

The Company recognized a $5.4 million loss on its investment in CBHS for the
three months ended March 31, 1998. As the Company invested in CBHS on June 17,
1997, there are no prior period amounts for comparative purposes. CBHS'
operating losses have been caused by downward trends in the average length of
stay and net revenue per equivalent patient day, which management believes to be
consistent with the general deterioration in the behavioral healthcare industry.
Effective March 3, 1998, the Company signed a definitive agreement (the "Equity
Purchase Agreement") to acquire the 50% membership interest in CBHS currently
owned by Charter Behavioral Health Systems, Inc., a subsidiary of Magellan
Health Services, Inc. ("Magellan"). Also effective March 3, 1998, CBHS signed a
definitive agreement (the "Purchase Agreement") to acquire from Magellan and
certain direct and indirect subsidiaries of Magellan equity interests in certain
entities and the assets of certain staff model clinics. The transactions
contemplated by the Equity Purchase Agreement and the Purchase Agreement are
structured such that the $78 million annual franchise fee currently paid by CBHS
to Magellan would be eliminated. Management believes that the elimination of the
franchise fees would result in an improvement in the operating results of CBHS.

As of March 31, 1998, the Company had made total equity and debt contributions
of $25.0 million to CBHS, including $17.5 million in redeemable preferred
interests. For financial reporting purposes, the amount of losses the Company
has recognized with respect to its investment in CBHS has been limited to the
balance of the investment

15
<PAGE> 16

in CBHS. The Company's investment in CBHS was zero as of March 31, 1998.
Pursuant to the terms of the Equity Purchase Agreement, the Company anticipates
that it will invest at least an additional $30 million, assuming the
transactions contemplated thereby are consummated, and may make a further
investment in accordance with the terms of the support agreement, pursuant to
which the Company has agreed, among other things, to advance to CBHS any amounts
necessary to pay expenses incurred in connection with obtaining financing to
meet CBHS payment obligations under the Purchase Agreement. If the Company
elects not to proceed with the Equity Purchase Agreement tansactions, it will be
obligated to pay Magellan a $5 million break-up fee.

Liquidity and Capital Resources

The Company currently has pending acquisitions and future opportunities for
which it does not yet have adequate financing, including transactions involving
Crescent Machinery, CBHS, Station Casinos, Inc., Hicks-Muse and the
Mavericks/Stars arena and adjacent development opportunities. Management is
considering an equity offering (as discussed below), various financing
alternatives with Crescent Equities and Crescent Partnership, additional bank
financing, and other private equity financing possibilities. Crescent Operating
anticipates that it will obtain adequate financing to capitalize on pending and
identified future business and investment opportunities, although there can be
no assurances that adequate financing will be obtained at a cost of capital
acceptable to the Company.

Net cash flows used in operating activities for the three months ended March 31,
1998 were $3.4 million compared with the net cash provided by operating
activities of $10,524 for the three months ended March 31, 1997. Significant
components of the $3.4 million of cash used in operating activities for the
three months ended March 31, 1998 were the current year loss of $1.2 million,
cash used as a result of a net increase in accounts receivable and inventories
of $7.0 million and a decrease in accounts payable and accrued expenses of $8.9
million. These amounts were offset by equity in losses of unconsolidated
subsidiaries of $2.4 million, $3.5 million of depreciation and amortization
expense and an increase in deferred revenue of $7.2 million.

Net cash flows provided by investing activities for the three months ended March
31, 1998 were $24.0 million compared with the net cash used in investing
activities of $.6 million for the three months ended March 31, 1997. Significant
components of the $24.0 million of cash provided by investing activities for the
three months ended March 31, 1998 were net cash received from the collection and
sales of notes receivable of $21.4 million and from the sale of real estate of
$4.5 million offset by $3.0 million of cash used for the purchase of property
and equipment.

Net cash flows used in financing activities for the three months ended March 31,
1998 were $31.8 million compared with the net cash provided by financing
activities of $.7 million for the three months ended March 31, 1997. Significant
components of the $31.8 million of cash used in financing activities for the
three months ended March 31, 1998 were cash used for the payments of long-term
debt of $33.3 million and distributions to minority interest of $1.5 million
offset by cash received of $3.0 million from the issuance of long term debt.

In connection with the formation and capitalization of Crescent Operating in the
second quarter of 1997, Crescent Operating received approximately $14.1 million
in cash from Crescent Partnership and Crescent Partnership loaned Crescent
Operating approximately $35.9 million pursuant to a five-year term loan,
maturing on May 8, 2002, of which approximately $26.8 million was outstanding as
of March 31, 1998. The loan is a recourse loan that is collateralized, to the
extent not prohibited by pre-existing arrangements, by a first lien on the
assets which the Company now owns or may acquire in the future. The loan bears
interest at the rate of 12% per annum, compounded annually, and is payable
quarterly in an amount equal to the lesser of (i) the net cash flow for the
preceding quarter and (ii) the quarterly amount of principal due, together with
interest accrued on the loan. Net cash flow is computed by subtracting the total
costs incurred by Crescent Operating from its gross receipts. The Company also
obtained a $20.4 million line of credit from Crescent Partnership in connection
with its formation and capitalization. Advances under the line of credit bear
interest at the same rate as the term loan. The line of credit is payable on an
interest-only basis during its term, which expires on the later of (i) May 31,
2002 or (ii) five years after the last draw under the line of credit. Draws may
be made under the line of credit until June 22, 2002. The line of credit is a
recourse obligation and amounts outstanding thereunder are collateralized, to
the extent not prohibited by pre-existing arrangements, by a first lien on the
assets which the Company now owns or may acquire in the future. As of March 31,
1998, $13.5 million was outstanding under the line of credit.

<PAGE> 17

Approximately $12.6 million in cash and the proceeds of approximately $15.3
million of loans were used to acquire the Carter-Crowley Assets and the 12.38%
DBL Interest in May 1997. An additional $1.5 million in the form of cash,
together with the remaining approximately $20.6 million advanced in the form of
loans, was used both to acquire, and make an additional contribution relating
to, the CBHS Interest and to acquire the Magellan warrants for an aggregate of
approximately $20.0 million, and to fund an obligation of Crescent Machinery
(formerly known as Moody-Day) to purchase construction equipment for
approximately $2.1 million. The line of credit was used to support funding
obligations associated with these acquisitions (consisting of approximately $2.1
million relating to Crescent Operating's investment in Hicks-Muse and
approximately $17.5 million relating to the CBHS Interest) and other cash
requirements.

In August 1997, the Company obtained a $15.0 million short-term unsecured bank
line of credit from NationsBank. The line of credit has a one-year term (subject
to the Company's right to renew the term for an additional one-year period) and
bears interest at LIBOR plus 1%. The $15.0 million available under the line of
credit from NationsBank was fully drawn as of March 31, 1998, and was used to
acquire RoseStar and reduce the outstanding balance of the line of credit with
Crescent Partnership.

The primary source of repayment of the NationsBank line of credit is anticipated
to be a future equity offering, which the Company has agreed to use its best
efforts to complete prior to maturity of the line of credit in August 1998 or
1999. The Company has obtained an agreement from Richard Rainwater, Gerald
Haddock and John Goff (each a stockholder, director and/or officer of the
Company) which provides that, if the Company does not raise from an equity
offering funds sufficient to pay the NationsBank line of credit when due (a
"Successful Offering"), each of Messrs. Rainwater, Haddock and Goff jointly and
severally agree to purchase the number of additional shares of the Company's
common stock necessary to fund repayment of the NationsBank line of credit. The
Company has agreed to sell such additional shares of common stock to Messrs.
Rainwater, Haddock, and Goff at a price equal to the average closing bid price
of the Company's common stock during the 10 days immediately preceding the date
NationsBank notifies Messrs. Rainwater, Haddock and Goff that the Company has
not completed a Successful Offering prior to maturity of the NationsBank line of
credit.

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

Desert Mountain Properties also has a credit agreement with Crescent Partnership
pursuant to which Crescent Partnership has advanced funds to Desert Mountain
Properties through a "Junior Note", a "Senior Note" and a "Lot Sales Note". The
Junior Note evidences a $60.0 million advance from Crescent Partnership to
Desert Mountain Properties and accrues interest at 14% per annum. The Senior
Note evidences a $110.0 million advance from Crescent Partnership to Desert
Mountain Properties and accrues

<PAGE> 18

interest at 10% per annum. The principal and interest on both the Junior Note
and the Senior Note are payable in quarterly installments, based on proceeds
from the operations of Desert Mountain Properties. The Lot Sales Note bore
interest at an annual rate equal to the prime rate plus 1%, and was payable in
monthly installments based on the previous month's proceeds obtained by Desert
Mountain Properties from other land note receivables. The Lot Sales Note was
repaid during the first quarter of 1998. As of March 31, 1998, the outstanding
balances on the Junior Note and Senior Note were $60.0 million and $96.0
million, respectively.

Crescent Machinery has various equipment notes payable to finance companies
which are collateralized by the equipment financed. The notes are payable in
monthly principal and interest payments and bear interest at 8.5% to 10% per
annum. These notes mature between 1998 and 2003. As of March 31, 1998, the
outstanding balance on these equipment notes was $12.9 million.

Modification of Computer Software for the Year 2000

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

18
<PAGE> 19

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits
-------------- -------------------------------------------------------------------

<S> <C>
3.1* First Amended and Restated Certificate of Incorporation

3.2* First Amended and Restated Bylaws

4.1* Specimen stock certificate

4.2* Preferred Share Purchase Rights Plan

10.1* Amended Stock Incentive Plan

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

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

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

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

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

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

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
</TABLE>

<PAGE> 20

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>

20
<PAGE> 21

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

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

10.29*** Form of Indemnification Agreement

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

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

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

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

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

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

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

27 Financial Data Schedule

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

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

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

(b) Reports on Form 8-K

Form 8-K, dated January 15, 1998 and filed January 22, 1998, disclosing a
change in the Company's certifying accountants.

<PAGE> 22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, on the 15th day of May,
1998.

CRESCENT OPERATING, INC.
(Registrant)

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

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

<PAGE> 23
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits
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3.1* First Amended and Restated Certificate of Incorporation

3.2* First Amended and Restated Bylaws

4.1* Specimen stock certificate

4.2* Preferred Share Purchase Rights Plan

10.1* Amended Stock Incentive Plan

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

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

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