<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                   FORM 10-K
 
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                        Commission file number 1-12246
 
                        NATIONAL GOLF PROPERTIES, INC.
            (Exact name of registrant as specified in its charter)


                  Maryland                              95-4549193
          (State of incorporation)          (I.R.S. Employer Identification No.)
 
        2951 28th Street, Suite 3001
              Santa Monica, CA                                     90405
   (Address of principal executive offices)                    (Zip Code)
 
                                (310) 664-4100
             (Registrant's telephone number, including area code)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<S>                                            <C>
             Title of each class                 Name of each exchange on which registered
             -------------------                 -----------------------------------------
         Common Stock $.01 par value                      New York Stock Exchange
</TABLE>
 
       Securities registered pursuant to Section 12(g) of the Act: None
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  As of March 1, 1999, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $291.5 million, based upon
the closing price ($25.375) on the New York Stock Exchange on that date. (For
this computation, the registrant has excluded the market value of all shares
of its common stock reported as owned by executive officers and directors of
the registrant and certain other stockholders; such exclusion shall not be
deemed to constitute an admission that any such person is an "affiliate" of
the registrant.)
 
  Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
 
    12,620,145 shares of common stock, $.01 par value, as of March 1, 1999
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the registrant's Proxy Statement in connection with its Annual
Meeting of Stockholders to be held June 30, 1999, are incorporated by
reference in Part III.
 
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<PAGE>
 
                                    PART I
 
Item 1. BUSINESS
 
  a) General Development of Business
 
  National Golf Properties, Inc. (the "Company") commenced operations
effective with the completion of its initial public stock offering (the
"Offering") of common stock, par value $.01 per share (the "Common Stock"), on
August 18, 1993. The Company qualifies as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
 
  The Company became the general partner in National Golf Operating
Partnership, L.P. (the "Operating Partnership") when the Operating Partnership
was formed as a Delaware limited partnership in June 1993. On July 8, 1994,
the Operating Partnership acquired an 89% general partner interest in Royal
Golf, L.P. II ("Royal Golf"). Royal Golf owns four golf courses on Hilton Head
Island, South Carolina. Unless the context otherwise requires, all references
to the Company's business and properties include the business and properties
of the Operating Partnership and Royal Golf.
 
  In 1997, the Company acquired a 50% general partnership interest in Pumpkin
Ridge Joint Venture ("Pumpkin Ridge"). Pumpkin Ridge owns two golf courses in
Cornelius, Oregon. The Company accounts for its investment in Pumpkin Ridge
under the equity method of accounting.
 
  The Company is the sole general partner in the Operating Partnership and
currently owns 59% of the common partnership interest in the Operating
Partnership. The limited partners are individuals, partnerships, corporations
and trusts who have contributed their properties in exchange for units of
common partnership interest ("Common Units") or who have contributed cash in
exchange for units of preferred partnership interest ("Preferred Units").
 
  In 1998, the Company purchased seven golf courses for an aggregate initial
investment of approximately $42.8 million and made one participating mortgage
loan of approximately $22.6 million, which investment was financed by
approximately $7.4 million of cash from operations and $58 million of advances
under the Company's credit facility. Subsequent to December 31, 1998, the
Company purchased two golf courses for an aggregate initial investment of
approximately $10.4 million, which investment was financed by approximately
$4.4 million of cash from operations and $6 million of advances under the
Company's credit facility. In addition, there was a pay down of approximately
$9.6 million on the participating mortgage loan.
 
  On March 31, 1999, the Company purchased fee interests in 15 golf courses
and long-term leasehold interests in five golf courses and made a
participating mortgage loan secured by an additional golf course
(collectively, the "Acquired Cobblestone Courses") previously owned by
subsidiaries of Meditrust Corporation and Meditrust Operating Company
(collectively, "Meditrust") comprising the "Cobblestone Golf Group" for an
aggregate initial investment of approximately $184.3 million, which investment
was financed by approximately $178.7 million of cash and approximately
$5.6 million of assumed notes. The Company's acquisition of interests in these
golf courses was part of a larger transaction in which a subsidiary of
American Golf Corporation ("AGC") and a subsidiary of ClubCorp International
("ClubCorp") formed Golf Acquisitions, L.L.C., a new limited liability company
("Golf Acquisitions"), to purchase from Meditrust the subsidiaries comprising
the Cobblestone Golf Group. Golf Acquisitions closed this purchase on
March 31, 1999, and immediately thereafter sold interests in 23 golf courses
to subsidiaries of ClubCorp, sold interests in the Acquired Cobblestone
Courses to the Company and sold to AGC short-term interests in three golf
course facilities and a portion of the personal property assets related to the
Acquired Cobblestone Courses. Three of the Acquired Cobblestone Courses are
leasehold interests in the golf courses at Carmel Mountain Ranch Country Club
and Sweetwater Country Club, in which the Company already owned the fee
interest and had previously leased such properties to a subsidiary of
Meditrust.
 
  Concurrently with closing its purchase of the Acquired Cobblestone Courses,
the Company entered into agreements to lease or sublease 18 of the Acquired
Cobblestone Courses to AGC and two of the Acquired
 
                                       2
<PAGE>

Cobblestone Courses to Golf Enterprises, Inc. AGC also entered into a separate
agreement to lease the golf course which secures the Company's participating
mortgage loan to a subsidiary of Golf Acquisitions. The Company financed its
acquisition of the Acquired Cobblestone Courses with borrowings under a new
$300 million credit facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
  The following diagram depicts the beneficial ownership of the Company, the
Operating Partnership, Royal Golf and Pumpkin Ridge as of March 31, 1999:

<TABLE> 
<S>                              <C>                                                          <C>
                                    National Golf Properties, Inc.
                                 .  91% owned by public stockholders
                                 .  2.8% owned by David G. Price
                                 .  6.2% owned by employees of
                                         National Golf Properties and
                                         American Golf Corporation
                                              |
                                              |
                                              |
                                    National Golf Operating Partnership, L.P.
                                 .  59% owned by National Golf
                                         Properties, the managing general
                                         partner of National Golf Operating
                                         Partnership
                                 .  16% owned by David G. Price
                                 .  25% owned by limited partners
                                              |
       _______________________________________|___________________________________________________________
       |                                      |                                                           |
       |                                 Royal Golf, L.P. II                                     Pumpkin Ridge Joint Venture*
       |
       |                         .  89% owned by National Golf Operating                      .  50% owned by National Golf
       |                                Partnership, the managing                                     Operating Partnership
       |                                general partner of Royal Golf, L.P. II                .  50% owned by two other general
       |                         .  11% owned by a limited partner                                     partners
     ____________________________________________________________           |                             |
     |                                                          |           |                             |
2 Golf Courses    1 Golf Course      1 Golf Course     141 Golf Courses**   4 Golf Courses             2 Golf Courses
 . 100% owned by   . 100% owned by    . 100% owned by   . 100% owned by      . 100% owned by          . 100% owned by 
  National Golf     National Golf      National Golf     National Golf        Royal Golf                  Pumpkin
  Operating         Operating          Operating         Operating                                         Ridge
  Partnership       Partnership        Partnership       Partnership
    |                    |                 |                   |                    |                       |
    |                    |                 |                   |                    |                       |
    |                    |                 |                   _____________________________________________
    |                    |                 |                                                |
    |                    |                 |                                                |
  Golf               The Links      Evergreen Alliance                                 American Golf
Enterprises, Inc.    Group, Inc.      Golf Limited                                      Corporation
 
   (Lessee)           (Lessee)          (Lessee)                                         (Lessee)
</TABLE>
-------
 * The Company accounts for its investment in Pumpkin Ridge under the equity
   method of accounting.
** The Company has participating mortgage loans on two golf courses which it
   does not own.
 
                                       3
<PAGE>
 
  b) Narrative Description of Business
 
  The Company is a self-administered REIT specializing in the acquisition and
ownership of golf course properties. As of March 31, 1999, the Company's
portfolio consisted of the ownership of 149 golf courses (the "Golf Courses"),
including the two golf courses owned by Pumpkin Ridge, in 135 separate
locations in 26 states and two participating mortgage loans, which are
collateralized by mortgages on the golf courses. As a self-administered REIT,
the Company's own employees perform its administrative and management
functions, rather than the Company relying on an outside manager for these
services.
 
  The Golf Courses include facilities such as clubhouses with restaurants,
banquet space, locker rooms and retail pro shops, driving ranges, pools,
tennis courts and fitness facilities. Services provided at such properties
include golf cart rentals, golf and tennis lessons, banquets and tournaments.
In order to maintain qualification as a REIT, the Company's income must be
derived from real-property related sources, including rents from real property
and generally excluding income from the operation of a golf course.
Accordingly, the Company is generally precluded from operating golf courses
and, as a consequence, leases the Golf Courses to experienced and creditworthy
golf course operators. In selecting operators, the Company considers factors
such as the number of years that the company has been in operation, the
experience of the management team, the number of golf courses currently owned,
leased or managed by the operator, the operator's net worth or ability to
provide credit support to the Company's satisfaction, and the operator's
ability to maximize the revenues of the golf course and to improve the long-
term value of the golf course.
 
Business Objectives and Operating Strategies
 
  The Company's primary business objective is to maximize stockholder return
through the acquisition of quality golf courses and the subsequent lease of
such properties to experienced and creditworthy operators. The Company focuses
on the ownership and acquisition of golf course properties that have strong
cash flow growth potential and expects to hold such properties for long-term
investment and capital appreciation. The Company's business and operating
strategies include:
 
  .  Increasing income and portfolio value by continuing the strategic
     expansion of its golf course portfolio through the selective acquisition
     of golf course properties in urban areas or resort locations that
     demonstrate potential for significant revenue and cash flow increases.
     For the period August 18, 1993 to December 31, 1998, the Company
     purchased 88 Golf Courses, including the two golf courses owned by
     Pumpkin Ridge, for an aggregate initial investment of approximately
     $486.9 million. For the period January 1, 1999 to March 1, 1999, the
     Company purchased two Golf Courses for approximately $10.4 million;
 
  .  Structuring favorable leases for the Company's properties with
     experienced and creditworthy golf course operators under which the
     operators pay base rent and percentage rent based on revenues and pay
     substantially all expenses in connection with the operation of such
     properties, including all real and personal property taxes, utility
     costs, insurance costs, irrigation costs, maintenance costs and other
     operating expenses;
 
  .  Working with golf course operators on strategies to increase revenues,
     which in turn would increase percentage rent to the Company;
 
  .  Working with golf course operators on strategies to improve and enhance
     golf course holdings through proper maintenance and capital
     improvements;
 
  .  Monitoring on an ongoing basis the operating performance of the Golf
     Courses, compliance by its operators with their lease obligations and
     other market factors that could affect the financial performance of its
     courses; and
 
  .  Maintaining a ratio of debt-to-total market capitalization of 50% or
     less. Such ratio is calculated as total debt of the Company as a
     percentage of the market value of issued and outstanding shares of
     Common Stock, Preferred Units and interests in the Operating Partnership
     that are exchangeable for
 
                                       4
<PAGE>
 
     shares of Common Stock plus total debt. At December 31, 1998, the
     Company's total debt constituted approximately 29% of its total market
     capitalization. At March 31, 1999, after giving effect to the
     acquisition of the Acquired Cobblestone Courses, the Company's total
     debt constituted approximately 46% of its total market capitalization.
 
Seasonality
 
  Although the results of operations of the Company and its predecessors have
not been significantly impacted by seasonality, the Company generally expects
that its results of operations may be adversely affected as a function of
reduced payments of percentage rent in the first and fourth quarters of each
year due to adverse weather conditions and the scheduled closure of the Golf
Courses located in harsh winter climates.
 
Tenant and Leases
 
   All but four of the Golf Courses in the Company's portfolio are currently
leased to AGC pursuant to long-term triple net leases (the "Leases"). AGC is
one of the largest and most experienced operators of golf courses and related
facilities in the world and currently manages and operates 294 golf courses
and related facilities in 31 states. In addition, AGC, through its subsidiary
American Golf (U.K.) Limited, manages 21 golf courses and related facilities
in the United Kingdom. AGC operates a diverse portfolio of golf courses for a
variety of golf course owners including municipalities, counties and others.
AGC was founded in 1973 by David G. Price, the Chairman of the Company's Board
of Directors and AGC's Chairman and principal shareholder. Including the Golf
Courses, AGC manages 229 daily fee golf courses and 86 private club courses.
AGC oversees the management and operations of championship golf courses
throughout the United States and manages municipal golf courses for such
cities as Atlanta, New York and San Diego and for the County of Los Angeles.
 
  AGC does not own any golf courses, but rather manages and operates golf
courses either as a lessee under leases, generally triple net, or pursuant to
management agreements. AGC derives revenues from the operation of golf courses
principally through the receipt of green fees, membership initiation fees,
membership dues, golf cart rentals, driving range charges and sales of food,
beverages and merchandise.
 
  Each Lease is for an initial term, depending upon the Golf Course, ranging
between 15 and 20 years. The Leases are triple net leases which require AGC to
pay substantially all expenses associated with the operation of the Golf
Courses, such as all real and personal property taxes, utility costs,
insurance costs, irrigation costs, maintenance costs and other operating
expenses. In addition, AGC has options to extend the term of each Lease for
one to three five-year terms. Each Lease permits AGC to operate the leased
property as a golf course, along with a clubhouse and other activities
customarily associated with or incidental to the operation of a golf course.
 
  The base rent for the first year for each Golf Course under the Leases is
initially set at a fixed amount. For the Leases entered into by the Company
with respect to its initial portfolio of 44 golf courses at the time of the
Offering (the "Initial Golf Courses"), base rent is increased each year by 4%
or, if lower, 150% of the annual percentage increase in the Consumer Price
Index ("CPI") (the "Base Rent Escalation"). In addition, generally percentage
rent is paid each year in the amount, if any, by which the sum of 35% of
Course Revenue in excess of a baseline amount and 5% of Other Revenue in
excess of a baseline amount exceeds the cumulative Base Rent Escalation since
the commencement date of such Leases. "Course Revenue" is generally defined in
the Leases to include all revenue received from the operation of the
applicable Golf Course, including revenues from memberships, initiation fees,
dues, green fees, guest fees, driving range charges and golf cart rentals, but
excluding those revenues described as Other Revenue. "Other Revenue" is
generally defined in the Leases to include all revenue received from food and
beverage and merchandise sales and other revenue not directly related to golf
activities. Generally, the baseline amounts for the Initial Golf Courses were
established based on revenues for each of such Golf Courses for the twelve
months ended February 28, 1993. Payment of percentage rent based upon the
revenues of the Golf Courses will enable the Company to participate in growth
in revenues at the Golf Courses.
 
  For the Leases entered into subsequent to the Offering, the rent generally
is based upon the greater of (a) the base rent or (b) a specified percentage
of Course Revenue and Other Revenue. The base rent under these Leases
 
                                       5
<PAGE>
 
is increased for specified years during the Lease term based upon increases in
the CPI, provided that each such annual CPI increase shall not exceed five
percent. The Leases for the Acquired Cobblestone Courses specify that the
minimum base rent for such properties will increase by a fixed 0.5% each year
for specified years during the term of each Lease.
 
  The Leases for the Initial Golf Courses require AGC to post and maintain an
irrevocable letter of credit in an amount equal to approximately $13.6
million, which is comprised of six monthly installments of the annual rent, to
collateralize its obligations under such Leases. AGC's obligation to post and
maintain such letter of credit will be suspended, subject to reinstatement, at
such time as AGC achieves: (i) a Fixed Charge Coverage Ratio, as defined, of
not less than 1.5 to 1.0 for two consecutive fiscal quarters and (ii) a
minimum Tangible Net Worth, as defined, of at least $30,000,000 or, following
a change in control, $30,000,000 increased by 4% per annum compounded annually
from the commencement date of the Leases to the date of a change in control of
AGC.
 
  The obligations of AGC under each Lease are cross-defaulted to each of the
other Leases with respect to monetary defaults and all other defaults except
those not within the reasonable control of AGC. The Company has general
recourse to AGC under the Leases, but such Leases are not collateralized by
any assets of AGC. The stockholders of the Company have no recourse to AGC
under the Leases.
 
  The Independent Committee, comprised of all four independent directors of
the Company, oversees the selection of operators and approves transactions
between the Company and David G. Price and his affiliates.
 
  The Company continues to explore the use of operators other than AGC for
certain of its new acquisitions. In addition to AGC, the Company leases four
of its Golf Courses to three other operators: Golf Enterprises, Inc. ("GE");
The Links Group, Inc. ("TLG"); and Evergreen Alliance Golf Limited ("EAGL").
Unless the context otherwise requires, all references to the Leases include
the leases with GE, TLG and EAGL.
 
  GE operates Sweetwater Country Club (two courses) near Houston, Texas. GE is
a golf course operating company with 19 properties under management in eight
states.
 
  TLG operates Colonial Charters Golf Course near Myrtle Beach, South
Carolina. TLG is a golf course operating company that operates 11 golf courses
in the southeastern United States.
 
  EAGL operates San Geronimo Golf Course near San Francisco, California. EAGL
is a golf course acquisition and operating company with 38 properties under
ownership or management in 12 states.
 
Competitive Conditions
 
  The Golf Courses are, and any additional golf courses and related facilities
acquired by the Company will be, subject to competition for players and
members from other golf courses located in the same geographic areas,
including golf courses owned by municipalities or third parties that are
operated by the lessees. The number and quality of golf courses in a
particular area also could have a material effect on the revenues of the Golf
Courses. In addition, revenues of the Golf Courses will be affected by a
number of factors including the demand for golf and the availability of other
forms of recreation.
 
  According to its published data (1998 editions), the National Golf
Foundation, an independent industry organization, estimates that the number of
golfers in the United States is approximately 26.5 million. In addition,
favorable demographic trends offer encouraging growth prospects for the golf
course industry both in terms of the participation rate and the number of
rounds. The National Golf Foundation reports that the annual average rounds
played per golfer increases significantly as golfers age. Golfers in their
fifties generally play twice as many rounds annually as golfers in their
thirties. Golfers age 65 and older generally play three times as many rounds
annually as golfers in their thirties. Currently, approximately 75% of all
golfers are less than 50 years old and approximately 45% of all golfers are
between the ages of 30 and 49. Accordingly, the Company expects an increase in
the demand for golf as the younger segment of the golfing population reaches
its prime golfing age
 
                                       6
<PAGE>
 
over the next 20 years. In addition, the children of the baby boom generation
are entering their twenties and thirties, an age range in which they are most
likely to begin playing golf.
 
  The Company is also subject to competition for the acquisition of golf
courses and related facilities with other purchasers of golf course
properties, including other golf course acquisition companies. According to
the National Golf Foundation, there are approximately 16,000 golf courses in
the United States. Ownership of these courses is extremely fragmented. The
Company believes that the nation's 15 largest golf course owners and operators
collectively own, lease, or manage approximately five percent of the courses
in the United States. This fragmentation provides an excellent opportunity for
aggressive acquisition of quality golf course properties; however, the market
for golf course acquisitions is becoming increasingly competitive with the
addition of several new companies pursuing acquisitions. In addition, other
REITs have or are considering entering the market.
 
  In certain markets, construction of new golf courses has increased in the
last several years. Although such construction activity may add excess
capacity to some local markets, the Company's experience indicates that well-
managed and properly located facilities should continue to generate stable
revenue growth. The Company's courses are generally located in communities
with populations sufficient to absorb additional course development or in
areas with significant barriers to new course construction (i.e., limited
supply of suitable land, governmental restrictions, etc.). Consequently, new
course development has not adversely affected the Company's portfolio. In
addition, the Company expects that new course development will provide
numerous acquisition opportunities. Moreover, the new courses offer improved
access for golfers, particularly beginners, women and juniors, which should
ultimately increase the pool of golf customers.
 
Employees
 
  As of March 1, 1999, the Company and the Operating Partnership had 14 full-
time employees including two regional vice presidents and two directors of
business development who are dedicated on a full-time basis to the
identification of golf courses to be acquired or financed.
 
  The President of the Company is employed and compensated by both the
Operating Partnership and the Company. The Company believes that the
allocation of his compensation as between the Company and the Operating
Partnership reflects the services provided by him with respect to each entity.
The remainder of the employees are employed solely by the Operating
Partnership. Royal Golf has no employees.
 
  The Company and the Operating Partnership have entered into a services
agreement pursuant to which the Operating Partnership provides the Company
with administrative, accounting and other services relating to the operations
and administration of the Company at a rate equal to the cost (including
allocable overhead) to the Operating Partnership of providing such services
plus 15% of such costs.
 
Government Regulation
 
  Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of any hazardous substances
released on its property. These laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the release of
hazardous substances. The presence of such substances, or the failure to
remediate such substances properly when released, may adversely affect the
owner's ability to sell or rent such real estate or to borrow using such real
estate as collateral.
 
  The Company has not been notified by any governmental authority of any
material non-compliance, liability or other claim in connection with any of
the Golf Courses. The Company is not aware of any other environmental
condition with respect to any of the Golf Courses that is likely to be
material to the Company. All of the Golf Courses have been subjected to a
preliminary environmental investigation. Such investigation generally involves
an examination of public records for ownership, use and current permitting
status, site visits, visual inspections for indications of contamination or
potential contamination and interviews with the on-site managers. Such
 
                                       7
<PAGE>
 
investigation generally does not involve invasive procedures, such as soil
sampling or ground water analysis. No assurance can be given that such
investigation would reveal all potential environmental liabilities, that no
prior owner or adjacent landowner created any material environmental condition
not known to the Company or that future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in imposition of environmental liability. Also, environmental
conditions, liabilities or compliance concerns may have arisen at a Golf
Course after the related review was completed. Although the Leases provide
that the lessees will indemnify the Company for certain potential
environmental liabilities at the Golf Courses, there can be no assurance that
the indemnification provided by such leases would be sufficient to satisfy all
environmental liabilities.
 
  Americans with Disabilities Act. The Golf Courses are subject to the
Americans with Disabilities Act of 1990 (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial
facilities" but generally requires that public facilities such as clubhouses
and recreation areas be made accessible to people with disabilities.
Noncompliance could result in imposition of fines or an award of damages to
private litigants. Under the Leases, the lessees are required to make any
necessary modifications or improvements to comply with the ADA. The lessees
and the Company have undertaken, where necessary, a capital improvement
program to cause the public facilities at the Golf Courses to comply with the
ADA. The expenditures for the modifications and improvements have not been
material.
 
Item 2. PROPERTIES
 
  As of March 31, 1999, the Golf Courses consisted of 149 golf courses that
are geographically diversified and located in 26 states, with 27 Golf Courses
in Texas, 24 in California, 17 in Arizona, six in each of Florida, Georgia,
Ohio, South Carolina and Virginia, five in each of Minnesota and Pennsylvania,
four in each of Colorado, Illinois, Kansas, Oregon and Washington, three in
each of Nevada and New Jersey, two in each of Maryland, Missouri, New Mexico,
North Carolina, Oklahoma and Tennessee and one in each of Idaho, Indiana and
Louisiana. In addition, the Company holds participating mortgages on two golf
courses, one in each of California and Nevada. The distribution of the Golf
Courses reflects the Company's belief that geographic diversification provides
stability of our income and helps insulate the portfolio from regional
economic and climatic influences. Substantially all of the Golf Courses are
located in areas with populations in excess of 250,000 people.
 
  Of the Company's 149 Golf Courses owned as of March 31, 1999, 94 are daily
fee courses and 55 are private club courses. All of the Golf Courses are owned
100% in fee by either the Company, the Operating Partnership, Royal Golf or
Pumpkin Ridge except for the three Golf Courses at Bear Creek Golf World,
which are leased by the Company under a ground lease expiring in 2022, and
Mesquite Golf & Country Club, of which a portion of the golf course is leased
under various ground leases expiring between 2041 and 2043. The Company also
leases Ridgeview Ranch Country Club and The Vineyard at Escondido under long-
term ground leases.
 
  Daily Fee Courses. Daily fee courses are open to the public and related
amenities generally include practice facilities, small clubhouses with pro
shops offering limited merchandise and a moderate food and beverage operation.
Daily fee courses generate revenues principally through green fees, golf cart
rentals and food, beverage and merchandise sales. Daily fee courses generated
$50.2 million of rent revenues to the Company in 1998 compared to $47.7
million in 1997.
 
  Private Club Courses. Private club courses are generally closed to the
public and related amenities typically include practice facilities, large
clubhouses with pro shops offering extensive merchandise, locker room
facilities and multiple food and beverage outlets, including grills,
restaurants and banquet facilities. Private club courses generate revenues
principally through initiation fees, membership dues, and food, beverage and
merchandise sales. As of December 31, 1998, the Company's private club courses
had approximately 33,000 members. Private club courses generated $33.1 million
of rent revenues to the Company in 1998 compared to $26.6 million in 1997.
 
                                       8
<PAGE>
 
  The following table sets forth certain information regarding the Golf
Courses as of March 31, 1999. As of that date, the Company owned 149 Golf
Courses in 26 states. The number of locations (135) differs from the number of
Golf Courses because in some cases there is more than one Golf Course at a
specific location. The number of courses at each location is indicated for
locations with more than one course. In addition, the Company has
participating mortgage loans on two golf courses which it does not own.
 
                      The Golf Courses--Daily Fee Courses
 
<TABLE>
<CAPTION>
                                                           No. of     1998
            Course Name           Location (City, State)   Holes  Rent Revenues
            -----------           ----------------------   ------ -------------
                                                                       (In
                                                                   thousands)
 <C> <S>                         <C>                       <C>    <C>
  1  Continental Golf Course..   Scottsdale, Arizona         18      $  377
  2  Desert Lakes Golf Club...   Fort Mojave, Arizona        18         380
  3  El Caro Golf Club........   Phoenix, Arizona            18         277
  4  Foothills Golf Club,
     The......................   Phoenix, Arizona            18           *
  5  Kokopelli Golf Resort....   Gilbert, Arizona            18         627
  6  Lakes at Ahwatukee Golf
     Club, The................   Phoenix, Arizona            18           *
  7  Legend at Arrowhead,
     The......................   Glendale, Arizona           18         554
  8  London Bridge Golf Club..   Lake Havasu City, Arizona   36         520
      (2 Courses)
  9  Stonecreek Golf Course...   Phoenix, Arizona            18       1,053
 10  Superstition Springs Golf
     Club.....................   Mesa, Arizona               18         647
 11  Villa De Paz Golf
     Course...................   Phoenix, Arizona            18         311
 12  Aptos Seascape Golf
     Course...................   Aptos, California           18       1,500
 13  BlackLake Golf Course....   Nipomo, California          27       1,118
 14  Camarillo Springs Golf
     Course...................   Camarillo, California       18       1,139
 15  Carmel Mountain Ranch
     Country Club.............   San Diego, California       18         787
 16  Eagle Crest Golf Club....   Escondido, California       18           *
 17  Lomas Santa Fe Executive
     Golf Course..............   Solana Beach, California    18         509
 18  Mesquite Golf & Country
     Club.....................   Palm Springs, California    18         686
 19  Oakhurst Country Club....   Clayton, California         18         949
 20  Rancho San Joaquin Golf
     Course...................   Irvine, California          18       2,379
 21  San Geronimo Golf
     Course...................   San Geronimo, California    18         655
 22  Summitpointe Golf Club...   Milpitas, California        18         824
 23  Upland Hills Country
     Club.....................   Upland, California          18         892
 24  Vineyard at Escondido
     Golf Club, The...........   Escondido, California       18           *
 25  Vista Valencia Golf
     Course...................   Valencia, California        27         878
      (2 Courses)
 26  Arrowhead Golf Club......   Littleton, Colorado         18       1,225
 27  Eagle Golf Club..........   Broomfield, Colorado        18         396
 28  Arrowhead Golf & Sports
     Club.....................   Davie, Florida              18         367
 29  Baymeadows Golf Club.....   Jacksonville, Florida       18         474
 30  Binks Forest Country
     Club.....................   Wellington, Florida         18         464
 31  Sabal Palm Golf Course...   Tamarac, Florida            18         537
 32  Summerfield Crossing Golf
     Club.....................   Tampa, Florida              18         277
 33  Bradshaw Farm, The Golf
     Club at..................   Woodstock, Georgia          18         665
 34  Goshen Plantation Country
     Club.....................   Augusta, Georgia            18         326
 35  River's Edge Golf Club...   Fayetteville, Georgia       18         456
 36  Trophy Club of
     Appalachee, The..........   Dacula, Georgia             18           *
 37  Trophy Club of Atlanta,
     The......................   Alpharetta, Georgia         18           *
 38  Ruffled Feathers Golf
     Course...................   Lemont, Illinois            18         969
 39  Tamarack Golf Club.......   Naperville, Illinois        18         547
 40  Sugar Ridge Golf Course..   Lawrenceburg, Indiana       18         310
 41  Deer Creek Golf Club.....   Overland Park, Kansas       18         841
 42  Dub's Dread Golf Course..   Kansas City, Kansas         18         434
</TABLE>
--------
*Acquired in 1999
 
                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                   No. of     1998
            Course Name               Location (City, State)       Holes  Rent Revenues
            -----------               ----------------------       ------ -------------
                                                                               (In
                                                                           thousands)
 <C> <S>                        <C>                                <C>    <C>
 43  WestWinds Country Club..   New Market, Maryland                 18          439
 44  Majestic Oaks Golf
     Club....................   Ham Lake, Minnesota                  45          650
      (3 Courses)
 45  Links at Northfork,
     The.....................   Ramsey, Minnesota                    18          390
 46  Woodland Creek Golf
     Course..................   Andover, Minnesota                    9           31
 47  Royal Meadows Golf
     Course..................   Kansas City, Missouri                27          283
      (2 Courses)
 48  Las Vegas National Golf
     Club....................   Las Vegas, Nevada                    18        2,502
 49  Painted Desert Golf
     Course..................   Las Vegas, Nevada                    18          890
 50  Wildhorse Country Club..   Henderson, Nevada                    18        1,535
 51  Beaver Brook Country
     Club....................   Clinton, New Jersey                  18            *
 52  Brigantine Golf Links...   Brigantine, New Jersey               18          449
 53  Rancocas Golf Club......   Willingboro, New Jersey              18          573
 54  Paradise Hills Golf
     Course..................   Albuquerque, New Mexico              18          566
 55  Carolina Shores Golf &
     Country Club............   Calabash, North Carolina             18          696
 56  Pawtuckett Golf Club....   Charlotte, North Carolina            18          170
 57  Bent Tree Golf Club.....   Columbus, Ohio                       18          464
 58  Fowler's Mill Golf
     Course..................   Chesterland, Ohio                    27          649
 59  Country Club of Hershey,
     South Course............   Hershey, Pennsylvania                18          267
 60  Golden Oaks Country
     Club....................   Fleetwood, Pennsylvania              18          601
 61  Hickory Heights Golf
     Club....................   Bridgeville, Pennsylvania            18          309
 62  Colonial Charters Golf
     Course..................   Longs, South Carolina                18          538
 63  Port Royal Golf &
     Racquet Club............   Hilton Head Island, South Carolina   54        2,575
      (3 Courses)
 64  Shipyard Golf Club......   Hilton Head Island, South Carolina   27        1,270
 65  Stono Ferry, The Links
     at......................   Charleston, South Carolina           18          180
 66  Forrest Crossing Golf
     Course..................   Nashville, Tennessee                 18          337
 67  Bear Creek Golf World...   Houston, Texas                       54        1,461
      (3 Courses)
 68  Blackstone Golf Club....   Frisco, Texas                        18            *
 69  Lake Houston Golf Club..   Huffman, Texas                       18          215
 70  Longwood Golf Club......   Houston, Texas                       27        1,109
 71  Pecan Valley Golf Club..   San Antonio, Texas                   18          509
 72  Ridgeview Ranch Country
     Club....................   Plano, Texas                         18            *
 73  Riverchase Golf Club....   Coppell, Texas                       18        1,160
 74  Riverside Golf Club.....   Grand Prairie, Texas                 18          731
 75  Southwyck Golf Club.....   Pearland, Texas                      18          558
 76  Woodlake Country Club...   San Antonio, Texas                   18            *
 77  Chesapeake Golf Club....   Chesapeake, Virginia                 18          476
 78  Honey Bee Golf Club.....   Virginia Beach, Virginia             18          568
 79  Kiskiack Golf Club......   Williamsburg, Virginia               18            *
 80  Reston National Golf
     Course..................   Reston, Virginia                     18        1,124
 81  Virginia Oaks Golf
     Club....................   Gainesville, Virginia                18            *
 82  Capitol City Golf Club..   Olympia, Washington                  18          318
 83  Classic Golf Club, The..   Spanaway, Washington                 18            *
 84  Lake Wilderness Golf
     Course..................   Maple Valley, Washington             18          267
                                                                             -------
        Total Daily Fee
        Courses..............                                                $50,210
                                                                             =======
</TABLE>
--------
* Acquired in 1999
 
                                       10
<PAGE>
 
                     The Golf Courses--Private Club Courses
 
<TABLE>
<CAPTION>
                                                              No. of     1998
            Course Name             Location (City, State)    Holes  Rent Revenues
            -----------             ----------------------    ------ -------------
                                                                          (In
                                                                      thousands)
 <C> <S>                         <C>                          <C>    <C>
  1  Ahwatukee Country Club..    Phoenix, Arizona               18      $     *
  2  Ancala Country Club.....    Scottsdale, Arizona            18          876
  3  Arrowhead Country Club..    Glendale, Arizona              18          609
  4  Red Mountain Ranch
     Country Club............    Mesa, Arizona                  18            *
  5  Tatum Ranch Golf Club...    Cave Creek, Arizona            18        1,420
  6  Canyon Oaks Country
     Club....................    Chico, California              18          460
  7  Escondido Country Club..    Escondido, California          18          715
  8  Monterey Country Club...    Palm Desert, California        27          832
  9  Palm Valley Country Club
     (2 Courses).............    Palm Desert, California        36        1,470
 10  SeaCliff Country Club...    Huntington Beach, California   18        1,497
 11  Spanish Hills Country
     Club....................    Camarillo, California          18        1,738
 12  Sunset Hills Country
     Club....................    Thousand Oaks, California      18        1,370
 13  Wood Ranch Golf Club....    Simi Valley, California        18        1,196
 14  Heather Ridge Country
     Club....................    Aurora, Colorado               18          339
 15  Pinery Country Club.....    Denver, Colorado               27          601
 16  Crescent Oaks Country
     Club....................    Clearwater, Florida            18          149
 17  Brookstone Golf &
     Country Club............    Acworth, Georgia               18          745
 18  Plantation Golf Club,
     The.....................    Boise, Idaho                   18          289
 19  Eagle Brook Country
     Club....................    Geneva, Illinois               18          925
 20  Mission Hills Country
     Club....................    Northbrook, Illinois           18          863
 21  Highlands Golf & Supper
     Club....................    Hutchinson, Kansas             18          103
 22  Tallgrass Country Club..    Wichita, Kansas                18          286
 23  Shenandoah Country
     Club....................    Baton Rouge, Louisiana         18          177
 24  Hunt Valley Golf Club...    Phoenix, Maryland              27        1,759
 25  Tanoan Country Club.....    Albuquerque, New Mexico        27        1,373
 26  Brandywine Country
     Club....................    Maumee, Ohio                   27          765
 27  Ivy Hills Country Club..    Cincinnati, Ohio               18          145
 28  Oakhurst Country Club...    Grove City, Ohio               18          424
 29  Royal Oak Country Club..    Cincinnati, Ohio               18          430
 30  Meadowbrook Country
     Club....................    Tulsa, Oklahoma                18          444
 31  The Trails..............    Norman, Oklahoma               18          267
 32  Creekside Golf Club.....    Salem, Oregon                  18          638
 33  Oregon Golf Club, The...    West Linn, Oregon              18        1,159
 34  Country Club of Hershey
     (2 Courses).............    Hershey, Pennsylvania          36        1,094
 35  Gettysvue Polo, Golf &
     Country Club............    Knoxville, Tennessee           18          280
 36  Berry Creek Country
     Club....................    Georgetown, Texas              18          538
 37  Diamond Oaks Country
     Club....................    Fort Worth, Texas              18          513
 38  Eldorado Country Club...    McKinney, Texas                18          714
 39  Great Southwest Golf
     Club....................    Grand Prairie, Texas           18          888
 40  Los Rios Country Club...    Plano, Texas                   18            *
 41  Oakridge Country Club...    Garland, Texas                 18          410
 42  Pecan Grove Plantation
     Country Club............    Richmond,Texas                 27            *
 43  Sonterra, The Club at (2
     Courses)................    San Antonio, Texas             36          932
 44  Sweetwater Country Club
     (2 Courses).............    Sugarland, Texas               36        1,717
 45  Thorntree Country Club..    DeSoto, Texas                  18            *
 46  Walden on Lake Houston
     Country Club............    Humble, Texas                  18          423
 47  Willow Fork Country
     Club....................    Katy, Texas                    18          341
 48  Woodhaven Country Club..    Forth Worth, Texas             18          294
 49  Brandermill Country
     Club....................    Midlothian, Virginia           18            *
 50  Bear Creek Country
     Club....................    Woodinville, Washington        18          932
                                                                        -------
        Total Private Club
        Courses..............                                           $33,140
                                                                        =======
        Total All Courses....                                           $83,350
                                                                        =======
</TABLE>
--------
*Acquired in 1999
 
                                       11
<PAGE>
 
                   The Golf Courses--Owned by Joint Venture
 
<TABLE>
<CAPTION>
                                              Location (City,    No. of   Type of
                   Course Name                     State)        Holes     Course
                   -----------                ---------------    ------ ------------
 <C> <C>                                     <S>                 <C>    <C>
  1  Pumpkin Ridge Golf Club (Ghost Creek).. Cornelius, Oregon     18    Daily Fee
  2  Pumpkin Ridge Golf Club
      (Witch Hollow)........................ Cornelius, Oregon     18   Private Club
</TABLE>
 
Capital Improvements
 
  Under the Leases, the lessees are required to maintain each Golf Course in
good order, repair and appearance. Capital improvements for which the Company
is responsible would be limited to projects that the Company agreed to fund at
the time a property was acquired or projects subsequently identified by the
Company or its operators that enhance the revenue potential and long-term
value of a property. For the Golf Courses acquired through March 1, 1999, the
Company is required under the Leases to pay for various remaining capital
improvements totaling approximately $23.2 million, $22.3 million of which will
be paid by the end of the year 2000. The Company believes these improvements
will add value to the golf courses and bring the quality of the golf courses
up to our expected standards. Any subsequent capital improvements are the
responsibility of the lessees. Upon the Company's funding of such capital
improvements, the base rent payable under the Leases with respect to these
Golf Courses will be adjusted to reflect, over the term of the Leases, the
Company's investment in such improvements.
 
Item 3. LEGAL PROCEEDINGS
 
  Owners and operators of golf courses are subject to a variety of legal
proceedings arising in the ordinary course of operating a golf course,
including proceedings relating to personal injury and property damage. Such
proceedings are generally brought against the operator of a golf course, but
may also be brought against the owner. Although neither the Company nor the
predecessor owners of the Golf Courses are currently parties to any legal
proceedings relating to the Golf Courses that would have a material adverse
effect upon the Company's business or financial position, it is possible that
in the future the Company could become a party to such proceedings. The
lessees are a party to certain litigation relating to the Golf Courses arising
in the ordinary course of operations. The lessees have advised the Company
that they do not believe that such litigation, if resolved against the
lessees, would have a material adverse effect upon their business or financial
position. The Leases provide that the lessees are responsible for claims based
on personal injury and property damage at the Golf Courses and require the
lessees to maintain insurance for such purposes.
 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                      12
<PAGE>
 
                                    PART II
 
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  a) Market Information
 
  The following table sets forth for periods shown the high and low sales
price for the Company's Common Stock on the New York Stock Exchange under the
symbol "TEE" and distributions declared.
 
<TABLE>
<CAPTION>
                                                    High     Low    Distribution
                                                  -------- -------- ------------
   <S>                                            <C>      <C>      <C>
   1998
   Fourth quarter................................ $29.375  $24.875      $.44
   Third quarter.................................  31.1875  23.4375      .44
   Second quarter................................  32.0625  28.50        .43
   First quarter.................................  32.9375  28.5625      .43
 
   1997
   Fourth quarter................................ $33.00   $30.3125     $.43
   Third quarter.................................  34.75    30.00        .43
   Second quarter................................  34.75    28.50        .42
   First quarter.................................  32.875   29.875       .42
</TABLE>
 
  b) Holders
 
  The number of record holders of the Company's Common Stock was 774 as of
March 1, 1999. The number of street name stockholders is estimated at 16,000.
 
  c) Distributions
 
  The Company paid distributions to stockholders of $1.73 per share in 1998,
of which $1.61 represents ordinary income and $0.12 represents return of
capital on a tax basis. On a book basis, calculated using basic earnings per
share, $0.40 per share represents return of capital. In 1997, the Company paid
distributions to stockholders of $1.69 per share, of which $1.49 represents
ordinary income, $0.05 represents capital gains (20% tax rate) and $0.15
represents return of capital on a tax basis. On a book basis, calculated using
basic earnings per share $0.43 per share represents return of capital. In
order to maintain its qualification in 1998 and 1997 as a REIT for federal
income tax purposes, the Company was required to make distributions to its
stockholders of at least $1.46 and $1.38 per share, respectively. In addition,
on January 11, 1999, the Company declared a quarterly distribution for the
fourth quarter of 1998 of $0.44 per share to stockholders of record on January
29, 1999, which was paid on February 15, 1999.
 
                                      13
<PAGE>
 
Item 6. SELECTED FINANCIAL DATA
 
  The selected financial data included in this table is derived from the
Company's consolidated financial statements for the years presented, which have
been audited by PricewaterhouseCoopers LLP.
 
<TABLE>
<CAPTION>
                                       Year ended December 31,
                              ------------------------------------------------
                                1998      1997      1996      1995      1994
                              --------  --------  --------  --------  --------
                                 (In thousands, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
Statement of Operations
 Data:
Revenues
  Rent......................  $ 83,350  $ 74,316  $ 58,898  $ 45,931  $ 36,637
  Equity in income from
   joint venture............       385       119       --        --        --
  Gain on sale of
   properties...............       --        158     1,199     1,893       --
                              --------  --------  --------  --------  --------
    Total revenues..........    83,735    74,593    60,097    47,824    36,637
                              --------  --------  --------  --------  --------
Expenses
  General & administrative..     5,156     5,336     4,734     4,258     4,709
  Depreciation &
   amortization.............    27,079    24,758    19,124    14,027    10,413
                              --------  --------  --------  --------  --------
    Total...................    32,235    30,094    23,858    18,285    15,122
                              --------  --------  --------  --------  --------
  Interest expense..........   (20,350)  (19,810)  (14,067)   (8,793)   (2,212)
  Interest income...........     1,170       364     2,110     4,144     3,459
  Gain on property
   condemnation.............     1,493       --        --        --        --
  Gain on insurance
   proceeds.................       --      2,231       --        --        --
  Other income..............       352       521       238       114       194
                              --------  --------  --------  --------  --------
Income before provision for
 taxes and minority
 interest...................    34,165    27,805    24,520    25,004    22,956
Provision for taxes.........      (231)     (223)     (256)     (352)     (368)
                              --------  --------  --------  --------  --------
Income before minority
 interest...................    33,934    27,582    24,264    24,652    22,588
Minority interest...........   (17,292)  (12,003)  (10,852)  (11,366)  (10,712)
                              --------  --------  --------  --------  --------
Net income..................  $ 16,642  $ 15,579  $ 13,412  $ 13,286  $ 11,876
                              ========  ========  ========  ========  ========
Basic earnings per share....  $   1.33  $   1.26  $   1.19  $   1.25  $   1.12
Weighted average number of
 shares.....................    12,497    12,368    11,317    10,622    10,612
Diluted earnings per share..  $   1.32  $   1.25  $   1.17  $   1.25  $   1.12
Weighted average number of
 shares.....................    12,599    12,512    11,420    10,643    10,616
<CAPTION>
                                              December 31,
                              ------------------------------------------------
                                1998      1997      1996      1995      1994
                              --------  --------  --------  --------  --------
                                 (In thousands, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
Balance Sheet Data:
Real estate before
 accumulated depreciation...  $663,018  $601,882  $515,794  $362,068  $272,034
Total assets................   597,295   535,314   469,945   347,967   275,071
Total debt..................   283,405   299,032   230,590   144,983    66,441
Minority interest(1)........   166,655    96,007    98,551    90,609    92,938
Stockholders' equity(1).....   132,224   134,890   137,670   110,298   113,134
Cash distributions declared
 per share..................      1.74      1.70      1.66      1.61      1.49
</TABLE>
 
                                       14
<PAGE>
 
<TABLE>
<CAPTION>
                                       Year ended December 31,
                             ------------------------------------------------
                               1998      1997      1996      1995      1994
                             --------  --------  --------  --------  --------
                                 (In thousands, except property data)
<S>                          <C>       <C>       <C>       <C>       <C>
Other Data:
Company's funds from
 operations(2).............. $ 31,203  $ 27,851  $ 23,215  $ 19,641  $ 17,209
Cash flows from (used in):
  Operating activities......   60,333    55,576    44,217    36,383    34,241
  Investing activities......  (77,483)  (94,408)  (68,481)  (76,019)  (32,003)
  Financing activities......   17,163    29,306    28,399    42,639       (52)
Number of owned courses.....      130       123       114        81        71
Number of locations.........      116       112       104        72        63
</TABLE>
--------
(1) Minority interest and stockholders' equity have been restated for the
    years ended December 31, 1997, 1996, 1995 and 1994 to reflect an
    accounting allocation for reporting purposes from additional paid in
    capital to minority interest for the Operating Partnership's limited
    partners' interest in the net assets of the Company after giving effect to
    their exchange rights of Common Units into Common Stock. Generally
    accepted accounting principles require the reporting of such exchange
    rights "as if converted." This reallocation had no effect on earnings per
    share or results of operations or allocations of net income to the general
    partner and limited partners of the Operating Partnership. The
    reallocation at December 31, 1998, 1997 1996, 1995 and 1994 was
    approximately $78.6 million, $78.1 million, $77.7 million, $67.6 million,
    and $70 million, respectively.
 
(2) The Company believes that to facilitate a clear understanding of the
    historical consolidated operating results, funds from operations should be
    examined in conjunction with net income. Funds from operations is
    considered by the Company's management as an appropriate measure of the
    performance of an equity REIT because it is predicated on cash flow
    analyses, which the Company's management believes is more reflective of
    the value of real estate companies such as the Company rather than a
    measure predicated on generally accepted accounting principles which gives
    effect to non-cash expenditures such as depreciation. Funds from
    operations is generally defined as net income (loss) plus certain non-cash
    items, primarily depreciation and amortization. Funds from operations
    should not be considered as an alternative to net income as an indication
    of the Company's performance or as an alternative to cash flow, as defined
    by generally accepted accounting principles, as a measure of liquidity.
    The funds from operations presented may not be comparable to funds from
    operations for other REITs. The following table summarizes the Company's
    funds from operations for the years ended December 31, 1998, 1997, 1996,
    1995 and 1994.
 
<TABLE>
<CAPTION>
                                      For the year ended December 31,
                                  -------------------------------------------
                                   1998     1997     1996     1995     1994
                                  -------  -------  -------  -------  -------
                                              (In thousands)
   <S>                            <C>      <C>      <C>      <C>      <C>
   Net income.................... $16,642  $15,579  $13,412  $13,286  $11,876
   Distributions--Preferred
    Units........................  (4,797)     --       --       --       --
   Minority interest.............  17,292   12,003   10,852   11,366   10,712
   Depreciation and
    amortization.................  27,472   24,883   19,124   14,027   10,413
   Gain on property
    condemnation.................  (1,493)     --       --       --       --
   Gain on insurance proceeds....     --    (2,231)     --       --       --
   Gain on sale of properties....     --      (158)  (1,199)  (1,893)     --
   Excess land sales.............    (342)    (469)     --       --       --
   Write off of option payable...     --       --       --      (101)     --
   Discount on payoff of note
    payable......................     --       --       --       --      (175)
   Amortization--loan costs......    (241)    (227)    (147)    (195)     (66)
   Depreciation--corporate.......     (87)     (69)     (47)     (43)     (31)
                                  -------  -------  -------  -------  -------
   Funds from operations......... $54,446  $49,311  $41,995  $36,447  $32,729
   Company's share of funds from
    operations...................   57.31%   56.48%   55.28%   53.89%   52.58%
                                  -------  -------  -------  -------  -------
   Company's funds from
    operations................... $31,203  $27,851  $23,215  $19,641  $17,209
                                  =======  =======  =======  =======  =======
</TABLE>
 
  In order to maintain its qualification as a REIT for federal income tax
  purposes, the Company is required to make distributions to its
  stockholders. The Company's distributions to stockholders have been less
  than the total funds from operations because the Company is obligated to
  make certain payments with respect to principal debt and capital
  improvements. Management believes that to continue the Company's growth,
  funds from operations in excess of distributions, principal reductions and
  capital improvement expenditures should be invested in assets expected to
  generate returns on investment to the Company commensurate with the
  Company's investment objectives and policies.
 
                                      15
<PAGE>
 
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 accompanying
Consolidated Financial Statements and Notes thereto. The forward-looking
statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") relating to certain matters
involve risks and uncertainties, including anticipated financial performance,
business prospects, anticipated capital expenditures and other similar
matters, which reflect management's best judgement based on factors currently
known. Actual results and experience could differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements as a result of a number of factors, including but not
limited to those discussed in MD&A.
 
  The discussion of the results of operations compares the year ended December
31, 1998 with the year ended December 31, 1997 and the year ended December 31,
1997 with the year ended December 31, 1996.
 
Results of Operations
 
 Comparison of year ended December 31, 1998 to year ended December 31, 1997
 
  Net income increased by $1,063,000 to $16,642,000 for the year ended
December 31, 1998 compared to $15,579,000 for the year ended December 31,
1997. The increase was primarily attributable to an increase in (i) rent
revenues of approximately $9,034,000; (ii) interest income of approximately
$806,000; and (iii) gain on property condemnation of approximately $1,493,000,
which was offset by (i) an increase in depreciation and amortization expense
of approximately $2,321,000; (ii) a decrease in gain on insurance proceeds of
approximately $2,231,000; (iii) an increase in interest expense of
approximately $540,000; and (iv) an increase in income applicable to minority
interest of approximately $5,289,000.
 
  The increase in rent revenues is due to (i) the acquisition of seven golf
course properties during 1998, which accounted for approximately $1,758,000 of
the increase; (ii) a full year of rent in 1998 on nine golf course properties
acquired in 1997, which accounted for approximately $4,129,000 of the
increase; (iii) an increase in base rent of approximately $2,573,000; and (iv)
an increase in percentage rent of approximately $574,000. The increase in
depreciation and amortization expense was due to an increase in depreciation
expense of approximately $2,559,000, which was offset by a decrease in
amortization expense of approximately $238,000. The increase in depreciation
expense was primarily due to (i) the acquisition of seven golf course
properties during 1998, which accounted for approximately $812,000 of the
increase and (ii) a full year of depreciation expense in 1998 on nine golf
course properties acquired in 1997, which accounted for approximately
$2,075,000 of the increase. The decrease in amortization expense was primarily
due to certain covenants becoming fully amortized.
 
  The increase in interest income was primarily due to the participating
mortgage loan of approximately $22.6 million made during the year. The
increase in gain on property condemnation was due to the State of North
Carolina condemning four golf holes at one of the Company's golf courses for a
state highway project. The State has not taken physical possession of the
property because the project has not been started. The Company purchased land
adjacent to the golf course sufficient to replace the condemned holes. The
decrease in gain on insurance proceeds was due to a fire completely destroying
a clubhouse at one of the Golf Courses during 1997. The Company applied the
insurance proceeds to rebuild the clubhouse. The increase in interest expense
was primarily attributable to the increase in outstanding advances under the
Company's $100 million credit facility. The increase in income applicable to
minority interest was primarily due to income allocated to holders of
Preferred Units.
 
 Comparison of year ended December 31, 1997 to year ended December 31, 1996
 
  Net income increased by $2,167,000 to $15,579,000 for the year ended
December 31, 1997 compared to $13,412,000 for the year ended December 31,
1996. The increase was primarily attributable to an increase in
 
                                      16
<PAGE>
 
(i) rent revenues of approximately $15,418,000; and (ii) gain on insurance
proceeds of approximately $2,231,000, which was offset by (i) an increase in
general and administrative expenses of approximately $602,000; (ii) an
increase in depreciation and amortization expense of approximately $5,634,000;
(iii) a decrease in interest income from affiliates of approximately
$1,683,000; and (iv) an increase in interest expense of approximately
$5,743,000.
 
  The increase in rent revenues was due to (i) the acquisition of nine golf
course properties during 1997, which accounted for approximately $3,611,000 of
the increase; (ii) a full year of rent in 1997 on 34 golf course properties
acquired in 1996, which accounted for approximately $9,248,000 of the
increase; (iii) an increase in base rent of approximately $1,212,000; and (iv)
an increase in percentage rent of approximately $1,347,000. The increase in
general and administrative expenses in 1997 was primarily due to (i) an
increase in compensation expense resulting from the issuance of restricted
stock and (ii) payments to be made to the former president of the Company
pursuant to a separation agreement. The increase in depreciation and
amortization expense was due to an increase in depreciation expense of
approximately $5,696,000, which was offset by a decrease in amortization
expense of approximately $62,000. The increase in depreciation expense was
primarily due to (i) the acquisition of nine golf course properties during
1997, which accounted for approximately $1,810,000 of the increase and (ii) a
full year of depreciation expense in 1997 on 34 golf course properties
acquired in 1996, which accounted for approximately $4,239,000 of the
increase. The decrease in amortization expense was primarily due to certain
covenants and loan costs becoming fully amortized.
 
  The decrease in interest income from affiliates was due to the retirement of
certain participating mortgage loans in 1996. The increase in gain on
insurance proceeds was due to a fire completely destroying a clubhouse at one
of the Golf Courses. The Company applied the insurance proceeds to rebuild the
clubhouse. The increase in interest expense was primarily attributable to (i)
the issuance of $75 million of fixed-rate, unsecured notes in 1996 ($40
million in July and $35 million in December) and (ii) the increase in
outstanding advances under the Company's $100 million credit facility.
 
Liquidity and Capital Resources
 
  At December 31, 1998, the Company had approximately $3 million in cash and
investments, mortgage loans of approximately $24.8 million, mortgage
indebtedness of approximately $30.2 million and unsecured indebtedness of
approximately $253.2 million. The $283.4 million aggregate principal amount of
mortgage and unsecured indebtedness bears interest at a weighted average rate
of 7.63%. Of the $283.4 million of debt, $205.4 million is fixed-rate debt and
is payable either quarterly, semi-annually or annually and matures between
1999 and 2008.
 
  In order to maintain its qualification as a REIT for federal income tax
purposes, the Company is required to make substantial distributions to its
stockholders. The following factors, among others, will affect cash flow from
operations and will influence the decisions of the Company's Board of
Directors regarding distributions: (i) increase in debt service resulting from
additional indebtedness; (ii) scheduled increases in base rent under the
Leases with respect to the Golf Courses; (iii) any payment to the Company of
percentage rent under the Leases with respect to the Golf Courses; and (iv)
increase in preferred distributions resulting from the issuance of Preferred
Units. Although the Company receives most of its rental payments on a monthly
basis, it has and intends to continue to pay distributions quarterly.
 
  The Company anticipates that its cash from operations and its new bank line
of credit, described below, will provide adequate liquidity to conduct its
operations, fund administrative and operating costs, interest payments,
capital improvements and acquisitions and allow distributions to the Company's
stockholders in accordance with the Code's requirements for qualification as a
REIT and to avoid any corporate level federal income or excise tax. Capital
improvements for which the Company is responsible are limited to projects that
the Company agreed to fund at the time a property was acquired or projects
subsequently identified by the Company or its operators that enhance the
revenue potential and long-term value of a property. For the Golf Courses
acquired through March 1, 1999, the Company is required under the Leases to
pay for various remaining
 
                                      17
<PAGE>
 
capital improvements totaling approximately $23.2 million, $22.3 million of
which will be paid during the next two years. The Company believes these
improvements will add value to the Golf Courses and bring the quality of the
Golf Courses up to the Company's expected standards in order to enhance
revenue growth. Any subsequent capital improvements are the responsibility of
the lessees. Upon the Company's funding of the capital improvements, the base
rent payable under the Leases with respect to these Golf Courses will be
adjusted to reflect, over the term of the Leases, the Company's investment in
such improvements.
 
  Future acquisitions will be made subject to the Company's investment
objectives and policies established to maximize both current income and long-
term growth in income. The Company's liquidity requirements with respect to
future acquisitions may be reduced to the extent the Company uses Common Stock
or Common Units as consideration for such purchases.
 
  On March 31, 1999, the Company entered into a new $300 million unsecured
revolving credit facility with a group of lenders led by The First National
Bank of Chicago, as Administrative Agent. Advances under the credit facility
bear interest at the Administrative Agent's alternate base rate plus the then-
applicable base rate margin or, at the option of the Company, LIBOR plus the
then-applicable LIBOR rate margin. The Administrative Agent's alternate base
rate for any day means the greater of (i) a rate per annum equal to the
corporate base rate of interest announced by the Administrative Agent from
time to time, and (ii) the federal funds rate as published by the Federal
Reserve Bank plus one-half percent (0.50%) per annum. The amount of the base
rate margin and LIBOR rate margin vary depending upon the amount of the
Company's outstanding indebtedness compared to its capitalization. The initial
rate of interest for borrowings made under the new facility as of March 31,
1999 will be equal to LIBOR plus a margin of 2.25% or the alternate base rate
plus 1.00%. The credit facility terminates on March 31, 2002, but may be
extended by the Company for an additional year if approved by all of the
lenders under the credit facility. The credit facility replaces the Company's
previous $100 million credit facility, which has been terminated.
 
  The Company borrowed approximately $256.5 million under the new facility on
March 31, 1999, of which $160 million was used to pay the remaining aggregate
initial investment for the Acquired Cobblestone Courses, $93.5 million was
used to repay all outstanding indebtedness under the previous credit facility,
and $3 million was used for general partnership purposes. At December 31, 1998
and March 1, 1999, there were outstanding advances under the previous credit
facility of $78 million and $98.5 million, respectively. The new facility
requires that the Company use its best efforts to obtain certain modifications
of the covenants applicable to its $175 million fixed-rate unsecured senior
notes by June 4, 1999 (which may be advanced to an earlier date under certain
circumstances). The Company is currently exploring various alternatives in the
event it cannot obtain such modifications. The Company has a commitment from
The First National Bank of Chicago, subject to certain conditions, to provide
financing to prepay the senior notes, including a make-whole premium and
certain other fees. If such senior notes were required to be prepaid, the
Company would incur an extraordinary charge. Alternatively, the Company could
attempt to refinance or modify the new credit facility. The Company cannot
predict at this time whether it will obtain such covenant modifications or
make any such alternative arrangements, and, accordingly, cannot predict the
resulting impact on its financial condition or results of operations.
 
  The Company may finance future acquisitions of golf course properties with
additional borrowings under the credit facility or a replacement credit
facility or with issuances of the Company's or the Operating Partnership's
equity or debt securities. In the future, the Company also may refinance a
portion of the credit facility with issuances of such debt or equity
securities. Any such offering which involves the sale of the equity securities
of the Company could adversely affect the market price of shares of the
Company's common stock held by the Company's existing stockholders.
 
  On June 15, 1998, in anticipation of the Operating Partnership issuing $100
million of fixed-rate, ten-year notes or some similar security, the Operating
Partnership entered into a $100 million treasury lock swap transaction with a
financial institution in order to hedge its exposure to interest rate
fluctuations. The treasury
 
                                      18
<PAGE>
 
lock matures on May 3, 1999. Under this agreement, the Operating Partnership
pays or receives an amount equal to the difference between the treasury lock
rate and the market rate on the date of settlement, based on the principal of
$100 million. The realized gain or loss on the transaction at the settlement
date will be recorded on the balance sheet and amortized to interest expense
over the period of the related notes if issued. If the notes or similar
securities are not issued, the realized gain or loss on the transaction at the
settlement date will be recorded in the statement of operations. At March 1,
1999 and December 31, 1998, the treasury lock rate was higher than the market
rate. Therefore, at March 1, 1999 and December 31, 1998, the Operating
Partnership had an unrealized loss of approximately $1.9 million and $6.9
million, respectively.
 
  In 1998, the Company purchased seven Golf Courses for an aggregate initial
investment of approximately $42.8 million and made one participating mortgage
loan of approximately $22.6 million, which investment was financed by
approximately $7.4 million of cash from operations and $58 million of advances
under the Company's credit facility. Between December 31, 1998 and March 1,
1999, the Company purchased two Golf Courses for an aggregate initial
investment of approximately $10.4 million, which the Company financed with
approximately $4.4 million of cash from operations and $6 million of advances
under the Company's previous credit facility. In addition, there was a pay
down of approximately $9.6 million on the participating mortgage loan. On
March 31, 1999, the Company purchased the Acquired Cobblestone Courses for an
aggregate initial investment of approximately $184.3 million, which the
Company financed with borrowings of approximately $178.7 million under its new
credit facility and approximately $5.6 million of assumed notes.
 
  On March 4, 1998, the Operating Partnership completed a private placement of
1,200,000 Preferred Units to an institutional investor in exchange for a
contribution to the Operating Partnership of $60 million. The Preferred Units,
which may be called by the Operating Partnership at par on or after March 4,
2003, have no stated maturity or mandatory redemption and pay a cumulative,
quarterly dividend at an annualized rate of 8%. The dividends attributable to
such Preferred Units have been reported as a component of minority interest in
the related financial statements. The Preferred Units are not convertible into
Common Stock, but are convertible into preferred stock of the Company. The
Operating Partnership used $58 million of the approximately $58.5 million of
net proceeds from such private placement to reduce outstanding indebtedness
under the Operating Partnership's revolving credit facility. Also, on April
20, 1998, the Operating Partnership completed a private placement of an
additional 300,000 Preferred Units to the same institutional investor in
exchange for a contribution to the Operating Partnership of $15 million. The
Operating Partnership used $14.5 million of the approximately $14.6 million of
net proceeds from such private placement to reduce outstanding indebtedness
under the Operating Partnership's revolving credit facility.
 
  The limited partners of the Operating Partnership have the right, in each
twelve-month period ending August 18, to sell up to one-third of their Common
Units or exchange up to the greater of 75,000 Common Units or one-third of
their Common Units to the Company. If the Common Units are sold for cash, the
Company will have the option to pay for such Common Units with available cash,
borrowed funds or from the proceeds of an offering of Common Stock. If the
Common Units are exchanged for shares of Common Stock, the limited partners
will receive one share of Common Stock for each Common Unit exchanged.
 
 Comparison of cash flow statement for year ended December 31, 1998 to year
ended December 31, 1997
 
  Net cash provided by operating activities increased by $4,757,000 to
$60,333,000 for the year ended December 31, 1998 compared to $55,576,000 for
the year ended December 31, 1997. The increase was primarily attributable to
an increase in rent revenues of approximately $9,034,000, which was offset by
a decrease in changes in other assets of approximately $4,194,000.
 
  Net cash used by investing activities decreased by $16,925,000 to
$77,483,000 for the year ended December 31, 1998 compared to $94,408,000 for
the year ended December 31, 1997. The decrease was primarily attributable to
(i) an increase in issuance of mortgage loans of approximately $22,649,000;
(ii) a decrease in purchase of property of approximately $32,754,000; and
(iii) a decrease in investment in joint venture of approximately $8,109,000.
 
                                      19
<PAGE>
 
  Net cash provided by financing activities decreased by $12,143,000 to
$17,163,000 for the year ended December 31, 1998 compared to $29,306,000 for
the year ended December 31, 1997. The decrease was primarily attributable to
(i) an increase in principal payments on notes payable of approximately
$31,259,000; (ii) a decrease in proceeds from notes payable of approximately
$48,650,000; (iii) an increase in net proceeds from Preferred Units of
approximately $73,010,000; and (iv) an increase in limited partners' cash
distributions of approximately $4,391,000.
 
 Comparison of cash flow statement for year ended December 31, 1997 to year
ended December 31, 1996
 
  Net cash provided by operating activities increased by $11,359,000 to
$55,576,000 for the year ended December 31, 1997 compared to $44,217,000 for
the year ended December 31, 1996. The increase was primarily attributable to
an increase in rent revenues of approximately $15,418,000, which was offset by
an increase in interest expense of approximately $5,743,000.
 
  Net cash used by investing activities increased by $25,927,000 to
$94,408,000 for the year ended December 31, 1997 compared to $68,481,000 for
the year ended December 31, 1996. The increase was primarily attributable to
(i) a decrease in proceeds from mortgage loans of approximately $24,740,000;
(ii) a decrease in purchase of property from affiliates of approximately
$4,937,000; (iii) an increase in investment in joint venture of approximately
$8,128,000; and (iv) an increase in proceeds from sale of properties and
related assets of approximately $2,575,000.
 
  Net cash provided by financing activities increased by $907,000 to
$29,306,000 for the year ended December 31, 1997 compared to $28,399,000 for
the year ended December 31, 1996. The increase was primarily attributable to
an increase in proceeds from stock options exercised of approximately
$993,000.
 
Year 2000
 
  The Year 2000 issue is the result of computer software and embedded chips
using two digits, instead of four digits, to identify the applicable year. Any
of the Company's computers, computer software and other equipment that have
date-sensitive software may recognize a date using "00" as the year 1900
instead of 2000. If any of the Company's systems or equipment that have date-
sensitive software use only two digits, system failures or miscalculations may
result causing disruptions of operations.
 
  The Company has identified its Year 2000 risk in three categories: (i)
internal computers and equipment; (ii) tenants' compliance; and (iii) external
compliance.
 
  The Company has replaced all of its personal computers and most of its
software with computers and software that are Year 2000 compliant. The Company
plans to install the remaining software by the end of the second quarter in
1999. The Company also has replaced its computer servers and plans to upgrade
its computer software by the end of the second quarter of 1999. The Company
has spent approximately $63,000 to replace such computer equipment through
December 31, 1998 and anticipates spending an additional $37,000 before the
end of 1999 on additional replacement equipment and software upgrades. The
Company has determined that most of the other office equipment that the
Company uses also is Year 2000 compliant. This has been confirmed in writing
with third party vendors. The Company will continue to conduct ongoing testing
of its computers, software and other equipment which has not yet been tested
or replaced to ensure Year 2000 compliance.
 
  The Company has identified key tenants that it believes could have a
material impact on its operations if those tenants are not Year 2000
compliant. The Company is monitoring its largest tenant, AGC, and has had
preliminary discussions with the other tenants about their Year 2000
compliance. AGC has informed the Company that its Year 2000 compliance project
is progressing as planned and is expected to be completed by September 1999.
The Company will send written requests to its tenants to determine their Year
2000 compliance during 1999.
 
  The Company has had preliminary discussions with some of its service
providers. The Company will send written requests to its key service providers
to determine their Year 2000 compliance during 1999.
 
                                      20
<PAGE>
 
  The Company does not currently have a comprehensive contingency plan with
respect to the Year 2000 problem. However, the Company intends to establish
such a plan during 1999 as part of its ongoing Year 2000 compliance effort.
 
  Despite the Company's efforts to identify and resolve Year 2000 compliance
problems, the Company cannot guarantee that all of the Company's systems will
be Year 2000 compliant or that other companies on which the Company relies
will be timely converted. As a result, the Company's operations could be
interrupted or otherwise adversely affected. The failure to correct a material
Year 2000 problem could result in an interruption in, or a failure of, certain
business operations. Such failures could have a material adverse effect on the
Company's financial condition and results of operations. However, the Company
believes that, at worst, it might cease receiving percentage rents on a
temporary basis. This would result from the Company's tenants having to use a
manual system to prepare their accounting records and, as a consequence, it
would take additional time for the Company's tenants to gather financial
performance information from its golf courses and calculate the percentage
rent amounts. This temporary reduction in rent revenue could cause price
fluctuations in the Common Stock.
 
  The forward-looking statements regarding Year 2000 involve risks and
uncertainties, which reflect the Company's management's best judgment based on
factors currently known. Actual results and experience could differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements as a result of a number of factors, including but
not limited to those discussed above.
 
Other Data
 
  The Company believes that to facilitate a clear understanding of the
historical consolidated operating results, funds from operations should be
examined in conjunction with net income as presented in the audited
Consolidated Financial Statements. Funds from operations is considered by
management as an appropriate measure of the performance of an equity REIT
because it is predicated on cash flow analyses, which management believes is
more reflective of the value of real estate companies such as the Company
rather than a measure predicated on generally accepted accounting principles
which gives effect to non-cash expenditures such as depreciation. Funds from
operations is generally defined as net income (loss) plus certain non-cash
items, primarily depreciation and amortization. Funds from operations should
not be considered as an alternative to net income as an indication of the
Company's performance or as an alternative to cash flow, as defined by
generally accepted accounting principles, as a measure of liquidity.
 
  The funds from operations presented may not be comparable to funds from
operations for other REITs. The following table summarizes the Company's funds
from operations for the years ended December 31, 1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                                        For the year ended
                                                           December 31,
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
                                                           (In thousands)
<S>                                                   <C>      <C>      <C>
Net income........................................... $16,642  $15,579  $13,412
Distributions--Preferred Units.......................  (4,797)     --       --
Minority interest....................................  17,292   12,003   10,852
Depreciation and amortization........................  27,472   24,883   19,124
Gain on property condemnation........................  (1,493)     --       --
Gain on insurance proceeds...........................     --    (2,231)     --
Gain on sale of properties...........................     --      (158)  (1,199)
Excess land sales....................................    (342)    (469)     --
Amortization--loan costs.............................    (241)    (227)    (147)
Depreciation--corporate..............................     (87)     (69)     (47)
                                                      -------  -------  -------
Funds from operations................................ $54,446  $49,311  $41,995
Company's share of funds from operations.............   57.31%   56.48%   55.28%
                                                      -------  -------  -------
Company's funds from operations...................... $31,203  $27,851  $23,215
                                                      =======  =======  =======
</TABLE>
 
                                      21
<PAGE>
 
  In order to maintain its qualification as a REIT for federal income tax
purposes, the Company is required to make distributions to its stockholders.
The Company's distributions to stockholders have been less than the total
funds from operations because the Company is obligated to make certain
payments with respect to principal debt and capital improvements. Management
believes that to continue the Company's growth, funds from operations in
excess of distributions, principal reductions and capital improvement
expenditures should be invested in assets expected to generate returns on
investment to the Company commensurate with the Company's investment
objectives and policies.
 
 Comparison of funds from operations for year ended December 31, 1998 to year
ended December 31, 1997
 
  Funds from operations increased by $5,135,000 to $54,446,000 for the year
ended December 31, 1998 compared to $49,311,000 for the year ended December
31, 1997. The increase was primarily attributable to an increase in rent
revenues of approximately $9,034,000, which was offset by an increase in
distributions on Preferred Units of approximately $4,797,000.
 
 Comparison of funds from operations for year ended December 31, 1997 to year
ended December 31, 1996
 
  Funds from operations increased by $7,316,000 to $49,311,000 for the year
ended December 31, 1997 compared to $41,995,000 for the year ended December
31, 1996. The increase was primarily attributable to an increase in rent
revenues of approximately $15,418,000, which was offset by an increase in
interest expense of approximately $5,743,000.
 
Inflation
 
  All the Leases of the Golf Courses provide for base and participating rent
features. All of such Leases are triple net leases requiring the lessees to
pay for all maintenance and repair, insurance, utilities and services, and,
subject to certain limited exceptions, all real and personal property taxes,
thereby minimizing the Company's exposure to increases in costs and operating
expenses resulting from inflation.
 
Seasonality
 
  Although the results of operations of the Company and its predecessors have
not been significantly impacted by seasonality, the Company generally expects
that its results of operations may be adversely affected as a function of
reduced payments of percentage rent in the first and fourth quarters of each
year due to adverse weather conditions and the scheduled closure of Golf
Courses located in harsh winter climates.
 
New Pronouncements Issued But Not Yet Effective
 
  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. The accounting
for the changes in the fair values of such derivatives would depend on the use
of the derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for the Company's financial statements issued for periods beginning
January 1, 2000. The Company has not determined when it will implement SFAS
133; however, the Company anticipates that implementing SFAS 133 will not
materially impact the Company's financial condition or results of operations.
However, there could be a material impact on comprehensive income.
 
                                      22
<PAGE>
 
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The Company's primary market risk exposure is interest rate risk. The
Company has and will continue to manage interest rate risk by (1) maintaining
a conservative ratio of fixed rate, long-term debt to total debt such that
variable rate exposure is kept at an acceptable level, (2) using treasury rate
locks where appropriate to fix rates on anticipated debt transactions, and (3)
taking advantage of favorable market conditions for long-term debt and/or
equity.
 
  The following table sets forth the Company's long term debt obligations,
principal cash flows by scheduled maturity, weighted average interest rates
and estimated fair value ("FV") at December 31, 1998 (dollars in thousands):
 
<TABLE>
<CAPTION>
                           For the Year Ended December 31,
                         ----------------------------------------
                          1999    2000    2001     2002     2003   Thereafter  Total       FV
                         ------  ------  -------  -------  ------  ---------- --------  --------
<S>                      <C>     <C>     <C>      <C>      <C>     <C>        <C>       <C>
Long term debt:
  Fixed rate............ $9,918  $8,539  $26,013  $ 7,145  $7,715   $146,075  $205,405  $214,348
  Average interest
   rate.................   7.01%   7.72%    7.09%    8.39%   8.39%      8.35%     8.07%
  Variable rate.........    --      --       --    78,000     --         --     78,000    78,000
  Average interest
   rate.................    --      --       --      6.48%    --         --       6.48%
                         ------  ------  -------  -------  ------   --------  --------  --------
    Total debt.......... $9,918  $8,539  $26,013  $85,145  $7,715   $146,075  $283,405  $292,348
                         ======  ======  =======  =======  ======   ========  ========  ========
</TABLE>
 
  In addition, the Company has assessed the market risk for its variable rate
debt and believes that a 1% increase in interest rates would have an
approximate $780,000 increase in interest expense based on $78 million
outstanding at December 31, 1998.
 
  The estimated fair value of the Company's long term debt is estimated based
on discounted cash flows at interest rates that the Company's management
believes reflects the risks associated with long term debt of similar risk and
duration.
 
                                      23
<PAGE>
 
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of National Golf Properties, Inc.
 
  We have audited the consolidated financial statements and financial
statement schedule of National Golf Properties, Inc. (the "Company") as listed
in Item 14(a)(1) and (2) of this Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of National Golf Properties, Inc. as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
 
  As described in Note 1(n), the Company changed their method of accounting
for contingent rental income.
 
  As described in Note 1(p), the consolidated financial statements have been
restated for the allocation of minority interest.
 
  Additionally, Note 16 to the accompanying consolidated financial statements
has been restated for American Golf Corporation and Subsidiaries change in
their method of accounting for membership initiation deposits and fees and the
related incremental direct costs.
 
                                          PricewaterhouseCoopers LLP
 
Los Angeles, California
February 4, 1999, except for Note 19,
as to which the date is March 31, 1999
 
                                      24
<PAGE>
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
 
<TABLE>
<CAPTION>
                                                              December 31,
                                                           -------------------
                                                             1998       1997
                                                           ---------  --------
<S>                                                        <C>        <C>
                          ASSETS
                          ------
 
Property
  Land.................................................... $  77,317  $ 72,339
  Buildings...............................................   202,920   181,571
  Ground improvements.....................................   332,066   301,814
  Furniture, fixtures and equipment.......................    39,341    35,589
  Construction in progress................................    11,374    10,569
                                                           ---------  --------
                                                             663,018   601,882
  Less: accumulated depreciation..........................  (121,095)  (94,872)
                                                           ---------  --------
    Net property..........................................   541,923   507,010
Cash and cash equivalents.................................     1,711     1,698
Investments...............................................     1,295     1,215
Mortgage notes receivable.................................    24,849     2,200
Investment in joint venture...............................     7,630     8,004
Due from affiliate........................................       958     4,524
Other assets, net.........................................    18,929    10,663
                                                           ---------  --------
    Total assets.......................................... $ 597,295  $535,314
                                                           =========  ========
 
           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------
 
Notes payable............................................. $ 283,405  $299,032
Accounts payable and other liabilities....................    15,011     5,385
                                                           ---------  --------
    Total liabilities.....................................   298,416   304,417
                                                           ---------  --------
Minority interest.........................................   166,655    96,007
                                                           ---------  --------
 
Commitments and contingencies (Note 8)
 
Stockholders' Equity:
  Preferred stock, $.01 par value, 5,000,000 shares
   authorized--none issued................................       --        --
  Common stock, $.01 par value, 40,000,000 shares
   authorized, 12,519,745 and 12,408,195 shares issued and
   outstanding at December 31, 1998 and 1997,
   respectively...........................................       125       124
  Additional paid in capital..............................   135,205   139,222
  Accumulated deficit.....................................       --     (1,360)
  Unamortized restricted stock compensation...............    (3,106)   (3,096)
                                                           ---------  --------
    Total stockholders' equity............................   132,224   134,890
                                                           ---------  --------
    Total liabilities and stockholders' equity............ $ 597,295  $535,314
                                                           =========  ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       25
<PAGE>
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                     For the year ended
                                                        December 31,
                                                 ----------------------------
                                                   1998      1997      1996
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Revenues:
  Rent from affiliate........................... $ 79,652  $ 71,087  $ 57,291
  Rent..........................................    3,698     3,229     1,607
  Equity in income from joint venture...........      385       119       --
  Gain on sale of properties....................      --        158     1,199
                                                 --------  --------  --------
    Total revenues..............................   83,735    74,593    60,097
                                                 --------  --------  --------
Expenses:
  General and administrative....................    5,156     5,336     4,734
  Depreciation and amortization.................   27,079    24,758    19,124
                                                 --------  --------  --------
    Total expenses..............................   32,235    30,094    23,858
                                                 --------  --------  --------
  Operating income..............................   51,500    44,499    36,239
Other income (expense):
  Interest income from affiliates...............      --        --      1,683
  Interest income...............................    1,170       364       427
  Gain on property condemnation.................    1,493       --        --
  Gain on insurance proceeds....................      --      2,231       --
  Other income..................................      352       521       238
  Interest expense..............................  (20,350)  (19,810)  (14,067)
                                                 --------  --------  --------
Income before provision for taxes and minority
 interest.......................................   34,165    27,805    24,520
Provision for taxes.............................     (231)     (223)     (256)
                                                 --------  --------  --------
Income before minority interest.................   33,934    27,582    24,264
Income applicable to minority interest..........  (17,292)  (12,003)  (10,852)
                                                 --------  --------  --------
Net income...................................... $ 16,642  $ 15,579  $ 13,412
                                                 ========  ========  ========
Basic earnings per share........................ $   1.33  $   1.26  $   1.19
Weighted average number of shares...............   12,497    12,368    11,317
Diluted earnings per share...................... $   1.32  $   1.25  $   1.17
Weighted average number of shares...............   12,599    12,512    11,420
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       26
<PAGE>
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               (In thousands, except share and per share amounts)
 
<TABLE>
<CAPTION>
                                            Additional             Unamortized
                         Number of   Common  Paid in   Accumulated Restricted
                           Shares    Stock   Capital     Deficit      Stock     Total
                         ----------  ------ ---------- ----------- ----------- --------
<S>                      <C>         <C>    <C>        <C>         <C>         <C>
Balance at December 31,
 1995................... 10,621,975   $106   $114,121   $ (1,360)    $(2,569)  $110,298
 Amortization of
  restricted stock......        --     --         --         --        1,089      1,089
 Issuance of stock for
  acquisitions..........  1,577,820     16     40,771        --          --      40,787
 Issuance of restricted
  stock.................     82,000      1      1,878        --       (1,878)         1
 Exercise of stock
  options...............     21,925    --         446        --          --         446
 Distributions paid
  ($1.65 per share).....        --     --      (4,840)   (13,412)        --     (18,252)
 Allocation for minority
  interest in the
  Operating
  Partnership...........        --     --     (10,111)       --          --     (10,111)
 Net income.............        --     --         --      13,412         --      13,412
                         ----------   ----   --------   --------     -------   --------
Balance at December 31,
 1996................... 12,303,720    123    142,265     (1,360)     (3,358)   137,670
 Amortization of
  restricted stock......        --     --         --         --        1,532      1,532
 Issuance of restricted
  stock.................     52,000    --       1,840        --       (1,840)       --
 Forfeiture of
  restricted stock......    (20,000)   --        (570)       --          570        --
 Exercise of stock
  options...............     72,475      1      1,438        --          --       1,439
 Distributions paid
  ($1.69 per share).....        --     --      (5,332)   (15,579)        --     (20,911)
 Allocation for minority
  interest in the
  Operating
  Partnership...........        --     --        (419)       --          --        (419)
 Net income.............        --     --          --     15,579         --      15,579
                         ----------   ----   --------   --------     -------   --------
Balance at December 31,
 1997................... 12,408,195    124    139,222     (1,360)     (3,096)   134,890
 Amortization of
  restricted stock......        --     --         --         --        1,560      1,560
 Issuance of restricted
  stock.................     52,000    --       1,570        --       (1,570)       --
 Exercise of stock
  options...............     59,550      1      1,210        --          --       1,211
 Distributions paid
  ($1.73 per share).....        --     --      (6,346)   (15,282)        --     (21,628)
 Allocation for minority
  interest in the
  Operating
  Partnership...........        --     --        (451)       --          --        (451)
 Net income.............        --     --         --      16,642         --      16,642
                         ----------   ----   --------   --------     -------   --------
Balance at December 31,
 1998................... 12,519,745   $125   $135,205   $    --      $(3,106)  $132,224
                         ==========   ====   ========   ========     =======   ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       27
<PAGE>
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                For the year ended December
                                                            31,
                                                ------------------------------
                                                  1998       1997      1996
                                                ---------  --------  ---------
<S>                                             <C>        <C>       <C>
Cash flows from operating activities:
  Net income................................... $  16,642  $ 15,579  $  13,412
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Depreciation and amortization..............    27,079    24,758     19,124
    Amortization of restricted stock...........     1,560     1,532      1,089
    Minority interest in earnings..............    17,292    12,003     10,852
    Distributions from joint venture, net of
     equity in income..........................       393       124        --
    Gain on insurance proceeds.................       --     (2,231)       --
    Gain on property condemnation..............    (1,493)      --         --
    Gain on sale of properties.................       --       (158)    (1,199)
    Other adjustments..........................        11        71          5
    Changes in assets and liabilities:
      Other assets.............................    (2,331)    1,863       (591)
      Accounts payable and other liabilities...     2,378     2,480        866
      Due from/to affiliate....................    (1,198)     (445)       659
                                                ---------  --------  ---------
        Net cash provided by operating
         activities............................    60,333    55,576     44,217
                                                ---------  --------  ---------
Cash flows from investing activities:
  Purchase of available-for-sale securities....    (5,607)   (7,623)    (5,644)
  Proceeds from sale of available-for-sale
   securities..................................     5,526     6,694      6,167
  Issuance of mortgage note receivable.........   (22,649)      --         --
  Proceeds from mortgage notes receivable......       --        732     25,472
  Loan costs on mortgage note issued...........      (147)      --         --
  Proceeds from short-term investment..........       366       --         --
  Purchase of property and related assets......   (56,733)  (89,487)   (90,368)
  Purchase of property and related assets from
   affiliates..................................       --        --      (4,937)
  Investment in joint venture..................       (19)   (8,128)       --
  Proceeds from sale of properties and related
   assets......................................     1,780     3,404        829
                                                ---------  --------  ---------
        Net cash used by investing activities..   (77,483)  (94,408)   (68,481)
                                                ---------  --------  ---------
Cash flows from financing activities:
  Principal payments on notes payable..........  (114,559)  (83,300)  (111,952)
  Proceeds from notes payable..................    98,500   147,150    173,299
  Loan costs...................................       (15)     (106)      (530)
  Proceeds from Preferred Units, net of
   offering expenses...........................    73,010       --         --
  Repurchase of Common Units...................       --        --        (116)
  Proceeds from stock options exercised........     1,212     1,439        446
  Cash distributions...........................   (21,628)  (20,911)   (18,252)
  Limited partners' cash distributions.........   (19,357)  (14,966)   (14,496)
                                                ---------  --------  ---------
        Net cash provided by financing
         activities............................    17,163    29,306     28,399
                                                ---------  --------  ---------
Net increase (decrease) in cash and cash
 equivalents...................................        13    (9,526)     4,135
Cash and cash equivalents at beginning of
 period........................................     1,698    11,224      7,089
                                                ---------  --------  ---------
Cash and cash equivalents at end of period..... $   1,711  $  1,698  $  11,224
                                                =========  ========  =========
Supplemental cash flow information:
  Interest paid................................ $  20,232  $ 18,729  $  13,646
  Taxes paid...................................        38       261        265
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       28
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) Organization and Summary of Significant Accounting Policies
 
 a) Organization
 
  National Golf Properties, Inc. (the "Company") commenced operations
effective with the completion of its initial public stock offering (the
"Offering") of common stock (the "Common Stock"), on August 18, 1993. The
Company acquires and owns golf courses located throughout the United States.
At December 31, 1998, the Company leased all but five of its golf courses to
American Golf Corporation ("AGC") pursuant to long-term triple net leases (the
"Leases"). David G. Price, the Chairman of the Board of Directors of the
Company, owns approximately 2.8% of the Company's outstanding Common Stock and
approximately 17% of National Golf Operating Partnership, L.P. (the "Operating
Partnership") and a controlling interest in AGC. The Company owns
substantially all of the golf courses through its 58.5% general partner
interest in the Operating Partnership. On July 8, 1994, the Operating
Partnership acquired an 89% general partner interest in Royal Golf, L.P. II
("Royal Golf"). Royal Golf owns four golf courses on Hilton Head Island, South
Carolina. Unless the context otherwise requires, all references to the
Company's business and properties include the business and properties of the
Operating Partnership and Royal Golf.
 
  In conjunction with the formation of the Company and the Operating
Partnership, the partners of the entities transferring their interest in the
initial portfolio of golf courses (the "Initial Golf Courses") to the
Operating Partnership became limited partners in the Operating Partnership and
received units of common limited partnership interest in the Operating
Partnership (the "Common Units"). Their interest in the Initial Golf Courses
were carried over to the Operating Partnership on a historical cost basis
similar to pooling of interest accounting and became part of the beginning
balance of minority interest. Minority interest is adjusted for the limited
partners' proportionate share of net income of the Company and any additional
contributions or distributions to the limited partners.
 
  A Common Unit and a share of Common Stock of the Company have the same
economic characteristics inasmuch as they effectively share equally in the net
income or loss and any distributions of the Operating Partnership. The limited
partners of the Operating Partnership have the right, in each twelve-month
period ending August 18, to sell up to one-third of their Common Units or
exchange up to the greater of 75,000 Common Units or one-third of their Common
Units to the Company.
 
  In order for the Company to maintain its qualification as a real estate
investment trust ("REIT"), not more than 50% in value of its Common Stock may
be owned, directly or constructively, by five or fewer individuals. For the
purpose of preserving the Company's REIT qualification, the Certificate of
Incorporation prohibits direct or constructive ownership of more than 9.8% of
the Common Stock by any person. Thus, although a Common Unit is convertible
into a share of Common Stock, the conversion of the majority of the Common
Units owned by David G. Price is restricted by the Company and the ownership
limitations in order to preserve its REIT status.
 
  The consolidated financial statements include the accounts of the Company,
the Operating Partnership and Royal Golf. All significant intercompany
transactions and balances have been eliminated.
 
 b) Cash Equivalents
 
  The Company considers all money market funds with an original maturity of
three months or less at the date of purchase to be cash equivalents with cost
approximating market.
 
 c) Investments
 
  Debt securities that the Company expects to hold to maturity are classified
as held-to-maturity securities and reported at amortized cost. Debt securities
not classified as either held-to-maturity securities or bought and
 
                                      29
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(1) Organization and Summary of Significant Accounting Policies--(Continued)
 
 c) Investments--(Continued)
 
held principally for the purpose of selling them in the near term are
classified as available-for-sale securities and reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. Cost of investments sold is determined on
the average cost method.
 
 d) Concentration of Credit Risk
 
  Concentration of credit risk with respect to the Company's portfolio of 130
golf courses is limited due to the golf courses being geographically
diversified and located in 26 states. The distribution of the golf courses
reflects the Company's belief that geographic diversification helps insulate
the portfolio from regional economic and climatic influences. As of December
31, 1998, the Company had no significant concentration of credit risk.
 
  The Company has cash in financial institutions which is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per institution.
At December 31, 1998 and 1997, the Company had cash accounts in excess of FDIC
insured limits.
 
 e) Property
 
  Property is carried at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets as follows:
 
<TABLE>
     <S>                                                           <C>
     Buildings....................................................      30 years
     Ground improvements..........................................      20 years
     Furniture, fixtures & equipment.............................. 3 to 10 years
</TABLE>
 
The Leases presently provide that at the end or termination of the existing
Leases, all improvements and fixtures placed on the rental property become the
property of the Company.
 
  The Company assesses whether there has been an impairment in the value of
rental property by considering factors such as expected future operating
income, trends and prospects, as well as the effects of demand, competition
and other economic factors. Such factors include a lessee's ability to perform
its duties and pay rent under the terms of the lease. If the property was
leased at a significantly lower rent, the Company may recognize an impairment
loss if the income stream were not sufficient to recover its investment. Such
a loss would be determined as the difference between the carrying value,
including any allocated goodwill, and the fair value of the property, with the
carrying value of the intangible asset reduced first. The Company determines
whether there has been impairment by comparing the expected undiscounted
future cash flows from each golf course with the net carrying value for such
golf course, including any related intangible asset. Management believes no
impairment has occurred in its net property carrying values.
 
  When assets are sold or retired, the asset and related depreciation
allowance is eliminated from the records and any gain or loss on disposal is
included in operations.
 
 f) Income Taxes
 
  The Company qualifies as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"). A REIT will generally not be subject to federal income
taxation to the extent that it distributes at least 95% of its taxable income
to its stockholders and complies with other requirements. The Company paid
distributions to stockholders of $1.73 per share in 1998, of which $1.61
represents ordinary income and $0.12 represents return of capital on a tax
basis. On a book basis, calculated using basic earnings per share, $0.40 per
share represents
 
                                      30
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(1) Organization and Summary of Significant Accounting Policies--(Continued)
 
 f) Income Taxes--(Continued)
 
return of capital. In addition, on January 11, 1999, the Company declared a
quarterly distribution for the fourth quarter of 1998 of $0.44 per share to
stockholders of record on January 29, 1999, which was paid on February 15,
1999. The Company may be subject to federal alternative minimum tax in 1998.
The Company is also subject to
state income and franchise taxes in certain states in which it operates.
Therefore, a tax provision has been reflected for these income, franchise, and
alternative minimum taxes.
 
 g) Revenue Recognition
 
  The Company recognizes rental revenue on an accrual basis over the terms of
the Leases.
 
 h) Intangible Assets
 
  Included in other assets are intangible assets which consist of covenants
not to compete, goodwill and other intangibles. Intangible assets are carried
at cost less accumulated amortization and are amortized on a straight-line
basis. The covenants are amortized over their contractual lives which range
from three to 30 years. Goodwill, arising from golf course acquisitions, is
amortized over the life of the Leases (15 to 20 years). Other intangibles are
amortized over periods from one to ten years. The Company assesses whether
there has been an impairment in the value of intangible assets by considering
factors such as expected future operating income, trends and prospects, as
well as the effects of demand, competition and other economic factors. Such
factors include a lessee's ability to perform its duties and pay rent under
the terms of the lease. If the property was leased at a significantly lower
rent, the Company may recognize an impairment loss if the income stream is not
sufficient to recover its investment. Such a loss would be determined as the
difference between the carrying value, including any allocated goodwill, and
the fair value of the property, with the carrying value of the intangible
asset reduced first. The Company determines whether there has been impairment
by comparing the expected undiscounted future cash flow from each golf course
with the net carrying value for such golf course, including any related
intangible asset. Management believes no impairment in the carrying value of
its intangible assets has occurred. Accumulated amortization at December 31,
1998 and 1997, was approximately $5,117,000 and $4,318,000, respectively.
 
 i) 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 j) Fair Value of Financial Instruments
 
  To meet the reporting requirements of Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company calculates the fair value of financial instruments
and includes this additional information in the notes to the consolidated
financial statements when the fair value is different than the carrying value
of those financial instruments. When the fair value reasonably approximates
the carrying value, no additional disclosure is made. The estimated fair value
amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
 
                                      31
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(1) Organization and Summary of Significant Accounting Policies--(Continued)
 
 k) Earnings Per Share
 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 supersedes and simplifies the
existing computational guidelines under Accounting Principles Board ("APB")
Opinion No. 15, "Earnings Per Share." It was effective for financial
statements issued for periods ending after December 15, 1997. Among other
changes, SFAS No. 128 eliminates the presentation of primary earnings per
share and replaces it with basic earnings per share for which common stock
equivalents are not considered in the computation. It also revises the
computation of diluted earnings per share. The Company has adopted SFAS No.
128 and there is no material impact to the Company's earnings per share. The
Company's earnings per share have been restated for all periods presented to
be consistent with SFAS No. 128.
 
  The computation of diluted earnings per share is based on the weighted
average number of outstanding common shares during the period and the
incremental shares, using the treasury stock method, from stock options. The
incremental shares for the years ended December 31, 1998, 1997 and 1996 were
101,790, 143,697 and 103,365, respectively.
 
 l) Accounting for Stock-Based Compensation
 
  The Company measures compensation cost for their plans using the accounting
principles prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The pro forma disclosures of net income, basic earnings per share
and diluted earnings per share as if the fair value based method of accounting
defined in SFAS No. 123, "Accounting for Stock-Based Compensation" had been
applied, have been disclosed.
 
 m) Accounting for Internal Acquisition Costs
 
  In March 1998, the Emerging Issues Task Force of the FASB (the "EITF")
issued Issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions." This statement provides that internal acquisition
costs of identifying and acquiring operating properties should be expensed as
incurred. Prior to this statement, the only internal acquisition costs
capitalized by the Company were acquisition bonuses. This statement applies to
all internal acquisition costs incurred after March 19, 1998. There was no
material impact by the adoption of this statement to the Company's earnings
per share, financial conditions, or results of operations.
 
 n) Accounting for Contingent Rent
 
  In May 1998, the EITF issued Issue No. 98-9, "Accounting for Contingent Rent
in Interim Financial Periods." This statement provides that recognition of
contingent rental income should be deferred until specified targets that
trigger the contingent rent are achieved. This statement applies to all
contingent rental income effective with the second quarter of 1998. On a
quarterly basis, there was a material impact to the Company's earnings per
share, financial condition, and results of operations. Contingent rent not
recorded in the second or third quarters was recognized in the fourth quarter.
Therefore, on an annual basis, there was no impact to the Company's earnings
per share, financial condition, or results of operations. In November 1998,
Issue No. 98-9 was withdrawn by the EITF. However, the Company has continued
to account for contingent rent in accordance with Issue No. 98-9.
 
                                      32
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(1) Organization and Summary of Significant Accounting Policies--(Continued)
 
 o) Accounting for Derivative Instruments and Hedging Activities
 
  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. The accounting
for the changes in the fair values of such derivatives would depend on the use
of the derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for the Company's financial statements issued for periods beginning
January 1, 2000. The Company has not determined when it will implement
SFAS 133, however, there is no material impact anticipated to the Company's
financial condition or results of operations. However, there could be a
material impact on comprehensive income.
 
 p) Minority Interest
 
  The accompanying consolidated balance sheets and statements of stockholders'
equity have been restated for the years ended December 31, 1997 and 1996 to
reflect an accounting allocation for reporting purposes from additional paid
in capital to minority interest for the limited partners' interest in the net
assets of the Company after giving effect to their exchange rights of Common
Units into the Company's Common Stock. Generally accepted accounting
principles require the reporting of such exchange rights "as if converted."
This reallocation had no effect on earnings per share or results of operations
or allocations of net income to the general and limited partners of the
Operating Partnership. The reallocation at December 31, 1998, 1997, and 1996
was approximately $78.6 million, $78.1 million, and $77.7 million,
respectively.
 
 q) Segment Reporting
 
  During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 established standards
for disclosure about operating segments and related disclosures about products
and services, geographic areas, and major customers. The Company currently
operates in one business segment, the acquisition and ownership of golf course
properties. Additionally, the Company operates in one geographic area, the
United States. The revenues from one major lessee, AGC, amounted to
approximately 96%, 96% and 95% of total revenues for the years ended December
31, 1998, 1997 and 1996, respectively.
 
(2) Property Acquisitions and Sales
 
  In 1998, the Company purchased seven golf courses for an aggregate initial
investment of approximately $42.8 million. The acquisitions have been
accounted for utilizing the purchase method of accounting and, accordingly,
the acquired assets are included in the statement of operations from the date
of acquisition. The initial investment amount includes purchase price, closing
costs and other direct costs associated with the purchase. The aforementioned
golf courses are leased to AGC pursuant to long-term triple net leases.
 
<TABLE>
<CAPTION>
Acquisition                                                                  Initial
   Date                Course Name                       Location           Investment
-----------            -----------                       --------           ----------
                                                                          (In thousands)
<S>          <C>                                 <C>                      <C>
4/13/98      Ivy Hills Country Club              Cincinnati, Ohio            $ 1,806
             Majestic Oaks Golf Club (3
 7/8/98      Courses)                            Ham Lake, Minnesota          11,907
             Woodland Creek Golf Course          Andover, Minnesota              559
             The Club at Sonterra (2
 9/1/98      Courses)                            San Antonio, Texas           28,553
                                                                             -------
             Total Initial Investment................................        $42,825
                                                                             =======
</TABLE>
 
 
                                      33
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(2) Property Acquisitions and Sales--(Continued)
 
  In 1998, the Company recognized a gain on property condemnation of
approximately $1.5 million due to the State of North Carolina condemning four
golf holes at one of the Company's golf courses for a state highway project.
The State has not taken physical possession of the property because the
project has not been started. The Company purchased land, for approximately
$356,000, adjacent to the golf course sufficient to replace the condemned
holes.
 
  In 1997, the Company recognized a gain on insurance proceeds of
approximately $2.2 million due to a fire completely destroying a clubhouse at
one of the Golf Courses. The Company has applied the insurance proceeds to
rebuilding the clubhouse.
 
(3) Investments
<TABLE>
<CAPTION>
                                                   December 31,
                                            ---------------------------
                                                1998          1997
                                            ------------- -------------
                                             Cost  Market  Cost  Market Maturity
                                            ------ ------ ------ ------ --------
                                                  (In thousands)
<S>                                         <C>    <C>    <C>    <C>    <C>
Available-for-sale securities:
  Commercial Paper......................... $  --  $  --  $  107 $  107  1/1998
  Corporate Note...........................    --     --     200    200  1/1998
  U.S. Government and Agency Obligation....    --     --     908    908  1/1998
  Commercial Paper.........................  1,095  1,095    --     --   1/1999
  Corporate Note...........................    200    200    --     --   3/1999
                                            ------ ------ ------ ------
    Total.................................. $1,295 $1,295 $1,215 $1,215
                                            ====== ====== ====== ======
</TABLE>
 
  In 1998 and 1997, available-for-sale securities were sold resulting in
proceeds of $5,526,000 and $6,694,000, respectively. There were no gross
realized gains or losses in 1998 and 1997.
 
(4) Mortgage Notes Receivable
 
  On August 20, 1998, the Company made a participating mortgage loan of
approximately $22.6 million to an unrelated entity that owns Badlands Golf
Course in Las Vegas, Nevada (the "Badlands Mortgage"). The borrower may prepay
approximately $9.6 million of the principal amount. As part of the loan
agreement, the Company has agreed to loan an additional $315,000 to the
borrower to be used for capital improvements at the golf course.
 
  Under the terms of the participating mortgage loan, the Company will receive
minimum annual base interest equal to 8.75% of the principal amount. The
minimum interest will increase during each of the first five years of the 15-
year term of the loan. In addition, a participating interest feature will
allow the Company to participate in growth in revenues at the golf course and
a portion of the appreciation in the fair market value of the golf course.
Interest income from the Badlands Mortgage for the year ended December 31,
1998 was approximately $738,000.
 
  The Company had fixed-term options to acquire four golf courses (the "Option
Golf Courses") in exchange for Common Units. The Operating Partnership made
participating mortgage loans of approximately $25.2 million at the time of the
Offering (the "Participating Mortgage Loans") to David G. Price and one of his
affiliates (the other partner in the affiliate is Richard C. Price, the
President of the Company at the time the Participating Mortgage Loans were
made) that owned the Option Golf Courses and were collateralized by first
mortgage liens
 
                                      34
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(4) Mortgage Notes Receivable--(Continued)
 
on such Option Golf Courses. Interest was payable monthly and the interest
rate for 1996 was 9.28%. During 1996, the Participating Mortgage Loans were
paid off and the Company exercised the options on the Option Golf Courses.
 
  On March 13, 1995, the Company sold Hidden Hills Country Club in Stone
Mountain, Georgia for approximately $3.2 million. The Company provided seller
financing in the form of a mortgage loan in the amount of $2.2 million at an
initial interest rate of 11% per annum and a maturity date of March 2000 (the
"Hidden Hills Mortgage"). In March 1998, the interest rate was increased to
11.5% per annum, and in March 1999, the interest rate will be increased to 12%
per annum. Interest income from the Hidden Hills Mortgage for the years ended
December 31, 1998, 1997 and 1996 was $251,000, $242,000, and $242,000,
respectively.
 
  On January 19, 1996, the Company sold Wootton Bassett Golf Club in
Wiltshire, United Kingdom for approximately $2 million. The Company provided
seller financing in the form of a mortgage loan in the amount of approximately
$900,000 at an interest rate of 6% per annum and a maturity date of January
1999 (the "Wootton Bassett Mortgage"). Interest income from the Wootton
Bassett Mortgage for the years ended December 31, 1997 and 1996 was
approximately $8,000 and $47,000, respectively. In April 1997, the Wootton
Bassett Mortgage was paid in full.
 
  The market value of mortgage notes receivable at December 31, 1998 and 1997
is estimated to be approximately $24,871,000 and $2,409,000, respectively,
based on current interest rates for comparable loans.
 
(5) Investment in Joint Venture
 
  On September 8, 1997, the Operating Partnership acquired a 50% general
partner interest in Pumpkin Ridge Joint Venture ("Pumpkin Ridge") for
approximately $8.1 million. Pumpkin Ridge owns two golf courses in Cornelius,
Oregon. The Company accounts for its investment in Pumpkin Ridge under the
equity method of accounting. The aforementioned golf courses are leased to AGC
pursuant to a long-term triple net lease.
 
(6) Treasury Lock Swap Transactions
 
  On June 15, 1998, in anticipation of the Operating Partnership placing $100
million of fixed-rate, ten-year notes or some similar security, the Operating
Partnership entered into a $100 million treasury lock swap transaction with a
financial institution in order to hedge its exposure to interest rate
fluctuations. The treasury lock matures on February 1, 1999. Under this
agreement, the Operating Partnership pays or receives an amount equal to the
difference between the treasury lock rate and the market rate on the date of
settlement, based on the principal of $100 million. The realized gain or loss
on the transaction at the settlement date will be recorded on the balance
sheet and amortized to interest expense over the period of the related notes,
if issued. If the notes or similar securities are not issued, the realized
gain or loss on the transaction at the settlement date will be recorded in the
statement of operations. At December 31, 1998, the treasury lock rate was
higher than the market rate. Therefore, the Operating Partnership has an
unrealized loss of approximately $6.9 million. This amount has been recorded
in the consolidated balance sheet as other assets, with a corresponding amount
recorded as other liabilities.
 
  During 1998, the Operating Partnership entered into two other treasury lock
swap transactions, which resulted in approximately $215,000 and $151,000 being
received by the Operating Partnership. These amounts are being amortized as a
credit to interest expense over a period of ten years.
 
                                      35
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(7) Notes Payable
 
  Notes payable consist of the following:
 
<TABLE>
<CAPTION>
                                                       December 31,
                              Interest   Interest    -----------------
Type of Collateral              Rate      Payment      1998     1997   Maturity
------------------            -------- ------------- -------- -------- --------
                                                      (In thousands)
<S>                           <C>      <C>           <C>      <C>      <C>
Uncollateralized note........   6.88%     Monthly    $    --  $ 17,000  1/1998
Uncollateralized note........   6.92%     Monthly         --     5,000  1/1998
Uncollateralized note........   6.95%     Monthly         --    33,000  1/1998
Uncollateralized note........   7.01%     Monthly         --     5,500  1/1998
Uncollateralized note........   7.12%     Monthly         --     9,500  1/1998
Uncollateralized note........   7.13%     Monthly         --    10,000  1/1998
Uncollateralized note........   8.50%    Quarterly        --     7,000  1/1998
Uncollateralized note........   6.88%                     --     4,000  2/1998
Uncollateralized note........   6.48%     Monthly       9,500      --   1/1999
Uncollateralized note........   6.55%     Monthly      10,500      --   1/1999
Uncollateralized note........   6.34%     Monthly       5,000      --   1/1999
Uncollateralized note........   7.75%    Quarterly      4,000      --   1/1999
Uncollateralized note........   6.38%     Monthly      13,500      --   2/1999
Collateralized note..........   5.50%    Quarterly      4,500    4,500  2/1999
Uncollateralized note........   6.41%     Monthly      25,500      --   3/1999
Uncollateralized note........   6.35%     Monthly      10,000      --   3/1999
Collateralized note..........   6.00%     Monthly       1,500    1,447  8/2000
Collateralized note..........   5.50%    Quarterly        474      646  5/2001
Collateralized note..........   6.60%    Quarterly     20,000   20,000  7/2001
Collateralized note..........   6.00%    Annually       3,750    3,587 10/2004
Uncollateralized notes.......   8.68%  Semi-annually   47,295   48,705 12/2004
Uncollateralized notes.......   8.73%  Semi-annually   48,024   49,369  6/2005
Uncollateralized notes.......   7.90%  Semi-annually   40,000   40,000  6/2006
Uncollateralized notes.......                           2,994    2,779  7/2006
Uncollateralized notes.......   8.00%  Semi-annually   35,000   35,000 12/2006
Uncollateralized notes.......   8.00%    Quarterly      1,868    1,999  1/2008
                                                     -------- --------
                                                     $283,405 $299,032
                                                     ======== ========
</TABLE>
 
  The following is a schedule of maturities on notes payable for the next five
years ending December 31 and in total thereafter:
 
<TABLE>
<CAPTION>
                                                                     Amount
                                                                  -------------
                                                                  (In thousands)
       <S>                                                        <C>
       1999......................................................      9,918
       2000......................................................      8,539
       2001......................................................     26,013
       2002......................................................     85,145
       2003......................................................      7,715
       Thereafter................................................    146,075
                                                                    --------
                                                                    $283,405
                                                                    ========
</TABLE>
 
                                      36
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(7) Notes Payable--(Continued)
 
  The note agreements contain, among other things, covenants restricting the
sale of property and certain financial ratios and reporting requirements.
 
  The Company currently has a $100 million credit facility with a group of
four commercial banks, which terminates in April 2002. The Company has two
interest rate options under the credit facility depending upon the length of
time the advances are outstanding. For advances which will be outstanding for
less than a month, the advances bear interest at prime. At December 31, 1998,
such rate was 7.75%. For advances which will be outstanding for one month or
more, the advances bear maximum interest at a floating rate equal to LIBOR
plus a spread of 1.125%. The spread will be reduced upon the Company's receipt
of specified credit ratings. There were outstanding advances of $78 million
under this credit facility as of December 31, 1998. The Company intends to
roll over the advances due in 1999 to a future period.
 
  In connection with the purchase of Eagle Brook Country Club during 1997, the
Company entered into a three year collateralized note for $1.5 million with
the seller of the property. During the first year of the note, no interest was
paid or accrued on the outstanding principal balance. Thereafter, interest
accrues on the outstanding principal balance at the rate of 6% per annum. The
interest rate used to discount the note was 6%. The discount was amortized
over the first year of the note using the effective interest method. The note
balance at December 31, 1998 was $1.5 million.
 
  In connection with the purchase of Gettysvue Polo, Golf & Country Club
during 1997, the Company entered into a seven-year, interest bearing,
collateralized note for $3,750,000 with the seller of the property. During the
first year of the note, no interest was paid or accrued on the outstanding
principal balance. For years two through four, the interest rate is six
percent per annum. For years five through seven, the interest rate is 8% per
annum. The interest rate used to discount the note was 6%. The discount was
amortized over the first year of the note using the effective interest method.
The note balance at December 31, 1998 was $3,750,000.
 
  In 1996, the Operating Partnership placed $75 million of fixed-rate,
uncollateralized notes due 2006 with a group of institutional investors. The
notes were issued in two series. The first note series in the amount of
$40 million was issued in July 1996 with a fixed interest rate of 7.9%, and
the second note series in the amount of $35 million was issued in December
1996 with a fixed interest rate of 8%. The Operating Partnership applied the
net proceeds from the $75 million notes to repay bank debt and to partially
finance the acquisition of two golf courses.
 
  In connection with the combined purchase of Monterey Country Club and Palm
Valley Country Club during 1995, the Company entered into an eleven-year, non-
interest bearing, uncollateralized note for $4,000,000 with the seller of the
properties. The interest rate used to discount the note was 7.75%. The
discount is being amortized over the life of the loan using the effective
interest method. The discounted note balance at December 31, 1998 was
approximately $2,994,000. The unamortized discount balance at December 31,
1998 was approximately $1,006,000.
 
  In 1994, the Operating Partnership placed $100 million of fixed-rate,
uncollateralized notes due 2004 and 2005 with a group of institutional
investors. The notes were issued in two series of $50 million. The first note
series was issued with a fixed interest rate of 8.68%, and the second note
series was issued with a fixed interest rate of 8.73%. With respect to the $50
million first note series, the Operating Partnership received $30 million in
December 1994 and $20 million in January 1995. With respect to the $50 million
second note series, the Operating Partnership received $50 million in June
1995. The Operating Partnership applied the net proceeds from the $100 million
notes to repay bank debt, to finance acquisitions of golf courses and related
facilities and properties, and for general partnership purposes.
 
                                      37
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(7) Notes Payable--(Continued)
 
  A limited partner who owns or controls 75,003 Common Units is the holder of
a promissory note for approximately $1.9 million that the Company assumed at
the time of the Offering in connection with the Company's acquisition of four
golf courses from a corporation that previously had been 50% owned by such
limited partner. The interest rate is 8% per annum with a maturity date in
January 2008. The Company made interest payments in 1998 and 1997 of
approximately $156,000 and $166,000, respectively.
 
  The market value of notes payable at December 31, 1998 and 1997 is estimated
to be approximately $292,348,000 and $310,830,000, respectively, based on
current interest rates for comparable loans. The net book value at December
31, 1998 of the assets collateralizing the notes payable is $60.1 million.
 
(8) Commitments and Contingencies
 
  The Company is required under the Leases to pay for various remaining
capital improvements totaling approximately $22.3 million, $21.3 million of
which will be paid during the next two years. Any subsequent capital
improvements to these golf courses are the responsibility of the Lessees.
 
  In addition, the Company leases the land associated with Bear Creek Golf
World from a local municipality pursuant to a ground lease. At December 31,
1998, there was a net book value of approximately $2,666,000 of improvements
at this property included in buildings, ground improvements and furniture,
fixtures and equipment on the balance sheet. At the termination of the lease
in June 2022, all fixed improvements are surrendered to the local
municipality. Under the terms of the ground lease, the Company remits a
percentage of the green fees and net profits from the sale of food and
beverages to the local municipality. For the years ended December 31, 1998,
1997 and 1996, the ground lease expense was approximately $375,000, $413,000
and $351,000, respectively.
 
  Also, the Company leases a portion of land associated with Mesquite Golf &
Country Club from various landowners. The leases for this property expire
between 2041 and 2043. AGC, as the lessee under the Lease, is required to make
all ground lease payments.
 
(9) Preferred Units
 
  On March 4, 1998, the Operating Partnership completed the private placement
of 1,200,000 8% Series A Cumulative Redeemable Preferred Units ("Preferred
Units"), representing limited partnership interests in the Operating
Partnership, to an institutional investor in exchange for a contribution to
the Operating Partnership of $60 million. The Preferred Units, which may be
called by the Operating Partnership at par on or after March 4, 2003, have no
stated maturity or mandatory redemption and pay a cumulative, quarterly
dividend at an annualized rate of 8%. The dividends attributable to such
Preferred Units have been reported as a component of minority interest in the
related financial statements. The Preferred Units are not convertible into
Common Stock, but are convertible into preferred stock of the Company. The
Operating Partnership used $58 million of the approximately $58.5 million of
net proceeds from such private placement to reduce outstanding indebtedness
under the Operating Partnership's revolving credit facility.
 
  Also, on April 20, 1998, the Operating Partnership completed on the same
terms as above the private placement of an additional 300,000 Preferred Units
to the same institutional investor in exchange for a contribution to the
Operating Partnership of $15 million. The Operating Partnership used $14.5
million of the approximately $14.6 million of net proceeds from such private
placement to reduce outstanding indebtedness under the Operating Partnership's
revolving credit facility.
 
                                      38
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(10) Lease Rental Agreements
 
  Future minimum rents to be received by the Company under the Leases for the
next five years ending December 31 and in total thereafter are as follows:
 
<TABLE>
<CAPTION>
                                                                     Amount
                                                                  -------------
                                                                  (In thousands)
       <S>                                                        <C>
       1999......................................................  $   81,285
       2000......................................................      81,285
       2001......................................................      81,285
       2002......................................................      81,285
       2003......................................................      81,285
       Thereafter................................................     619,113
                                                                   ----------
                                                                   $1,025,538
                                                                   ==========
</TABLE>
 
  The minimum rent for the first year for each golf course under the Leases is
initially set at a fixed amount. Thereafter, generally with respect to the
Leases for the Initial Golf Courses, minimum rent is increased each year by 4%
or, if lower, 150% of the annual percentage increase in the Consumer Price
Index ("CPI") (the "Base Rent Escalation"). For these Leases, generally
percentage rent is paid to the Company each year in the amount, if any, by
which the sum of 35% of Course Revenue in excess of a baseline amount plus 5%
of Other Revenue in excess of a baseline amount exceeds the cumulative Base
Rent Escalation since the commencement date of such Leases. "Course Revenue"
is generally defined in the Leases to include all revenue received from the
operation of the applicable golf course, including revenues from memberships,
initiation fees, dues, green fees, guest fees, driving range charges and golf
cart rentals, but excluding those revenues described as Other Revenue. "Other
Revenue" is generally defined in the Leases to include all revenue received
from food and beverage and merchandise sales and other revenue not directly
related to golf activities. AGC has options to extend the term of each lease
for one to three five-year terms. Generally, for the Leases entered into
subsequent to the Offering, the rent is based upon the greater of (a) the
minimum base rent or (b) a specified percentage of Course Revenue and Other
Revenue. The minimum base rent under these Leases is increased for specified
years during the Lease term based upon increases in the CPI, provided that
each such annual CPI increase shall not exceed five percent. Percentage rent
income for the years ended December 31, 1998, 1997 and 1996 was approximately
$6,691,000, $5,920,000 and $4,289,000, respectively.
 
(11) Stock Options and Awards
 
  The Company has established the 1993 Stock Incentive Plan (the "1993 Plan")
and the 1997 Equity Participation Plan (the "1997 Plan"), under which
executive officers and other key employees of the Company and AGC may be
granted stock options or restricted stock. Restricted stock is subject to
restrictions determined by the Company's Compensation Committee. The
Compensation Committee, comprised of Directors who are not officers of the
Company, determines compensation, including awards under the 1993 Plan and
1997 Plan, for the Company's executive officers. The shares of restricted
stock will be sold at a purchase price equal to $.01 and will vest 20% per
year over a five year period. Restricted stock has the same dividend and
voting rights as other common stock and is considered to be currently issued
and outstanding. Compensation expense is determined by reference to the market
value on the date of grant and is being amortized on a straight-line basis
over the five year vesting period. Such expense amounted to approximately
$1,560,000, $1,532,000 and $1,089,000, for the years ended December 31, 1998,
1997, and 1996, respectively.
 
                                      39
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(11) Stock Options and Awards--(Continued)
 
  Stock options vest at 25% per year over four years and are exercisable at
the market value on the date of grant. The options' maximum term is ten years.
The following table summarizes the restricted stock and stock option
transactions pursuant to the 1993 Plan for the years ended December 31, 1998,
1997 and 1996:
 
<TABLE>
<CAPTION>
                            Number of Shares-   Number of      Weighted Average
                            Restricted Stock  Shares-Options Option Exercise Price
                            ----------------- -------------- ---------------------
   <S>                      <C>               <C>            <C>
   Outstanding at December
    31, 1995...............      143,000         503,600            $20.32
     Granted...............       70,000          40,000             25.88
     Vested................      (46,500)            --                --
     Cancelled.............          --          (34,075)            21.70
     Exercised.............          --          (21,925)            20.38
                                 -------         -------            ------
   Outstanding at December
    31, 1996...............      166,500         487,600            $20.68
     Granted...............       50,000             --                --
     Vested................      (56,500)            --                --
     Forfeited.............      (20,000)        (20,000)            25.88
     Exercised.............          --          (72,475)            19.86
                                 -------         -------            ------
   Outstanding at December
    31, 1997...............      140,000         395,125            $20.57
     Vested................      (66,500)            --                --
     Cancelled.............          --           (1,600)            20.38
     Exercised.............          --          (59,550)            20.34
                                 -------         -------            ------
   Outstanding at December
    31, 1998...............       73,500         333,975            $20.61
                                 =======         =======            ======
</TABLE>
 
<TABLE>
<CAPTION>
                                                   Number
                                                     of      Weighted Average
                                                   Shares  Option Exercise Price
                                                   ------- ---------------------
   <S>                                             <C>     <C>
   Options exercisable at:
     December 31, 1998............................ 323,975        $20.45
     December 31, 1997............................ 371,375        $20.44
     December 31, 1996............................ 327,575        $20.23
</TABLE>
 
  The range of exercise prices for the options outstanding at December 31,
1998 is $18.50 through $25.875 with a weighted average remaining contractual
life of 4.9 years. The range of exercise prices for options exercisable at
December 31, 1998 is $18.50 through $25.875 with a weighted average remaining
contractual life of 4.8 years.
 
  As of December 31, 1998, a total of 779,575 additional shares remain
unissued under the 1993 Plan. There were 1,600,000 shares originally reserved
for issuance under the 1993 Plan. When the 1997 Plan was established, the 1993
Plan was terminated regarding future grants of restricted stock and stock
options.
 
                                      40
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(11) Stock Options and Awards--(Continued)
 
  The following table summarizes the restricted stock and stock option
transactions pursuant to the 1997 Plan for the years ended December 31, 1998
and 1997.
 
<TABLE>
<CAPTION>
                            Number of Shares-   Number of      Weighted average
                            Restricted Stock  Shares options option exercise price
                            ----------------- -------------- ---------------------
   <S>                      <C>               <C>            <C>
   Granted.................         --            22,500            $30.06
                                 ------           ------            ------
     Outstanding at
      December 31, 1997....         --            22,500             30.06
     Granted...............      50,000           50,000             30.31
                                 ------           ------            ------
   Outstanding at December
    31, 1998...............      50,000           72,500            $30.23
                                 ======           ======            ======
</TABLE>
 
<TABLE>
<CAPTION>
                                                  Number     Weighted Average
                                                 of Shares Option Exercise Price
                                                 --------- ---------------------
   <S>                                           <C>       <C>
   Options exercisable at:
     December 31, 1998..........................   5,625          $30.06
</TABLE>
 
  The range of exercise prices for the options outstanding at December 31,
1998 is $30.0625 through $30.3125 with a weighted average remaining
contractual life of 9 years. The exercise price for the options exercisable at
December 31, 1998 is $30.06 with a remaining contractual life of 8.8 years.
 
  As of December 31, 1998, a total of 677,500 additional shares remain
reserved for issuance under the 1997 Plan. There were 800,000 shares
originally reserved for issuance under the 1997 Plan.
 
  The Company also has adopted the 1995 Independent Director Equity
Participation Plan, pursuant to which directors of the Company may be granted
stock options and restricted stock. The shares of restricted stock will be
sold at a purchase price equal to $.01 and will vest at the earlier of (i) the
fifth anniversary of the date of grant or (ii) the directors' normal
retirement at or after age 65. Restricted stock has the same dividend and
voting rights as other common stock and is considered to be currently issued
and outstanding. Stock options vest on the first anniversary of the date on
which the option was granted and are exercisable at the market value on the
date of grant. The options' maximum term is ten years. The following table
summarizes the restricted stock and stock option transactions pursuant to the
1995 Independent Director Equity Participation Plan for the years ended
December 31, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                            Number of Shares-   Number of     Weighted Average
                            Restricted Stock  Share-Options Option Exercise Price
                            ----------------- ------------- ---------------------
   <S>                      <C>               <C>           <C>
   Granted.................      12,000          24,000            $23.42
                                 ------          ------            ------
   Outstanding at December
    31, 1996...............      12,000          24,000            $23.42
   Granted.................       2,000           8,000             31.50
                                 ------          ------            ------
   Outstanding at December
    31, 1997...............      14,000          32,000            $25.44
   Granted.................       2,000           8,000             27.25
                                 ------          ------            ------
   Outstanding at December
    31, 1998...............      16,000          40,000            $25.80
                                 ======          ======            ======
</TABLE>
 
<TABLE>
<CAPTION>
                                                  Number     Weighted Average
                                                 of Shares Option Exercise Price
                                                 --------- ---------------------
   <S>                                           <C>       <C>
   Options exercisable at:
     December 31, 1998..........................  32,000          $25.44
     December 31, 1997..........................  24,000          $23.42
     December 31, 1996..........................  16,000          $20.94
</TABLE>
 
                                      41
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(11) Stock Options and Awards--(Continued)
 
  The range of exercise prices for the options outstanding at December 31,
1998 is $19.75 through $31.50 with a weighted average remaining contractual
life of 8 years. The range of exercise prices for options exercisable at
December 31, 1998 is $19.75 through $31.50 with a weighted average remaining
contractual life of 7.5 years.
 
  As of December 31, 1998, a total of 92,000 shares remain reserved for
issuance under the 1995 Independent Director Equity Participation Plan. There
were 148,000 shares originally reserved for issuance under the 1995
Independent Director Equity Participation Plan.
 
  The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and will continue to use the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1998 and 1997 consistent with the provisions of SFAS
No. 123, the Company's net income, basic earnings per share and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
 
<TABLE>
<CAPTION>
                                               For the year ended December 31,
                                              ---------------------------------
                                                    1998             1997
                                              ---------------- ----------------
                                               (In thousands, except per share)
   <S>                                        <C>              <C>
   Net income, as reported................... $         16,642 $         15,579
   Net income, pro forma.....................          $16,479 $         15,501
   Basic earnings per share, as reported..... $           1.33 $           1.26
   Basic earnings per share, pro forma....... $           1.32 $           1.25
   Diluted earnings per share, as reported... $           1.32 $           1.25
   Diluted earnings per share, pro forma..... $           1.31 $           1.24
</TABLE>
 
  The weighted average fair value of options granted during 1998 and 1997 are
$6.55 and $7.10, respectively. The fair value of each option grant issued in
1998 and 1997 is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: (a)
dividend yield of 1.5% in 1998 and 1.6% in 1997, (b) expected volatility of
the Company's stock of 20.6% in 1998 and 21.5% in 1997, (c) a risk free
interest rate based on U.S. Zero Coupon Bonds with time of maturity
approximately equal to the options' expected time to exercise and (d) expected
option lives of four years for options granted in 1998 and 1997.
 
(12) 401(k) Plan
 
  The Company established a qualified retirement plan designed to qualify
under Section 401(k) of the Code (the "401(k) Plan"). The 401(k) Plan allows
participants to defer up to 10% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts. Matching contributions may be made
in amounts and at times determined by the Company. The 401(k) Plan provides
for matching contributions by the Company in an amount equal to fifty-cents
for each one dollar of participant contributions up to a maximum of three
percent of the participant's salary per year. Participants received credit for
employment with the predecessors of the Company and affiliates. Amounts
contributed by the Company for a participant will vest over five years.
Employees of the Company will be eligible to participate in the 401(k) Plan if
they meet certain requirements concerning minimum age and period of credited
service.
 
  For the years ended December 31, 1998, 1997 and 1996 the Company's
contributions to the 401(k) Plan were approximately $21,000, $21,000 and
$14,000, respectively.
 
 
                                      42
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(13) Deferred Compensation Plan
 
  During 1997, the Company established a non-qualified deferred compensation
plan under which key executives of the Company may elect to defer receiving up
to 100% of their compensation in any one year until a later year. The
participants' contributions to the deferred compensation plan were invested in
the Company's Common Stock or additional investment options. The assets and
income from the deferred compensation trust are recorded on the Company's
books.
 
(14) Related Party Transactions
 
  The Company has in the past and will continue to identify golf courses it
seeks to acquire for the purpose of leasing such courses to AGC and other golf
course operators. The Company evaluates potential golf course acquisitions
based on a golf course's ability to generate cash flows sufficient to enable
an operator to operate the course profitably and provide the Company its
desired rate of return on its capital investment. Such evaluation is integral
to the Company's determination of the price it is willing to pay for a
particular course. The Company's acquisition of a course is recorded in the
Company's financial statements at cost and the value of such course then is
evaluated periodically to determine its carrying value based on the cash flow
from the lease of such property. Because AGC may be deemed to be an affiliate
of the Company, the Company's leases with AGC may not reflect arms-length
transactions. As a result, there is a risk that the terms of such leases are
not as favorable to the Company as the terms would have been if the Company
leased its golf courses to unaffiliated operators and, if the Company could
have obtained more favorable terms, that the Company's financial statements
understate the returns that the Company could obtain on leases of such
properties. It is management's belief, however, that the terms and conditions
of its leases with AGC are no less favorable to the Company than the terms and
conditions that the Company could obtain if it leased its golf courses to
operators other than AGC.
 
(15) Statement of Cash Flows--Supplemental Disclosures
 
  Non-cash transactions for the year ended December 31, 1997 include
approximately $5 million of golf course acquisitions which were financed by
notes payable.
 
  Non-cash transactions for the year ended December 31, 1996 include (i)
approximately $40.8 million of golf course acquisitions which were financed by
the issuance of 1,577,820 shares of Common Stock; (ii) the assumption of
approximately $25.2 million of debt; (iii) approximately $1.3 million in
capital improvements accrued but not paid; (iv) approximately $1.5 million of
golf course acquisitions which were financed by the issuance of 61,339 Common
Units; and (v) approximately $900,000 in seller financing related to the sale
of Wootton Bassett Golf Club by the Company.
 
(16) Other Data
 
  AGC is the lessee of all but five of the golf courses in the Company's
portfolio. AGC is a golf course management company that operates a diverse
portfolio of golf courses for a variety of golf course owners including
municipalities, counties and others. AGC does not own any golf courses, but
rather manages and operates golf courses either as a lessee under leases,
generally triple net, or pursuant to management agreements. AGC derives
revenues from the operation of golf courses principally through receipt of
green fees, membership initiation fees, membership dues, golf cart rentals,
driving range charges and sales of food, beverages and merchandise.
 
  Based on recent Securities and Exchange Commission pronouncements, AGC
changed its accounting policy for member initiation fees to defer such
revenues and recognize them on a straight-line basis over the expected
 
                                      43
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(16) Other Data--(Continued)
 
average life of active membership. Accordingly, AGC's consolidated financial
statements have been retroactively adjusted to reflect this change for all
periods presented.
 
  The following table sets forth certain condensed financial information
concerning AGC.
 
<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                1998     1997
                                                              -------- --------
                                                                (In thousands)
   <S>                                                        <C>      <C>
   Current assets............................................ $ 82,809 $ 79,692
   Non-current assets........................................  163,629  147,423
                                                              -------- --------
     Total assets............................................ $246,438 $227,115
                                                              ======== ========
   Total current liabilities................................. $ 84,893 $ 70,411
   Total long-term liabilities...............................  147,667  128,197
   Minority interest.........................................      503      501
   Total shareholders' equity................................   13,375   28,006
                                                              -------- --------
     Total liabilities and shareholders' equity.............. $246,438 $227,115
                                                              ======== ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                          For the year ended
                                                             December 31,
                                                      --------------------------
                                                        1998     1997     1996
                                                      -------- -------- --------
                                                            (In thousands)
   <S>                                                <C>      <C>      <C>
   Total revenues.................................... $575,853 $517,131 $427,743
                                                      -------- -------- --------
   Net income........................................ $  4,746 $ 12,323 $  4,343
                                                      ======== ======== ========
</TABLE>
 
  This accounting change resulted in a decrease in AGC's retained earnings of
$49,952,000, $41,172,000 and $34,315,000 as of December 31, 1998, 1997 and
1996, respectively. This impact did not have any affect on the Company's
consolidated financial statements.
 
(17) Quarterly Financial Information (Unaudited)
 
  Summarized quarterly financial data for the years ended December 31, 1998
and 1997 is as follows (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                    Quarter ended
                                      -----------------------------------------
              Fiscal 1998             March 31 June 30 September 30 December 31
              -----------             -------- ------- ------------ -----------
   <S>                                <C>      <C>     <C>          <C>
   Revenues.......................... $19,898  $18,797   $19,671      $25,369
   Operating income.................. $11,926  $11,161   $11,658      $16,755
   Net income........................ $ 3,711  $ 3,504   $ 3,094      $ 6,333
   Basic earnings per share.......... $  0.30  $  0.28   $  0.25      $  0.51
   Diluted earnings per share........ $  0.29  $  0.28   $  0.25      $  0.50
 
<CAPTION>
                                                    Quarter ended
                                      -----------------------------------------
              Fiscal 1997             March 31 June 30 September 30 December 31
              -----------             -------- ------- ------------ -----------
   <S>                                <C>      <C>     <C>          <C>
   Revenues.......................... $17,449  $18,731   $19,335      $19,078
   Operating income.................. $10,317  $11,479   $11,494      $11,209
   Net income........................ $ 3,278  $ 4,087   $ 3,752      $ 4,462
   Basic earnings per share.......... $  0.27  $  0.33   $  0.30      $  0.36
   Diluted earnings per share........ $  0.26  $  0.33   $  0.30      $  0.36
</TABLE>
 
                                      44
<PAGE>
 
                        NATIONAL GOLF PROPERTIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(17) Quarterly Financial Information (Unaudited)--(Continued)
 
  As a result of EITF 98-9, no percentage rent and only approximately $231,000
of percentage rent was recognized in the second and third quarters of 1998,
respectively. Otherwise, the Company would have recorded percentage rent in
the second and third quarters of approximately $1,808,000 and $1,981,000,
respectively.
 
(18) Pro Forma Financial Information (Unaudited)
 
  The pro forma financial information set forth below is presented as if the
1998 acquisitions (Note 2) had been consummated as of January 1, 1997.
 
  The pro forma financial information is not necessarily indicative of what
actual results of operations of the Company would have been assuming the
acquisitions had been consummated as of January 1, 1997, nor does it purport
to represent the results of operations for future periods (in thousands,
except per share amounts).
 
<TABLE>
<CAPTION>
                                                                 For the year
                                                                ended December
                                                                      31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
   <S>                                                          <C>     <C>
   Revenues from rental property............................... $85,897 $78,509
   Net income.................................................. $16,402 $14,952
   Basic earnings per share.................................... $  1.31 $  1.21
   Diluted earnings per share.................................. $  1.30 $  1.20
</TABLE>
 
  The pro forma financial information includes the following adjustments: (i)
an increase in depreciation and amortization expense; (ii) an increase in
interest expense; and (iii) a decrease in income applicable to minority
interest.
 
(19) Subsequent Events (Unaudited)
 
  On January 6, 1999, the Company purchased Beaver Brook Country Club located
in Clinton, New Jersey and The Classic Golf Club located in Spanaway,
Washington for a combined purchase price of approximately $10.4 million.
 
  On January 11, 1999, the Company declared a quarterly distribution for the
fourth quarter of 1998 of $0.44 per share to stockholders of record on January
29, 1999, which was paid on February 15, 1999.
 
  On February 1, 1999, the Company extended the treasury lock until May 3,
1999.
 
  On March 31, 1999, the Company entered into a new $300 million unsecured
revolving credit facility with a group of lenders. Advances under the credit
facility bear interest at the Administrative Agent's alternate base rate plus
the then-applicable base rate margin or, at the option of the Company, LIBOR
plus the then-applicable LIBOR rate margin. The Administrative Agent's
alternate base rate for any day means the greater of (i) a rate per annum
equal to the corporate base rate of interest announced by the Administrative
Agent from time to time, and (ii) the federal funds rate as published by the
Federal Reserve Bank plus one-half percent (0.50%) per annum. The amount of
the base rate margin and LIBOR rate margin vary depending upon the amount of
the Company's outstanding indebtedness compared to its capitalization. The
initial rate of interest for borrowings made under the new facility as of
March 31, 1999 will be equal to LIBOR plus a margin of 2.25% or the alternate
base rate plus 1.00%. The credit facility replaces the Company's previous $100
million credit facility, which has been terminated.
 
  On March 31, 1999, the Company purchased from Golf Acquisitions, L.L.C.
("Golf Acquisitions") fee interests in 15 golf courses and long-term leasehold
interests in five golf courses and made a participating mortgage loan secured
by one additional golf course for an aggregate initial investment of
approximately $184.3 million, which investment was financed by approximately
$178.7 million of cash and approximately $5.6 million of assumed notes. A
subsidiary of AGC and a subsidiary of ClubCorp International formed Golf
Acquisitions.
 
                                      45
<PAGE>
 
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Incorporated by reference to the sections entitled (i) "Nominees for
Election as Director;" (ii) "Directors Continuing in Office;" and (iii)
"Executive Officers" contained in the Company's Proxy Statement to be filed
pursuant to Regulation 14A.
 
Item 11. EXECUTIVE COMPENSATION
 
  Incorporated by reference to the section entitled "Executive Compensation"
contained in the Company's Proxy Statement to be filed pursuant to Regulation
14A.
 
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Incorporated by reference to the section entitled "Security Ownership of
Certain Beneficial Owners and Management" contained in the Company's Proxy
Statement to be filed pursuant to Regulation 14A.
 
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Incorporated by reference to the section entitled "Certain Relationships and
Related Transactions" contained in the Company's Proxy Statement to be filed
pursuant to Regulation 14A.
 
                                      46
<PAGE>
 
                                    PART IV
 
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
                                                                         Page No.
                                                                         --------
 <C> <S>                                                                 <C>
 (a) 1. Financial Statements
 
     Report of Independent Accountants................................      24
 
     Consolidated Balance Sheets of National Golf Properties, Inc. as
      of December 31, 1998 and 1997...................................      25
 
     Consolidated Statements of Operations of National Golf
      Properties, Inc. for the years ended December 31, 1998, 1997 and
      1996............................................................      26
 
     Consolidated Statements of Stockholders' Equity of National Golf
      Properties, Inc. for the years ended December 31, 1998, 1997 and
      1996............................................................      27
 
     Consolidated Statements of Cash Flows of National Golf
      Properties, Inc. for the years ended December 31, 1998, 1997 and
      1996............................................................      28
 
     Notes to Consolidated Financial Statements.......................      29
 
     2. Financial Statement Schedules
 
     Schedule III--Real Estate and Accumulated Depreciation...........      48
</TABLE>
 
                                       47
<PAGE>
 
                                                                    SCHEDULE III
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                  REAL ESTATE AND ACCUMULATED DEPRECIATION(1)
 
                               December 31, 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                  Initial Cost                      Gross Amount at Which
                                   to Company                     Carried at Close of Period
                               -------------------      Cost      --------------------------
                                                    Capitalized           Total Cost
                                      Buildings &    Subsequent          Buildings &         Accumulated     Date       Date
  Description     Encumbrances  Land  Improvements To Acquisition  Land  Improvements Total  Depreciation Constructed Acquired
  -----------     ------------ ------ ------------ -------------- ------ ------------ ------ ------------ ----------- --------
<S>               <C>          <C>    <C>          <C>            <C>    <C>          <C>    <C>          <C>         <C>
DAILY FEE
COURSES:
Continental,
Scottsdale, AZ..     $  --     $   64    $  881        $   12     $   66    $  891    $  957    $  531       1974       1986
Desert Lakes,
Fort Mojave,
AZ..............        --        163     3,102            53        163     3,155     3,318       758       1990       1993
El Caro,
Phoenix, AZ.....        --         61       553            13         63       564       627       556       1975       1983
Kokopelli,
Gilbert, AZ.....        --      1,177     4,261           170      1,177     4,431     5,608     1,205       1993       1994
Legend at
Arrowhead,
Glendale, AZ....        --        502     3,408           136        503     3,543     4,046     1,255       1986       1992
London Bridge,
Lake Havasu
City, AZ........        --        301     1,699            24        305     1,719     2,024       822       1968       1986
Stonecreek,
Phoenix, AZ.....        --      1,197     8,250           500      1,197     8,750     9,947       915       1983       1997
Superstition
Springs, Mesa,
AZ..............        --        698     3,771            32        702     3,799     4,501     1,455       1986       1992
Villa De Paz,
Phoenix, AZ.....        --        186       397            18        188       413       601       369       1974       1981
Aptos Seascape,
Aptos, CA.......        --        901     3,491           716        904     4,204     5,108     1,144       1926       1986
BlackLake,
Nipomo, CA......        --      1,744     9,299            20      1,747     9,316    11,063     1,123       1965       1996
Camarillo
Springs,
Camarillo, CA...        --        141     2,880           710        143     3,588     3,731     1,863       1972       1984
Carmel Mountain,
San Diego, CA...        --      1,669     5,865           --       1,669     5,865     7,534     1,012       1986       1995
Lomas Santa Fe
Exec., Solana
Beach, CA.......        --        175       575            20        177       593       770       543       1974       1982
Mesquite, Palm
Springs, CA.....        --      1,057     5,140           225      1,061     5,361     6,422     1,228       1985       1993
Oakhurst,
Clayton, CA.....        --      1,596     8,069           221      1,596     8,290     9,886       562       1997       1997
Rancho San
Joaquin, Irvine,
CA..............        --        871     8,375         1,281        873     9,654    10,527     3,197       1962       1992
San Geronimo,
San Geronimo,
CA..............        --        846     5,426           208        847     5,633     6,480       602       1964       1996
Summitpointe,
Milpitas, CA....      4,500     2,315     4,813           642      2,315     5,455     7,770     1,361       1977       1994
Upland Hills,
Upland, CA......        --      1,835     6,312           148      1,836     6,459     8,295     1,093       1982       1995
Vista Valencia,
Valencia, CA....        --        652     5,369           278        657     5,642     6,299     3,015       1963       1987
Arrowhead,
Littleton, CO...        --        302     3,245         1,927        304     5,170     5,474     1,303       1972       1988
Eagle,
Broomfield, CO..        --        400     2,425            20        402     2,443     2,845     1,549       1961       1988
Arrowhead,
Davie, FL.......        --        601     2,190            20        604     2,207     2,811       818       1967       1993
Baymeadows,
Jacksonville,
FL..............        --        226     4,337           315        226     4,652     4,878       423       1968       1997
Binks Forest,
Wellington, FL..        --        224     4,591           145        224     4,736     4,960     1,068       1991       1994
Sabal Palm,
Tamarac, FL.....        --        441     3,357            20        444     3,374     3,818     1,811       1967       1990
Summerfield
Crossing, Tampa,
FL..............        --        105     2,508           156        105     2,664     2,769       326       1987       1996
Bradshaw Farm,
Woodstock, GA...        --        238     6,365           118        238     6,483     6,721       516       1995       1997
Goshen
Plantation,
Augusta, GA.....        --        195     3,042           256        196     3,297     3,493       679       1971       1994
River's Edge,
Fayetteville,
GA..............        --        250     4,069           154        143     4,330     4,473       910       1989       1994
</TABLE>
 
                                       48
<PAGE>
 
                                                                    SCHEDULE III
                                                                     (Continued)
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                  REAL ESTATE AND ACCUMULATED DEPRECIATION(1)
 
                               December 31, 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                Initial Cost                       Gross Amount at Which
                                                 to Company                     Carried at Close of Period
                                             -------------------      Cost      ---------------------------
                                                                  Capitalized           Total Cost
                                                    Buildings &    Subsequent          Buildings &          Accumulated
  Description                  Encumbrances   Land  Improvements To Acquisition  Land  Improvements  Total  Depreciation
  -----------                  ------------  ------ ------------ -------------- ------ ------------ ------- ------------
<S>                            <C>           <C>    <C>          <C>            <C>    <C>          <C>     <C>
DAILY FEE
COURSES:
Ruffled
Feathers,
Lemont, IL......                 $   --      $  293   $ 9,316        $  (18)    $  293   $ 9,298    $ 9,591    $1,571
Tamarack,
Naperville, IL..                     --         326     5,067           195        326     5,262      5,588       555
Sugar Ridge,
Lawrenceburg,
IN..............                     --         168     2,602           466        168     3,068      3,236       678
Deer Creek,
Overland Park,
KS..............                     --         695     7,147           471        696     7,617      8,313       990
Dub's Dread,
Kansas City,
KS..............                     --         135     2,997           355        135     3,352      3,487       818
WestWinds, New
Market, MD......                     --         153     3,614           610        153     4,224      4,377       470
Majestic Oaks,
Ham Lake, MN....                     --       1,713    10,194           --       1,713    10,194     11,907       290
Links at
Northfork,
Ramsey, MN......                     --         280     3,770            75        280     3,845      4,125       853
Woodland Creek,
Andover, MN.....                     --          86       473           --          87       472        559        12
Royal Meadows,
Kansas City,
MO..............                     --         176     1,822            40        181     1,857      2,038     1,170
Las Vegas
National, Las
Vegas, NV.......                     --         261     3,727         1,586        263     5,311      5,574     3,349
Painted Desert,
Las Vegas, NV...                     --       1,355     4,741           --       1,355     4,741      6,096       576
Wildhorse,
Henderson, NV...                     --       4,677     6,557         2,578      4,679     9,133     13,812     1,581
Brigantine,
Brigantine, NJ..                     --         194     1,768         1,299        197     3,064      3,261     1,288
Rancocas,
Willingboro,
NJ..............                     --         239     1,816         1,206        241     3,020      3,261     1,170
Paradise Hills,
Albuquerque,
NM..............                     --         350     5,181           315        363     5,483      5,846       725
Carolina Shores,
Calabash, NC....                     --         588     5,903            12        590     5,913      6,503     2,845
Pawtuckett,
Charlotte, NC...                     --          63     1,563           146        405     1,367      1,772       157
Bent Tree,
Columbus, OH....                     --         123     4,207           248        123     4,455      4,578       528
Fowler's Mill,
Chesterland,
OH..............                     --         346     1,760         1,380        349     3,137      3,486     1,129
Hershey South,
Hershey, PA.....                     --         150     1,995           396        150     2,391      2,541       557
Golden Oaks,
Fleetwood, PA...                     --         989     4,677           331      1,008     4,989      5,997       787
Hickory Heights,
Bridgeville,
PA..............                     --          87     2,027         1,018         82     3,050      3,132       513
Colonial
Charters, Longs,
SC..............                     --         213     4,579             5        213     4,584      4,797       545
Port Royal,
Hilton Head
Island, SC......                  20,000(2)   6,289    15,190         3,647      6,289    18,837     25,126     3,635
Shipyard, Hilton
Head Island,
SC..............                     -- (2)   4,773     9,756         1,829      4,773    11,585     16,358     2,276
Stono Ferry, Charleston, SC..        --          44     1,582            71         44     1,653      1,697       202
Forrest
Crossing,
Nashville, TN...                     --         140     2,829           386        140     3,215      3,355       364
Bear Creek,
Houston, TX.....                     --         --      6,163           757        --      6,920      6,920     4,253
Lake Houston,
Huffman, TX.....                     --         823     1,620            63        829     1,677      2,506     1,012
<CAPTION>
                                  Date       Date
  Description                  Constructed Acquired
  -----------                  ----------- --------
<S>                            <C>         <C>
DAILY FEE
COURSES:
Ruffled
Feathers,
Lemont, IL......                  1992       1995
Tamarack,
Naperville, IL..                  1989       1997
Sugar Ridge,
Lawrenceburg,
IN..............                  1994       1994
Deer Creek,
Overland Park,
KS..............                  1989       1996
Dub's Dread,
Kansas City,
KS..............                  1963       1994
WestWinds, New
Market, MD......                  1971       1996
Majestic Oaks,
Ham Lake, MN....                  1972       1998
Links at
Northfork,
Ramsey, MN......                  1992       1994
Woodland Creek,
Andover, MN.....                  1989       1998
Royal Meadows,
Kansas City,
MO..............                  1933       1984
Las Vegas
National, Las
Vegas, NV.......                  1961       1982
Painted Desert,
Las Vegas, NV...                  1987       1996
Wildhorse,
Henderson, NV...                  1959       1994
Brigantine,
Brigantine, NJ..                  1926       1989
Rancocas,
Willingboro,
NJ..............                  1963       1989
Paradise Hills,
Albuquerque,
NM..............                  1963       1996
Carolina Shores,
Calabash, NC....                  1974       1986
Pawtuckett,
Charlotte, NC...                  1971       1996
Bent Tree,
Columbus, OH....                  1988       1996
Fowler's Mill,
Chesterland,
OH..............                  1972       1986
Hershey South,
Hershey, PA.....                  1927       1994
Golden Oaks,
Fleetwood, PA...                  1994       1996
Hickory Heights,
Bridgeville,
PA..............                  1990       1994
Colonial
Charters, Longs,
SC..............                  1989       1996
Port Royal,
Hilton Head
Island, SC......                  1985       1994
Shipyard, Hilton
Head Island,
SC..............                  1969       1994
Stono Ferry, Charleston, SC..     1989       1996
Forrest
Crossing,
Nashville, TN...                  1988       1996
Bear Creek,
Houston, TX.....                  1966       1985
Lake Houston,
Huffman, TX.....                  1975       1985
</TABLE>
 
                                       49
<PAGE>
 
                                                                    SCHEDULE III
                                                                     (Continued)
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                  REAL ESTATE AND ACCUMULATED DEPRECIATION(1)
 
                               December 31, 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                   Initial Cost                        Gross Amount at Which
                                    to Company                      Carried at Close of Period
                               --------------------      Cost      -----------------------------
                                                     Capitalized            Total Cost
                                       Buildings &    Subsequent           Buildings &           Accumulated     Date       Date
  Description     Encumbrances  Land   Improvements To Acquisition  Land   Improvements  Total   Depreciation Constructed Acquired
  -----------     ------------ ------- ------------ -------------- ------- ------------ -------- ------------ ----------- --------
<S>               <C>          <C>     <C>          <C>            <C>     <C>          <C>      <C>          <C>         <C>
DAILY FEE
COURSES:
Longwood,
Houston, TX.....    $   --     $ 1,558   $  8,148      $   543     $ 1,558   $  8,691   $ 10,249   $   705       1995       1997
Pecan Valley,
San Antonio,
TX..............        --         389      3,989          412         391      4,399      4,790     1,996       1962       1990
Riverchase,
Coppell, TX.....        --         250      1,658        1,220         252      2,876      3,128     1,254       1987       1988
Riverside, Grand
Prairie, TX.....        --         574      4,445          105         576      4,548      5,124     1,519       1986       1990
Southwyck,
Pearland, TX....        --         672      3,492          275         673      3,766      4,439       952       1988       1993
Chesapeake,
Chesapeake, VA..        --         321      3,490        1,086         321      4,576      4,897       538       1984       1996
Honey Bee,
Virginia Beach,
VA..............        --         556      5,009          --          556      5,009      5,565     1,081       1987       1995
Reston National,
Reston, VA......        --         996      4,584          134         999      4,715      5,714     1,402       1968       1993
Capitol City,
Olympia, WA.....        474        437      2,572          163         437      2,735      3,172       620       1961       1994
Lake Wilderness,
Maple Valley,
WA..............        --         110      1,665          332         110      1,997      2,107       456       1974       1994
                    -------    -------   --------      -------     -------   --------   --------   -------
                    $24,974    $52,725   $301,760      $32,295     $53,073   $333,707   $386,780   $79,434
                    =======    =======   ========      =======     =======   ========   ========   =======
PRIVATE COUNTRY
CLUBS:
Ancala,
Scottsdale, AZ..    $   --     $   207   $  8,319      $   --      $   207   $  8,319   $  8,526   $   850       1990       1996
Arrowhead,
Glendale, AZ....        --         185      5,816            7         185      5,823      6,008       616       1986       1996
Tatum Ranch,
Cave Creek, AZ..        --       1,000      3,972           (5)      1,002      3,965      4,967     1,652       1986       1992
Canyon Oaks,
Chico, CA.......        --         309      2,172        2,350         309      4,522      4,831       671       1987       1994
Escondido,
Escondido, CA...        --         114      2,382          587         116      2,967      3,083     1,556       1962       1983
Monterey, Palm
Desert, CA......        --       1,294      6,584          290       1,294      6,874      8,168     1,332       1978       1995
Palm Valley,
Palm Desert,
CA..............        --       1,750     13,769          447       1,750     14,216     15,966     2,337       1985       1995
SeaCliff,
Huntington
Beach, CA.......        --       2,430      7,602          760       2,451      8,341     10,792       900       1975       1996
Spanish Hills,
Camarillo, CA...        --       2,975     14,076          453       3,021     14,483     17,504       917       1993       1997
Sunset Hills,
Thousand Oaks,
CA..............        --         302      1,378           18         304      1,394      1,698     1,192       1966       1975
Wood Ranch, Simi
Valley, CA......        --         481      9,111        1,235         481     10,346     10,827     1,789       1984       1995
Heather Ridge,
Aurora, CO......        --         992      1,500          715         995      2,212      3,207     1,162       1970       1990
Pinery, Denver,
CO..............        --         174      5,380          430         174      5,810      5,984       711       1972       1996
Crescent Oaks,
Clearwater, FL..        --          35        833          183          35      1,016      1,051       163       1990       1996
Brookstone,
Acworth, GA.....        --         557      2,608          410         559      3,016      3,575     1,000       1987       1993
The Plantation,
Boise, ID.......        --          87      2,562          201          87      2,763      2,850       324       1920       1996
Eagle Brook,
Geneva, IL......      1,500        701      9,739          233         701      9,972     10,673       752       1992       1997
Mission Hills,
Northbrook, IL..        --         400      3,600          531         402      4,129      4,531     2,329       1980       1988
Highlands Golf,
Hutchinson, KS..        --          40        576          249          40        825        865        90       1972       1996
Tallgrass,
Wichita, KS.....        --          43      2,409          145          43      2,554      2,597       321       1980       1996
Shenandoah,
Baton Rouge,
LA..............        --          38      1,268          218          38      1,486      1,524       218       1972       1996
</TABLE>
 
                                       50
<PAGE>
 
                                                                    SCHEDULE III
                                                                     (Continued)
 
                         NATIONAL GOLF PROPERTIES, INC.
 
                  REAL ESTATE AND ACCUMULATED DEPRECIATION(1)
 
                               December 31, 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                   Initial Cost                        Gross Amount at Which
                                    to Company                      Carried at Close of Period
                               --------------------      Cost      -----------------------------
                                                     Capitalized            Total Cost
                                       Buildings &    Subsequent           Buildings &           Accumulated     Date       Date
  Description     Encumbrances  Land   Improvements To Acquisition  Land   Improvements  Total   Depreciation Constructed Acquired
  -----------     ------------ ------- ------------ -------------- ------- ------------ -------- ------------ ----------- --------
<S>               <C>          <C>     <C>          <C>            <C>     <C>          <C>      <C>          <C>         <C>
PRIVATE COUNTRY
CLUBS:
Hunt Valley,
Phoenix, MD.....    $   --     $   515   $  1,662      $ 1,208     $   517   $  2,868   $  3,385   $  1,385         1972    1983
Tanoan,
Albuquerque,
NM..............        --          12      3,241           20          14      3,259      3,273      2,607         1978    1982
Brandywine,
Maumee, OH......        --         814      2,861           82         816      2,941      3,757      1,109         1967    1991
Ivy Hills,
Cincinnati, OH..        --          30      1,776          --           30      1,776      1,806         69         1992    1998
Oakhurst, Grove
City, OH........        --         344      1,776        1,151         346      2,925      3,271        882         1959    1980
Royal Oak,
Cincinnati, OH..        --         175        822           12         178        831      1,009        530         1963    1985
Meadowbrook,
Tulsa, OK.......        --          89      3,236        1,095          89      4,331      4,420        413   mid 1950's    1996
The Trails,
Norman, OK......        --          42      2,361          246         163      2,486      2,649        347         1982    1996
Creekside,
Salem, OR.......        --         128      3,456        2,438         128      5,894      6,022        999         1993    1995
Oregon Golf,
West Linn, OR...        --         433     10,230          534         435     10,762     11,197      1,587         1992    1995
Hershey,
Hershey, PA.....        --       1,624      6,400        1,130       1,624      7,530      9,154      1,871         1915    1994
Gettysvue,
Knoxville, TN...      3,750        753      5,550          184         753      5,734      6,487        349         1995    1997
Berry Creek,
Georgetown, TX..        --         204      4,876          150         204      5,026      5,230        856         1986    1995
Diamond Oaks,
Fort Worth, TX..        --         132      3,577        1,537         132      5,114      5,246        453         1959    1996
Eldorado,
McKinney, TX....        --         221      6,247        2,404         221      8,651      8,872        457         1981    1996
Great Southwest,
Grand Prairie,
TX..............        --         442      7,825          612         442      8,437      8,879        957         1964    1996
Oakridge,
Garland, TX.....        --          87      3,439          673          87      4,112      4,199        440         1982    1996
Sweetwater,
Sugarland, TX...        --         207     11,783        1,029         207     12,812     13,019      1,816         1983    1996
Sonterra, San
Antonio, TX.....        --       2,686     25,867          --        2,686     25,867     28,553        442         1978    1998
Walden, Humble,
TX..............        --         178      3,425          698         180      4,121      4,301        411         1984    1996
Willow Fork,
Katy, TX........        --          44      2,742          308          44      3,050      3,094        319         1990    1996
Woodhaven, Fort
Worth, TX.......        --          43      2,022          654          43      2,676      2,719        288         1972    1996
Bear Creek,
Woodinville,
WA..............        --         705      4,823          310         711      5,127      5,838      1,939         1983    1993
                    -------    -------   --------      -------     -------   --------   --------   --------
                    $ 5,250    $24,022   $225,653      $25,932     $24,244   $251,363   $275,607   $ 41,408
                    -------    -------   --------      -------     -------   --------   --------   --------
Total Courses...    $30,224    $76,747   $527,413      $58,227     $77,317   $585,070   $662,387   $120,842
                    =======    =======   ========      =======     =======   ========   ========   ========
</TABLE>
----
(1) Corporate assets are not included within the amounts.
(2) Combined encumbrance for Port Royal and Shipyard golf courses.
 
                                       51
<PAGE>
 
                                                                   SCHEDULE III
                                                                    (Continued)
 
                        NATIONAL GOLF PROPERTIES, INC.
 
                   REAL ESTATE AND ACCUMULATED DEPRECIATION
 
                               December 31, 1998
                                (In thousands)
 
  Depreciation of the Company's investment in Buildings and Improvements
reflected in the statements of operations are calculated over the estimated
useful lives of the assets as follows:
 
<TABLE>
     <S>                                                           <C>
     Buildings....................................................      30 years
     Ground improvements..........................................      20 years
     Furniture, fixtures and equipment............................ 3 to 10 years
</TABLE>
 
  The changes in total real estate assets and accumulated depreciation
(excluding corporate assets and related accumulated depreciation) for the
three years ended December 31, are as follows:
 
<TABLE>
<CAPTION>
                                                    Total Real Estate Assets
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
     <S>                                           <C>       <C>       <C>
     Balance, beginning of year................... $601,375  $515,557  $361,831
     Acquisitions.................................   43,181    79,171   155,013
     Improvements.................................   18,155    14,307     6,346
     Disposals....................................     (324)   (7,660)   (7,633)
                                                   --------  --------  --------
     Balance, end of year......................... $662,387  $601,375  $515,557
                                                   ========  ========  ========
<CAPTION>
                                                    Accumulated Depreciation
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
     <S>                                           <C>       <C>       <C>
     Balance, beginning of year................... $ 94,678  $ 72,906  $ 58,709
     Depreciation for year........................   26,193    23,652    17,978
     Disposals....................................      (29)   (1,880)   (3,781)
                                                   --------  --------  --------
     Balance, end of year......................... $120,842  $ 94,678  $ 72,906
                                                   ========  ========  ========
</TABLE>
 
                                      52
<PAGE>
 
  3. Exhibits
 
<TABLE>
     <C>  <S>
      3.1 Articles of Incorporation of National Golf Properties, Inc.
           (incorporated by reference to Exhibit 3.1 to the Company's Current
           Report on Form 8-K dated September 26, 1995)
 
      3.2 By-Laws of National Golf Properties, Inc. (incorporated by reference
           to Exhibit 3.2 to the Company's Current Report on Form 8-K dated
           September 26, 1995)
 
      3.3 Specimen of certificate representing shares of Common Stock
           (incorporated by reference to Exhibit 3.3 to the Company's Report on
           Form 8-B dated December 29, 1995)
 
      3.4 Articles Supplementary of National Golf Properties, Inc.
           (incorporated by reference to Exhibit 3.1 to the Company's Current
           Report on Form 8-K dated March 4, 1998)
 
      3.5 Articles Supplementary of National Golf Properties, Inc.
           (incorporated by reference to Exhibit 3.1 to the Company's Quarterly
           Report on Form 10-Q for the period ended March 31, 1998)
 
      4.1 The 1995 Independent Director Equity Participation Plan of National
           Golf Properties, Inc. (incorporated by reference to Exhibit 4.1 to
           the Company's Registration Statement on Form S-8 dated August 15,
           1997)
 
      4.2 The 1997 Equity Participation Plan of National Golf Properties, Inc.,
           National Golf Operating Partnership, L.P. and American Golf
           Corporation (incorporated by reference to Exhibit 4.2 to the
           Company's Registration Statement on Form S-8 dated August 15, 1997)
 
     10.1 Second Amended and Restated Agreement of Limited Partnership of
           National Golf Operating Partnership, L.P., dated as of April 20,
           1998, (incorporated by reference to Exhibit 10.1 to the Company's
           Quarterly Report on Form 10-Q for the period ended March 31, 1998)
 
     10.2 Form of Lease Agreement between the Company and AGC with respect to
           the Initial Golf Courses and the Mesquite and Desert Lakes golf
           courses (incorporated by reference to Exhibit 10.2 to the Company's
           Registration Statement on Form S-11 No. 33-63110)
 
     10.3 Form of Lease Agreement between the Company and AGC with respect to
           the following golf courses: Southwyck, Dub's Dread, Kokopelli,
           Summitpointe, Lake Wilderness, Links at Northfork, Hershey, Hershey
           South, Canyon Oaks, Capitol City, Binks Forest, Port Royal,
           Shipyard, Sugar Ridge, Wildhorse, Goshen Plantation, Hickory
           Heights, River's Edge, Berry Creek, Carmel Mountain, Creekside,
           Honey Bee, Wood Ranch, Monterey, Palm Valley, Ruffled Feathers,
           Upland Hills, Oregon Golf, Golden Oaks, Paradise Hills, Chesapeake,
           SeaCliff, Ancala, Arrowhead, BlackLake, Painted Desert, Pinery,
           Crescent Oaks, Summerfield Crossing, The Plantation, Highlands,
           Tallgrass, Shenandoah, Pawtuckett, Bent Tree, Meadowbrook, The
           Trails, The Links, Forrest Crossing, Diamond Oaks, Eldorado, Great
           Southwest, Oakridge, Willow Fork, Woodhaven, Walden, Deer Creek,
           WestWinds, Stonecreek, Tamarack, Baymeadows, Bradshaw Farm,
           Longwood, Eagle Brook, Gettysvue; Oakhurst; Ivy Hills; Majestic
           Oaks; Woodland Creek and Sonterra; and Form of Lease Agreement
           between the Company and CGG with respect to the Carmel Mountain golf
           course and the Sweetwater golf course (incorporated by reference to
           Exhibit 10.3 to the Company's Annual Report on Form 10-K dated
           February 29, 1996)
 
     10.4 Registration Rights Agreement, made and entered into as of August 18,
           1993, by and among National Golf Properties, Inc. and the persons
           named therein (incorporated by reference to Exhibit 10.4 to the
           Company's Annual Report on Form 10-K dated February 29, 1996)
 
     10.5 Shelf Registration Rights Agreement, made and entered into as of
           August 18, 1993, by and among National Golf Properties, Inc. and the
           persons named therein (incorporated by reference to Exhibit 10.5 to
           the Company's Annual Report on Form 10-K dated February 29, 1996)
</TABLE>
 
                                       53
<PAGE>
 
 
 
<TABLE>
     <C>    <S>
     *10.6  National Golf Properties, Inc. Stock Incentive Plan Key Employees
             of National Golf Properties, Inc., National Golf Operating
             Partnership, L.P. and American Golf Corporation, effective August
             18, 1993 (incorporated by reference to Exhibit 10.6 to the
             Company's Annual Report on Form 10-K dated February 29, 1996)
 
     *10.7  Indemnification Agreement, made as of August 18, 1993, by and
             between National Golf Properties, Inc. and its directors and
             officer (incorporated by reference to Exhibit 10.7 to the
             Company's Annual Report on Form 10-K dated February 29, 1996)
 
      10.8  Director Designation Agreement, dated as of August 18, 1993 by and
             among David G. Price, National Golf Properties, Inc. and National
             Golf Operating Partnership, L.P. (incorporated by reference to
             Exhibit 10.9 to the Company's Annual Report on Form 10-K dated
             February 29, 1996)
 
      10.9  Services Agreement, entered into as of August 18, 1993, by and
             between National Golf Properties, Inc. and National Golf Operating
             Partnership, L.P. (incorporated by reference to Exhibit 10.10 to
             the Company's Annual Report on Form 10-K dated February 29, 1996)
 
      10.10 Partnership Interests Exchange Agreement, dated as of August 18,
             1993, by and among National Golf Operating Partnership, L.P. and
             Partners of Partnerships Controlling 21 Courses (incorporated by
             reference to Exhibit 10.13 to the Company's Annual Report on Form
             10-K dated February 29, 1996)
 
      10.11 Agreement for Transfer of Realty and Assets, dated as of August 18,
             1993, by and among The Price Revocable Trust, Myershan, Inc. and
             National Golf Operating Partnership, L.P. (incorporated by
             reference to Exhibit 10.14 to the Company's Annual Report on
             Form 10-K dated February 29, 1996)
 
      10.12 Plan and Agreement of Merger, dated as of August 18, 1993, by and
             among Bear Creek Enterprises, Inc., National Golf Properties,
             Inc., The Price Revocable Trust and David G. Price (incorporated
             by reference to Exhibit 10.15 to the Company's Annual Report on
             Form 10-K dated February 29, 1996)
 
      10.13 Partnership Interests Acquisition Agreement, dated as of August 18,
             1993, by and among The Price Revocable Trust, American Golf
             Investment, Inc., Supermarine Aviation, Limited, David G. Price
             and National Golf Properties, Inc. (incorporated by reference to
             Exhibit 10.16 to the Company's Annual Report on Form 10-K dated
             February 29, 1996)
 
      10.14 Contribution Agreement, dated as of August 18, 1993, by and between
             National Golf Operating Partnership, L.P. and National Golf
             Properties, Inc. (incorporated by reference to Exhibit 10.17 to
             the Company's Annual Report on Form 10-K dated February 29, 1996)
 
      10.15 Option Courses Agreement, dated as of August 18, 1993, by and among
             David G. Price, The Price Revocable Trust, Black Lake/Penasquitos,
             David G. Price, American Golf Corporation and National Golf
             Operating Partnership, L.P. (incorporated by reference to Exhibit
             10.18 to the Company's Annual Report on Form 10-K dated February
             29, 1996)
 
      10.16 Agreement relating to prohibition on acquisitions of golf courses
             by David G. Price and his affiliates, made and entered into as of
             August 18, 1993, by and among National Golf Properties, Inc.,
             National Golf Operating Partnership, L.P., American Golf
             Corporation, David G. Price, Dallas P. Price and The Price
             Revocable Trust (incorporated by reference to Exhibit 10.19 to the
             Company's Annual Report on Form 10-K dated February 29, 1996)
 
      10.17 Amendment to agreement relating to prohibition on acquisitions of
             golf courses by David G. Price and his affiliates among National
             Golf Properties, Inc., National Golf Operating Partnership, L.P.,
             American Golf Corporation, David G. Price, Dallas P. Price and The
             Price Revocable Trust (incorporated by reference to Exhibit 10 to
             the Company's Quarterly Report on Form 10-Q/A for the period ended
             September 30, 1995)
</TABLE>
--------
*Management contract or compensatory plan or arrangement.
 
                                       54
<PAGE>
 
 
 
<TABLE>
     <C>   <S>
     10.18 Note Purchase Agreement ("Note Purchase Agreement"), dated as of
            December 15, 1994, with respect to National Golf Operating
            Partnership, L.P.'s Series A 8.68% Guarantied Senior Promissory
            Notes due December 15, 2004 and Series B 8.73% Guarantied Senior
            Promissory Notes due June 15, 2005 (incorporated by reference to
            Exhibit 10.21 to the Company's Annual Report on Form 10-K dated
            February 29, 1996)
 
     10.19 Series A 8.68% Guarantied Senior Promissory Notes and Series B 8.73%
            Guarantied Senior Promissory Notes (incorporated by reference to
            Exhibit 10.22 to the Company's Annual Report on Form 10-K dated
            February 29, 1996)
 
     10.20 General Continuing Guaranty of National Golf Properties, Inc.
            ("General Continuing Guaranty"), dated as of December 15, 1994,
            with respect to National Golf Operating Partnership, L.P.'s Series
            A 8.68% Guarantied Senior Promissory Notes due December 15, 2004
            and Series B 8.73% Guarantied Senior Promissory Notes due June 15,
            2005 (incorporated by reference to Exhibit 10.15 to the Company's
            Report on Form 8-B dated December 29, 1995)
 
     10.21 First Amendment to Note Purchase Agreements, dated as of August 31,
            1995 (incorporated by reference to Exhibit 10.17 to the Company's
            Report on Form 8-B dated December 29, 1995)
 
     10.22 First Amendment to General Continuing Guarantee, dated as of August
            31, 1995 (incorporated by reference to Exhibit 10.18 to the
            Company's Report on Form 8-B dated December 29, 1995)
 
     10.23 Agreement of Limited Partnership of Royal Golf, L.P., II, dated as
            of July 7, 1994 (incorporated by reference to Exhibit 10.19 to the
            Company's Report on Form 8-B dated December 29, 1995)
 
     10.24 Amended and Restated Loan Agreement, dated as of July 7, 1994, by
            and between Royal Golf, L.P., II and NationsBank of South Carolina,
            N.A. (incorporated by reference to Exhibit 10.19 to the Company's
            Report on Form 8-B dated December 29, 1995)
 
     10.25 Restated Note Agreement, dated as of July 1, 1996, with respect to
            National Golf Operating Partnership, L.P.'s Series A-1, Series A-2
            and Series A-3 7.9% Guarantied Senior Promissory Notes due June 15,
            2006 and Series B 8% Guarantied Senior Promissory Notes due
            December 12, 2006 (incorporated by reference to Exhibit 10.30 to
            the Company's Annual Report on Form 10-K dated March 14, 1997)
 
     10.26 Form of Series A 7.9% Guarantied Senior Promissory Notes and Series
            B 8% Guarantied Senior Promissory Notes (incorporated by reference
            to Exhibit 10.31 to the Company's Annual Report on Form 10-K dated
            March 14, 1997)
 
     10.27 Amended and Restated General Continuing Guaranty of National Golf
            Properties, Inc., dated as of July 1, 1996, with respect to
            National Golf Operating Partnership, L.P.'s Series A-1, Series A-2
            and Series A-3 7.9% Guarantied Senior Promissory Notes due June 15,
            2006 and Series B 8% Guarantied Senior Promissory Notes due
            December 12, 2006 (incorporated by reference to Exhibit 10.32 to
            the Company's Annual Report on Form 10-K dated March 14, 1997)
 
     10.28 Assumption Agreement, dated as of July 1, 1996, by National Golf
            Operating Partnership, L.P. and the Purchasers named therein
            (incorporated by reference to Exhibit 10.33 to the Company's Annual
            Report on Form 10-K dated March 14, 1997)
 
     10.29 Assumption Agreement, dated as of July 1, 1996, by National Golf
            Operating Partnership, L.P. and the Purchasers named therein
            (incorporated by reference to Exhibit 10.34 to the Company's Annual
            Report on Form 10-K dated March 14, 1997)
 
     10.30 Lease Agreement, dated as of July 11, 1996, between the Company and
            The Links Group, Inc. with respect to Colonial Charters Golf Course
            (incorporated by reference to Exhibit 10.35 to the Company's Annual
            Report on Form 10-K dated March 14, 1997)
</TABLE>
 
                                       55
<PAGE>
 
 
 
<TABLE>
     <C>    <S>
      10.31 Lease Agreement, dated as of December 17, 1996, between the Company
             and Evergreen Alliance Golf Limited with respect to San Geronimo
             Golf Course (incorporated by reference to Exhibit 10.36 to the
             Company's Annual Report on Form 10-K dated March 14, 1997)
 
      10.32 Lease Agreement, dated as of October 22, 1997, between the Company
             and Camarillo Golf, LLC with respect to Spanish Hills Country Club
             (incorporated by reference to Exhibit 10.33 to the Company's
             Annual Report on Form 10-K dated February 6, 1998)
 
      10.33 Assignment Agreement, dated as of July 30, 1996, between National
             Golf Properties, Inc. and National Golf Operating Partnership,
             L.P. (incorporated by reference to Exhibit 2.3 to the Company's
             Current Report on Form 8-K dated August 13, 1996)
 
      10.34 Lease Agreement, dated as of July 30, 1996, between National Golf
             Operating Partnership, L.P. and American Golf Corporation
             (incorporated by reference to Exhibit 2.4 to the Company's Current
             Report on Form 8-K dated August 13, 1996)
 
      10.35 $100,000,000 Credit Agreement dated as of April 25, 1997, among
             National Golf Operating Partnership, L.P., National Golf
             Properties, Inc., the Lender Parties named therein and NationsBank
             of Texas, N.A. (incorporated by reference to Exhibit 10.2 to the
             Company's Quarterly Report on Form 10-Q dated April 29, 1997)
 
     *10.36 National Golf Properties, Inc. Deferred Compensation Plan,
             effective June 1, 1997 (incorporated by reference to Exhibit 10.2
             to the Company's Quarterly Report on Form 10-Q dated July 29,
             1997)
 
     *10.37 National Golf Properties, Inc. Deferred Compensation Plan Trust
             Agreement, dated as of June 1, 1997, by and between National Golf
             Properties, Inc. and Imperial Trust Company (incorporated by
             reference to Exhibit 10.3 to the Company's Quarterly Report on
             Form 10-Q dated July 29, 1997)
 
     *10.38 Consulting Agreement, entered into as of the 30th day of April,
             1997, between National Golf Properties, Inc. and Edward R. Sause
             (incorporated by reference to Exhibit 10.4 to the Company's
             Quarterly Report on Form 10-Q dated July 29, 1997)
 
      10.39 Pumpkin Ridge Joint Venture Joint Venture Agreement, dated as of
             September 8, 1997, by and among National Golf Operating
             Partnership, L.P. and Pumpkin Ridge Partners (incorporated by
             reference to Exhibit 10.2 to the Company's Quarterly Report on
             Form 10-Q dated October 30, 1997)
 
      10.40 Lease Agreement, dated as of September 8, 1997, between Pumpkin
             Ridge Joint Venture and AGC (incorporated by reference to Exhibit
             10.3 to the Company's Quarterly Report on Form 10-Q dated October
             30, 1997)
 
      10.41 USGA Agreement, made and entered into as of September 8, 1997, by
             and between Pumpkin Ridge Joint Venture and AGC (incorporated by
             reference to Exhibit 10.4 to the Company's Quarterly Report on
             Form 10-Q dated October 30, 1997)
 
      10.42 Amended and Restated Registration Rights Agreement, dated as of
             April 20, 1998, by and among National Golf Properties, Inc.,
             National Golf Operating Partnership, L.P. and the unit holders
             named therein (incorporated by reference to Exhibit 10.2 to the
             Company's Quarterly Report on Form 10-Q for the period ended March
             31, 1998)
 
      10.43 Contribution Agreement, dated as of March 4, 1998, between Belair
             Capital Fund LLC, National Golf Operating Partnership, L.P. and
             National Golf Properties, Inc. (incorporated by reference to
             Exhibit 10.3 to the Company's Current Report on Form 8-K dated
             March 4, 1998)
</TABLE>
 
--------
*Management contract or compensatory plan or arrangement.
 
                                       56
<PAGE>
 
 
 
<TABLE>
     <C>   <S>
     10.44 Contribution Agreement, dated as of April 20, 1998, between Belair
            Capital Fund LLC, National Golf Operating Partnership, L.P. and
            National Golf Properties, Inc. (incorporated by reference to
            Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
            period ended March 31, 1998)
 
     10.45 Loan Agreement between The Badlands Golf Club, Inc. and National
            Golf Operating Partnership, L.P. dated as of August 18, 1998
 
     10.46 Senior Secured Participating Promissory Note made and entered into
            as of August 18, 1998, between National Golf Operating Partnership,
            L.P. and The Badlands Golf Club, Inc.
 
     10.47 First Deed of Trust, Assignment of Rents, Security Agreement and
            Fixture Filing relating to the Senior Secured Participating
            Promissory Note made and entered into as of August 18, 1998, by and
            among The Badlands Golf Club, Inc. and National Golf Operating
            Partnership, L.P.
 
     21.1  List of Subsidiaries of National Golf Properties, Inc. (incorporated
            by reference to Exhibit 22.1 to the Company's Report on Form 8-B
            dated December 29, 1995)
 
     23.1  Consent of Independent Accountants
 
     27.1  Financial Data Schedule
</TABLE>
 
                                       57
<PAGE>
 
<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
 
(b) Reports on Form 8-K filed during the Last Quarter
 
  None.
 
(d) Additional Information Regarding American Golf Corporation and Subsidiaries
 
 
 <C> <S>                                                                <C>
     Analysis of American Golf Corporation's Consolidated Financial
      Information.....................................................     59
 
     American Golf Corporation's Consolidated Financial Statements
 
     Report of Independent Accountants................................     62
 
     Consolidated Balance Sheets as of December 31, 1998 and 1997.....     63
 
     Consolidated Statements of Operations and Comprehensive Income
      for the years ended December 31, 1998, 1997 and 1996............     64
 
     Consolidated Statements of Shareholders' Equity for the years
      ended December 31, 1998, 1997 and 1996..........................     65
 
     Consolidated Statements of Cash Flows for the years ended
      December 31, 1998, 1997 and 1996................................     66
 
     Notes to Consolidated Financial Statements.......................     67
</TABLE>
 
                                       58
<PAGE>
 
         Analysis of American Golf Corporation's Financial Information
 
 Overview
 
  The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto of American Golf
Corporation and Subsidiaries ("AGC" or "the Company"). The forward-looking
statements included in Analysis of American Golf Corporation's Financial
Information relating to certain matters involve risks and uncertainties,
including anticipated financial performance, business prospects, anticipated
capital expenditures and other similar matters, which reflect management's
best judgement based on factors currently known. Actual results and experience
could differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements as a result of a number
of factors, including but not limited to those discussed in Analysis of
American Golf Corporation's Financial Information.
 
  The discussion of the results of operations compares the year ended December
31, 1998 with the year ended December 31, 1997 and the year ended December 31,
1997 with the year ended December 31, 1996.
 
Results of Operations
 
 Comparison of the year ended December 31, 1998 to the year ended December 31,
1997.
 
  Total revenues from golf course operations and management agreements for AGC
increased by $58.8 million, or 11.4%, to $575.9 million for the year ended
December 31, 1998 as compared to $517.1 million for the year ended December
31, 1997. The increase in revenues was primarily attributable to the net
increase of 14 new leased courses and 3 new courses under management
agreements. Green fees for the year ended December 31, 1998, $204.2 million,
increased by $15.5 million, or 8.2%, as compared to $188.7 million for the
year ended December 31, 1997. Cart rental revenues for the year ended December
31, 1998, $65.6 million, increased by $4.8 million, or 7.9%, from $60.8
million for the year ended December 31, 1997. Member dues and initiation fees
for the year ended December 31, 1998, $100.0 million, increased by $17.0
million, or 20.5%, from $83.0 million for the year ended December 31, 1997.
Food and beverage revenues for the year ended December 31, 1998, $108.7
million, increased by $19.1 million, or 21.3%, from $89.6 million for the year
ended December 31, 1997. Merchandise sales were $50.8 million, an increase of
$6.1 million, or 13.6%, from $44.7 million for the year ended December 31,
1997. Other operating revenue, which includes range income, decreased by $3.1
million, or 7.2%, to $40.1 million for the year ended December 31, 1998, from
$43.2 million for the year ended December 31, 1997. Management fees revenue of
$6.6 million decreased $0.5 million, or 7%, for the year ended December 31,
1998, from $7.1 million for the year ended December 31, 1997.
 
  Total operating expenses increased by $64.6 million or 12.8%, to $567.7
million for the year ended December 31, 1998 as compared to $503.1 million for
the year ended December 31, 1997. Rent expense increased by $17.7 million, or
16.2%, to $126.8 million for the year ended December 31, 1998, from
$109.1 million for the year ended December 31, 1997. General and
administrative expenses for the year ended December 31, 1998, $46.1 million,
increased by $3.5 million, or 8.2%, from $42.6 million for the year ended
December 31, 1997. These expenses increased primarily due to the addition of
new courses.
 
  Net income decreased by $7.6 million to $4.7 million for the year ended
December 31, 1998, from $12.3 million for the year ended December 31, 1997.
The decrease in net income is principally attributable to the reduction in
same course revenue from the harsh weather brought about by the El Nino
phenomenon in the sun belt states, where the Company has more mature
properties with higher operating margins. Additionally, while the new
acquisitions described above contributed favorably to revenue, such properties
historically operate at lower margins in the first year of operation.
 
 Comparison of the year ended December 31, 1997 to the year ended December 31,
1996.
 
  Total revenues from golf course operations and management agreements for AGC
increased by $89.4 million, or 20.9%, to $517.1 million for the year ended
December 31, 1997 as compared to $427.7 million
 
                                      59
<PAGE>
 
for the year ended December 31, 1996. The increase in revenues was due, in
part, to the net increase of 10 new leased courses and 3 new courses under
management agreements in 1997 as well as a full year of operations related to
48 leased courses and 6 management agreements acquired in July 1996. The
increase in revenues was also attributable to favorable results generated in
various regions due to good weather during 1997 as compared with 1996. Green
fees for the year ended December 31, 1997, $188.7 million, increased by $30.9
million, or 19.6%, as compared to $157.8 million for the year ended December
31, 1996. Cart rental revenues for the year ended December 31, 1997, $60.8
million, increased by $3.0 million, or 5.2%, from $57.8 million for the year
ended December 31, 1996. Member dues and initiation fees for the year ended
December 31, 1997, $83 million, increased by $20.7 million, or 33.2%, from
$62.3 million for the year ended December 31, 1996. Food and beverage revenues
for the year ended December 31, 1997, $89.6 million, increased by $19.3
million, or 27.5%, from $70.3 million for the year ended December 31, 1996.
Merchandise sales were $44.7 million, an increase of $6.9 million, or 18.3%,
from $37.8 million for the year ended December 31, 1996. Other revenue, which
includes range income, increased by $5.8 million, or 15.5%, to $43.2 million
for the year ended December 31, 1997, from $37.4 million for the year ended
December 31, 1996. Management fees revenue of $7.1 million increased
$2.7 million, or 61.4%, for the year ended December 31, 1997, from $4.4
million for the year ended December 31, 1996.
 
  Total operating expenses increased by $81.3 million, or 19.3%, to $503.1
million for the year ended December 31, 1997 as compared to $421.8 million for
the year ended December 31, 1996. Payroll and related expenses increased by
$44 million, or 30.4%, to $188.8 million for the year ended December 31, 1997,
from $144.8 million for the year ended December 31, 1996. Rent expense
increased by $15.6 million, or 16.7%, to $109.1 million for the year ended
December 31, 1997, from $93.5 million for the year ended December 31, 1996.
General and administrative expenses for the year ended December 31, 1997,
$42.6 million, increased by $.4 million, or .01%, from $42.2 million for the
year ended December 31, 1996. These expenses increased primarily due to the
addition of new courses.
 
  Net income increased by $8 million to $12.3 million for the year ended
December 31, 1997, from $4.3 million for the year ended December 31, 1996. The
increase in net income is primarily due to the net increase in new courses and
a full year of operations related to 48 leased courses and 6 management
agreements acquired in July 1996 as well as the seasonal nature of AGC's
business in that the weather during the year ended December 31, 1997, was more
favorable than the weather during the year ended December 31, 1996.
 
Liquidity and Capital Resources
 
  On December 31, 1997, the Company entered into a $40 million credit facility
and a $13.5 million standby letter of credit facility with a commercial bank
that bears interest at prime or a LIBOR based rate. Letters of credit issued
under these credit facilities are charged a 1.0% annual letter of credit fee.
The $40 million facility is used to finance working capital requirements and
expires on January 2, 2001. At December 31, 1998, there was $22 million
outstanding under the $40 million credit facility and $2.5 million in standby
letters of credit outstanding. The $13.5 million stand-by letter of credit
facility, which expires on January 2, 2001, supports outstanding letters of
credit issued in favor of National Golf Properties ("NGP"), pursuant to the
terms of the leases between NGP and AGC. Under the terms of the credit
facilities, the Company is also required to maintain specified financial
ratios and levels of net worth.
 
  Subsequent to December 31, 1998, AGC temporarily increased its revolving
credit facility to $50 million. The additional $10 million available under the
revolving credit facility is to be used solely for specified acquisition and
related costs, and expires on May 31, 1999. AGC believes it will be able to
meet this obligation with cash flow from operations.
 
  AGC has working capital of approximately $11 million as of December 31,
1998, excluding deferred revenue related to initiation fees. AGC believes it
will be able to satisfy its liquidity requirements, including capital
expenditures and rental payments due under its leases, with cash flow
available from operations and borrowings. AGC has capital expenditure
commitments related to acquiring and renewing leases. These
 
                                      60
<PAGE>
 
commitments are typically satisfied over several years. The material capital
commitments are clubhouse renovations, building and course improvements and
irrigation systems. At December 31, 1998, AGC's capital expenditure commitment
was approximately $6,700,000. The improvements will be funded from AGC's
operating cash flow and from borrowings under the bank credit facilities.
 
 Year 2000
 
  The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations.
 
  The Company utilizes management information systems and software technology
that may be affected by Year 2000 issues throughout its business. During 1998,
the Company completed its assessment of these systems and developed
implementation plans to bring the non-compliant systems into compliance. These
plans includes replacing hardware and upgrading software to Windows 95
compatible versions. The Company's corporate office was completed in 1998 and
all the golf courses will be completed during 1999. The Company also utilizes
a Year 2000 compliant HP3000 to run its financial software. This software will
be upgraded to a Year 2000 compliant version by June 30, 1999. The hardware,
software and installation will cost approximately $3.6 million and will be
leased or paid for with cash from operations. As of December 31, 1998, the
Company has incurred approximately $500,000 in expenses related to year 2000
issues.
 
  The Company has developed questionnaires and has contacted key suppliers
regarding their Year 2000 compliance to determine any impact on its
operations. In general, the suppliers have developed or are developing plans
to address the Year 2000 issue. The Company will continue to monitor and
evaluate the progress of its suppliers on this critical matter. The Company is
also reviewing its non-information technology systems to determine the extent
of any changes that may be necessary and believes that there will be minimal
changes necessary for compliance. None of the Company's other information
technology projects have been delayed due to the implementation of the Year
2000 project.
 
  Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
 
  Despite the Company's effort to identify and resolve Year 2000 compliance
problems, the Company cannot guarantee that all of the Company's systems will
be Year 2000 compliant or that other companies on which the Company relies
will be timely converted. As a result, the Company's operations could be
interrupted or otherwise adversely affected. The failure to correct a material
Year 2000 problem could result in an interruption in, or a failure of, certain
business operations. Such failures could have a material adverse effect on the
Company's financial condition and results of operations.
 
  The forward-looking statements regarding the Year 2000 involve risks and
uncertainties, which reflect management's best judgment based on factors
currently known. Actual results and experience could differ materially from
the anticipated results or other expectations expressed in the Company's
forward-looking statements as a result of a number of factors, including but
not limited to those discussed above.
 
                                      61
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of
American Golf Corporation and Subsidiaries
 
  We have audited the accompanying consolidated balance sheets of American
Golf Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American Golf Corporation and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
 
  As discussed in Note 2 to the accompanying consolidated financial
statements, American Golf Corporation and Subsidiaries changed their method of
accounting for membership initiation deposits and fees and the related
incremental direct costs and has restated the consolidated financial
statements to give retroactive effect to this change.
 
                                          PricewaterhouseCoopers LLP
 
Los Angeles, California
January 29, 1999, except for Note 15,
as to which the date is March 31, 1999.
 
                                      62
<PAGE>
 
                   AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
 
<TABLE>
<CAPTION>
                                                      December 31, December 31,
                                                          1998         1997
                                                      ------------ ------------
<S>                                                   <C>          <C>
                       ASSETS
                       ------
 
Current assets:
  Cash and cash equivalents..........................   $  1,453     $ 16,738
  Accounts receivable--members (less allowance for
   doubtful accounts of $1,570 and $1,312 in 1998 and
   1997, respectively)...............................     22,627       18,854
  Other receivables..................................     26,603       18,314
  Receivables from affiliates, net...................     11,580        9,730
  Inventories........................................     14,670       12,332
  Prepaid expenses...................................      5,876        3,724
                                                        --------     --------
      Total current assets...........................     82,809       79,692
Property, equipment and capital leases, net..........    105,934       87,597
Licenses.............................................        997          815
Leasehold rights.....................................     18,489       17,888
Deposits and other assets............................      9,209       12,123
Note receivable from shareholders....................     29,000       29,000
                                                        --------     --------
      Total assets...................................   $246,438     $227,115
                                                        ========     ========
        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------
 
Current liabilities:
  Accounts payable...................................   $ 10,113     $  4,932
  Notes payable--current portion:
    Shareholders.....................................         33           31
    Capital leases...................................      2,446        1,587
    Other............................................      2,309          642
  Accrued expenses...................................     35,295       34,519
  Other liabilities..................................     21,593       17,959
  Deferred revenue...................................     13,104       10,741
                                                        --------     --------
      Total current liabilities......................     84,893       70,411
  Notes payable--long-term portion:
    Shareholders.....................................        389          422
    Capital leases...................................      1,733        2,856
    Other............................................     79,108       59,188
  Accrued expenses...................................     29,589       35,300
  Deferred revenue...................................     36,848       30,431
                                                        --------     --------
      Total liabilities..............................    232,560      198,608
                                                        --------     --------
Minority interest....................................        503          501
                                                        --------     --------
Shareholders' equity:
  Common stock--no par value; 10,000,000 shares
   authorized; 6,294,918 and 6,438,525 shares
   outstanding at December 31, 1998 and 1997,
   respectively......................................        --         6,594
  Retained earnings..................................     18,995       28,066
  Notes receivable from shareholders.................     (5,576)      (6,591)
  Cumulative foreign currency translation
   adjustment........................................        (44)         (63)
                                                        --------     --------
      Total shareholders' equity.....................     13,375       28,006
                                                        --------     --------
      Total liabilities and shareholders' equity.....   $246,438     $227,115
                                                        ========     ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       63
<PAGE>
 
                   AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                      For the year ended
                                                         December 31,
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues:
  Green fees..................................... $204,189  $188,725  $157,821
  Cart rentals...................................   65,594    60,762    57,753
  Member dues and initiation fees................   99,955    82,994    62,288
  Food and beverage sales........................  108,665    89,633    70,289
  Merchandise sales..............................   50,790    44,695    37,805
  Other revenue..................................   40,074    43,203    37,427
  Management fees................................    6,586     7,119     4,360
                                                  --------  --------  --------
    Total revenues...............................  575,853   517,131   427,743
                                                  --------  --------  --------
Costs & expenses:
  Payroll and related expenses...................  203,265   188,808   144,779
  Cost of food and beverage sold.................   34,240    28,190    22,682
  Cost of merchandise sold.......................   31,682    28,598    24,660
  General and administrative.....................   46,121    42,604    42,155
  Repairs and maintenance........................   14,748    11,996    11,639
  Other operating expenses.......................   99,998    84,454    72,806
  Rents..........................................  126,779   109,141    93,494
  Depreciation and amortization..................   10,914     9,275     9,546
                                                  --------  --------  --------
    Total costs & expenses.......................  567,747   503,066   421,761
                                                  --------  --------  --------
Operating income.................................    8,106    14,065     5,982
                                                  --------  --------  --------
Other income (expense):
  Interest income................................    4,506     4,541     2,210
  Interest expense...............................   (7,594)   (5,823)   (3,841)
                                                  --------  --------  --------
    Income before provision for state income
     taxes and minority interest in (income)
     loss........................................    5,018    12,783     4,351
Provision for state income taxes.................     (270)     (425)     (223)
                                                  --------  --------  --------
    Income before minority interest in (income)
     loss........................................    4,748    12,358     4,128
Minority interest in (income) loss...............       (2)      (35)      215
                                                  --------  --------  --------
    Net income...................................    4,746    12,323     4,343
                                                  --------  --------  --------
Other comprehensive income, net of tax:
    Foreign currency translation adjustment......       19       (40)      (79)
                                                  --------  --------  --------
    Comprehensive income......................... $  4,765  $ 12,283  $  4,264
                                                  ========  ========  ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       64
<PAGE>
 
                   AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                                       Cumulative
                                                                         Foreign
                          Common Stock               Notes Receivable   Currency       Total
                         ---------------  Retained         From        Translation Shareholder's
                         Shares  Amount   Earnings  Officers/Directors Adjustment     Equity
                         ------  -------  --------  ------------------ ----------- -------------
<S>                      <C>     <C>      <C>       <C>                <C>         <C>
Balance, December 31,
 1995................... 6,354   $ 8,682  $ 36,382       $(4,901)         $ 56       $ 40,219
  Net income............   --        --      4,343           --            --           4,343
  Dividends.............   --        --     (9,133)          --            --          (9,133)
  Notes receivable from
   shareholders.........   --       (602)      --            602           --             --
  Foreign currency
   translation
   adjustment...........   --        --        --            --            (79)           (79)
                         -----   -------  --------       -------          ----       --------
Balance, December 31,
 1996................... 6,354     8,080    31,592        (4,299)          (23)        35,350
  Net income............   --        --     12,323           --            --          12,323
  Dividends.............   --        --    (15,849)          --            --         (15,849)
  Issuance of shares for
   notes receivable.....   149     4,235       --         (4,115)          --             120
  Purchase of shares
   from shareholders....   (65)   (5,721)      --          1,823           --          (3,898)
  Foreign currency
   translation
   adjustment...........   --        --        --            --            (40)           (40)
                         -----   -------  --------       -------          ----       --------
Balance, December 31,
 1997................... 6,438     6,594    28,066        (6,591)          (63)        28,006
  Net income............   --        --      4,746           --            --           4,746
  Dividends.............   --        --     (6,314)          --            --          (6,314)
  Issuance of shares for
   notes receivable.....    32     3,012       --         (3,012)          --             --
  Purchase of shares
   from shareholders....  (175)   (9,606)   (7,503)        4,027           --         (13,082)
  Foreign currency
   translation
   adjustment...........   --        --        --            --             19             19
                         -----   -------  --------       -------          ----       --------
Balance, December 31,
 1998................... 6,295   $   --   $ 18,995       $(5,576)         $(44)      $ 13,375
                         =====   =======  ========       =======          ====       ========
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       65
<PAGE>
 
                   AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                      For the year ended
                                                         December 31,
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
  Net income..................................... $  4,746  $ 12,323  $  4,343
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization................   10,914     9,275     9,475
    Minority interest in income/(loss)...........        2        35      (215)
    Increase (decrease) from changes in:
      Accounts receivable--members...............   (3,775)   (1,253)   (6,914)
      Other receivables..........................   (8,282)   (4,243)   (4,204)
      Receivable from affiliates, net............   (1,858)   (1,745)    1,288
      Inventories................................   (2,334)     (875)   (1,205)
      Prepaid expenses...........................   (2,153)   (1,200)      930
      Licenses, deposits and other assets........    2,736    (5,160)    2,413
      Accounts payable...........................    5,181    (2,640)      770
      Accrued expenses...........................   (4,962)   33,692     8,882
      Other liabilities..........................    3,616     6,766     4,177
      Deferred revenue...........................    8,780     6,857     9,932
                                                  --------  --------  --------
        Net cash provided by operating
         activities..............................   12,611    51,832    29,672
                                                  --------  --------  --------
Cash flows from investing activities:
  Acquisition of property and equipment..........  (26,220)  (13,758)   (9,970)
  Acquisition of leasehold rights................   (1,759)   (4,730)   (3,571)
  Issuance of note receivable from shareholders..      --        --    (29,000)
                                                  --------  --------  --------
        Net cash used in investing activities....  (27,979)  (18,488)  (42,541)
                                                  --------  --------  --------
Cash flows from financing activities:
  Proceeds from notes payable
        Other....................................   65,500    12,053    57,732
  Payments on notes payable
        Shareholders.............................      (31)      (29)      (26)
        Other....................................  (43,910)  (12,018)  (34,717)
        Capital leases...........................   (2,070)   (1,713)   (1,160)
  Purchase of common stock.......................  (13,082)   (1,447)      --
  Proceeds from issuance of common stock to
   shareholders..................................      --        120       --
  Dividends paid.................................   (6,314)  (15,849)   (9,133)
                                                  --------  --------  --------
    Net cash provided by (used in) financing
     activities..................................       93   (18,883)   12,696
    Effect of exchange rate changes on cash and
     cash equivalents............................      (10)      (14)      119
                                                  --------  --------  --------
    Net increase (decrease) in cash and cash
     equivalents.................................  (15,285)   14,447       (54)
Cash and cash equivalents, beginning of period...   16,738     2,291     2,345
                                                  --------  --------  --------
Cash and cash equivalents, end of period......... $  1,453  $ 16,738  $  2,291
                                                  ========  ========  ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       66
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) Organization and Summary of Significant Accounting Policies:
 
 Organization
 
  The consolidated financial statements include the accounts of American Golf
Corporation ("AGC" or "the Company"), a California subchapter S Corporation,
and its majority-owned subsidiaries, American Golf of Atlanta ("Atlanta"), a
Georgia general partnership, American Golf of Detroit ("Detroit"), a Michigan
general partnership, American Golf (UK) Limited ("AG(UK)"), a United Kingdom
limited liability company, and CW Golf Partners ("CWP"), a California limited
partnership (collectively, the "Company"). AGC was formed in 1973 for the
purpose of operating public and private golf and tennis facilities on leased
premises. At December 31, 1998 and 1997, 71% and 70%, respectively, of the
Company was owned by David G. Price and Dallas P. Price ("The Prices"). The
following table lists AGC's majority-owned subsidiaries and selected
information:
 
<TABLE>
<CAPTION>
                                         AGC
   Entity              Formation Date Ownership            Purpose
   ------              -------------- ---------            -------
   <C>                 <C>            <C>       <S>
                                                Operate four courses in
   Atlanta............ June 1986         65%    Atlanta, Georgia.
                                                Operate four courses in
   Detroit............ December 1990     80%    Detroit, Michigan.
                                                Operate courses in the United
   AG(UK)............. August 1993       75%    Kingdom.
                                                Operate one course in Los
   CWP................ September 1993    75%    Angeles, California.
</TABLE>
 
  The remaining 25% interest in AG(UK) is owned by European Golf Corporation,
an affiliate of AGC.
 
  The term "affiliate", as used in these financial statements, refers to any
entity in which The Prices have a controlling interest.
 
  At December 31, 1998, the Company leases 125 golf courses from National Golf
Properties, Inc. ("NGP"). David G. Price, Chairman of the Board of Directors
of NGP, and Dallas P. Price each own 2.8% of NGP's outstanding stock and 17%
of the common units of National Golf Operating Partnership, L.P.
 
  On July 30, 1996, NGP purchased 20 golf courses from Golf Enterprises Inc.
for a purchase price of $58 million. All of the courses acquired were leased
to the Company on a triple net basis. NGP receives minimum annual base rent
for these related golf courses equal to 10% of its investment. The minimum
base rent will be adjusted in specific years based on increases in the CPI.
Additionally, a percentage rent feature allows NGP to participate in any
growth in revenues.
 
 Principles of Consolidation
 
  All material intercompany transactions and balances have been eliminated in
consolidation.
 
 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Inventories
 
  Inventories are stated at the lower of cost (using the first-in, first-out
method) or market. Inventories consist primarily of food, beverage, golf and
tennis equipment, and clothing and accessories.
 
                                      67
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Revenue Recognition
 
  Revenue from green fees, cart rentals, food and beverage sales, merchandise
sales and range income are generally recognized at the time of sale.
 
  Revenue from membership dues are generally billed monthly and recognized in
the month earned. The monthly dues are structured to cover the club operating
costs and membership services. Initiation fee deposits are generally
refundable in 30 years. Accordingly, the difference between the amount of the
deposits and the net present value of the future obligation is recognized as
revenue on a straight-line basis over the expected average life of active
membership, unless uncertainty surrounding collectibility exists for
initiation fee deposits paid either on terms or an installment basis. In
addition, related incremental direct costs (primarily commissions and
percentage rent) are recorded in the same manner as the revenues are
recognized.
 
  The initiation fee deposit liability accretes over 30 years using the
interest method. The accretion is recorded to interest expense in the
accompanying consolidated statements of operations and comprehensive income.
As of December 31, 1998, there are no initiation fee deposits that are
contractually due and payable during the next five years.
 
 Property, Equipment, Capital Leases and Leasehold Rights
 
  Property, equipment and leasehold rights are carried at the lower of cost or
net realizable value. Property and equipment under capital leases are stated
at the lower of the present value of the future minimum lease payments at the
beginning of the lease term or the fair value at the inception of the lease.
 
  Depreciation of property and equipment is computed using the straight-line
method over the lesser of the estimated useful life of the asset (3 to 30
years) or the remaining term of the lease. Property and equipment held under
capital leases and leasehold rights are amortized using the straight-line
method over the lesser of the lease term or the estimated useful life of the
asset.
 
  When property and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation and amortization account are
relieved, and any gain or loss is included in operations. Expenditures for
maintenance and repairs are charged to operations. Significant expenditures
which extend the useful life of existing assets are capitalized.
 
 Impairment of Long-Lived and Intangible Assets
 
  Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Certain long-lived assets and certain identifiable intangibles
to be disposed of must be reported at the lower of carrying amount or fair
value less cost to sell. The Company periodically assesses whether there has
been an impairment in the value of long-lived assets and certain identifiable
intangibles by considering factors such as expected future operating income,
trends and prospects, as well as the effects of demand, competition and other
economic factors. The Company determines whether there has been impairment by
comparing the expected undiscounted future cash flow from each golf course
with the net carrying value for such golf course, including any related
intangible asset. Management believes no impairment has occurred.
 
                                      68
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Stock-Based Employee Compensation Awards
 
  SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require companies to record compensation cost for stock-based compensation
plans at fair value. The Company has adopted the disclosure requirements of
SFAS No. 123, which involves proforma disclosure of net income under
SFAS No. 123 and detailed descriptions of plan terms and assumptions used in
valuing stock option grants. The Company has chosen to continue to account for
stock-based employee compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
 
 Comprehensive Income
 
  Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption had
no impact on the Company's net income or shareholders' equity. Comprehensive
income includes foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
 
 Concentration of Credit Risk
 
  Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables.
 
  The Company has cash in financial institutions which is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per account. At
various times throughout the year and as of December 31, 1998, the Company had
cash in financial institutions which was in excess of the FDIC insurance
limit.
 
  Concentration of credit risk with respect to trade receivables, which
consists primarily of membership dues and charges, is limited due to the large
number of club members comprising the Company's customer base, and their
dispersion across many different geographic areas. The trade receivables are
billed and due monthly, and all probable bad debt losses have been
appropriately considered in establishing an allowance for doubtful accounts.
As of December 31, 1998, the Company had no significant concentration of
credit risk.
 
 Fair Value of Financial Instruments
 
  To meet the reporting requirements of SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," the Company calculates the fair value of
financial instruments and includes this additional information in the notes to
the consolidated financial statements when the fair value is materially
different than the carrying value of those financial instruments. When the
fair value reasonably approximates the carrying value, no additional
disclosure is made. The Company uses quoted market prices, when available, or
discounted cash flows to calculate these fair values.
 
 Cash and Cash Equivalents
 
  The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
 
 Advertising
 
  The Company expenses advertising costs as incurred. Advertising costs for
the years ended December 31, 1998, 1997 and 1996 were approximately
$7,375,000, $5,627,000 and $5,531,000, respectively.
 
                                      69
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Foreign Currency Translation
 
  The Company translates foreign currency financial statements by translating
balance sheet accounts at the year-end exchange rate and income statement
accounts at the average exchange rate for the year. Translation gains and
losses are recorded in shareholders' equity and as a component of other
comprehensive income. Realized gains and losses are included in operations.
The effect of realized gains and losses is not material to the consolidated
financial statements.
 
(2) Change in Accounting Policy:
 
  Based on recent Securities and Exchange Commission pronouncements the
Company changed its accounting policy for member initiation fees to defer such
revenues and recognize them on a straight-line basis over the expected average
life of active membership. The Company previously recognized as revenue the
difference between the amount of the fees and the net present value of the
future obligation at the time of sale, unless for initiation fees paid either
on terms or an installment basis uncertainty surrounding collectibility
existed. In addition to the deferral of member initiation fees, the Company
has deferred the related incremental direct costs (primarily commissions and
percentage rent) and is recording such costs in the same manner as the
revenues are recognized. As noted below, this change in accounting policy
resulted in a reduction to previously reported revenues, net income and
retained earnings. The deferred member initiation fees and related incremental
direct costs will be recognized in future periods over the expected average
life of active membership. Accordingly, the accompanying consolidated
financial statements have been retroactively adjusted to reflect this change
for all periods presented. The impact of the restatement is a reduction as
summarized below:
 
<TABLE>
<CAPTION>
                                                      1998     1997      1996
                                                    --------  -------  --------
                                                          (In thousands)
   <S>                                              <C>       <C>      <C>
   Total revenues.................................. ($10,422) ($8,101) ($11,824)
   Net income......................................   (8,780)  (6,857)   (9,932)
</TABLE>
 
  In addition, this change resulted in a decrease in retained earnings of
$49,952,000, $41,172,000 and $34,315,000 as of December 31, 1998, 1997 and
1996, respectively.
 
(3) Receivables from Affiliates, net:
 
  The receivables from affiliates are uncollateralized and due within one
year.
 
(4) Property, Equipment and Capital Leases:
 
  Property, equipment and capital leases consist of the following:
 
<TABLE>
<CAPTION>
                            Estimated
                             Useful     December 31,
                              Lives   ------------------
                             (Years)    1998      1997
                            --------- --------  --------
                                        (In thousands)
   <S>                      <C>       <C>       <C>
   Golf course
    improvements...........   10-20   $ 71,848  $ 58,038
   Buildings...............   15-30     43,242    38,411
   Furniture, fixtures,
    machinery and
    equipment..............    3-7      31,108    27,627
   Equipment under capital
    leases.................    3-7       9,299     7,515
                                      --------  --------
                                       155,497   131,591
   Less: Accumulated
    depreciation...........            (52,687)  (44,378)
                                      --------  --------
                                       102,810    87,213
   Construction-in-
    progress...............              3,124       384
                                      --------  --------
                                      $105,934  $ 87,597
                                      ========  ========
</TABLE>
 
                                      70
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Equipment under capital leases includes golf carts, turf and maintenance
equipment, computers, and other office equipment.
 
  No interest was capitalized for the year ended December 31, 1998. Interest
capitalized for the years ended December 31, 1997 and 1996 was approximately
$177,000 and $347,000, respectively.
 
 
(5) Note Receivable from Shareholders:
 
  During 1996, the Company loaned $29 million to The Prices. The note is due
in 2004. The note bears interest at 9.35% and is payable semi-annually.
 
(6) State Income Taxes:
 
  The Company has elected to be taxed as an S corporation under the Internal
Revenue Code of 1986, as amended. Accordingly, corporate income is taxed
directly to the shareholders for federal income tax reporting purposes. The
Company therefore has no provision in its consolidated financial statements
for federal income taxes. The following is the provision for state franchise
and income taxes for the years ended December 31, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                 1998 1997 1996
                                                                 ---- ---- ----
                                                                 (In thousands)
   <S>                                                           <C>  <C>  <C>
   Current...................................................... $--  $270 $--
   Deferred.....................................................  270  155  223
                                                                 ---- ---- ----
     Total provision for state income taxes..................... $270 $425 $223
                                                                 ==== ==== ====
</TABLE>
 
(7) Notes Payable--Shareholders:
 
  The notes are due in 2007 and bear interest at 8%. Interest expense to the
shareholders for the years ended December 31, 1998, 1997 and 1996 was
approximately $35,000, $37,000 and $40,000, respectively.
 
  Annual maturities on the notes payable to shareholders are as follows:
 
<TABLE>
<CAPTION>
     Year ended December 31,                                          Amount
     -----------------------                                      --------------
                                                                  (In thousands)
     <S>                                                          <C>
       1999.....................................................      $  33
       2000.....................................................         36
       2001.....................................................         39
       2002.....................................................         43
       2003.....................................................         46
       Thereafter...............................................        225
                                                                      -----
                                                                      $ 422
                                                                      =====
</TABLE>
 
                                      71
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(8) Notes Payable--Others:
 
  Notes payable to others consist of the following:
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                  -------------------------------
                                                       1998            1997
                                                  --------------- ---------------
                                                           (In thousands)
                                                           Long-           Long-
                          Interest    Interest    Current  Term   Current  Term
Type of Collateral          Rate      Payments    Portion Portion Portion Portion Maturity
------------------        --------- ------------- ------- ------- ------- ------- --------
<S>                       <C>       <C>           <C>     <C>     <C>     <C>     <C>
Uncollateralized note...     9.0%      Monthly    $  --   $   --   $  7   $   --   4/1998
Collateralized note.....   9%-23%      Monthly        18      --    133        16  4/1999
Uncollateralized line of
 credit.................  Reference    Monthly       --    22,000   --        --   1/2001
Collateralized note.....     9.5%     Quarterly       80    2,326   --      2,380 12/2001
Uncollateralized note...     6.1%     Annually       817    1,634   --      2,451  1/2002
Uncollateralized note...     8.3%     Quarterly       46      133    42       178  6/2002
Collateralized note.....     9.4%   Semi-Annually    660   40,840   --     41,500  7/2004
Collateralized note.....     8.0%      Monthly       281    4,115   237     4,426  9/2009
Collateralized note.....     9.5%      Monthly       262    4,520   223     4,808  1/2010
Collateralized note.....     9.2%      Monthly       145    3,540   --      3,429 11/2012
                                                  ------  -------  ----   -------
                                                  $2,309  $79,108  $642   $59,188
                                                  ======  =======  ====   =======
</TABLE>
 
At December 31, 1998 and 1997, the bank prime and reference rate was 7.75% and
8.50%, respectively.
 
  Annual maturities on notes payable to others are as follows:
 
<TABLE>
<CAPTION>
     Year ended December 31,                                          Amount
     -----------------------                                      --------------
                                                                  (In thousands)
     <S>                                                          <C>
       1999.....................................................     $ 2,309
       2000.....................................................       4,907
       2001.....................................................       5,292
       2002.....................................................       4,844
       2003.....................................................       5,308
       Thereafter...............................................      58,757
                                                                     -------
                                                                     $81,417
                                                                     =======
</TABLE>
 
  The note agreements and credit facilities contain, among other covenants,
working capital maintenance, fixed charge and debt to net worth ratios,
minimum tangible net worth amounts, and certain restrictions regarding
indebtedness to others.
 
  On December 31, 1997, the Company entered into a $40 million revolving
credit facility and a $13.5 million standby letter of credit facility with a
commercial bank that bears interest at prime or a LIBOR based rate. Letters of
credit issued under these credit facilities are charged a 1.0% annual letter
of credit fee. The $40 million revolving credit facility is used to finance
working capital requirements and expires on January 2, 2001. At December 31,
1998, there was $22 million outstanding and $2.5 million in standby letters of
credit outstanding under the $40 million revolving credit facility. The $13.5
million standby letter of credit facility, which expires on January 2, 2001,
supports outstanding letters of credit issued in favor of NGP, pursuant to the
terms of the leases between NGP and AGC.
 
  In December 1996, the Company placed $41.5 million of fixed rate senior
collateralized notes due 2004 with a group of institutional investors. The net
proceeds from the private placement were used to repay bank debt and provide a
$29 million loan to The Prices.
 
                                      72
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  On July 30, 1996, the Company entered into two $15 million credit facilities
with a commercial bank that beared interest at prime or a Libor based rate.
Letters of credit issued under these credit facilities were charged a 1.5%
annual letter of credit fee. The first $15 million facility was used to
finance working capital requirements and expired on August 1, 1997. The second
$15 million credit facility, which was due to expire on August 15, 1997, but
was extended to December 31, 1997, supported $13,555,000 of letters of credit
issued in favor of NGP, pursuant to the terms of the leases between NGP and
AGC. The Company was also required to maintain specified financial ratios and
levels of net worth.
 
  The credit facilities and the private placement loan are collateralized by
the issued and outstanding stock of an affiliate.
 
(9) Notes Payable--Capital Leases:
 
  Future minimum payments, by year and in the aggregate, under capital leases
with initial remaining terms of one year or more consist of the following at
December 31, 1998:
 
<TABLE>
<CAPTION>
   Year ended December 31,                                           Amount
   -----------------------                                        -------------
                                                                  (In thousands)
   <S>                                                            <C>
      1999.......................................................    $2,733
      2000.......................................................     1,317
      2001.......................................................       408
      2002.......................................................       124
      2003.......................................................        18
      Thereafter ................................................         8
                                                                     ------
    Total minimum lease payments.................................     4,608
    Amount representing interest.................................       429
                                                                     ------
    Present value of net minimum lease payments..................     4,179
    Current portion..............................................     2,446
                                                                     ------
    Long-term portion............................................    $1,733
                                                                     ======
</TABLE>
 
(10) Employee Benefit Plans:
 
 1994 Equity Participation Plan
 
  In 1994, the Company established the 1994 Equity Participation Plan, as
amended (the "1994 Plan"). Under the 1994 Plan, 1,200,000 shares may be
awarded to key employees as either nonqualified stock options, performance
awards, or the right to purchase common stock. There were 162,928 and 280,484
shares available under the 1994 Plan as of December 31, 1998 and 1997,
respectively. In 1998, the Company issued 31,700 shares of common stock at
$95.00 per share and received a note totaling $3,012,000. The Company also
repurchased 175,307 shares of common stock issued under the 1994 Plan at
prices ranging from $80.55 to $95.00 per share. As part of the repurchase,
notes receivable totaling $4,026,000 were paid off. In 1997, the Company
issued 149,264 shares of common stock at prices ranging from $22.05 to $43.12
per share and received notes receivable totaling $4,115,000. The Company also
repurchased 65,236 shares of common stock issued under the 1994 Plan at prices
ranging from $87.05 to $88.06 per share. As part of the repurchase, notes
receivable totaling $1,823,000 were paid off.
 
  Stock options granted vest over a three to five year period and are subject
to continued employment and the Company achieving certain financial
performance targets. The fair value of stock options granted is estimated
using the minimum value pricing method with the following assumptions: (i)
risk-free interest rate of 7.0%,
 
                                      73
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(ii) expected option life of seven years, (iii) forfeiture rate of zero, (iv)
no expected volatility and (v) dividend yield of 5%.
 
  The summary of the status of the Company's stock options as of December 31,
1998, 1997 and 1996, and the activity with executives, key employees and
members of the AGC Board of Directors during the years then ended is presented
below:
 
<TABLE>
<CAPTION>
                                1998              1997              1996
                          ----------------- ----------------- ----------------
                                   Weighted          Weighted         Weighted
                                   Average           Average          Average
                          Number    Option  Number    Option  Number   Option
                            of     Exercise   of     Exercise   of    Exercise
                          Shares    Price   Shares    Price   Shares   Price
                          -------  -------- -------  -------- ------- --------
<S>                       <C>      <C>      <C>      <C>      <C>     <C>
Outstanding at beginning
 of year................. 440,424   $26.60  350,595   $22.05  350,595  $22.05
Granted--price equals
 fair value.............. 297,111    87.12   15,821    22.05      --      --
Granted--price greater
 than fair value.........     --       --    95,127    43.12      --      --
Exercised................  (9,395)   22.05      --       --       --      --
Canceled................. (47,265)   28.77  (21,119)   22.05      --      --
                          -------   ------  -------   ------  -------  ------
Options outstanding at
 year end................ 680,875   $53.04  440,424   $26.60  350,595  $22.05
                          =======   ======  =======   ======  =======  ======
Options exercisable at
 year end................ 347,516           290,314               --
                          =======           =======           =======
</TABLE>
 
  The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                        Options Outstanding         Options Exercisable
                 --------------------------------- ---------------------
                    Number     Weighted               Number
                 Outstanding    Average   Weighted Outstanding  Weighted
                      at       Remaining  Average       at      Average
      Exercise   December 31, Contractual Exercise December 31, Exercise
       price         1998        Life      Price       1998      Price
      --------   ------------ ----------- -------- ------------ --------
     <S>         <C>          <C>         <C>      <C>          <C>
          22.05    303,722        3.1      $22.05    291,065     $22.05
          43.12    123,597        4.3       43.12     56,451      43.12
          95.00    253,556        6.0       95.00        --       95.00
                   -------                           -------
                   680,875                           347,516
                   =======                           =======
</TABLE>
 
  The Company adopted the disclosure only provision of SFAS No. 123 and
accordingly, no compensation expense has been recognized for stock option
grants to executives, key employees and members of the AGC Board of Directors.
Had compensation expense for such grants been determined based on the fair
value of the award, at the grant date, consistent with the provisions of SFAS
No. 123, the Company's net income would have been reduced to the proforma
amounts indicated below:
 
<TABLE>
<CAPTION>
                                                           For the year ended
                                                              December 31,
                                                          ---------------------
                                                           1998   1997    1996
                                                          ------ ------- ------
                                                              (In thousands)
   <S>                                                    <C>    <C>     <C>
   Net income--as reported............................... $4,746 $12,323 $4,343
                                                          ====== ======= ======
   Net income--pro forma................................. $4,746 $12,301 $4,343
                                                          ====== ======= ======
</TABLE>
 
                                      74
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  In 1995, performance awards were granted to key members of management who
were not awarded the right to purchase common stock or nonqualified stock
options. The 1994 Plan provides that holders of performance awards have the
right to receive an amount equal to the appreciation in share value (as
measured by a predetermined formula based on the Company's earnings). All
performance awards were scheduled to mature on December 31, 1998. In 1998, the
Company granted the holders of performance awards the right to receive, as a
prepayment, a portion of their appreciation in share value based on the 1997
share price, payable in 1999, and extend the maturity date of the performance
shares to December 31, 1999. The appreciation in share value, less the
prepayment, is payable in three equal annual installments, beginning in early
2000. Performance awards vest based on achieving certain earnings targets of
the Company and are subject to continued employment. Performance awards
outstanding totaled 191,884 and 180,567 as of December 31, 1998 and 1997,
respectively. For the year ended December 31, 1998, no compensation expense
was recorded with respect to the performance awards as management determined
that the accrual recorded in 1997 is adequate based on earnings estimates of
the Company for the year ended December 31, 1999. For the year ended December
31, 1997 compensation expense recorded was $17,500,000. For the year ended
December 31, 1996 no compensation expense was recorded with respect to the
performance awards as the minimum vesting targets had not been achieved.
 
 Share Appreciation Plan
 
  The Company has a long-term share appreciation plan (phantom stock plan) for
key members of management. The plan is administered by the AGC Board of
Directors and provides that the participants have the right to receive an
amount equal to the appreciation in share value (as measured by a
predetermined formula based on cash flow) at a date five years following the
date of grant. The appreciation in share value is payable 50% after the
exercise period, and the remainder, with interest, in three equal
installments, on the last day of the succeeding three years. There were 76,000
and 125,000 outstanding share appreciation rights as of December 31, 1998 and
1997, respectively. There was no share appreciation expense for the years
ended December 31, 1998 and 1997. The share appreciation expense for the year
ended December 31, 1996 was approximately $620,000. The Company does not
intend to grant any additional share appreciation rights.
 
 401(k) Employee Savings Plan
 
  The Company has a 401(k) Employee Savings Plan available to all employees
who have earned one year of vesting service and are at least 21 years of age.
Participants may contribute from 1% to 10% of their earnings, in whole
percentages, on a before-tax basis. The Company contributes to participants'
accounts based on the amount the participant elects to defer and a matching
contribution equal to $0.50 on each dollar contributed by a participant up to
3% of the participant's gross pay. The Company's expense for the plan for the
years ended December 31, 1998, 1997 and 1996 was approximately $947,000,
$796,000 and $635,000, respectively.
 
                                      75
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(11) Commitments and Contingencies:
 
  The Company is the lessee under long-term operating leases for golf courses
and equipment. At December 31, 1998, future minimum rental payments required
pursuant to the terms of all lease obligations are as follows:
 
<TABLE>
<CAPTION>
                                                   Related  Unrelated
   Year ended December 31,                         Parties   Parties    Total
   -----------------------                         -------- --------- ----------
                                                           (In thousands)
   <S>                                             <C>      <C>       <C>
     1999........................................  $ 77,768 $ 39,464  $  117,232
     2000........................................    77,768   35,641     113,409
     2001........................................    77,768   31,402     109,170
     2002........................................    77,768   27,721     105,489
     2003........................................    77,768   25,407     103,175
     Thereafter..................................   586,081  330,260     916,341
                                                   -------- --------  ----------
                                                   $974,921 $489,895  $1,464,816
                                                   ======== ========  ==========
</TABLE>
 
  In addition to minimum rental payments, certain leases require payment of
the excess of various percentages of gross revenue over the minimum rental
payments. During the years ended December 31, 1998, 1997 and 1996, percentage
rentals paid to unrelated parties were approximately $9,572,000, $10,179,000
and $9,430,000, respectively.
 
  Under the terms of certain leases, the Company is committed to make
improvements at golf courses. At December 31, 1998, approximately $6,681,000
of such improvements remain to be made.
 
  At December 31, 1998, the Company was contingently liable for outstanding
letters of credit in the amount of approximately $16,010,000.
 
  The Company has continuing litigation matters and other contingencies
incurred in the ordinary course of business and has recorded allowances for
the payment of these contingencies when such amounts can be estimated and are
considered material to the results of operations. Where no allowance has been
recorded, the Company does not consider the contingencies material to its
consolidated financial position, results of operations or cash flows.
 
(12) Related Party Transactions:
 
  The Company rents golf and tennis facilities from The Prices and related
entities in which they have a controlling interest. Rent expense paid to The
Prices and related entities was approximately $80,027,000, $71,434,000 and
$58,643,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
 
  The Company recorded net management fees from related entities in the amount
of approximately $1,504,000, $2,610,000 and $1,332,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
 
  The Company has accumulated costs in other receivables relating to
construction in progress at certain golf and tennis facilities owned by NGP.
Periodically, substantially all of these costs are reimbursed by NGP. At
December 31, 1998, 1997 and 1996, these accumulated costs amounted to
approximately $8,855,000, $9,057,000 and $6,456,000, respectively.
 
  The Company earns interest on receivables from affiliates at a prime based
rate. Interest income from affiliates was approximately $247,000, $587,000 and
$818,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
 
                                      76
<PAGE>
 
                  AMERICAN GOLF CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(13) Statement of Cash Flows--Supplemental Disclosures:
 
  Interest paid for the years ended December 31, 1998, 1997 and 1996 was
approximately $6,815,000, $5,192,000 and $1,950,000, respectively.
 
  State income taxes paid for the years ended December 31, 1998, 1997 and 1996
were approximately $259,000, $38,000 and $223,000, respectively.
 
(14) Shareholders' Equity:
 
  As discussed in Note 10 to the consolidated financial statements, the
Company has issued 298,525 shares of common stock to key employees for notes
receivable with a balance at December 31, 1998 and 1997 of $5,576,000 and
$6,591,000, respectively. The notes receivable bear interest ranging from six
to seven percent and the principal is due in 2004. The notes are
collateralized by the common stock issued and are shown on the consolidated
balance sheets as a reduction in shareholders' equity. Interest income accrued
on the notes receivable was approximately $425,000, $491,000 and $300,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
 
  Interest is paid with proceeds from shareholder distributions and, if
necessary, a portion of their annual bonus. To the extent these amounts are
insufficient to cover the current year interest, the unpaid interest may be
added to the principal of the note. No amounts were added to principal for the
years ended December 31, 1998, 1997 and 1996.
 
(15) Subsequent Event (Unaudited)
 
  On March 31, 1999, Golf Acquisitions, LLC ("Golf Acquisitions"), a new
limited liability company formed by a subsidiary of AGC and a subsidiary of
ClubCorp International ("ClubCorp"), purchased the Meditrust Corporation
("Meditrust") subsidiaries comprising the "Cobblestone Golf Group" for
approximately $391.3 million in cash and assumed debt. Upon the closing of the
stock purchase, AGC and ClubCorp divided the Cobblestone portfolio of 48 golf
courses with AGC allocated 24 owned, leased and managed golf courses.
Concurrently with closing its purchase, the Company and Golf Acquisitions sold
to NGP its interest in 20 of the golf courses. The Company has entered into
agreements to lease or sublease 18 of the Cobblestone courses from NGP. In
connection with this transaction, the Company temporarily increased its
revolving credit facility to $50 million. The additional $10 million available
under the revolving credit facility is to be used solely for costs and working
capital requirements related to the Cobblestone Golf Group acquisition, and
expires on May 31, 1999.
 
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<PAGE>
 
                                  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.
 
                                          NATIONAL GOLF PROPERTIES, INC.
 
                                                  /s/ James M. Stanich
                                          By: _________________________________
                                                      James M. Stanich
                                                         President
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ David G. Price            Chairman of the Board         March 31, 1999
____________________________________
           David G. Price
 
      /s/ James M. Stanich           President and Director        March 31, 1999
____________________________________  (Principal Executive
          James M. Stanich            Officer)
 
       /s/ Neil M. Miller            Vice President--Finance       March 31, 1999
____________________________________
           Neil M. Miller
 
      /s/ William C. Regan           Vice President--Controller    March 31, 1999
____________________________________  and Treasurer
          William C. Regan
 
     /s/ Richard A. Archer           Director                      March 31, 1999
____________________________________
         Richard A. Archer
 
    /s/ John C. Cushman, III         Director                      March 31, 1999
____________________________________
        John C. Cushman, III
 
        /s/ Bruce Karatz             Director                      March 31, 1999
____________________________________
            Bruce Karatz
 
      /s/ Charles S. Paul            Director                      March 31, 1999
____________________________________
          Charles S. Paul
 
      /s/ Edward R. Sause            Director                      March 31, 1999
____________________________________
          Edward R. Sause
</TABLE>
 
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