<PAGE>   1

                                                        EXHIBIT 13.1

Urban Shopping Centers, Inc.
900 North Michigan Avenue
Suite 1500
Chicago, Illinois 60611


Urban Shopping Centers, Inc.
Annual Report 1996

Urban Shopping Centers, Inc. is a self-administered real estate
investment trust (REIT) in the business of owning, acquiring, managing,
leasing, developing and redeveloping super-regional and regional malls
throughout the United States. It commenced operations in October 1993 and is
listed on The New York Stock Exchange and The Chicago Stock Exchange (Symbol:
URB).
     Urban Shopping Centers currently owns a portfolio consisting of thirteen
retail properties comprised of more than eleven million square feet of space.
The company also has a 1.2 million square foot regional mall and a 450,000
square foot community center under development. The company opened the highly
successful Brandon TownCenter in Tampa, Florida in 1995 and Wolfchase Galleria
in Memphis, Tennessee on February 26, 1997. The company's portfolio produced
sales per square foot of $351 in 1996, which ranks among the highest in the
industry.
     Urban Shopping Centers owns interests in some of the premier shopping
centers in the United States including Oakbrook Center (Oak Brook, Illinois),
Water Tower Place (Chicago, Illinois) and Old Orchard Center (Skokie, Illinois)
as well as in Urban Retail Properties Co., its property management, leasing and
development affiliate. Urban Retail Properties Co. is one of the nation's
largest retail property managers, managing more than 55 million square feet of
regional malls and community centers in 23 states and the District of Columbia.


<TABLE>
                 <S>                                         <C>

                 Table of Contents
                 Letter to Shareholders                      1
                 Performance                                 4
                 Development                                 6
                 Acquisition                                 8
                 Retail Mix                                 10
                 Management                                 12
                 Property Locations                         14
                 Financial Highlights                       15
                 Management's Discussion                    16
                 Financial Statements                       22
                 Notes to Financial Statements              26
                 Independent Auditors' Report               34
                 Selected Financial Data                    35
                 Quarterly Financial Summary                35
                 Board of Directors/Officers                36
                 Shareholder Information                    36
</TABLE>

On the Cover
Old Orchard Center in Skokie, Illinois which was acquired by Urban Shopping
Centers in December of 1996. The property was redeveloped by Urban Retail
Properties Co. during 1994 and 1995.


Members of the redevelopment team seen on the cover are as follows:

On the front cover, from left to right:

Judith J. Jacobs, Vice President-Leasing

Michael T. Laing, Vice President-Development

Michael S. Levin, Executive Vice President-Development


On the back cover, from left to right:

Charles C. Porter, Senior Vice President-Development

Robert W. Lenke, Senior Vice President-Development

Wendy J. Peczkowski, Vice President-Leasing


<PAGE>   2


STRATEGY, EXECUTION, RESULTS

These three words have been our focus since Urban Shopping Centers, Inc. became
a public company in 1993. Because of that focus, we have established Urban
Shopping Centers as one of the country's premier owners, developers and
property managers in the regional mall industry.
     Our ongoing strategy has been to create dominant, destination shopping
malls with broad demographic appeal. We believe our properties will continue to
outperform the retail marketplace during most economic conditions and therefore
continue to provide strong and consistent long-term returns to shareholders.
     To execute that strategy, we assembled a management team with
industry-leading credentials -- unquestioned expertise in developing/
redeveloping mall properties, acquisitions, property management, leasing and
market research. A major highlight for us in 1996 was the acquisition of Old
Orchard Center outside of Chicago. We utilized all our management and
development expertise, originally managing, renovating and expanding the mall
for its third party owner, enhancing the tenant mix and eventually acquiring it
for our own property portfolio. The addition of Old Orchard has solidified our
position as the dominant regional mall operator in the greater Chicago market.
     In the following pages of this year's annual report, we have outlined in
more detail the elements of our strategy and execution which help us meet the
challenge of creating long-term company growth and increased shareholder
value.

   Funds Available
  for Distribution
   ($in millions)

   94   95   96

  [INSERT PLOT POINTS]

Mall Tenant Sales
($in millions)

   94   95   96

  [INSERT PLOT POINTS]

Debt to Total Market
Capitalization (in percent)

  [INSERT PLOT POINTS]

  94   95   96
<PAGE>   3

Shareholders


1996 Financial Overview
Most importantly, we are pleased to report to you that the continuing execution
of our strategy resulted in record results for the company in 1996. We not only
exceeded industry analysts' expectations, but also surpassed management's own
internal projections. The end result was a 45% total return to our shareholders
in 1996.
     Funds available for distribution per share increased 10.8%. We continued
our strategy of increasing our dividend annually, but at a rate that is lower
than the increase in earnings. In addition to the acquisition of Old Orchard,
we increased our ownership in the Miami International Mall to 40%. To help fund
these activities and maintain a flexible balance sheet, we completed a 3.2
million common share offering in December 1996.
     Mall tenant sales for the year increased 3.3% to $945 million compared to
$915 million in 1995. Sales per square foot, which we now calculate in
accordance with the official ICSC definition, were $351 in 1996, up 4.8% from
$335 in 1995. These figures are not comparable to full-year sales per square
foot previously reported that did not include Brandon TownCenter. The total
mall gross leasable area occupied was 91.2% at December 31, 1996, still among
the highest in the industry. At year-end, our regional mall portfolio was 92.9%
leased.

Dividend and Payout Ratio
The Board of Directors increased the dividend in 1996 to 49.5 cents per share.
As this annual report was going to press, your Directors were pleased to
announce another increase in the dividend to 50.75 cents per share per quarter
or $2.03 per share annually. One of our primary and continuing financial goals
is to increase the company's dividend annually while lowering our payout ratio.
Because of the positive acquisition environment combined with our development
pipeline, we believe our best strategy is to lower our payout ratio, retaining
ample operating funds to give us the increased financial flexibility to take
advantage of these growth opportunities. With 1996 funds available for
distribution of $34.6 million, our total dividend of $27.2 million paid in 1996
represented a payout ratio of 79%, a significant decrease from 87% in 1995.

Capital Structure Remains Strong
We remain committed to maintaining a strong financial position. Our goal is to
minimize our cost of capital and maintain financial flexibility. We were
pleased with the reception our public offering received from the market. The
net proceeds from the offering of $80.6 million were used to fund a portion of
our acquisition of Old Orchard and to reduce amounts outstanding under our
revolving line of credit. Thus at year-end 1996, our debt to total market
capitalization was approximately 46%, and our interest expense coverage ratio
for 1996 was 2.7 to 1.

[PHOTO]

Above left to right:
Matthew S. Dominski, President and Chief Executive Officer; Urban Shopping
Centers, Inc.
Adam S. Metz, Executive Vice President and Chief Financial Officer; Urban
Shopping Centers, Inc.
Joseph M. Shrader, Senior Executive Vice President-Management; Urban Retail
Properties Co.
James L. Czech, Executive Vice President; Urban Shopping Centers, Inc. and
President-Development; Urban Retail Properties Co.
Ross B. Glickman, Executive Vice President-Leasing; Urban Retail Properties
Co.
<PAGE>   4


What's In Store for 1997
In the current year, expect us to stay focused on implementing our proven
strategy for success. Urban Shopping Centers should have
considerable operating momentum as 1997 unfolds because of the addition of Old
Orchard Center to our owned property portfolio and the opening of our newest
regional mall, Wolfchase Galleria in Memphis, Tennessee, in February. Our
development team completed Wolfchase Galleria on schedule, opening at
approximately 94% leased, with all the elements necessary to become the
dominant destination mall in its region: major retailers, unique specialty
shops, entertainment and restaurants in a two-level, 1.1 million square foot
project.
     With Wolfchase complete, we will concentrate on
a series of projects already in our development pipeline. Our next scheduled
development project will be the 1.2 million square foot Citrus Park Town
Center, our second development in the fast-growing Tampa, Florida region. The
anchor line-up has already been finalized for Citrus Park Town Center, which is
slated to open in March of 1999. We also plan to open a 450,000 square foot
community center, Citrus Park Plaza, opposite the regional mall in the fall of
1998. We have identified a site in California as our first development project
for the 21st century.
     Our property management affiliate, Urban Retail Properties Co., maintained
its position as one of the nation's largest property management companies.
During 1996, Urban Retail Properties Co. added several new regional mall and
community center management contracts to its portfolio and will continue to
pursue additional property management opportunities where its expertise can add
value for third party owners.
     While design and development of our own properties continues to offer the
highest risk-adjusted returns for our company, there is also a current window
of opportunity in property acquisitions that we are analyzing. We think there
are a number of properties available on the market today that have the upside
redevelopment potential which our management team saw in Old Orchard several
years ago.We also believe that today's market offers the opportunity to buy
existing properties that are consistent with our current portfolio at
attractive prices.
     Today's property pricing might make it possible to produce alternative
risk-adjusted investment yields on acquisitions and redevelopment approaching
what we normally achieve from a new development project. We will continue to
evaluate and pursue acquisition opportunities that will enhance long-term
shareholder value.
     In closing, let us recognize the efforts of our employees and offer some
thanks to you, our shareholders. Our performance in 1996 once again highlights
the commitment of our employees to producing long-term growth and
industry-leading returns for our shareholders. We realize our employees are a
great, competitive advantage Urban Shopping Centers has in the regional mall
industry.
     Speaking for all of them, we would like to thank our shareholders for your
continued support and confidence and we want to assure you that we remain
focused on enhancing the value of your investment in Urban Shopping Centers,
Inc.

Sincerely,



/S/ Matthew S. Dominski
President and Chief Executive Officer

/S/ Adam S. Metz
Executive Vice President and Chief Financial Officer




<PAGE>   5
Performance

"As  a company, Williams Sonoma, Inc. is concerned about providing
a quality shopping experience to customers inside our stores," said Arthur
Tropp, Vice President of Real Estate, who oversees the leasing of retail space
nationwide for both Williams Sonoma and Pottery Barn stores. Tropp has leased
space in a number of Urban Shopping Centers' properties, including Old Orchard,
Oakbrook and Pottery Barn's first Tennessee store in Urban's recently-opened
Wolfchase Galleria in Memphis. "We find Urban is just as concerned about
providing a quality shopping experience outside our stores."

<PAGE>   6

Each month senior management of Urban Shopping Centers meets to review the
performance and future of each owned property on a tenant by tenant basis. This
approach allows management to focus on the productivity of each property and
ensures that the overall tenant mix at each center continues to be appropriate.
     There are two measurements of a mall's productivity which indicate to
management that quality emphasis is the right strategic focus. The first is
that mall tenant sales increased 3.3% to $945 million in 1996, continuing a
pattern of sales increases since the company went public in 1993. The second is
sales per square foot which increased 4.8% in 1996 to $351. Both of these
figures compare favorably to other publicly-traded regional mall REITs.
     Another indication of the attractiveness of Urban Shopping Centers'
properties is the growing list of major national retailers which have a
multi-store presence in the company's nationwide portfolio of owned or managed
properties, including Pottery Barn, Gap, Banana Republic, Ann Taylor, Warner
Bros. Studio Store, The Disney Store, Crate & Barrel and Eddie Bauer. These
companies want to be part of Urban Shopping Centers' dominant, upscale shopping
venues which attract a premier customer base.
     A prime tenet of the Urban Shopping Centers strategy is to own, develop
and acquire quality regional malls. That quality guideline is achieved through
a series of managed factors: locations selected with strong regional
demographics; a safe, well-maintained environment that is visually appealing
and easy to access; and a combination of strong anchor stores, nationally
recognized major retailers, unique specialty shops, entertainment outlets and
the latest in restaurant concepts.
     The recently opened Wolfchase Galleria in Memphis, Tennessee is a striking
example of the combination of factors which will make Urban Shopping Centers'
newest regional mall the dominant shopping destination in its marketplace. It
is located at the junction of three major highways in one of the most affluent
and fastest growing areas of Memphis. The mall opened on February 26, 1997 and
was approximately 94% leased.

     The 1.1 million square foot regional mall has four major anchor
retailers -- Dillard's, Goldsmith's, JCPenney and Sears -- approximately 120
specialty shops and restaurants, a food court and multi-screen theater.
Retailers opening stores in the mall include: the first Pottery Barn store in
Tennessee, a 22,000 square foot Finish Line athletic wear store, Harold's,
Laura Ashley, Eddie Bauer, Gap, Banana Republic, Brookstone, Ann Taylor, Brooks
Brothers, Talbot's, Abercrombie & Fitch, Nine West, Warner Bros. Studio Store,
The Disney Store and Johnny Rockets.



<PAGE>   7

Development

"We  have had private/public economic development partnerships before,
but nothing approaching the quality of every step taken by Urban Shopping
Centers," said Jim Norman, Hillsborough County Commissioner.

"We  were in dire need of a major shopping mall in the Brandon area,"
said Dottie Berger, Hillsborough County Commissioner. "Since Urban built
Brandon TownCenter, we not only have that major shopping mall, we also have job
growth, an increased tax base and residential growth in that area of the county
has taken off!"






<PAGE>   8

Since becoming a public company in 1993, one of Urban Shopping Centers' stated
goals has been to create a property development pipeline that would create new
regional malls, similar in quality, demographics and retail dominance to those
properties already in the portfolio, approximately every two years through the
turn of the century.
     To accomplish this goal, the company utilizes a development team with
specific expertise in areas critical to successful regional mall development.
The development group includes members with skills in market research,
architecture, engineering and permitting. In addition to handling new
development and redevelopment projects for Urban Shopping Centers' own
portfolio, the development group also manages redevelopment projects for
various third parties.
      Urban Shopping Centers' predecessor company had a track record of more
than twenty years of successfully developing and redeveloping retail
properties. Since the company went public in 1993, the development group has
twice proven its ability to select a site, design and build on budget and on
schedule, new regional malls which are valuable additions to the Urban Shopping
Centers' property portfolio. The one million square foot Brandon TownCenter in
Tampa, Florida opened in early 1995 over 90% occupied and has become the
dominant regional mall that was originally envisioned. The newest completed
project -- Wolfchase Galleria in Memphis, Tennessee -- opened as planned in
February of 1997. From the day it opened, the 1.1 million square foot Wolfchase
Galleria was close to fully leased and its unique combination of national
retailers and four strong anchor stores have made it a shopping destination for
people throughout the region.

     Intensive market research is the crucial first element in any successful
development/redevelopment project. The company's research arm analyzes the
competitive regional retailing market, as well as the local demographics for
population growth, per capita income, age, education, etc., to ensure that the
project's statistical characteristics are comparable with Urban Shopping
Centers' existing portfolio. These demographic characteristics are a major
contributor to a mall's success.
     Urban Shopping Centers' next project in the development pipeline will be
the Citrus Park Town Center and Citrus Park Plaza, also in the Tampa area,
scheduled to open in March of 1999 and the fall of 1998 respectively. The
company also has identified a site in California as its first regional mall
development project for the 21st century.
<PAGE>   9

Acquisition

"Since Urban Shopping Centers took over Penn Square Mall, they have
turned it into the shopping destination in downtown Oklahoma City," said David
Ooley, whose men's specialty clothing store has seen a significant increase in
business since relocating to Penn Square. "We sell finer quality Italian and
handmade Oxford men's clothing. Our opening price range is about $950 per suit
and we found that our customers were here. Penn Square is centrally located,
has tourist appeal with proximity to the better downtown hotels, and has become
a focal point of our downtown area."

The management team of Urban Shopping Centers is constantly evaluating
acquisition opportunities. The market profile of each acquisition candidate is
compared to the current performance profile of the company's owned and managed
properties. If ongoing market research identifies a mall property with
significant redevelopment potential, Urban Shopping Centers has successfully
demonstrated that it has the expertise to transform that potential into
enhanced returns to shareholders.
     For example, after acquiring Penn Square Mall in Oklahoma City during the
late 1980s, Urban Shopping Centers' development group implemented two separate
expansions in which it added a second level, two new anchor stores, several
unique merchandising concepts and more than 575,000 square feet of retail space
to the property. As a result, Penn Square has become the dominant regional mall
in the Oklahoma City market. All this improvement has contributed to the growth
of Urban Shopping Centers' funds available for distribution and, subsequently,
its dividend to shareholders.
     Urban Shopping Centers also seeks acquisitions of mature, highly
productive malls. The recent purchase of Old Orchard Center in Skokie, Illinois
is an example of this type of acquisition. Old Orchard was originally owned by
the predecessor to Urban Shopping Centers and later was sold to a third party.
The mall was redeveloped during 1994 and 1995 by Urban Retail Properties Co.
for the third party which utilized all of the company's design, development,
market research, leasing and property management skills.
     The redevelopment of Old Orchard increased overall retail space at the
center to more than 1.7 million square feet and included the expansion and
renovation of three existing anchor stores (Lord & Taylor, Marshall Field's and
Saks Fifth Avenue), the addition of two new anchors (Bloomingdale's and
Nordstrom), construction of two new parking structures, the addition of a seven
screen movie theater and a food court, and the expansion and retenanting of the
mall's specialty shops. The redeveloped Old Orchard also includes approximately
60,000 square feet of office space.
     Now a shopping and entertainment destination for Chicago's affluent North
Shore suburbs, Old Orchard complements Urban Shopping Centers' other portfolio
properties and solidifies the company's position as the dominant regional mall
operator in the Chicago area.


<PAGE>   10

Retail Mix

Nordstrom and Urban Shopping Centers are very much in agreement on our
retailing concepts," noted Michele Love, store manager of Nordstrom at Oakbrook
Center. "That's why it made sense for us to locate our flagship store in the
Midwest here. We believe shopping is a form of entertainment. That's why we
have piano music, brewing coffee and restaurants in our store, complementing
our high quality merchandise. Urban Shopping Centers has done the same with the
retail atmosphere it has created at Oakbrook which serves to attract our
customers."

<PAGE>   11


Urban Shopping Centers and Urban Retail Properties Co. have established a
reputation as industry leaders at identifying retail trends and assembling the
right retail mix to attract shoppers in almost any economic environment. The
company's leasing and management efforts focus on linking the retail options
consumers want with entertainment concepts, restaurants, music and books. When
these elements are in place, its malls become a destination, not just a
shopping choice.
     To maintain that "destination" appeal for its malls, Urban Shopping
Centers implements a three-year strategic leasing plan for each owned or
managed property which evaluates each property's performance space by space. A
major tool in that evaluation process is Urban Shopping Centers' proprietary
performance database which is constantly updated with operating information
from tenants at the company's owned and managed regional malls. This data
allows management to evaluate the performance of each tenant to ensure a high
level of productivity at each property.
     The company also commits significant resources on an ongoing basis to
understand trends in the general retail market and at its individual properties
through focus groups, exit surveys and regional consumer surveys.
     Sales and volume numbers drive the evaluation process with non-performing
stores being replaced in each mall's retail mix. Increasingly strong sales
performance and identified consumer shopping trends are major considerations
for lease renewals and retail space expansions at each property. The ultimate
leasing goal is to stay ahead of consumer trends and constantly enhance the
retail mix, and draw shoppers with high disposable incomes to the mall.
     One of the most successful regional malls in the country, Oakbrook Center
in suburban Chicago, is a standout example of ongoing retail mix enhancement.
Current consumer demand for lifestyle products is creating both movement and
expansion of several of the approximately 190 retailers at the two million
square foot mall. Pottery Barn is expanding its leased space to more than 8,000
square feet and Williams Sonoma is also moving into a larger space. Polo will
also open a new store at the mall to take advantage of consumers' increasing
interest in adult sportswear and items for the home. In addition, two new
Lettuce Entertain You Enterprises restaurant concepts are scheduled to open at
Oakbrook: Papagus, serving Greek fare, and Wild Fire, a restaurant featuring a
barbecue-style menu.


<PAGE>   12


Management

"At  our foodlife venue here in Chicago's Water Tower Place, as well as
at all our restaurants, we are committed to several key concepts," said Jeffrey
Winograd, area supervisor for Lettuce Entertain You Restaurants. "We believe
that high quality food, served in a high quality environment, will make a great
guest experience for our customers. Urban Shopping Centers has shown its
commitment to those same concepts here at Water Tower Place, creating a great
shopping experience for customers with its mix of high quality retailers in a
well- managed mall."

<PAGE>   13



        The properties owned by Urban Shopping Centers, as well as the nearly
100 third party regional malls and community centers under management
nationwide benefit from the industry-leading property management
expertise of Urban Retail Properties Co. The company manages more than 55
million square feet of retail space in 23 states and the District of Columbia
and has set national property management standards for the management of retail
properties.

        The management staff of Urban Retail Properties Co. is involved in
every aspect of property operations, from obtaining favorable pricing for goods
and services used by the properties to establishing five-year maintenance and
capital improvement budgets at every managed property. The company also
coordinates highly visible marketing campaigns and other national
promotions for its managed regional malls.

        Urban Retail Properties Co. has established operating standards for
landscaping, security, crisis training and maintenance for all properties,
managed and owned. Urban Retail Properties Co. offers tenants and third party
owners the cost efficiency advantages of centralized purchasing and advertising
at all properties. In addition, the property management staff is constantly
evaluating the expense structures in areas such as utilities and waste removal
to help reduce shared tenant costs.

        Urban Retail Properties Co. has some very special competitive
advantages in managing all types of retail properties. The company maintains
and regularly uses a proprietary database of mall operating statistics. This
database, which is constantly updated with data from all owned and managed
properties, enables the company to create a list of best practices for such
things as reconfiguring common space, retail build-out for existing tenants and
in-mall advertising. Urban Retail Properties Co. has also developed a unique
expertise in managing mixed-use, vertical, downtown retail malls. By managing
Water Tower Place in Chicago and Copley Place in Boston, the company has gained
a unique understanding of leasing, management, traffic, security and
maintenance issues involved with operating multi-story properties that may also
contain residential, office or hotel space.

<PAGE>   14

<TABLE>
<CAPTION>

Property Locations



[US MAP]


Property                     Location              Anchors                           Total Sq. Ft.  Ownership
<S>      <C>                 <C>                   <C>                       <C>                    <C>        <C>
1        Oakbrook Center     Oak Brook, Illinois   Lord & Taylor, Marshall Field's,     2,015,000        100%
                                                   Neiman Marcus, Nordstrom,
                                                   Saks Fifth Avenue, Sears
-------------------------------------------------------------------------------------------------------------
2        Old Orchard Center  Skokie, Illinois      Bloomingdale's, Lord & Taylor,       1,796,000        100%
                                                   Marshall Field's, Nordstrom,
                                                   Saks Fifth Avenue
-------------------------------------------------------------------------------------------------------------
3        Citrus Park         Tampa, Florida        Burdines, Dillard's,                 1,600,000        100%
         Town Center (1) and                       JCPenney, Sears
         Citrus Park Plaza (1)
-------------------------------------------------------------------------------------------------------------
4        MainPlace           Santa Ana,            Macy's, Nordstrom,                    1,116,000       100%
                             California            Robinsons-May (2 stores)
-------------------------------------------------------------------------------------------------------------
5        Wolfchase Galleria  Memphis, Tennessee    Dillard's, Goldsmith's,               1,086,000       100%
-------------------------------------------------------------------------------------------------------------
6        Penn Square Mall    Oklahoma City,        Dillard's, Foley's, JCPenney,         1,075,000       100%
                             Oklahoma              Montgomery Ward
-------------------------------------------------------------------------------------------------------------
7        Brandon             Tampa, Florida        Burdines, Dillard's,                    980,000       100%
         TownCenter                                JCPenney, Sears
-------------------------------------------------------------------------------------------------------------
8        Miami               Miami, Florida        Burdines (2 stores),                    973,000        40%
         International Mall                        JCPenney, Mervyn's, Sears
-------------------------------------------------------------------------------------------------------------
9        Coral Square Mall   Coral Springs,        Burdines (2 stores), JCPenney,          941,000        50%
                             Florida               Mervyn's, Sears
-------------------------------------------------------------------------------------------------------------
10       Water Tower Place   Chicago, Illinois     Lord & Taylor, Marshall Field's         821,000        55%
-------------------------------------------------------------------------------------------------------------
11       Valencia            Valencia, California  JCPenney, Robinsons-May, Sears          675,000        25%
         Town Center
-------------------------------------------------------------------------------------------------------------
12       The Plaza at        Tampa, Florida        Service Merchandise, Target             243,000       100%
         Brandon TownCenter
-------------------------------------------------------------------------------------------------------------
13       Service Merchandise Columbus, Ohio         Service Merchandise                    134,000       100%
         Plaza
-------------------------------------------------------------------------------------------------------------
14       New York Square     Aurora, Illinois      Kohl's, OfficeMax                       116,000       100%
</TABLE>


(1) Under development


     Indicates this state contains properties owned by Urban Shopping Centers,
Inc.

     Indicates this state contains properties managed by Urban Retail
Properties Co.

<PAGE>   15

                                                          Financial Highlights




<TABLE>
<CAPTION>

($000's omitted, except share amounts)                                                          Years ended December 31
-----------------------------------------------------------------------------------------------------------------------
                                                         1996                         1995(1)                      1994(1)
-----------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                          <C>                          <C>

Total tenant sales (2)                            $ 1,323,126                  $ 1,278,097                  $ 1,171,889
Mall tenant sales (2)(3)                              944,965                      914,501                      819,666
Property revenues (4)                                 130,774                      121,890                      106,339
Interest expense coverage ratio (5)                      2.67                         2.60                         2.67
Income before extraordinary items                      19,969                       18,644                       17,978
Funds from operations (FFO) (6)                        35,419                       32,827                       29,208
Funds available for distribution (FAD)                 34,582                       30,485                       27,691
Average number of shares outstanding               14,066,243                   13,742,259                   13,742,259
Shares outstanding at end of period                17,081,336                   13,742,259                   13,742,259
Debt to total market capitalization (7)                 46.3%                        49.3%                        50.1%
Occupancy (8)                                           91.2%                        92.6%                        93.3%
========================================================================================================================
</TABLE>

The chart below shows the calculation of funds from operations for the years
1994 through 1996:


<TABLE>
<CAPTION>
                                                                            1996               1995(1)          1994(1)
---------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                <C>               <C>
Income before extraordinary items and minority interest               $   30,702         $  28,595        $    27,339
Plus depreciation and amortization                                        19,232             17,695            13,313
Plus Company's share of depreciation and amortization from
    unconsolidated partnerships and Urban Retail Properties Co.            4,129              3,995             3,941
Less preferred unit distribution                                             (75)                --                --
---------------------------------------------------------------------------------------------------------------------
Total funds from operations                                           $   53,988         $   50,285         $  44,593
---------------------------------------------------------------------------------------------------------------------
Company's share of funds from operations (9)                          $   35,419         $   32,827         $  29,208
======================================================================================================================
</TABLE>

The chart below shows the calculation of funds available for distribution for
the years 1994 through 1996:

<TABLE>
<CAPTION>

                                                                         1996                 1995(1)                  1994(1)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                  <C>                      <C>
Total funds from operations                                        $   53,988           $   50,285               $   44,593
Plus non-cash effect of Oakbrook Center straight-lined
    ground rent and related interest                                    3,173                3,218                    3,065
Less adjustment to reflect actual cash received from
    Urban Retail Properties Co.                                         (619)              (1,737)                     (737)
Plus write-off of assets (10)                                             308                  787                      467
Less straight-line rent adjustment (11)                                  (767)              (1,360)                  (1,851)
---------------------------------------------------------------------------------------------------------------------------
Total funds available for distribution including other gain        $   56,083           $   51,193               $   45,537
---------------------------------------------------------------------------------------------------------------------------
Company's share of funds available for distribution
    including other gains (9)                                      $   36,794           $   33,420               $   29,825
===========================================================================================================================
Total funds available for distribution excluding other gain        $   52,711           $   46,697               $   42,276
---------------------------------------------------------------------------------------------------------------------------
Company's share of funds available for distribution
    excluding other gains (9)                                      $   34,582           $   30,485               $   27,691
===========================================================================================================================
</TABLE>


(1) Restated to present funds from operations and funds available for
distribution based upon the new National Association of Real Estate Investment
Trusts ("NAREIT") definition of funds from operations, which excludes the add
back of non-real estate depreciation and amortization.

(2) Only for those tenants who report sales. 1996 excludes Old Orchard, which
was acquired on December 18, 1996.

(3) Excludes anchors and movie theaters.

(4) Represents the Company's consolidated revenues and its share of revenues
from unconsolidated partnerships.

(5) Represents the ratio of total funds available for distribution before
interest expense (including the Company's share of unconsolidated entities) to
interest expense (including capitalized interest and excluding deferred
interest). 1995 and 1994 have been restated to present the interest expense
coverage ratio based upon the restated funds available for distribution.

(6) Funds from operations should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of
operating performance or as an alternative to cash flows from operating,
investing or financing activities as a measure of liquidity.

(7) Based upon a closing price of $29, $21 3/8 and $19 7/8 per share as of
December 31, 1996, 1995 and 1994, respectively.

(8) Occupancy of the regional malls as of December 31 of each year.  1996
excludes Old Orchard, which was acquired on December 18, 1996. 1994 excludes
Brandon TownCenter, which opened in February 1995.

(9) Based upon a weighted average of 21,440,480, 21,050,426 and 20,981,460
shares and units outstanding for 1996, 1995 and 1994, respectively.

(10) Includes the Company's share of unconsolidated partnerships and Urban
Retail Properties Co.

(11) Includes the Company's share of unconsolidated partnerships.




<PAGE>   16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Annual
Report. Historical and percentage relationships set forth in the Consolidated
Financial Statements and Notes should not be taken as indicative of future
operations of the Company.

REVIEW OF OPERATIONS
Urban Shopping Centers, Inc. is in the business of owning, managing, leasing,
acquiring, developing and redeveloping retail shopping centers. Strong
performance across all segments of the Company's portfolio produced a 13.4%
increase in 1996 funds available for distribution to $34.6 million from 1995
funds available for distribution of $30.5 million. The 1995 funds available for
distribution increased 10.1% from 1994 funds available for distribution of
$27.7 million. Presented below is a discussion of sales, occupancy and rents at
the properties. This information is presented for all regional malls on a
combined basis, excluding Old Orchard Center ("Old Orchard") which was acquired
on December 18, 1996.

SALES
Management closely follows the level of retail sales at its properties. Such
sales affect profitability because they determine the amount the tenant can
afford to pay the landlord for total charges. Some of the specific sales
figures the Company follows are discussed and shown in the graph below.

TOTAL TENANT SALES AND MALL TENANT SALES
Management generally considers increasing total tenant sales to be an
indication that a property is attracting more customers and providing a greater
benefit to its tenants. Mall tenant sales indicate the amount of sales
generated by the mall tenants. During 1996, mall tenants contributed
approximately 87% of the Company's total regional mall shopping center
revenues. The following graph illustrates total tenant sales and mall tenant
sales at the Company's regional malls for 1992 through 1996.


[CHART]


     Aggregate annual sales volume at the regional malls for those mall shops
and anchors that report sales has increased from $1.03 billion in 1992 to $1.32
billion in 1996, an annual rate of 6.4%. Mall tenant sales (excluding anchors
and movie theaters) have grown at an annual rate of 7.5% during the same
period. It should be noted that a portion of the sales increase can be
attributed to the mall GLA and anchor square footage added to certain centers
during the last few years as a result of (i) expansions at certain of the
centers and (ii) the addition of Valencia Town Center in September 1992 and
Brandon TownCenter in February 1995.

SALES PER SQUARE FOOT
Sales per square foot is reported for the first time in 1996 based upon the
International Council of Shopping Centers definition and represents total
non-anchor reported sales divided by the total square feet occupied by the
tenants reporting those sales. Sales per square foot at the regional malls
increased 4.8% to $351 in 1996 as compared to $335 in 1995. These figures are
not comparable to full-year sales per square foot previously reported that did
not include Brandon TownCenter. We believe our sales per square foot continue
to be among the highest in the industry. Our sales level reflects the quality
and viability of our centers.

TENANT OCCUPANCY
Tenant occupancy is one measure which reflects the demand for space at our
properties. The following chart shows the mall GLA occupancy rate at the
regional malls for 1992 through 1996. The 3.5% increase in occupancy from 1992
to 1993 is primarily attributable to occupancy increases at Penn Square Mall
and Water Tower Place. The slight decrease in occupancy over the past two years
is primarily attributable to the renovation and re-merchandising of certain
centers. The mall GLA was 92.9% leased at December 31, 1996.


                                      16

<PAGE>   17



[CHART]


IN PLACE RENTS
The average in place rents for the Company's regional malls increased 2.5% to
$29.55 per square foot at December 31, 1996 from $28.83 per square foot at
December 31, 1995. Excluding Brandon TownCenter which opened in February 1995,
the average in place rents increased 3.4% to $29.08 per square foot at December
31, 1995 from $28.13 per square foot at December 31, 1994.

OCCUPANCY COSTS
In order to maximize funds available for distribution over the long term,
management believes tenants in the properties must be able to operate
profitably. A major factor contributing to a tenant's profitability is such
tenant's occupancy costs. Occupancy costs generally consist of (i) minimum rent
(the contractual amount a tenant must pay), (ii) percentage rent (the
percentage of sales revenue a tenant must pay as additional rent) and (iii)
expense recoveries (the amount a tenant must pay to reimburse the landlord for
the costs of operating the mall), including real estate taxes. Typically, when
occupancy costs for any specific tenant exceed a certain percentage of such
tenant's annual sales, the tenant may not be profitable. Generally, tenants in
more productive regional malls are able to afford higher occupancy costs. The
following table sets forth the Company's regional mall occupancy costs (as a
percentage of sales) for the last five years. While the Company believes that
its relatively low occupancy cost ratio reflects an opportunity for the Company
to achieve higher rents in the future, it also notes that the ratio has
generally risen over the period as a result of the Company's leasing efforts
and increased emphasis on expense recoveries and cost control.

<TABLE>
<CAPTION>

                                                       Years ended December 31
-------------------------------------------------------------------------------
                                 1996      1995      1994      1993     1992(1)
-------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>       <C>       <C>
Mall Tenant Sales (2)          $944,965  $914,501  $819,666  $783,971  $689,465
Percent of Sales
   Minimum Rents                    8.3%      8.2%      8.1%      8.1%      8.0%
   Percentage Rents                  .4%       .4%       .5%       .5%       .5%
   Expense Recoveries (3)           3.0%      2.8%      3.1%      2.9%      2.7%
-------------------------------------------------------------------------------
In-Line Tenant
   Occupancy Costs (4)             11.7%     11.4%     11.7%     11.5%     11.2%
-------------------------------------------------------------------------------
</TABLE>

(1) 1992 excludes Valencia Town Center, which opened in September 1992.

(2) In thousands of dollars. Excludes sales from anchor tenants and movie
theaters.

(3) Represents real estate tax and common area maintenance charges.

(4) Total mall tenant occupancy costs divided by total mall tenant sales
(excluding anchor tenants and movie theaters).


RESULTS OF OPERATIONS

1996 COMPARED TO 1995
Shopping center revenues increased $6.2 million, or 6.9%, to $95.2 million in
1996 from $89.0 million in 1995. This increase was primarily attributable to
increases in shopping center revenues at Brandon TownCenter, Old Orchard and
Penn Square Mall. Minimum rents and recoveries from tenants increased at
Brandon TownCenter primarily due to its having been open for a full year in
1996 as compared to a partial year in 1995. Minimum rents and recoveries from
tenants increased as a result of the acquisition of Old Orchard on December 18,
1996. Minimum rents and recoveries from tenants increased at Penn Square Mall
primarily due to its completed expansion of various new mall shops and a
125,000 square foot JCPenney store on October 30, 1995. Percentage rents at
certain centers increased in the fourth quarter of 1996.
     Interest income decreased $.7 million to $1.9 million in 1996 from $2.6
million in 1995. This decrease was primarily attributable to a decrease in the
average outstanding investment balance in 1996. The Company's strategy is to
utilize cash to reduce borrowings on the Company's line of credit.
     Shopping center expenses, including depreciation and amortization,
increased $1.9 million to $52.2 million in 1996 from $50.3 million in 1995.
This increase was primarily attributable to (i) an increase in shopping center
expenses, including depreciation and amortization, at Brandon TownCenter as a
result of its having been open for a full year in 1996 as compared to a partial
year in 1995, (ii) an increase in shopping center expenses, including
depreciation and amortization, as a result of the acquisition of Old Orchard on
December 18, 1996 and (iii) an increase in depreciation and amortization at
Penn Square Mall as a result of its completed expansion in October 1995.


                                      17


<PAGE>   18



These increases were partially offset by a decrease in management fees as a
result of the termination of management contracts with the Management Company
for six of the Company's consolidated investment properties during 1995. New
management contracts were entered into with the Operating Partnership and those
fees are eliminated in consolidation.
     Income from unconsolidated partnerships increased $1.7 million to $3.0
million in 1996 from $1.3 million in 1995. This increase was primarily
attributable to the purchase of an additional approximate 18% interest in Miami
International Mall on April 1, 1996 and an increase in operations at Water
Tower Place.
     Income from the Management Company decreased $2.0 million to $1.1 million
in 1996 from $3.1 million in 1995. This decrease was primarily attributable to
(i) a decrease in management fees as a result of the termination of management
contracts for six of the Company's consolidated investment properties during
1995, (ii) an increase in operating expenses and (iii) an increase in mortgage
interest as a result of interest on the JMB Realty Corporation affiliated debt
beginning in May 1996. These decreases were partially offset by increases in
development recoveries and lease commissions.
     Other gains of $3.4 million in 1996 represent the gain on sale of four
outparcels at Wolfchase Galleria. Other gains of $4.5 million in 1995 represent
the gain on sale of two Company purchase options.
     The extraordinary item, net of minority interest, of $1.0 million in 1995
represents the write-off of unamortized financing costs relating to the
repayment of the construction loan at Brandon TownCenter.

1995 COMPARED TO 1994
Shopping center revenues increased $15.6 million, or 21.4%, to $89.0 million in
1995 from $73.4 million in 1994. This increase was primarily attributable to
increases in shopping center revenues at Brandon TownCenter, The Plaza at
Brandon TownCenter and Penn Square Mall. Minimum rents, recoveries from tenants
and other shopping center revenues increased at The Plaza at Brandon TownCenter
and Brandon TownCenter (collectively, the "Brandon Project") due to their
openings in August 1994 and February 1995, respectively. Minimum rents and
recoveries from tenants increased at Penn Square Mall primarily due to an
increase in average occupancy and rents in 1995. On October 30, 1995, Penn
Square Mall completed its expansion of various new mall shops and a 125,000
square foot JCPenney store.
     Shopping center expenses, including depreciation and amortization,
increased $10.1 million to $50.3 million in 1995 from $40.2 million in 1994.
This increase was primarily attributable to an increase in shopping center
expenses, including depreciation and amortization, at The Plaza at Brandon
TownCenter and Brandon TownCenter as a result of their respective openings in
August 1994 and February 1995.
     Mortgage and other interest increased $6.4 million to $14.5 million in
1995 from $8.1 million in 1994. This increase was primarily attributable to (i)
the sale of the Company's $30.0 million temporary investment in the Oakbrook
Center mortgage notes in September 1994, (ii) an increase in the LIBOR rate,
(iii) a decrease in capitalized interest and a related increase in interest
expense as a result of the opening of the Brandon Project and (iv) interest on
fundings from the Company's line of credit.
     Income from the Management Company increased $.3 million to $3.1 million
in 1995 from $2.8 million in 1994. This increase was primarily attributable to
additional management contracts secured by the Management Company.
     Other gains of $4.5 million in 1995 represent the gain on sale of two
Company purchase options. Other gains of $3.0 million in 1994 represent the
gain on sale of outparcels at the Brandon Project.
     The extraordinary item, net of minority interest, of $1.0 million in 1995
represents the write-off of unamortized financing costs relating to the
repayment of the construction loan at Brandon TownCenter.

LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL CONDITION
Net cash flows from operating activities increased $5.9 million in 1996 from
1995. This increase resulted primarily from an increase in rental operations as
discussed above and receipt of prepaid rents (included in accounts payable and
other liabilities in the accompanying consolidated balance sheets). Net cash
flows from operating activities increased $10.1 million in 1995 from 1994. This
increase resulted primarily from (i) an increase in rental operations as
discussed above, (ii) construction costs reimbursed by JCPenney relative to the
expansion at Penn Square Mall and (iii) receipt of prepaid rents.


                                      18


<PAGE>   19




     Net cash flows used in investing activities increased $91.4 million in
1996 from 1995. This increase was primarily attributable to (i) the purchase of
Old Orchard in December 1996, (ii) the purchase of an additional approximate
18% interest in Miami International Mall in April 1996, (iii) the continuing
construction costs incurred at Wolfchase Galleria in 1996 and (iv) a decrease
in the net sales and maturities of short-term investments. These increases were
partially offset by the acquisition of development parcels at Wolfchase
Galleria in 1995 and a decrease in additions to investment properties as a
result of the completion and opening of Brandon TownCenter in 1995. Net cash
flows used in investing activities decreased $11.1 million in 1995 from 1994.
This decrease was primarily attributable to an increase in the net sales and
maturities of short-term investments and a decrease in restricted cash. These
decreases were partially offset by an increase in additions to investment
properties due to the remaining construction at the Brandon Project and the
acquisition of development parcels and continuing development at Wolfchase
Galleria.
     Net cash flows from financing activities increased $92.8 million in 1996
from 1995. This increase was primarily attributable to additional fundings in
1996 from (i) the Company's line of credit, (ii) the construction loan at
Wolfchase Galleria and (iii) the issuance of Common Stock, preferred units in
the Operating Partnership and Unit Voting Stock in 1996. These increases were
partially offset by the net fundings from the construction loan at Brandon
TownCenter in 1995. Net cash flows used in financing activities increased $22.9
million in 1995 from 1994. This increase was primarily attributable to
repayments on the Brandon TownCenter construction loan in 1995; partially
offset by fundings from the Brandon TownCenter construction loan and the
Company's line of credit.
     At December 31, 1996, the Company and its consolidated ventures had cash,
cash equivalents and short-term investments of $5.3 million. Such funds are
available for working capital requirements, recurring
capital expenditures, dividends and distributions to shareholders and limited
partners of the Operating Partnership, respectively, and future acquisitions,
expansions, renovations and developments.
     Beginning with the dividend declared and paid in the first quarter of
1997, the Company increased its quarterly dividend to $.5075 per share, up 2.5%
from $.4950 per share previously.

CAPITALIZATION
At December 31, 1996, the Company's debt (including the Company's share of debt
of unconsolidated partnerships and the Management Company) totaled $636.0
million of which $605.9 million is fixed rate debt and $30.1 million is
floating rate debt. On December 18, 1996, the Company acquired Old Orchard
subject to $159.8 million in property debt. On November 6, 1996, the Company
entered into an agreement with a lender for a one year $5.0 million unsecured
revolving line of credit. As of December 31, 1996, no amounts were outstanding
on this line of credit. On May 29, 1996, the Company executed a construction
loan commitment with a lender in the amount of $65.0 million to finance the
remaining construction costs at Wolfchase Galleria. The loan was initially
funded in May 1996 and matures on May 29, 1998; however, it may be extended for
three one-year periods. As of December 31, 1996, $32.0 million had been funded.
These transactions were the primary reason for the increase in mortgage notes
payable to $439.9 million at December 31, 1996 as compared to $251.0 million at
December 31, 1995. On July 26, 1995, the Company signed an agreement with a
group of lenders for the establishment of a $90.0 million secured, revolving
line of credit ("Line"). The Line is secured by Brandon TownCenter, The Plaza
at Brandon TownCenter, Bed Bath and Beyond outparcel at Brandon TownCenter, New
York Square and Service Merchandise Plaza (formerly The Plaza at Sawmill
Place). The Line is an obligation of the Operating Partnership and is
guaranteed by the Company. The Line has an initial three year term and, subject
to lenders' approval, may be extended for an additional one or two year period.
As of December 31, 1996, $28.1 million was outstanding. In connection with the
initial funding on the Line, the Company repaid the $12.0 million then
outstanding balance on the construction loan at Brandon TownCenter. On February
10, 1997, the Company refinanced the Water Tower Place $170.0 million of
indebtedness. The new loan matures on February 1, 1999; however, it may be
extended for two one-year periods. Of the total $170.0 million, $160.0 million
bears interest at LIBOR + 1.125% and $10.0 million bears interest at LIBOR +
1.500%.
     Although there can be no assurances, the Company believes that operating
cash flows will be sufficient to service all Company debt and anticipates
repayment or refinancing when such amounts are due in the ordinary course of
its business. As a result of the Company's increased funds available for
distribution and relatively flat interest expense, the Company's interest
expense coverage




<PAGE>   20




ratio (including the Company's share of unconsolidated entities interest
expense and including capitalized interest and excluding deferred interest)
increased to 2.67 at December 31, 1996 as compared to 2.60 at December 31,
1995. At December 31, 1996, the Company's ratio of Company debt to total
market capitalization (which includes the market value of issued and
outstanding shares of capital stock of the Company and of partnership
interests in the Operating Partnership not held by the Company, plus Company
debt) was approximately 46% as illustrated by the table on the following page.
     On November 25, 1996, the Company completed an offering of 3,000,000
shares of Common Stock under a shelf registration declared effective by the
Securities and Exchange Commission on April 22, 1996 (for up to $200.0
million). On December 12, 1996, an overallotment option was exercised for an
additional 225,000 shares of Common Stock. Net proceeds from the sale of these
shares, after underwriter's discount, was $80.6 million. The net proceeds after
deducting transaction costs were used to fund a portion of the December 18,
1996 acquisition of Old Orchard and to reduce outstanding borrowings under the
Company's Line. The remaining balance outstanding on the shelf registration is
$119.4 million.
     The Company believes that its cash generated from property operations will
provide the necessary funds on a short-term and long-term basis for its
operating expenses, interest expenses on outstanding indebtedness and recurring
capital expenditures and all dividends to the shareholders necessary to satisfy
the REIT requirements. Sources of capital for future acquisitions, development
and non-recurring capital expenditures, such as major building renovations and
expansions, as well as for scheduled principal payments, including balloon
payments, on the outstanding indebtedness are expected to be obtained from the
following sources: (i) excess funds available for distribution, (ii) working
capital reserves, (iii) additional Company or property financing, (iv) proceeds
from the sale of assets, including outparcels and (v) additional equity raised
in the public or private markets (including the issuance of additional Units
and/or Unit Voting Stock). Accordingly, the Company expects that it may incur
additional indebtedness. In light of current economic conditions, relative
costs of debt and equity capital, market values of properties, growth and
acquisition opportunities and other factors, the Company may consider an
increase or decrease in its ratio of Company debt to total market
capitalization accordingly.

CAPITAL INVESTMENTS
Brandon TownCenter, the approximately one million square foot super-regional
mall anchored by Burdines, Dillard's, JCPenney and Sears, and including
approximately 360,000 square feet of mall GLA, opened on February 15, 1995. The
Plaza at Brandon TownCenter, the adjacent 243,000 square foot community center
anchored by Service Merchandise and Target, opened in August 1994. In addition,
there are approximately 25 acres of outparcel land at Brandon TownCenter which
may be used for future sale or development. The addition of a 125,000 square
foot JCPenney store and various new mall shops at Penn Square Mall was
completed on October 30, 1995. The Company owns approximately 8 acres of land
adjacent to Service Merchandise Plaza
(formerly The Plaza at Sawmill Place) which may be used for future sale or
development.
     On December 18, 1996, the Company acquired Old Orchard for $78.6 million
in cash prior to prorations and the issuance of $28.0 million in preferred
units in the Operating Partnership, subject to $159.8 million of existing
indebtedness. In connection with the issuance of the preferred units, the
Company issued $1.1 million in Unit Voting Stock. Old Orchard is an open air
regional shopping center located in Skokie, Illinois. Old Orchard contains 1.7
million square feet of retail space and is anchored by Bloomingdale's, Lord &
Taylor, Marshall Field's, Nordstrom and Saks Fifth Avenue. In addition, Old
Orchard contains approximately 120 other stores, theaters and restaurants. Old
Orchard includes approximately 675,000 square feet of mall GLA and contains
parking for over 7,500 vehicles and approximately 60,000 square feet of office
space.
     The Company's newest super-regional mall, Wolfchase Galleria, in Memphis,
opened on February 26, 1997. The anchor tenants are Dillard's, Goldsmith's
(a division of Federated Department Stores, Inc.), JCPenney and Sears.
Wolfchase Galleria also contains approximately 120 retailers, restaurants, a
food court, a major entertainment complex and approximately 5,450 parking
spaces. Wolfchase Galleria was approximately 94% leased at opening. The Company
has also sold four outparcels at Wolfchase Galleria that add to the mall's
overall appeal to shoppers in the Memphis retail market. As of December 31,
1996, net proceeds from the sale of these outparcels totaled $4.7 million. The
Company also signed an agreement with Bed Bath and Beyond to lease a building
that the Company constructed under a build to suit lease on an outparcel and
which opened on


                                      20


<PAGE>   21



September 3, 1996. There are approximately 29 acres of outparcel land remaining
at Wolfchase Galleria for future sale or development. In connection with this
project, the Company acquired, on May 25, 1995, a 137 acre parcel from an
affiliate of JMB Realty Corporation, a 50% interest in a 30 acre parcel from
Urban Retail Properties Co. and the remaining 50% interest in the 30 acre parcel
from a third party. The aggregate acquisition value of such land parcels of
$11.4 million was paid in cash and Units, of which $10.0 million is included in
land and $1.4 million is included in construction in progress in the
accompanying consolidated balance sheets at December 31, 1996 and 1995.
Additional costs of $60.7 million have been incurred as of December 31, 1996,
for development of these lands parcels. The Company's next planned development
project after Wolfchase Galleria will be the 1.2 million square foot Citrus Park
Town Center ("Citrus Park") in Tampa, Florida. Burdines, Dillard's, JCPenney and
Sears have agreed to be anchor stores for the project. Citrus Park is scheduled
to open in March of 1999. In addition, a 450,000 square foot community center
opposite the regional mall, Citrus Park Plaza, is scheduled to open in the fall
of 1998. Currently, the Company owns a 50% interest in the 163 acre development
parcel. The Management Company owns the remaining 50% interest, subject to a
purchase option in favor of the Company. The Company also has a purchase option
from an affiliate of JMB Realty Corporation on 68 acres of land across the
street from the regional mall which will be used for development of the
community center. In addition, a bond offering of $26.7 million to fund the
roadwork surrounding the property was completed by the Citrus Park Community
Development District (the "CDD") during the fourth quarter of 1996. The Company
assisted the CDD in obtaining the financing for the roadwork by guaranteeing the
irrevocable letter of credit which supports the bonds.

<TABLE>
<CAPTION>

                                                                                        100% Balance                Pro Rata Share
                                                                          Annual         of Mortgage    Ownership     of Mortgage
($000's omitted, except share amounts)                Maturity Date    Interest Rate    Notes Payable    Interest    Notes Payable
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>                <C>           <C>          <C>
Consolidated Entities:
     Old Orchard                                          Sept. 2000      8.5260%(1)         $159,804      100.0%       $  159,804
     Oakbrook Center                                       Oct. 2000      6.0751%(2)          140,000      100.0%          140,000
     MainPlace                                             Oct. 1998      5.4066%(3)           80,000      100.0%           80,000
     Operating Partnership                                 July 1998          (4)              28,100      100.0%           28,100
     Wolfchase Galleria                                     May 1998          (5)              31,982      100.0%           31,982
----------------------------------------------------------------------------------------------------------------------------------
                                                                                              439,886                      439,886

Unconsolidated Entities: (6)
     Water Tower Place                                    April 1997      8.2540%(7)          170,000       55.0%           93,500
     Coral Square Mall                                     Dec. 2000      7.4000%              53,300       50.0%           26,650
     Miami International Mall                              Dec. 2003      6.9100%              47,500       40.0%           19,000
     Management Company                                    Aug. 2001      7.5400%              51,000       95.0%           48,450
     Management Company                                   Sept. 2001      7.0000%               9,000       95.0%            8,550
----------------------------------------------------------------------------------------------------------------------------------
                                                                                              330,800                      196,150
----------------------------------------------------------------------------------------------------------------------------------
Company debt                                                                                                            $  636,036
==================================================================================================================================
Convertible preferred units                                                                                             $   28,000
==================================================================================================================================

Market value of equity interests
     as of December 31, 1996, based upon
     24,454,937 shares/Units at $29 per share                                                                           $  709,193
==================================================================================================================================
Total market capitalization                                                                                             $1,373,229
==================================================================================================================================
Company debt to total market capitalization                                                                                     46%
==================================================================================================================================
</TABLE>

(1) Mortgage consists of two notes, one with a balance of $104.9 million which
bears interest at 9.09% and a second with a balance of $54.9 million which
bears interest at 7.45%. Interest rate shown is a weighted average.

(2) Of the $140.0 million of total debt, $58.0 million is subject to a fixed
rate of 5.856% and $82.0 million is subject to a fixed rate of 6.23%. Interest
rate shown is a weighted average. In November 1995, the Company sold its
interest rate protection agreements on the $82.0 million of floating rate
indebtedness and simultaneously entered into an interest rate swap agreement
thereby fixing the rate as noted.

(3) In December 1995, the interest rate on the loan was reduced by .34% from a
spread of .89% over LIBOR to .55% over LIBOR. Accordingly, the interest rate
was reduced from 5.7466% to 5.4066%.

(4) The line of credit, subject to lenders' approval, may be extended for an
additional one or two year period and is subject to a floating rate of 1.42%
over LIBOR.

(5) The construction loan may be extended for three one-year periods and is
subject to a floating rate of 1.375% over LIBOR.

(6) Excludes Valencia Town Center as the Company is currently not entitled to
any cash distributions until the outside partner has received a return on and
of its contributions to the partnership.

(7) Mortgage consists of two notes, one with a balance of $160.0 million which
bears interest at 8.22% and a second with a balance of $10.0 million which
bears interest at 8.80%. Interest rate shown is a weighted average. On February
10, 1997, the Water Tower Place indebtedness was refinanced. The new loan
matures on February 1, 1999; however, it may be extended for two one-year
periods. Of the total $170.0 million, $160.0 million bears interest at LIBOR +
1.125% and $10.0 million bears interest at LIBOR + 1.500%.



                                      21


<PAGE>   22






CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

($000's omitted, except share amounts)                              December 31
-------------------------------------------------------------------------------
                                                              1996         1995
-------------------------------------------------------------------------------
<S>                                                     <C>           <C>
ASSETS
Investment properties:
    Land, including peripheral land parcels             $  102,559    $  79,331
    Buildings and improvements                             766,847      525,704
    Equipment, furniture and fixtures                        2,560        1,871
    Construction in progress                                62,216       18,912
-------------------------------------------------------------------------------
                                                           934,182      625,818

    Accumulated depreciation                               (97,558)     (79,544)
-------------------------------------------------------------------------------
        Investment properties, net of accumulated
        depreciation                                       836,624      546,274

Investments in unconsolidated partnerships                  15,233        3,703
Investment in the Management Company                        15,557       15,673
Cash, cash equivalents and short-term investments            5,276        8,152
Receivables:
    Tenant, net of allowance for doubtful accounts
        of $2,141 and $2,351 in 1996 and 1995,
        respectively                                        11,619       10,691
    Other                                                    8,307          704
Deferred expenses and other assets                          11,460       13,310
-------------------------------------------------------------------------------
                                                        $  904,076   $  598,507
===============================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Mortgage notes payable                              $  439,886   $  251,000
    Land sale-leaseback proceeds                            75,000       75,000
    Deferred lease accrual                                  16,252       13,911
    Accounts payable and other liabilities                  30,512       18,663
    Investments in unconsolidated partnerships              36,030       33,563
    Commitments and contingencies
-------------------------------------------------------------------------------
        Total liabilities                                  597,680      392,137

Minority interest                                          111,733       71,861
Stockholders' equity:
    Common stock, $.01 par value, authorized 140,000,000
        shares, issued and outstanding 16,737,279 shares
        in 1996 and 13,440,626 shares in 1995                  167          134
    Unit voting stock, $.01 par value, authorized
        5,000,000 shares, issued and outstanding 344,057
        shares in 1996 and 301,633 shares in 1995                4            3
    Additional paid-in capital                             326,495      259,120
    Retained earnings (deficit)                           (132,003)    (124,748)
-------------------------------------------------------------------------------
        Total stockholders' equity                         194,663      134,509
-------------------------------------------------------------------------------
                                                        $  904,076   $  598,507
===============================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                      22




<PAGE>   23





CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

($000's omitted, except share amounts)                  Years ended December 31
-------------------------------------------------------------------------------
                                               1996          1995          1994
-------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>
Revenues:
   Shopping center revenues:
       Minimum rents                       $ 60,944      $ 57,683      $ 46,083
       Percentage rents                       4,056         3,414         3,819
       Recoveries from tenants               27,659        24,972        20,944
       Other                                  2,521         2,971         2,504
-------------------------------------------------------------------------------
                                             95,180        89,040        73,350
   Interest income                            1,864         2,587         2,433
-------------------------------------------------------------------------------
                                             97,044        91,627        75,783
-------------------------------------------------------------------------------

Expenses:
   Shopping center expenses                  30,924        30,655        25,535
   Mortgage and other interest               14,246        14,501         8,139
   Ground rent                                4,420         4,404         4,427
   Depreciation and amortization             21,236        19,683        14,672
   General and administrative                 2,650         2,428         2,270
   Write-off of assets                          308           232           467
-------------------------------------------------------------------------------
                                             73,784        71,903        55,510
-------------------------------------------------------------------------------

       Operating income                      23,260        19,724        20,273
Income from unconsolidated partnerships       3,000         1,297         1,258
Income from the Management Company            1,070         3,078         2,819
-------------------------------------------------------------------------------
       Income before other gains,
           minority interest and
           extraordinary items               27,330        24,099        24,350
Other gains                                   3,372         4,496         2,989
Minority interest                           (10,733)       (9,951)       (9,361)
-------------------------------------------------------------------------------

       Income before extraordinary items     19,969        18,644        17,978
Extraordinary items (net of
   minority interest)                            --        (1,014)           --
-------------------------------------------------------------------------------

       Net income                          $ 19,969      $ 17,630      $ 17,978
===============================================================================

Income per common and unit voting
common share:
   Before extraordinary items              $   1.42      $   1.35      $   1.31
   Extraordinary items                           --          (.07)           --
-------------------------------------------------------------------------------

       Net income                          $   1.42      $   1.28      $   1.31
===============================================================================

Dividends declared and paid                $   1.98      $   1.94      $   1.82
===============================================================================
Weighted average common and unit voting
   common shares outstanding             14,066,243    13,742,259    13,742,259
===============================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                      23




<PAGE>   24





CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                         Common Stock and
                                         Unit Voting Stock  Additional     Retained
                                        ------------------     Paid-In     Earnings
($000's omitted, except share amounts)      Shares  Amount     Capital    (Deficit)      Total
----------------------------------------------------------------------------------------------
<S>                                     <C>          <C>     <C>        <C>          <C>
Balances at December 31, 1993           13,742,259   $ 137   $ 258,139  $ (108,685)  $ 149,591
Net income                                      --      --          --      17,978      17,978
Dividends declared and paid                     --      --          --     (25,011)    (25,011)
----------------------------------------------------------------------------------------------

Balances at December 31, 1994           13,742,259     137     258,139    (115,718)    142,558
Net income                                      --      --          --       17,630     17,630
Dividends declared and paid                     --      --          --      (26,660)   (26,660)
Reallocation of minority interest               --      --         981           --        981
----------------------------------------------------------------------------------------------

Balances at December 31, 1995           13,742,259     137     259,120     (124,748)   134,509
Shares issued in connection with:
    Public offering                      3,225,000      32      80,405           --     80,437
    Issuance of Unit Voting Stock           42,424       1       1,134           --      1,135
    Stock option plan                       71,653       1       1,656           --      1,657
Net income                                      --      --          --       19,969     19,969
Dividends declared and paid                     --      --          --      (27,224)   (27,224)
Reallocation of minority interest               --      --     (15,820)          --    (15,820)
----------------------------------------------------------------------------------------------

Balances at December 31, 1996           17,081,336   $ 171   $ 326,495   $ (132,003) $ 194,663
==============================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                      24






<PAGE>   25





Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>

($000's omitted, except share amount                    Years ended December 31
-------------------------------------------------------------------------------
                                               1996          1995          1994
-------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                 $ 19,969      $ 17,630      $ 17,978
Adjustments to reconcile net income
    to net cash provided by operating
        activities:
    Depreciation and amortization            21,236        19,683        14,672
    Write-off of assets                         308           232           467
    Provision (recovery) for losses on
        accounts receivable                    (225)          195           276
    Income from unconsolidated partnerships  (3,000)       (1,297)       (1,258)
    Income from the Management Company,
        net of distributions                     --        (1,083)       (1,713)
    Minority interest                        10,733         9,951         9,361
    Other gains                              (3,372)       (4,496)       (2,989)
    Extraordinary items                          --         1,014            --
    Changes in other assets and
        liabilities                           7,091         5,038          (22)
-------------------------------------------------------------------------------
        Net cash provided by
        operating activities                 52,740        46,867        36,772
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment properties, net of
    change in related payables              (48,011)      (49,946)      (48,590)
Acquisition of investment property          (76,639)           --            --
Acquisition of partnership interest          (9,431)           --            --
Acquisition of development parcels               --        (8,604)           --
Proceeds from sale of options, land
    parcels or interest in
    unconsolidated partnership                4,679         4,496         4,924
Cash contributions to unconsolidated
    partnerships and the
    Management Company                       (2,253)         (329)          (99)
Cash distributions from unconsolidated
    partnerships and the
    Management Company                        5,563         2,615         6,711
Net sales and maturities (purchases) of
    short-term investments                      161        15,160        (5,798)
Decrease (increase) in restricted cash          (26)        2,097        (2,871)

Decrease in notes receivable                     21            12            87
-------------------------------------------------------------------------------
        Net cash used in
        investing activities               (125,936)      (34,499)      (45,636)
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net
    of issuance costs                        87,982        53,195        39,525
Proceeds from issuance of Common Stock and
    Unit Voting Stock                        83,229            --            --
Repayment of debt                           (58,900)      (34,717)           --
Cash distributions to partners              (14,606)      (14,162)      (13,175)
Dividends paid                              (27,224)      (26,660)      (25,011)
Other, net                                       --            --          (746)
-------------------------------------------------------------------------------
        Net cash provided by (used in)
        financing activities                 70,481       (22,344)          593
-------------------------------------------------------------------------------
Net decrease in cash and cash equivalents    (2,715)       (9,976)       (8,271)
Cash and cash equivalents at beginning
    of year                                   7,866        17,842        26,113
-------------------------------------------------------------------------------
Cash and cash equivalents at end of year   $  5,151       $ 7,866       $17,842
===============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for mortgage and other
        interest, net of
        amounts capitalized                $ 13,586       $13,519       $ 8,575
===============================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                      25





<PAGE>   26





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000's omitted, except share amounts)


1. ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION
The Company was incorporated under the General Corporation Laws of Maryland on
May 12, 1993 and commenced operations effective with the completion of its
initial public offering (the "Offering") on October 14, 1993, whereby the
Company sold 11,870,000 shares at $23.50 per share. The Company was formed to
continue the regional mall business of JMB Realty Corporation ("JMB Realty")
and certain of its affiliates ("JMB Partners") in owning, managing, leasing,
acquiring, developing and redeveloping a portfolio of super-regional and
regional malls located throughout the United States. Substantially all of the
Company's assets and interests in investment properties (the "Properties") are
held by, and substantially all of its operations are conducted through Urban
Shopping Centers, L.P. (the "Operating Partnership"). On November 25, 1996, the
Company completed a public offering of 3,000,000 shares at $25.50 per share. On
December 12, 1996, an overallotment option was exercised for an additional
225,000 shares at $25.50 per share. Net proceeds from the sale of these shares,
after underwriter's discount, was $80,625. Subsequent to the public offering
and the 1996 issuance of Unit Voting Stock and preferred units in the Operating
Partnership, the Company which is the sole general partner of the Operating
Partnership, owns an approximate 69.9% interest; JMB Partners and certain other
parties (together referred to as the "Contributor Group") hold limited
partnership interests ("Units") in the Operating Partnership and own an
approximate 30.1% minority interest. Each Unit may be exchanged for one share
of Common Stock. In general, for financial reporting purposes, the net profits
and losses of the Operating Partnership are allocated to the general and
limited partners in accordance with their percentage ownership. The Company
operates as a real estate investment trust ("REIT") for Federal income tax
purposes.

BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company, the Operating Partnership and all controlled affiliates. The effect of
all significant intercompany balances and transactions have been eliminated in
the consolidated presentation.
     The equity method of accounting has been applied in the accompanying
consolidated financial statements with respect to the Company's interests in
Water Tower Joint Venture ("Water Tower Place"), Coral-CS/LTD Associates
("Coral Square Mall"), West Dade County Associates ("Miami International
Mall"), Valencia Town Center Associates, L.P. ("Valencia Town Center"), Citrus
Park Venture ("Citrus Park") and Urban Retail Properties Co. (the "Management
Company").
     Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT PROPERTIES
Investment properties are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method, based on estimated
useful lives of 3-40 years.
     Maintenance and repair expenses are charged to operations as incurred.
Significant betterments and improvements are capitalized and depreciated over
their estimated useful lives.
     Development costs, including interest and real estate taxes incurred in
connection with construction or expansion of certain investment properties, are
capitalized as a cost of the investment property and depreciated over the
estimated useful life of the related asset. During 1996, 1995 and 1994, the
Company incurred interest of $17,643, $15,720 and $11,717, respectively, and
capitalized interest of $3,397, $1,219 and $3,578, respectively.
     The Company adopted the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates its investment properties periodically to
assess whether any impairment indications are present, including recurring
operating deficits and significant adverse changes in legal factors or business
climate that affect the recovery of recorded asset value. If any investment
property is considered impaired, a loss is provided to reduce the carrying
value of the property to its estimated fair value. Adoption of this statement
did not have an impact on the Company's financial position, results of
operations, or liquidity.


                                      26


<PAGE>   27




CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents (which aggregated $5,151 and $7,866 at December 31,
1996 and 1995, respectively) include a treasury money market fund which invests
principally in U.S. Treasury notes and bills ($2,928 and $6,301 at December 31,
1996 and 1995, respectively). Other short-term investments (generally with
original maturities of one year or less) are generally held to maturity and
aggregated $125 and $286 at December 31, 1996 and 1995, respectively. Cash
equivalents and other short-term investments are held at cost which
approximates market.

DEFERRED EXPENSES
Deferred mortgage loan fees and expenses (including the cost of interest rate
protection agreements related to specific mortgage loans) are amortized on a
straight-line basis over the terms of the related mortgage notes. Deferred
leasing commissions and concessions are amortized over the terms of the related
leases. Organization costs are amortized over 60 months.

REVENUE RECOGNITION
Although certain leases of the Company provide for tenant occupancy during
periods for which no rent is due and/or increases exist in minimum lease
payments over the term of the lease, the Company generally accrues rental
income for the full period of occupancy on a straight-line basis. Accrued rents
receivable relating to such leases of $8,791 and $8,266 have been included in
tenant receivables in the accompanying consolidated balance sheets at December
31, 1996 and 1995, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES
Certain general and administrative expenses are allocated among the Company,
the Operating Partnership and the Management Company pursuant to a corporate
services agreement among the three parties.

DERIVATIVES
The Company uses interest rate protection and swap agreements to hedge exposure
to interest rates on floating rate indebtedness and not for trading purposes.
Interest rate protection agreements (the original cost of which was $2,305)
were purchased in October 1993 on $82,000 of Oakbrook Center's floating rate
indebtedness. In addition, the Company entered into interest rate swap
agreements in October 1993 on $58,000 of Oakbrook Center's and $80,000 of
MainPlace's floating rate indebtedness. Premiums paid for the interest rate
protection agreements are amortized over the terms of the agreements and
unrealized gains or losses are recognized as yield adjustments over the life of
the related debt.
     In November 1995, the Company sold its interest rate protection agreements
related to the Oakbrook Center $82,000 floating rate indebtedness and
simultaneously entered into an interest rate swap agreement until maturity. In
December 1995, the Company entered into an unsecured five year interest rate
swap agreement for $20,000 of its current outstanding indebtedness. In
addition, in November 1996, the Company entered into an unsecured seven year
interest rate swap agreement for an additional $10,000 of its current
outstanding indebtedness. Unamortized premiums are included in deferred
expenses and other assets in the accompanying consolidated balance sheets. The
carrying value of the Company's interest rate swap agreements is $1,253 and
$1,582 as of December 31, 1996 and 1995, respectively. The fair value of the
Company's interest rate swap agreements is estimated at approximately $5,698
and $1,856 as of December 31, 1996 and 1995, respectively. The fair value is
estimated based upon management's good faith estimate.

FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires
disclosure about the fair values of financial instruments, whether or not
recognized in the consolidated balance sheets. Management believes that the
carrying amount of mortgage notes payable at December 31, 1996 and 1995,
approximates the SFAS 107 value. Management believes its guarantees on certain
indebtedness will not require payments. Other financial instruments are
described under "Derivatives" above, or are either carried at amounts which
approximate the SFAS 107 value or are not considered significant.

INCOME TAXES
No provision has been made for Federal income taxes for the Company in the
accompanying consolidated financial statements because the Company has operated
as a REIT. Under the applicable provisions of the Internal Revenue Code (the
"Code"), a REIT will generally not be subject to Federal income tax on that
portion of its REIT taxable income it currently distributes to its shareholders
so long as it distributes at least 95% of its taxable income to its
shareholders and complies with certain other requirements.




                                      27


<PAGE>   28





<TABLE>
<CAPTION>

PER SHARE DATA
The table below presents the dividend allocation for
tax purposes.
                                             1996           1995           1994
-------------------------------------------------------------------------------
<S>                                         <C>            <C>            <C>
Dividends declared and paid per share       $1.98          $1.94          $1.82
Ordinary income                                78%            64%            60%
Return of capital                              11%            10%            40%
Long-term capital gain                         11%            26%            --

</TABLE>


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.

3. OLD ORCHARD ACQUISITION
On December 18, 1996, the Company acquired Old Orchard for $78,577 in cash
prior to prorations and the issuance of $28,000 in preferred units in the
Operating Partnership, subject to $159,804 of existing indebtedness. In
connection with the issuance of the preferred units, the Company issued $1,135
in Unit Voting Stock. Old Orchard was owned 90% by an unaffiliated third party
and 10% by an affiliate of JMB Partners. In connection with the transaction,
the affiliate of JMB Partners first increased its interest in Old Orchard by
16% through a purchase from the unaffiliated third party so that immediately
preceding the closing, Old Orchard was owned 74% by the unaffiliated third
party and 26% by the affiliate of JMB Partners. The cash portion of the
acquisition price was funded from the proceeds of the Company's public offering
completed in December 1996. The preferred units have a distribution rate of 7%,
a redemption price of $27.50 per unit and a conversion price of $27.50 per unit
to common units which in turn are convertible to Common Stock. The preferred
units have a perpetual term with a seven year lock-out period. After seven
years the preferred units may be redeemed at the option of the Company for cash
or may be converted at the option of the holder into common units. The
operating results of Old Orchard have been consolidated in the Company's
financial statements from the acquisition date. The acquisition had an
immaterial effect on net income in 1996.
     The following summarized pro forma (unau-dited) financial information
assumes the acquisition of Old Orchard occurred on January 1, 1996 and January
1, 1995, respectively. This information does not purport to be indicative of
the results which would actually have been obtained had the acquisition been
completed on January 1, 1996 or January 1, 1995, or which may be obtained in
the future.


<TABLE>
<CAPTION>

                                                     1996                  1995
-------------------------------------------------------------------------------
<S>                                             <C>                   <C>
Revenues                                        $ 127,254             $ 115,138
Income before extraordinary items               $  17,494             $  16,864
Income before extraordinary items per
   common and unit voting common share          $    1.03             $    0.99
Weighted average common and unit
   voting common shares outstanding            17,016,586            17,009,684

</TABLE>


4. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
The accompanying consolidated financial statements include investments in
certain partnerships in which the Company does not own a controlling interest.
These investments are reported using the equity method. To the extent the
Company's investment basis differs from its share of the capital of an
unconsolidated partnership, such difference is amortized over the depreciable
lives of the unconsolidated partnership's investment assets. Investments in
unconsolidated partnerships consist of the following:

<TABLE>
<CAPTION>
<S>               <C>                  <C>
Name              Property             Ownership Interest
---------------------------------------------------------
Water Tower       Water Tower Place,
Joint Venture     Chicago, IL          55% (a)
---------------------------------------------------------
Coral-CS/LTD      Coral Square Mall,
Associates        Coral Springs, FL    50%
---------------------------------------------------------
West Dade County  Miami International
Associates        Mall, Miami, FL      40% (b)
---------------------------------------------------------
Valencia          Valencia
Town Center       Town Center,
Associates, L.P.  Valencia, CA         25% (c)
---------------------------------------------------------
Citrus Park
Venture           Tampa, FL            50% (d)
=========================================================
</TABLE>


(a) The Company owns a 55% interest in a retail property (Water Tower Place)
through its investment in Water Tower Joint Venture ("WTJV"). All major
decisions concerning the retail property require the approval of both partners
of WTJV and thus the Company does not control the partnership.

(b) Effective April 1, 1996, JMB/Miami International Associates ( an
unconsolidated partnership) distributed its interest in West Dade County
Associates ("West Dade") to its partners (the Operating Partnership and two
affiliates of JMB Realty). Effective April 1, 1996, the Operating Partnership
purchased an approximate 18% interest in West Dade from one of the JMB Realty
affiliates for $9,431 in cash and the assumption of the seller's pro rata share
of all liabilities of West Dade. The remaining interests owned by the JMB
Realty affiliates were sold to the outside partner in West Dade for $5,375 in
cash and the assumption of the sellers' pro rata share of all liabilities of
West Dade. Subsequent to these transactions, the Operating Partnership owns a
40% interest in West Dade and the outside partner owns the remaining 60%
interest.

(c) The outside partner has a right to all cash distributions until it has
received a return on and of its contributions to the partnership (as set forth
in the partnership agreement).

(d) On June 23, 1995, the Company acquired a 50% interest in Citrus Park
Venture (a development parcel). The Management Company currently owns the
remaining 50% interest in Citrus Park Venture, subject to a purchase option in
favor of the Company. In addition, a bond offering of $26,700 to fund the
roadwork surrounding the property was completed by the Citrus Park Community
Development District (the "CDD") during the fourth quarter of 1996. The Company
assisted the CDD in obtaining the financing for the roadwork by guaranteeing
the irrevocable letter of credit which supports the bonds.


                                     28





<PAGE>   29






     Summarized financial information for the unconsolidated partnerships is
presented below.

<TABLE>
<CAPTION>

                                                         December 31
--------------------------------------------------------------------
                                                1996            1995
--------------------------------------------------------------------
<S>                                        <C>             <C>
Assets:
  Investment properties, net               $ 292,829       $ 292,452
  Other assets                                29,190          28,817
--------------------------------------------------------------------
                                             322,019         321,269
Less liabilities:
  Mortgage notes payable                     310,800         310,800
  Other liabilities                           16,484          16,624
--------------------------------------------------------------------
     Total deficit                            (5,265)         (6,155)
Less outside partners' capital                15,532          23,705
--------------------------------------------------------------------
     Total investments in
       unconsolidated partnerships         $ (20,797)     $  (29,860)
====================================================================

Total investments in unconsolidated partnerships are presented in the
accompanying consolidated balance sheets as follows:

  Assets -- Investments in
     unconsolidated partnerships           $  15,233      $    3,703
  Liabilities -- Investments in
     unconsolidated partnerships              36,030          33,563
--------------------------------------------------------------------
                                           $ (20,797)     $  (29,860)
====================================================================
</TABLE>
<TABLE>
<CAPTION>

                                             Years ended December 31
--------------------------------------------------------------------
                                        1996        1995        1994
--------------------------------------------------------------------
<S>                                 <C>         <C>         <C>
Revenues:
  Shopping centers                  $ 79,361    $ 75,866    $ 76,160
  Interest income                        385         501         328
Expenses:
  Shopping centers                   (35,839)    (33,799)    (36,332)
  Mortgage and other
     interest and ground rent        (25,375)    (25,595)    (25,127)
  Depreciation and
     amortization                    (11,107)    (11,468)    (11,840)
  Write-off of assets                     --        (138)         --
Gain on sale of land                      --          --       1,211
--------------------------------------------------------------------
     Net income                     $  7,425    $  5,367    $  4,400
====================================================================

Company's share of:
  Mortgage and other
     interest and ground rent       $(10,810)   $(10,400)  $ (10,427)
  Depreciation and
     amortization                     (4,519)     (4,381)     (4,333)
  Write-off of assets                     --         (76)         --
  Gain on sale of land                    --          --         272
  Net income                           3,000       1,297       1,258
====================================================================
</TABLE>


5. INVESTMENT IN THE MANAGEMENT COMPANY
The Management Company was incorporated on May 12, 1993. Generally, the
Company's preferred stock investment in the Management Company entitles it to
95% of the distributions, profits and losses from the management, leasing and
development business (as defined) and 5% of the net distributions, profits and
losses from the land parcels (as defined). The Company's consolidated financial
statements present its investment in the Management Company under the equity
method of accounting.

     Summarized financial information for the Management Company is presented
below.

<TABLE>
<CAPTION>
                                                         December 31
--------------------------------------------------------------------
                                                      1996      1995
--------------------------------------------------------------------
<S>                                               <C>       <C>
Assets:
  Investments in land parcels (a)                 $ 38,391  $ 36,795
  Cash, cash equivalents
     and short-term investments                      5,443     3,251
  Receivables and deferred expenses                 11,346    11,274
--------------------------------------------------------------------
                                                  $ 55,180  $ 51,320
====================================================================

Liabilities:
  Notes payable (b)                               $ 70,000  $ 70,000
  Accounts payable and other liabilities             5,095     3,589
--------------------------------------------------------------------
                                                    75,095    73,589
Owners' deficit                                    (19,915)  (22,269)
--------------------------------------------------------------------
                                                  $ 55,180  $ 51,320
====================================================================
</TABLE>

<TABLE>
<CAPTION>
                                             Years ended December 31
--------------------------------------------------------------------
                                         1996        1995       1994
--------------------------------------------------------------------
<S>                                  <C>         <C>       <C>
Revenues                             $ 38,501    $ 38,139  $  33,526
Expenses:
  Management, leasing
     and development services          30,346      28,929     25,730
  Mortgage and
     other interest                     5,457       5,045      5,049
  Land parcels                            427         214        215
  Depreciation and
     amortization                         433         410        298
  Write-down of assets (c)                 --       9,580         --
--------------------------------------------------------------------
                                       36,663      44,178     31,292
--------------------------------------------------------------------
     Operating income (loss)            1,838      (6,039)     2,234
Income tax benefit (provision)           (840)        252        599
Gain (loss) on sale of land                --       1,074       (498)
--------------------------------------------------------------------
     Net income (loss)               $    998    $ (4,713) $   2,335
====================================================================
</TABLE>


(a) Includes 50% of the outstanding mortgage loan of an affiliated joint
venture. The mortgage loan, with a 50% face value of $25,750, was acquired for
$19,312 resulting in a discount of $6,438. The loan bears interest at a
variable rate based on market interest rates (as defined) and is secured by the
affiliated joint venture's interest in a land parcel located in Chicago, IL.
Interest is recorded for financial reporting purposes when received.
Accordingly, accretion of the discount has also not been recorded.

(b) Includes $51,000 of indebtedness secured by the Management Company's
interest in certain management contracts and a guarantee by Penn Square Mall
Limited Partnership (a consolidated venture) which is secured by Penn Square
Mall. The $51,000 bears interest at 7.54% per annum and matures on August 1,
2001. Also includes $9,000 of indebtedness owed to affiliates of JMB Realty
which bore no interest through the original maturity of May 20, 1996, at which
time it was extended to September 1, 2001, at an interest rate of 7.0%. The
effective interest rate on the aggregate $60,000 of indebtedness is 7.46%
through September 1, 2001. The Management Company also is indebted under a
$10,000 note payable to the Company. Such note bears interest at 12% per annum
and matures on September 1, 2001.

(c) Write-downs represent reduction of the carrying values in two retail
development land parcels due to the uncertainty of realizing the carrying
values upon future sale or development.



                                     29



<PAGE>   30





     The Management Company provides management, leasing and development
services to the Company's consolidated and unconsolidated investment
properties, to affiliated entities and to third parties. During 1995,
management contracts for six of the Company's consolidated investment
properties were terminated and new management contracts were entered into with
the Operating Partnership. In connection therewith, the Operating Partnership
entered into a service agreement with the Management Company to provide
supervisory services by Management Company personnel at 105% of the Management
Company's cost thereof. During the year ended December 31, 1996, the Management
Company received such reimbursements from the Operating Partnership of $603. In
1996 and 1995, management, leasing and development revenues of $9,787 and
$10,571, respectively, resulted from services provided to affiliated entities.
In 1994, management, leasing and development revenues of $16,743 resulted from
services provided to affiliated entities, of which approximately one-half
related to sources that are no longer affiliated, but that continue to receive
and pay for such services from the Management Company. In addition, the
Management Company received reimbursements (at cost) of payroll and other
operating expenses from affiliated entities for activities performed on their
behalf. Such reimbursements were $14,527, $2,525 and $556 during 1996, 1995 and
1994, respectively. Commencing January 1, 1996, the Management Company began
employing its own personnel to provide services to its affiliated entities and
third parties.
     The Management Company entered into an administrative services agreement
with JMB Service Bureau Co. ("Service Co."), an affiliate of JMB Partners, to
provide accounting, marketing, data processing and computer, human resources
and other support services. The compensation for such services was calculated
as the lesser of actual cost or $4,000 per annum during the initial term. This
agreement was for an initial term through December 31, 1994 and was renewed
with the same pricing structure for a one-year term for 1995. The agreement was
not renewed at December 31, 1995. Com-mencing January 1, 1996, the Management
Company began employing its own personnel to perform the services previously
provided under the administrative service agreement. Additionally, rent
expense, including building expenses, paid by the Management Company to
affiliates of JMB Realty in 1996, 1995 and 1994 was $822, $812 and $947,
respectively.
     The Company has options to purchase certain development parcels from the
Management Company at the lower of fair market value or 110% of allocable costs
(all terms as defined) until October 2000. In addition, the sale or development
of any development parcels by the Management Company is subject to a right of
first offer in favor of the Company on the same conditions as described above.
On May 25, 1995, the Company exercised its option to acquire the Management
Company's 50% interest in a 30 acre development parcel in Memphis as further
discussed in Note 8 of Notes to Consolidated Financial Statements. On August
17, 1995, the Company sold its option to purchase Woodbury (a development
parcel) in Minneapolis from the Management Company to an unaffiliated third
party. The unaffiliated third party exercised its option and purchased Woodbury
from the Management Company as further discussed in Note 8 of Notes to
Consolidated Financial Statements.

6. MORTGAGE NOTES PAYABLE

Mortgage notes payable consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                              1996                        1995
------------------------------------------------------------------------------
<S>                                      <C>                             <C>
Non-recourse mortgage loans payable,
secured by Old Orchard; $104,887
bearing interest at 9.09% and $54,917
bearing interest at 7.45%; payable in
principal and interest through
September 16, 2000 (maturity)            $ 159,804                         $--
------------------------------------------------------------------------------
Non-recourse mortgage loan payable,
secured by Oakbrook Center (a); $58,000
bearing interest at 5.856% and $82,000
bearing interest at 6.230% (through
interest rate swap agreements);
payable interest only through
October 1, 2000 (maturity)                 140,000                     140,000
------------------------------------------------------------------------------
Non-recourse mortgage loan payable,
secured by MainPlace (b); bearing
interest at 5.4066% (through an interest
rate swap agreement); payable interest
only through October 19, 1998
(maturity)                                  80,000                      80,000
------------------------------------------------------------------------------
Line of credit, secured by Brandon
TownCenter, The Plaza at Brandon
TownCenter, Bed Bath and Beyond
outparcel at Brandon TownCenter,
New York Square and Service Merchandise
Plaza (formerly The Plaza at Sawmill
Place) (c); bearing interest at 1.42%
over LIBOR; payable interest only through
July 26, 1998 (maturity)                     28,100                     31,000
------------------------------------------------------------------------------
Construction loan payable, secured by
Wolfchase Galleria (d); bearing interest
at 1.375% over LIBOR; payable interest
only through May 29, 1998 (maturity)         31,982                         --
------------------------------------------------------------------------------
                                          $ 439,886                  $ 251,000
==============================================================================
</TABLE>



                                     30


<PAGE>   31




(a) In November 1995, the interest rate protection agreements on the $82,000
were sold and simultaneously an interest rate swap agreement was entered into
which fixed the interest rate at 6.230% through maturity.

(b) In December 1995, the floating rate of interest on the loan was reduced by
 .34% from a spread of .89% over LIBOR to .55% over LIBOR. Accordingly, the
effective fixed rate of interest was reduced from 5.7466% to 5.4066%.

(c) On July 26, 1995, the Company signed an agreement with a group of lenders
for the establishment of a $90,000 secured, revolving line of credit ("Line").
The Line is an obligation of the Operating Partnership and is guaranteed by the
Company. The Line has an initial three year term and, subject to lenders'
approval, may be extended for an additional one or two year period. In July
1995, the Company repaid, with the initial proceeds from the Line, the $12,000
then outstanding balance on the Brandon TownCenter construction loan. As a
result of this repayment, the Company wrote-off the unamortized balance of
deferred financing costs related to the construction loan of $1,014, net of
minority interest, reflected as an extraordinary item in the accompanying
consolidated statement of operations for the year ended December 31, 1995.

(d) On May 29, 1996, the Company executed a loan agreement with a lender to
finance $65,000 of the remaining construction costs at Wolfchase Galleria. The
loan matures on May 29, 1998; however, it may be extended for three one-year
periods.

     Five year maturities of long-term debt for the years 1997 through 2001 are
$1,233, $141,423, $1,458, $295,772 and none, respectively.
     In December 1995, the Company entered into an unsecured five year interest
rate swap agreement for $20,000 of its current outstanding indebtedness.
In addition, in November 1996, the Company entered into an unsecured seven year
interest rate swap agreement for an additional $10,000 of its current
outstanding indebtedness.
     On November 6, 1996, the Company entered into an agreement with a lender
for a one year, $5,000 unsecured revolving line of credit. No amounts were
outstanding as of December 31, 1996.
     The Company is exposed to credit loss in the event of non-performance by
the third parties to the interest rate swap agreements (which $220,000 are AAA
and $30,000 are AA rated).
     The Company has established certain escrow accounts, totaling $1,326 at
December 31, 1996, in connection with certain mortgage notes payable described
above. These escrows are included in deferred expenses and other assets in the
accompanying consolidated balance sheets.

7. LEASES

AS PROPERTY LESSOR
At December 31, 1996, the Company's principal consolidated assets are eight
operating shopping center properties and one shopping center property,
Wolfchase Galleria, under construction. Management has determined that all
leases relating to these properties are properly classified as operating
leases; therefore, rental income is reported when earned. Leases with tenants
range in term from one to 39 years and generally provide for fixed minimum
rents and reimbursement of operating costs. In addition, leases with shopping
center tenants provide for additional rent based upon percentages of tenant
sales volumes.
     Minimum lease payments to be received in the years 1997 to 2001, and
thereafter, under the above lease agreements are $86,244, $83,770, $81,946,
$79,984, $75,753 and $377,027, respectively.

AS PROPERTY LESSEE
On December 31, 1990, Oak Brook Urban Venture (a consolidated venture) sold the
land underlying Oakbrook Center for $75,000 ("ground sale-leaseback proceeds"
or "Lessor Base Amounts") and leased it back for a period of 50 years with
options to renew for an additional 49 years. For financial reporting purposes,
the ground sale-leaseback proceeds were accounted for as a financing
transaction. Minimum annual rent to the ground lessor accrues at 5% of the
Lessor Base Amount, a portion of which may be deferred based on available cash
flow (as defined) from Oakbrook Center. Deferred amounts accrue interest at 5%
per annum. In each of the years 1996, 1995 and 1994, Oak Brook Urban Venture
reported rent expense of $3,750 of which payment of $2,350 has been deferred in
1996 and $2,550 has been deferred in 1995 and 1994. Interest has been accrued
and deferred of $823, $668 and $515 for 1996, 1995 and 1994, respectively, on
the deferred balance. The total deferred interest and ground lease rent
included in the accompanying consolidated balance sheet at December 31, 1996 is
$18,359.
     The Oakbrook Ground Lease was amended, effective upon closing of the
Offering, to escalate the minimum annual payment from $1,200 to $1,800 for the
period 1994 to 2000. Payment of the portion of the annual rent of $3,750 in
excess of the minimum annual payment is deferred to the extent that the rental
income is inadequate to (i) pay all expenses (including debt service), (ii)
provide an amount equal to the excess of 5.5% of gross revenues over property
management fees actually paid to the property manager (currently 2.5% of gross
revenues) and (iii) allow the lessee to recover a 10% yield on its investment
(as defined) in Oakbrook Center (cumulative from the date of the amendment,
subject to certain limitations). So long as the lessee has recouped such 10%
yield, the rental income in excess of expenses (including debt service and
minimum annual rental) is used to pay the deferred annual rental plus a yield
thereon of 5%. Excess rental income remaining after payment of the deferred
annual rental plus the 5% yield will be used as follows: (i) the lessee is
entitled to retain $1,250 per annum cumulative plus a yield thereon of 5% per
annum and (ii) 50% of any remaining amount of rental income



                                     31



<PAGE>   32






will be paid to the lessor as participating rent and 50% will be retained by
the lessee. Net proceeds from sale or refinancing are allocated between
lessor and lessee pursuant to the terms of the ground lease.
     A substantial portion of Penn Square Mall is on land subject to a ground
lease expiring in 2060. The lease currently provides for minimum rent equal to
the greater of: (a) annual rents of $607, subject to adjustment based on the
Consumer Price Index every fifth lease year with the next adjustment in 2001,
or (b) 3/8% of the gross annual retail sales, plus 4 5/8% of the gross annual
rents from non-retail tenants of Penn Square Mall. In 1996, 1995 and 1994, Penn
Square Mall recorded rent expense of $670, $654 and $677, respectively.

8. TRANSACTIONS WITH AFFILIATES

(not disclosed elsewhere)
Costs and expenses for services provided by the Manage-ment Company and the
Operating Partnership to the Company's investment properties, including the
Company's share of unconsolidated investment properties, were as follows:

<TABLE>
<CAPTION>
                              Years ended December 31
-----------------------------------------------------
                               1996     1995     1994
-----------------------------------------------------
<S>                         <C>      <C>      <C>
Property management and
 leasing services           $ 2,780  $ 2,549  $ 2,051
Development services          1,212    1,074      523
-----------------------------------------------------
                            $ 3,992  $ 3,623  $ 2,574
=====================================================
</TABLE>


(a) In 1995, the management agreements for the following properties were
terminated by their owners: New York Square (July 1995), Brandon TownCenter,
The Plaza at Brandon TownCenter, MainPlace and Penn Square Mall (all October
1995), and Service Merchandise Plaza (formerly The Plaza at Sawmill Place)
(November 1995). New management agreements were put in place with the Operating
Partnership on substantially the same terms. Management services of $1,415 and
$278 for the years ended December 31, 1996 and 1995, respectively, provided by
the Operating Partnership to these consolidated investment properties and
included above, have been eliminated in consolidation.


     The Company has purchase options, until October 2000, with respect to
interests in certain improved retail properties in which JMB Partners has an
interest. In addition, these interests may not be sold by JMB Partners without
first offering such interests to the Company at the lower of the option price
or the then fair market value of such property. The Company also has options to
purchase certain retail development land parcels from JMB Partners at the lower
of fair market value or 110% of allocable costs (all terms as defined) until
October 2000. In addition, the sale or development of any development parcels
by JMB Partners is subject to a right of first offer in favor of the Company on
the same conditions as described above.
     On May 25, 1995, the Company exercised its options to acquire interests in
167 acres of land in Memphis for the development of Wolfchase Galleria. The
aggregate acquisition value of such parcels was $11,443. A 137 acre parcel from
JMB Partners and a 50% interest in a 30 acre parcel from the Management Company
were acquired. The Company acquired the remaining 50% interest in the 30 acre
parcel from an unaffiliated third party. The aggregate consideration was paid
in cash of $8,604 and through the issuance of 134,400 Units.
     On June 23, 1995, the Company sold, to an unaffiliated third party, its
option to purchase from JMB Partners a 25% interest in Northpoint Mall in
Atlanta in exchange for $664 and a 50% interest in Citrus Park Venture (a 163
acre development parcel). For financial reporting purposes, the $664 is
reflected as other gains in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
     On August 17, 1995, the Company sold, to an unaffiliated third party, its
option to purchase Woodbury (a development parcel) in Minneapolis from the
Management Company for $3,874. For financial reporting purposes, the $3,874,
net of selling expenses of $42, is reflected as other gains in the accompanying
consolidated statement of operations for the year ended December 31, 1995. The
unaffiliated third party exercised its option and purchased Woodbury from the
Management Company for $1,853 net of selling expenses.

9. EMPLOYEE BENEFIT PLANS

OPTION PLAN
In 1993, the Company adopted a stock option plan (the "Option Plan") which
provides for the granting of options to officers and key employees of the
Company and the Management Company to purchase a specified number of shares of
Common Stock or Units ("Options"). Under the Option Plan, the total number of
shares of Common Stock available to be issued upon exchange of Units issued
under the Option plan is equal to 1,500,000. The Options are granted at the
market value on the day of the grant.



                                     32


<PAGE>   33






     At December 31, 1996, there were 296,334 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
Options granted during 1996 and 1995 was $0.85 and $1.35, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1996-expected dividend yield of 9.00%, risk-free
interest rate of 5.31%, expected life of 6 years and expected volatility rate
of 16.6%; 1995-expected dividend yield of 8.50%, risk-free interest rate of
7.56%, expected life of 6 years and expected volatility rate of 15.3%. The
Options granted in 1996 and 1995 have a contractual term of ten years.
     On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and net
income per share disclosures for employee option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 in accounting for its Option Plan and, accordingly, no
compensation cost has been recognized for its Options in the consolidated
financial statements. Disclosure of pro forma effects are required only for
options granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected because
compensation cost is reflected over the Options vesting period of three years
and compensation cost for Options granted prior to January 1, 1995 is not
considered. Had the Company determined compensation cost based upon the fair
value at the grant date for these Options under SFASNo. 123, the effects on the
Company's net income and net income per share would not have been material.


     Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>

                                                     Weighted-
                                                       Average
                                  Number     Number   Exercise
                               of Shares   of Units      Price
--------------------------------------------------------------
<S>                               <C>      <C>       <C>
Balances at December 31, 1993     30,675    760,325  $ 23.5000
   Granted                            --         --         --
   Exercised                          --         --         --
   Canceled                           --   (13,333)    23.5000
   Expired                            --         --         --
--------------------------------------------------------------

Balances at December 31, 1994     30,675    746,992    23.5000
   Granted                         6,700    297,800    20.7500
   Exercised                          --         --         --
   Canceled                           --   (52,667)    23.2389
   Expired                            --         --         --
--------------------------------------------------------------

Balances at December 31, 1995     37,375    992,125    22.7000
   Granted                         4,760    161,240    20.3125
   Exercised                          --   (71,653)    23.1303
   Canceled                           --   (18,834)    21.9181
   Expired                            --         --         --
--------------------------------------------------------------
Balances at December 31, 1996     42,135  1,062,878  $ 22.3267
==============================================================
</TABLE>


     At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding Options was $20.3125-$23.5000 and
7.53 years, respectively.
     At December 31, 1996 and 1995, the number of Options exercisable was
769,178 and 498,666 respectively, and the weighted-average exercise price of
these Options was $23.1493 and $23.4895, respectively.

1996 INCENTIVE UNIT PROGRAM
In 1996, the Company adopted, subject to shareholder approval, an Incentive
Unit Program (the "Program") which provides for the award of up to 525,000
Incentive Units to officers and key employees of the Company and the Management
Company. Incentive Units may be earned 25% in each of calendar years 1996
through 1999 subject to the Company achieving annual and cumulative performance
targets in its funds available for distribution for each year. The
determination of whether the performance target for any year has been achieved
is to be made not later than March 31 of the following year (the "Determination
Date"). Awards are subject to vesting over a three-year period following the
Determination Date. Awards for 525,000 Incentive Units were granted in 1996.
The Program had no effect on 1996 results of operations.



                                     33


<PAGE>   34




SAVINGS AND RETIREMENT PLAN
The Company and the Management Company participate in the JMB Realty
Corporation Employee Savings Plan which permits the employees to defer a
portion of their compensation in accordance with the provisions of Section
401(k) of the Code. The Company and the Management Company make a matching
contribution of 10% of deferrals. The Company and the Management Company also
participate in the Core Retirement Award Program, (a defined contribution plan)
in which an eligible employee (as defined) is credited with an annual
contribution equal to 3% of such employee's total compensation. The Core
Retirement Award Program was adopted on January 1, 1995, to replace the Cash
Balance Plan which was terminated as of December 31, 1994. In 1996, 1995 and
1994, the Company and the Management Company contributed in aggregate $107, $88
and $79, respectively, to the JMB Realty Corporation Employee Savings Plan, and
$515, $380 and $403, respectively, to the Core Retirement Award Program.

10. CONTINGENCIES

LITIGATION
The Company and its unconsolidated partnership investments and the Management
Company are parties to a variety of legal proceedings arising in the ordinary
course of their business. It is management's opinion that the ultimate
resolution of these matters will not have a material adverse impact on the
financial condition, results of operations or liquidity of the Company.

11. SUBSEQUENT EVENT
On February 10, 1997, the Company refinanced the Water Tower Place $170,000 of
indebtedness. The new loan matures on February 1, 1999; however, it may be
extended for two one-year periods. Of the total $170,000, $160,000 bears
interest at LIBOR + 1.125% and $10,000 bears interest at LIBOR + 1.500%.


INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS

URBAN SHOPPING CENTERS, INC.:
We have audited the accompanying consolidated balance sheets of Urban Shopping
Centers, Inc. and consolidated partnerships (the Company) as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 financial position of the Company
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.


KPMG PEAT MARWICK LLP

January 24, 1997, except as to note 11,
which is as of February 10, 1997
Chicago, Illinois



                                     34



<PAGE>   35




SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

($000's omitted, except share amounts)                  Years ended December 31
-------------------------------------------------------------------------------
                               1996       1995       1994       1993       1992
-------------------------------------------------------------------------------
<S>                       <C>        <C>        <C>        <C>        <C>
Operating data: (1)
Total revenues            $  97,044  $  91,627  $  75,783  $  96,881  $ 102,707
Income (loss) before other
  gains (losses), minority
  interest and
  extraordinary items        27,330     24,099     24,350      4,077     (9,261)
Income (loss) before
  extraordinary items        19,969     18,644     17,978      2,751     (5,835)
-------------------------------------------------------------------------------
Income per common and
  unit voting common share
  before extraordinary items   1.42       1.35       1.31       0.18         --
-------------------------------------------------------------------------------

<CAPTION>

($000's omitted, except share amounts)                              December 31
===============================================================================
                               1996       1995       1994       1993       1992
-------------------------------------------------------------------------------
<S>                       <C>        <C>        <C>        <C>        <C>
Balance sheet data: (1)
Total assets              $ 904,076  $ 598,507  $ 586,638  $ 543,153  $ 611,218
Mortgage notes payable
  and land sale-leaseback
  proceeds                  514,886    326,000    305,745    265,000    524,383
Stockholders' equity        194,663    134,509    142,558    149,591     36,635
===============================================================================
</TABLE>

(1) This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
table above presents selected operating and balance sheet data for the periods
presented on the historical basis and includes investment properties which were
distributed to JMB Partners prior to the closing of the Offering. Included in
income (loss) before extraordinary items, are (i) a $3,372 gain on sale of four
outparcels at Wolfchase Galleria in 1996, (ii) a $4,496 gain on sale of two
Company purchase options in 1995, (iii) a $2,989 gain on sale of outparcels at
the Brandon Project in 1994 and (iv) a $3,447 gain on settlement in 1992
related to a 1991 bankruptcy settlement with FDS.

QUARTERLY FINANCIAL SUMMARY

<TABLE>
<CAPTION>

($000's omitted, except share amounts)        1996 Quarters                         1995 Quarters
-----------------------------------------------------------------------------------------------------------------
                              First     Second      Third     Fourth      First     Second      Third      Fourth
-----------------------------------------------------------------------------------------------------------------
<S>                         <C>        <C>        <C>        <C>        <C>        <C>        <C>         <C>
Total revenues              $23,183    $22,899    $24,482    $26,480    $20,936    $23,993    $22,727     $23,971
Income before
  extraordinary items         3,127      4,468(1)   4,636(2)   7,738(3)   3,502      3,884(4)   5,266(5)    5,992(7)
Net income                    3,127      4,468(1)   4,636(2)   7,738(3)   3,502      3,884(4)   4,259(5)(6) 5,985(7)
=================================================================================================================
Income per share               0.23       0.33       0.34       0.51       0.25       0.28       0.31        0.44
=================================================================================================================
Dividends declared
  and paid                    0.495      0.495      0.495      0.495      0.485      0.485      0.485       0.485
=================================================================================================================
Stock price:
  High                      $22-3/8     $24-1/4    $25-3/8       $29    $20-7/8    $22-1/8    $22-3/8     $22-1/2
  Low                        20-1/8      22-1/8     22-7/8    24-1/4     19-3/4     19-7/8     20-1/4      20-1/8
=================================================================================================================

</TABLE>
(1) Includes the Company's share of gain on sale of an outparcel at Wolfchase
Galleria, net of minority interest, of $471.

(2) Includes the Company's share of gain on sale of an outparcel at Wolfchase
Galleria, net of minority interest, of $398.

(3) Includes the Company's share of gain on sale of two outparcels at Wolfchase
Galleria, net of minority interest, of $1,823.

(4) Includes the Company's share of gain on sale of option to purchase
Northpoint Mall in Atlanta, net of minority interest, of $434.

(5) Includes the Company's share of gain on sale of option to purchase Woodbury
(a development parcel) in Minneapolis, net of minority interest, of $451.

(6) Includes the Company's share of extraordinary item, net of minority
interest, of $1,014 relative to the write-off of unamortized construction loan
costs at Brandon TownCenter.

(7) Includes the Company's share of gain on sale of option to purchase Woodbury
(a development parcel) in Minneapolis, net of minority interest, of $2,050.>>


                                      35




<PAGE>   36





URBAN SHOPPING CENTERS, INC.

BOARD OF DIRECTORS
Neil G. Bluhm 3
Co-Chairman of the Board of Directors

Judd D. Malkin 2
Co-Chairman of the Board of Directors

James B. Digney 1
Senior Vice President
Metropolitan Life Insurance Company

Matthew S. Dominski 3
President and Chief Executive Officer
Urban Shopping Centers, Inc.

Susan Getzendanner 2
Partner - Skadden, Arps, Slate,
Meagher & Flom (Illinois)

John E. Neal 2
President - Kemper Funds

Phillip B. Rooney 3
Chairman
F.N.B.C. of LaGrange, Inc.

John G. Schreiber 1
President - Schreiber Investments and
Partner - Blackstone Real Estate Advisors

Henry T. Segerstrom 1,2
Managing Partner - C.J. Segerstrom & Sons

1 Audit Committee Member

2 Executive Compensation Committee Member

3 Nominating Committee Member

OFFICERS

Matthew S. Dominski
President and Chief Executive Officer

Adam S. Metz
Executive Vice President, Chief Financial Officer,
Treasurer and Director of Acquisitions

James L. Czech
Executive Vice President and
President-Development,
Urban Retail Properties Co.

Michael G. Hilborn
Senior Vice President,
General Counsel and Secretary

Dennis M. Zaslavsky
Senior Vice President and Assistant Secretary

Michael A. Goldberg
Vice President

SHAREHOLDER INFORMATION

ANNUAL MEETING
The 1997 Annual Meeting of Share-holders will be held at 10:00 a.m.
local time on Tuesday, May 6, 1997 at
American National Bank
1 North LaSalle Street
Chicago, Illinois.

SHARE INFORMATION
In 1996, Urban Shopping Centers' shares traded at a high of $29 and a low of
$20 1/8. The stock closed at $31 1/8 on February 20, 1997.
     Urban Shopping Centers is listed on The New York Stock Exchange and The
Chicago Stock Exchange (Symbol: URB). As of February 20, 1997, there were
17,268,073 shares outstanding held by 470 shareholders of record.

DIVIDEND
Urban Shopping Centers most recently declared a quarterly cash dividend of
50.75 cents per share on February 24, 1997. The dividend equates to an annual
dividend of $2.03. The dividend was paid on March 14, 1997 to shareholders of
record on March 6, 1997.
     Of the total dividends paid in 1996, 77.54% was ordinary income, 11.04%
was long-term capital gain and 11.42% was return of capital for tax purposes.

TRANSFER AGENT
First Chicago Trust Company
     of New York
P. O. Box 2500
Jersey City, New Jersey 07303
Phone: (800) 446-2617

DIVIDEND REINVESTMENT PLAN
Registered shareholders are eligible to reinvest their dividends through the
company's authorized DirectSERVICEa Program with all applicable brokerage
commissions and transaction fees paid by Urban Shopping Centers. The Direct-
SERVICEa Program also allows both existing and new shareholders to purchase
shares through voluntary cash payments. For information on this program, please
contact
First Chicago Trust Company
at 1-800-446-2617 (for registered shareholders) or 1-800-992-4566
(for non-registered shareholders).

FOR ADDITIONAL INFORMATION
Urban Shopping Centers, Inc.
c/o Investor Relations
900 North Michigan Avenue
Suite 1500
Chicago, Illinois 60611
Phone: (312) 915-2000
Facsimile: (312) 915-2001




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