<PAGE>
 
                      The Rouse Company and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

                          December 31, 1998 and 1997

                       (in thousands, except share data)


<TABLE> 
<CAPTION> 
                                                                                       1998                1997    
                                                                                    -----------         -----------
<S>                                                                                 <C>                 <C>  
ASSETS 
Property (notes 4 and 7):

     Operating properties:

         Property and deferred costs of projects.............................       $ 4,718,727         $ 3,079,962

         Less accumulated depreciation and amortization......................           578,311             515,229
                                                                                     ----------          ----------
                                                                                      4,140,416           2,564,733

     Properties in development...............................................           167,360             232,349

     Properties held for sale................................................           165,894              20,052
                                                                                     ----------          ----------

         Total property......................................................         4,473,670           2,817,134

Investments in and advances to unconsolidated
     real estate ventures (notes 3 and 7)....................................           322,066             338,692

Prepaid expenses, receivables under finance leases and
     other assets (note 15)..................................................           241,040             228,956

Accounts and notes receivable (note 5).......................................            75,917             114,300

Investments in marketable securities.........................................             4,256               3,586

Cash and cash equivalents....................................................            37,694              87,100
                                                                                    -----------         -----------

     TOTAL...................................................................       $ 5,154,643         $ 3,589,768
                                                                                    ===========         ===========
</TABLE> 


The accompanying notes are an integral part of these statements.

                                                                               4
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                   1998               1997       
                                                                                               ------------        -----------    
<S>                                                                                            <C>                 <C>            
LIABILITIES                                                                                                                       
Debt (note 7):                                                                                                                    
     Property debt not carrying a Parent Company guarantee of repayment.................        $2,923,119         $ 2,085,456    
                                                                                                                                  
     Parent Company debt and debt carrying a Parent Company guarantee of                                                          
         repayment:                                                                                                               
         Property debt..................................................................           161,986             158,093    
         Convertible subordinated debentures............................................           128,515             130,000    
         Other debt.....................................................................           845,200             256,000    
                                                                                               -----------          ----------    
                                                                                                                                  
                                                                                                 1,135,701             544,093    
                                                                                               -----------          ----------    
                                                                                                                                  
         Total debt.....................................................................         4,058,820           2,629,549    
                                                                                               -----------           ---------    
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
Obligations under capital leases........................................................             9,639              54,591    
                                                                                                                                  
Accounts payable, accrued expenses and other liabilities................................           320,293             302,613    
                                                                                                                                  
                                                                                                                                  
Company-obligated mandatorily redeemable preferred securities of a trust                                                          
     holding solely Parent Company subordinated debt securities (note 8)................           136,965             137,500    
                                                                                                                                  
Commitments and contingencies (notes 15 and 16)                                                                                   
                                                                                                                                  
SHAREHOLDERS' EQUITY (notes 12 and 13)                                                                                            
Series B Convertible Preferred stock with a liquidation preference of $202,500                          41                  41    
                                                                                                                                  
Common stock of 1 cent par value per share; 250,000,000 shares authorized;                                                      
     issued 72,225,223 shares in 1998 and 66,910,901 shares in 1997.....................               723                 669    
                                                                                                                                  
Additional paid-in capital..............................................................           836,508             686,976    
Accumulated deficit.....................................................................          (206,520)           (222,171)   
Accumulated other comprehensive income..................................................            (1,826)                ---    
                                                                                               -----------          ----------    
                                                                                                                                  
     Net shareholders' equity...........................................................           628,926             465,515    
                                                                                               -----------          ----------    
                                                                                                                                  
     TOTAL..............................................................................       $ 5,154,643         $ 3,589,768    
                                                                                               ===========         ===========     
</TABLE> 

                                                                               5
<PAGE>
 
                      The Rouse Company and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                           AND COMPREHENSIVE INCOME

                 Years ended December 31, 1998, 1997 and 1996

                     (in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                                             1998           1997           1996    
                                                                         -----------    -----------     -----------
<S>                                                                      <C>            <C>             <C> 
Revenues ..............................................................  $   692,571    $   916,771     $   821,036

Operating expenses, exclusive of provision for bad debts,
     depreciation and amortization.....................................      350,647        530,076         468,366
Interest expense (note 7)..............................................      209,564        207,490         220,381
Provision for bad debts................................................        7,735          5,766           3,688
Depreciation and amortization (note 4).................................       84,068         82,944          77,414
Equity in earnings of unconsolidated real estate ventures (note 3).....       75,769          6,815           8,917
Loss on dispositions of assets and other provisions, net (note 11).....       11,174         23,484          16,499
                                                                         -----------    -----------     -----------

     Earnings before income taxes, extraordinary items and
         cumulative effect of changes in accounting principle..........      105,152         73,826          43,605
                                                                         -----------    -----------     -----------

Income tax provision (benefit) (note 10):
     Current...........................................................          (24)         8,137             123
     Deferred---primarily Federal......................................          ---       (124,203)         25,596
                                                                         -----------    -----------     -----------

                                                                                 (24)      (116,066)         25,719
                                                                         -----------    -----------     -----------

     Earnings before extraordinary items and cumulative effect
         of changes in accounting principle............................      105,176        189,892          17,886

Extraordinary gain (loss), net (note 7)................................        4,355        (21,342)         (1,453)
Cumulative effect at January 1, 1998 of change in accounting
     for participating mortgages (note 1)..............................       (4,629)           ---             ---
Cumulative effect at October 1, 1997 of change in accounting
     for business process reengineering costs, net (note 1)............          ---         (1,214)            ---
                                                                         -----------    -----------     -----------

     NET EARNINGS......................................................      104,902        167,336          16,433

Other items of comprehensive income - minimum
     pension liability adjustment......................................       (1,826)           ---              --
                                                                         -----------    -----------     -----------

     COMPREHENSIVE INCOME..............................................  $   103,076    $   167,336     $    16,433
                                                                         ===========    ===========     ===========

     NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS....................  $    92,750    $   157,023     $     5,900
                                                                         ===========    ===========     ===========

EARNINGS PER SHARE OF COMMON STOCK (NOTE 14):
     Basic:
         Earnings before extraordinary items and cumulative effect
             of changes in accounting principle........................  $      1.36    $      2.70     $       .13
         Extraordinary items...........................................          .07           (.32)           (.03)
         Cumulative effect of changes in accounting principle..........         (.07)          (.02)            ---
                                                                         -----------    -----------     -----------

             Total.....................................................  $      1.36    $      2.36     $       .10
                                                                         ===========    ===========     ===========

     Diluted:
         Earnings before extraordinary items and cumulative effect
             of changes in accounting principle........................  $      1.34    $      2.59     $       .12
         Extraordinary items...........................................          .07           (.28)           (.03)
         Cumulative effect of changes in accounting principle..........         (.07)          (.02)            ---
                                                                         -----------    -----------     -----------

             Total.....................................................  $      1.34    $      2.29     $       .09
                                                                         ===========    ===========     ===========
</TABLE> 

The accompanying notes are an integral part of these statements.   

                                                                               6
<PAGE>
 
                      The Rouse Company and Subsidiaries

          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                 Years ended December 31, 1998, 1997 and 1996

                   (in thousands, except per share amounts)

<TABLE> 
<CAPTION> 
                                                                                                                    Accumulated     
                                                      Series A     Series B               Additional                   other        
                                                      Preferred    Preferred    Common      paid-in    Accumulated  comprehensive   
                                                        stock        stock       stock      capital       deficit      income       
                                                      ---------    ---------    ------    ----------   -----------  -------------   
<S>                                                   <C>          <C>          <C>       <C>          <C>          <C> 
BALANCE AT DECEMBER 31, 1995........................   $   45       $  ---      $   479     $ 309,943    $ (267,883)   $     ---    

Net earnings .......................................      ---          ---          ---           ---        16,433          ---    
Dividends declared: ..                                                                                                              
     Common stock -- $.88 per share.................      ---          ---          ---           ---       (50,384)         ---    
     Preferred stock -- $2.44 per share.............      ---          ---          ---           ---       (10,533)         ---    
Conversion of Series A Preferred stock (note 12)          (45)         ---          106           (61)          ---          ---    
Purchases of common stock...........................      ---          ---           (2)       (7,005)          ---          ---    
Common stock issued in acquisition of                                                                                               
     The Hughes Corporation (note 2)................      ---          ---           78       178,008           ---          ---    
Common stock issued pursuant to Contingent                                                                                          
     Stock Agreement (note 13)......................      ---          ---            2         5,023           ---          ---    
Proceeds from exercise of stock options, net........      ---          ---            4         1,038           ---          ---    
Lapse of restrictions on common stock awards........      ---          ---          ---         1,903           ---          ---    
                                                       ------       ------      -------     ---------    ----------    ---------  

BALANCE AT DECEMBER 31, 1996........................      ---          ---          667       488,849      (312,367)         ---    

Net earnings........................................      ---          ---          ---           ---       167,336          ---    
Dividends declared:                                                                                                                 
     Common stock -- $1.00 per share................      ---          ---          ---           ---       (66,827)         ---    
     Preferred stock -- $2.65 per share.............      ---          ---          ---           ---       (10,313)         ---    
Issuance of Series B Preferred stock (note 12)......      ---           41          ---       196,787           ---          ---    
Purchases of common stock...........................      ---          ---           (8)      (26,357)          ---          ---    
Common stock issued pursuant to Contingent                                                                                          
     Stock Agreement (note 13)......................      ---          ---            8        23,305           ---          ---    
Proceeds from exercise of stock options, net........      ---          ---            2         2,077           ---          ---    
Lapse of restrictions on common stock awards........      ---          ---          ---         2,315           ---          ---    
                                                       ------       ------      -------     ---------    ----------    ---------    

BALANCE AT DECEMBER 31, 1997........................      ---           41          669       686,976      (222,171)         ---    
                                                                                                                                    
Net earnings........................................      ---          ---          ---           ---       104,902          ---    
Other comprehensive income..........................      ---          ---          ---           ---           ---       (1,826)   
Dividends declared:                                                                                                                 
     Common stock -- $1.12 per share................      ---          ---          ---           ---       (77,099)         ---    
     Preferred stock -- $3.00 per share.............      ---          ---          ---           ---       (12,152)         ---    
Purchases of common stock...........................      ---          ---          (21)      (65,412)          ---          ---    
Conversion of convertible subordinated debentures         ---          ---            1         1,484           ---          ---    
Common stock issued pursuant to Contingent                                                                                          
     Stock Agreement (note 13)......................      ---          ---           21        65,002           ---          ---    
Other common stock issued...........................      ---          ---           50       143,378           ---          ---    
Proceeds from exercise of stock options, net........      ---          ---            3           484           ---          ---    
Lapse of restrictions on common stock awards........      ---          ---          ---         4,596           ---          ---    
                                                       ------       ------      -------     ---------    ----------    ---------    

BALANCE AT DECEMBER 31, 1998........................   $  ---       $   41      $   723     $ 836,508    $ (206,520)   $  (1,826)   
                                                       ======       ======      =======     =========    ==========    =========    
</TABLE> 

The accompanying notes are an integral part of these statements.              7

<PAGE>
 
                      The Rouse Company and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1998, 1997 and 1996

                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                            1998            1997           1996    
                                                                         -----------    -----------     -----------
<S>                                                                      <C>            <C>             <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received.................................       $   666,080    $   714,784     $   685,990
Proceeds from land sales and on notes receivable from land 
   sales..........................................................            80,017        159,932         122,245
Interest received.................................................            14,038         11,877          11,939
Land development expenditures.....................................               ---        (97,868)        (54,343)
Operating expenditures............................................          (339,962)      (395,528)       (381,061)
Interest paid.....................................................          (204,897)      (207,681)       (216,644)   
Dividends, interest and other operating distributions from
   unconsolidated majority financial interest ventures, net.......            45,907            ---             ---
                                                                         -----------    -----------     -----------

     Net cash provided by operating activities....................           261,183        185,516         168,126
                                                                         -----------    -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for properties in development and improvements to
     existing properties funded by debt...........................          (306,950)      (283,401)       (123,985)
Expenditures for acquisition of The Hughes Corporation,
     net of acquired cash.........................................               ---            ---         (36,331)
Expenditures for property acquisitions............................          (882,404)       (79,420)        (18,152)
Expenditures for improvements to existing properties funded by 
     cash provided by operating activities:
         Tenant leasing and remerchandising.......................            (7,955)        (5,964)         (8,095)
         Building and equipment...................................           (13,873)       (15,933)        (12,691)
Proceeds from sales of operating properties.......................           130,070         81,281          26,345
Payments received on loans and advances to unconsolidated
   majority financial interest ventures...........................            47,483            ---             ---
Other.............................................................             1,429        (19,042)        (10,086)
                                                                         -----------    -----------     -----------

     Net cash used by investing activities........................        (1,032,200)      (322,479)       (182,995)
                                                                         -----------    -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of property debt...........................           650,987        693,525         291,373
Repayments of property debt:
     Scheduled principal payments.................................           (50,689)       (46,282)        (39,048)
     Other payments...............................................          (347,725)      (572,139)       (251,807)
Proceeds from issuance of other debt..............................           602,000         11,868          31,652
Repayments of other debt..........................................           (15,287)        (1,520)            ---
Proceeds from issuance of Series B Preferred stock................               ---        196,828             ---
Proceeds from issuance of common stock............................            43,428            ---             ---
Purchases of common stock.........................................           (65,433)       (26,365)         (7,007)
Dividends paid....................................................           (89,251)       (77,140)        (60,917)
Other.............................................................            (6,419)         1,522            (533)
                                                                         -----------    -----------     -----------

     Net cash provided (used) by financing activities.............           721,611        180,297         (36,287)
                                                                         -----------    -----------     -----------

Net increase (decrease) in cash and cash equivalents..............           (49,406)        43,334         (51,156)

Cash and cash equivalents at beginning of year....................            87,100         43,766          94,922
                                                                         -----------    -----------     -----------

Cash and cash equivalents at end of year..........................       $    37,694    $    87,100     $    43,766
                                                                         ===========    ===========     ===========
</TABLE> 

The accompanying notes are an integral part of these statements.

                                                                               8
<PAGE>
 
RECONCILIATION OF NET EARNINGS TO NET CASH
     PROVIDED BY OPERATING ACTIVITIES

<TABLE> 
<CAPTION> 
                                                                            1998            1997           1996    
                                                                         -----------    -----------     -----------
<S>                                                                      <C>            <C>             <C> 
NET EARNINGS......................................................       $   104,902    $   167,336     $    16,433
Adjustments to reconcile net earnings to net cash
     provided by operating activities:
     Depreciation and amortization................................            84,068         82,944          77,414
     Undistributed earnings of majority financial interest 
         ventures.................................................           (41,720)           ---             ---
     Loss on dispositions of assets and other provisions, net.....            11,174         23,484          16,499
     Extraordinary (gain) loss, net...............................            (4,355)        21,342           1,453
     Cumulative effect of change in accounting principle, net.....             4,629          1,214             ---
     Additions to preconstruction reserve.........................             1,700          2,800           2,700
     Participation expense pursuant to Contingent Stock Agreement.            44,075         35,832          28,844
     Provision for bad debts......................................             7,735          5,766           3,688
     Decrease (increase) in:
         Accounts and notes receivable............................            32,507        (70,045)        (26,862)
         Other assets.............................................             1,845         (2,312)         (5,694)
     Increase in accounts payable, accrued expenses
         and other liabilities....................................             8,852         48,783          25,885
     Deferred income taxes........................................               ---       (124,203)         25,596
     Other, net...................................................             5,771         (7,425)          2,170
                                                                         -----------    -----------     -----------

NET CASH PROVIDED BY OPERATING ACTIVITIES.........................       $   261,183    $   185,516     $   168,126
                                                                         ===========    ===========     ===========


-----------------------------------------------------------------------------------------------------------------------------

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES


                                                                            1998            1997           1996    
                                                                         -----------    -----------     -----------
Common stock issued pursuant to Contingent Stock
     Agreement (note 13)..........................................       $    65,023    $    23,313     $     5,025
Common stock and other noncash consideration issued
     in acquisitions of property interests (note 4)...............           100,000          5,323          13,520
Mortgage and other debt assumed or issued in acquisitions of
     property interests...........................................           599,795            ---          21,090
Mortgage debt extinguished on dispositions
     of interests in properties...................................            19,875            ---             ---
Termination of capital lease obligation...........................            46,387            ---             ---
Common stock issued on conversion of convertible
   subordinated debentures........................................             1,485            ---             ---
Capital lease obligations incurred................................             2,743          1,101           3,789
Debt assumed by purchasers of land................................                 2         21,928          16,991
Mortgage and other debt of subsidiaries in
     which a majority voting interest was sold
     to an affiliate (note 3).....................................               ---        280,595             ---
Property of subsidiaries in which a majority voting
     interest was sold to an affiliate (note 3)...................               ---        547,295             ---
Debt and other liabilities assumed in acquisition of The Hughes
     Corporation, net (note 2)....................................               ---            ---         334,155
Common stock issued in acquisition of The Hughes
     Corporation (note 2).........................................               ---            ---         178,086
Notes received from sales of operating properties.................               ---            ---           8,440
                                                                         ===========    ===========     ===========
</TABLE> 

                                                                               9
<PAGE>
 
                      The Rouse Company and Subsidiaries
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       December 31, 1998, 1997 and 1996

                            
(1) SUMMARY OF SIGNIFICANT    (A) DESCRIPTION OF BUSINESS
    ACCOUNTING POLICIES       Through its subsidiaries and affiliates, the
                              Company acquires, develops and/or manages income-
                              producing properties located throughout the United
                              States and develops and sells land for
                              residential, commercial and other uses. The 
                              income-producing properties consist of retail
                              centers, office and industrial buildings and 
                              mixed-use and other properties. The retail centers
                              are primarily regional shopping centers in
                              suburban market areas, but also include specialty
                              marketplaces in certain downtown areas and several
                              village centers, primarily in Columbia, Maryland.
                              The office and industrial properties are located
                              primarily in the Columbia, Baltimore and Las Vegas
                              market areas or are components of large-scale
                              mixed-use properties (which include retail,
                              parking and other uses) located in other urban
                              markets. Land development and sales operations are
                              predominantly related to large-scale, long-term
                              community development projects in Columbia and
                              Summerlin, Nevada.

                              (B) BASIS OF PRESENTATION
                              The consolidated financial statements include the
                              accounts of The Rouse Company, all subsidiaries
                              and partnerships in which it has a majority voting
                              interest and control and the Company's
                              proportionate share of the assets, liabilities,
                              revenues and expenses of unconsolidated real
                              estate ventures in which it has joint interest and
                              control with other venturers. Investments in other
                              ventures are accounted for using the equity or
                              cost methods as appropriate in the circumstances.
                              Significant intercompany balances and transactions
                              are eliminated in consolidation.
                                   The preparation of financial statements in
                              conformity with generally accepted accounting
                              principles requires management to make estimates
                              and judgments that affect the reported amounts of
                              assets and liabilities and disclosures of
                              contingencies at the date of the financial
                              statements and revenues and expenses recognized
                              during the reporting period. Significant estimates
                              are inherent in the preparation of the Company's
                              financial statements in a number of areas,
                              including evaluation of impairment of long-lived
                              assets (including operating properties and
                              properties held for development or sale),
                              determination of useful lives of assets subject to
                              depreciation or amortization, evaluation of
                              collectibility of accounts and notes receivable
                              and measurement of pension and postretirement
                              obligations. Actual results could differ from
                              those and other estimates.
                                   Certain amounts for prior years have been
                              reclassified to conform to the presentation for
                              1998.
 
                              (C) PROPERTY
                              Properties to be developed or held and used in
                              operations are carried at cost reduced for
                              impairment losses, where appropriate. Properties
                              held for sale are carried at cost reduced for
                              valuation allowances, where appropriate.
                              Acquisition, development and construction costs of
                              properties in development are capitalized
                              including, where applicable, salaries and related
                              costs, real estate taxes, interest and
                              preconstruction costs. The preconstruction stage
                              of development of an operating property (or an
                              expansion of an existing property) includes
                              efforts and related costs to secure land control
                              and zoning, evaluate feasibility and complete
                              other initial tasks which are essential to
                              development. Provision is made for potentially
                              unsuccessful preconstruction efforts by charges to
                              operations. Development and construction costs and
                              costs of significant improvements, replacements
                              and renovations at operating properties are
                              capitalized, while costs of maintenance and
                              repairs are expensed as incurred.
                                   Direct costs associated with financing and
                              leasing of operating properties are capitalized as
                              deferred costs and amortized over the periods
                              benefited by the expenditures. Effective March 19,
                              1998, the Company adopted a policy of charging
                              internal staff costs associated with acquisitions
                              of operating properties to expense as incurred as
                              required by a consensus of the Emerging Issues
                              Task Force of the Financial Accounting Standards
                              Board. Prior to that date, such costs were
                              capitalized as part of the cost of properties
                              acquired. This change did not have a material
                              effect on net earnings for 1998.

                                                                              10
<PAGE>
 
                                   Depreciation of operating properties is
                              computed using the straight-line method. The
                              annual rate of depreciation for most of the
                              Company's retail centers is based on a 55-year
                              composite life and a salvage value of
                              approximately 10%, producing an effective annual
                              rate of depreciation for new properties of 1.6%.
                              The other retail centers, all office buildings and
                              other properties are generally depreciated using
                              composite lives of 40 years producing an effective
                              annual rate of depreciation for such properties of
                              2.5%.
                                   If events or circumstances indicate that the
                              carrying value of an operating property to be held
                              and used may be impaired, a recoverability
                              analysis is performed based on estimated
                              nondiscounted future cash flows to be generated
                              from the property. If the analysis indicates that
                              the carrying value is not recoverable from future
                              cash flows, the property is written down to
                              estimated fair value and an impairment loss is
                              recognized.
                                   Properties held for sale are carried at the
                              lower of their carrying values (i.e., cost less
                              accumulated depreciation and any impairment loss
                              recognized, where applicable) or estimated fair
                              values less costs to sell. The net carrying values
                              of operating properties are classified as
                              properties held for sale when marketing of the
                              properties for sale is authorized by management.
                              Depreciation of these properties is discontinued
                              at that time, but operating revenues, interest and
                              other operating expenses continue to be recognized
                              until the date of sale. Revenues and expenses
                              related to property interests acquired with the
                              intention to resell are not recognized.

                              (D) SALES OF PROPERTY
                              Gains from sales of operating properties and
                              revenues from land sales are recognized using the
                              full accrual method provided that various criteria
                              relating to the terms of the transactions and any
                              subsequent involvement by the Company with the
                              properties sold are met. Gains or revenues
                              relating to transactions that do not meet the
                              established criteria are deferred and recognized
                              when the criteria are met or using the installment
                              or cost recovery methods, as appropriate in the
                              circumstances. For land sale transactions under
                              the terms of which the Company is required to
                              perform additional services and incur significant
                              costs after title has passed, revenues and cost of
                              sales are recognized on a percentage of completion
                              basis.
                                   Cost of land sales is generally determined as
                              a specified percentage of land sales revenues
                              recognized for each land development project. The
                              cost percentages used are based on estimates of
                              development costs and sales revenues to completion
                              of each project and are revised periodically for
                              changes in estimates or development plans. The
                              specific identification method is used to
                              determine cost of sales of certain parcels of
                              land.
 
                              (E) LEASES
                              Leases which transfer substantially all the risks
                              and benefits of ownership to tenants are
                              considered finance leases and the present values
                              of the minimum lease payments and the estimated
                              residual values of the leased properties, if any,
                              are accounted for as receivables. Leases which
                              transfer substantially all the risks and benefits
                              of ownership to the Company are considered capital
                              leases and the present values of the minimum lease
                              payments are accounted for as property and debt.
                                   In general, minimum rent revenues are
                              recognized when due from tenants; however,
                              estimated collectible minimum rent revenues under
                              leases which provide for varying rents over their
                              terms are averaged over the terms of the leases.
 
                              (F) INCOME TAXES
                              In December 1997, the Company determined that it
                              would elect to be taxed as a real estate
                              investment trust (REIT) pursuant to the Internal
                              Revenue Code of 1986, as amended, effective 
                              January 1, 1998. In general, a corporation that
                              distributes at least 95% of its REIT taxable
                              income to shareholders in any taxable year and
                              complies with certain other requirements (relating
                              primarily to the nature of its assets and the
                              sources of its revenues) is not subject to Federal
                              income taxation to the extent of the income which
                              it distributes. Management believes that the
                              Company met the qualifications for REIT status as
                              of December 31, 1998 and intends for it to
                              continue to meet the qualifications in the future
                              and to distribute at least 100% of its REIT
                              taxable income (determined after taking into
                              account any net operating loss deduction) to
                              shareholders in 1999 and subsequent years. As
                              discussed more fully in note 10, management also
                              does not expect that the Company will pay taxes on
                              "built-in gains" on its assets. Based on these
                              considerations, management does not believe that
                              the Company will be liable for income taxes at the
                                                                              11
<PAGE>
 
                              Federal level or in most of the states in which it
                              operates in 1998 and future years. Accordingly,
                              the Company eliminated substantially all of its
                              existing deferred tax assets and liabilities at
                              December 31, 1997, and does not expect to provide
                              for deferred income taxes in future periods except
                              in certain states. 
                                   Where required, deferred income taxes are
                              accounted for using the asset and liability
                              method. Under this method, deferred income taxes
                              are recognized for temporary differences between
                              the financial reporting bases of assets and
                              liabilities and their respective tax bases and for
                              operating loss and tax credit carryforwards based
                              on enacted tax rates expected to be in effect when
                              such amounts are realized or settled. However,
                              deferred tax assets are recognized only to the
                              extent that it is more likely than not that they
                              will be realized based on consideration of
                              available evidence, including tax planning
                              strategies and other factors.

                              (G) INVESTMENTS IN MARKETABLE SECURITIES AND CASH
                                  AND CASH EQUIVALENTS
                              The Company's investment policy defines authorized
                              investments and establishes various limitations on
                              the maturities, credit quality and amounts of
                              investments held. Authorized investments include
                              U.S. government and agency obligations,
                              certificates of deposit, bankers acceptances,
                              repurchase agreements, commercial paper, money
                              market mutual funds and corporate debt and equity
                              securities.
                                   Investments with maturities at dates of
                              purchase in excess of three months are classified
                              as marketable securities and carried at amortized
                              cost as it is the Company's intention to hold
                              these investments until maturity. Short-term
                              investments with maturities at dates of purchase
                              of three months or less are classified as cash
                              equivalents, except that any such investments
                              purchased with the proceeds of loans which may be
                              expended only for specified purposes are
                              classified as investments in marketable
                              securities. At December 31, 1998 and 1997,
                              investments in marketable securities consist
                              primarily of U.S. government and agency
                              obligations with maturities of less than one year
                              which are held for restricted uses.

                              (H) DERIVATIVE FINANCIAL INSTRUMENTS
                              The Company makes limited use of interest rate
                              exchange agreements, including interest rate caps
                              and swaps, to manage interest rate risk associated
                              with variable rate debt. The Company may also use
                              other types of agreements to hedge interest rate
                              risk associated with anticipated project financing
                              transactions. These instruments are designated as
                              hedges and, accordingly, changes in their fair
                              values are not recognized in the financial
                              statements, provided that they meet defined
                              correlation and effectiveness criteria at
                              inception and thereafter. Instruments that cease
                              to qualify for hedge accounting are marked-to-
                              market with gains or losses recognized in income.
                                   Under interest rate cap agreements, the
                              Company makes initial premium payments to the
                              counterparties in exchange for the right to
                              receive payments from them if interest rates on
                              the related variable rate debt exceed specified
                              levels during the agreement period. Premiums paid
                              are amortized to interest expense over the terms
                              of the agreements using the interest method and
                              payments receivable from the counterparties are
                              accrued as reductions of interest expense. Under
                              interest rate swap agreements, the Company and the
                              counterparties agree to exchange the difference
                              between fixed rate and variable rate interest
                              amounts calculated by reference to specified
                              notional principal amounts during the agreement
                              period. Notional principal amounts are used to
                              express the volume of these transactions, but the
                              cash requirements and amounts subject to credit
                              risk are substantially less. Amounts receivable or
                              payable under swap agreements are accounted for as
                              adjustments to interest expense on the related
                              debt. 
                                   Parties to interest rate exchange agreements
                              are subject to market risk for changes in interest
                              rates and risk of credit loss in the event of
                              nonperformance by the counterparty. The Company
                              does not require any collateral under these
                              agreements, but deals only with highly rated
                              financial institution counterparties (which, in
                              certain cases, are also the lenders on the related
                              debt) and does not expect that any counterparties
                              will fail to meet their obligations.

                              (I) OTHER INFORMATION ABOUT FINANCIAL INSTRUMENTS
                              Fair values of financial instruments approximate
                              their carrying values in the financial statements
                              except for debt and related interest rate exchange
                              agreements for which fair value information is
                              provided in note 7.

                                                                              12
<PAGE>
 
                              (J)  EARNINGS PER SHARE OF COMMON STOCK
                              Basic earnings per share (EPS) is computed by
                              dividing income available to common shareholders
                              by the weighted-average number of common shares
                              outstanding. Diluted EPS is computed after
                              adjusting the numerator and denominator of the
                              basic EPS computation for the effects of all
                              dilutive potential common shares outstanding
                              during the period. The dilutive effects of
                              convertible securities are computed using the "if-
                              converted" method and the dilutive effects of
                              options, warrants and their equivalents (including
                              fixed awards and nonvested stock issued under
                              stock-based compensation plans) are computed using
                              the "treasury stock" method.

                              (K) STOCK-BASED COMPENSATION
                              The Company uses the intrinsic value method to
                              account for stock-based employee compensation
                              plans. Under this method, compensation cost is
                              recognized for awards of shares of common stock or
                              stock options to employees only if the quoted
                              market price of the stock at the grant date (or
                              other measurement date, if later) is greater than
                              the amount the employee must pay to acquire the
                              stock. Information concerning the pro forma
                              effects on net earnings and earnings per share of
                              common stock of using an optional fair value-based
                              method, rather than the intrinsic value method, to
                              account for stock-based compensation plans is
                              provided in note 13.

                              (L) BUSINESS PROCESS REENGINEERING COSTS
                              Effective October 1, 1997, the Company adopted a
                              policy of charging costs of business process
                              reengineering activities to expense as incurred as
                              required by a consensus of the Emerging Issues
                              Task Force of the Financial Accounting Standards
                              Board. Prior to that date, such costs were
                              deferred and amortized over the period benefited
                              by the expenditures. The cumulative effect at
                              October 1, 1997 of this accounting change was to
                              reduce net earnings for 1997 by $1,214,000 ($.02
                              per share), net of related income tax benefits of
                              $654,000. The effect of this change on earnings
                              before extraordinary losses and net earnings for
                              1997, excluding the cumulative effect of the
                              change, was not material and application of the
                              new policy in 1996 would not have had a material
                              effect on reported earnings before extraordinary
                              losses, net earnings or related per share amounts.

                              (M)  PARTICIPATING MORTGAGES
                              Effective January 1, 1998, the Company adopted the
                              American Institute of Certified Public
                              Accountants' Statement of Position 97-1
                              "Accounting by Participating Mortgage Loan
                              Borrowers." This Statement prescribes borrowers'
                              accounting for participating mortgage loans and
                              requires, among other things, that borrowers
                              recognize liabilities for the estimated fair value
                              of lenders' participations in the appreciation in
                              value (if any) of mortgaged real estate projects
                              and record such participations as interest over
                              the terms of the related loans. The Company had
                              not previously recognized lenders' participations
                              in the appreciation in value of mortgaged
                              properties. The cumulative effect of this
                              accounting change at January 1, 1998 was to reduce
                              net earnings by approximately $4,629,000 ($.07 per
                              share basic and diluted). The effect of this
                              change, excluding the cumulative effect of initial
                              adoption, was not material (approximately $.01 per
                              share basic and diluted) in 1998.

                              (N) COMPREHENSIVE INCOME
                              Effective January 1, 1998, the Company adopted
                              Statement of Financial Accounting Standards No.
                              130, "Reporting Comprehensive Income." This
                              Statement establishes standards for reporting and
                              presentation of comprehensive income and its
                              components in financial statements. Comprehensive
                              income includes all changes in shareholders'
                              equity during a period, except those relating to
                              investments by and distributions to shareholders.
                              The Company's comprehensive income consists of net
                              earnings and adjustments to minimum pension
                              liability and is presented in the statements of
                              operations and comprehensive income. Accumulated
                              other comprehensive income is displayed as a
                              separate component of shareholders' equity. No
                              amounts were required to be reclassified to other
                              comprehensive income for 1997 and 1996.

                              (O) PENSION AND OTHER POSTRETIREMENT PLANS
                              Effective January 1, 1998, the Company adopted
                              Statement of Financial Accounting Standards No.
                              132, "Employers' Disclosures about Pension and
                              Other Postretirement Benefits." This 

                                                                              13
<PAGE>
 
                              Statement revises disclosure requirements about
                              pension and other postretirement benefit plans,
                              but does not change the method of accounting for
                              them.
 
(2) THE HUGHES CORPORATION    On June 12, 1996, the Company acquired all of the
    ACQUISITION AND RELATED   outstanding equity interests in The Hughes
    MATTERS                   Corporation and its affiliated partnership, Howard
                              Hughes Properties, Limited Partnership (together,
                              "Hughes"). In connection with the acquisition, the
                              Company issued 7,742,884 shares of common stock
                              valued at $178,086,000 and incurred or assumed
                              debt and other liabilities of $370,486,000 (net of
                              certain receivables and other current assets
                              acquired). As discussed in note 13, additional
                              shares of common stock (or, in certain
                              circumstances, Increasing Rate Cumulative
                              Preferred stock) have been and may continue to be
                              issued to the former Hughes owners or their
                              successors pursuant to terms of a Contingent Stock
                              Agreement. The acquisition was accounted for using
                              the purchase method. The total purchase cost
                              approximated the aggregate fair values of the
                              assets acquired which consisted primarily of a
                              regional shopping center in Las Vegas, a large-
                              scale, master-planned community in Summerlin,
                              Nevada, and four large-scale, master-planned
                              business parks and various other properties in
                              Nevada and Southern California.

                                   The consolidated statement of operations 
                              and comprehensive income for the year ended 
                              December 31, 1996 includes revenues and costs and
                              expenses from the date of acquisition. The
                              Company's unaudited pro forma consolidated results
                              of operations for the year ended December 31,
                              1996, assuming the acquisition of Hughes occurred
                              on January 1, 1996, are summarized as follows (in
                              thousands, except per share data):
                              
<TABLE> 
                                             <S>                                                       <C>  
                                             Revenues................................................  $  872,805
                                             Earnings before extraordinary items.....................      20,990
                                             Net earnings............................................      19,537
                                             Earnings per share of common stock:                                 
                                             Basic:                                                              
                                               Earnings before extraordinary items...................         .16
                                               Net earnings..........................................         .14
                                             Diluted:                                                            
                                               Earnings before extraordinary items...................         .16
                                               Net earnings..........................................         .14
                                                                                                       ==========   
</TABLE> 

                                   The unaudited pro forma revenues and earnings
                              summarized above are not necessarily indicative of
                              the results that would have occurred if the
                              acquisition had been consummated on January 1,
                              1996.
                    
(3) UNCONSOLIDATED REAL       Investments in and advances to unconsolidated real
    ESTATE VENTURES           estate ventures at December 31, 1998 and 1997 are
                              summarized, based on the level of the Company's
                              financial interest, as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                          1998           1997
                                                                                      ----------      ----------
                                         <S>                                          <C>             <C> 
                                         Majority interest ventures.................  $  270,085      $  259,320
                                         Joint interest and control ventures........       1,140           3,412
                                         Minority interest ventures.................      50,841          75,960
                                                                                      ----------      ----------
                                             Total..................................  $  322,066      $  338,692 
                                                                                      ==========      ==========
</TABLE> 

                                   The equity in earnings of unconsolidated real
                              estate ventures for the years ended December 31,
                              1998, 1997 and 1996 is summarized, based upon the
                              level of the Company's financial interest, as
                              follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                         1998         1997           1996    
                                                                                       --------     ---------      -------- 
                                               <S>                                     <C>          <C>            <C>   
                                               Majority interest ventures..........    $  63,475    $     ---      $    --- 
                                               Minority interest ventures..........       12,294        6,815         8,917 
                                                                                       --------     ---------      -------- 
                                                   Total...........................    $  75,769    $   6,815      $  8,917  
                                                                                       =========    =========      ========
 </TABLE> 

                                                                              14
<PAGE>
 
                         The ventures in which the Company has majority
                    financial interests were initiated on December 31, 1997,
                    when certain wholly owned subsidiaries issued 91% of their
                    voting common stock to The Rouse Company Incentive
                    Compensation Statutory Trust, an entity which is neither
                    owned nor controlled by the Company, for an aggregate
                    consideration of $1,400,000. These sales were made at fair
                    value and as part of the Company's plan to meet the
                    qualifications for REIT status. The Company retained the
                    remaining voting stock of the ventures and holds shares of
                    nonvoting common and/or preferred stock and, in certain
                    cases, mortgage loans receivable from the ventures which,
                    taken together, comprise substantially all (at least 98%) of
                    the financial interest in them. As a result of its
                    disposition of the majority voting interest in the ventures,
                    the Company began accounting for its investment in them
                    using the equity method effective December 31, 1997. Due to
                    the Company's continuing financial interest in the ventures,
                    it recognized no gain on the sales of stock for financial
                    reporting purposes and the ventures retained the Company's
                    cost basis of the assets acquired and liabilities assumed.
                    The assets of the ventures consist primarily of land to be
                    developed and sold as part of community development projects
                    in Columbia and Summerlin, other investment land, primarily
                    in Nevada, certain office and retail properties in Columbia
                    and contracts to manage various operating properties.

                         The condensed, combined balance sheets of these
                    ventures at December 31, 1998 and 1997 are summarized as
                    follows (in thousands):

<TABLE> 
<CAPTION>
                                                                                   1998            1997
                                                                                ----------      ----------
                    <S>                                                         <C>             <C>  
                    Assets:
                         Operating properties, net........................      $  244,470      $  211,385
                         Properties in development........................          66,442          23,144
                         Land held for development and sale...............         236,999         231,530
                         Investment land..................................          41,156          34,947
                         Properties held for sale.........................             ---          46,289
                         Advances to the Company..........................         112,310         131,832
                         Other............................................         192,437         169,876 
                                                                                ----------      ----------
                              Total.......................................      $  893,814      $  849,003
                                                                                ==========      ==========
                                                                          
                    Liabilities and shareholders' deficit:                
                         Loans and advances from the Company..............      $  488,363      $  538,586
                         Mortgages payable and other long-term debt.......         332,945         280,595
                         Other liabilities................................         116,244         104,119 
                         Redeemable Series A Preferred stock..............          50,000          50,000 
                         Shareholders' deficit............................         (93,738)       (124,297)
                                                                                ----------      ----------
                              Total.......................................      $  893,814      $  849,003
                                                                                ==========      ==========
</TABLE>

                         The condensed combined statement of operations of these
                    ventures for 1998 is summarized as follows (in thousands):

<TABLE>
                    <S>                                                         <C> 
                    Revenues, including interest on loans to the
                         Company of $9,067................................      $  282,010
                    Operating expenses....................................        (161,350)
                    Interest expense, including interest on loans from    
                         the Company of $53,340...........................         (68,146) 
                    Depreciation and amortization.........................         (10,585) 
                    Equity in earnings of unconsolidated real                               
                         estate ventures..................................             811  
                    Gain on dispositions of assets, net...................          15,856  
                    Income taxes..........................................         (22,060) 
                    Extraordinary losses, net.............................          (1,127)  
                                                                                ----------
                                                                          
                              Net earnings................................      $   35,409
                                                                                ==========
</TABLE> 

                                                                              15
<PAGE>
 
                         The Company's share of the net earnings before
                    extraordinary losses of these ventures for 1998 is
                    summarized as follows (in thousands):

<TABLE>
                    <S>                                                         <C> 
                    Share of net earnings based on ownership interest......     $   35,055
                    Share of extraordinary losses..........................          1,116
                    Participation by others in the Company's share of      
                         earnings..........................................        (24,152)
                    Interest on loans and advances, net....................         44,273
                    Eliminations and other, net............................          7,183
                                                                                ----------

                                                                                $   63,475
                                                                                ==========
</TABLE>

                         The ventures in which the Company has joint interest
                    and control are accounted for using the proportionate share
                    method. These ventures are partnerships that own various
                    retail centers which are managed by affiliates of the
                    Company. The consolidated financial statements include the
                    Company's proportionate share of its historical cost of
                    these properties and depreciation based on the Company's
                    depreciation policies which differ, in certain cases, from
                    those of the ventures.

                         The condensed, combined balance sheets of these
                    ventures and the Company's proportionate share of their
                    assets, liabilities and equity at December 31, 1998 and 1997
                    and the condensed, combined statements of earnings of these
                    ventures and the Company's proportionate share of their
                    revenues and expenses for 1998, 1997 and 1996 are summarized
                    as follows (in thousands):

<TABLE>
<CAPTION> 
                                                                 Combined             Proportionate Share
                                                          ----------------------     ----------------------
                                                             1998         1997          1998         1997
                                                          ---------    ---------     ---------    ---------
     <S>                                                  <C>          <C>           <C>          <C>  
     Total assets, primarily property................     $ 315,576    $ 353,132     $ 140,983    $ 153,399
                                                          =========    =========     =========    =========
                                                    
     Liabilities, primarily long-term debt...........     $ 207,386    $ 247,949     $  90,034    $ 109,852
     Venturers' equity...............................       108,190      105,183        50,949       43,547
                                                          ---------    ---------     ---------    ---------
        Total liabilities and venturers' equity......     $ 315,576    $ 353,132     $ 140,983    $ 153,399
                                                          =========    =========     =========    =========
</TABLE> 

<TABLE>
<CAPTION>
                                                         Combined                           Proportionate Share
                                           -----------------------------------       ----------------------------------
                                              1998         1997         1996            1998         1997        1996
                                           ---------    ---------    ---------       ---------    ---------   ---------
     <S>                                   <C>          <C>          <C>             <C>          <C>         <C> 
     Revenues.........................     $ 119,023    $ 123,802    $ 118,360       $  52,390    $  55,477   $  56,105
     Operating and interest expenses..        58,311       69,825       65,862          25,621       31,528      29,535
     Depreciation and amortization....        11,915       12,013       11,257           3,876        3,657       2,588
                                           ---------    ---------    ---------       ---------    ---------   ---------
        Net earnings..................     $  48,797    $  41,964    $  41,241       $  22,893    $  20,292   $  23,982
                                           =========    =========    =========       =========    =========   =========
</TABLE>

                         The ventures in which the Company holds minority
                    interests are accounted for using the equity or cost
                    methods, as appropriate. Most of these properties are
                    managed by affiliates of the Company and the agreements
                    relating to them generally provide for preference returns to
                    the Company when operating results or sale or refinancing
                    proceeds exceed specified levels. At December 31, 1998,
                    these ventures are primarily partnerships and corporations
                    which own retail centers. Prior to December 1998, these
                    ventures also included a corporate joint venture which owned
                    various office and industrial properties. The Company
                    acquired the interest of the other venturer in the corporate
                    joint venture on November 30, 1998.

                                                                              16
<PAGE>
 
                         The condensed, combined balance sheets of these
                    ventures at December 31, 1998 and 1997 and their condensed,
                    combined statements of earnings for 1998, 1997 and 1996 are
                    summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                              1998           1997
                                                                           ----------     ----------
                    <S>                                                    <C>            <C> 
                    Total assets, primarily property....................   $  546,130     $1,101,163
                                                                           ==========     ==========
                    Liabilities, primarily long-term debt...............   $  369,847     $  491,436
                    Venturers' equity...................................      176,283        609,727
                                                                           ----------     ----------
                       Total liabilities and venturers' equity..........   $  546,130     $1,101,163
                                                                           ==========     ==========
</TABLE> 

<TABLE>
<CAPTION>
                                                                              1998           1997           1996
                                                                           ----------     ----------     ----------
                    <S>                                                    <C>            <C>            <C>  
                    Revenues............................................   $  189,361     $  212,614     $  201,769
                    Operating and interest expenses.....................      134,411        148,065        138,460
                    Depreciation and amortization.......................       32,041         37,423         35,634
                    Gain (loss) on dispositions of assets...............       38,915        (11,097)         1,110
                                                                           ----------     ----------     ----------
                       Net earnings.....................................   $   61,824     $   16,029     $   28,785
                                                                           ==========     ==========     ==========
</TABLE>

                         The Company's share of net earnings of these ventures
                    was $12,294,000, $6,815,000, and $8,917,000 in 1998, 1997
                    and 1996, respectively.

(4) PROPERTY        Operating properties and deferred costs of projects at
                    December 31, 1998 and 1997 are summarized as follows (in
                    thousands):

<TABLE> 
<CAPTION> 
                                                                              1998           1997
                                                                           ----------     ----------
                    <S>                                                    <C>            <C> 
                    Buildings and improvements..........................   $4,113,654     $2,729,908
                    Land................................................      488,114        231,935
                    Deferred costs......................................      106,385        111,455
                    Furniture and equipment.............................       10,574          6,664
                                                                           ----------     ----------
                       Total............................................   $4,718,727     $3,079,962
                                                                           ==========     ==========
</TABLE> 

                         Depreciation expense for 1998, 1997 and 1996 was
                    $73,646,000, $70,751,000, and $64,113,000, respectively.
                    Amortization expense for 1998, 1997 and 1996 was
                    $10,422,000, $12,193,000, and $13,301,000, respectively.

                         On April 6, 1998, the Company and Westfield America,
                    Inc. agreed to purchase a portfolio of interests in retail
                    centers from TrizecHahn Centers Inc. (TrizecHahn). Under
                    terms of the agreement, the Company purchased ownership
                    interests in seven retail centers in a series of
                    transactions completed in the third and fourth quarters of
                    1998. The aggregate purchase price of the interests in the
                    retail centers was approximately $1,154,981,000, including
                    $352,529,000 in mortgage and other debt assumed. The net
                    purchase price was funded primarily by new mortgage debt
                    secured by the properties and borrowings under the Company's
                    revolving credit and bridge loan facilities. In February
                    1999, the Company contributed its ownership interests in
                    four of the retail centers to a joint venture and received a
                    35% ownership interest in the joint venture. The joint 
                    venture assumed obligations under the bridge loan facility
                    of $271,000,000 which were subsequently repaid using cash 
                    contributed by other venturers. 

                         On November 30, 1998, the Company purchased a portfolio
                    of office and industrial properties and certain land parcels
                    from a corporate joint venture in which the Company held a
                    5% ownership interest. The portfolio consisted of 41 office
                    buildings and 26 industrial buildings. The purchase price of
                    the properties was approximately $373,000,000, including
                    approximately $112,000,000 of mortgage debt assumed. The net
                    purchase price was funded by issuing $100,000,000 of common
                    stock (3,525,782 shares), a $50,000,000 note secured by
                    certain of the properties, a $58,000,000 unsecured note and
                    by borrowings under the Company's revolving credit facility.
                    In December 1998, the Company sold three of the office
                    buildings to TrizecHahn for approximately $91,000,000.

                         Properties in development include construction and
                    development in progress and preconstruction costs, net.
                    Construction and development in progress includes land and
                    land improvements of $63,737,000 and $41,951,000 at December
                    31, 1998 and 1997, respectively.

                                                                              17
<PAGE>
 
                                   Properties held for sale are generally those
                              that, for various reasons, management has
                              determined do not meet the Company's investment
                              criteria or that the Company acquired with the
                              intention to sell. Properties held for sale at
                              December 31, 1998 and 1997 are summarized as
                              follows (in thousands):

<TABLE> 
<CAPTION>
                                                                                        1998           1997    
                                                                                     ----------     ---------- 
                              <S>                                                    <C>            <C>        
                              Retails centers (two properties in 1998 and                                      
                                 three properties in 1997)...................        $  163,307     $   10,499 
                              Office and other properties....................             2,587          9,553 
                                                                                     ----------     ---------- 
                                                                                                               
                                 Total.......................................        $  165,894     $   20,052 
                                                                                     ==========     ==========  
</TABLE> 

                                   In 1998, the Company acquired interests in 
                              the retail centers held for sale at December 31,
                              1998, with the intention of selling them.
                              Accordingly, revenues of $6,395,000 and operating
                              losses of $723,000 relating to them are not
                              included in the consolidated statement of
                              operations and comprehensive income. Revenues
                              relating to other properties held for sale were
                              $1,405,000 in 1998, $17,642,000 in 1997 and
                              $29,600,000 in 1996 and these properties had
                              operating income of $859,000 in 1998 and incurred
                              operating losses of $3,558,000 in 1997 and
                              $811,000 in 1996. All of the properties held for
                              sale at December 31, 1998 are expected to be sold
                              in 1999.

(5) ACCOUNTS AND NOTES        Accounts and notes receivable at December 31, 1998
    RECEIVABLE                and 1997 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                        1998           1997
                                                                                     ----------     ----------
                              <S>                                                    <C>            <C> 
                              Accounts receivable, primarily accrued rents and
                                 income under tenant leases.......................   $   54,261     $   49,424
                              Notes receivable from sales of properties...........        5,497         10,154
                              Notes receivable from sales of land.................       35,987         76,033
                                                                                     ----------     ----------
                                                                                         95,745        135,611
                              Less allowance for doubtful receivables.............       19,828         21,311
                                                                                     ----------     ----------
                                 Total............................................   $   75,917     $  114,300
                                                                                     ==========     ==========
</TABLE>
                                   Accounts and notes receivable due after one
                              year were $23,197,000 and $54,180,000 at December
                              31, 1998 and 1997, respectively. Credit risk with
                              respect to receivables from tenants is not highly
                              concentrated due to the large number of tenants
                              and the geographic diversification of the
                              Company's operating properties. The Company
                              performs credit evaluations of prospective new
                              tenants and requires security deposits in certain
                              circumstances. Tenants' compliance with the terms
                              of their leases is monitored closely, and the
                              allowance for doubtful receivables is established
                              based on analyses of the risk of loss on specific
                              tenant accounts, historical trends and other
                              relevant information. Notes receivable from sales
                              of land are primarily due from builders at the
                              community development project in Summerlin. The
                              Company stopped financing land sales in 1998 and
                              does not anticipate financing any future land
                              sales. The Company performed credit evaluations of
                              the builders and generally required substantial
                              down payments (at least 20%) on all land sales
                              that it financed. These notes and notes from sales
                              of operating properties are generally secured by
                              first liens on the related properties.

(6) PENSION, POSTRETIREMENT   The Company has a defined benefit pension plan
    AND DEFERRED COMPENSA-    (the "funded plan") covering substantially all 
    TION PLANS                employees and employees of certain affiliates and
                              separate, nonqualified unfunded retirement plans
                              (the "unfunded plans") covering directors and
                              participants in the funded plan whose defined
                              benefits exceed the plan's limits. Benefits under
                              the pension plans are based on the participants'
                              years of service and compensation. The Company
                              also has a retiree benefits plan that provides
                              postretirement medical and life insurance benefits
                              to full-time employees and employees of certain
                              affiliates who meet minimum age and service
                              requirements. The Company pays a portion of the
                              cost of participants' life insurance coverage and
                              makes contributions to the cost of participants'
                              medical insurance coverage based on years of
                              service, subject to a maximum annual contribution.

                                                                              18
<PAGE>
 
                         Information relating to the obligations, assets and
                    funded status of the plans at December 31, 1998 and 1997 and
                    for the years then ended is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                  Pension               Postretirement        
                                                                                   Plans                     Plan             
                                                                           ----------------------   ----------------------    
                                                                             1998        1997         1998        1997        
                                                                             ----        ----         ----        ----        
                    <S>                                                    <C>         <C>          <C>         <C>           
                    Change in benefit obligations:                                                                            
                     Benefit obligations at beginning of year              $ 57,440    $ 42,890     $ 14,668    $ 13,202      
                     Service cost                                             4,609       3,373          718         578      
                     Interest cost                                            4,549       3,702        1,024         990      
                     Amendment - revision to benefit formula                      -       6,504            -           -      
                     Actuarial loss                                          17,194       8,515          282         539      
                     Benefits paid                                          (11,448)     (7,544)        (805)       (641)
                                                                           --------    --------     --------    -------- 
                       Benefit obligations at end of year                    72,344      57,440       15,887      14,668      
                                                                           --------    --------     --------    --------      
                                                                                                                              
                    Change in plan assets:                                                                                    
                     Fair value of plan assets at beginning of year          47,083      38,991            -           -      
                     Actual return on plan assets                             7,900       7,870            -           -      
                     Employer contribution                                   11,449       7,766          805         641      
                     Benefits paid                                          (11,448)     (7,544)        (805)       (641)
                                                                           --------    --------     --------    --------      
                       Fair value of plan assets at end of year              54,984      47,083            -           -      
                                                                           --------    --------     --------    --------       
                                                                                                                              
                                                                                                                              
                    Funded status                                           (17,360)    (10,357)     (15,887)    (14,668)       
                    Unrecognized net actuarial (gain) loss                   23,784      12,292           83        (199)          
                    Unamortized prior service cost                            7,652       9,062            -           -      
                    Unrecognized transition obligation                          870       1,071        4,664       4,998      
                                                                           --------    --------     --------    --------      
                      Net amount recognized                                $ 14,946    $ 12,068     $(11,140)   $ (9,869)     
                                                                           ========    ========     ========    ========      
                                                                                                                              
                    Amounts recognized in the balance sheets                                                                  
                       consist of:                                         $ 20,189    $ 15,378     $      -    $      -      
                     Prepaid benefit cost                                                                                     
                     Accrued benefit liability                              (11,382)     (8,818)     (11,140)     (9,869)     
                     Intangible asset                                         4,313       5,508            -           -      
                     Accumulated other comprehensive income                                                                   
                       items                                                  1,826           -            -           -      
                                                                           --------    --------     --------    --------      
                       Net amount recognized                               $ 14,946    $ 12,068     $(11,140)   $ (9,869)      
                                                                           ========    ========     ========    ========      
                                                                                                                              
                    Weighted-average assumptions as of                                                                        
                       December 31:                                                                                           
                     Discount rate                                             7.00%       7.25%        7.00%       7.25%     
                     Expected rate of return on plan assets                    7.25        8.00            -           -      
                     Rate of compensation increase                             4.50        4.50            -           -      
                                                                           ========    ========     ========    ========       
</TABLE> 

                         The assets of the funded plan consist primarily of
                    pooled separate accounts with an insurance company and
                    marketable equity securities. Because the Company's
                    contributions to the cost of participants' medical insurance
                    coverage are fixed, health care cost trend rates do not
                    affect the benefit obligation under the postretirement plan.

                                                                              19
<PAGE>
 
                         The net pension cost includes the following components
                    (in thousands):

<TABLE>
<CAPTION>
                                                                           1998         1997          1996
                                                                        ---------    ---------     ---------
                    <S>                                                 <C>          <C>           <C>  
                    Service cost....................................    $   4,609    $   3,373     $   2,989
                    Interest cost on projected benefit obligations..        4,549        3,702         3,107
                    Expected return on funded plan assets...........       (3,479)      (3,239)       (2,807)
                    Prior service cost recognized...................        1,410        1,410           756
                    Net loss recognized.............................        1,281          436           875
                    Amortization of transition obligation...........          201          201           201
                                                                        ---------    ---------     ---------
                         Net pension cost...........................    $   8,571    $   5,883     $   5,121
                                                                        =========    =========     =========
</TABLE> 

                         The net postretirement benefit cost includes the
                    following components (in thousands):

<TABLE> 
<CAPTION> 
                                                                            1998         1997         1996
                                                                         ---------    ---------    ---------
                    <S>                                                  <C>          <C>          <C>   
                    Service cost......................................   $     718    $     578    $     640
                    Interest cost on accumulated benefit obligations..       1,024          990          932
                    Amortization of transition obligation.............         333          333          333
                                                                         ---------    ---------    ---------
                         Net postretirement benefit cost..............   $   2,075    $   1,901    $   1,905
                                                                         =========    =========    =========
</TABLE>

                         Affiliates that participate in the pension and
                    postretirement plans reimburse the Company for their share
                    of the annual benefit cost of the plans. The affiliates'
                    share of the benefit cost for 1998 was $3,091,000.

                         The Company also has a deferred compensation program
                    which permits directors and certain management employees of
                    the Company and certain affiliates to defer portions of
                    their compensation on a pretax basis. The participants
                    designate the investment of the deferred funds based on
                    various alternatives and, under certain of the plans, the
                    Company's contributions are made in common stock. The
                    Company recognized deferred compensation expense related to
                    this program of $189,000, $73,000 and $84,000 in 1998, 1997
                    and 1996, respectively.

(7) DEBT            In recognition of the various characteristics of real estate
                    financing, debt is classified as follows:

                    (a)  "Property debt not carrying a Parent Company guarantee
                         of repayment" which is subsidiary company debt having
                         no express written obligation which would require the
                         Company to repay the principal amount of such debt
                         during the full term of the loan (nonrecourse loans);
                         and
                    (b)  "Parent Company debt and debt carrying a Parent Company
                         guarantee of repayment" which is debt of the Company
                         and subsidiary company debt with an express written
                         obligation of the Company to repay the principal amount
                         of such debt during the full term of the loan (Company
                         and recourse loans).

                         With respect to nonrecourse loans, the Company has in
                    the past and may in the future, under some circumstances,
                    support those subsidiary companies whose annual obligations,
                    including debt service, exceed their operating revenues. At
                    December 31, 1998 and 1997, nonrecourse loans include
                    $185,574,000 and $416,335,000, respectively, of subsidiary
                    companies' mortgages and bonds which are subject to
                    agreements with lenders requiring the Company to provide
                    support for operating and debt service costs, where
                    necessary, for defined periods or until specified conditions
                    relating to the operating results of the related properties
                    are met.

                                                                              20
<PAGE>
 
                         Debt at December 31, 1998 and 1997 is summarized as
                    follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                     1998           1997
                                                                 -----------    -----------
                    <S>                                          <C>            <C> 
                    Mortgages and bonds.......................   $ 2,948,324    $ 2,159,418
                    Convertible subordinated debentures.......       128,515        130,000
                    Medium-term notes.........................        97,500        110,300
                    Bank credit facility borrowings:                
                      Bridge facility.........................       304,000            ---
                      Revolving credit facility...............       298,000            ---
                    Other loans...............................       282,481        229,831
                                                                 -----------    -----------
                         Total................................   $ 4,058,820    $ 2,629,549
                                                                 ===========    ===========
</TABLE>

                         Mortgages and bonds are secured by deeds of trust or
                    mortgages on properties and general assignments of rents.
                    This debt matures at various dates through 2024 and, at
                    December 31, 1998, bears interest at a weighted-average
                    effective rate of 7.65%, including lender participations in
                    operations. At December 31, 1998, approximately $312,008,000
                    of this debt provides for payments of additional interest
                    based on operating results of the related properties in
                    excess of stated levels. 

                         The convertible subordinated debentures bear interest
                    at 5.75% and mature in 2002. The debentures are convertible
                    at the option of holders into one share of common stock for
                    each $28.63 of par value and are redeemable at the option of
                    the Company at any time at a price equal to par value plus
                    accrued interest.

                         The Company has registered $150,000,000 of unsecured,
                    medium-term notes which may be issued to the public from
                    time to time. The notes may be issued, subject to market
                    conditions, for varying terms (nine months to 30 years) and
                    at fixed or variable interest rates based on market indices
                    at the time of issuance. The notes outstanding at December
                    31, 1998, mature at various dates from 1999 to 2015, bear
                    interest at a weighted-average effective rate of 7.6%
                    (including an average rate of 6.01% on $26,000,000 of
                    variable rate notes) and have a weighted average maturity of
                    4.5 years.

                         The Company has credit facilities with a group of
                    lenders that provide for aggregate unsecured borrowings of
                    up to $800,000,000, including $450,000,000 under a revolving
                    credit facility and $350,000,000 under a bridge facility.
                    Advances under the facilities bear interest at a variable
                    rate based on LIBOR (6.52% on the revolving credit facility
                    and 6.61% on the bridge facility at December 31, 1998). The
                    revolving credit facility is available to July 2001, subject
                    to a one-year renewal option. The bridge facility was
                    available solely for specified property acquisitions that
                    were completed in 1998 and related borrowings are due on or
                    before July 30, 1999. In February 1999, approximately
                    $271,000,000 of the outstanding borrowings under the bridge
                    facility were repaid by a joint venture formed to own four
                    of the acquired retail centers. At December 31, 1998, 
                    availability under the bridge loan facility had been fully 
                    utilized, and until it is repaid in full, the net proceeds
                    of any equity transactions and project refinancings must be
                    applied to reduce the balance. Payment of borrowings under
                    the credit facilities is guaranteed by certain of the
                    unconsolidated real estate ventures in which the Company has
                    a majority financial interest, and the Company has pledged
                    its stock in the ventures to the lenders under the credit
                    facilities.

                         Other loans include $120,000,000 of 8.5% unsecured
                    notes due in 2003, various property acquisition loans and
                    certain other borrowings. These loans include aggregate
                    unsecured borrowings of $258,213,000 and $208,019,000 at
                    December 31, 1998 and 1997, respectively, and at December
                    31, 1998, bear interest at a weighted-average effective rate
                    of 8.28%.

                        At December 31, 1998, approximately $1,376,844,000 of
                    the mortgages and bonds and $58,000,000 of the other loans
                    were payable to one lender.

                         The agreements relating to various loans impose
                    limitations on the Company. The most restrictive of these
                    limit the levels and types of debt the Company and its
                    affiliates may incur and require the Company and its
                    affiliates to maintain specified minimum levels of debt
                    service coverage and net worth. The agreements also impose
                    restrictions on the dividend payout ratio, and on sale,
                    lease and certain other transactions, subject to various
                    exclusions and limitations. These restrictions have not
                    limited the Company's normal business activities.

                                                                              21
<PAGE>
 
                                   The annual maturities of debt at December 31,
                              1998 are summarized as follows (in thousands):

<TABLE> 
<CAPTION>
                                                               Nonrecourse        Company and
                                                                  Loans          Recourse Loans         Total
                                                              -------------     ----------------    -------------
                              <S>                             <C>               <C>                 <C>  
                              1999.........................    $   159,407        $    337,058       $   496,465
                              2000.........................         57,080             104,622           161,702
                              2001.........................        171,241             358,189           529,430
                              2002.........................        121,051             163,440           284,491
                              2003.........................        439,696             120,092           559,788
                              Subsequent to 2003...........      1,974,644              52,300         2,026,944
                                                               -----------        ------------       -----------
                                   Total...................    $ 2,923,119        $  1,135,701       $ 4,058,820
                                                               ===========        ============       ===========
</TABLE>

                                   At December 31, 1998, the Company had
                              interest rate cap agreements which effectively
                              limit the average interest rate on $70,538,000 of
                              mortgages to 8.9% through May 2002. The interest
                              rate swap agreements outstanding at December 31,
                              1998 were not material. Interest rate exchange
                              agreements did not have a material effect on the
                              weighted-average effective interest rates on debt
                              at December 31, 1998 and 1997 or interest expense
                              for 1998, 1997 and 1996.

                                   Total interest costs were $229,478,000 in
                              1998, $231,098,000 in 1997, and $230,960,000 in
                              1996, of which $19,914,000, $23,608,000, and
                              $10,579,000 were capitalized, respectively.

                                   In 1998, the Company recognized net 
                              extraordinary gains related to extinguishments of
                              debt prior to scheduled maturity of $3,626,000,
                              and in 1997 and 1996 incurred extraordinary losses
                              on such transactions of $32,834,000, and
                              $2,236,000, respectively, before deferred income
                              tax benefits of $729,000, $11,492,000 and
                              $783,000, respectively. The sources of funds used
                              to pay the debt and fund the prepayment penalties,
                              where applicable, were refinancings of properties,
                              the Series B Preferred stock issued in 1997, the
                              medium-term notes and the Company-obligated
                              mandatorily redeemable preferred securities issued
                              in 1995.

                                   The estimated fair value of debt is
                              determined based on quoted market prices for
                              publicly-traded debt and on the discounted
                              estimated future cash payments to be made for
                              other debt. The discount rates used approximate
                              current market rates for loans or groups of loans
                              with similar maturities and credit quality. The
                              estimated future payments include scheduled
                              principal and interest payments, and lenders'
                              participations in operating results and residual
                              values of the related properties, where
                              applicable.

                                   The carrying amount and estimated fair value
                              of the Company's debt at December 31, 1998 and
                              1997 are summarized as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                   1998                         1997
                                                        ------------------------     -------------------------
                                                         Carrying      Estimated      Carrying       Estimated
                                                          Amount      Fair Value       Amount       Fair Value
                                                        ----------    ----------     ----------     ----------
                              <S>                       <C>           <C>            <C>            <C> 
                              Fixed rate debt........   $3,099,949    $3,198,641     $2,390,590     $2,528,215
                              Variable rate debt.....      958,871       958,871        238,959        238,959
                                                        ----------    ----------     ----------     ----------
                                                        $4,058,820    $4,157,512     $2,629,549     $2,767,174
                                                        ==========    ==========     ==========     ==========
</TABLE>

                                   Fair value estimates are made at a specific
                              point in time, are subjective in nature and
                              involve uncertainties and matters of significant
                              judgment. Settlement of the Company's debt
                              obligations at fair value may not be possible and
                              may not be a prudent management decision.

(8) COMPANY-OBLIGATED         The redeemable preferred securities consist of 
    MANDATORILY REDEEMABLE    5,500,000 Cumulative Quarterly Income Preferred 
    PREFERRED SECURITIES      Securities (preferred securities), with a
                              liquidation amount of $25 per security, which were
                              issued in November 1995 by a statutory business
                              trust. The trust used the proceeds of the
                              preferred securities and other assets to purchase
                              at par $141,753,000 of junior subordinated
                              debentures (debentures) of the Company due in
                              November 2025, which are the sole assets of the
                              trust.

                                   Payments to be made by the trust on the
                              preferred securities are dependent on payments
                              that the Company has undertaken to make,
                              particularly the payments to be made by the
                              Company on 

                                                                              22
<PAGE>
 
                              the debentures. Compliance by the Company with its
                              undertakings, taken together, would have the
                              effect of providing a full, irrevocable and
                              unconditional guarantee of the trust's obligations
                              under the preferred securities.

                                   Distributions on the preferred securities are
                              payable from interest payments received on the
                              debentures and are due quarterly at an annual rate
                              of 9.25% of the liquidation amount, subject to
                              deferral for up to five years under certain
                              conditions. Distributions payable are included in
                              operating expenses. Redemptions of the preferred
                              securities are payable at the liquidation amount
                              from redemption payments received on the
                              debentures.

                                   The Company may redeem the debentures at par
                              at any time after November 27, 2000, but
                              redemptions at or prior to maturity are payable
                              only from the proceeds of issuance of capital
                              stock of the Company or of securities
                              substantially comparable in economic effect to the
                              preferred securities. During 1998, the Company
                              repurchased 21,400 of the preferred securities for
                              approximately $535,000.

(9) SEGMENT INFORMATION       In 1998, the Company adopted Statement of
                              Financial Accounting Standards No. 131,
                              "Disclosures about Segments of an Enterprise and
                              Related Information." This Statement establishes
                              standards for reporting financial information
                              about operating segments in interim and annual
                              financial reports and provides for a "management
                              approach" to identifying the reportable segments
                              in place of the industry segment approach used
                              previously.

                                   The Company has five reportable segments:
                              retail centers, office, mixed-use and other
                              properties, land sales operations, development and
                              corporate. The retail centers segment includes the
                              operation and management of retail centers,
                              including regional shopping centers, downtown
                              specialty marketplaces and village centers. The
                              office, mixed-use and other properties segment
                              includes the operation and management of office,
                              industrial and mixed-use properties. The land
                              sales operations segment includes the development
                              and sale of land, primarily in large-scale, long-
                              term community development projects in Columbia
                              and Summerlin. The development segment includes
                              the evaluation of all potential new projects
                              (including expansions of existing properties) and
                              acquisition opportunities and the management of
                              them through the development or acquisition
                              process. The corporate segment is responsible for
                              cash and investment management and certain other
                              general and support functions. The Company's
                              reportable segments offer different products or
                              services and are managed separately because each
                              requires different operating strategies and
                              management expertise.

                                   Segment operating results are measured and
                              assessed based on a performance measure referred
                              to as Funds from Operations (FFO). The National
                              Association of Real Estate Investment Trusts
                              defines FFO as net earnings (computed in
                              accordance with generally accepted accounting
                              principles), excluding cumulative effects of
                              changes in accounting principles, extraordinary or
                              unusual items and gains or losses from debt
                              restructurings and sales of properties, plus
                              depreciation and amortization, and after
                              adjustments for minority interests and to record
                              unconsolidated partnerships and joint ventures on
                              the same basis. The Company also excludes deferred
                              income taxes from its computation of FFO. The
                              method used by the Company to compute FFO may
                              differ from methods used by other REITs. FFO is
                              not a measure of operating results or cash flows
                              from operating activities as measured by generally
                              accepted accounting principles, and is not
                              necessarily indicative of cash available to fund
                              cash needs and should not be considered an
                              alternative to cash flows as a measure of
                              liquidity.

                                   The accounting policies of the segments are
                              the same as those of the Company described in note
                              1, except that real estate ventures in which the
                              Company holds substantially all (at least 98%) of
                              the financial interest but does not own a majority
                              voting interest are accounted for on a
                              consolidated basis rather than using the equity
                              method, and the Company's share of FFO of
                              unconsolidated real estate ventures in which it
                              holds a minority interest is included in revenues.

                                                                              23
<PAGE>
 
                    Operating results for the segments are summarized as follows
(in thousands):

<TABLE> 
<CAPTION>
                                                    Office, Mixed-
                                         Retail      use and Other          Land
                                        Centers       Properties      Sales Operations    Development    Corporate      Total
                                      ----------    --------------    ----------------    -----------    ---------      -----
<S>                                   <C>           <C>               <C>                 <C>            <C>          <C> 
1998
----
    Revenues.....................     $  559,821      $   215,919       $    197,706       $     ---     $   3,797    $  977,243
    Operating expenses,                                                              
      exclusive of deprecia-                                                         
      tion and amortization,                                                         
      and current income taxes...        268,851          102,956            144,732           7,383        24,109       548,031
    Interest expense.............        150,889           77,894              4,201             ---        (8,614)      224,370
                                      ----------      -----------       ------------       ---------     ---------    ----------
        FFO......................     $  140,081      $    35,069       $     48,773       $  (7,383)    $ (11,698)   $  204,842
                                      ==========      ===========       ============       =========     =========    ==========

1997                                                                                   
----                                                                                   
    Revenues.....................     $  503,655      $   216,571       $    203,219       $     ---     $   4,485    $  927,930 
    Operating expenses,                                                                                                           
      exclusive of deprecia-                                                                                                      
      tion and amortization,                                                                                                      
      and current income taxes...        258,229          108,104            151,842           4,747        16,128       539,050  
    Interest expense.............        122,325           81,905              4,287             ---        (1,027)      207,490  
                                      ----------      -----------       ------------       ---------     ---------    ----------  
        FFO......................     $  123,101      $    26,562       $     47,090       $  (4,747)    $ (10,616)   $  181,390  
                                      ==========      ===========       ============       =========     =========    ==========  

1996                                                                                                                              
----                                                                                                                              
    Revenues.....................     $  508,415      $   182,154       $    137,853       $     ---     $   3,495    $  831,917  
    Operating expenses,                                                                                                           
      exclusive of deprecia-                                                                                                      
      tion and amortization,                                                                                                      
      and current income taxes...        260,027           89,643            107,791           4,964         9,752       472,177  
    Interest expense.............        129,091           76,659              1,658             361        12,612       220,381  
                                      ----------      -----------       ------------       ---------     ---------    ----------  
        FFO......................     $  119,297      $    15,852       $     28,404       $  (5,325)    $ (18,869)   $  139,359  
                                      ==========      ===========       ============       =========     =========    ==========   
</TABLE> 

                                                                              24
<PAGE>
 
                              Reconciliations of the total revenues and expenses
                         reported above to the related amounts in the financial
                         statements and of FFO reported above to earnings before
                         income taxes, extraordinary losses and cumulative
                         effect of changes in accounting principle in the
                         financial statements are summarized as follows:

<TABLE> 
<CAPTION>
                                                                             1998            1997           1996
                                                                          ----------      ----------     ----------
                         <S>                                              <C>             <C>            <C>  
                         Revenues:                                                                                                
                           Total reported above.....................      $  977,243      $  927,930     $  831,917
                           Revenues of majority financial interest                                                                
                              ventures excluding interest on                                                                    
                              advances to the Company...............        (272,943)            ---            ---             
                            Revenues representing the Company's                                                                   
                              share of FFO of minority financial                                                                  
                              interest ventures ....................         (12,753)        (11,159)       (10,881)            
                           Other....................................           1,024             ---            ---             
                                                                          ----------      ----------     ----------             
                              Total in financial statements.........      $  692,571      $  916,771     $  821,036             
                                                                          ==========      ==========     ==========             
                                                                                                                                  
                         Operating expenses, exclusive of                                                                         
                           depreciation and amortization:                                                                         
                         Total reported above.......................      $  548,031      $  539,050     $  472,177             
                           Operating expenses of majority                                                                         
                              financial interest ventures...........        (161,350)            ---            ---             
                           Current income taxes applicable to                           
                              operations............................              24          (3,208)          (123)  
                           Participation by others in the Company's                              
                              share of earnings of majority                                                                   
                              financial interest ventures...........         (24,152)            ---            ---             
                             Other..................................          (4,171)            ---            ---             
                                                                          ----------      ----------     ----------
                              Total in financial statements.........      $  358,382      $  535,842     $  472,054
                                                                          ==========      ==========     ==========

                         Interest expense:                                                                                        
                           Total reported above.....................      $  224,370      $  207,490     $  220,381
                           Interest expense of majority financial                         
                              interest ventures excluding interest                                                                
                              on borrowings from the Company........         (14,806)            ---            ---
                                                                          ----------      ----------     ----------
                              Total in financial statements.........      $  209,564      $  207,490     $  220,381
                                                                          ==========      ==========     ==========

                         Operating results:                                                                                       
                           FFO reported above.......................      $  204,842      $  181,390     $  139,359
                           Depreciation and amortization............         (84,068)        (82,944)       (77,414)
                           Loss on dispositions of assets and                                                          
                              other provisions, net.................         (11,174)        (23,484)       (16,499)
                           Depreciation and amortization,                                   
                              gain on disposition of assets                                                                       
                              and deferred income taxes of                                                                        
                              unconsolidated real estate                                                                          
                              ventures, net.........................          (4,380)         (4,344)        (1,964)
                           Current income taxes (benefit)                                    
                              applicable to operations..............             (24)          3,208            123
                           Other....................................             (44)            ---            ---
                                                                          ----------      ----------     ----------
                              Earnings before income taxes,                                      
                                extraordinary items and cumulative                                                               
                                effect of changes in accounting                                                                   
                                principle...........................      $  105,152      $   73,826     $   43,605
                                                                          ==========      ==========     ==========
</TABLE> 
                                                                              25
<PAGE>
 
                                        The assets by segment at December 31,
                                    1998, 1997 and 1996 are as follows (in
                                    thousands):

<TABLE> 
<CAPTION> 
                                                                                  1998              1997           1996
                                                                             ------------      ------------     ------------
                                    <S>                                      <C>               <C>              <C> 
                                    Retail centers........................    $ 3,636,874       $ 2,144,334      $ 2,374,162
                                    Office, mixed-use and other               
                                        properties........................      1,417,622         1,127,640          796,329
                                    Land sales operations.................        609,701           615,887          308,014
                                    Development...........................         61,166           165,101           92,030
                                    Corporate.............................         57,933           126,593           72,917
                                                                             ------------      ------------     ------------
                                        Total.............................    $ 5,783,296       $ 4,179,555     $  3,643,452
                                                                              ===========       ===========     ============
</TABLE> 

                                        Total segment assets exceeds total
                                    assets reported in the financial statements
                                    primarily because of the consolidation of
                                    the majority financial interest ventures for
                                    segment reporting purposes.

                                        Additions to long-lived assets of the
                                    segments are summarized as follows (in
                                    thousands):

<TABLE> 
<CAPTION> 
                                                                                  1998              1997             1996
                                                                             ------------      ------------     -------------
                                    <S>                                      <C>               <C>              <C> 
                                    Retail centers:
                                        Acquisitions......................   $   1,042,846     $      83,985    $     191,564
                                        Expansions and renovations........         231,607           139,608           47,449
                                        Improvements for tenants and other          18,105            15,960           13,796
                                                                             -------------     -------------    -------------
                                                                                 1,292,558           239,553          252,809
                                                                             -------------     -------------    -------------
                                    Office, mixed-use and other properties:
                                        Acquisitions......................         288,694               550          302,773
                                        Expansions and renovations........          24,390               975            6,176
                                        Improvements for tenants and other          10,688             7,667            7,421
                                                                             -------------     -------------    -------------
                                                                                   323,772             9,192          316,370
                                                                             -------------     -------------    -------------
                                    Land sales operations:
                                        Acquisitions......................          16,993               ---          118,764
                                        Development expenditures..........          82,656           131,310           48,474
                                                                             -------------     -------------    -------------
                                                                                    99,649           131,310          167,238
                                                                             -------------     -------------    -------------
                                    Development:
                                        Construction and development
                                            costs of new projects.........         112,184           153,620           58,581
                                                                             -------------     -------------    -------------

                                                    Total.................   $   1,828,163     $     533,675    $     794,998
                                                                             =============     =============    =============
</TABLE> 

                                        Approximately $169,860,000 of the
                                    additions in 1998 relate to property owned
                                    by the majority financial interest ventures.

(10)  INCOME TAXES                  Income tax expense (benefit) for 1997 and
                                    1996 is reconciled to the amount computed by
                                    applying the Federal corporate tax rate as
                                    follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                                       1997            1996
                                                                                                   -----------     -----------
                                    <S>                                                            <C>             <C> 
                                    Tax at statutory rate on earnings before
                                        income taxes, extraordinary items and
                                        cumulative effect of changes in
                                        accounting principle............................           $    25,839     $   15,262
                                    State income taxes, net of Federal income
                                        tax benefit.....................................                 3,147          1,023
                                    Nondeductible portion of distributions
                                        under Contingent Stock Agreement................                13,381          9,434
                                    Reduction of net deferred tax liabilities...........              (158,433)           ---
                                                                                                   -----------     ----------
                                      Income tax expense (benefit)......................           $  (116,066)    $   25,719
                                                                                                   ===========     ==========
</TABLE> 

                                                                              26
<PAGE>
 
                                        As discussed in note 1, the Company
                                    qualified to be taxed as a REIT beginning in
                                    1998. Management believes that the Company
                                    continued to meet the qualifications for
                                    REIT status as of December 31, 1998, and
                                    intends for it to continue to meet the
                                    qualifications in the future. Management
                                    does not expect the Company will be liable
                                    for significant income taxes at the Federal
                                    level or in most states in 1998 and future
                                    years. Accordingly, the Company eliminated
                                    substantially all of its existing deferred
                                    tax assets and liabilities at December 31,
                                    1997 and no longer provides for Federal or
                                    most state deferred income taxes.

                                        At December 31, 1998, the income tax
                                    bases of the Company's assets and
                                    liabilities were approximately
                                    $4,338,000,000 and $4,422,000,000,
                                    respectively. The net operating losses
                                    carried forward from December 31, 1998 for
                                    Federal income tax purposes aggregate
                                    approximately $281,000,000, and will expire
                                    from 2005 to 2011.

                                        In connection with its election to be
                                    taxed as a REIT, the Company will also elect
                                    to be subject to the "built-in gain" rules.
                                    Under these rules, taxes may be payable at
                                    the time and to the extent that the net
                                    unrealized gains on the Company's assets at
                                    the date of conversion to REIT status are
                                    recognized in taxable dispositions of such
                                    assets in the ten-year period following
                                    conversion. Such net unrealized gains were
                                    approximately $2,100,000,000 at January 1,
                                    1998. Management believes that the Company
                                    will not be required to make significant
                                    payments of taxes on built-in gains
                                    throughout the ten-year period due to the
                                    availability of its net operating loss
                                    carryforward to offset built-in gains which
                                    might be recognized, and the potential for
                                    the Company to make nontaxable dispositions,
                                    if necessary (e.g., like-kind exchanges of
                                    properties). At December 31, 1998, the net
                                    regular tax operating loss carryforward is
                                    sufficient to offset built-in gains on
                                    assets the Company has identified for
                                    disposition and no net deferred tax
                                    liability for built-in gains taxes has been
                                    recognized. It may be necessary to recognize
                                    a liability for such taxes in the future, if
                                    management's plans and intentions with
                                    respect to asset dispositions, or the
                                    related tax laws, change.

(11)  LOSS ON DISPOSITIONS          Loss on dispositions of assets and other
      OF ASSETS AND OTHER           provisions, net, is summarized as follows 
      PROVISIONS, NET               (in thousands):

<TABLE> 
<CAPTION> 
                                                                                     1998             1997             1996
                                                                                ------------     -----------       ----------
                                    <S>                                         <C>              <C>               <C> 
                                    Net loss on operating properties........    $     (6,109)    $   (22,426)      $  (26,515)
                                    Litigation judgment.....................             ---             ---            8,716
                                    Other, net..............................          (5,065)         (1,058)           1,300
                                                                                ------------     -----------       ----------

                                        Total...............................    $    (11,174)    $   (23,484)      $  (16,499)
                                                                                ============     ===========       ==========
</TABLE> 

                                        The net loss on operating properties in
                                    1998 relates primarily to a loss on disposal
                                    of a retail center. The other net loss for
                                    1998 includes a fourth quarter loss of
                                    $6,396,000 related to a treasury lock
                                    contract that no longer qualified for hedge
                                    accounting because the Company determined
                                    that the related anticipated financing
                                    transaction will not occur under the terms
                                    and timing originally expected.

                                        The net loss on operating properties in
                                    1997 relates primarily to provisions for
                                    losses recognized on several retail centers,
                                    an industrial property and a hotel the
                                    Company decided to sell, including
                                    additional provisions of $3,653,000 related
                                    to retail centers held for disposition prior
                                    to 1997. These provisions were partially
                                    offset by gains on dispositions of five
                                    office buildings ($4,704,000).

                                        The net loss on operating properties in
                                    1996 relates primarily to provisions for
                                    losses recognized on five retail centers the
                                    Company decided to sell.

                                        The litigation judgment relates to a
                                    matter involving a former tenant at the
                                    Riverwalk Shopping Center. In 1995, an
                                    appellate court substantially affirmed a
                                    trial court judgment against the Company and
                                    certain of its affiliates in an action in
                                    which the former tenant alleged various
                                    breaches of its lease agreement and claimed
                                    damages for lost future profits. The Company
                                    recorded a provision for the full amount of
                                    the appellate award ($12,321,000) at that
                                    time. In 1996, a portion of the provision
                                    recorded in 1995 was reversed following a
                                    negotiated settlement of the matter.

                                                                              27
<PAGE>
 
(12)   PREFERRED STOCK              The Company has authorized 50,000,000 shares
                                    of Preferred stock of 1(cent)par value per
                                    share of which (a) 4,505,168 shares have
                                    been classified as Series A Convertible
                                    Preferred; (b) 4,600,000 shares have been
                                    classified as Series B Convertible
                                    Preferred, (c) 10,000,000 shares have been
                                    classified as Increasing Rate Cumulative
                                    Preferred; and (d) 37,362 shares have been
                                    classified as 10.25% Junior Preferred,
                                    Series 1996.

                                        The Company sold 4,050,000 shares of the
                                    Series B Convertible Preferred stock in a
                                    public offering in the first quarter of
                                    1997. The shares have a liquidation
                                    preference of $50 per share and earn
                                    dividends at an annual rate of 6% of the
                                    liquidation preference. At the option of the
                                    holders, each share of the Series B
                                    Convertible Preferred stock is convertible
                                    into shares of the Company's common stock at
                                    a conversion rate of approximately 1.311
                                    shares of common stock for each share of
                                    Preferred stock, subject to adjustment in
                                    certain circumstances. In addition,
                                    beginning April 1, 2000, the shares of
                                    Preferred stock are redeemable for shares of
                                    common stock at the option of the Company,
                                    subject to certain conditions.

                                        The Company sold 4,025,000 shares of the
                                    Series A Convertible Preferred stock in a
                                    public offering in 1993 and issued 480,168
                                    shares in 1994 in connection with a
                                    modification of terms of a debt agreement
                                    related to a retail center. The shares of
                                    Series A Convertible Preferred stock had a
                                    liquidation preference of $50 per share and
                                    earned dividends at an annual rate of 6.5%
                                    of the liquidation preference. Each share
                                    was convertible into shares of the Company's
                                    common stock at a conversion rate of
                                    approximately 2.35 shares of common stock
                                    for each share of Preferred stock, subject
                                    to certain conditions. On September 30,
                                    1996, the Company redeemed all of the then
                                    outstanding shares of Series A Convertible
                                    Preferred stock. In 1996, the Company issued
                                    10,598,721 shares of common stock in
                                    exchange for 4,504,579 shares of Series A
                                    Convertible Preferred stock.

                                        Shares of the Increasing Rate Cumulative
                                    Preferred stock are issuable only to former
                                    Hughes owners or their successors pursuant
                                    to the Contingent Stock Agreement described
                                    in note 13. These shares are issuable only
                                    in limited circumstances and no shares have
                                    been issued. There were also no shares of
                                    10.25% Junior Preferred stock, Series 1996,
                                    outstanding at December 31, 1998 and 1997.

(13)   COMMON STOCK                     At December 31, 1998, shares of
                                    authorized and unissued common stock are
                                    reserved as follows: (a) 16,843,281 shares
                                    for issuance under the Contingent Stock
                                    Agreement discussed below; (b) 7,678,776
                                    shares for issuance under the Company's
                                    stock option and stock bonus plans; (c)
                                    4,489,607 shares for conversion of the
                                    convertible subordinated debentures; and (d)
                                    5,309,955 shares for conversion of the
                                    Series B Convertible Preferred stock.

                                        In connection with the acquisition of
                                    Hughes, the Company entered into a
                                    Contingent Stock Agreement ("Agreement") for
                                    the benefit of the former Hughes owners or
                                    their successors (the beneficiaries). Under
                                    terms of the agreement, additional shares of
                                    common stock (or in certain circumstances,
                                    Increasing Rate Cumulative Preferred stock)
                                    are issuable to the beneficiaries based on
                                    the appraised values of four defined groups
                                    of acquired assets at specified "termination
                                    dates" from 2000 to 2009 and/or cash flows
                                    generated from the development and/or sale
                                    of those assets prior to the termination
                                    dates (the "earnout periods"). The
                                    distributions of additional shares, based on
                                    cash flows, are payable semiannually as of
                                    June 30 and December 31. At December 31,
                                    1998, a distribution of approximately
                                    589,000 shares ($16,207,000) was payable to
                                    the beneficiaries.

                                        The Agreement is, in substance, an
                                    arrangement under which the Company and the
                                    beneficiaries will share in cash flows from
                                    development and/or sale of the defined
                                    assets during their respective earnout
                                    periods and the Company will issue
                                    additional shares of common stock to the
                                    beneficiaries based on the value, if any, of
                                    the defined asset groups at the termination
                                    dates. Substantially all of the remaining
                                    assets in the four defined asset groups were
                                    owned by subsidiaries in which the Company
                                    sold a majority voting interest to The Rouse
                                    Company Incentive Compensation Statutory
                                    Trust on December 31, 1997. However, the
                                    Company retained full responsibility for its
                                    obligations under the Agreement and,
                                    accordingly, it accounts for the
                                    beneficiaries' share of earnings from the
                                    assets as a reduction of its equity in the
                                    earnings of the related ventures. Prior to
                                    1998, the Company accounted for the
                                    beneficiaries' share of earnings from the
                                    assets as an operating expense. The Company
                                    will account for any distributions to the
                                    beneficiaries as of the termination dates as
                                    an additional investment in the related
                                    ventures (i.e., contingent consideration).
                                    At the time of acquisition of Hughes, the
                                    Company reserved 20,000,000 shares of com-

                                                                              28
<PAGE>
 
                                    mon stock for possible issuance under the
                                    Agreement. The number of shares reserved was
                                    determined based on conservative estimates
                                    in accordance with the provisions of the
                                    Agreement. The actual number of shares
                                    issuable will be determined only from events
                                    occurring over the term of the Agreement and
                                    could differ significantly from the number
                                    of shares reserved.

                                        Under the Company's stock option plans,
                                    options to purchase shares of common stock
                                    and stock appreciation rights may be awarded
                                    to directors, officers and employees. Stock
                                    options are generally granted with an
                                    exercise price equal to the market price of
                                    the common stock on the date of grant,
                                    typically vest over a three- to five-year
                                    period, subject to certain conditions, and
                                    have a maximum term of ten years. The
                                    Company has not granted any stock
                                    appreciation rights. Changes in options
                                    outstanding under the plans are summarized
                                    as follows:

<TABLE> 
<CAPTION> 
                                                                   1998                     1997                    1996
                                                          ----------------------    --------------------   ---------------------
                                                                        Weighted-               Weighted-              Weighted-
                                                                         average                 average                average
                                                                        Exercise                Exercise                Exercise
                                                            Shares        Price      Shares       Price       Shares      Price
                                                          ----------    --------    ---------   --------    ---------   --------
                                    <S>                   <C>           <C>         <C>         <C>         <C>         <C> 
                                    Balance at
                                      beginning of
                                      year.............    4,670,138     $ 24.90    2,765,779    $ 20.18    2,227,400    $ 19.89 
                                    Options granted....    1,210,402       29.06    2,155,901      30.45      654,000      21.09  
                                    Options                                                                                       
                                      exercised........     (263,076)      19.48     (239,942)     20.16      (87,371)     18.61  
                                    Options expired or                                                                            
                                      cancelled........     (183,250)      30.36      (11,600)     28.76      (28,250)     22.82  
                                                          ----------    --------   ----------   --------    ---------   --------  
                                       Balance at                                                                         
                                         end of year...    5,434,214     $ 25.91    4,670,138    $ 24.90    2,765,779    $ 20.18  
                                                          ==========    ========   ==========    =======    =========   ========  
</TABLE> 

                                        Information about stock options
                                    outstanding at December 31, 1998 is
                                    summarized as follows:

<TABLE> 
<CAPTION> 
                                                            Options Outstanding                           Options Exercisable
                                    -----------------------------------------------------------------    ---------------------------
                                                                            Weighted-
                                         Range of                            average       Weighted-                    Weighted-
                                         Exercise                           Remaining       average                      average
                                          Prices                Shares     Life (Years)  Exercise Price     Shares    Exercise Price
                                    -----------------        ----------    ------------  --------------   ----------  --------------
                                    <S>                      <C>           <C>           <C>              <C>         <C> 
                                    $13.50 to $19.875         1,645,961        5.6           $18.68        1,130,995      $18.37
                                    $23.75 to $32.875         3,788,253        7.7            29.04          799,923       26.08
                                                             ----------        ---           ------       ----------      ------
                                                              5,434,214        7.0           $25.91        1,930,918      $21.56
                                                             ==========        ===           ======       ==========      ====== 
</TABLE> 

                                        At December 31, 1997 and 1996, options
                                    to purchase 1,594,705 and 1,449,844 shares,
                                    respectively, were exercisable at per share
                                    weighted-average prices of $21.07 and
                                    $20.84, respectively.

                                        The per share weighted-average estimated
                                    fair values of options granted during 1998,
                                    1997 and 1996 were $3.17, $8.34, and $5.44,
                                    respectively. These fair values were
                                    estimated on the dates of each grant using
                                    the Black-Scholes option-pricing model with
                                    the following assumptions:

<TABLE> 
<CAPTION> 
                                                                                           1998     1997     1996
                                                                                           ----     ----     ----
                                                        <S>                                <C>      <C>      <C> 
                                                        Risk-free interest rate.........     4.6%    6.0%     6.0%
                                                        Dividend yield..................     6.0     3.5      4.0
                                                        Volatility factor...............    21.8    28.0     28.0
                                                        Expected life in years..........     6.6     6.9      7.0
                                                                                           =====    ====     ====
</TABLE> 

                                        The option prices were greater than or
                                    equal to the market prices at the date of
                                    grant for all of the options granted in
                                    1998, 1997 and 1996 and, accordingly, no
                                    compensation cost has been recognized for
                                    stock options in the financial statements.

                                                                              29
<PAGE>
 
                                        If the Company had applied a fair
                                    value-based method to recognize compensation
                                    cost for stock options, net earnings and
                                    earnings per share of common stock would
                                    have been adjusted as indicated below (in
                                    thousands):

<TABLE> 
<CAPTION> 
                                                                                            1998         1997        1996
                                                                                            ----         ----        ----
                                    <S>                                                  <C>          <C>           <C> 
                                    Net earnings: 
                                        As reported..................................    $ 104,902    $ 167,336   $ 16,433
                                        Pro forma....................................       99,653      164,445     15,397
                                    Earnings per share of common stock:
                                        Basic:
                                           As reported...............................         1.36         2.36        .10
                                           Pro forma.................................         1.28         2.32        .08
                                        Diluted:
                                           As reported...............................         1.34         2.29        .09
                                           Pro forma.................................         1.27         2.25        .08
                                                                                          ========     ========    =======
</TABLE> 

                                        The pro forma amounts reflect only
                                    options granted after 1994. Therefore, the
                                    full impact of calculating compensation cost
                                    for stock options under a fair value-based
                                    method is not reflected in the pro forma
                                    amounts because compensation cost is
                                    reflected over the options' vesting periods
                                    and compensation cost for options granted
                                    prior to January 1, 1995 is not required to
                                    be considered.

                                        Under the Company's stock bonus plans,
                                    shares of common stock may be awarded to
                                    officers and employees. Shares awarded under
                                    the plans are typically subject to
                                    forfeiture restrictions which lapse at
                                    defined annual rates. Awards granted in
                                    1998, 1997 and 1996 aggregated 164,850,
                                    49,000 and 415,000 shares, respectively,
                                    with a weighted-average market value per
                                    share of $27.54, $31.25 and $20.99,
                                    respectively. In connection with the stock
                                    bonus plan awards, the Company typically
                                    makes loans to the recipients for the
                                    payment of related income taxes, which loans
                                    are forgiven in installments subject to the
                                    recipients' continued employment. The total
                                    loans outstanding at December 31, 1998, 1997
                                    and 1996 were $4,012,000, $5,710,000, and
                                    $6,565,000, respectively. The Company
                                    recognizes amortization of the fair value of
                                    the stock awarded, any forgiven loan
                                    installments and certain related costs as
                                    compensation costs on a straight-line basis
                                    over the terms of the awards. Such costs
                                    amounted to $5,572,000 in 1998, $5,807,000
                                    in 1997, and $4,923,000 in 1996.

                                                                              30
<PAGE>
 
(14)  EARNINGS PER SHARE            Information relating to the calculations of
                                    earnings per share of common stock for 1998,
                                    1997 and 1996 is summarized as follows (in
                                    thousands):
<TABLE> 
<CAPTION> 
                                                                            1998                   1997                1996
                                                                     -------------------   -------------------   ----------------
                                                                     Basic      Diluted    Basic      Diluted    Basic    Diluted
                                                                     -----      -------    -----      -------    -----    ------- 
                                    <S>                              <C>        <C>        <C>        <C>        <C>       <C>  
                                    Earnings before extraordinary
                                        items and cumulative effect
                                        of changes in accounting
                                        principle.................   $105,176   $ 105,176  $ 189,892  $ 189,892  $ 17,886  $ 17,886
                                    Dividends on Preferred stock..    (12,152)    (12,152)   (10,313)       ---   (10,533)  (10,533)

                                    Dividends on unvested
                                        common stock awards.......       (620)       (425)      (632)      (552)     (659)     (659)

                                    Interest on convertible
                                        subordinated debentures...        ---         ---        ---      7,475       ---       ---
                                                                    ---------   ---------  ---------   --------  --------  --------
                                    Adjusted earnings before
                                        extraordinary items and
                                        cumulative effect of changes
                                        in accounting principle used
                                        in EPS computation........   $ 92,404   $  92,599  $ 178,947  $ 196,815  $  6,694  $  6,694
                                                                    =========  ==========  =========  =========  ========  ========

                                    Weighted-average shares
                                        outstanding...............     67,874      67,874     66,201     66,201    54,913    54,913
                                    Dilutive securities:
                                        Convertible subordinated
                                          debentures..............        ---         ---        ---      4,542       ---       ---
                                        Convertible Preferred stock       ---         ---        ---      4,509       ---       ---
                                        Options, warrants and
                                          unvested common stock
                                          awards..................        ---         985        ---        753       ---       398
                                                                    ---------   ---------  ---------  ---------  --------  --------
                                    Adjusted weighted-average
                                        shares used in EPS
                                        computation...............     67,874      68,859     66,201     76,005    54,913    55,311
                                                                    =========  ==========  =========  =========  ========  ========
</TABLE> 
                                    Effects of potentially dilutive securities
                                    are presented only in periods in which they
                                    are dilutive.

(15)   LEASES                       The Company, as lessee, has entered into
                                    operating leases expiring at various dates
                                    through 2076. Rents under such leases
                                    aggregated $8,096,000 in 1998, $9,147,000 in
                                    1997, and $9,648,000 in 1996, including
                                    contingent rents, based on the operating
                                    performance of the related properties, of
                                    $2,330,000, $3,158,000, and $3,844,000,
                                    respectively. In addition, real estate
                                    taxes, insurance and maintenance expenses
                                    are obligations of the Company. Minimum rent
                                    payments due under operating leases in
                                    effect at December 31, 1998 are summarized
                                    as follows (in thousands):
<TABLE>
                                    <S>                                                                            <C> 
                                    1999.................................................................          $   6,114
                                    2000.................................................................              5,962
                                    2001.................................................................              5,996
                                    2002.................................................................              6,015
                                    2003.................................................................              5,984
                                    Subsequent to 2003...................................................            218,799
                                                                                                                   ---------
                                        Total............................................................          $ 248,870
                                                                                                                   =========
</TABLE> 
                                                                              31
<PAGE>
 
                                        Space in the Company's operating
                                    properties is leased to approximately 6,000
                                    tenants. In addition to minimum rents, the
                                    majority of the retail center leases provide
                                    for percentage rents when the tenants' sales
                                    volumes exceed stated amounts, and the
                                    majority of the retail center and office
                                    leases provide for other rents which
                                    reimburse the Company for certain of its
                                    operating expenses. Rents from tenants are
                                    summarized as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                  1998              1997             1996
                                                                             -------------     -------------    ------------
                                    <S>                                      <C>               <C>              <C>  
                                    Minimum rents.........................    $  383,974        $  387,488       $  348,296
                                    Percentage rents......................        13,071            14,999           14,830
                                    Other rents...........................       204,862           213,005          223,949
                                                                             -----------       -----------      -----------

                                        Total.............................    $  601,907        $  615,492       $  587,075
                                                                              ==========        ==========       ==========
</TABLE> 

                                        The minimum rents to be received from
                                    tenants under operating leases in effect at
                                    December 31, 1998, excluding leases of
                                    properties held for sale and of retail
                                    centers contributed to a joint venture in
                                    February 1999, are summarized as follows (in
                                    thousands):

<TABLE> 
                                    <S>                                                                          <C> 
                                    1999.....................................................................    $   393,882
                                    2000.....................................................................        358,232
                                    2001.....................................................................        313,208
                                    2002.....................................................................        271,192
                                    2003 ....................................................................        220,097
                                    Subsequent to 2003.......................................................        708,453
                                                                                                                 -----------

                                        Total................................................................    $ 2,265,064
                                                                                                                 ===========
</TABLE> 

                                        Rents under finance leases aggregated
                                    $9,332,000 in 1998, $9,316,000 in 1997, and
                                    $9,645,000 in 1996. The net investment in
                                    finance leases at December 31, 1998 and 1997
                                    is summarized as follows (in thousands):


<TABLE> 
<CAPTION> 
                                                                                                    1998            1997
                                                                                               ------------     -----------
                                    <S>                                                        <C>  
                                    Total minimum rent payments to be received
                                        over lease terms...................................     $   157,374      $   166,706
                                    Estimated residual values of leased properties.........           5,695            5,695
                                    Unearned income........................................         (75,717)         (83,237)
                                                                                               ------------     ------------

                                        Net investment in finance leases...................     $    87,352      $    89,164
                                                                                                ===========      ===========
</TABLE> 

                                        Minimum rent payments to be received
                                    from tenants under finance leases in effect
                                    at December 31, 1998 are $9,304,000,
                                    $9,365,000, $10,190,000, $10,164,000, and 
                                    $10,261,000 for 1999, 2000, 2001, 2002 and
                                    2003, respectively.
                                                                              32
<PAGE>
 
(16) OTHER COMMITMENTS              Commitments for the construction and
     AND CONTINGENCIES              development of properties in the ordinary
                                    course of business and other commitments not
                                    set forth elsewhere amount to approximately
                                    $129,000,000 at December 31, 1998.
                                          At December 31, 1998, subsidiaries of
                                    the Company have contingent liabilities of
                                    approximately $17,791,000 with respect to
                                    future minimum rents under long-term lease
                                    obligations of certain unconsolidated real
                                    estate ventures and approximately
                                    $10,795,000 with respect to bank letters of
                                    credit issued to secure their obligations
                                    under certain agreements.
                                        At December 31, 1998, the Company had a
                                    shelf registration statement for future sale
                                    of up to an aggregate of $2.1 billion (based
                                    on the public offering price) of common
                                    stock, Preferred stock and debt securities.
                                    Securities may be issued pursuant to this
                                    registration statement in amounts and on
                                    terms to be determined at the time of
                                    offering.
                                        The Company and certain of its
                                    subsidiaries are defendants in various
                                    litigation matters arising in the ordinary
                                    course of business, some of which involve
                                    claims for damages that are substantial in
                                    amount. Some of these litigation matters are
                                    covered by insurance. In the opinion of
                                    management, adequate provision has been made
                                    for losses with respect to litigation
                                    matters, where appropriate, and the ultimate
                                    resolution of such litigation matters is not
                                    likely to have a material effect on the
                                    consolidated financial position of the
                                    Company. Due to the Company's fluctuating
                                    net earnings, it is not possible to predict
                                    whether the resolution of these matters is
                                    likely to have a material effect on the
                                    Company's net earnings and it is, therefore,
                                    possible that the resolution of these
                                    matters could have such an effect in any
                                    future quarter or year.

(17) NEW ACCOUNTING                 In March 1998, the American Institute of
     STANDARDS NOT YET              Certified Public Accountants issued         
     ADOPTED                        Statement of Position 98-1, "Accounting for 
                                    the Costs of Computer Software Developed or 
                                    Obtained for Internal Use" (SOP 98-1) which 
                                    is required to be adopted by the Company no 
                                    later than January 1, 1999. SOP 98-1        
                                    provides guidance as to whether costs       
                                    incurred relating to internal-use software  
                                    should be expensed or capitalized. The      
                                    guidance in SOP 98-1 is required to be      
                                    applied to costs incurred subsequent to     
                                    adoption and may not be applied to costs    
                                    incurred prior to initial application. The  
                                    Company intends to adopt SOP 98-1 effective 
                                    January 1, 1999, and does not believe that  
                                    adoption will have a material effect on its 
                                    results of operations.                      
                                        In April 1998, the American Institute of
                                    Certified Public Accountants issued
                                    Statement of Position 98-5, "Reporting on
                                    the Costs of Start-up Activities" (SOP 98-5)
                                    which is required to be adopted by the
                                    Company no later than January 1, 1999. SOP
                                    98-5 requires that start-up costs and
                                    organization costs, not otherwise addressed
                                    in existing authoritative literature, be
                                    expensed as incurred. The Company intends to
                                    adopt SOP 98-5 effective January 1, 1999,
                                    and the initial application will be reported
                                    as the cumulative effect of a change in
                                    accounting principle. The Company does not
                                    believe that adoption will have a material
                                    effect on its results of operations in
                                    future periods.
                                        In June 1998, the Financial Accounting
                                    Standards Board issued Statement of
                                    Financial Accounting Standards No. 133,
                                    "Accounting for Derivative Instruments and
                                    Hedging Activities," (Statement 133) which
                                    is required to be adopted by the Company no
                                    later than January 1, 2000. The Company's
                                    use of derivative instruments has consisted
                                    primarily of interest rate swap and cap
                                    agreements related to specific debt
                                    financings. While the Company has not
                                    completed its analysis of Statement 133 and
                                    has not made a decision regarding the timing
                                    of adoption, it does not believe that
                                    adoption will have a material effect on its
                                    financial position and results of operations
                                    based on its current use of derivative
                                    instruments.

                                                                              33
<PAGE>
 
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
Year ended December 31 (in thousands, except per share data)
-------------------------------------------------------------------------------------------------------------------------------
                                                          1998             1997             1996            1995          1994
                                                       ------------    ------------     ------------    ------------   ----------
<S>                                                    <C>             <C>               <C>            <C>            <C>  
Operating results data:                            
    Revenues from continuing operations.............   $  692,571       $  916,771       $   821,036     $    672,821  $  671,171
    Earnings from continuing operations.............      105,176          189,892            17,886            5,850       6,606
    Basic earnings (loss) from continuing          
      operations                                   
      applicable to common shareholders            
      per share of common stock.....................         1.36             2.70               .13             (.19)       (.14)
                                                   
    Diluted earnings (loss) from continuing        
      operations                                   
      applicable to common shareholders per share  
      of common stock...............................         1.34             2.59               .12             (.19)      (.14) 
                                                   
Balance sheet data:                                   
    Total assets....................................    5,154,643        3,589,768         3,643,452        2,985,609   2,915,860
    Debt and capital leases.........................    4,068,459        2,684,140         2,895,447        2,538,315   2,532,920
    Shareholders' equity ...........................      628,926          465,515           177,149           42,584      95,026
    Shareholders' equity per share of              
      common stock (note 1) ........................         8.11             6.45              2.65              .73        1.63
Other selected data:                               
    Funds from Operations (note 2)..................      204,842          181,390           139,359          108,360      94,710
    Net cash provided (used) by:                   
      Operating activities..........................       261,183          185,516           168,126          107,001     113,775
      Investing activities..........................    (1,032,200)        (322,479)         (182,995)         (64,995)   (178,551)
      Financing activities..........................       721,611          180,297           (36,287)           3,518      40,618
    Dividends per share of common stock.............          1.12             1.00               .88              .80         .68
    Dividends per share of convertible             
      Preferred stock...............................          3.00             2.65              2.44             3.25        3.25
    Market price per share of common stock         
      at year end...................................         27.50            32.75             31.75            20.13       19.25
    Market price per share of convertible          
      Preferred stock at year end...................         43.38            50.50               ---            51.63       48.50
      Weighted-average common shares               
      outstanding (basic)...........................        67,874           66,201            54,913           47,375      47,258
      Weighted-average common shares               
      outstanding (diluted).........................        68,859           76,005            55,311           47,375      47,258
</TABLE> 
    
NOTES:
(1)---For 1998 and 1997, shareholders' equity per share of common stock assumes
      conversion of the Series B Convertible Preferred stock issued in 1997. For
      1995 and 1994, shareholders' equity per share of common stock assumes the
      conversion of the Series A Convertible Preferred stock. The Series A
      Convertible Preferred Stock was issued in 1993 and redeemed for common
      stock in 1996.

(2)---Funds from Operations (FFO) is not a measure of operating results or cash
      flows from operating activities as defined by generally accepted
      accounting principles. Additionally, FFO is not necessarily indicative of
      cash available to fund cash needs, including the payment of dividends, and
      should not be considered as an alternative to cash flows as a measure of
      liquidity. See the "Funds from Operations" section of Management's
      Discussion and Analysis of Financial Condition and Results of Operations
      on page 42 for a full discussion of FFO.

                                                                              34
<PAGE>
 
<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------------------------
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Interim consolidated results of operations are summarized as follows (in thousands, except per share data):
---------------------------------------------------------------------------------------------------------------------------------
                                                                            Quarter ended
                                    ---------------------------------------------------------------------------------------------
                                     December   September      June       March    December   September      June       March
                                     31, 1998    30, 1998    30, 1998   31, 1998    31, 1997    30, 1997    30, 1997   31, 1997
                                     --------    --------    --------   --------    --------    --------    ---------  --------
<S>                                  <C>         <C>         <C>        <C>         <C>        <C>          <C>        <C>    
Revenues......................       $193,714    $164,318    $155,377   $179,162   $240,096    $229,331      $239,602    $207,742
Operating income..............         25,562      28,938      29,123     32,703     29,103      27,781        22,886      16,288
Earnings before extraordinary                                                                    
  items.......................         19,868      21,512      29,264     34,532    162,086      16,271         3,125       8,410
NET EARNINGS (LOSS)...........         19,549      19,611      36,755     28,987    151,852      16,164        (6,961)      6,281
                                      =======     =======     =======   ========   ========     ========    =========       =====
                                                                                                
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
   Earnings before extraordinary
     items....................       $    .24    $    .27    $    .38   $    .47   $   2.40    $    .20      $    ---    $    .10
   Extraordinary gains (losses)            --        (.03)        .11       (.01)      (.14)        ---          (.15)       (.03)
   Cumulative effect of accounting                                                                  
     change...................             --         ---         ---       (.07)      (.02)        ---           ---         ---
                                      -------     -------     -------   --------    --------    --------    ---------       -----
                                                                                                   
                                     $    .24    $    .24    $    .49   $    .39   $   2.24    $    .20      $   (.15)   $    .07
                                      =======     =======     =======   ========    ========    ========    =========       ===== 
                                                                                                      
                                                                                                      
Diluted:
   Earnings before extraordinary
     items....................       $    .24    $    .27    $   .37    $    .46   $   2.12    $    .20      $    ---    $    .10
   Extraordinary gains (losses)            --        (.03)       .11        (.01)      (.11)        ---          (.15)       (.03)
   Cumulative effect of accounting                                                                 
     change...................             --         ---        ---        (.07)      (.02)        ---           ---         ---
                                      -------     -------     ------     -------    --------    -------        -------     -------
                                                                                                    
   TOTAL......................       $    .24    $    .24    $   .48    $    .38   $   1.99    $    .20      $   (.15)   $    .07
                                      =======     =======     ======     =======    ========    =======        =======     =======
</TABLE> 
 


NOTE---Extraordinary gains (losses) relate to early extinguishments of debt. Net
       earnings for the fourth quarter of 1998 includes a loss of $6,396,000
       ($.09 per share) related to a treasury lock contract that no longer
       qualified for hedge accounting. Net earnings for the third quarter of
       1998 includes a loss of $7,653,000 ($.11 per share) on disposal of a
       retail center. Net earnings for the first quarter of 1998 includes the
       Company's equity in gains on disposition of operating properties of an
       unconsolidated real estate venture of $12,315,000 ($.18 per share). Net
       earnings for the fourth quarter of 1997 includes the effect of
       eliminating substantially all ($158,433,000) of the net deferred income
       tax liability ($2.39 per share basic, $2.05 per share diluted) due to the
       Company's determination to elect to be taxed as a REIT. Net earnings
       (loss) for the second and fourth quarters of 1997 include provisions for
       losses on operating properties of $8,964,000 ($.14 per share) and
       $8,229,000 ($.13 per share basic, $.10 per share diluted), respectively.

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------------------------
PRICE OF COMMON STOCK AND DIVIDENDS
The Company's common stock is traded on the New York Stock Exchange.   The prices and dividends per share were as follows:
---------------------------------------------------------------------------------------------------------------------------------
                                                                            Quarter ended
                                                    -----------------------------------------------------------------------------
                                     December     September     June       March     December   September     June      March
                                      31, 1998     30, 1998   30, 1998   31, 1998    31, 1997    30, 1997   30, 1997   31, 1997
                                      --------    ---------   --------   --------    --------    --------   --------   --------
<S>                                   <C>          <C>        <C>        <C>         <C>         <C>          <C>       <C> 
High..........................        $ 28.88      $ 32.19      $32.81     $34.69     $ 33.00     $31.50      $ 29.50    $ 32.00
Low...........................          23.63        24.81       28.88      29.75       27.25      28.44        25.75      28.88
Dividends.....................            .28          .28         .28        .28         .25        .25          .25        .25
                                                                                                      
---------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
NUMBER OF HOLDERS OF COMMON STOCK
The number of holders of record of the Company's common stock as of February 18,
1999 was 2,105.

                                                                              35
<PAGE>
 
                      The Rouse Company and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

GENERAL        Through its subsidiaries and affiliates, the Company acquires,
               develops and manages a diversified portfolio of retail centers,
               office and industrial buildings and mixed-use and other
               properties (office/mixed-use properties) located throughout the
               United States and develops and sells land for residential,
               commercial and other uses, primarily in Columbia, Maryland, and
               Summerlin, Nevada.

                  In December 1997, the Company determined that it would elect
               to be taxed as a real estate investment trust ("REIT") effective
               January 1, 1998 and, on December 31, 1997, completed certain
               transactions that enabled it to meet the qualifications for REIT
               status. As a REIT, the Company has greater flexibility in
               acquisition and merger opportunities and its corporate income
               taxes will be substantially lower in future periods.
               
                  One of the Company's primary objectives is to own and operate
               premier properties - shopping centers, office and industrial
               buildings and major mixed-use projects - in major markets across
               the United States. In order to achieve this objective, management
               is continually evaluating opportunities to acquire properties
               owned by others that may have future prospects consistent with
               the Company's long-term investment criteria and is continually
               evaluating the future outlook for properties in its portfolio.
               This includes considering opportunities to expand and/or renovate
               the properties and assessing whether particular properties are
               meeting or have the potential to meet the Company's investment
               criteria. The Company plans to continue making substantial
               investments to expand and/or renovate leasable space and/or add
               new department stores to its existing properties to meet its
               objectives. The Company is also continually evaluating
               opportunities for new operating properties and/or land
               development projects it believes have future prospects consistent
               with its objectives. The Company has sold a number of properties
               over the last several years and intends to continue to dispose of
               properties that are not meeting and/or are not considered to have
               the potential to continue to meet its investment criteria. While
               disposition decisions may cause the Company to recognize gains or
               losses that could have material effects on reported net earnings
               (loss) in future quarters or fiscal years, they are not
               anticipated to have a material effect on the overall consolidated
               financial position or operating income of the Company.
               
                  In 1998, the Company completed several transactions designed
               to upgrade the overall quality of its portfolio of operating
               properties. In the third and fourth quarters, the Company
               purchased ownership interests in eight retail centers, including
               the interests of partners in two centers (The Fashion Show and
               Governor's Square) in which the Company now holds 100% ownership
               interests. In February 1999, the Company contributed its
               ownership interests in four of the acquired centers (Bridgewater
               Commons, Fashion Place Mall, Park Meadows and Towson Town Center)
               to a joint venture in which it retained a 35% ownership interest.
               The Company acquired the other two ownership interests with the
               intent to sell them. The Company disposed of four retail centers
               (Eastfield Mall, Greengate Mall, Salem Mall and St. Louis Union
               Station) and its 5% ownership interests in six retail centers. In
               the fourth quarter, the Company also acquired a portfolio of
               office and industrial properties and salable land of an entity in
               which the Company previously held a 5% ownership interest. The
               acquired assets consisted of 64 buildings (excluding three which
               were subsequently sold) and approximately 100 acres of land.
               Substantially all of the acquired assets are in the Baltimore-
               Washington metropolitan area. The Company and its affiliates
               disposed of their interests in two hotels and certain industrial
               buildings in Baltimore and Columbia and their office properties
               in Los Angeles.
                  
                  The Company has continued to achieve strong financial results
               in recent years, despite the rapidly changing environment for
               retail businesses. Funds from Operations ("FFO"), which is
               defined and discussed in detail below, increased 13% in 1998 and
               30% in 1997, including increases of 14% and 3%, respectively,
               from retail centers, 32% and 68%, respectively, from office/mixed
               use properties and 4% and 66%, respectively, from land sales.
               These results are attributable to several factors, including:
               
                  . the acquisition of The Hughes Corporation and its affiliated
                    partnership, Howard Hughes Properties, Limited Partnership
                    (together "Hughes") in June 1996,

                  . other changes in the Company's portfolio of properties,

                  . expansions of certain retail properties,

                  . openings of new retail centers and office buildings,

                                                                        36
<PAGE>
 
                  . higher occupancy levels in retail and office properties,

                  . refinancings of project-related debt at lower interest rates
                    and,

                  . repayments of certain project-related and corporate debt.

                  Management believes the outlook is for continued solid growth
               in FFO in 1999. The Company will continue to focus considerable
               effort and resources on leasing and remerchandising existing
               retail centers. The prospects for growth from retail centers and
               office/mixed-use properties are excellent as the Company should
               benefit from a full year of operations of properties acquired
               and/or opened in 1998 and continued strong occupancy levels in
               existing projects. FFO from land sales should also remain strong
               in 1999, assuming continued good market conditions in Columbia
               and Summerlin.

OPERATING      This discussion and analysis of operating results covers each of
RESULTS        the Company's five business segments as management believes that
               a segment analysis provides the most effective means of
               understanding the business. Note 9 to the consolidated financial
               statements and the information relating to revenues and expenses
               in the Five Year Summary of Funds from Operations and Net
               Earnings (Loss) on page 48, should be referred to when reading
               this discussion and analysis. As discussed in note 9, the Company
               adopted Statement of Financial Accounting Standards No. 131,
               "Disclosures about Segments of an Enterprise and Related
               Information" in 1998. As required by the Statement, segment
               operating data are reported using the accounting policies
               followed by the Company for internal reporting to management.
               These policies are the same as those followed for external
               reporting, except that real estate ventures in which the Company
               holds substantially all (at least 98%) of the financial interest,
               but does not own a majority voting interest, are reported on a
               consolidated basis rather than using the equity method, and the
               Company's share of FFO of unconsolidated real estate ventures in
               which it holds a minority interest is included in revenues. These
               differences affect only the reported revenues and operating and
               interest expenses of the segments, and have no effect on the
               reported net earnings of the Company. Revenues and operating and
               interest expenses reported for the segments are reconciled to the
               related amounts reported in the financial statements in note 9.

               OPERATING PROPERTIES:  The Company reports the results of its
               operating properties in two segments: retail centers and
               office/mixed-use properties. The Company's tenant leases provide
               the foundation for the performance of its retail centers and
               office/mixed-use properties. In addition to minimum rents, the
               majority of retail and office tenant leases provide for other
               rents which reimburse the Company for most of its operating
               expenses. Substantially all of the Company's retail leases also
               provide for additional rent (percentage rent) based on tenant
               sales in excess of stated levels. As leases expire, space is
               released, minimum rents are generally adjusted to market rates,
               expense reimbursement provisions are updated and new percentage
               rent levels are established for retail leases.
                           
                  Most of the Company's operating properties are financed with
               long-term, fixed rate, nonrecourse debt and, accordingly, their
               operating results are not directly affected by changes in
               interest rates. Although the interest rates on this debt do not
               fluctuate, certain loans provide for additional payments to the
               lenders based on operating results of the related properties in
               excess of stated levels.
                
                                                                        37
 

<PAGE>
 
               RETAIL CENTERS: Operating results of retail centers are
               summarized as follows (in millions):

<TABLE> 
<CAPTION> 
                                                            1998
                                     ------------------------------------------------
                                                    Majority    Minority
                                     Consolidated   Interest    Interest    
                                      Properties    Ventures    Ventures      Total         1997          1996
                                     ------------   --------    --------    ---------    ----------    -----------
<S>                                  <C>            <C>         <C>         <C>          <C>           <C>     
Revenues..........................     $   489.3    $   58.7    $   11.8     $  559.8      $  503.6       $  508.4
Operating expenses, exclusive of                                                                              
 depreciation and amortization....         237.7        31.1           -        268.8         258.2          260.0
Interest expense..................         138.3        12.6           -        150.9         122.3          129.1
                                       ---------    --------    --------     --------      --------       -------- 
                                           113.3        15.0        11.8        140.1         123.1          119.3 
Depreciation and amortization.....          55.8         4.9         2.4         63.1          51.2           50.1
                                       ---------    --------    --------     --------      --------       --------
Operating income..................     $    57.5    $   10.1    $    9.4     $   77.0      $   71.9       $   69.2
                                       =========    ========    ========     ========      ========       ========
</TABLE> 
 
 
                  Revenues from retail centers increased $56.2 million in 1998
               and decreased $4.8 million in 1997. The increase in 1998 was
               attributable primarily to properties opened or expanded
               (approximately $25 million) or acquired (approximately $38
               million) in 1998 and 1997, higher average occupancy levels (92.5%
               in 1998 as compared to 90.8% in 1997) and higher rents on re-
               leased space. These increases were partially offset by
               dispositions of interests in properties in 1998 and 1997
               (approximately $25 million), and lower tenant lease termination
               payments. The decrease in 1997 was attributable primarily to
               dispositions of interests in properties in 1997 and 1996 and
               lower tenant lease termination payments. This decrease was
               partially offset by the effects of slightly higher average
               occupancy (90.8% in 1997 as compared to 90.2% in 1996), the
               operations of two properties which were opened or expanded in
               1997 and a full year of operations of two properties in which the
               Company acquired interests in 1996. 

               Total operating and interest expenses (exclusive of depreciation
               and amortization) for retail properties increased $39.2 million
               in 1998 and decreased $8.6 million in 1997. The increase in 1998
               was attributable primarily to the properties opened or expanded
               (approximately $19 million) or acquired (approximately $37
               million) in 1998 and 1997. These increases were partially offset
               by dispositions of interests in properties in 1998 and 1997
               (approximately $24 million). The decrease in 1997 was
               attributable primarily to the dispositions of interests in
               properties referred to above and refinancings and repayments of
               project-related debt. These decreases were partially offset by
               the effects of a full year of operations of the properties in
               which the Company acquired interests in 1996. Depreciation and
               amortization expense for retail properties increased $11.9
               million in 1998 and $1.1 million in 1997. These changes were due
               primarily to the net effect of changes in the Company's portfolio
               of retail properties referred to above.

                                                                        38
                 
<PAGE>
 
               OFFICE, MIXED-USE AND OTHER PROPERTIES: Operating results of
               office/mixed-use properties are summarized as follows (in
               millions):

<TABLE> 
<CAPTION> 
                                                              1998
                                      -------------------------------------------------
                                                      Majority    Minority
                                      Consolidated    Interest    Interest   
                                       Properties     Ventures    Ventures      Total         1997          1996
                                      ------------    --------    --------    ---------    ----------    -----------
<S>                                   <C>             <C>         <C>         <C>          <C>           <C>    
Revenues...........................      $   166.6    $   48.2    $    1.1    $   215.9     $   216.6      $   182.2
Operating expenses, exclusive of             
 depreciation and amortization.....           70.5        32.4           -        102.9         108.1           89.6 
Interest expense...................           68.6         9.3           -         77.9          81.9           76.7
                                         ---------    --------    --------    ---------     ---------      ---------         
                                              27.5         6.5         1.1         35.1          26.6           15.9
Depreciation and amortization......           27.9         5.5          .8         34.2          34.8           29.9 
                                         ---------    --------    --------    ---------     ---------      ---------         
Operating income...................      $     (.4)   $    1.0    $     .3    $      .9     $    (8.2)     $   (14.0) 
                                         =========    ========    ========    =========     =========      =========
</TABLE> 
 

                  Revenues from office/mixed-use properties decreased $0.7
               million in 1998 and increased $34.4 million in 1997. The decrease
               in 1998 was attributable primarily to dispositions of certain
               properties in Los Angeles and Las Vegas, and certain industrial
               and hotel properties in Baltimore and Columbia (approximately $21
               million). These decreases were substantially offset by the
               acquisition of the 64 office and industrial buildings referred to
               above (approximately $5 million), the openings of new office
               properties in Las Vegas in 1998 and 1997 (approximately $7
               million), the addition of a cinema to Arizona Center in 1998
               (approximately $2 million) and higher occupancy levels (96.3% in
               1998 and 93.4% in 1997) at comparable properties. The increase in
               1997 was attributable primarily to a full year of operations of
               the properties acquired in the Hughes transaction, openings of
               new office and other properties in Las Vegas and higher occupancy
               levels at hotel and Columbia office properties.
                  
                  Total operating and interest expenses (exclusive of
               depreciation and amortization) for office/mixed-use properties
               decreased $9.2 million in 1998 and increased $23.7 million in
               1997. The decrease in 1998 was attributable primarily to the
               dispositions of properties referred to above (approximately $18
               million) and to the repayment and refinancing of certain property
               debt. These decreases were partially offset by the project
               openings (approximately $5 million) and the acquisitions
               (approximately $4 million) referred to above. The increase in
               1997 was attributable primarily to a full year of operations of
               the properties acquired in the Hughes transaction, the effects of
               higher occupancy levels and the openings of new properties
               referred to above.

               LAND SALES OPERATIONS: Land sales operations relate primarily to
               the communities of Columbia, Maryland, and Summerlin, Nevada.
               Generally, revenues and operating income from land sales are
               affected by such factors as the availability to purchasers of
               construction and permanent mortgage financing at acceptable
               interest rates, consumer and business confidence, availability of
               salable land for particular uses and decisions to sell, develop
               or retain land.
                
                                                                        39
 
<PAGE>
 
               Operating results from land sales operations are summarized as
               follows (in millions):

<TABLE> 
<CAPTION> 
                                                                  1998
                                                -------------------------------------
                                                                Majority
                                                Consolidated    Interest                
Hughes Land Operations:                          Properties     Ventures      Total         1997         1996 
                                                ------------    --------    ---------    ----------    ---------
<S>                                             <C>             <C>         <C>          <C>           <C>    
   Revenues.............................           $    33.7    $  118.5    $   152.2     $   163.2     $   98.4 
   Operating costs and                                    
     expenses...........................                24.2        96.3        120.5         130.0         83.4  
   Interest expense.....................                  .2          .1           .3            .5           .7     
                                                   ---------    --------    ---------     ---------     --------  
   Operating income.....................           $     9.3    $   22.1    $    31.4     $    32.7     $   14.3 
                                                   =========    ========    =========     =========     ========  

Columbia and Other:                                    
   Revenues.............................           $      --    $   45.5    $    45.5     $    40.0     $   39.5 
   Operating costs and                                                      
     expenses...........................                  --        24.2         24.2          21.8         24.4
   Interest expense.....................                  .8         3.1          3.9           3.8          1.0
                                                   ---------    --------    ---------     ---------     --------        
   Operating income (loss)..............                 (.8)   $   18.2    $    17.4     $    14.4     $   14.1
                                                   =========    ========    =========     =========     ========                   

Total Land Sales Operations:                                              
   Revenues.............................           $    33.7    $  164.0    $   197.7     $   203.2     $  137.9 
   Operating costs and                                                                                              
     expenses...........................                24.2       120.5        144.7         151.8        107.8 
   Interest expense.....................                 1.0         3.2          4.2           4.3          1.7 
                                                   ---------    --------    ---------     ---------     --------               
   Operating income.....................           $     8.5    $   40.3    $    48.8     $    47.1     $   28.4 
                                                   =========    ========    =========     =========     ========                   
</TABLE> 


                  Revenues and operating income from Hughes land operations for
               1998 include $99.6 million and $20.7 million, respectively,
               relating to Summerlin and $52.6 million and $10.7 million,
               respectively, relating to other land holdings. Revenues and
               operating income from Hughes land operations for 1997 include
               $128.8 million and $27.1 million, respectively, relating to
               Summerlin and $34.4 million and $5.6 million, respectively,
               relating to other land holdings. Revenues and operating income
               from Hughes land operations for 1996 include $93.1 million and
               $14.2 million, respectively, relating to Summerlin and $5.3
               million and $.1 million, respectively, relating to other land
               holdings. The decreases in revenues and operating income in 1998
               relating to Summerlin were attributable primarily to lower levels
               of land sold for residential purposes. The increases in revenues
               and operating income in 1997 relating to Summerlin were
               attributable primarily to a full year of Hughes land operations.
               The increase in operating income in 1997 also reflects higher
               margins on sales, primarily because land on which development was
               completed or in progress at the time of the acquisition of Hughes
               (which carried lower profit margins) comprised a smaller
               proportion of sales in 1997 than in 1996. The increases in
               revenues and operating income relating to other land holdings in
               1998 were attributable to higher levels of land sales at the
               Company's master planned business parks, including all of the
               remaining land at Howard Hughes Center in Los Angeles,
               California. These increases were partially offset by lower levels
               of sales of investment land. The increases in revenues and
               operating income in 1997 relating to other land holdings were
               attributable primarily to sales of various investment land
               parcels, particularly holdings in Nevada.
                  
                  Revenues and operating income from land sales in Columbia
               increased $5.5 million and $3.0 million, respectively, in 1998
               and $.5 million and $1.3 million, respectively, in 1997. The
               increases in revenues and operating income in 1998 were
               attributable primarily to higher levels of land sales for
               commercial purposes.

                                                                         40
 
<PAGE>
 
               DEVELOPMENT:  Development expenses were $7.4 million in 1998,
               $4.7 million in 1997 and $5.3 million in 1996. These costs
               consist primarily of additions to the preconstruction reserve and
               new business costs.

                  The preconstruction reserve is determined on a project-by-
               project basis and is maintained to provide for costs of projects
               in the preconstruction phase of development, including retail and
               mixed-use property renovation and expansion opportunities, which
               may not go forward to completion. Additions to the
               preconstruction reserve were $1.7 million in 1998, $2.8 million
               in 1997 and $2.7 million in 1996. New business costs relate
               primarily to the initial evaluation of potential acquisition and
               development opportunities. These costs were $5.7 million in 1998,
               $1.9 million in 1997 and $1.8 million in 1996. The lower level of
               preconstruction reserve additions in 1998 was due to the progress
               of several significant retail center projects. The higher level
               of new business costs in 1998 was attributable to the Company's
               focus on acquisition efforts.
               
               CORPORATE:  Corporate revenues consist primarily of interest
               income earned on short-term investments, including investments of
               unallocated proceeds from refinancings of certain properties.
               Corporate interest income was $3.8 million in 1998, $4.5 million
               in 1997 and $3.5 million in 1996. The changes in income during
               these years were attributable primarily to changes in the average
               investment balances, including in 1997, temporary investment of
               the unused proceeds of the Series B Convertible Preferred stock
               issued in the first quarter.

                  Corporate expenses consist of certain interest and operating
               expenses, as discussed below, reduced by costs capitalized or
               allocated to other business segments. Interest is capitalized on
               corporate funds invested in projects under development, and
               interest on corporate borrowings and distributions on the Company
               obligated mandatorily redeemable preferred securities which are
               used for other segments are allocated to those segments.
               Accordingly, corporate interest expense consists primarily of
               interest on the convertible subordinated debentures, the
               unsecured 8.5% notes, the medium-term notes, credit facility
               borrowings and unallocated proceeds from refinancings of certain
               properties, net of interest capitalized on development projects
               or allocated to other segments, and corporate operating expenses
               consist primarily of general and administrative costs and
               distributions on the redeemable preferred securities.
                  
                  Corporate interest costs were $6.3 million in 1998, $13.9
               million in 1997 and $18 million in 1996. Interest of $14.9
               million, $14.9 million and $5.4 million was capitalized in 1998,
               1997 and 1996, respectively, on funds invested in development
               projects. The decreases in corporate interest costs in 1998 and
               1997 were attributable primarily to allocations of debt to other
               segments to fund property acquisitions and certain capital
               expenditures. The higher level of interest capitalized in 1998
               and 1997 reflects the higher level of corporate funds invested in
               projects in development.

               GAIN (LOSS) ON DISPOSITIONS OF ASSETS AND OTHER PROVISIONS, NET:
               The loss on dispositions of assets and other provisions, net, for
               1998 consisted primarily of a loss on the disposal of a retail
               property ($7.7 million) and a loss related to a treasury lock
               contract ($6.4 million) that no longer qualified for hedge
               accounting because the related anticipated financing transaction
               will not occur under the terms and timing originally expected.
               Unconsolidated real estate ventures in which the company holds
               substantially all of the financial interest recorded a net gain
               on disposition of assets of $19 million relating primarily to the
               sale of a hotel in Columbia. 

               The loss on dispositions of assets and other provisions, net, for
               1997 consisted primarily of provisions for losses recognized on
               several retail properties, an industrial property, and a hotel
               the Company decided to sell, including additional provisions of
               $3.7 million related to retail properties held for disposition
               prior to 1997. These provisions were partially offset by gains on
               dispositions of five office properties ($4.7 million).
               
                  The loss on dispositions of assets and other provisions, net,
               for 1996 consisted primarily of provisions for losses totaling
               $25.9 million recognized on five retail properties the Company
               decided to sell. These losses were partially offset by the
               reversal of a portion ($8.7 mil-

                                                                        41
 
<PAGE>
 
               lion) of a 1995 provision for loss on a tenant litigation
               judgment following a negotiated settlement of the matter.

               EXTRAORDINARY ITEMS, NET OF RELATED INCOME TAX BENEFITS: The net
               extraordinary gains in 1998, and extraordinary losses in 1997 and
               1996 resulted from early extinguishments of debt and aggregated
               $3.6 million, $32.8 million and $2.2 million, respectively,
               before deferred income tax benefits of $.7 million, $11.5 million
               and $.8 million, respectively.

               NET EARNINGS: The Company had net earnings of $104.9 million in
               1998, $167.3 million in 1997 and $16.4 million in 1996. The
               Company's operating income (after depreciation and amortization)
               was $116.3 million in 1998, $97.3 million in 1997 and $60.1
               million in 1996. The improvements in operating income were due
               primarily to the factors described above. Net earnings for each
               year was affected by unusual and/or nonrecurring items discussed
               above in gain (loss) on dispositions of assets and other
               provisions, net, and extraordinary items, net of related income
               tax benefits. In addition, net earnings for 1997 was affected by
               the reversal of substantially all ($158.3 million) of the
               recorded deferred income tax assets and liabilities at December
               31, 1997 as a result of the Company's decision to be taxed as a
               REIT effective January 1, 1998. The deferred income taxes were
               reversed because management believes that the Company met the
               qualifications for REIT status as of December 31, 1997, intends
               for it to continue to meet the qualifications in the future and
               does not expect that the Company will be liable for income taxes
               or taxes on "built-in gains" on its assets at the Federal level
               or in most states in future years. The Company's effective tax
               rate was (157.2)% in 1997 and 58.9% in 1996. The effective rate
               in 1997 was affected by the reversal of deferred tax assets and
               liabilities discussed above. Excluding the effect of the
               reversal, the effective rate for 1997 was 57.4%. The effective
               rates were high in 1997 and 1996 because a portion of the
               distributions payable to the former Hughes owners (or their
               successors) under the Contingent Stock Agreement was not
               deductible for income tax purposes.
               
               FUNDS FROM OPERATIONS: The Company uses a supplemental
               performance measure along with net earnings (loss) to report its
               operating results. This measure is referred to as Funds from
               Operations ("FFO"). The National Association of Real Estate
               Investment Trusts defines FFO as net earnings (loss) (computed in
               accordance with generally accepted accounting principles),
               excluding cumulative effects of changes in accounting principles,
               extraordinary or unusual items and gains or losses from debt
               restructurings and sales of properties, plus depreciation and
               amortization, and after adjustments for minority interests and to
               record unconsolidated partnerships and joint ventures on the same
               basis. The Company also excludes deferred income taxes from its
               computation of FFO. The method used by the Company to compute FFO
               may differ from methods used by other REITs. FFO is not a measure
               of operating results or cash flows from operating activities as
               defined by generally accepted accounting principles.
               Additionally, FFO is not necessarily indicative of cash available
               to fund cash needs and should not be considered as an alternative
               to cash flows as a measure of liquidity. However, the Company
               believes that FFO provides relevant information about its
               operations and is necessary, along with net earnings, for an
               understanding of its operating results.
               
                  The Company excludes deferred income taxes from FFO because
               payments of income taxes have not been significant and are not
               anticipated to become significant in the future. Current Federal
               and state income taxes are included as reductions of FFO;
               however, in 1997, current income taxes incurred as a result of
               transactions completed to enable the Company to meet the
               qualifications for REIT status are excluded. Management believes
               this exclusion is appropriate as these taxes were nonrecurring
               and were not related to operations. Gain (loss) on dispositions
               of assets and other provisions, net, and extraordinary losses,
               net of related income tax benefits, represent unusual and/or
               nonrecurring items and are therefore excluded from FFO. FFO is
               reconciled to net earnings (loss) in the Five Year Summary of
               Funds from Operations and Net Earnings (Loss) on page 49.

                                                                        42 
 
<PAGE>
 
                  FFO was $204.8 million in 1998, $181.4 million in 1997 and
               $139.4 million in 1996. The increase in FFO in 1998 was due
               primarily to property acquisitions, expansions and dispositions
               in 1998 and 1997, higher occupancy levels, and higher rents from
               re-leased space. The increase in FFO in 1997 was due primarily to
               the acquisition of Hughes. The results in 1997 were also affected
               by refinancings of project debt at lower interest rates, debt
               repayments from proceeds of the Series B Convertible Preferred
               stock offering in the first quarter and openings and dispositions
               of projects in both 1997 and 1996. The reasons for significant
               changes in revenues and expenses comprising FFO by segment are
               described above.

FINANCIAL      Management believes that the Company's financial position is
CONDITION,     sound and that its liquidity and capital resources are adequate
LIQUIDITY AND  for near-term and longer-term requirements. Shareholders' equity
CAPITAL        increased to $628.9 million at December 31, 1998 from $465.5
RESOURCES      million at December 31, 1997. The increase was due primarily to
               the issuance of common stock, including $43 million to a unit 
               investment trust and $100 million issued in the acquisition of 
               the 64 office and industrial properties in the fourth quarter of
               1998, and net earnings for the year, partially offset by the
               payment of regular quarterly dividends on the common and
               Preferred stocks.

                  The Company had cash and cash equivalents and investments in
               marketable securities totaling $41.9 million and $90.6 million at
               December 31, 1998 and 1997, respectively. 

                  Net cash provided by operating activities was $261.2 million,
               $185.5 million and $168.1 million in 1998, 1997 and 1996,
               respectively. The changes in cash provided by operating
               activities were due primarily to the factors discussed above in
               the analysis of operating results. The level of net cash provided
               by operating activities is also affected by the timing of receipt
               of revenues (including proceeds of land sales financed by the
               Company) and the payment of operating and interest expenses and
               land development costs.
               
                  The Company relies primarily on fixed rate nonrecourse loans
               from private institutional lenders to finance its operating
               properties and expects that it will continue to do so in the
               future. The Company has also made use of the public equity and
               debt markets to meet its capital resource needs principally to
               repay or refinance corporate and project related debt and to
               provide funds for project development and acquisition costs and
               other corporate purposes. In 1998, the Company obtained a $450
               million revolving credit facility, which is available until July
               2001, subject to a one year renewal option, and a $350 million
               bridge loan facility from a group of lenders. The revolving
               credit facility replaced a $250 million line of credit facility
               previously maintained by the Company. The bridge loan facility
               was available to fund certain property acquisitions made in the
               third and fourth quarters of 1998. The Company is continually
               evaluating sources of capital and management believes that there
               are satisfactory sources available for all requirements without
               necessitating sales of operating properties. However, selective
               dispositions of properties are expected to provide capital
               resources in 1999 and may also provide them in subsequent years.

                  Most of the Company's debt consists of mortgages
               collateralized by operating properties. Scheduled principal
               payments on property debt were $50.7 million, $46.3 million and
               $39.0 million in 1998, 1997 and 1996, respectively. The increase
               in 1997 was attributable primarily to principal payments on debt
               assumed in the Hughes transaction.

                  The annual maturities of debt for the next five years are as
               follows (in millions):

<TABLE> 
<CAPTION> 
                                                     Scheduled     Balloon              
                                                     Payments      Payments      Total     
                                                     ---------     --------    ---------   
                            <S>                      <C>           <C>         <C>       
                            1999..............       $      49     $    447    $     496                   
                            2000..............              57          105          162                   
                            2001..............              62          467          529                   
                            2002..............              64          220          284                   
                            2003..............              73          487          560                    
                                                     ---------     --------    ---------
                                                     $     305     $  1,726    $   2,031
                                                     =========     ========    =========
</TABLE> 

                                                                        43 
<PAGE>
 
                  Balloon payments due in 1999 include $304 million of
               borrowings under the bridge loan credit facility which is due on
               or before July 30, 1999. In February 1999, the Company
               contributed to a joint venture four of the retail centers
               acquired in 1998. These acquisitions were financed, in part, by
               borrowings under the bridge loan credit facility. The Company
               retained a 35% interest in the joint venture, and, in connection
               with this transaction, the joint venture repaid approximately
               $271 million of outstanding borrowings under the bridge loan
               facility.

                  Balloon payments due in 1999 also include $40 million due on a
               mortgage securing a property the Company expects to sell in the
               second quarter of 1999. The Company expects the buyer to assume
               the mortgage.

                  The remaining balloon payments, including payments under the
               bridge loan credit facility, due in 1999 are expected to be paid
               at or before the scheduled maturity dates of the related loans
               from proceeds of the sale of the property interest referred to 
               above, property refinancings or credit facilities or other 
               available corporate funds.

                  Cash expenditures for properties in development and
               improvements to existing properties funded by debt were $306.9
               million, $283.4 million and $124 million in 1998, 1997 and 1996,
               respectively. The increases in 1998 and 1997 were due to
               increased project development activity, primarily new retail
               properties, retail property expansions and development of new
               office and industrial properties in Las Vegas. A substantial
               portion of the costs of properties in development is financed
               with construction or similar loans and/or credit line borrowings.
               Typically, long-term fixed rate debt financing is arranged
               concurrently with the construction financing or before completion
               of construction.

                  Improvements to existing properties funded by debt consist
               primarily of costs of renovation and remerchandising programs and
               other capital improvement costs. The Company's share of these
               costs has been financed primarily from proceeds of refinancings
               of the related properties or other properties and credit line
               borrowings.

                  Due to the large number of projects under construction or in
               development, the Company anticipates that the level of capital
               expenditures for new development (excluding land development) and
               improvements to existing properties will be over $300 million in
               1999. A substantial portion of these expenditures relates to new
               properties or retail center expansions and it is expected that
               most of these costs will be financed by debt, including property-
               specific construction loans and/or credit line borrowings.

                  Cash expenditures for acquisitions of interests in properties
               were $882.4 million in 1998, $79.4 million in 1997 and $18.1
               million in 1996. The acquisitions in 1998, consisting of
               interests in the eight retail centers, 67 office and industrial
               buildings and the land assets referred to above, had combined
               purchase prices of approximately $1.58 billion, including
               approximately $492 million of mortgage debt secured by the
               acquired properties and assumed by the Company. The Company
               issued $100 million of common stock, $108 million of mortgage and
               other debt and $882.4 million of cash to the sellers as payment.
               The required cash payments were funded by approximately $234
               million of additional mortgage debt secured by the acquired
               properties, proceeds of $91 million from the sale of three of the
               acquired office buildings and by borrowings under the Company's
               bridge loan and revolving credit facilities. The acquisitions in
               1997 consisted primarily of a purchase of a retail center. The
               acquisitions in 1996 consisted of purchases of partners'
               interests in two retail centers, one of which was financed in
               part by the seller. Acquisition cash requirements in 1997 and
               1996 were financed primarily by nonrecourse debt.

                  Cash expenditures for the acquisition of Hughes were $36.3
               million in 1996 and were financed primarily by credit line
               borrowings.

                  In addition to its unrestricted cash and cash equivalents and
               investments in marketable securities, the Company has other
               available sources of capital. The Company has a line of credit
               with a group of lenders that provides for aggregate unsecured
               borrowings of up to $450 million, of which $152 million was
               available at December 31, 1998. This line of credit can be used
               for various purposes, including land and project development
               costs, property acquisitions, liquidity and other corporate
               needs. In addition, under an effective registration statement,
               the Company may issue additional medium-term notes of up to $29.7
               million. Also, the Company has a shelf registration statement for
               the sale of up to an aggregate of approximately $2.25 billion
               (based on the public offering price) of common stock, Preferred
               stock and debt securities. At December 31, 1998, the Company had
               issued approximately $158 million of common stock and debt
               securities under the shelf registration statement, with a
               remaining availability of approximately $2.1 billion.

                                                                            44 
<PAGE>
 
                  The agreements relating to various loans impose limitations on
               the Company. The most restrictive of these limit the levels and
               types of debt the Company and its affiliates may incur and
               require the Company and its affiliates to maintain specified
               minimum levels of debt service coverage and net worth. The
               agreements also impose restrictions on the dividend payout ratio,
               and on sale, lease and certain other transactions, subject to
               various exclusions and limitations. These restrictions have not
               limited the Company's normal business activities and are not
               expected to do so in the foreseeable future.

MARKET RISK    The market risk associated with financial instruments and
INFORMATION    derivative financial and commodity instruments is the risk of
               loss from adverse changes in market prices or rates. The
               Company's market risk arises primarily from interest rate risk
               relating to variable rate borrowings used to maintain liquidity
               (e.g., revolving credit facility advances) or finance project
               acquisition or development costs (e.g., acquisition bridge loan
               facility or construction loan advances). The Company's interest
               rate risk management objective is to limit the impact of interest
               rate changes on earnings and cash flows. In order to achieve this
               objective, the Company relies primarily on long-term, fixed rate
               nonrecourse loans from institutional lenders to finance its
               operating properties. In addition, long term, fixed rate
               financing is typically arranged concurrently with or shortly
               after a variable rate project acquisition or construction loan is
               negotiated. The Company also makes limited use of interest rate
               exchange agreements, including interest rate swaps and caps, to
               mitigate its interest rate risk on variable rate debt. The
               Company does not enter into interest rate exchange agreements for
               speculative purposes and the fair value of these and other
               derivative financial instruments is insignificant at December 31,
               1998.
               
                  The Company's interest rate risk is monitored closely by
               management. The table below presents the principal amounts,
               weighted-average interest rates and fair values required to
               evaluate the expected cash flows of the Company under debt and
               related agreements and its sensitivity to interest rate changes
               at December 31, 1998. The information relating to debt maturities
               (in millions) is based on expected maturity dates which consider
               anticipated refinancing or other transactions:

<TABLE> 
<CAPTION>                               
                                                                                                                  Fair
                               1999        2000        2001        2002      2003     Thereafter      Total       Value           
                              -----       -----       -----       -----     -----    -----------    ---------   ---------         
<S>                           <C>         <C>         <C>         <C>       <C>      <C>            <C>         <C>               
Fixed rate debt               $ 145       $  54       $ 160       $ 215     $ 554        $ 1,972      $ 3,100     $ 3,199         
Average interest rate           7.8%        7.8%        7.9%        8.0%      8.0%           8.0%         7.8%                    
                                                                                                                                  
Variable rate LIBOR debt      $ 351       $ 108       $ 369       $  69     $   6        $    56      $   959     $   959         
Average interest rate           6.4%        6.4%        5.6%        5.3%      5.1%           5.1%         6.6%                    
</TABLE> 


                  At December 31, 1998, approximately $304 million of the
               Company's variable rate debt relates to borrowings under its
               acquisition bridge loan facility and approximately $84.2 million
               relates to borrowings under project construction loans.
               Approximately $271 million of the borrowings under the bridge
               loan credit facility were repaid in February 1999 as discussed
               above. The borrowings under project construction loans are
               expected to be repaid from proceeds of long-term fixed rate
               loans at dates from 1999 to 2001 when construction of the related
               projects is scheduled to be completed. At December 31, 1998, the
               Company had interest rate cap agreements which effectively limit
               the average interest rate on all of the variable rate LIBOR debt
               maturing in 2002 to 8.9%.
                  
                  As the table incorporates only those exposures that exist as
               of December 31, 1998, it does not consider exposures or positions
               which could arise after that date. As a result, the Company's
               ultimate realized gain or loss with respect to interest rate
               fluctuations will depend on the exposures that arise after
               December 31, 1998, the Company's hedging strategies during that
               period and interest rates.

                                                                        45
<PAGE>
 
THE YEAR 2000  The year 2000 issue relates to whether computer systems will
ISSUE          properly recognize date sensitive information to allow accurate
               processing of transactions and data relating to the year 2000 and
               beyond. In addition, the year 2000 issue relates to whether non-
               Information Technology (IT) systems that depend on embedded
               computer technology will recognize the year 2000. Systems that do
               not properly recognize such information could generate erroneous
               data or fail.
               
                  In 1996, the Company adopted a plan to replace virtually all
               of its management information and accounting systems. This plan
               was adopted in the context of the Company's long-term Information
               Systems strategy. In accordance with this plan, all mission-
               critical IT systems are being replaced with systems that have
               been certified by the vendors as year 2000 compliant. The Company
               has implemented new financial accounting, accounts payable,
               property management, human resources, payroll and leasing
               management systems that are year 2000 compliant except for
               certain legacy systems that are still in use by Hughes. The
               Company is in the process of migrating Hughes from its legacy
               general ledger, accounts payable and property management systems
               to the Company's new systems. This migration is scheduled to be
               completed no later than October 1, 1999. The Company is in
               the process of implementing a new cash management system, which
               is expected to be operational by June 1, 1999 and which will be
               year 2000 compliant. Also, the Company has commenced testing of
               its new IT systems for year 2000 compliance and expects testing
               and analysis of the results to be completed in the second quarter
               of 1999. In addition, in connection with the Company's normal
               upgrade and replacement process, all network and desktop
               equipment meet the requirements for the year 2000. As a result,
               the Company expects that the costs to specifically remediate year
               2000 IT issues will be minimal. For non-IT systems, the Company
               has completed a comprehensive review of computer hardware and
               software in mechanical systems and has developed a program to
               repair or replace non-IT systems that are not year 2000
               compliant. It is anticipated that the program will be completed
               in the third quarter of 1999. Costs to specifically remediate 
               non-IT systems (e.g., escalators, elevators, heating, ventilating
               and cooling systems, etc.) that are non-compliant are not
               expected to exceed $2 million. Management does not believe that
               the year 2000 issue will pose significant problems in its IT or
               non-IT systems, or that resolution of any potential problems with
               respect to these systems will have a material effect on the
               Company's financial condition or results of operations.
               
                  It is very difficult to identify "the most reasonably likely
               worst-case scenario." The Company's exposure is widely spread,
               with no known major direct exposure. The Company believes that
               the most likely worst-case exposure is at the indirect level,
               involving vendors, suppliers and tenants. For example, there
               could be failures in the information systems of certain tenants
               that may delay the payment of rents. While it is not possible at
               this time to determine the likely impact of these potential
               problems, the Company is evaluating these risks based on public
               disclosures and, if desirable, direct contacts with certain major
               vendors, suppliers and tenants of key Company properties. Based
               on this evaluation, the Company will determine during the second
               quarter of 1999 whether specific contingency plans should be
               developed.

NEW ACCOUNTING    In March 1998, the American Institute of Certified Public     
STANDARDS      Accountants issued Statement of Position 98-1, "Accounting for   
NOT YET        the Costs of Computer Software Developed or Obtained for Internal
ADOPTED        Use" (SOP 98-1) which is required to be adopted by the Company no
               later than January 1, 1999. SOP 98-1 provides guidance as to     
               whether costs incurred relating to internal-use software should  
               be expensed or capitalized. The guidance in SOP 98-1 is required 
               to be applied to costs incurred subsequent to adoption and may
               not be applied to costs incurred prior to initial application.
               The Company intends to adopt SOP 98-1 effective January 1, 1999,
               and does not believe that adoption will have a material effect on
               its results of operations.
               
               In April 1998, the American Institute of Certified Public        
               Accountants issued Statement of Position 98-5, "Reporting on the 
               Costs of Start-up Activities" (SOP 98-5) which is required to be 
               adopted by the Company no later than January 1, 1999. SOP 98-5   
               requires that start-up costs and organization costs, not         
               otherwise addressed in existing authoritative literature, be     
               expensed as incurred. The Company intends to adopt SOP 98-5      
               effective January 1, 1999, and the initial application will be   
               reported as the cumulative effect of a change in accounting      
               principle. The Company does not believe that adoption will have a
               material effect on its results of operations in future periods.


                                      46
<PAGE>
 
                  In June 1998, the Financial Accounting Standards Board issued
               Statement of Financial Accounting Standards No. 133, "Accounting
               for Derivative Instruments and Hedging Activities," (Statement
               133) which is required to be adopted by the Company no later than
               January 1, 2000. The Company's use of derivative instruments has
               consisted primarily of interest rate swap and cap agreements
               related to specific debt financings. While the Company has not
               completed its analysis of Statement 133 and has not made a
               decision regarding the timing of adoption, it does not believe
               that adoption will have a material effect on its financial
               position and results of operations based on its current use of
               derivative instruments.

IMPACT OF      The major portion of the Company's operating properties, its
INFLATION      retail centers, is substantially protected from declines in the
               purchasing power of the dollar. Retail leases generally provide
               for minimum rents plus percentage rents based on sales over a
               minimum base. In many cases, increases in tenant sales (whether
               due to increased unit sales or increased prices from demand or
               general inflation) will result in increased rental revenue to the
               Company. A substantial portion of the tenant leases (retail and
               office) also provide for other rents which reimburse the Company
               for certain of its operating expenses; consequently, increases in
               these costs do not have a significant impact on the Company's
               operating results. The Company has a significant amount of debt
               which, in a period of inflation, will result in a holding gain
               since debt will be paid off with dollars having less purchasing
               power.

INFORMATION    This Annual Report to Shareholders of the Company includes
RELATING       forward-looking statements which reflect the Company's current
TO FORWARD-    views with respect to future events and financial performance.
LOOKING        These forward-looking statements are subject to certain risks and
STATEMENTS     uncertainties, including those identified below which could cause
               actual results to differ materially from historical results or
               those anticipated. The words "believe", "expect", "anticipate"
               and similar expressions identify forward-looking statements.
               Readers are cautioned not to place undue reliance on these
               forward-looking statements, which speak only as of their dates.
               The Company undertakes no obligation to publicly update or revise
               any forward-looking statements, whether as a result of new
               information, future events or otherwise. The following are among
               the factors that could cause actual results to differ materially
               from historical results or those anticipated: (1) real estate
               investment trust risks; (2) real estate development and
               investment risks; (3) liquidity of real estate investments; (4)
               dependence on rental income from real property; (5) effect of
               uninsured loss; (6) lack of geographical diversification; (7)
               possible environmental liabilities; (8) difficulties of
               compliance with Americans with Disabilities Act; (9) competition;
               (10) changes in the economic climate; and (11) changes in tax
               laws or regulations. For a more detailed discussion of these and
               other factors, see Exhibit 99.2 of the Company's Form 10-K for
               the fiscal year ended December 31, 1998.

                                                                              47

<PAGE>
 
                      The Rouse Company and Subsidiaries 
  Five Year Summary of Funds From Operations and Net Earnings (loss) (Note 1)

                                (in thousands)
<TABLE> 
<CAPTION> 
                                                                                  Year ended December 31
                                                           --------------------------------------------------------------------
                                                               1998          1997          1996          1995           1994
                                                           ----------    ----------    ----------    ----------     -----------
<S>                                                        <C>           <C>           <C>           <C>            <C> 
REVENUES:
Retail centers:
   Minimum and percentage rents.....................       $  308,900    $  271,743    $  256,880    $  245,192     $  238,222
   Other rents and other revenues...................          250,921       231,912       251,535       246,488        248,253
                                                           ----------    ----------    ----------    ----------     ----------
                                                              559,821       503,655       508,415       491,680        486,475
                                                           ----------    ----------    ----------    ----------     ----------  
Office, mixed-use and other:
   Minimum and percentage rents.....................          137,118       130,744       106,246        80,319         82,347
   Other rents and other revenues...................           78,801        85,827        75,908        64,647         64,225
                                                           ----------    ----------    ----------    ----------     ----------
                                                              215,919       216,571       182,154       144,966        146,572
                                                           ----------    ----------    ----------    ----------     ----------  
Land sales..........................................          197,706       203,219       137,853        33,403         35,232
Corporate interest income...........................            3,797         4,485         3,495         2,772          2,892
                                                           ----------    ----------    ----------    ----------     ----------

                                                              977,243       927,930       831,917       672,821        671,171
                                                           ----------    ----------    ----------    ----------     ----------

OPERATING EXPENSES, EXCLUSIVE OF DEPRECIATION
   AND AMORTIZATION:
Retail centers......................................          268,786       257,848       260,027       246,747        253,095
Office, mixed-use and other.........................          102,945       108,063        89,524        70,096         74,368
Land sales..........................................          144,709       151,800       107,787        17,827         19,877
Development.........................................            7,383         4,747         4,964         7,288          6,494
Corporate...........................................           18,813        13,384         9,752         8,920          8,309
                                                           ----------    ----------    ----------    ----------     ----------

                                                              542,636       535,842       472,054       350,878        362,143
                                                           ----------    ----------    ----------    ----------     ----------

INTEREST EXPENSE:
Retail centers......................................          150,889       122,325       129,091       128,215        128,798
Office, mixed-use and other.........................           77,894        81,905        76,659        69,034         67,892
Land sales..........................................            4,201         4,287         1,658         5,071          5,028
Development.........................................              ---           ---           361           358            495
Corporate...........................................           (8,614)       (1,027)       12,612        10,285         11,370
                                                           ----------    ----------    ----------    ----------     ----------

                                                              224,370       207,490       220,381       212,963        213,583
                                                           ----------    ----------    ----------    ----------     ----------

CURRENT INCOME TAXES APPLICABLE TO OPERATIONS
   (NOTE 3).........................................            5,395         3,208           123           620            735
                                                           ----------    ----------    ----------    ----------     ----------

                                                              722,401       746,540       692,558       564,461        576,461
                                                           ----------    ----------    ----------    ----------     ----------

FUNDS FROM OPERATIONS (NOTE 2)......................       $  204,842    $  181,390    $  139,359    $  108,360     $   94,710
                                                           ==========    ==========    ==========    ==========     ==========
</TABLE> 

                                                                              48
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                  Year ended December 31
                                                           --------------------------------------------------------------------
                                                               1998          1997          1996          1995           1994
                                                           ----------    ----------    ----------    ----------     -----------
<S>                                                        <C>           <C>           <C>           <C>            <C> 
FUNDS FROM OPERATIONS BY SEGMENT:
Retail centers......................................       $  140,081    $  123,101    $  119,297    $  116,135     $  103,978
Office, mixed-use and other.........................           35,069        26,562        15,852         5,839          4,273
Land sales..........................................           48,773        47,090        28,404        10,502         10,330
Development.........................................           (7,383)       (4,747)       (5,325)       (7,646)        (6,989)
Corporate...........................................          (11,698)      (10,616)      (18,869)      (16,470)       (16,882)
                                                           ----------    ----------    ----------    ----------     ----------

FUNDS FROM OPERATIONS...............................       $  204,842    $  181,390    $  139,359    $  108,360     $   94,710
                                                           ==========    ==========    ==========    ==========     ==========


RECONCILIATION TO NET EARNINGS (LOSS):
Funds from Operations...............................       $  204,842    $  181,390    $  139,359    $  108,360     $   94,710
Depreciation and amortization.......................          (84,068)      (82,944)      (77,414)      (73,062)       (74,186)
Deferred income taxes applicable to operations......              ---       124,203       (25,596)       (3,699)        (5,995)
Certain current income taxes (note 3)...............              ---        (4,929)          ---           ---            ---
Loss on dispositions of assets and
   other provisions, net............................          (11,174)      (23,484)      (16,499)      (25,749)        (7,923)
Depreciation and amortization, gain on disposition
   of assets and deferred income taxes of
   unconsolidated real estate ventures, net.........           (4,380)       (4,344)       (1,964)          ---            ---
Extraordinary gain (loss), net......................            4,355       (21,342)       (1,453)       (8,631)        (4,447)
Cumulative effect at January 1, 1998 of
   change in accounting for participating
   mortgages .......................................           (4,629)          ---           ---           ---            ---
Cumulative effect at October 1, 1997 of
   change in accounting for business
   process reengineering costs......................              ---        (1,214)          ---           ---            ---
Other...............................................              (44)          ---           ---           ---            ---
                                                           ----------    ----------    ----------    ----------     ----------  
 NET EARNINGS (LOSS).................................      $  104,902    $  167,336    $   16,433    $   (2,781)    $    2,159
                                                           ==========    ==========    ==========    ==========     ==========  
</TABLE> 


NOTES:

(1)    Operating and Funds from Operations (FFO) data included in this five-year
       summary are presented by segment. Consistent with the requirements of
       Statement of Financial Accounting Standards No. 131, "Disclosures about
       Segments of an Enterprise and Related Information," segment data are
       reported using the accounting policies followed by the Company for
       internal reporting to management. These policies are the same as those
       used for external reporting, except that real estate ventures in which
       the Company holds a majority financial interest but does not own a
       majority voting interest are reported on a consolidated basis rather
       than using the equity method, and the Company's share of FFO of
       unconsolidated real estate ventures in which it holds a minority interest
       is included in revenues. These differences affect the revenues and
       expenses reported in the summary of FFO to net earnings (loss), however,
       they have no effect on the Company's net earnings or FFO.

(2)    FFO is not a measure of operating results or cash flows from operating
       activities as defined by generally accepted accounting principles.
       Additionally, FFO is not necessarily indicative of cash available to fund
       cash needs, including the payment of dividends and should not be
       considered as an alternative to cash flows as a measure of liquidity. See
       the "Funds from Operations" section of Management's Discussion and
       Analysis of Financial Condition and Results of Operations on page 42 for
       a full discussion of FFO.

(3)    FFO for 1997 excludes current income taxes arising from transactions
       completed by the Company in connection with its determination to elect to
       be taxed as a REIT.

                                                                              49
<PAGE>
 
                         PROJECTS OF THE ROUSE COMPANY


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Retail Centers in Operation
------------------------------------------------------------------------------------------------------------------------------------
                                         Date of Opening                                                    Retail Square Footage
Consolidated Centers (note 1)             or Acquisition      Department Stores/Anchor Tenants            Total Center     Mall Only
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                  <C>                                         <C>             <C>
Augusta Mall,                                      8/78       Rich's; Macy's; JCPenney; Sears;               1,081,000       332,000
  Augusta, GA (a)                                             Dillard's                                                  
------------------------------------------------------------------------------------------------------------------------------------
Bayside Marketplace,                               4/87       ---                                              223,000       223,000
  Miami, FL (b)                                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
Beachwood Place,                                   8/78       Saks Fifth Avenue; Dillard's;                    912,000       348,000
  Cleveland, OH (a)                                           Nordstrom                                                  
------------------------------------------------------------------------------------------------------------------------------------
Bridgewater Commons,                              12/98       Lord & Taylor; Macy's; Stern's                   875,000       372,000
  Bridgewater, NJ (f)                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
Cherry Hill Mall,                                 10/61       Strawbridge's, Macy's; JCPenney                1,292,000       543,000
  Cherry Hill, NJ (a)                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
The Mall in Columbia,                              8/71       Hecht's; JCPenney; Sears;                      1,235,000       423,000
  Columbia, MD (e)                                            Lord & Taylor                                              
------------------------------------------------------------------------------------------------------------------------------------
Echelon Mall,                                      9/70       Strawbridge's; JCPenney; Boscov's;             1,140,000       429,000
  Voorhees, NJ (a)                                            Sears                                                      
------------------------------------------------------------------------------------------------------------------------------------
Exton Square,                                      3/73       Strawbridge's                                    434,000       253,000
  Exton, PA (a)                                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
Faneuil Hall Marketplace,                          8/76       ---                                              215,000       215,000
  Boston, MA (a)                                                                                                         
------------------------------------------------------------------------------------------------------------------------------------
Fashion Place Mall,                               10/98       Dillard's; Nordstrom; Sears                      966,000       400,000
  Salt Lake City, UT (f)                                                                                                 
------------------------------------------------------------------------------------------------------------------------------------
The Fashion Show,                                  6/96       Neiman Marcus; Saks Fifth Avenue;                840,000       308,000
  Las Vegas, NV (a)                                           Macy's; Dillard's; Robinsons-May                           
------------------------------------------------------------------------------------------------------------------------------------
Franklin Park,                                     7/71       Marshall Fields; JCPenney; Jacobson's;         1,099,000       313,000
  Toledo, OH (b)                                              Lion (Dillard's)                                           
------------------------------------------------------------------------------------------------------------------------------------
The Gallery at Market East,                        8/77       Strawbridge's; JCPenney; KMart                 1,179,000       363,000
  Philadelphia, PA(a)(c)                                                                                                 
------------------------------------------------------------------------------------------------------------------------------------
Governor's Square,                                 8/79       Burdines; Dillard's; Sears; JCPenney           1,044,000       340,000
  Tallahassee, FL (a)                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
The Grand Avenue,                                  8/82       The Boston Store                                 492,000       242,000
  Milwaukee, WI (a)                                                                                                      
------------------------------------------------------------------------------------------------------------------------------------
Harborplace,                                       7/80       ---                                              136,000       136,000
  Baltimore, MD (a)                                                                                                      
------------------------------------------------------------------------------------------------------------------------------------
Highland Mall,                                     8/71       Dillard's; Foley's; JCPenney                   1,085,000       367,000
  Austin, TX (b)                                                                                                         
------------------------------------------------------------------------------------------------------------------------------------
Hulen Mall, Ft.                                    8/77       Foley's; Ward's; Dillard's                       938,000       327,000
  Worth, TX (a)                                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
The Jacksonville Landing,                          6/87       ---                                              128,000       128,000
  Jacksonville, FL (a)                                                                                                   
------------------------------------------------------------------------------------------------------------------------------------
Mall St. Matthews,                                 3/62       Dillard's; JCPenney; Bacon;                    1,102,000       363,000
  Louisville, KY (a)                                          Lord & Taylor                                              
------------------------------------------------------------------------------------------------------------------------------------
Midtown Square,                                   10/59       Burlington Coat Factory                          235,000       190,000
  Charlotte, NC (a)                                                                                                      
------------------------------------------------------------------------------------------------------------------------------------
Mondawmin Mall (a)/Metro Plaza (b),               1/78;       ---                                              496,000       496,000
  Baltimore, MD                                   12/82                                                                  
------------------------------------------------------------------------------------------------------------------------------------
Moorestown Mall,                                  12/97       Strawbridge's; Boscov's; Sears                   823,000       264,000
  Moorestown, NJ (a)                                                                                                     
------------------------------------------------------------------------------------------------------------------------------------
North Star,                                        9/60       Dillard's; Foley's; Saks Fifth                 1,251,000       462,000
  San Antonio, TX (b)                                         Avenue; Macy's; Mervyn's California                        
------------------------------------------------------------------------------------------------------------------------------------
Oakwood Center,                                   10/82       Sears; Dillard's; Mervyn's California;           991,000       362,000
  Gretna, LA (a)                                              Maison Blanche (JCPenney)                                  
------------------------------------------------------------------------------------------------------------------------------------
Oviedo Marketplace,                                3/98       Dillard's; Parisian                              820,000       340,000
  Orlando, FL (a)                                                                                                        
------------------------------------------------------------------------------------------------------------------------------------
Owings Mills,                                      7/86       Macy's; Hecht's; JCPenney; Lord &              1,165,000       352,000
  Baltimore, MD (a)                                           Taylor; Sears; General Cinema 17                           
------------------------------------------------------------------------------------------------------------------------------------
Paramus Park,                                      3/74       Macy's; Sears                                    761,000       382,000
  Paramus, NJ (a)                                                                                                        
------------------------------------------------------------------------------------------------------------------------------------
Park Meadows,                                      7/98       Dillard's; Foley's; Joslins (Lord &            1,640,000       594,000
  Denver, CO (f)                                              Taylor); Nordstrom; JCPenney                               
------------------------------------------------------------------------------------------------------------------------------------
Perimeter Mall,                                    8/71       Rich's; JCPenney; Macy's; Nordstrom            1,424,000       444,000
  Atlanta, GA (b)                                                                                                        
------------------------------------------------------------------------------------------------------------------------------------
Plymouth Meeting,                                  2/66       Strawbridge's; Boscov's; IKEA;                   944,000       390,000
  Plymouth Meeting, PA (a)                                    General Cinema 12                                          
------------------------------------------------------------------------------------------------------------------------------------
Riverwalk,                                         8/86       ---                                              179,000       179,000
  New Orleans, LA (a)                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
Santa Monica Place,                               10/80       Macy's; Robinsons-May                            570,000       287,000
  Santa Monica, CA (a)                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
South Street Seaport,                              7/83       ---                                              259,000       259,000
  New York, NY (a)                                                                                                       
------------------------------------------------------------------------------------------------------------------------------------
Tampa Bay Center,                                  8/76       Burdines; Sears; Ward's                          895,000       325,000
  Tampa, FL (b)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                              50
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Retail Centers in Operation
------------------------------------------------------------------------------------------------------------------------------------
                                         Date of Opening                                                    Retail Square Footage
Consolidated Centers (note 1)             or Acquisition      Department Stores/Anchor Tenants            Total Center     Mall Only
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                  <C>                                         <C>             <C>
Towson Town Center,                               10/98       Hecht's; Nordstrom; Nordstrom Rack               997,000       538,000
  Baltimore, MD (f)                                                                                                       
------------------------------------------------------------------------------------------------------------------------------------
White Marsh,                                       8/81       Macy's; JCPenney; Hecht's; Sears; IKEA;        1,148,000       359,000
  Baltimore, MD (b)                                           Lord & Taylor                                               
------------------------------------------------------------------------------------------------------------------------------------
Willowbrook,                                       9/69       Lord & Taylor; Macy's; Stern's; Sears          1,530,000       502,000
  Wayne, NJ (b)                                                                                                           
------------------------------------------------------------------------------------------------------------------------------------
Woodbridge Center,                                 3/71       Lord & Taylor; Sears; Stern's;                 1,546,000       560,000
  Woodbridge, NJ (a)                                          Fortunoff; JCPenney                                         
------------------------------------------------------------------------------------------------------------------------------------
Community Centers in                                ---       ---                                              890,000       890,000
  Columbia, MD (12) (e)                                                                                                   
------------------------------------------------------------------------------------------------------------------------------------
Community Centers in                                ---       ---                                              238,000       238,000
  Summerlin, NV (2) (b)                                                                                                   
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Consolidated Centers in Operation*      35,218,000    14,838,000
------------------------------------------------------------------------------------------------------------------------------------
Nonconsolidated/Managed Centers
------------------------------------------------------------------------------------------------------------------------------------
Burlington Center,                                 8/82       Strawbridge's; Sears; JCPenney                   666,000       242,000
  Burlington Township, NJ (d)                                                                                             
------------------------------------------------------------------------------------------------------------------------------------
Collin Creek,                                      9/95       Dillard's; Foley's; JCPenney; Sears;           1,123,000       333,000
  Plano, TX (d)                                               Mervyn's California                                         
------------------------------------------------------------------------------------------------------------------------------------
Randhurst, Mt.                                     7/81       Carson, Pirie, Scott; JCPenney;                1,304,000       581,000
  Prospect, IL (d)                                            Ward's; Kohl's                                              
------------------------------------------------------------------------------------------------------------------------------------
Ridgedale Center,                                  1/89       Dayton's; JCPenney; Sears; Dayton's            1,027,000       334,000
  Minneapolis, MN (d)                                         Men & Home                                                  
------------------------------------------------------------------------------------------------------------------------------------
Sherway Gardens,                                  12/78       Eaton's; The Bay; Holt Renfrew;                  972,000       444,000
  Toronto, ONT (c)                                            Sporting Life                                               
------------------------------------------------------------------------------------------------------------------------------------
Southland Center,                                  1/89       Hudson's; Mervyn's California; JCPenney          903,000       320,000
  Taylor, MI (d)                                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
Staten Island Mall,                               11/80       Sears; Macy's; JCPenney                        1,229,000       622,000
  Staten Island, NY (d)                                                                                                   
------------------------------------------------------------------------------------------------------------------------------------
Town & Country Center,                             2/88       Sears; Marshalls                                 642,000       421,000
  Miami, FL (c)                                                                                                           
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Nonconsolidated/Managed Centers          7,866,000     3,297,000
                                                              in Operation                                                
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Retail Centers in Operation*            43,084,000    18,135,000
------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>  
------------------------------------------------------------------------------------------------------------------------------------
                                         Date of Opening                                                    Retail Square Footage
Properties Held for Sale                  or Acquisition      Department Stores/Anchor Tenants            Total Center     Mall Only
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                  <C>                                         <C>             <C>   
Retail Centers
------------------------------------------------------------------------------------------------------------------------------------
Valley Fair Mall,                                  7/98       Macy's (2); Nordstrom                          1,138,000       469,000
  San Jose, CA (b)                                                                                                        
------------------------------------------------------------------------------------------------------------------------------------
Westdale Mall,                                    10/98       JCPenney; Von Maur; Younkers; Ward's             912,000       383,000
  Cedar Rapids, IA (d)                                                                                                              
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Retail Centers Held for Sale             2,050,000       852,000
------------------------------------------------------------------------------------------------------------------------------------
Office/Mixed-Use Properties
------------------------------------------------------------------------------------------------------------------------------------
Lucky's Center,                                    6/96       ---                                              142,000       142,000
  Los Angeles, CA (a)                                                                                                        
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Properties Held for Sale                 2,192,000       994,000
------------------------------------------------------------------------------------------------------------------------------------
  
*Not including 691,000 square feet of retail space in five mixed-use properties listed on the following page.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                              51
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Office, Mixed-Use and Other Properties in Operation
------------------------------------------------------------------------------------------------------------------------------------
Consolidated Mixed-Use Properties                                 Location                                             Square Feet
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                                       <C>
Arizona Center (a)                                                Phoenix, AZ
   The Shops at Arizona Center                                                                                             151,000
   Garden Office Pavilion                                                                                                   33,000
   One Arizona Center Office Tower                                                                                         330,000
   Two Arizona Center Office Tower                                                                                         449,000
   AMC Cinemas                                                                                                              90,000
------------------------------------------------------------------------------------------------------------------------------------
The Gallery at Harborplace (a)                                    Baltimore, MD                                                  
   The Gallery                                                                                                             141,000
   Office Tower                                                                                                            265,000
   Renaissance Hotel                                                                                                     622 rooms
------------------------------------------------------------------------------------------------------------------------------------
Pioneer Place (a)                                                 Portland, OR                                                   
   Saks Fifth Avenue                                                                                                        60,000
   Retail Pavillion                                                                                                        147,000
   Office Tower                                                                                                            283,000
------------------------------------------------------------------------------------------------------------------------------------
Village of Cross Keys (a)                                         Baltimore, MD                                                  
   Village Shops                                                                                                            74,000
   Village Square Offices                                                                                                   79,000
   Quadrangle Offices                                                                                                      110,000
------------------------------------------------------------------------------------------------------------------------------------
Westlake Center (b)                                               Seattle, WA                                                    
   Retail Pavillion                                                                                                        118,000
   Office Tower                                                                                                            342,000
------------------------------------------------------------------------------------------------------------------------------------
Consolidated Office and Other Properties (note 1)
------------------------------------------------------------------------------------------------------------------------------------
Columbia Office (11 buildings) (a) (e)                            Columbia, MD                                             993,000
------------------------------------------------------------------------------------------------------------------------------------
Columbia Industrial (9 buildings) (e)                             Columbia, MD                                             623,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Center (13 buildings) (a)                                  Las Vegas, NV                                          1,005,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Airport Center (31 buildings) (a)                          Las Vegas, NV                                          1,575,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Cheyenne Center (3 buildings) (a)                          Las Vegas, NV                                            377,000
------------------------------------------------------------------------------------------------------------------------------------
Summerlin Commercial (13 buildings) (a)                           Summerlin, NV                                            815,000
------------------------------------------------------------------------------------------------------------------------------------
Inglewood Business Center (7 buildings) (a)                       Prince Georges County, MD                                538,000
------------------------------------------------------------------------------------------------------------------------------------
Owings Mills Town Center (4 buildings) (b)                        Baltimore, MD                                            731,000
------------------------------------------------------------------------------------------------------------------------------------
Hunt Valley Business Center (24 buildings) (a)                    Baltimore, MD                                          1,834,000
------------------------------------------------------------------------------------------------------------------------------------
Rutherford Business Center (24 buildings) (a)                     Baltimore, MD                                            877,000
------------------------------------------------------------------------------------------------------------------------------------
Other Office Projects (5 buildings) (a)                           Various                                                  501,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                  Total Consolidated Office, Mixed-Use and                       
                                                                  Other Properties**                                    12,541,000
------------------------------------------------------------------------------------------------------------------------------------
 
**Including 691,000 square feet of retail space in the mixed-use properties.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

                                                                              52
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Retail Centers Under Construction                                                                           Retail Square Footage
or in Development                                             Department Stores/Anchor Tenants            Total Center     Mall Only
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                                         <C>             <C>
The Mall in Columbia Expansion, Columbia, MD                  Nordstrom                                        270,000       110,000
------------------------------------------------------------------------------------------------------------------------------------
Exton Square Expansion, Exton, PA                             Sears; Boscov's; JCPenney                        569,000       120,000
------------------------------------------------------------------------------------------------------------------------------------
Oviedo Marketplace Expansion, Orlando, FL                     Sears                                            125,000           ---
------------------------------------------------------------------------------------------------------------------------------------
Moorestown Mall Expansion, Moorestown, NJ                     Strawbridges; Lord & Taylor                      321,000           ---
------------------------------------------------------------------------------------------------------------------------------------
Perimeter Mall Expansion, Atlanta, GA                         ---                                               75,000        75,000
------------------------------------------------------------------------------------------------------------------------------------
The Fashion Show Expansion, Las Vegas, NV                     Neiman Marcus; Saks Fifth Avenue; 
                                                              Macy's; Robinsons-May; Lord & Taylor; 
                                                              Dillard's; Bloomingdales                         800,000       250,000
------------------------------------------------------------------------------------------------------------------------------------
Ft. Myers, Ft. Myers, FL                                      Dillard's; Sears                                 900,000       350,000
------------------------------------------------------------------------------------------------------------------------------------
Bridgewater Commons Expansion, Bridgewater, NJ                Bloomingdale's                                   400,000       150,000
------------------------------------------------------------------------------------------------------------------------------------
Fashion Place Expansion, Salt Lake City, UT                   Nordstrom; Dillard's; ZCMI                       300,000        70,000
------------------------------------------------------------------------------------------------------------------------------------
Summerlin Town Center, Summerlin, NV                          Robinsons-May; Lord & Taylor; Dillard's;
                                                              Sears                                          1,050,000       350,000
------------------------------------------------------------------------------------------------------------------------------------
West Kendall, Dade County, FL                                 Dillard's; Sears; Burdines                     1,200,000       350,000
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Retail Centers Under Construction 
                                                              or in Development                              6,010,000     1,825,000
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Office, Mixed-Use and Other Properties Under
Construction or in Development                                Type of Space                                              Square Feet
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                                                        <C> 
Pioneer Place Expansion, Portland, OR                         Saks Fifth Avenue; Sundance Cinema                             150,000
------------------------------------------------------------------------------------------------------------------------------------
Arizona Center Expansion, Phoenix, AZ                         Embassy Suites                                               350 rooms
------------------------------------------------------------------------------------------------------------------------------------
The Village of Merrick Park, Coral Gables, FL                 Neiman Marcus, Nordstrom                                       360,000
                                                              Specialty retail shops                                         424,000
                                                              Office                                                          80,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Center (1 building), Las Vegas, NV                     Office                                                         171,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Airport Center (3 buildings), Las Vegas, NV            Industrial                                                     168,000
------------------------------------------------------------------------------------------------------------------------------------
Park Square, Columbia, MD                                     Office                                                         100,000
------------------------------------------------------------------------------------------------------------------------------------
Summerlin Commercial (1 building), Summerlin, NV              Office                                                          71,000
------------------------------------------------------------------------------------------------------------------------------------
                                                              Total Office, Mixed-Use and Other Properties
                                                              Under Construction or in Development                         1,524,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Note 1  Includes projects wholly owned by subsidiaries of the Company, projects
in which the Company has joint interest and control and projects owned by
affiliates in which the Company holds substantially all (at least 98%) of the
financial interest, but does not own a majority voting interest.

Additional Notes:
(a)  Projects are wholly owned by subsidiaries of the Company.
(b)  Projects are owned by joint ventures or partnerships and are managed by
     affiliates of the Company for a fee.  The Company's ownership interest,
     through its subsidiaries, is at least 50% (except for North Star and
     Willowbrook, in which the Company has 37 1/2% interests).
(c)  Projects are managed by affiliates of the Company for a fee plus a share of
     cash flow.
(d)  Projects are owned by partnerships or by subsidiaries of the Company
     (Burlington Center, Randhurst and Staten Island Mall) and are managed by
     affiliates of the Company for a fee plus a share of cash flow and a share
     of proceeds from sales or refinancings.  The Company's ownership interest
     in the partnerships is less than 20%, except for Collin Creek Mall in which
     the Company has a 30% interest.
(e)  Projects are owned and managed by affiliates in which the Company holds
     substantially all (at least 98%) of the financial interest, but does not
     own a majority voting interest.
(f)  Projects were wholly owned by subsidiaries of the Company as of December
     31, 1998, and contributed to a joint venture in February 1999. The Company
     retains a 35% interest in the joint venture.
 

                                                                              53