<PAGE>
 
Exhibit 13.  Annual report to security holders



The annual report to shareholders has not been completed as of this filing and
will be filed with the Securities and Exchange Commission in its entirety on or
before April 4, 1997.

The financial section of the annual report, which is incorporated by reference,
is final and is enclosed as Exhibit 13.  This financial section includes all the
information incorporated by reference in Parts I, II and IV of this Form 10-K
Annual Report for the fiscal year ended December 31, 1996.
<PAGE>
                 REPORT OF INDEPENDENT REAL ESTATE CONSULTANTS


Landauer Associates, Inc.
666 Fifth Avenue
New York, New York 10103


KPMG PEAT MARWICK LLP AND
THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE ROUSE COMPANY:

We have reviewed estimates of the market value of equity and other interests in
certain real property owned and/or managed by The Rouse Company (the Company)
and its subsidiaries as of December 31, 1996 and 1995. The properties reviewed
at December 31, 1996 include all the projects identified as "In Operation" on
the "Projects of The Rouse Company" table on pages 64 through 66 of the Annual
Report for 1996, investment land and land held for development and sale, and
certain parcels of land in development and certain other properties held for
sale. The properties reviewed at December 31, 1995 were the same, except for the
properties which were acquired or disposed during 1996.

  The total values of its equity and other interests estimated by the Company
were $2,839,570,000 and $2,444,218,000 at December 31, 1996 and 1995,
respectively.

  Based upon our review, we concur with the Company's estimates of the total
value of the property interests appraised. In our opinion, the aggregate value
estimated by the Company varies less than 10% from the aggregate value we would
estimate in a full and complete appraisal of the same interests. A variation of
less than 10% between appraisers implies substantial agreement as to the most
probable market value of such property interests.

  The data used in our review were supplied to us in summary form by the
Company. We have relied upon the Company's interpretation and summaries of
leases, operating agreements, mortgages and partnership, joint venture and
management agreements. We have had complete and unrestricted access to all
underlying documents and have confirmed certain information by reference to such
documents. We have found no discrepancies in the data and, to the best of our
knowledge, believe all such data to be accurate and complete. The basic
assumptions used by the Company and the individual value estimates prepared by
the Company were, in our opinion, fair and reasonable. No assumption has been
made with respect to a bulk sale of the entire holdings or groups of property
interests. We have also physically inspected, within the past three years,
substantially all of the properties which were reviewed.

  We certify that neither Landauer Associates, Inc. nor the undersigned have any
present or prospective interest in the Company's properties, and we have no
personal interest or bias with respect to the parties involved. To the best of
our knowledge and belief, the facts upon which the analysis and conclusions were
based are materially true and correct. No one, other than the undersigned
assisted by members of our staff, performed the analyses and reached the
conclusions resulting in the opinion expressed in this letter. Our fee for this
assignment was not contingent on any action or event resulting from the
analyses, opinions, or conclusions in, or the use of, this review. Our review
has been prepared in conformity with the Uniform Standards of Professional
Appraisal Practice.

Sincerely,
Landauer Associates, Inc.


/s/ James C. Kafes            /s/ Deborah A. Jackson

James C. Kafes, MAI, CRE      Deborah A. Jackson
Managing Director             Senior Vice President
                              Director of Retail Valuation

February 25, 1997

                                      23
<PAGE>
 
                       The Rouse Company and Subsidiaries


                          CONSOLIDATED COST BASIS AND
                       CURRENT VALUE BASIS BALANCE SHEETS
                   December 31, 1996 and 1995 (in thousands)
<TABLE>
<CAPTION>
 
 
                                                     1996                        1995
                                          -------------------------   --------------------------
                                          Current Value      Cost     Current Value      Cost
                                          Basis (note 1)    Basis     Basis (note 1)     Basis
                                           ------------   ---------   -------------   ----------
<S>                                       <C>             <C>         <C>             <C>
Assets
Property (notes 5, 9, 16 and 17):
 Operating properties:
  Property and deferred costs
   of projects                               $4,662,590   $3,374,976     $4,323,010    $3,006,356
 
  Less accumulated depreciation
   and amortization                                          552,201                      519,319
                                           ------------   ----------     ----------    ----------
                                              4,662,590    2,822,775      4,323,010     2,487,037
 Properties in development                      181,368      176,060         62,030        56,151
 Properties held for sale                        73,080       73,080         22,687        22,687
 Investment land and land held for
  development and sale                          322,136      244,117        149,239       134,083
                                           ------------   ----------     ----------    ----------
  Total property                              5,239,174    3,316,032      4,556,966     2,699,958
                                           ------------   ----------     ----------    ----------
Prepaid expenses, deferred charges and
 other assets                                   196,952      187,689        160,854       151,068
Accounts and notes receivable (note 6)           92,369       92,369         36,751        36,751
Investments in marketable securities              3,596        3,596          2,910         2,910
Cash and cash equivalents                        43,766       43,766         94,922        94,922
                                           ------------   ----------     ----------    ----------
 Total                                       $5,575,857   $3,643,452     $4,852,403    $2,985,609
                                           ============   ==========     ==========    ==========

</TABLE>

The accompanying notes are an integral part of these statements.

                                      24
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                              1996                        1995
                                                   --------------------------   ---------------------------
                                                   Current Value      Cost      Current Value       Cost
                                                   Basis (note 1)     Basis     Basis (note 1)     Basis
                                                    ------------   ----------   -------------   -----------
<S>                                                <C>             <C>          <C>             <C>
Liabilities
Debt (note 9):
 Property debt not carrying a Parent
  Company guarantee of repayment                      $2,290,406   $2,290,406      $1,990,041    $1,990,041
                                                    ------------   ----------    ------------   -----------
 Parent Company debt and debt carrying a
 Parent Company guarantee of repayment:
   Property debt                                         179,540      179,540         138,488       138,488
   Convertible subordinated debentures                   133,419      130,000         126,750       130,000
   Other debt                                            244,491      235,300         231,884       221,000
                                                    ------------   ----------    ------------   -----------
                                                         557,450      544,840         497,122       489,488
                                                    ------------   ---------     ------------   ----------
   Total debt                                          2,847,856    2,835,246       2,487,163     2,479,529
                                                    ------------   ----------    ------------   -----------
Obligations under capital leases (note 16)                60,201       60,201          58,786        58,786
Accounts payable, accrued expenses and
 other liabilities                                       298,562      298,562         185,561       185,561
 
Deferred income taxes (note 12)                          410,928      134,794         445,613        81,649
 
Company-obligated mandatorily redeemable
 preferred securities of a trust holding
 solely Parent Company subordinated
 debt securities (note 10)                               139,563      137,500         136,125       137,500
 
Commitments and contingencies (notes 16 and 17)
 
Shareholders' equity (notes 14, 15 and 18)
Series A Convertible Preferred stock with
 a liquidation preference of $225,250 in 1995                 --           --              45            45
Common stock of 1c par value per share;
 250,000,000 shares authorized; issued
 66,742,871 shares in 1996 and
 47,922,749 shares in 1995                                   667          667             479           479
Additional paid-in capital                               488,849      488,849         309,943       309,943
Accumulated deficit                                     (312,367)    (312,367)       (267,883)     (267,883)
Revaluation equity                                     1,641,598           --       1,496,571            --
                                                    ------------   ----------    ------------   -----------
 Total shareholders' equity                            1,818,747      177,149       1,539,155        42,584
                                                    ------------   ----------    ------------   -----------
 
 Total...........................................     $5,575,857   $3,643,452      $4,852,403    $2,985,609
                                                    ============   ==========    ============    ==========
 
</TABLE>

                                      25

<PAGE>
 
                       The Rouse Company and Subsidiaries


                CONSOLIDATED COST BASIS STATEMENTS OF OPERATIONS
                 Years ended December 31, 1996, 1995 and 1994
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
  
                                                                               1996       1995       1994
                                                                             --------   --------   --------
<S>                                                                          <C>        <C>        <C>
 
Revenues                                                                     $831,917   $672,821   $671,171
 
Operating expenses, exclusive of provision for bad debts,
 depreciation and amortization                                                468,366    347,560    356,958
Interest expense (note 9)                                                     220,381    212,963    213,583
Provision for bad debts                                                         3,688      3,318      5,185
Depreciation and amortization (note 5)                                         79,990     73,062     74,186
Gain (loss) on dispositions of assets and other provisions, net (note 13)     (15,887)   (25,749)    (7,923)
                                                                             --------   --------   --------
 
 Earnings before income taxes and extraordinary losses                         43,605     10,169     13,336
                                                                             --------   --------   --------
 
Income taxes (note 12):
 Current--primarily state                                                         123        620        735
 Deferred--primarily Federal                                                   25,596      3,699      5,995
                                                                             --------   --------   --------
                                                                               25,719      4,319      6,730
                                                                             --------   --------   --------
 
 Earnings before extraordinary losses                                          17,886      5,850      6,606
 
Extraordinary losses, net of related income tax benefits (note 9)               1,453      8,631      4,447
                                                                             --------   --------   --------
 Net earnings (loss)                                                         $ 16,433   $ (2,781)  $  2,159
                                                                             ========   ========   ========
 
 Net earnings (loss) applicable to common shareholders                       $  5,900   $(17,422)  $(10,922)
                                                                             ========   ========   ========
Earnings (loss) per share of common stock after
 dividends on Preferred stock (note 14):
 Earnings (loss) before extraordinary losses                                 $    .14   $   (.18)  $   (.14)
 Extraordinary losses                                                            (.03)      (.18)      (.09)
                                                                             --------   --------   --------
 Total                                                                       $    .11   $   (.36)  $   (.23)
                                                                             ========   ========   ========
 
</TABLE>
The accompanying notes are an integral part of these statements.

                                      26
<PAGE>
 
                       The Rouse Company and Subsidiaries


           CONSOLIDATED COST BASIS STATEMENTS OF SHAREHOLDERS' EQUITY
          Years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
 
 
                                                  Series A
                                                Convertible           Additional
                                                 Preferred   Common     paid-in    Accumulated
                                                   stock      stock     capital      deficit
                                                -----------  ------   ----------   -----------
<S>                                             <C>          <C>      <C>          <C>
 
Balance at December 31, 1993                         $40       $476     $281,533     $(168,898)
 
Net earnings                                          --         --           --         2,159
Dividends declared:                                            
 Common stock -- $ .68 per share                      --         --           --       (32,349)
 Preferred stock -- $3.25 per share                   --         --           --       (13,081)
Proceeds from exercise of stock options, net          --         --          108            --
Amortization of restricted common stock               --         --        2,225            --
Issuance of Preferred stock (note 14)                  5         --       22,808            --
                                                     ---       ----     --------     --------- 
 
Balance at December 31, 1994                          45        476      306,674      (212,169)
                                                                
Net loss                                              --         --           --        (2,781)
Dividends declared:                                             
 Common stock -- $ .80 per share                      --         --           --       (38,292)
 Preferred stock -- $3.25 per share                   --         --           --       (14,641)
Proceeds from exercise of stock options, net          --          3        2,139            --
Amortization of restricted common stock               --         --        1,130            --
                                                     ---       ----     --------     --------- 
 
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)
Proceeds from exercise of stock options, net          --          4        1,038            --
Amortization of restricted common stock               --         --        1,903            --
Conversion of Preferred stock (note 14)              (45)       106          (61)           --
Purchases of common stock                             --         (2)      (7,005)           --
Common stock issued in acquisition of
 The Hughes Corporation (note 3)                      --         78      178,008            --
Common stock issued pursuant to
 Contingent Stock Agreement (note 15)                 --          2        5,023            --
                                                     ---       ----     --------     --------- 
 
Balance at December 31, 1996                         $--       $667     $488,849     $(312,367)
                                                     ===       ====     ========     =========
 
</TABLE>

The accompanying notes are an integral part of these statements.

                                      27
<PAGE>
 
                       The Rouse Company and Subsidiaries



                CONSOLIDATED COST BASIS STATEMENTS OF CASH FLOWS
          Years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
 
 
                                                                     1996        1995        1994
                                                                  ---------   ---------   ---------
<S>                                                               <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received                                 $ 685,990   $ 625,373   $ 622,033
Proceeds from land sales                                            122,245      33,233      37,482
Interest received                                                    11,939      10,323      10,297
Land development expenditures                                       (50,099)    (16,874)    (16,760)
Operating expenditures:
 Operating properties                                              (349,947)   (308,425)   (315,607)
 Land sales, development and corporate                              (35,358)    (18,738)    (11,880)
Interest paid:
 Operating properties                                              (206,870)   (202,120)   (195,751)
 Land sales, development and corporate                               (9,774)    (15,771)    (16,039)
                                                                  ---------   ---------   --------- 
 Net cash provided by operating activities                          168,126     107,001     113,775
                                                                  ---------   ---------   --------- 
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for properties in development and improvements to
 existing properties funded by debt                                (123,985)    (61,591)    (78,628)
Expenditures for acquisition of The Hughes Corporation,
 net of acquired cash                                               (36,331)         --          --
Expenditures for property acquisitions                              (18,152)    (28,206)    (94,113)
Expenditures for improvements to existing properties funded
 by cash provided by operating activities:
  Tenant leasing and remerchandising                                 (8,095)     (8,344)     (8,121)
  Building and equipment                                            (12,691)     (4,688)     (5,155)
Proceeds from sales of operating properties                          26,345          --          --
Purchases of marketable securities                                   (8,903)     (5,411)    (70,189)
Proceeds from redemptions or sales of marketable securities           8,217      32,650      74,443
Other                                                                (9,400)     10,595       3,212
                                                                  ---------   ---------   --------- 
 Net cash used in investing activities                             (182,995)    (64,995)   (178,551)
                                                                  ---------   ---------   --------- 
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of property debt                             291,373     288,851     446,628
Repayments of property debt:
 Scheduled principal payments                                       (39,048)    (36,446)    (46,750)
 Other payments                                                    (251,807)   (413,438)   (304,977)
Proceeds from issuance of other debt                                141,337     124,831          --
Repayments of other debt                                           (109,685)    (42,440)     (8,968)
Proceeds from issuance of Company-obligated mandatorily
 redeemable preferred securities                                         --     132,951          --
Purchases of common stock                                            (7,007)         --          --
Proceeds from exercise of stock options                               1,042       2,142         108
Dividends paid                                                      (60,917)    (52,933)    (45,423)
Other                                                                (1,575)         --          --
                                                                  ---------   ---------   --------- 
 Net cash provided by (used in) financing activities                (36,287)      3,518      40,618
                                                                  ---------   ---------   --------- 
Net increase (decrease) in cash and cash equivalents                (51,156)     45,524     (24,158)
Cash and cash equivalents at beginning of year                       94,922      49,398      73,556
                                                                  ---------   ---------   --------- 
Cash and cash equivalents at end of year                          $  43,766   $  94,922   $  49,398
                                                                  =========   =========   =========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      28
<PAGE>
 
<TABLE>
<CAPTION>
 
 
RECONCILIATION OF NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
                                                                      1996              1995          1994
                                                                    --------          --------      -------
<S>                                                                 <C>               <C>           <C>        
Net earnings (loss)                                                 $ 16,433          $ (2,781)     $  2,159
Adjustments to reconcile net earnings (loss) to net cash
 provided by operating activities:
 Depreciation and amortization                                        79,990            73,062        74,186
 (Gain) loss on dispositions of assets and other provisions, net      15,887            25,749         7,923
 Extraordinary losses, net of related income tax benefits              1,453             8,631         4,447
 Additions to preconstruction reserve                                  2,700             3,800         3,400
 Provision for bad debts                                               3,688             3,318         5,185
 Decrease (increase) in: 
  Accounts and notes receivable                                      (26,862)           (3,836)       (3,150)
  Other assets                                                        (5,694)            1,357         5,323
 Increase (decrease) in accounts payable, accrued expenses
  and other liabilities                                               54,729           (10,690)        5,754
 Deferred income taxes                                                25,596             3,699         5,995
 Other, net                                                              206             4,692         2,553
                                                                    --------          --------      --------
 
Net cash provided by operating activities                           $168,126          $107,001      $113,775
                                                                    ========          ========      ========
<CAPTION> 
------------------------------------------------------------------------------------------------------------

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
                                                                      1996              1995          1994
                                                                    --------          --------      -------
<S>                                                                 <C>               <C>           <C>        
 
Debt and other liabilities assumed in acquisition of The Hughes
 Corporation, net (note 3)                                          $334,155          $     --      $    --
Common stock issued in acquisition of The Hughes
 Corporation (note 3)                                                178,086                --           --
Common stock issued pursuant to Contingent Stock
 Agreement (note 15)                                                   5,025                --           --
Debt assumed by purchasers of land                                   (16,991)               --           --
Notes received from sales of operating properties                      8,440                --           --
Value of noncash consideration given in acquisitions of
 interests in properties                                              13,520            79,811        1,129
Mortgage and other debt assumed in acquisitions of
 interests in properties                                              21,090             6,175           --
Mortgage debt extinguished on dispositions
 of interests in properties                                               --            20,779       15,681
Capital lease obligations incurred                                     3,789             1,837          613
Series A Convertible Preferred stock issued in
 satisfaction of mortgage debt                                            --                --       23,000
                                                                    ========          ========     ========
 
</TABLE>

                                      29
<PAGE>
 
                       The Rouse Company and Subsidiaries


                 CONSOLIDATED CURRENT VALUE BASIS STATEMENTS OF
                         CHANGES IN REVALUATION EQUITY
          Years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
                                                                          1996         1995         1994
                                                                       ----------   ----------   ----------
<S>                                                                    <C>          <C>          <C>
Revaluation equity at beginning of year                                $1,496,571   $1,519,219   $1,412,455
Revaluation equity attributable to interests in operating
 properties sold or disposed                                               (5,493)       3,082        5,609
                                                                       ----------   ----------   ----------
                                                                        1,491,078    1,522,301    1,418,064
                                                                       ----------   ----------   ----------
Value of acquired interests in properties                                 114,887        8,152           --
Change in value of interests in other operating properties,
 including properties held for sale                                       (41,680)      39,233      101,168
Change in value of land in development and investment land and land
 held for development and sale, including effects of sales and
 transfers to operating properties                                         (1,580)      (5,827)       1,007
                                                                       ----------   ----------   ----------
        Change in value of interests in operating properties,
         land in development and investment land and land held for
         development and sale                                              71,627       41,558      102,175
 
Change in value of other property                                            (523)       1,053         (337)
Change in value attributable to debt, exclusive of operating
 debt, and redeemable preferred securities                                 (8,414)     (34,509)      32,068
Change in present value of potential income taxes, net of cost
 basis deferred income taxes                                               87,830      (33,832)     (32,751)
                                                                       ----------   ----------   ----------
                                                                          150,520      (25,730)     101,155
                                                                       ----------   ----------   ----------
 
Revaluation equity at end of year                                      $1,641,598   $1,496,571   $1,519,219
                                                                       ==========   ==========   ==========
 
</TABLE>
The accompanying notes are an integral part of these statements.

                                      30
<PAGE>
 
                       The Rouse Company and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1996, 1995 and 1994

(1)  CURRENT VALUE BASIS FINANCIAL STATEMENTS

(a) CURRENT VALUE REPORTING

The Company's interests in operating properties, land held for development and
sale and certain other assets have appreciated in value and, accordingly, their
aggregate current value substantially exceeds their aggregate cost basis net
book value determined in conformity with generally accepted accounting
principles. The current value basis financial statements present information
about the current values to the Company of its assets and liabilities and the
changes in such values. The current value basis financial statements are not
intended to present the current liquidation values of assets or liabilities of
the Company or its net assets taken as a whole.

  Management believes that the current value basis financial statements more
realistically reflect the underlying financial strength of the Company. The
current values of the Company's interests in operating properties, including
interests in unconsolidated real estate ventures, represent management's
estimates of the value of these assets primarily as investments. These values
will generally be realized through future cash flows generated by the operation
of these properties over their economic lives. The current values of land held
for development and sale represent management's estimates of the value of these
assets under long-term development and sales programs.

  Shareholders' equity on a current value basis was $1,818,747,000 or $27.25 per
share of common stock at December 31, 1996 and $1,539,155,000 or $26.30 per
share of common stock at December 31, 1995. The per share calculation at
December 31, 1995 assumes conversion of the Preferred stock.

  The process for estimating the current values of the Company's assets and
liabilities requires significant estimates and judgments by management. These
estimates and judgments are made based on information and assumptions considered
by management to be adequate and appropriate in the circumstances; however, they
are not subject to precise quantification or verification and may change from
time to time as economic and market factors, and management's evaluation of
them, change.

  The current value basis financial statements are not presented as part of the
Company's quarterly reports to shareholders. The extensive market research,
financial analyses and testing of results required to produce reliable current
value information make it impractical to report this information on an interim
basis.

(b) BASES OF VALUATION

INTERESTS IN OPERATING PROPERTIES--The current value of the Company's interests
in operating properties is the Company's share of each property's equity value
plus the outstanding balance of debt specifically related to the properties.
Equity values are determined based on the present values of forecasted net cash
flows and residual values, if applicable, or on the application of a
capitalization rate to stabilized net operating income (primarily for office
properties in 1996). The current value of the Company's interests in
unconsolidated real estate ventures is the present value of the Company's share
of forecasted net cash flow, including incentive management fees, and residual
value of the respective real estate ventures.

  The forecasts of net cash flow generally cover periods of eleven years, are
based on an evaluation of the history and future of each property and are
supported by market studies, analyses of tenant lease terms and projected sales
performance and detailed estimates of revenues and operating expenses. The
internal rates of return used in determining present values and capitalization
rates vary by project and between years as investor yield requirements change.
The resulting values recognize the considerable differences between properties
in terms of quality, age, outlook and risk as well as the prevailing yield
requirements of investors for income-producing properties.

PROPERTIES IN DEVELOPMENT--Properties in development are carried at the same
amounts as in the cost basis financial statements except that certain parcels of
land are carried at their estimated current values. Management believes that
properties in development have values in excess of their historical cost, but
has followed a practice of not recognizing any value increment until these
properties are completed and operating.

INVESTMENT LAND AND PROPERTIES HELD FOR SALE--Investment land and properties
held for sale are carried at their estimated fair values less costs to sell.
Fair values are based on contract prices,

                                      31
<PAGE>
 
negotiations with prospective purchasers or management's estimates of future
cash flows from operations and/or sale of the properties, where appropriate.

LAND HELD FOR DEVELOPMENT AND SALE--The current value of land held for
development and sale is based on the present value of forecasted net cash flows
under development and sales programs. These programs set forth the proposed
timing and cost of all improvements necessary to bring the properties to
saleable condition, the pace and price of sales and the costs to administer the
programs and sell the properties.

DEBT--Debt and obligations under capital leases specifically related to
interests in operating properties are carried at the same amount as in the cost
basis balance sheets since the value of the Company's equity interest in each
property is based on net cash flow after payments on the debt or leases. The
current values of publicly-traded debt not specifically related to interests in
properties are determined using quoted market prices. The current values of
other debt and obligations under capital leases are carried at the same amount
as in the cost basis balance sheets since the difference between the stated and
estimated market interest rates for such obligations is not material.

DEFERRED INCOME TAXES--Because the current value basis financial statements are
prepared on the assumption that values will generally be realized over the long-
term through operating cash flows and not through liquidation, the deferred
income tax obligation on a current value basis is the estimated present value of
income tax payments which may be made based primarily on long-term projections
of taxable income. The projections of taxable income reflect all allowable
deductions and the Company's state income tax planning strategies. The discount
rates used to compute the present value of income tax payments are based on the
Company's assessment of the uncertainty with respect to the ultimate timing and
amounts of income tax payments.

OTHER ASSETS AND LIABILITIES--Substantially all other assets and liabilities are
carried in the current value basis balance sheets at the lower of cost or net
realizable value or, where applicable, fair value less costs to sell--the same
stated value as in the cost basis balance sheets.

(c) REVALUATION EQUITY

The aggregate difference between the current value basis and cost basis of the
Company's assets and liabilities is reported as revaluation equity in the
shareholders' equity section of the consolidated current value basis balance
sheets.

  The components of revaluation equity at December 31, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
                                                             1996          1995
                                                         -----------   -----------
<S>                                                      <C>           <C>
Value of interests in operating properties:
 Retail centers                                          $ 2,042,670   $ 2,038,316
 Office, mixed-use and other                                 440,868       256,165
Value of investment land and land held for
 development and sale                                        309,693       134,012
Value of land in development                                  46,339        15,725
                                                         -----------   -----------
 Total equity value                                        2,839,570     2,444,218
Debt related to equity interests                           2,328,203     2,141,610
                                                         -----------   -----------
 Total asset value                                         5,167,773     4,585,828
Depreciated cost of interests in operating properties
 and costs of investment land and land held for
 development and sale, land in development
 and certain other assets                                 (3,244,632)   (2,728,820)
Present value of potential income taxes related
 to revaluation equity, net of cost basis
 deferred income taxes                                      (276,134)     (363,964)
Other, net                                                    (5,409)        3,527
                                                         -----------   -----------
 Total revaluation equity                                $ 1,641,598   $ 1,496,571
                                                         ===========   ===========
</TABLE>

                                       32
<PAGE>
 
(2)   SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES

(a) DESCRIPTION OF BUSINESS

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, primarily in Columbia, Maryland and Las
Vegas, Nevada. The income-producing properties consist of retail centers, office
buildings, 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. The office properties are primarily suburban buildings in the
Columbia, Baltimore and Las Vegas market areas or components of large-scale
mixed-use properties located in urban markets which also include retail, parking
and other uses. Land development and sales operations are predominantly related
to large-scale, long-term community developments.

 The proportionate revenues of the Company's lines of business are summarized as
follows:
<TABLE>
<CAPTION>
 
                                          1996   1995   1994
                                          ----   ----   ----
<S>                                       <C>    <C>    <C>
Retail centers                              61%    73%    73%
Office, mixed-use and other properties      22     22     22
Land sales                                  17      5      5
                                          ----   ----   ----
 Total                                     100%   100%   100%
                                          ====   ====   ====
</TABLE> 

(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 interest and
control and the Company's proportionate share of the assets, liabilities,
revenues and expenses of unincorporated 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 historical cost basis financial statements in a
number of areas, including evaluation of impairment of long-lived assets
(including operating properties to be held and used, investment land and land
held for development and sale), determination of useful lives of assets subject
to depreciation or amortization, evaluation of collectibility of accounts and
notes receivable, measurement of pension and postretirement obligations and
evaluation of whether deferred tax assets will be realized. Actual results could
differ from those estimates.

  Certain amounts for prior years have been reclassified to conform with the
presentation for 1996.

(c) PROPERTY

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." Statement No. 121
establishes new standards for measurement and recognition of impairment of long-
lived assets. Initial adoption of the Statement by the Company in 1996 did not
have a material effect on the financial position or results of operations
reported by the Company.

  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 operating properties,
properties in development and land development projects 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. These costs are
transferred to construction and development in progress when the precon-

                                       33
<PAGE>
 
struction tasks are completed. Provision is made for potentially unsuccessful
preconstruction efforts by charges to operations. Costs of significant
improvements, replacements and renovations at operating properties are
capitalized, while costs of maintenance and repairs are expensed as incurred.
Certain costs associated with financing and leasing of operating properties are
capitalized as deferred costs and amortized over the periods benefited by the
expenditures.

  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 or a land development project may be impaired, a
recoverability analysis is performed based on estimated nondiscounted future
cash flows to be generated from the property or project. If the analysis
indicates that the carrying value is not recoverable from future cash flows, the
property or project 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 value
(i.e., cost less accumulated depreciation and any impairment loss recognized,
where applicable) or estimated fair value 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 time
of sale.

(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
which 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 terms of
which the Company is required to perform additional services and incur
significant costs after title has passed, revenues and costs of sales are
recognized proportionately on a percentage of completion basis.

  Cost of land sales is generally determined as a specified percentage of land
sales 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 in
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. Direct costs of negotiating and consummating tenant leases
are deferred and amortized over the terms of the related leases.

  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

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

                                      34
<PAGE>
 
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. The effects of changes in tax laws or rates on deferred tax assets and
liabilities are recognized in the period that includes the enactment date.

(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, 1996 and
1995, 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) INTEREST RATE EXCHANGE AGREEMENTS

The Company makes limited use of interest rate exchange agreements, including
interest rate caps and swaps, primarily to manage interest rate risk associated
with variable rate debt. 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
arrangements 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 value in the
financial statements except for debt and related interest rate exchange
agreements for which fair value information is provided in note 9.

(j) EARNINGS (LOSS) PER SHARE OF COMMON STOCK

Earnings (loss) per share of common stock is computed by dividing net earnings
(loss), after deducting dividends on Preferred stock, by the weighted average
number of shares of common stock outstanding during the year. The numbers of
shares used in the computations were 55,572,000 for 1996, 47,814,000 for 1995,
and 47,565,000 for 1994. Common stock equivalents have not been used in
computing earnings (loss) per common share because their effects are not
material or are anti-dilutive.

                                      35
<PAGE>
 
(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 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.

  In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 permits companies to adopt a new fair value-
based method to account for stock-based employee compensation plans or to
continue using the intrinsic value method. Information concerning the pro forma
effects on net earnings (loss) and earnings (loss) per share of common stock of
using a fair value-based method to account for stock-based compensation plans,
as permitted by Statement No. 123, is provided in note 15.


(3) ACQUISITION OF
    THE HUGHES CORPORATION
    AND RELATED MATTERS


On June 12, 1996, the Company acquired all of the outstanding equity interests
in The Hughes 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 15, additional shares of common stock (or, in certain circumstances,
Increasing Rate Cumulative Preferred Stock) may 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 value of the assets acquired which consist
primarily of a regional shopping center and a large-scale, master-planned
community in Las Vegas, Nevada, and four large-scale, master-planned business
parks and various other properties in Nevada and Southern California.

  The consolidated cost basis statement of operations 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 years ended December 31,1996 and 1995, assuming the
acquisition of Hughes occurred on January 1, 1995, are summarized as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
                                              1996      1995
                                            --------  --------
<S>                                         <C>       <C>
Revenues                                    $883,686  $956,094
Earnings before extraordinary losses          20,990    29,504
Net earnings                                  19,537    20,873
Earnings per share of common stock after
 dividends on Preferred stock:
 Earnings before extraordinary losses            .17       .26
 Net earnings                                    .15       .11
                                            ========  ========
</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, 1995 or of future results of
operations of the combined companies.


(4) REAL ESTATE VENTURES


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

                                      36
<PAGE>
 
  The condensed, combined balance sheets of these ventures and the Company's
proportionate share of their assets, liabilities and equity at December 31, 1996
and 1995 and the condensed, combined statements of earnings of these ventures
and the Company's proportionate share of their revenues and expenses for 1996,
1995 and 1994 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                    Combined       Proportionate Share
                                                               ------------------  -------------------
                                                                 1996      1995      1996       1995
                                                               --------  --------  --------   --------
<S>                                                            <C>       <C>       <C>        <C>       
Total assets, primarily property                               $296,232  $339,121   $119,702  $151,195
                                                               ========  ========   ========  ========
Liabilities, primarily long-term debt                          $223,480  $313,282   $ 98,436  $145,113
Venturers' equity                                                72,752    25,839     21,266     6,082
                                                               --------  --------  --------   --------
Total liabilities and venturers' equity                        $296,232  $339,121   $119,702  $151,195
                                                               ========  ========   ========  ========
 
                                                     Combined               Proportionate Share
                                           ----------------------------  -----------------------------
                                             1996      1995      1994      1996       1995      1994
                                           --------  --------  --------  --------   --------  --------
Revenues                                   $118,360  $128,979  $143,573  $ 56,105   $ 58,085  $ 65,650
Operating and interest expenses              65,862    77,223    83,492    29,535     35,336    38,592
Depreciation and amortization                11,257    13,071    13,281     2,588      3,472     3,680
                                           --------  --------  --------  --------   --------  --------
Net earnings                               $ 41,241  $ 38,685  $ 46,800  $ 23,982   $ 19,277  $ 23,378
                                           ========  ========  ========  ========   ========  ========
</TABLE>

  The Company holds minority interests in certain real estate ventures which are
accounted for using the equity or cost methods, as appropriate. Most of these
projects are managed by 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. The condensed, combined
balance sheets of these ventures at December 31, 1996 and 1995 and their
condensed combined statements of earnings for 1996, 1995 and 1994 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
                                                       1996        1995
                                                    ----------  ----------
<S>                                                 <C>         <C>
Total assets, primarily property                    $1,340,699  $1,507,438
                                                    =========== ========== 
Liabilities, primarily long-term debt               $  540,418  $  481,528
Venturers' equity                                      800,281   1,025,910
                                                    ----------- ---------- 
 Total liabilities and venturers' equity            $1,340,699  $1,507,438
                                                    ==========  ========== 

                                                        1996        1995       1994
                                                     ----------  ----------  ---------   
Revenues                                              $202,879    $209,100    $200,728
Operating and interest expenses                        138,460     141,509     133,470
Depreciation and amortization                           35,634      39,701      37,701
Loss on disposition                                         --          --      25,722
                                                      --------    --------    --------
 Net earnings                                         $ 28,785    $ 27,890    $  3,835
                                                      ========    ========    ========
</TABLE>

  The Company's share of net earnings of these ventures was $4,348,000,
$5,691,000 and $2,926,000 in 1996, 1995 and 1994, respectively.

(5) PROPERTY

Operating properties and deferred costs of projects at December 31, 1996 and
1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                         1996        1995
                                                      ----------  ----------
<S>                                                   <C>         <C>
Buildings and improvements                            $2,822,164  $2,516,625
Land                                                     244,243     185,265
Deferred costs                                           113,904     118,930
Receivables under finance leases                          94,876      81,632
Investments in unconsolidated real estate ventures        81,757      84,772
Furniture and equipment                                   18,032      19,132
                                                      ----------  ----------
 Total                                                $3,374,976  $3,006,356
                                                      ==========  ==========
</TABLE>

                                      37
<PAGE>
 
  Depreciation expense for 1996, 1995 and 1994 was $66,689,000, $59,247,000, and
$59,914,000, respectively. Amortization expense for 1996, 1995 and 1994 was
$13,301,000, $13,815,000, and $14,272,000, respectively.

  Properties in development include construction and development in progress and
preconstruction costs, net. The construction and development in progress
accounts include land and land improvements of $41,032,000 at December 31, 1996
and $16,056,000 at December 31, 1995.

  Changes in preconstruction costs, net, for 1996 and 1995 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
                                                                                1996        1995
                                                                              --------    --------
<S>                                                                           <C>         <C>
Balance at beginning of year, before
 preconstruction reserve                                                      $ 21,463     $20,633
Costs incurred                                                                  20,189      12,451
Costs transferred to construction and development                                         
 in progress                                                                   (16,742)     (7,405)
Costs transferred to operating properties                                         (990)     (1,686)
Costs of unsuccessful projects written off                                      (1,762)     (2,530)
                                                                              --------    --------
                                                                                22,158      21,463
Less preconstruction reserve                                                    16,317      15,379
                                                                              --------    -------- 
 Balance at end of year, net                                                  $  5,841     $ 6,084
                                                                              ========    ========
</TABLE> 

 Properties held for sale at December 31, 1996 and 1995 is summarized as
  follows (in thousands):
 
<TABLE> 
<CAPTION> 
                                                                                1996         1995
                                                                              --------    -------- 
<S>                                                                           <C>         <C> 
Retail centers (six properties in 1996 and
 four properties in 1995)                                                     $ 70,775    $ 15,493
Office and other properties                                                      2,305       7,194
                                                                              --------    -------- 
 Total                                                                        $ 73,080    $ 22,687
                                                                              ========    ========
</TABLE>

  Revenues relating to properties held for sale were $29,600,000 in 1996 and
$8,355,000 in 1995, and operating losses relating to these properties were
$810,500 in 1996 and $1,174,000 in 1995. All of the properties held for sale at
December 31, 1996 are expected to be sold in 1997.

  Investment land and land held for development and sale at December 31, 1996
and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                        1996      1995
                                                      --------  --------
<S>                                                   <C>       <C>
Land under development                                $ 87,301  $ 49,106
Finished land                                           59,913    45,388
Raw land                                                96,903    39,589
                                                      --------  --------
 Total                                                $244,117  $134,083
                                                      ========  ========
</TABLE> 

(6)   ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable at December 31, 1996 and 1995 are summarized as 
follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                1996       1995
                                                                              --------   -------- 
<S>                                                                           <C>        <C> 
Accounts receivable, primarily accrued rents and
 income under tenant leases                                                   $ 67,527   $ 58,916
Notes receivable from sales of properties                                       16,929      1,900
Notes receivable from sales of land                                             36,066        403
                                                                              --------   -------- 
                                                                               120,522     61,219
Less allowance for doubtful receivables                                         28,153     24,468
                                                                              --------   --------  
  Total                                                                       $ 92,369   $ 36,751
                                                                              ========   ======== 
</TABLE>
  Accounts and notes receivable due after one year were $41,654,000 and
$13,967,000 at December 31, 1996 and 1995, respectively.

                                       38
<PAGE>
 
  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 operating at the Company's Summerlin project in Las
Vegas. The Company performs credit evaluations of the builders and requires
substantial down payments (20% or more) on all land sales that it finances.
These notes and notes from sales of operating properties are generally secured
by first liens on the related properties.

(7)   PENSION PLANS

The Company has a defined benefit pension plan (the "funded plan") covering
substantially all employees. The Company's policy is to fund, at a minimum,
current service costs and amortization of unfunded accrued liabilities subject
to the limits of the Internal Revenue Code. In addition, the Company has
separate, nonqualified unfunded retirement plans (the "unfunded plans") covering
directors and employees whose defined benefits exceed the limits of the funded
plan. Benefits under the pension plans are based on the participants' years of
service and compensation.

 The net pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
 
                                                                                           1996      1995      1994
                                                                                         --------  --------  -------- 
<S>                                                                                      <C>       <C>       <C>
Service cost                                                                              $ 2,989   $ 2,382   $ 2,904
Interest cost on projected benefit obligations                                              3,107     3,309     3,425
Actual return on funded plan assets                                                        (4,997)   (5,422)   (1,930)
Other, net                                                                                  4,022     3,262       927
                                                                                         --------  --------  -------- 
 Net pension cost                                                                         $ 5,121   $ 3,531   $ 5,326
                                                                                         ========  ========  ========
</TABLE> 

The funded status of the pension plans at December 31, 1996 and 1995 is 
summarized as follows (in thousands):

<TABLE> 
<CAPTION> 

                                                      1996                 1995
                                                ------------------    ------------------
                                                 Funded   Unfunded     Funded   Unfunded
                                                  Plan     Plans        Plan     Plans
                                                --------  --------    --------  --------   
                                                <S>       <C>         <C>       <C> 
Accumulated benefit obligations:
 Vested                                         $ 30,589  $  2,610    $ 31,045  $  4,658
 Nonvested                                         3,386       193       2,983       393
                                                --------  --------    --------  --------   
  Total                                         $ 33,975  $  2,803    $ 34,028  $  5,051
                                                ========  ========    ========  ========
Projected benefit obligations                   $ 38,567  $  4,322    $ 38,808  $  6,801
Plan assets at fair value                        (38,990)       --     (34,084)       --
                                                --------  --------    --------  --------    
Excess of projected benefit
 obligations over plan assets                       (423)    4,322       4,724     6,801
Unamortized prior service cost                    (1,888)   (2,081)     (2,124)   (3,067)
Unrecognized net loss                             (8,513)     (330)    (10,783)   (1,077)
Unrecognized net obligation at                                                    
 January 1, 1987, net of                                                          
  amortization                                      (598)     (676)       (664)     (810)
Additional minimum liability                          --     1,568          --     3,204
                                                --------  --------    --------  --------    
  Accrued (prepaid) pension cost                $(11,422) $  2,803    $ (8,847) $  5,051
                                                ========  ========    ========  ========
</TABLE>
         
  The projected benefit obligations for the plans were determined using discount
rates of 7.75% and 7.25% in 1996 and 1995, respectively. The rate of 
compensation increases assumed was 4.5% in 1996 and 1995. The expected long-term
rate of return on plan assets of the funded plan was 8% in 1996 and 11% in 1995.
The assets of the funded plan consist primarily of pooled separate accounts with
an insurance company and marketable equity securities.

                                       39
<PAGE>
 
  The Company also has a deferred compensation program which permits directors
and certain management employees 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
matches a percentage of the participants' contributions in common stock. Total
deferred compensation liabilities at December 31, 1996 and 1995 were $6,584,000
and $4,416,000, respectively.

(8) OTHER POSTRETIREMENT BENEFITS

The Company has a retiree benefits plan that provides postretirement medical and
life insurance benefits to full-time employees who meet minimum age and service
requirements. The Company pays a portion of the cost of participants' life
insurance coverage and makes contributions based on years of service to the cost
of participants' medical insurance coverage, subject to a maximum annual
contribution.

<TABLE> 
<CAPTION> 

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

 
                                                                                                           1996      1995      1994
                                                                                                          ------   -------   ------
<S>                                                                                                       <C>      <C>       <C>
Service cost                                                                                              $  640   $  607    $  741
Interest cost on accumulated benefit obligation                                                              932      853       823
Amortization of transition obligation at January 1, 1993                                                     333      484       485
Amortization of net gain                                                                                      --      (26)       --
                                                                                                          ------   ------    ------
 Net postretirement benefit cost                                                                          $1,905   $1,918    $2,049
                                                                                                          ======   ======    ======
</TABLE> 

 The status of the postretirement benefit plan at December 31, 1996 and 1995 
is summarized as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                                            1996      1995
                                                                                                           -------   -------
<S>                                                                                                        <C>       <C> 
Accumulated postretirement benefit obligation:
 Retirees                                                                                                  $ 8,475   $ 3,195
 Other fully eligible participants                                                                           1,514     1,720 
 Other active participants                                                                                   6,138     8,186
                                                                                                           -------   -------
                                                                                                            16,127    13,101
Unrecognized net gain (loss)                                                                                   987      (502)
Unrecognized transition obligation                                                                          (5,331)   (8,235)
                                                                                                           -------   -------
 Accrued postretirement benefit cost                                                                       $11,783   $ 4,364
                                                                                                           =======   =======
</TABLE>

  The net increase in the accrued postretirement benefit cost in 1996 includes
the effects of the admission of former employees of Hughes to the plan (with
credit for prior service) and an amendment to the plan to reduce the Company's
share of life insurance premium costs effective January 1, 1996.

  The weighted average discount rates used to determine the accumulated
postretirement benefit obligation were 7.75% and 7.25% in 1996 and 1995,
respectively. The transition obligation at January 1, 1993 is being amortized to
postretirement benefit cost over 20 years. Because the Company's contributions
are fixed, health care cost trend rates do not affect the accumulated
postretirement benefit obligation.

(9) 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 operating revenues. At
December 31, 1996 and 1995, nonrecourse loans include $475,754,000 and
$443,440,000, respectively, of mortgages and bonds relating to operating
properties of subsidiary companies which are subject to agreements with

                                       40
<PAGE>
 
  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 properties are met.

 Debt at December 31, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
 
                                          1996        1995
                                       ----------  ----------
<S>                                    <C>         <C>
Mortgages and bonds                    $2,279,971  $1,997,998
Convertible subordinated debentures       130,000     130,000
Medium-term notes                         115,300     100,300
Credit line borrowings                     64,000          --
Other loans                               245,975     251,231
                                       ----------  ----------
 Total                                 $2,835,246  $2,479,529
                                       ==========  ==========
</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
2025 and, at December 31, 1996, bears interest at a weighted average effective
rate of 8.68%, including lender participations. At December 31, 1996,
approximately $594,482,000 of this debt is subject to payment of additional
interest based on the operating results of the related properties in excess of
stated levels. In addition, certain of this debt provides for payments to
lenders of shares of the related properties' residual values, if any, upon sale
or refinancing or at maturity. At December 31, 1996, approximately
$1,035,000,000 of the mortgages and bonds were payable to one lender.

  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, 1996, mature at various dates from 1997 to
2015, bear interest at a weighted average effective rate of 7.52% (including an
average rate of 6.36% on $43,800,000 of variable rate notes) and have a weighted
average maturity of 5.6 years.

  The Company and certain of its subsidiaries have credit lines from banks and
other lenders aggregating $248,120,000, including outstanding borrowings at
December 31, 1996. These credit lines are unsecured, bear interest at variable
rates based on specified market indices and may be used for various purposes,
including land and project development costs, property acquisitions and other
corporate needs, subject to specific use limitations and/or lender approvals in
certain cases. The credit line borrowings outstanding at December 31, 1996, are
due at various dates in 1999 and 2000 and bear interest at a weighted average
effective rate of 6.96%.

  Other loans include $120,000,000 of 8.5% unsecured notes due in 2003, various
property acquisition and land loans and certain other borrowings. These loans
include aggregate unsecured borrowings of $209,705,000 and $229,372,000 at
December 31, 1996 and 1995, respectively, and at December 31, 1996, bear
interest at a weighted average effective rate of 8.76%.

  The agreements relating to the medium-term notes, certain of the lines of
credit, the 8.5% unsecured notes, and certain other loans impose limitations on
the Company. The most restrictive of these limit the Company's ability to incur
certain types of additional debt if the Company does not maintain specified debt
service coverage ratios. The agreements also impose restrictions on sale, lease
and certain other transactions, subject to various exclusions and limitations.
These restrictions have not limited the Company's normal business activities.

                                      41
<PAGE>
 
 The annual maturities of debt at December 31, 1996 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
                       Nonrecourse   Company and
                          Loans     Recourse Loans    Total
                       -----------  --------------  ----------
<S>                    <C>          <C>             <C>
1997                    $  113,218        $ 11,307  $  124,525
1998                        70,726          22,624      93,350
1999                       174,884          32,824     207,708
2000                       171,099          58,285     229,384
2001                       130,733          40,838     171,571
Subsequent to 2001       1,629,746         378,962   2,008,708
                        ----------       ---------  ----------
 Total                  $2,290,406        $544,840  $2,835,246
                        ==========       =========  ==========
</TABLE>

  The nonrecourse loans maturing in 1997 include two retail center mortgages
aggregating $58,250,000 due in the second quarter. The Company is in the process
of obtaining securitized mortgage loans to refinance these loans and has
received a commitment from a lender for an interim loan for up to six months
pending completion of the securitized loans. The Company expects to repay the
mortgages at their scheduled maturity date.

  At December 31, 1996, the Company had interest rate cap agreements which
effectively limit the average interest rate on $66,050,000 of mortgages to 9.72%
through April 1997. The Company also had an interest rate cap agreement related
to a line of credit. The agreement effectively limits the interest rate on
advances up to $55,000,000 to 10% through April 1998 and to 9.08% on advances up
to $60,000,000 thereafter until April 1999.

  The interest rate swap agreements outstanding at December 31, 1996 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, 1996 and
1995 or interest expense for the years ended December 31, 1996, 1995 and 1994.

  Total interest costs were $230,960,000 in 1996, $219,838,000 in 1995, and
$220,971,000 in 1994 of which $10,579,000, $6,875,000, and $7,388,000 were
capitalized, respectively.

  During 1996, 1995 and 1994, the Company incurred extraordinary losses, related
to extinguishments of debt prior to scheduled maturity or required partial early
redemptions of debt of $2,236,000, $13,278,000, and $6,824,000, respectively,
less related deferred income tax benefits of $783,000, $4,647,000, and
$2,377,000, respectively. The sources of funds used to pay the debt and fund the
prepayment penalties, where applicable, were provided by refinancings of
properties, the medium-term notes and the Company-obligated mandatorily
redeemable preferred securities issued in 1995 and the 8.5% unsecured notes and
Preferred stock issued in 1993.

  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,
cash flows under interest rate exchange agreements, where applicable, 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, 1996 and December 31, 1995 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
 
                                 1996                     1995
                         ----------------------  ----------------------
                          Carrying   Estimated    Carrying   Estimated
                           Amount    Fair Value    Amount    Fair Value
                         ---------   ----------  ---------   ----------
<S>                      <C>         <C>         <C>         <C>
Fixed rate debt          $2,405,382  $2,466,854  $2,195,137  $2,249,968
Variable rate debt          429,864     429,864     284,392     284,392
                         ----------  ----------  ----------  ----------
                         $2,835,246  $2,896,718  $2,479,529  $2,534,360
                         ==========  ==========  ==========  ==========
</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.

                                      42
<PAGE>
 
(10)  COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES


The redeemable preferred securities consist of 5,500,000 Cumulative Quarterly
Income Preferred Securities (preferred securities), with a liquidation amount of
$25 per security, which were issued in November 1995 by a statutory business
trust that is wholly-owned by the Company. 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 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 a 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.

(11)  OPERATING RESULTS AND ASSETS BY LINE OF BUSINESS

Operating results before gain (loss) on dispositions of assets and other
provisions, net, income taxes and extraordinary losses are summarized by line of
business as follows (in thousands):

<TABLE>
<CAPTION>
                                                 1996       1995       1994
                                               --------   --------   --------
<S>                                            <C>        <C>        <C>
Operating properties:
 Revenues                                      $690,569   $636,646   $633,047
 Operating expenses, exclusive of provision
  for bad debts, depreciation and
  amortization                                  345,863    313,525    322,278
 Interest expense                               205,750    197,249    196,690
 Provision for bad debts                          3,688      3,318      5,185
 Depreciation and amortization                   79,990     73,062     74,186
                                               --------   --------   --------
                                                 55,278     49,492     34,708
                                               --------   --------   --------
 
Land sales:
 Revenues                                       137,853     33,403     35,232
 Operating costs and expenses                   107,787     17,827     19,877
 Interest expense                                 1,658      5,071      5,028
                                               --------   --------   --------
                                                 28,408     10,505     10,327
                                               --------   --------   --------
 
Development:
 Operating costs and expenses                     4,964      7,288      6,494
 Interest expense                                   361        358        495
                                               --------   --------   --------
                                                 (5,325)    (7,646)    (6,989)
                                               --------   --------   --------
 
Corporate:
 Interest income                                  3,495      2,772      2,892
 Interest expense                                12,612     10,285     11,370
 Other expenses                                   9,752      8,920      8,309
                                               --------   --------   --------
                                                (18,869)   (16,433)   (16,787)
                                               --------   --------   --------
 Operating income                              $ 59,492   $ 35,918   $ 21,259
                                               ========   ========   ========
</TABLE>

                                      43
<PAGE>
 
 The assets by line of business at December 31, 1996, 1995 and 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
                           1996        1995        1994
                        ----------  ----------  ----------
<S>                     <C>         <C>         <C>
Operating properties    $3,084,445  $2,656,527  $2,617,045
Land sales                 308,014     141,275     136,986
Development                178,076      63,732      68,863
Corporate                   72,917     124,075      92,966
                        ----------  ----------  ----------
 Total                  $3,643,452  $2,985,609  $2,915,860
                        ==========  ==========  ==========
</TABLE>

(12)   INCOME TAXES

Income tax expense is reconciled to the amount computed by applying the Federal
corporate tax rate as follows (in thousands):
<TABLE>
<CAPTION>
                                                                     1996      1995       1994
                                                                   -------   --------   --------
<S>                                                                <C>       <C>        <C>
Tax at statutory rate on earnings                                  
 before income taxes and extraordinary losses                      $15,262   $  3,560   $  4,668
State income taxes, net of Federal income                          
 tax benefit                                                         1,023        759      2,062
Nondeductible portion of distributions                             
 under Contingent Stock Agreement                                    9,434         --         --
                                                                   -------   --------   --------
Income tax expense                                                 $25,719   $  4,319   $  6,730
                                                                   =======   ========   ========
Effective rate                                                        58.9%      42.5%      50.5%
                                                                   =======   ========   ========
</TABLE> 

 The net deferred tax liability at December 31, 1996 and 1995 consists of the 
following (in thousands):

<TABLE> 
<CAPTION> 
                                                     1996       1995
                                                   --------   --------
<S>                                                <C>        <C> 
Total deferred tax liabilities                     $355,182   $299,717
Total deferred tax assets                           220,388    218,068
                                                   --------   --------
 Net deferred tax liability                        $134,794   $ 81,649
                                                   ========   ========
</TABLE>

 The tax effects of temporary differences and carryforwards that are included
in the net deferred tax liability at December 31, 1996 and 1995 relate to the
following (in thousands):

<TABLE>
<CAPTION>
                                                                1996       1995
                                                             ---------  --------- 
<S>                                                          <C>        <C>         
Property, primarily differences in depreciation and
 amortization, the tax basis of acquired assets and
 treatment of interest and certain other costs               $ 329,413  $ 273,585
Accounts and notes receivable, primarily
 differences in timing of recognition of rent
 revenues and doubtful receivables                               4,368      5,684
Accrued expenses, primarily differences in timing of
 recognition of interest, compensation and pension
 expenses                                                        4,296     (4,925)
Operating loss and tax credit carryforwards                   (203,283)  (192,695)
                                                             ---------   -------- 
 
 Total                                                       $ 134,794   $ 81,649
                                                             =========   =========
</TABLE>

  The net operating losses carried forward from December 31, 1996 for Federal
income tax purposes aggregate approximately $568,000,000.

  As indicated above, the deferred tax assets relate primarily to operating loss
carryforwards for Federal income tax purposes. These loss carryforwards will
begin to expire in 1998, and the ultimate realization of these assets is
dependent upon the generation of sufficient future taxable income to use the
loss carryforwards before they expire. Based on projections of future taxable
income over the loss carryfoward period (which projections reflect, among other
things, the effects of numerous significant transactions completed in the last
several years, including debt refinancings and restructurings for various
properties, acquisitions/expansions of new and existing properties and
dispositions of several properties that were generating operating losses) and
the scheduled reversal of deferred tax liabilities (particularly those relating
to depreciation

                                      44
<PAGE>
 
of property), management believes that it is more likely than not that the
Company will realize the benefits of the operating loss carryforwards at
December 31, 1996. The amount of the deferred tax asset considered realizable
could be reduced, however, if estimates of future taxable income are reduced.

(13)  GAIN (LOSS) ON DISPOSITIONS OF ASSETS AND OTHER PROVISIONS, NET


Gain (loss) on dispositions of assets and other provisions, net, is summarized
as follows (in thousands):

<TABLE>
<CAPTION>
                                      1996       1995       1994
                                    --------   --------   -------
<S>                                 <C>        <C>        <C>    
Litigation judgment                 $  8,716   $(12,321)  $    --
Net loss on operating properties     (25,903)   (13,210)   (7,496)
Other, net                             1,300       (218)     (427)
                                    --------   --------   -------
 Total                              $(15,887)  $(25,749)  $(7,923)
                                    ========   ========   =======
</TABLE>

  The litigation judgment relates to the matter involving a former tenant at the
Riverwalk Shopping Center discussed in note 17. In 1996, a portion of the
provision recorded in 1995 was reversed following settlement of the matter.

  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 net loss on operating properties in 1995 relates primarily to provisions
for losses recognized on four retail centers the Company decided to sell
($15,589,000). These provisions were partially offset by a gain on disposition
of a retail center ($2,379,000).

  The net loss on operating properties in 1994 relates primarily to losses
incurred on dispositions of interests in two retail centers, a hotel and an
office building ($8,045,000) and a provision for loss on an industrial building
($2,212,000). These losses were partially offset by a gain on disposition of an
interest in a retail center ($2,761,000).

(14)   PREFERRED STOCK


The Company has authorized 50,000,000 shares of Preferred stock of 1c par value
per share of which (a) 4,505,168 shares have been classified as Series A
Convertible Preferred; (b) 10,000,000 shares have been classified as Increasing
Rate Cumulative Preferred; and (c) 37,362 shares have been classified as 10.25%
Junior Preferred, Series 1996. In February 1997, 4,600,000 shares were
classified as Series B Convertible Preferred and 4,000,000 of these shares were
issued (see note 18).

  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 valued at $23,000,000 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 and 1995, the Company issued
10,598,721 and 75 shares respectively, of common stock in exchange for 4,504,579
and 32 shares, respectively, of Series A Convertible Preferred stock. If all of
the shares of Series A Convertible Preferred stock had been converted to shares
of common stock on January 1, 1994, the pro forma earnings (loss) per share of
common stock would have been $0.26 in 1996, $(0.05) in 1995 and $0.04 in 1994.

  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 15. These shares are issuable only in limited
circumstances, and at December 31, 1996, no shares of Increasing Rate Cumulative
Preferred stock were outstanding. There were also no shares of 10.25% Junior
Preferred stock, Series 1996, outstanding at December 31, 1996.

                                      45
<PAGE>
 
(15)   COMMON STOCK

At December 31, 1996, shares of authorized and unissued common stock are
reserved as follows: (a) 19,801,763 shares for issuance under the Contingent
Stock Agreement discussed below; (b) 3,151,084 shares for issuance under the
Company's stock option and stock bonus plans; (c) 4,540,692 shares for
conversion of the convertible subordinated debentures; and (d) 500,000 shares
for exercise of the warrants discussed below.

  In connection with the acquisition of Hughes, the Company entered into a
Contingent Stock 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 assets acquired in the purchase of Hughes 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 and, at December 31,
1996, a distribution of approximately 591,000 shares ($16,697,000) was payable
to the beneficiaries. The Contingent Stock 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. The Company accounts for the beneficiaries' share of earnings
from the assets subject to the Contingent Stock Agreement as an operating
expense and will account for any distributions to the beneficiaries as of the
termination dates as an additional cost to acquire the related assets (i.e.,
contingent consideration). At the time of acquisition of Hughes, the Company
reserved 20,000,000 shares of common stock for possible issuance under the
Contingent Stock 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 determinable 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. A
summary of changes in options outstanding under the plans is as follows:
<TABLE>
<CAPTION>
 
                                                                 1996                      1995                    1994
                                                         ---------------------   -----------------------    ---------------------
                                                                     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                             2,227,400      $19.89    2,228,102      $19.68     1,709,302      $20.10
Options granted                                            654,000       21.09      200,500       18.63       566,000       18.59
Options exercised                                          (87,371)      18.61     (179,452)       5.36        (8,700)      13.04
Options canceled                                           (28,250)      22.82      (21,750)      24.41       (38,500)      24.13
                                                         ---------   ---------   ----------     --------    ---------    -------- 
 Balance at end of year                                  2,765,779      $20.18    2,227,400      $19.89     2,228,102      $19.68
                                                         =========   =========   ==========     ========    =========    ========
</TABLE> 

 A summary of information about stock options
  outstanding at December 31, 1996 is 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                                         1,931,279             7.4           $18.38      755,344            $17.75
$23.75 to $27.00                                            834,500             4.4            24.34      694,500             24.21
                                                          ---------         -------       ----------  -----------        ----------
                                                          2,765,779             6.5           $20.18    1,449,844            $20.84
                                                          =========         =======       ==========  ===========        ==========
</TABLE> 

                                      46
<PAGE>
 
  At December 31, 1995 and 1994, options to purchase 1,229,000 and 1,063,000
shares, respectively, were exercisable at weighted average prices of $21.50 and
$20.96, respectively.

  The per share weighted-average estimated fair value of options granted during
1996 and 1995 was $5.44 and $5.24, respectively. These fair values were
estimated on the dates of each grant using the Black-Scholes option-pricing
model with the following assumptions: risk-free interest rates of 6.0% in 1996
and 7.2% in 1995; dividend yield of 4% in both years; expected lives of 7 years
in both years; and volatility of 28% in both years.

  The option prices were equal to the market prices at the date of grant for all
of the options granted in 1996 and 1995 and, accordingly, no compensation cost
has been recognized for stock options in the financial statements. If the
Company had applied a fair value-based method to account for options granted,
net earnings for 1996 would have been $15,369,000 ($.09 per share of common
stock) and the net loss for 1995 would have been $3,036,000 ($.37 per share of
common stock). The pro forma amounts reflect only options granted in 1996 and
1995. 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 1996 and 1995 aggregated 415,000 and 200,000 shares, respectively, with a
weighted average market value per share of $20.99 and $18.63, 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, 1996 and 1995 were $6,565,000 and
$3,829,000, respectively.

  The Company recognizes any forgiven loan installments, amortization of the
fair value of the stock awarded and certain related costs as compensation costs
over the terms of the awards. Such costs amounted to $4,923,000 in 1996,
$2,763,000 in 1995 and $1,663,000 in 1994.

  In 1992, seven investors acquired 8,500,000 shares of the Company's common
stock in a private placement from a stockholder. Stock warrants allowing the
seller to purchase 500,000 shares of common stock at a price of $18 per share
until September 1997 were issued by the Company to facilitate the transaction.

(16) LEASES

The Company, as lessee, has entered into operating leases expiring at various
dates through 2076. Rents under such leases aggregated $9,648,000 in 1996,
$9,421,000 in 1995, and $11,927,000 in 1994, including contingent rents, based
on the operating performance of the related properties, of $3,844,000,
$3,644,000, and $6,232,000, respectively. In addition, real estate taxes,
insurance and maintenance expenses are obligations of the Company. The minimum
rent payments due under operating leases in effect at December 31, 1996 are
summarized as follows (in thousands):

<TABLE>
<S>                   <C>
1997                  $  5,744
1998                     5,687
1999                     5,663
2000                     5,672
2001                     5,680
Subsequent to 2001     237,851
                      --------
 Total                $266,297
                      ========
</TABLE>

  Obligations under capital leases relate to the Company's headquarters building
and certain operating properties and equipment. The property and other asset
accounts include costs of $67,718,000 and $66,790,000 and accumulated
depreciation of $19,632,000 and $19,531,000 at December 31, 1996 and 1995,
respectively, related to these leases. The mini-

                                      47
<PAGE>
 
mum rent payments due under capital leases and their present value at December
31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
 
<S>                                                      <C>
1997                                                     $   9,898
1998                                                         9,250
1999                                                         8,620
2000                                                         8,239
2001                                                         7,906
Subsequent to 2001                                         187,901
                                                         ---------
                                                           231,814
Imputed interest at rates ranging from 8.49% to 13.0%     (171,613)
                                                         ---------
 Obligations under capital leases                        $  60,201
                                                         =========
</TABLE>

  Space in the Company's operating properties is leased to approximately 6,400
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>
 
                      1996       1995       1994
                    --------   --------   --------
<S>                 <C>        <C>        <C>
Minimum rents       $348,296   $310,149   $303,425
Percentage rents      14,830     15,362     17,144
Other rents          223,949    217,037    220,532
                    --------   --------   --------
 Total              $587,075   $542,548   $541,101
                    ========   ========   ========
</TABLE>

  The minimum rents to be received from tenants under operating leases in effect
at December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<S>                   <C>
1997                  $  352,048
1998                     305,798
1999                     271,053
2000                     238,937
2001                     199,534
Subsequent to 2001       566,794
                      ----------
 Total                $1,934,164
                      ==========
</TABLE>

  Certain of the Company's tenant leases are accounted for as finance leases
since the terms of the leases transfer substantially all of the risks and
benefits of ownership to the tenants. Rents under such leases aggregated
$9,645,000 in 1996, $8,780,000 in 1995, and $8,511,000 in 1994. The net
investment in finance leases at December 31, 1996 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
                                                    1996       1995
                                                  --------   -------- 
<S>                                               <C>        <C>
Total minimum rent payments to be received
 over lease terms                                 $178,275   $167,050
Estimated residual values of leased properties       7,567      3,123
Unearned income                                    (90,966)   (88,541)
                                                  --------   -------- 
  Net investment in finance leases                $ 94,876   $ 81,632
                                                  ========   ========
</TABLE>

  The minimum rent payments to be received from tenants under finance leases in
effect at December 31, 1996 are $10,551,000, $10,626,000, $10,643,000,
$10,729,000 and $11,480,000 for 1997, 1998, 1999, 2000 and 2001, respectively.

                                      48
<PAGE>
 
(17) OTHER COMMITMENTS AND CONTINGENCIES

Commitments for the construction and development of land and properties in the
ordinary course of business and other commitments not set forth elsewhere amount
to approximately $47,000,000 at December 31, 1996.

  At December 31, 1996, subsidiaries of the Company have contingent liabilities
of approximately $21,320,000 with respect to future minimum rents under long-
term lease obligations of certain joint ventures and approximately $4,069,000
with respect to bank letters of credit issued to secure their obligations under
certain agreements. In addition, the Company had contingent liabilities with
respect to debt of certain joint ventures aggregating approximately $19,824,000.

  On November 6, 1990, Robert P. Guastella Equities, Inc. ("Plaintiff"), a
former tenant at the Riverwalk Shopping Center in New Orleans, Louisiana
("Riverwalk"), which is owned and operated by New Orleans Riverwalk Associates,
an affiliate of the Company ("NORA"), filed suit in the Civil District Court of
Orleans Parish, Louisiana against NORA, the Company, two Company affiliates, and
a partner of NORA (collectively, "Defendants"). Plaintiff alleged that
Defendants breached Plaintiff's lease agreement with NORA for the operation of a
restaurant at Riverwalk and that as a result of these breaches it suffered
losses and could not pay the rentals due under the lease agreement, as a result
of which the lease and its tenancy were terminated by NORA. Plaintiff sought
damages of approximately $600,000 for these alleged breaches.

  In addition, on September 3, 1992, Plaintiff claimed $33,000,000 for alleged
lost future profits which it claimed it would have earned had its lease not been
terminated. The Defendants filed answers denying the claims of Plaintiff and
asserting other defenses. NORA also asserted a counterclaim against Plaintiff
and its individual guarantors for past due rentals and other charges in the
approximate amount of $300,000 plus interest and attorneys' fees as provided for
in the lease agreement. The case was tried before a jury and, on October 28,
1993, the jury returned a verdict against Defendants upon which judgment was
entered by the trial court on January 7, 1994, in the total net amount of
approximately $9,128,000 (including a net award for lost future profits of
approximately $8,640,000) plus interest and attorneys' fees. On May 6, 1994, the
trial court denied all post-trial motions of both Plaintiff and Defendants. The
trial court also entered an amended judgment in which it awarded the Plaintiff
$450,000 in attorneys' fees and awarded Defendants $25,000 in attorneys' fees.

  On May 23, 1994, Defendants appealed this judgment to the Louisiana Court of
Appeal, Fourth Circuit. On November 16, 1995, the Louisiana Court of Appeal
reduced the judgment by $240,000, but otherwise affirmed the damage award to
Plaintiff. Defendants subsequently filed a motion for reconsideration with the
Louisiana Court of Appeal, which was denied on December 19, 1995. On January 18,
1996, Defendants filed a petition requesting the Louisiana Supreme Court to
consider a further appeal of this judgment. On April 8, 1996, the Louisiana
Supreme Court granted Defendants' petition. Subsequently, the parties entered
into settlement discussions which culminated in a July 25, 1996 Settlement
Agreement which dismissed all claims and counterclaims with prejudice. The
Company recorded a pre-tax provision in the amount of $12,321,000 in 1995,
representing the full amount of the modified award (including attorneys' fees)
plus interest, less pre-tax provisions previously recorded totaling $1,150,000.
Additional provisions for interest totaling $295,000 were recorded in the six
months ended June 30, 1996. The Company satisfied its financial and other
obligations under the Settlement Agreement in July 1996 and reversed $8,716,000
of the previously recorded provision for loss on this matter in the third
quarter of 1996.

  The Company and certain of its subsidiaries are defendants in various other
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 all litigation
matters, where appropriate, and the ultimate resolution of all such litigation
matters is not likely to have a material effect on the consolidated financial
position of the Company. Due to the Company's modest and fluctuating net
earnings (loss) it is not possible to predict whether the resolution of these
matters is likely to have a material effect on the Company's consolidated net
earnings (loss) and it is, therefore, possible that the resolution of these
matters could have such a material effect in any future quarter or year.

  On December 14, 1996, Riverwalk Shopping Center was struck by a grain
freighter, causing significant damage to the property and requiring the Company
to close the entire retail

                                      49
<PAGE>
 
center for a period of several weeks. Work to repair the property damage is in
process, and substantially all of the repair costs will be covered by related
insurance. There is also insurance covering loss of tenant rental revenues as
result of this incident. Due to uncertainties as to when certain tenants will be
able to reopen for business and how certain portions of the loss will be
measured, it is not possible to estimate the amount of this claim at this time;
however, the ultimate resolution of this matter is not expected to have a
material effect on the consolidated financial position or results of operations
of the Company.

  In connection with the acquisition of Hughes, the Company obtained minority,
limited partner interests in two partnerships which own a property known as
Playa Vista in Los Angeles, California. The partnerships are in the preliminary
stages of developing a master-planned community on the property (which includes
approximately 1,100 acres of land) and have experienced significant financial
losses. As a result, the partners have been involved in extensive negotiations
with lenders and others to restructure and recapitalize the partnerships. Under
the partnership agreements, the Company is not required to make additional
capital contributions to the partnerships and has no obligations, fixed or
contingent, with respect to their business, properties or other assets. Under
the Contingent Stock Agreement, the Company is obligated to make payments of
$10,000,000 with respect to Playa Vista. These payments may be in the form of
contributions to the partnerships (subject to certain conditions) or, if
aggregate contributions are less than $10,000,000 at the date the obligation
terminates, the balance is distributable in stock to the beneficiaries pursuant
to the Agreement. The Company recorded the obligation under the Agreement in
accounting for the purchase of Hughes and, at December 31, 1996, the unpaid
balance was approximately $8,963,000. While the outcome of the partnerships'
negotiations with lenders and others is not predictable, the Company's
obligations with respect to Playa Vista are limited as described above and the
ultimate resolution of this matter will not have an adverse effect on the
consolidated financial position or results of operations of the Company.

(18) SUBSEQUENT EVENT

In February 1997, the Company registered to sell up to an aggregate of
$500,000,000 (based on the public offering price) of common stock, Preferred
stock and debt securities. The stock and debt may be issued from time to time at
prices, in amounts and on terms to be determined at the time of offering. In
February 1997, pursuant to this registration, the Company issued 4,000,000
shares of the Series B Convertible Preferred stock in a public offering. The
shares of Preferred stock have a liquidation value of $50 per share (an
aggregate of $200,000,000 for the issued shares) and earn dividends at an annual
rate of 6% of the liquidation preference. At the option of the holders, each
share of the 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 net proceeds of the offering of approximately
$194,600,000 are to be used primarily for new development projects, retail
center expansions and/or acquisitions and to repay property debt. Any remaining
net proceeds will be used for general corporate purposes and, until required for
development or acquisition opportunities, a portion of the net proceeds will be
used, on an interim basis, to reduce or retire credit line borrowings and
property debt.

                                      50
<PAGE>
 
Five Year Comparison of Selected Financial Data

Year ended December 31 (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                          1996         1995         1994         1993        1992
                                                                        ----------  ----------  ----------  ----------  ----------
<S>                                                                     <C>         <C>         <C>         <C>         <C>
Operating results data:                                                                                                 
 Revenues from continuing operations                                    $  831,917  $  672,821  $  671,171  $  646,805  $  597,105
 Earnings (loss) from continuing operations                                 17,886       5,850       6,606      (1,291)    (15,849)
 Earnings (loss) from continuing operations applicable to                                                               
  common shareholders per share of common stock                                .14        (.18)       (.14)       (.27)       (.33)
Balance sheet data:                                                                                                     
 Total assets-cost basis                                                 3,643,452   2,985,609   2,915,860   2,874,982   2,726,281
 Total assets-current value basis                                        5,575,857   4,852,403   4,736,961   4,588,636   4,217,819
 Debt and capital leases                                                 2,895,447   2,538,315   2,532,920   2,473,596   2,498,983
 Shareholders' equity (deficit):                                                                                        
  Historical cost basis                                                    177,149      42,584      95,026     113,151     (34,848)
  Current value basis                                                    1,818,747   1,539,155   1,614,245   1,525,606   1,188,896
 Shareholders' equity (deficit) per share of common stock (note 1):                                                   
  Historical cost basis                                                       2.65         .73        1.63        1.98        (.74)
  Current value basis                                                        27.25       26.30       27.75       26.75       25.50
Other selected data:                                                                                                    
 Earnings before depreciation and deferred taxes                                                                        
  from operations (note 2)                                                 139,359     108,360      94,710      78,281      52,282
 Net cash provided by (used in):                                                                                        
  Operating activities                                                     168,126     107,001     113,775     101,149      66,630
  Investing activities                                                    (182,995)    (64,995)   (178,551)   (154,446)   (144,836)
  Financing activities                                                     (36,287)      3,518      40,618      47,068      98,914
 Dividends per share of common stock                                           .88         .80         .68         .62         .60
 Dividends per share of convertible Preferred stock                           2.44        3.25        3.25        2.83          --
 Market price per share of common stock at year end                          31.75       20.13       19.25       17.75       18.00
 Market price per share of convertible Preferred stock                                                                  
  at year end                                                                   --       51.63       48.50       53.75          --
 Weighted average common shares outstanding                                 55,572      47,814      47,565      47,411      47,994

</TABLE>

Note 1--For the years ended December 31, 1995, 1994 and 1993, historical cost
        basis shareholders' equity (deficit) per share of common stock and
        current value basis shareholders' equity per share of common stock
        assume the conversion of the Series A Convertible Preferred stock. The
        Series A Convertible Preferred Stock was issued in 1993 and redeemed for
        common stock on September 30, 1996.

Note 2--Earnings before depreciation and deferred taxes (EBDT) is not a measure
        of operating results or cash flows from operating activities as defined
        by generally accepted accounting principles. Additionally, EBDT 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 "Earnings Before
        Depreciation and Deferred Taxes" section of Management's Discussion and
        Analysis of Financial Condition and Results of Operations on page 56 for
        a full discussion of EBDT.

Interim Financial Information (Unaudited)

Interim consolidated results of operations are summarized as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                          Quarter ended
                                        ------------------------------------------------------------------------------------------
                                        December   September     June       March     December   September    June         March
                                         31, 1996   30, 1996    30, 1996   31, 1996   31, 1995    30, 1995   30, 1995     31, 1995
                                        ---------- ----------  ---------- ----------  ---------  ----------  ----------  ----------
<S>                                     <C>        <C>         <C>        <C>         <C>        <C>         <C>         <C>
Revenues                                $ 252,044  $ 227,675   $ 179,050   $ 173,148  $ 177,505   $ 169,165   $ 163,636   $162,515
Operating income                           25,796     11,477      11,061      11,158     13,385      11,380       6,499      4,654
Earnings (loss) before extraordinary                                                 
 losses                                     7,291     (2,456)      6,308       6,743      1,911       3,169       1,403       (633)
Net earnings (loss)                         7,199     (2,502)      6,308       5,428        634       3,032       1,403     (7,850)
                                        ========== ==========  ========== ==========  =========  ==========  ==========  ========== 
Earnings (loss) per common share:                                                    
Earnings (loss) before extraordinary                                                 
 losses                                 $     .11  $    (.10)  $     .05   $     .07  $    (.03)  $    (.01)  $    (.05)  $   (.09)
Extraordinary losses                           --         --          --        (.03)      (.03)         --          --       (.15)
                                        ---------- ----------  ---------- ----------  ---------  ----------  ----------  ----------
  Total                                 $     .11  $    (.10)  $     .05   $     .04  $    (.06)  $    (.01)  $    (.05)  $   (.24)
                                        ========== ==========  ========== ==========  =========  ==========  ==========  ========== 

</TABLE>

Note--Net earnings for the third and fourth quarters of 1996 include provisions
      for losses on dispositions of retail centers of $3,939,000 ($.07 per
      share) and $6,196,000 ($.09 per share), respectively. The provision for
      loss in the third quarter was partially offset by the reversal of a
      provision for a litigation matter of $5,665,000 ($.10 per share). Net
      earnings for the quarter ended December 31, 1995 includes a provision for
      the litigation matter of $8,009,000 ($.17 per share). Net earnings (loss)
      for the first, second and third quarters of 1995 include provisions for
      losses on disposition of operating properties of $3,156,000 ($.07 per
      share), $3,617,000 ($.08 per share) and $3,665,000 ($.08 per share),
      respectively. The provision for loss in the second quarter was partially
      offset by a gain on disposition of a retail center property of $1,261,000
      ($.03 per share).

Price of Common Stock and Dividends

The Company's common stock began trading on the New York Stock Exchange in
November 1995.  Prior to that time it was traded over the counter.  The prices
and dividends per share were as follows:

<TABLE>
<CAPTION>
                                                             Quarter ended
                              -------------------------------------------------------------------------------------
                              December   September   June      March    December  September      June       March
                              31, 1996   30, 1996  30, 1996   31, 1996  31, 1995   30, 1995    30, 1995    31, 1995
                              --------   -------   --------   --------  --------  ----------   --------   ---------
<S>                           <C>        <C>       <C>        <C>       <C>       <C>          <C>        <C>  
High bid or sales price       $  32.25   $  26.00  $  26.13   $  22.13  $  22.00  $    22.63   $  20.69   $   19.88
Low bid or sales price           30.88      24.88     25.75      21.88     18.63       19.50      17.00       18.00
Dividends                          .22        .22       .22        .22       .20         .20        .20         .20
</TABLE>

Number of Holders of Common Stock

The number of holders of record of the Company's common stock as of February 21,
1997 was 2,294.

                                      51
<PAGE>
 
                       The Rouse Company and Subsidiaries


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


GENERAL




The Company's primary business is the acquisition, development and management of
income-producing real estate projects. The Company operates a diversified
portfolio of retail centers, office buildings and mixed-use and other properties
located throughout the United States. In addition, the Company develops and
sells land for residential, commercial and other uses, primarily in Columbia,
Maryland, and Summerlin, Nevada.

  On June 12, 1996, the Company purchased all of the outstanding equity
interests in The Hughes Corporation and its affiliated partnership, Howard
Hughes Properties, Limited Partnership (together, Hughes). The acquired assets
consist primarily of a regional shopping center and a large-scale, master-
planned community (Summerlin) in Las Vegas, Nevada, and four large-scale,
master-planned business parks and various other properties in Nevada and
Southern California. The acquisition of Hughes enabled the Company to diversify
its portfolio of properties while establishing a significant presence in the
fast-growing Las Vegas market. For additional information about the acquisition
of Hughes, see note 3 to the consolidated financial statements.

  Management believes that the Company's financial position is sound and that
its liquidity and capital resources are adequate. As shown in the supplemental
current value basis financial statements, current value shareholders' equity,
which is an important indication of the Company's financial strength, was $1.82
billion at December 31, 1996, up from $1.54 billion at December 31, 1995.

  The Company has continued to achieve strong financial results in recent
periods, despite the generally difficult environment for retail businesses.
Earnings before depreciation and deferred taxes (EBDT), which is defined and
discussed in detail below, increased 28% in 1996 and 14% in 1995, including
increases of 10% and 12%, respectively, in EBDT from operating properties and an
increase of 170% in 1996 in EBDT from land sales. These results have been made
possible by several factors, including the acquisition of Hughes, expansions of
and/or acquisitions of ownership interests in certain retail centers, consistent
earnings from land sales and operating properties in Columbia, refinancing of a
significant amount of project-related debt at lower interest rates and, to a
lesser extent, dispositions or modifications of the terms of agreements relating
to properties which were incurring losses before depreciation and deferred
taxes.

  Management believes that the outlook is for continued solid growth in EBDT in
1997. Prospects for growth in EBDT from land sales and office/mixed-use
properties are excellent as the Company will have the benefit of a full year of
operations of the Hughes portfolio and conditions in the major markets in which
the Company operates are stable or improving. EBDT from retail centers is also
expected to grow in 1997. The rate of growth may continue at the modest rate
realized in 1996 given the continued difficult retailing environment, but the
Company intends to focus considerable effort and resources on leasing and
remerchandising its existing retail centers. The Company will also focus on
developing its land assets in Las Vegas and Columbia, opportunities to expand
existing retail centers and development of new projects in growing markets.

  Management is continually reviewing and evaluating the portfolio of properties
to identify expansion, renovation and/or remerchandising opportunities and
properties that may not have future prospects consistent with the Company's
long-term objectives. The Company will continue to dispose of properties that
are not meeting and/or are not considered to have the potential to meet its
investment criteria, particularly smaller properties in smaller market areas.
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.
The objective is to refine and continually upgrade the portfolio so that it is
comprised of top tier properties that will produce consistently strong increases
in earnings and increases in current values.


OPERATING RESULTS



This discussion and analysis of operating results covers each of the Company's
four business segments as management believes that a segment analysis provides
the most effective means of understanding the Company's business. Note 11 to the
consolidated financial statements and the information relating to revenues and
expenses in the Five Year Summary of Earnings Before Depreciation and Deferred
Taxes from Operations and Net Earnings (Loss) on page 60 should be referred to
when reading this discussion.

                                      52
<PAGE>
 
OPERATING PROPERTIES: The Company reports the results of its operating
properties in two categories: retail centers ("retail" properties) and office,
mixed-use and other properties ("office/mixed-use" properties).

  The Company's tenant leases provide the foundation for the performance of its
retail 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 based on tenant
sales (percentage rent) in excess of stated levels. As leases expire, space is
re-leased, 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, therefore, 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 Company's lenders based on
operating results and, in some instances, a share of a property's residual value
upon sale or refinancing or at maturity.

 Operating results of retail properties are summarized as follows (in millions):
<TABLE>
<CAPTION>
 
                                     1996    1995    1994
                                    ------  ------  ------
<S>                                 <C>     <C>     <C>
Revenues                            $508.4  $491.7  $486.5
Operating expenses, exclusive of
 depreciation and amortization       260.0   246.7   253.1
Interest expense                     129.1   128.2   128.8
                                    ------  ------  ------
                                     119.3   116.8   104.6
Depreciation and amortization         50.1    45.9    46.8
                                    ------  ------  ------
Operating income                    $ 69.2  $ 70.9  $ 57.8
                                    ======= ======  ======
</TABLE>

  Revenues from retail properties increased $16.7 million in 1996 and $5.2
million in 1995. The increase in 1996 was attributable primarily to acquisitions
of interests in four properties (two in the third quarter of 1995, one in
connection with the acquisition of Hughes in the second quarter of 1996 and one
in the third quarter of 1996), increased lease termination payments due to
tenant restructurings and downsizings and higher rents on re-leased space. These
increases were partially offset by the effects of lower average occupancy (88.8%
in 1996 compared to 90.9% in 1995) and dispositions of interests in properties
in the second quarter of 1995 and first quarter of 1996. The increase in 1995
was attributable to the operations of expansions opened in third quarter of 1994
and first quarter of 1995, purchases of ownership interests in two properties
and higher rents on re-leased space. These increases were partially offset by
the effects of lower average occupancy (90.9% in 1995 compared to 92.3% in
1994), lower recoveries of operating expenses due to expense reduction efforts
and dispositions of interests in properties in the first quarter of 1994 and
second quarter of 1995.

  Total operating and interest expenses (exclusive of depreciation and
amortization) for retail properties increased $14.2 million in 1996 and
decreased $7 million in 1995. The increase in 1996 was attributable primarily to
the operations and financing of the acquired properties referred to above. These
increases were partially offset by the property dispositions referred to above
and reductions in interest expense due to debt repayments and refinancings
completed in 1995 and early 1996. The decrease in 1995 was attributable
primarily to the effects of lower average occupancy levels, lower operating
expenses due to expense reduction efforts, the dispositions referred to above
and reductions in interest expense due to debt repayments and refinancings
completed in 1994 and early 1995 at certain properties. These decreases were
partially offset by increases in expenses associated with the operations and
financing of the properties opened or acquired referred to above. Depreciation
and amortization expense for retail properties increased $4.2 million in 1996
and decreased $.9 million in 1995. These changes were due primarily to the net
effect of changes in the Company's portfolio of retail properties referred to
above.

                                      53
<PAGE>
 
 Operating results of office/mixed-use properties are summarized as follows (in
millions):
<TABLE>
<CAPTION>
 
                                     1996     1995     1994
                                    ------   ------   ------
<S>                                 <C>      <C>      <C>
Revenues                            $182.2   $145.0   $146.6
Operating expenses, exclusive of
 depreciation and amortization        89.5     70.1     74.4
Interest expense                      76.7     69.1     67.9
                                    ------   ------   ------
                                      16.0      5.8      4.3
Depreciation and amortization         29.9     27.2     27.4
                                    ------   ------   ------
Operating loss                      $(13.9)  $(21.4)  $(23.1)
                                    ======   ======   ======
</TABLE>

  Revenues from office/mixed-use properties increased $37.2 million in 1996 and
decreased $1.6 million in 1995. The increase in 1996 was attributable primarily
to operations of the properties acquired in the Hughes transaction and higher
occupancy levels at hotel and other office properties. These increases were
partially offset by decreases in tenant lease termination payments and the
disposition of a property in the second quarter of 1995. The decrease in 1995
was attributable primarily to dispositions of properties in the third quarter of
1994 and second quarter of 1995 and lower recoveries of operating expenses due
to lower occupancy levels and reduced operating expenses at certain projects.
These decreases were partially offset by increased revenues at certain hotel and
office properties in Columbia due to higher occupancy levels and increases in
tenant lease cancellation payments.

  Total operating and interest expenses (exclusive of depreciation and
amortization) for office/mixed-use properties increased $27 million in 1996 and
decreased $3.1 million in 1995. The increase in 1996 was attributable primarily
to operations of the properties acquired in the Hughes transaction and expenses
associated with higher occupancy levels. These increases were partially offset
by the dispositions of a vacant industrial property in the second quarter of
1996 and an office property in the second quarter of 1995. The decrease in 1995
was attributable primarily to the dispositions of properties referred to above
and lower operating expenses at certain projects. These decreases were partially
offset by expenses related to two industrial buildings in Columbia which began
operations in the second quarter of 1994 and higher interest expense on a mixed-
use project. Interest on this project's loan was lower in 1994 because the
Company exercised an option in the loan agreement to make a specified payment
and reduce the effective interest rate on the loan retroactive to the beginning
of its term. The payment was less than the interest previously accrued, and the
difference was recorded as a reduction to interest expense in 1994. Depreciation
and amortization for office/mixed-use properties increased $2.7 million in 1996.
The increase was attributable primarily to the acquired properties referred to
above.

LAND SALES: The Company's 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
saleable land for particular uses and management's decisions to sell, develop or
retain land.

                                      54
<PAGE>
 
 Operating results for land sales are summarized as follows (in millions):
<TABLE>
<CAPTION>
 
                                         1996
                             -----------------------------
                                        Columbia
                              Hughes       and
                             Division    Other      Total     1995     1994
                             --------   --------   -------   ------   ------
<S>                            <C>        <C>        <C>     <C>      <C>
                                                   
Revenues                        $98.4      $39.5    $137.9    $33.4    $35.2
Operating costs and                               
 expenses                        83.4       24.4     107.8     17.8     19.9
Interest expense                   .7        1.0       1.7      5.1      5.0
                              -------    -------   -------   ------   ------
Operating income                $14.3      $14.1    $ 28.4    $10.5    $10.3
                              =======    =======   =======   ======   ======
</TABLE>                                           
                                                   
  Revenues and operating income from Hughes Division land sales for 1996 include
$90.4 million and $14 million, respectively, relating to Summerlin and $8
million and $.3 million, respectively, relating to other land holdings. The cost
of sales for land acquired in the purchase of Hughes is relatively high as a
percentage of revenues as the land sold consists primarily of inventory on which
development was completed or in progress at the date of acquisition. Cost of
sales for land acquired in the purchase of Hughes is expected to be lower as a
percentage of revenues in future periods as the inventory of land on which
development was completed or in progress at the date of acquisition is depleted.

  Revenues from land sales in Columbia increased $6.1 million in 1996 and
decreased $1.8 million in 1995. The increase in 1996 was due primarily to higher
sales of land for commercial/other uses, partially offset by lower sales of
residential land. The decrease in 1995 was due primarily to lower sales of land
for commercial/other uses.

  Columbia and other land sales costs and expenses increased $6.6 million in
1996 and decreased $2.1 million in 1995. These changes were attributable
primarily to the changes in land sales revenues referred to above.

DEVELOPMENT: Development expenses were $5.3 million in 1996, $7.6 million in
1995 and $7 million in 1994. 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 center renovation and expansion opportunities,
which may not go forward to completion. Additions to the preconstruction reserve
were $2.7 million in 1996, $3.8 million in 1995 and $3.4 million in 1994. New
business costs relate primarily to the initial evaluation of potential
acquisition and development opportunities. These costs were $1.8 million in
1996, $3.5 million in 1995 and $3.1 million in 1994. The decrease in
preconstruction reserve additions in 1996 was due to the progress of several
significant projects. The decrease in new business costs in 1996 was
attributable to the Company's focus on the Hughes acquisition which deferred
evaluation of other opportunities, particularly during the first half of 1996.
The increases in preconstruction reserve additions and new business costs in
1995 were attributable to the Company's more active pursuit of potential
development and acquisition opportunities.

CORPORATE: Corporate revenues consist primarily of interest income earned on
temporary investments, including investments of unallocated proceeds from
refinancings of certain properties. Corporate interest income was $3.5 million
in 1996, $2.8 million in 1995 and $2.9 million in 1994. The changes in income in
1996 and 1995 were attributable primarily to changes in the average investment
balances.

  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 and unallocated proceeds from refinancings
of certain prop-

                                      55
<PAGE>
 
erties, 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, net of distributions allocated to other segments.

  Corporate interest costs were $18 million in 1996, $14 million in 1995 and
$13.9 million in 1994. Of such amounts, $5.4 million, $3.7 million and $2.6
million were capitalized in 1996, 1995 and 1994, respectively, on funds invested
in development projects. The increase in corporate interest costs in 1996 was
attributable primarily to a higher level of credit line borrowings for
development projects and for other corporate purposes. The higher level of
interest capitalized in 1996 and 1995 reflects the higher level of corporate
funds invested in projects under development.

GAIN (LOSS) ON DISPOSITIONS OF ASSETS AND OTHER PROVISIONS, NET: 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
centers the Company decided to sell. These losses were partially offset by the
reversal of a portion of the provision recorded in 1995 for the litigation
matter discussed in note 17 to the consolidated financial statements.

  The loss on dispositions of assets and other provisions, net, for 1995
consisted primarily of a provision for loss of $12.3 million on a litigation
judgment involving a former tenant as discussed in note 17 to the consolidated
financial statements and provisions for losses totaling $15.6 million recognized
on retail centers the Company decided to sell. These losses were partially
offset by a gain of $2.4 million on disposition of a retail center.

  The loss on dispositions of assets and other provisions, net, for 1994
consisted primarily of losses totaling $8 million incurred on dispositions of
interests in two retail centers, a hotel and an office building and a provision
for loss of $2.2 million on an industrial building. These losses were partially
offset by a gain of $2.8 million on disposition of an interest in a retail
center.

EXTRAORDINARY LOSSES, NET OF RELATED INCOME TAX BENEFITS: The extraordinary
losses in 1996, 1995 and 1994 resulted from early extinguishments or required
partial early redemptions of debt and aggregated $2.2 million, $13.3 million and
$6.8 million, respectively, less deferred income tax benefits of $.8 million,
$4.6 million and $2.4 million, respectively.

NET EARNINGS (LOSS): The Company had net earnings of $16.4 million in 1996, a
net loss of $2.8 million in 1995 and net earnings of $2.2 million in 1994. The
Company's operating income (after depreciation and amortization) was $59.5
million in 1996, $35.9 million in 1995 and $21.3 million in 1994. The
improvements in operating income in 1996 and 1995 were due primarily to the
factors described above. Net earnings (loss) for each year was affected by
unusual and/or nonrecurring items. The most significant of these are the items
discussed above in gain (loss) on dispositions of assets and other provisions,
net, and extraordinary losses, net of related income tax benefits. Net earnings
(loss) was also affected by income taxes. The Company's effective tax rate was
58.9% in 1996, 42.5% in 1995 and 50.5% in 1994. The effective rate is higher in
1996, primarily because a portion of the distributions payable to the former
Hughes owners (or their successors) under the Contingent Stock Agreement is not
deductible for income tax purposes.

EARNINGS BEFORE DEPRECIATION AND DEFERRED TAXES: The Company uses a supplemental
performance measure along with net earnings (loss) to report its operating
results. This measure, referred to as Earnings Before Depreciation and Deferred
Taxes (EBDT), is not a measure of operating results or cash flows from operating
activities as defined by generally accepted accounting principles. Additionally,
EBDT 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 EBDT provides relevant information
about its operations and is necessary, along with net earnings (loss), for an
understanding of its operating results.

  Depreciation and amortization are excluded from EBDT because, as shown in the
current value basis balance sheets, the Company's portfolio of operating
properties is worth substantially more than its undepreciated historical cost.
Deferred income taxes are excluded

                                      56
<PAGE>
 
from EBDT because payments of income taxes have not been significant and are
not anticipated to become significant in the near term. Current Federal and
state income taxes are included as reductions of EBDT. 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 EBDT. EBDT is reconciled to net earnings (loss) in
the Five Year Summary of Earnings Before Depreciation and Deferred Taxes from
Operations and Net Earnings (Loss) on page 61.

  EBDT was $139.4 million in 1996, $108.4 million in 1995 and $94.7 million in
1994. The increase in EBDT in 1996 was due primarily to the acquisition of
Hughes. The increase in EBDT in 1995 was due primarily to improved results from
the operating properties business segment, particularly retail properties. The
significant changes in revenues and expenses comprising EBDT by segment are
described above.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Management believes that the current values of the Company's assets and
liabilities are the most realistic indicators of the Company's financial
strength and future profitability. Current values of the Company's interests in
operating properties (including interests in unconsolidated real estate
ventures) and land held for development and sale represent the present values of
forecasted net operating cash flows from these properties--the Company's most
significant assets. Since 1976, revaluation equity, the aggregate increment of
current value over cost basis net book value of the Company's assets and
liabilities, has increased at a compound annual rate of 14%. The majority of
revaluation equity relates to larger, major market retail centers which continue
to be a favored real estate investment. Revaluation equity increased $145
million or 10% to $1.64 billion at December 31, 1996. This increase was due
primarily to the current values of properties, particularly land, obtained in
the Hughes acquisition and a decrease in current value deferred income taxes.
The decrease in current value deferred income taxes is principally due to the
effects of implementing certain state income tax planning strategies which are
expected to significantly reduce future state income tax payments. The increase
in revaluation equity for 1996 was partially offset by decreases in current
values of certain retail and other properties due to the effects of competitive
factors in certain markets and continued consolidation in the retail industry.
During 1996, investor yield requirements for all property types remained
substantially unchanged from 1995.

  Cost basis shareholders' equity increased to $177.1 million at December 31,
1996 from $42.6 million at December 31, 1995. The increase was due primarily to
the issuance of common stock in the Hughes acquisition and the Company's net
earnings. These increases were partially offset by the payment of regular
quarterly dividends on the common and Preferred stocks. In 1996, substantially
all of the outstanding shares of Series A Preferred stock were converted into
approximately 10.6 million shares of common stock. The conversion had no effect
on shareholders' equity.

  The Company had cash and cash equivalents and investments in marketable
securities totaling $47.4 million and $97.8 million at December 31, 1996 and
1995, respectively.

  Net cash provided by operating activities was $168.1 million, $107 million and
$113.8 million in 1996, 1995 and 1994, 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 land sales proceeds) and the payment of operating and interest
expenses and land development costs. In particular, net cash provided by
operating activities for 1995 was reduced due to payment of certain pension
obligations and other liabilities.

  In 1996 and 1995, over 80% of the Company's debt consisted of mortgages and
bonds collateralized by operating properties. Scheduled principal payments on
property debt were $39 million, $36.4 million and $46.8 million in 1996, 1995
and 1994, respectively. The decreases in 1996 and 1995 from the 1994 level were
due primarily to early repayments of property debt.

                                      57
<PAGE>
 
 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>
               1997                  $ 49.6     $ 74.9    $124.5
               1998                    47.4       45.9      93.3
               1999                    46.5      161.2     207.7
               2000                    45.2      184.2     229.4
               2001                    51.5      120.1     171.6
                                  ---------   --------   -------
                                     $240.2     $586.3    $826.5
                                  =========   ========   =======
</TABLE>

  The balloon payments for 1997 include $58.3 million related to two retail
center mortgages due in the second quarter. The Company is in the process of
obtaining securitized mortgage loans to refinance these loans and has received a
commitment from a lender for an interim loan for up to six months pending
completion of the securitized loans. The Company expects to repay the mortgages
at their scheduled maturity date.

  The Company has historically relied 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. In recent years, however,
the Company has made greater use of the public capital markets to meet its
capital resource needs. Since 1993, the Company has completed public debt and
equity offerings aggregating over $800 million (including the unused portion of
the medium-term notes and the proceeds of the Series B Convertible Preferred
stock issued in February 1997 described in note 18 to the consolidated financial
statements), the proceeds of which have been or will be used primarily to repay
or refinance corporate and property debt and to provide funds for other
corporate purposes. These transactions were completed on terms which allowed the
Company to reduce its overall cost of capital while restructuring its debt
maturities and increasing its financial flexibility. The Company is continually
evaluating sources of capital, and management believes there are satisfactory
sources available for all requirements without necessitating property sales.

  Cash expenditures for properties in development and improvements to existing
properties funded by debt were $124 million, $61.6 million and $78.6 million in
1996, 1995 and 1994, respectively. The increase in these expenditures in 1996
was due to increased project development activity, including approximately $38.5
million relating to the development of office and industrial properties acquired
in the Hughes purchase. A substantial portion of the costs of properties in
development is financed with construction or similar loans and/or borrowings on
revolving lines of credit. Typically, long-term fixed rate debt financing is
arranged concurrently with the construction financing or before completion of
construction. Management also intends to finance certain future development
costs with proceeds from the Series B Convertible Preferred stock issued in
February 1997.

  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, credit line
borrowings and a portion of the proceeds of the 8.5% unsecured notes.

  Cash expenditures for the acquisition of Hughes were $36.3 million in 1996 and
were financed primarily by credit line borrowings. Cash expenditures for
acquisitions of interests in properties were $18.1 million in 1996, $28.2
million in 1995 and $94.1 million in 1994. These costs were financed primarily
by nonrecourse debt. The acquisitions in 1996 consisted of purchases of
partners' interests in two retail centers, one of which was financed in part by
the seller. The acquisitions in 1995 consisted of purchases of partners'
interests in two retail centers, which were financed in whole or in part by the
sellers, and purchase of a minority interest in a third retail center. The
acquisitions in 1994 consisted primarily of the purchase of land underlying a
retail center and the related equity interest of the former ground lessor.

  The Company has available sources of capital in addition to those discussed
above. The Company's equity interests in its operating properties, investment
land and land held for

                                      58
<PAGE>
 
development and sale and land in development represent a source of funds
either through sales or refinancings. The aggregate equity value of these
interests at December 31, 1996, was approximately $2.84 billion. The Company
also has lines of credit aggregating $248.1 million of which $184.1 million was
available at December 31, 1996. These lines of credit can be used for various
purposes, including land and project development costs, property acquisitions,
liquidity and other corporate needs, subject to specific use limitations and/or
lender approvals in certain cases. In addition, the Company may issue additional
medium-term notes of up to $29.7 million and additional common stock, Preferred
stock and/or debt securities of up to $300 million.

  The agreements relating to certain of the lines of credit, the 8.5% unsecured
notes, the medium-term notes and certain other loans impose limitations on the
Company. The most restrictive of these limit the Company's ability to incur
certain types of additional debt if the Company does not maintain specified debt
service coverage ratios. The agreements also impose restrictions 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.

IMPACT OF INFLATION

The major portion of the Company's operating properties, its 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. Generally, 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 RELATING TO FORWARD-LOOKING STATEMENTS

This Annual Report to Shareholders of the Company includes forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and 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 risks; (2) development 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; and (10) changes in the economic climate. 
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, 1996.

                                      59
<PAGE>
 
                       The Rouse Company and Subsidiaries

             FIVE YEAR SUMMARY OF EARNINGS BEFORE DEPRECIATION AND
             DEFERRED TAXES FROM OPERATIONS AND NET EARNINGS (LOSS)
<TABLE>
<CAPTION>
 
 
                                                                Year ended December 31,
                                                  ----------------------------------------------------
                                                    1996        1995       1994       1993       1992
                                                  --------    --------   --------   --------   --------
                                                                    (in thousands)
<S>                                               <C>         <C>        <C>        <C>        <C> 
Revenues:                                                   
Operating properties:                                       
 Retail centers:                                            
   Minimum and percentage rents                   $256,880    $245,192   $238,222   $227,140   $210,909
   Other rents and other revenues                  251,535     246,488    248,253    236,458    217,571
 Office, mixed-use and other:                               
   Minimum and percentage rents                    106,246      80,319     82,347     81,415     76,302
   Other rents and other revenues                   75,908      64,647     64,225     62,617     60,335
                                                  --------    --------   --------   --------   --------
                                                   690,569     636,646    633,047    607,630    565,117
Land sales                                         137,853      33,403     35,232     35,313     29,137
Corporate interest income                            3,495       2,772      2,892      3,862      2,851
                                                  --------    --------   --------   --------   --------
                                                   831,917     672,821    671,171    646,805    597,105
                                                  --------    --------   --------   --------   --------
Operating expenses, exclusive of depreciation               
  and amortization:                                         
Operating properties:                                       
 Retail centers                                    260,027     246,747    253,095    251,386    241,395
 Office, mixed-use and other                        89,524      70,096     74,368     76,148     69,589
                                                  --------    --------   --------   --------   --------
                                                   349,551     316,843    327,463    327,534    310,984
Land sales                                         107,787      17,827     19,877     19,387     16,330
Development                                          4,964       7,288      6,494      3,853      4,421
Corporate                                            9,752       8,920      8,309      6,184      5,927
                                                  --------    --------   --------   --------   --------
                                                   472,054     350,878    362,143    356,958    337,662
                                                  --------    --------   --------   --------   --------
Interest expense:                                           
Operating properties:                                       
 Retail centers                                    129,091     128,215    128,798    124,204    115,744
 Office, mixed-use and other                        76,659      69,034     67,892     65,601     69,199
                                                  --------    --------   --------   --------   --------
                                                   205,750     197,249    196,690    189,805    184,943
Land sales                                           1,658       5,071      5,028      4,093      2,959
Development                                            361         358        495        495        495
Corporate                                           12,612      10,285     11,370     16,413     18,412
                                                  --------    --------   --------   --------   --------
                                                   220,381     212,963    213,583    210,806    206,809
                                                  --------    --------   --------   --------   --------
Current income taxes-primarily state                   123         620        735        760        352
                                                  --------    --------   --------   --------   --------
                                                   692,558     564,461    576,461    568,524    544,823
                                                  --------    --------   --------   --------   --------
Earnings before depreciation and deferred    
  taxes from operations                           $139,359    $108,360   $ 94,710   $ 78,281   $ 52,282
                                                  ========    ========   ========   ========   ========
</TABLE>

                                      60
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                                   Year ended December 31,
                                                   -------------------------------------------------------
                                                     1996        1995        1994        1993       1992
                                                   --------    --------    --------    --------   --------
                                                                         (in thousands)
<S>                                                <C>         <C>         <C>         <C>        <C>
Earnings before depreciation and deferred taxes
from operations by segment:
Operating properties:
 Retail centers                                    $119,297    $116,135    $103,978    $ 87,248   $ 70,966
 Office, mixed-use other                             15,852       5,839       4,273       2,283     (2,127)
                                                   --------    --------    --------    --------   --------
                                                    135,149     121,974     108,251      89,531     68,839
Land sales                                           28,404      10,502      10,330      11,833      9,847
Development                                          (5,325)     (7,646)     (6,989)     (4,348)    (4,916)
Corporate                                           (18,869)    (16,470)    (16,882)    (18,735)   (21,488)
                                                   --------    --------    --------    --------   --------
Earnings before depreciation and                                                                  
  deferred taxes from operations                   $139,359    $108,360    $ 94,710    $ 78,281   $ 52,282
                                                   ========    ========    ========    ========   ========
Reconciliation to net earnings (loss):                                                            
Earnings before depreciation and deferred                                                         
  taxes from operations                            $139,359    $108,360    $ 94,710    $ 78,281   $ 52,282
Depreciation and amortization                       (79,990)    (73,062)    (74,186)    (70,200)   (68,163)
Deferred income taxes applicable to operations      (25,596)     (3,699)     (5,995)     (3,603)     5,286
Gain(loss) on dispositions of assets and                                                          
  other provisions, net                             (15,887)    (25,749)     (7,923)     (5,769)    (5,254)
Extraordinary losses, net of related income                                                       
  tax benefits                                       (1,453)     (8,631)     (4,447)     (8,051)      (348)
                                                   --------    --------    --------    --------   --------
Net earnings (loss)                                $ 16,433    $( 2,781)   $  2,159    $ (9,342)  $(16,197)
                                                   ========    ========    ========    ========   ======== 
</TABLE>

Note: Earnings before depreciation and deferred taxes (EBDT) is not a measure of
  operating results or cash flows from operating activities as defined by
  generally accepted accounting principles. Additionally, EBDT 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 "Earnings Before Depreciation and
  Deferred Taxes" section of Management's Discussion and Analysis of Financial
  Condition and Results of Operations on page 56 for a full discussion of EBDT.

                                      61
<PAGE>
 
                         PROJECTS OF THE ROUSE COMPANY


<TABLE>
<CAPTION>
 
 
RETAIL CENTERS IN OPERATION               
                                               DATE OF OPENING                                               RETAIL SQUARE FOOTAGE
CONSOLIDATED CENTERS                            OR ACQUISITION    DEPARTMENT STORES                        TOTAL CENTER    MALL ONLY
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>                                          <C>           <C>
Almeda Mall, Houston, TX (a)                              10/68   Foley's; JCPenney                             802,000      294,000
------------------------------------------------------------------------------------------------------------------------------------
Augusta Mall, Augusta, GA (a)                              8/78   Rich's; R.H. Macy; JCPenney; Sears            902,000      313,000
------------------------------------------------------------------------------------------------------------------------------------
Bayside Marketplace, Miami, FL (b)                         4/87   --                                            223,000      223,000
------------------------------------------------------------------------------------------------------------------------------------
Beachwood Place, Cleveland, OH (a)                         8/78   Saks Fifth Avenue; Dillard's                  453,000      228,000
------------------------------------------------------------------------------------------------------------------------------------
Cherry Hill Mall, Cherry Hill, NJ (a)                     10/61   Strawbridge & Clothier, R.H. Macy; JCPenney 1,285,000      544,000
------------------------------------------------------------------------------------------------------------------------------------
The Mall in Columbia, Columbia, MD (a)                     8/71   Hecht's; Sears; JCPenney                      876,000      421,000
------------------------------------------------------------------------------------------------------------------------------------
Eastfield Mall, Springfield, MA (a)                        4/68   Sears; Filene's; JCPenney                     674,000      217,000
------------------------------------------------------------------------------------------------------------------------------------
Echelon Mall, Voorhees, NJ (a)                             9/70   Strawbridge & Clothier; JCPenney; Boscov's  1,065,000      481,000
------------------------------------------------------------------------------------------------------------------------------------
Exton Square, Exton, PA (a)                                3/73   Strawbridge & Clothier                        443,000      253,000
------------------------------------------------------------------------------------------------------------------------------------
Faneuil Hall Marketplace, Boston, MA (a)                   8/76   --                                            215,000      215,000
------------------------------------------------------------------------------------------------------------------------------------
Fashion Show Mall, Las Vegas, NV (b)                       6/96   R.H. Macy; Dillard's; Saks Fifth Avenue;      840,000      308,000
                                                                  Neiman Marcus; Robinson's-May
------------------------------------------------------------------------------------------------------------------------------------
Franklin Park, Toledo, OH (b)                              7/71   Hudson's; JCPenney; Jacobson's; Lion        1,082,000      313,000
------------------------------------------------------------------------------------------------------------------------------------
The Gallery at Market East, Philadelphia, PA(a)(c)         8/77   Strawbridge & Clothier; Clover              1,320,000      360,000
------------------------------------------------------------------------------------------------------------------------------------
Governor's Square, Tallahassee, FL (b)                     8/79   Burdine's; Sears; JCPenney; Dillard's       1,031,000      340,000
------------------------------------------------------------------------------------------------------------------------------------
The Grand Avenue, Milwaukee, WI (a)                        8/82   Marshall Field; The Boston Store              842,000      242,000
------------------------------------------------------------------------------------------------------------------------------------
Greengate Mall, Greensburg, PA (a)                         8/65   Lazarus; Montgomery Ward                      612,000      233,000
------------------------------------------------------------------------------------------------------------------------------------
Harborplace, Baltimore, MD (a)                             7/80   --                                            136,000      136,000
------------------------------------------------------------------------------------------------------------------------------------
Harundale Mall, Glen Burnie, MD (b)                       10/58   Value City                                    309,000      232,000
------------------------------------------------------------------------------------------------------------------------------------
Highland Mall, Austin, TX (b)                              8/71   Dillard's; JCPenney; Foley's                1,099,000      367,000
------------------------------------------------------------------------------------------------------------------------------------
Hulen Mall, Ft. Worth, TX (a)                              8/77   Foley's; Montgomery Ward; Dillard's           924,000      327,000
------------------------------------------------------------------------------------------------------------------------------------
The Jacksonville Landing, Jacksonville, FL (a)             6/87   --                                            128,000      128,000
------------------------------------------------------------------------------------------------------------------------------------
Mall St. Matthews, St. Matthews, KY (a)                    3/62   JCPenney; Bacon's; Dillard's                1,092,000      353,000
------------------------------------------------------------------------------------------------------------------------------------
Midtown Square, Charlotte, NC (a)                         10/59   Burlington Coat Factory                       235,000      190,000
------------------------------------------------------------------------------------------------------------------------------------
Mondawmin (a)/Metro Plaza(b), Baltimore, MD          1/78;12/82   --                                            496,000      496,000
------------------------------------------------------------------------------------------------------------------------------------
The Shops at National Place, Washington, D.C. (a)(c)       5/84   --                                            125,000      125,000
------------------------------------------------------------------------------------------------------------------------------------
North Star, San Antonio, TX (b)                            9/60   Dillard's; Foley's; Saks Fifth Avenue;      1,288,000      487,000
                                                                  Marshall Field; Mervyn's
------------------------------------------------------------------------------------------------------------------------------------
Northwest Mall, Houston, TX (a)                           10/68   Foley's; JCPenney                             800,000      292,000
------------------------------------------------------------------------------------------------------------------------------------
Oakwood Center, Gretna, LA (a)                            10/82   Sears; Dillard's; Mervyn's; Maison Blanche    960,000      362,000
------------------------------------------------------------------------------------------------------------------------------------
Owings Mills, Baltimore County, MD (a)                     7/86   R.H. Macy; Hecht's                            809,000      325,000
------------------------------------------------------------------------------------------------------------------------------------
Paramus Park, Paramus, NJ (a)                              3/74   R.H. Macy; Sears                              755,000      279,000
------------------------------------------------------------------------------------------------------------------------------------
Perimeter Mall, Atlanta, GA (b)                            8/71   Rich's; JCPenney; R.H. Macy                 1,224,000      444,000
------------------------------------------------------------------------------------------------------------------------------------
Plymouth Meeting, Plymouth Meeting, PA (a)                 2/66   Strawbridge & Clothier; Boscov's              784,000      415,000
------------------------------------------------------------------------------------------------------------------------------------
Riverwalk, New Orleans, LA (a)                             8/86   --                                            179,000      179,000
------------------------------------------------------------------------------------------------------------------------------------
St. Louis Union Station, St. Louis, MO (a)                 8/85   --                                            172,000      172,000
------------------------------------------------------------------------------------------------------------------------------------
Salem Mall, Dayton, OH (a)                                10/66   Lazarus; Sears; JCPenney                      817,000      312,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      64
<PAGE>
 
<TABLE>
<CAPTION>
 
RETAIL CENTERS IN OPERATION

------------------------------------------------------------------------------------------------------------------------------------
                                            DATE OF OPENING                                                    RETAIL SQUARE FOOTAGE
CONSOLIDATED CENTERS                         OR ACQUISITION       DEPARTMENT STORES                         TOTAL CENTER   MALL ONLY
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                  <C>                                       <C>            <C>
Santa Monica Place, Santa Monica, CA (a)              10/80       The Broadway; Robinson's-May                   570,000     287,000
------------------------------------------------------------------------------------------------------------------------------------
South Street Seaport, New York, NY (a)                 7/83       --                                             257,000     257,000
------------------------------------------------------------------------------------------------------------------------------------
Tampa Bay Center, Tampa, FL (b)                        8/76       Burdine's; Sears; Montgomery Ward              883,000     325,000
------------------------------------------------------------------------------------------------------------------------------------
White Marsh, Baltimore County, MD (a)                  8/81       R.H. Macy; JCPenney; Hecht's; Sears          1,178,000     359,000
------------------------------------------------------------------------------------------------------------------------------------
Willowbrook, Wayne, NJ (b)                             9/69       R.H. Macy; Stern's; Sears                    1,499,000     485,000
------------------------------------------------------------------------------------------------------------------------------------
Woodbridge Center, Woodbridge, NJ (a)                  3/71       JCPenney; Stern's; Fortunoff; Sears; Lord    1,544,000     560,000
                                                                  and Taylor
------------------------------------------------------------------------------------------------------------------------------------
Community Centers in Columbia, MD (9) and
Summerlin, NV (1) (a) (b)                           Various       --                                             904,000     904,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                  Total Consolidated Centers*                 31,832,000  13,783,000
------------------------------------------------------------------------------------------------------------------------------------
NONCONSOLIDATED/MANAGED CENTERS
------------------------------------------------------------------------------------------------------------------------------------
Burlington Center, Burlington, NJ (d)                  8/82       Strawbridge & Clothier; Sears; JC Penney       669,000     246,000
------------------------------------------------------------------------------------------------------------------------------------
The Citadel, Colorado Springs, CO (d)                  8/80       Mervyn's; JCPenny; Foley's; Dillard's        1,128,000     460,000
------------------------------------------------------------------------------------------------------------------------------------
College Square, Cedar Falls, IA (d)                    8/80       Von Maur; Younkers; Wal-Mart                   560,000     313,000
------------------------------------------------------------------------------------------------------------------------------------
Collin Creek Mall, Plano, TX (d)                       9/95        Dillard's; Foley's; Sears; JCPenney; 
                                                                   Mervyn's                                    1,123,000     333,000
------------------------------------------------------------------------------------------------------------------------------------
Marshall Town Center, Marshalltown, IA (d)             8/80        JCPenney; Younkers; Menard's; Stage           340,000     141,000
------------------------------------------------------------------------------------------------------------------------------------
Muscatine Mall, Muscatine, IA (d)                      8/80        JCPenney; Wal-Mart                            347,000     178,000
------------------------------------------------------------------------------------------------------------------------------------
North Grand, Ames, IA (d)                              8/80        JCPenney; Sears; Younkers                     350,000     157,000
------------------------------------------------------------------------------------------------------------------------------------
Northwest Arkansas Mall, Fayetteville, AR (d)          8/80        JCPenney; Sears; Dillard's                    814,000     242,000
------------------------------------------------------------------------------------------------------------------------------------
Randhurst, Mt. Prospect, IL (d)                        7/81        Carson, Pirie, Scott; JCPenney; Montgomery  1,324,000     591,000
                                                                   Ward; Kohls
------------------------------------------------------------------------------------------------------------------------------------
Ridgedale Center, Minnetonka, MN (d)                   1/89        Dayton's; JCPenney; Sears                   1,039,000     334,000
------------------------------------------------------------------------------------------------------------------------------------
Salem Centre, Salem, OR (d)                            6/90        Meier & Frank; JCPenney; Mervyn's; Nordstrom  649,000     211,000
------------------------------------------------------------------------------------------------------------------------------------
Sherway Gardens, Toronto, ONT (c)                     12/78        Eaton's; The Bay                              968,000     524,000
------------------------------------------------------------------------------------------------------------------------------------
Southland, Taylor, MI (d)                              1/89        Hudson's; Mervyn's; JCPenney                  903,000     320,000
------------------------------------------------------------------------------------------------------------------------------------
Staten Island Mall, Staten Island, NY (d)             11/80        Sears; R.H. Macy; JCPenney                  1,224,000     618,000
------------------------------------------------------------------------------------------------------------------------------------
Town and Country Center, Miami, FL (c)                 2/88        Sears; Marshalls; Mervyn's                    645,000     467,000
------------------------------------------------------------------------------------------------------------------------------------
Westland Mall, West Burlington, IA (d)                 8/80        JCPenney; Younkers                            344,000     175,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                   Total Nonconsolidated/Managed Centers      12,427,000   5,310,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                   Total Retail Centers in Operation*         44,259,000  19,093,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Not including 1,301,000 square feet and 636,000 square feet, respectively, of
  Total Center and Mall Only space in five mixed-use properties listed on the
  following page.

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<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
 One Arizona Center Office Tower                                                                                             330,000
 Two Arizona Center Office Tower                                                                                             449,000
------------------------------------------------------------------------------------------------------------------------------------
The Gallery at Harborplace (a)                                          Baltimore, MD
 The Gallery at Harborplace                                                                                                  139,000
 Office Tower                                                                                                                265,000
 Renaissance Hotel                                                                                                         622 rooms
------------------------------------------------------------------------------------------------------------------------------------
Pioneer Place (a)                                                       Portland, OR
 Saks Fifth Avenue                                                                                                            60,000
 Retail Pavillion                                                                                                            160,000
 Office Tower                                                                                                                283,000
------------------------------------------------------------------------------------------------------------------------------------
Village of Cross Keys (a)                                               Baltimore, MD
 Village Shops                                                                                                                68,000
 Village Square Offices                                                                                                       79,000
 Quadrangle Offices                                                                                                          110,000
 Cross Keys Inn                                                                                                            148 rooms
------------------------------------------------------------------------------------------------------------------------------------
Westlake Center (a)                                                     Seattle, WA
 Nordstrom and Bon Marche                                                                                                    605,000
 Retail Pavillion                                                                                                            118,000
 Office Tower                                                                                                                342,000
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OFFICE AND OTHER PROPERTIES
------------------------------------------------------------------------------------------------------------------------------------
Columbia Office and Industrial (14 buildings) (a)                       Columbia, MD                                       2,432,000
------------------------------------------------------------------------------------------------------------------------------------
Columbia Inn (a)                                                        Columbia, MD                                       289 rooms
------------------------------------------------------------------------------------------------------------------------------------
Hughes Center (10 buildings) (a)                                        Las Vegas, NV                                        774,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Airport Center (27 buildings) (a)                                Las Vegas, NV                                      1,453,000
------------------------------------------------------------------------------------------------------------------------------------
Hughes Cheyenne Center (2 buildings) (a)                                Las Vegas, NV                                        267,000
------------------------------------------------------------------------------------------------------------------------------------
Summerlin Commercial (9 buildings) (a)                                  Summerlin, NV                                        432,000
------------------------------------------------------------------------------------------------------------------------------------
Howard Hughes Center (2 buildings) (a)                                  Los Angeles, CA                                      141,000
------------------------------------------------------------------------------------------------------------------------------------
Lucky's Center (3 buildings) (a)                                        Los Angeles, CA                                      142,000
------------------------------------------------------------------------------------------------------------------------------------
Owings Mills Town Center (4 buildings) (b)                              Baltimore County, MD                                 728,000
------------------------------------------------------------------------------------------------------------------------------------
Other Office Projects (4 buildings) (a)                                 Various                                              284,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Total Consolidated Office, Mixed-Use and
                                                                        Other Properties**                                 9,812,000
------------------------------------------------------------------------------------------------------------------------------------
NONCONSOLIDATED/MANAGED OFFICE, MIXED-USE AND
OTHER PROPERTIES
------------------------------------------------------------------------------------------------------------------------------------
Properties owned by Rouse-Teachers Properties, Inc. (d)                 Baltimore-Washington Corridor                      4,608,000
(29 buildings)
------------------------------------------------------------------------------------------------------------------------------------
300 East Lombard (d)                                                    Baltimore, MD                                        233,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Total Nonconsolidated/Managed Office, Mixed-Use
                                                                        and Other Properties                               4,841,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Total Office, Mixed-Use and Other
                                                                        Properties in Operation**                         14,653,000
------------------------------------------------------------------------------------------------------------------------------------
** Including 1,301,000 square feet of department store and retail
 space in the mixed-use properties.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      66
<PAGE>
 
<TABLE>
<CAPTION>
 
------------------------------------------------------------------------------------------------------------------------------
RETAIL CENTERS UNDER CONSTRUCTION                                                                      RETAIL SQUARE FOOTAGE   
OR IN DEVELOPMENT                                      DEPARTMENT STORES                             TOTAL CENTER    MALL ONLY
------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                                           <C>           <C>        
The Marketplace at Oviedo Crossing, Orlando, FL        Dillard's, Gayfer's                                700,000      300,000
------------------------------------------------------------------------------------------------------------------------------
Beachwood Place Expansion, Cleveland, OH               Nordstrom                                          462,000      120,000
------------------------------------------------------------------------------------------------------------------------------
Northwest Arkansas Mall Expansion, Fayetteville, AR    --                                                  35,000       35,000
------------------------------------------------------------------------------------------------------------------------------
Oakwood Center Expansion, Gretna, LA                   JCPenney                                           125,000           --
------------------------------------------------------------------------------------------------------------------------------
Plymouth Meeting Expansion, Plymouth Meeting, PA       --                                                  48,000       48,000
------------------------------------------------------------------------------------------------------------------------------
Perimeter Mall Expansion, Atlanta, GA                  Nordstrom                                          240,000       15,000
------------------------------------------------------------------------------------------------------------------------------
The Mall In Columbia Expansion, Columbia, MD           Nordstrom                                          220,000       50,000
------------------------------------------------------------------------------------------------------------------------------
Augusta Mall Expansion, August, GA                     J.B. White                                         160,000           --
------------------------------------------------------------------------------------------------------------------------------
Echelon Mall Expansion, Vorhees, NJ                    Sears                                              140,000           --
------------------------------------------------------------------------------------------------------------------------------
Exton Square Expansion, Exton, PA                      Boscov's, JCPenny, Sears                           555,000      110,000
------------------------------------------------------------------------------------------------------------------------------
Owings Mills Expansion, Baltimore County, MD           Sears                                              120,000           --
------------------------------------------------------------------------------------------------------------------------------
River Hill Village Center, Columbia, MD                --                                                  94,000       94,000
------------------------------------------------------------------------------------------------------------------------------
The Village Center at The Trails, Summerlin, NV        --                                                 175,000      175,000
------------------------------------------------------------------------------------------------------------------------------
Fairwood Village Center, Fairwood, MD                  --                                                  80,000       80,000
------------------------------------------------------------------------------------------------------------------------------
                                                       Total Retail Centers Under Construction or                             
                                                       in Development                                   3,154,000    1,027,000
------------------------------------------------------------------------------------------------------------------------------
OFFICE, MIXED-USE AND OTHER PROPERTIES UNDER                                                                                  
CONSTRUCTION OR IN DEVELOPMENT                         TYPE OF SPACE                                               SQUARE FEET
------------------------------------------------------------------------------------------------------------------------------
Pioneer Place Expansion, Portland, OR                  Retail                                                          150,000
------------------------------------------------------------------------------------------------------------------------------
Hughes Center (2 buildings), Las Vegas, NV             Office                                                           99,000
------------------------------------------------------------------------------------------------------------------------------
Hughes Airport Center (3 buildings), Las Vegas, NV     Industrial                                                      149,000
------------------------------------------------------------------------------------------------------------------------------
Hughes Cheyenne Center (1 building), Las Vegas, NV     Industrial                                                      110,000
------------------------------------------------------------------------------------------------------------------------------
Summerlin Commercial (2 buildings), Summerlin, NV      Office                                                          179,000
------------------------------------------------------------------------------------------------------------------------------
                                                       Total Office, Mixed-Use and Other Properties                           
                                                       Under Construction or in Development                            687,000
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(a) Projects are wholly-owned by subsidiaries of the Company.

(b) Projects are owned by joint ventures or partnerships and are managed by
    subsidiaries 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 subsidiaries of the Company for a fee plus a share
    of cash flow.

(d) Projects are owned by partnerships or wholly-owned (Burlington Center,
    Randhurst and Staten Island) by subsidiaries of the Company and are managed
    by subsidiaries 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.

                                      67