Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
For the quarterly period ended September 30, 2003
For the quarterly period ended June 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
For the transition period from to
Commission File Number 001-11543

(Exact name of registrant as specified in its charter)
Maryland		52-0735512
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10275 Little Patuxent Parkway Columbia, Maryland		21044-3456
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code (410) 992-6000

(Exact name of registrant as specified in its charter)

Maryland		52-0735512
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10275 Little Patuxent Parkway Columbia, Maryland		21044-3456
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (410) 992-6000

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

Yes

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes

Indicate the number of shares outstanding of the issuer’s common stock as of ~~November~~August 72, ~~2003~~2004:

Common Stock, $0.01 par value	~~Common Stock, $0.01 par value~~	102,720,733	~~90,553,288~~
Title of Class	~~Title of Class~~	Number of Shares	~~Number of Shares~~

Part I. Financial Information

Item 1. Financial Statements:.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income

Three and ~~Nine~~Six Months Ended ~~September~~ June 30, ~~2003~~2004 and ~~2002~~2003

(Unaudited; in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
	2004			2003			2004			2003
Revenues:
Rents from tenants	$	~~200~~207,~~429~~704		$	~~184~~180,~~466~~522		$	~~580~~406,~~935~~904		$	~~487~~358,~~624~~874
Land sales	6296,~~570~~203			7188,~~327~~256			~~220~~205,~~009~~188			~~174~~157,~~314~~439
Other	1115,~~529~~389			1114,~~713~~442			4028,~~338~~252			4128,~~660~~410
Total revenues	~~274~~319,~~528~~296			~~267~~283,~~506~~220			~~841~~640,~~282~~344			~~703~~544,~~598~~723
Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Operating properties	(86,~~618~~584		)	(8177,~~450~~346		)	(~~249~~172,~~779~~312		)	(~~215~~153,~~312~~676		)
Land sales operations	(2957,~~505~~672		)	(4659,~~338~~117		)	(~~129~~125,~~185~~434		)	(~~112~~99,~~625~~680		)
Other	(109,~~138~~292		)	(720,~~745~~502		)	(3919,~~799~~497		)	(2835,~~652~~357		)
Total operating expenses, exclusive of provision for bad debts, depreciation and amortization	(~~126~~153,~~261~~548		)	(~~135~~156,~~533~~965		)	(~~418~~317,~~763~~243		)	(~~356~~288,~~589~~713		)
Interest expense	(5659,~~933~~963		)	(5852,~~303~~931		)	(~~172~~118,~~003~~247		)	(~~159~~109,~~426~~678		)
Provision for bad debts	(31,~~022~~982		)	(1,~~249~~502		)	(54,~~714~~650		)	(52,~~841~~685		)
Depreciation and amortization	(4548,~~627~~521		)	(3540,~~190~~567		)	(~~129~~96,~~339~~346		)	(9678,~~356~~567		)
Other income (expense), net	10			(1,408		)	5,475			1,225
Other income, net	945			4,549			2,339			4,189
Other provisions and losses, net	(32,~~788~~086		)	(118,~~017~~631		)	(306,~~517~~180		)	(2119,~~701~~757		)
Impairment losses on operating properties	(6,500		)	—			(6,500		)	—
Earnings before income taxes, equity in earnings of unconsolidated real estate ventures, net gains on dispositions of interests in operating properties and discontinued operations	54,141			27,173			100,017			49,512
Earnings before income taxes, equity in earnings of unconsolidated real estate ventures, net gains on dispositions of interests in operating properties and discontinued operations	32,407			24,806			83,921			64,910
Income taxes, primarily deferred	(20,498		)	(15,993		)	(39,114		)	(26,578		)
Income taxes, primarily deferred	(1,625		)	(8,700		)	(28,177		)	(25,553		)
Equity in earnings of unconsolidated real estate ventures	5,337			6,781			8,635			14,281
Equity in earnings of unconsolidated real estate ventures	5,862			10,787			20,143			23,801
Earnings before net gains on dispositions of interests in operating properties and discontinued operations	38,980			17,961			69,538			37,215
Earnings before net gains on dispositions of interests in operating properties and discontinued operations	36,644			26,893			75,887			63,158
Net gains on dispositions of interests in operating properties	14,096			21,573			13,888			21,804
Earnings from continuing operations	53,076			39,534			83,426			59,019
Discontinued operations	8,163			98,558			44,927			103,213
Net earnings	61,239			138,092			128,353			162,232
Other items of comprehensive income (loss):
Minimum pension liability adjustment	229			390			(1,637		)	390
Unrealized net gains (losses) on derivatives designated as cash flow hedges	4,859			153			2,103			(3,199		)
Unrealized net gains (losses) on available-for-sale securities	(160		)	—			426			—
Comprehensive income	$	66,167		$	138,635		$	129,245		$	159,423
Net earnings applicable to common shareholders	$	61,239		$	135,054		$	128,353		$	156,156
Earnings per share of common stock
Basic:
Continuing operations	$	.52		$	.41		$	.83		$	.60
Discontinued operations	.08			1.13			.45			1.19
Total	$	.60		$	1.54		$	1.28		$	1.79
Diluted:
Continuing operations	$	.50		$	.40		$	.81		$	.59
Discontinued operations	.08			1.10			.43			1.16
Total	$	.58		$	1.50		$	1.24		$	1.75
Dividends per share:
Common stock	$	.47		$	.42		$	.94		$	.84
Preferred stock	$	—		$	.75		$	—		$	1.50

(continued)

The accompanying notes are an integral part of these statements.

Part I. Financial Information

Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income, continued

Three and Nine Months Ended September 30, 2003 and 2002

(Unaudited; in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
Net gains on dispositions of interests in operating properties	$	272	$	161		$	22,076	$	48,985
Earnings from continuing operations	36,916		27,054			97,963		112,143
Discontinued operations	3,576		5,245			104,761		33,008
Net earnings	40,492		32,299			202,724		145,151
Other items of comprehensive income (loss):
Minimum pension liability adjustment	—		(556		)	390		(1,445		)
Unrealized gains (losses) on derivatives designated as cash flow hedges	3,281		(4,872		)	82		(6,634		)
Comprehensive income	$	43,773	$	26,871		$	203,196	$	137,072
Net earnings applicable to common shareholders	$	37,454	$	29,261		$	193,610	$	136,037
Earnings per share of common stock
Basic:
Continuing operations	$	.38	$	.28		$	1.01	$	1.21
Discontinued operations	.04		.06			1.19		.39
Total	$	.42	$	.34		$	2.20	$	1.60
Diluted:
Continuing operations	$	.37	$	.27		$	.99	$	1.19
Discontinued operations	.04		.06			1.16		.38
Total	$	.41	$	.33		$	2.15	$	1.57
Dividends per share:
Common stock	$	.42	$	.39		$	1.26	$	1.17
Preferred stock	$	.75	$	.75		$	2.25	$	2.25

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

~~September~~June 30, ~~2003~~2004 and December 31, ~~2002~~ 2003

(In thousands, except share data)

	September 30, 2003			December 31, 2002
	June 30, 2004			December 31, 2003
	(Unaudited)
Assets:
Property and property-related deferred costs:
Operating properties:
Property	$	5,~~421~~830,~~273~~436		$	5,~~710~~351,~~945~~748
Less accumulated depreciation	~~900~~973,~~085~~241			~~896~~897,~~963~~277
	4,521,188			4,813,982
	4,857,195			4,454,471
Deferred costs	~~235~~251,~~612~~346			~~201~~238,~~959~~122
Less accumulated amortization	94103,~~181~~146			8494,~~713~~424
	141,431			117,246
	148,200			143,698
Net property and deferred costs	4,662,619			4,931,228
Net operating properties	5,005,395			4,598,169
Properties in development	~~235~~224,~~510~~732			~~176~~167,~~214~~073
Investment land and land held for development and sale	404,600			321,744
Properties held for sale	8,241			138,823
Total property and property-related deferred costs	5,302,729			5,429,186
Investment land and land held for development and sale	455,494			414,666
Investments in unconsolidated real estate ventures	479,164			422,735
Total property and property-related deferred costs	5,693,862			5,318,731
Advances to unconsolidated real estate ventures	26,333			19,670
Investments in unconsolidated real estate ventures	573,541			628,305
Prepaid expenses, receivables under finance leases and other assets	469,447			383,914
Advances to unconsolidated real estate ventures	14,222			19,562
Accounts and notes receivable	57,942			56,927
Prepaid expenses, receivables under finance leases and other assets	559,379			479,409
Investments in marketable securities	19,621			32,103
Accounts and notes receivable	67,147			53,694
Cash and cash equivalents	60,775			41,633
Investments in marketable securities	25,187			22,313
Total assets	$	6,416,011		$	6,386,168
Cash and cash equivalents	36,220			117,230
Total assets	$	6,969,558		$	6,639,244
Liabilities:
Debt:
Property debt not carrying a Parent Company guarantee of repayment	$	2,604,864		$	2,768,288
Debt secured by properties held for sale	—			110,935
Parent Company debt and debt carrying a Parent Company guarantee of repayment:
Property debt	181,548			179,150
Other debt	1,778,504			1,386,119
	1,960,052			1,565,269
Total debt	4,564,916			4,444,492
Accounts payable and accrued expenses	156,838			179,530
Other liabilities	657,907			611,042
Parent Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities	—			79,216
Shareholders’ equity:
Series B Convertible Preferred stock with a liquidation preference of $202,500	—			41
Common stock of 1¢ par value per share; authorized 500,000,000 shares in 2004 and 250,000,000 shares in 2003; issued 102,612,050 shares in 2004 and 91,759,723 shares in 2003	1,026			918
Additional paid-in capital	1,579,015			1,346,890
Retained earnings (accumulated deficit)	20,858			(10,991		)
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment	(6,265		)	(4,628		)
Unrealized net losses on derivatives designated as cash flow hedges	(5,163		)	(7,266		)
Unrealized net gains on available-for-sale securities	426			—
Total shareholders’ equity	1,589,897			1,324,964
Total liabilities and shareholders’ equity	$	6,969,558		$	6,639,244

The accompanying notes are an integral part of these statements.

Part I. Financial Information

Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets, continued

September 30, 2003 and December 31, 2002

(In thousands, except share data)

	September 30, 2003			December 31, 2002
	(Unaudited)
Liabilities:
Debt:
Property debt not carrying a Parent Company guarantee of repayment	$	2,815,222		$	3,271,437
Parent Company debt and debt carrying a Parent Company guarantee of repayment:
Property debt	181,127			158,258
Other debt	1,289,579			1,011,782
	1,470,706			1,170,040
Total debt	4,285,928			4,441,477
Accounts payable and accrued expenses	173,478			216,647
Other liabilities	592,849			479,620
Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities	104,284			136,340
Shareholders’ equity:
Series B Convertible Preferred stock with a liquidation preference of $202,500	41			41
Common stock of 1¢ par value per share; 250,000,000 shares authorized; 89,721,012 shares issued in 2003 and 86,909,700 shares issued in 2002	897			869
Additional paid-in capital	1,299,428			1,234,848
Accumulated deficit	(27,432		)	(109,740		)
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment	(3,275		)	(3,665		)
Unrealized net losses on derivatives designated as cash flow hedges	(10,187		)	(10,269		)
Total shareholders’ equity	1,259,472			1,112,084
Total liabilities and shareholders’ equity	$	6,416,011		$	6,386,168

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

~~Nine~~Six Months Ended ~~September~~ June 30, ~~2003~~2004 and ~~2002~~2003

(Unaudited, in thousands)

	2003			2002
	2004			2003
Cash flows from operating activities:
Rents from tenants and other revenues received	$	~~652~~425,~~232~~732		$	~~613~~446,~~871~~753
Proceeds from land sales and notes receivable from land sales	~~228~~188,~~276~~784			~~163~~173,~~922~~509
Interest received	53,~~692~~709			103,~~267~~847
Operating expenditures	(~~329~~212,~~364~~292		)	(~~294~~232,~~281~~258		)
Land development expenditures	(106,467		)	(84,752		)
Land development and acquisition expenditures	(88,187		)	(75,487		)
Interest paid	(~~177~~115,~~702~~350		)	(~~176~~125,~~763~~146		)
Income taxes paid	(915,~~144~~859		)	(42,~~703~~881		)
Operating distributions from unconsolidated real estate ventures	4118,~~206~~815			3227,~~376~~733
Net cash provided by operating activities	~~304~~205,~~729~~352			~~259~~216,~~937~~070
Cash flows from investing activities:
Expenditures for properties in development	(~~128~~54,~~566~~177		)	(~~114~~98,~~432~~015		)
Expenditures for improvements to existing properties	(5432,~~106~~013		)	(3032,~~264~~794		)
Expenditures for acquisitions of interests in properties and other assets	(~~173~~291,~~896~~412		)	(~~816~~1,~~532~~501		)
Proceeds from dispositions of interests in properties	~~272~~88,~~061~~402			~~132~~264,~~324~~772
Expenditures for investments in unconsolidated ventures	(42,739		)	(34,731		)
Other distributions from unconsolidated real estate ventures	31,518			—
Other	19,291			1,503
Expenditures for investments in unconsolidated real estate ventures	(4,620		)	(23,834		)
Net cash used by investing activities	(107,955		)	(862,132		)
Other	(451		)	4,702
Net cash provided (used) by investing activities	(262,753		)	113,330
Cash flows from financing activities:
Proceeds from issuance of property debt	~~215~~6,~~631~~825			~~126~~193,~~764~~560
Repayments of property debt:
Scheduled principal payments	(5536,~~426~~643		)	(6137,~~700~~889		)
Other payments	(~~426~~442,~~724~~866		)	(~~119~~271,~~477~~848		)
Proceeds from issuance of other debt	~~269~~502,~~655~~736			~~792~~6,~~500~~747
Repayments of other debt	(389,~~690~~000		)	(~~340~~121,~~410~~690		)
Repayments of Company-obligated mandatorily redeemable preferred securities	(32,056		)	—
Repayments of Parent Company-obligated mandatorily redeemable preferred securities	(79,751		)	(9,750		)
Purchases of common stock	(7131,~~076~~117		)	(2120,~~186~~886		)
Proceeds from issuance of common stock	—221,917			~~456,347~~—
Proceeds from exercise of stock options	6124,~~925~~554			1331,~~560~~684
Dividends paid	(~~120~~96,~~416~~506		)	(~~110~~79,~~272~~802		)
Other	(153,~~455~~758		)	7(8,~~904~~430		)
Net cash provided (used) by financing activities	(177,632		)	744,030
Net cash used by financing activities	(23,609		)	(318,304		)
Net increase in cash and cash equivalents	19,142			141,835
Net increase (decrease) in cash and cash equivalents	(81,010		)	11,096
Cash and cash equivalents at beginning of period	41117,~~633~~230			3241,~~123~~633
Cash and cash equivalents at end of period	$	6036,~~775~~220		$	~~173~~52,~~958~~729

The accompanying notes are an integral part of these statements.

Part I. Financial Information

Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows, continued

~~Nine~~Six Months Ended ~~September~~ June 30, ~~2003~~2004 and ~~2002~~2003

(Unaudited, in thousands)

	2003			2002
	2004			2003
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings	$	~~202~~128,~~724~~353		$	~~145~~162,~~151~~232
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	~~136~~97,~~448~~325			~~112~~90,~~662~~580
Decrease in undistributed earnings of unconsolidated real estate ventures	21,963			8,575
Change in undistributed earnings of unconsolidated real estate ventures	10,180			14,352
Net gains on dispositions of interests in operating properties	(9558,~~786~~602		)	(7691,~~643~~606		)
Impairment losses on operating properties	~~6,500~~270			—
Gains on extinguishment of debt	(20,454		)	—
Losses (gains) on extinguishment of debt	3,312			(21,169		)
Participation expense pursuant to Contingent Stock Agreement	4536,~~863~~001			3236,~~409~~120
Provision for bad debts	6,536			7,602
Land development and acquisition expenditures in excess of cost of land sales	(16,339		)	—
Debt assumed by purchasers of land	(17,514		)	(15,671		)
Provision for bad debts	4,664			3,568
Deferred income taxes	27,168			22,045
Debt assumed by purchasers of land	(4,723		)	(16,585		)
Other, net	(8,719		)	23,807
Deferred income taxes	30,057			22,466
Net cash provided by operating activities	$	304,729		$	259,937
Decrease (increase) in accounts and notes receivable	(17,600		)	2,440
Decrease in other assets	24,662			14,856
Increase (decrease) in accounts payable, accrued expenses and other liabilities	(37,539		)	3,435
Other, net	5,331			(4,619		)
Net cash provided by operating activities	$	205,352		$	216,070
Schedule of noncash investing and financing activities:
Common stock issued pursuant to Contingent Stock Agreement	$	6613,~~784~~177		$	1921,~~356~~058
Lapses of restrictions on common stock awards	6,974			2,515
Capital lease obligations incurred	6,938			1,429
Debt assumed by purchasers of land	17,514			15,671
Lapses of restrictions on common stock awards and grants of common stock	4,108			6,839
Debt assumed by purchaser of operating properties	276,588			—
Debt assumed by purchasers of land	4,723			16,585
Debt and other liabilities assumed in acquisition of assets	454,198			—
Debt assumed by purchasers of operating properties	130,787			276,588
Property and other assets contributed to an unconsolidated real estate venture	164,306			—
Debt and other liabilities assumed or issued in acquisition of assets	340,524			226,567
Debt and other liabilities related to property contributed to an unconsolidated real estate venture	163,406			—
Debt extinguished in excess of cash paid	—			28,026
Debt and other liabilities assumed in acquisition of assets from Rodamco North America N.V.	—			637,711
Property and other assets contributed to an unconsolidated real estate venture	—			164,306
Capital lease obligations incurred	1,429			11,741
Debt and other liabilities related to property contributed to an unconsolidated real estate venture	—			163,406

Part I. Financial Information

Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~September~~June 30, ~~2003~~2004

(1) ~~Principles~~ SUMMARY ofOF ~~statement~~SIGNIFICANT ~~presentation~~ACCOUNTING POLICIES

(a) Basis of presentation

The unaudited ~~condensed~~ consolidated financial statements include the accounts of The Rouse Company, our subsidiaries and ~~partnerships~~ ventures (“we,” “Rouse” or “~~Rouse~~us”) ~~include~~in ~~all adjustments~~ which ~~are~~we ~~necessary,~~have ina ~~the opinion~~majority ofvoting ~~management,~~interest toand ~~fairly~~control. We ~~present~~also consolidate ~~our~~the ~~financial~~accounts ~~position~~of ~~and~~variable ~~results~~interest ~~of operations. All~~entities ~~such~~where ~~adjustments~~we are ofthe primary abeneficiary. We ~~normal~~account ~~recurring~~for ~~nature. The~~investments ~~statements~~in ~~have~~other ~~been~~ventures ~~prepared~~ using the ~~accounting~~equity ~~policies~~or ~~described~~cost ~~below~~methods ~~and~~ as appropriate in the circumstances. Significant ~~2002~~intercompany balances ~~Annual~~and ~~Report~~transactions toare ~~Shareholders~~eliminated in consolidation.

~~Certain~~The unaudited ~~amounts~~condensed ~~for~~consolidated ~~2002~~financial statements include all adjustments which are necessary, in the opinion of management, to fairly present our financial position and results of operations. All such adjustments are of a normal recurring nature. The statements have been ~~reclassified~~prepared tousing ~~conform~~the toaccounting policies described in our ~~current~~2003 ~~presentation~~Annual Report to Shareholders.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 our financial statements in a number of areas, including the cost ratios and completion percentages used for land sales, evaluation of impairment of long-lived assets (bincluding operating properties and properties held for development or sale) ~~Property~~, evaluation of collectibility of accounts and ~~property-related~~notes receivable and allocation of the purchase price of acquired ~~deferred~~properties. Actual ~~costs~~results could differ from these and other estimates.

~~Properties to be~~In ~~developed~~April or2004, ~~held~~we ~~and~~reclassified ~~used~~certain incosts ~~operations~~and ~~are~~expenses ~~carried~~(primarily ~~at cost reduced for~~employee ~~impairment~~termination ~~losses,~~benefits) ~~where~~related ~~appropriate. Acquisition,~~to ~~development~~organizational changes and ~~construction~~early ~~costs of properties in~~retirements ~~development~~from ~~are~~other ~~capitalized~~provisions ~~including, where applicable, salaries~~ and ~~related costs~~losses, ~~real~~net ~~estate taxes, interest and preconstruction costs directly related~~ to ~~the~~operating ~~project~~expenses. ~~The~~We ~~preconstruction~~made ~~stage of development of an operating~~these ~~property~~reclassifications ~~(or~~because anthese ~~expansion~~expenses ofare anneither ~~existing~~infrequent ~~property)~~nor ~~includes~~unusual ~~efforts~~ and ~~related~~ ~~costs~~are tobecoming ~~secure~~a ~~land~~normal ~~control~~cost ~~and~~of ~~zoning,~~doing ~~evaluate feasibility and complete other initial tasks which are essential to development~~business. ~~Provisions~~ ~~are~~The ~~made~~amounts ~~for~~reclassified ~~costs of potentially~~were ~~unsuccessful~~$5.2 ~~preconstruction~~million ~~efforts~~and by$3.9 ~~charges~~million toin ~~operations. Development~~the three and ~~construction~~six ~~costs~~months ~~and~~ended ~~costs~~June 30, of2003, ~~significant improvements~~respectively, ~~replacements~~ and ~~renovations~~$1.0 atmillion ~~operating properties~~in ~~are~~the ~~capitalized,~~three ~~while~~months ~~costs~~ended ofMarch ~~maintenance~~31, ~~and repairs are expensed as incurred~~2004.

~~Direct costs associated~~Certain ~~with~~amounts ~~financing~~for ~~and~~2003 ~~leasing~~have ofbeen ~~operating~~reclassified ~~properties~~to ~~are~~conform ~~capitalized~~to asour ~~deferred costs~~current ~~and amortized using the interest or straight-line methods, as appropriate, over the periods of the related agreements~~presentation.

IfProperties ~~events~~to be developed or ~~circumstances~~held ~~indicate~~and ~~that~~used ~~the~~in ~~carrying~~operations ~~value~~are ofcarried anat ~~operating~~cost ~~property~~reduced tofor beimpairment losses, ~~held~~where appropriate. Acquisition, development and ~~used~~construction ~~may~~costs beof ~~impaired~~properties in development are capitalized including, awhere ~~recoverability~~applicable, ~~analysis~~salaries isand ~~performed~~related ~~based~~costs, ~~on estimated~~real ~~undiscounted~~estate ~~future~~taxes, interest ~~cash~~and ~~flows~~preconstruction tocosts bedirectly ~~generated~~related ~~from~~to the project. The preconstruction stage of development of an operating property~~. If~~ ~~the~~(or ~~analysis~~an ~~indicates~~expansion ~~that~~of ~~the~~an ~~carrying~~existing ~~value~~property) isincludes ~~not~~efforts ~~recoverable~~and ~~from~~related ~~future~~costs ~~cash~~to ~~flows~~secure land control and zoning, ~~the~~evaluate ~~property is~~feasibility ~~written~~and ~~down~~complete other initial tasks which are essential to ~~estimated~~development. ~~fair~~Provisions ~~value~~are ~~and~~made anfor ~~impairment~~costs ~~loss~~of ispotentially unsuccessful ~~recognized~~preconstruction efforts by charges to operations. ~~Fair~~Development ~~values~~and ~~are~~construction ~~determined~~costs ~~based~~and oncosts ~~appraisals~~of significant improvements and~~/or~~ ~~estimated~~replacements ~~future~~and ~~cash~~renovations ~~flows~~at ~~using~~operating properties ~~appropriate~~are ~~discount~~capitalized, while costs of maintenance and repairs are expensed ~~capitalization~~as ~~rates~~incurred.

8Direct costs associated with leasing of operating properties are capitalized as deferred costs and amortized using the straight-line method over the terms of the related leases.

~~Properties held for sale~~Depreciation ~~are carried at the lower~~ of ~~their~~each ~~carrying~~operating ~~values~~property ~~(i.e.,~~is ~~cost~~computed ~~less~~using ~~accumulated depreciation~~the ~~and~~straight-line ~~any impairment loss recognized, where applicable) or estimated fair values less costs to sell~~method. The ~~net carrying~~annual ~~values~~rate of ~~operating~~depreciation ~~properties are classified as properties held~~ for each ~~sale~~retail ~~when~~center ~~the~~(with ~~properties~~limited ~~are~~exceptions) ~~actively marketed, their sale~~ is ~~considered probable~~based ~~within~~on ~~one~~a 55-year composite life and ~~various~~a ~~other~~salvage ~~criteria~~value ~~relating~~of toapproximately ~~their disposition are met~~10%. ~~Depreciation of~~ ~~these~~Office ~~properties~~buildings ~~is discontinued at that time, but operating revenues, interest~~ and other ~~operating~~properties ~~expenses~~are ~~continue~~depreciated tousing becomposite lives ~~recognized until the date~~ of ~~sale~~40 years. If Furniture ~~active~~and ~~marketing ceases or the properties no longer meet the criteria to be~~fixtures ~~classified~~and ascertain ~~held~~common ~~for~~area ~~sale,~~improvements ~~the properties~~ are ~~reclassified~~depreciated asusing ~~operating, depreciation~~estimated ~~is resumed, depreciation for the period the properties were~~useful ~~classified~~lives asranging ~~held~~from ~~for~~2 ~~sale is recognized and deferred selling costs, if any, are charged~~ to ~~expense~~10 years.

~~(c) Acquisitions of operating properties~~6

WePart ~~allocate the purchase price of properties to net tangible and identified intangible assets acquired based on their fair values~~I. Financial Information

~~Above-market~~Item and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the in-place leases (including those under bargain renewal options) and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease1. ~~The~~ Financial ~~capitalized above- and below-market lease values are amortized as adjustments to rental income over the remaining terms of the respective leases (including periods under bargain renewal options)~~Statements.

~~The~~THE ~~aggregate~~ROUSE ~~value~~COMPANY ~~of other~~AND intangible assets acquired is measured based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. We use independent appraisals or our estimates to determine the respective property values. Our estimates of value are made using methods similar to those used by independent appraisers. Factors we consider in our analysis include an estimate of carrying costs during the expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals during the expected lease-up periods. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.SUBSIDIARIES

9Notes to Condensed Consolidated Financial Statements (Unaudited), continued

~~The~~If events ~~total~~or ~~amount~~circumstances ofindicate ~~other intangible~~that ~~assets~~the ~~acquired~~carrying isvalue ~~further~~of ~~allocated~~an operating property to ~~in-place~~be ~~lease~~held ~~values~~ and ~~customer~~ ~~relationship~~used ~~intangible~~may ~~values~~be ~~based~~impaired, ona ~~our~~recoverability ~~evaluation~~analysis ~~of the specific~~is ~~characteristics~~performed ofbased ~~each~~on ~~tenant’s~~estimated ~~lease~~undiscounted ~~and~~future ~~our~~cash ~~overall~~flows ~~relationship~~to ~~with~~be ~~that~~generated ~~respective~~from ~~tenant~~the property. ~~Characteristics~~If wethe analysis ~~consider~~indicates inthat ~~allocating~~the ~~these~~carrying ~~values~~value ~~include~~is ~~the~~not ~~nature~~recoverable ~~and~~from ~~extent~~future ofcash ~~our~~flows, ~~existing~~the ~~business~~property ~~relationships~~is ~~with~~written ~~the~~down ~~tenant,~~to ~~growth~~estimated ~~prospects~~fair ~~for~~value and an ~~developing~~impairment ~~new~~loss ~~business~~is ~~with~~recognized. Fair ~~the~~values ~~tenant,~~are ~~the~~determined ~~tenant’s~~based ~~credit~~on ~~quality~~appraisals and/or estimated future ~~expectations~~cash offlows ~~lease~~using ~~renewals,~~appropriate ~~among~~discount ~~other~~and ~~factors~~capitalization rates.

~~The~~Properties held ~~value~~for ofsale ~~in-place leases~~are iscarried ~~amortized~~at tothe ~~expense~~lower ~~over~~of ~~the~~their ~~initial~~carrying ~~term~~values of(i.e. ~~the~~cost ~~respective~~less accumulated ~~leases~~depreciation and any impairment loss recognized, where applicable) ~~primarily~~or ~~ranging~~estimated ~~from~~fair ~~two~~values toless ~~ten~~costs ~~years~~to sell. The ~~value~~net carrying values of ~~customer~~operating ~~relationship~~properties ~~intangibles~~are classified as properties held for sale when the properties are actively marketed, their sale is ~~amortized~~considered probable within one year and various other criteria relating to their ~~expense~~disposition are met. Depreciation ~~over~~of these properties is discontinued at that time, but operating revenues, interest and other operating expenses continue to be recognized until the ~~initial~~date of ~~term~~sale. Revenues and ~~any~~expenses ~~renewal~~of properties that are classified as held for sale are presented as discontinued operations for all periods presented in the statements ~~respective~~of ~~leases,~~operations ~~but~~if inthe properties will be or have been sold on terms where we have limited or no ~~event~~continuing ~~does~~involvement ~~the~~with ~~amortization~~them ~~period~~after ~~for~~the sale. If ~~intangible~~active ~~assets~~marketing ~~exceed~~ceases or the ~~remaining~~properties ~~depreciable~~no ~~life~~longer ofmeet the ~~building. Should~~criteria ato ~~tenant~~be ~~terminate~~classified ~~its~~as ~~lease~~held for sale, the properties ~~unamortized~~are ~~portion~~reclassified ofas ~~the~~operating, depreciation is resumed, depreciation ~~in-place~~for ~~lease~~the ~~value~~period the properties were classified as held for sale is recognized and ~~customer~~deferred ~~relationship~~selling ~~intangibles~~costs, ~~would~~if beany, are charged to expense. Additionally, we present other assets and liabilities of properties classified as held for sale separately in the balance sheet, if material.

~~In making estimates of~~Gains ~~fair~~from ~~values~~dispositions ~~for purposes~~ of ~~allocating~~interests ~~purchase~~in ~~price,~~operating weproperties ~~use~~are arecognized ~~number~~using ofthe ~~sources,~~full ~~including~~accrual ~~independent~~method ~~appraisals~~provided that ~~may~~various becriteria ~~obtained~~relating into ~~connection with~~the terms of the transactions ~~acquisition~~and orany ~~financing~~subsequent ofinvolvement ~~the~~by ~~respective~~us ~~property~~with ~~and~~the ~~other~~properties ~~market~~disposed ~~data~~of are met. WeGains ~~also~~relating ~~consider information~~to ~~obtained~~transactions ~~about~~that ~~each~~do ~~property~~not asmeet athe ~~result~~established ofcriteria ~~our~~are ~~pre-acquisition~~deferred ~~due diligence,~~and ~~marketing~~recognized ~~and~~when ~~leasing~~the ~~activities~~criteria inare ~~estimating~~met ~~the~~or ~~fair~~using ~~value~~the ofinstallment ~~the~~or ~~tangible~~cost recovery ~~and~~methods, ~~intangible~~as ~~assets~~appropriate ~~acquired~~in the circumstances.

Portions(c) ofAcquisitions the purchase price of acquisitionsoperating completed in 2002 and in the nine months ended September 30, 2003 were allocated to intangible assets and liabilities as follows (in millions):properties

	2003		2002
Assumed lease assets	$	1.3	$	24.2
In-place lease assets	1.5		16.9
Customer relationships	3.6		32.6
Assumed lease obligations	4.0		24.6

We allocate the purchase price of acquired properties to tangible and identified intangible assets based on their fair values. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.

10The fair values of tangible assets are determined on an “if-vacant” basis. The “if-vacant” fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on property tax assessments and other relevant information obtained in connection with the acquisition of the property.

Our intangible assets arise primarily from contractual rights and include leases with above- or below-market rents (dincluding ground leases where we are lessee) ~~Revenue~~, ~~recognition~~in-place lease and customer relationship values and a real estate tax stabilization agreement.

~~Rents~~Above-market ~~from~~and ~~tenants~~below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received or paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding space, measured over a period equal to the remaining non-cancelable term of the lease (including those under bargain renewal options). The capitalized above- and below-market lease values are amortized as adjustments to rental income or rental expense over the remaining terms of the respective leases (including periods under bargain renewal options).

~~Minimum rent revenues are recognized on a straight-line basis over the terms of the leases. Rents based on tenant sales are recognized when tenant sales exceed any contractual threshold.~~7

~~Revenues~~Part ~~for recoveries from tenants of real estate taxes, utilities, maintenance, insurance and other expenses pursuant to leases are recognized in the period in which the related expenses are incurred~~I. ~~Management fee~~ Financial ~~revenues are generally calculated as a fixed percentage of revenues of the managed property and are recognized as the revenues are earned.~~Information

~~Land~~Item 1. Financial ~~sales~~Statements.

~~Revenues~~THE ~~from~~ROUSE ~~land~~COMPANY ~~sales are~~AND recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by us with the land sold are met. Revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. For land sale transactions under the terms of which we are required to perform additional services and incur significant costs after title has passed, revenues and cost of sales are recognized on a percentage of completion basis.SUBSIDIARIES

~~Cost~~Notes of land sales is generally determined as a specified percentage of land sales revenues recognized for each land development project. The cost ratios used are based on actual costs incurred and estimates of development costs and sales revenues to ~~completion~~Condensed ofConsolidated ~~each project. The ratios are reviewed regularly and~~Financial ~~revised~~Statements ~~periodically for changes in sales and cost estimates or development plans. Significant changes in these estimates or development plans~~(Unaudited), whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project. The specific identification method is used to determine cost of sales for certain parcels of land.continued

11The aggregate fair values of in-place leases and customer relationship assets acquired are measured based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. This value is allocated to in-place lease and customer relationship assets (both anchor stores and tenants). The fair value of in-place leases is based on our estimates of carrying costs during the expected lease-up periods and costs to execute similar leases. Our estimate of carrying costs includes real estate taxes, insurance and other operating expenses and lost rentals during the expected lease-up periods considering current market conditions. Our estimate of costs to execute similar leases includes leasing commissions, legal and other related costs. The fair value of anchor store agreements is determined based on our experience negotiating similar relationships (not in connection with property acquisitions). The fair value of tenant relationships is based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics we consider in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. The value of in-place leases is amortized to expense over the initial term of the respective leases, primarily ranging from two to ten years. The value of anchor store agreements is amortized to expense over the estimated term of the anchor store’s occupancy in the property. Should an anchor store vacate the premises, the unamortized portion of the related intangible is charged to expense. The value of tenant relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense. The value allocated to the tax stabilization agreement was determined based on the difference between the present value of estimated market real estate taxes and amounts due under the agreement and is amortized to operating expense over the term of the agreement, which is approximately 24 years.

~~(e) Derivative~~The aggregate ~~financial~~purchase ~~instruments~~price of properties acquired in 2004 and 2003 was allocated to intangible assets and liabilities as follows (in millions):

We use derivative financial instruments to reduce risk associated with movements in interest rates. We may choose to reduce cash flow and earnings volatility associated with interest rate risk exposure on variable-rate borrowings and/or forecasted fixed-rate borrowings. In some instances, lenders may require us to do so. In order to limit interest rate risk on variable-rate borrowings, we may enter into interest rate swaps or interest rate caps to hedge specific risks. In order to limit interest rate risk on forecasted borrowings, we may enter into forward-rate agreements, forward starting swaps, interest rate locks and interest rate collars. We may also use derivative financial instruments to reduce risk associated with movements in currency exchange rates if and when we are exposed to such risk. We do not use derivative financial instruments for speculative purposes.

	2004		2003

Above-market leases	$	3.8	$	1.1
In-place lease assets	2.9		2.0
Tenant relationships	6.5		0.6
Below-market leases	4.2		4.7
Anchor store agreements	1.5		2.5
Below-market ground lease	14.5		—
Real estate tax stabilization agreement	94.2		—

~~Under interest rate cap~~(d) Investments ~~agreements, we make initial premium payments to the counterparties~~ in ~~exchange for~~marketable ~~the~~securities ~~right to receive payments from them if interest rates exceed specified levels during the agreement period. Under interest rate swap agreements, we~~ and ~~the~~ ~~counterparties~~cash ~~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.~~equivalents

~~Parties~~Our toinvestment ~~interest~~policy ~~rate~~defines ~~exchange~~authorized ~~agreements~~investments ~~are~~and ~~subject~~establishes tovarious ~~market~~limitations ~~risk~~on ~~for~~the ~~changes~~maturities, credit inquality ~~interest rates~~ and ~~risk~~amounts of ~~credit~~investments ~~loss~~held. Authorized ininvestments ~~the~~include ~~event~~U.S. ofgovernment ~~nonperformance~~and byagency ~~the~~obligations, ~~counterparty. We~~certificates doof ~~not~~deposit, ~~require~~bankers’ ~~any collateral~~acceptances, ~~under~~repurchase ~~these~~ agreements, commercial ~~but~~paper, ~~deal~~money ~~only~~market ~~with~~mutual ~~highly~~funds ~~rated~~and ~~financial institution~~corporate ~~counterparties~~debt ~~(which,~~and inequity securities. We ~~certain~~may ~~cases, are~~ also ~~the~~invest ~~lenders~~in onmutual ~~the~~funds ~~related~~to ~~debt)~~closely ~~and~~match ~~expect~~the ~~that~~investment ~~all~~selections ~~counterparties~~of ~~will~~participants ~~meet their~~in ~~obligations~~nonqualified deferred compensation plans.

~~All~~Debt security ofinvestments ~~the~~with ~~interest~~maturities ~~rate swap~~at ~~agreements~~dates weof ~~used~~purchase in ~~2003~~excess ~~and~~of ~~2002~~three months ~~qualified~~are classified as ~~cash~~marketable ~~flow~~securities ~~hedges~~ and ~~hedged~~ ~~our~~carried ~~exposure~~at toamortized ~~forecasted~~cost ~~interest payments on variable-rate LIBOR-based~~as ~~debt. Accordingly,~~it ~~the~~is ~~effective portion~~our ofintention ~~the~~to ~~swaps’~~hold ~~gains~~these orinvestments ~~losses~~until ~~are~~maturity. Short-term ~~reported~~investments aswith amaturities ~~component~~at dates of ~~other comprehensive~~purchase ~~income~~of ~~and~~three ~~reclassified~~months ~~into~~or ~~earnings~~less ~~when~~are ~~the~~classified ~~related~~as ~~forecasted transaction~~cash ~~affects earnings~~equivalents. ~~If we~~ ~~discontinue~~Most ainvestments ~~cash~~in ~~flow~~marketable ~~hedge~~equity ~~because~~securities itare isclassified ~~probable~~as ~~that the original~~trading ~~forecasted~~securities ~~transaction~~and ~~will~~are ~~not~~carried ~~occur,~~at ~~the~~market ~~net~~value ~~gain~~with orchanges ~~loss~~ in ~~accumulated other~~values ~~comprehensive~~recognized ~~income will be immediately reclassified into~~ in earnings. If weInvestments ~~discontinue~~in amarketable ~~cash~~equity ~~flow~~securities ~~hedge~~subject ~~because~~to significant ~~the~~restrictions ~~variability~~on ofsale ~~the~~or ~~probable~~transfer ~~forecasted~~are ~~transaction~~classified ~~has~~as ~~been~~available-for-sale ~~eliminated,~~and ~~the~~are ~~net~~carried ~~gain~~at ormarket ~~loss~~value inwith ~~accumulated~~unrealized ~~other~~changes ~~comprehensive~~in ~~income~~values isrecognized ~~reclassified~~in toother ~~earnings~~comprehensive ~~over the term of the designated hedging relationship~~income.

In the periods presented, we have not recognized any losses as a result of hedge discontinuance and the losses that we recognized related to changes in the time value of interest rate cap agreements were immaterial.8

~~Amounts~~Part ~~receivable or payable under interest rate cap and swap agreements are accounted for as adjustments to interest expense on the related debt~~I. Financial Information

12Item 1. Financial Statements.

~~(f) Stock-based~~THE ~~compensation~~ROUSE COMPANY AND SUBSIDIARIES

WeNotes ~~apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued~~ to ~~Employees,”~~Condensed ~~and~~Consolidated ~~related~~Financial ~~interpretations~~Statements to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock or stock options to our officers and employees only if the quoted market price of the stock at the grant date (~~or other measurement date, if later~~Unaudited) is greater than the amount the grantee must pay to acquire the stock. The following table summarizes the pro forma effects on net earnings (in thousands) and earnings per share of common stock of using an optional fair value-based method, ~~rather than the intrinsic value-based method, to account for stock-based compensation awards made since 1995.~~continued

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Net earnings, as reported	$	40,492		$	32,299		$	202,724		$	145,151
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects and amounts capitalized	391			1,931			3,487			2,768
Deduct: Total stock-based employee compensation expense determined under fair value-based method, net of related tax effects and amounts capitalized	(1,530		)	(5,170		)	(8,511		)	(8,439		)
Pro forma net earnings	$	39,353		$	29,060		$	197,700		$	139,480
Earnings per share of common stock
Basic:
As reported	$	.42		$	.34		$	2.20		$	1.60
Pro forma	$	.41		$	.30		$	2.14		$	1.53
Diluted:
As reported	$	.41		$	.33		$	2.15		$	1.57
Pro forma	$	.40		$	.30		$	2.10		$	1.51

Other income, net in the three and six months ended June 30, 2004 and 2003 is summarized as follows (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004		2003

Interest income	$	611	$	570	$	1,194	$	1,161
Dividends	22		22		52		46
Gains on trading securities, net	312		3,957		1,093		2,982
	$	945	$	4,549	$	2,339	$	4,189

WeMinimum ~~elected~~rent torevenues beare recognized ~~taxed~~on as a ~~real~~straight-line ~~estate investment~~basis ~~trust~~over ~~(“REIT”) pursuant to~~ the ~~Internal~~terms ~~Revenue Code~~ of ~~1986,~~the ~~as amended, effective January 1, 1998~~leases. ~~We believe~~Rents ~~that~~based weon ~~met~~tenant ~~the~~sales ~~qualifications~~are ~~for REIT status as of September 30, 2003~~recognized ~~and~~when ~~intend~~tenant tosales ~~meet~~exceed ~~the~~contractual ~~qualifications in the future~~thresholds.

~~A REIT is permitted to own stock in~~Revenues ~~taxable~~related ~~REIT subsidiaries (“TRS”). TRS are corporations that are permitted~~ to ~~engage~~variable inrecoveries ~~nonqualifying~~from ~~REIT activities. We~~tenants ~~own and operate several TRS that are principally engaged in the development and sale~~ of ~~land~~real ~~for residential,~~estate ~~commercial and other uses~~taxes, ~~primarily in and around Columbia~~utilities, ~~Maryland and Summerlin~~maintenance, ~~Nevada. The~~insurance ~~TRS also operate~~ and~~/or~~ ~~own~~other ~~several~~expenses ~~retail~~pursuant ~~centers~~to ~~and~~leases ~~office~~are ~~and~~recognized ~~other~~in ~~properties. Except~~the ~~with~~period ~~respect~~in towhich the ~~TRS,~~ ~~management~~related ~~does~~expenses ~~not~~are ~~believe~~incurred. ~~that~~Fixed wecontributions ~~will~~from tenants berelated ~~liable~~to ~~for~~these ~~significant~~expenses ~~income taxes~~are atrecognized ~~the~~when ~~Federal~~due. Lease ~~level~~termination orfees inare ~~most~~recognized of when the ~~states~~related inagreements ~~which~~are weexecuted. Management ~~operate~~fee inrevenues ~~2003 and~~are ~~future~~calculated ~~years.~~as ~~Current~~a ~~Federal~~fixed ~~income~~percentage ~~taxes~~of revenues of the ~~TRS~~managed ~~are~~properties ~~likely~~and ~~to increase~~are inrecognized ~~future years~~ as ~~we exhaust~~ the ~~net~~managed ~~loss~~properties’ ~~carryforwards of certain~~revenues ~~TRS~~are ~~and complete certain land development projects~~earned.

~~In connection with our~~Revenues ~~election~~from toland besales ~~taxed~~are asrecognized ausing ~~REIT,~~the wefull ~~have~~accrual ~~also~~method ~~elected~~provided tothat various becriteria ~~subject~~relating to the ~~“built-in~~ ~~gain”~~terms ~~rules~~of on the ~~assets~~transactions ofand ~~our~~any ~~Qualified REIT Subsidiaries~~subsequent ~~(“QRS”). Under~~involvement ~~these~~by ~~rules,~~us ~~taxes~~with ~~will be~~the ~~payable~~land atsold ~~the~~are ~~time~~met. Revenues ~~and~~relating to ~~the~~transactions ~~extent~~ that ~~the~~do ~~net~~not ~~unrealized~~meet ~~gains~~the onestablished ~~our~~criteria ~~assets~~are atdeferred ~~the~~and ~~date~~recognized ofwhen ~~conversion~~the tocriteria ~~REIT~~are ~~status~~met ~~are~~or ~~recognized~~using inthe ~~taxable~~installment ~~dispositions~~or ofcost ~~such~~recovery ~~assets~~methods, as appropriate in the ~~ten-year period following conversion~~circumstances. ~~Such~~For ~~net~~land ~~unrealized~~sale ~~gains~~transactions ~~were~~under ~~approximately $2.5~~the ~~billion. We~~terms ~~believe~~of which ~~that~~ we ~~will not~~are be required to ~~make~~perform ~~significant~~additional ~~payments~~services ofand ~~taxes~~incur ~~on built-in gains with~~significant ~~respect~~costs toafter ~~these~~title ~~assets~~has ~~throughout~~passed, ~~the~~revenues ~~ten-year~~and ~~period~~cost ~~due to the availability~~ of ~~our~~sales ~~net~~are ~~operating loss carryforward to offset built-in gains which might be~~ recognized ~~and~~on ~~the ability for us to make nontaxable dispositions through like-kind exchanges, if necessary. It may be necessary to recognize~~ a ~~liability for such taxes in the future, if our~~ ~~plans~~percentage ~~and~~of ~~intentions~~completion ~~with respect to QRS asset dispositions or the related tax laws change~~basis.

~~Our deferred tax asset~~Cost ~~was~~of ~~$95.1~~land ~~million~~sales ~~and~~is ~~our~~determined ~~deferred~~as ~~tax~~a ~~liability~~specified ~~was~~percentage ~~$75.2~~of ~~million~~land atsales ~~September~~revenues ~~30,~~recognized ~~2003. Our~~for ~~deferred~~each ~~tax~~community ~~asset~~development ~~was $3~~project.8 The ~~million~~cost ~~and~~ratios ~~our~~used ~~deferred~~are ~~tax~~based ~~liability~~on ~~was $96.2 million at December 31, 2002. In September 2003, we acquired a~~actual ~~controlling~~costs ~~financial~~incurred ~~interest~~and inestimates anof ~~entity~~development ~~(in~~costs ~~which~~and wesales ~~previously~~revenues ~~held a~~to ~~minority~~completion ~~interest acquired from Rodamco) whose assets include, among other things, approximately $400 million~~ of ~~temporary~~each ~~differences~~project. WeThe ~~believe~~ratios are ~~that~~reviewed itregularly isand ~~more~~revised ~~likely~~for ~~than~~changes ~~not that~~in wesales ~~will realize these assets~~ and, ~~accordingly,~~cost ~~recorded~~estimates ~~a deferred tax~~or ~~asset~~development ~~of approximately $140 million~~plans. WeSignificant changes ~~also~~in ~~recorded~~these aestimates ~~deferred~~or ~~credit~~development ofplans, ~~approximately~~whether ~~$122~~due ~~million~~to changes in ~~accordance~~market ~~with~~conditions ~~EITF~~or ~~98-11~~other factors, ~~“Accounting~~could ~~for~~result ~~Acquired Temporary Differences~~ in ~~Certain Purchase~~changes ~~Transactions~~to ~~That~~the ~~Are~~cost ~~Not~~ratio ~~Accounted~~used for a asspecific ~~Business Combinations~~project.” ~~This~~The ~~deferred credit~~specific ~~will~~identification ~~reduce~~method ~~income~~is ~~tax~~used ~~expense~~to ~~when~~determine ~~the~~cost ~~deferred~~of ~~tax~~sales ~~asset~~for iscertain ~~realized. Deferred~~parcels ~~tax~~of land, ~~liabilities~~including ~~will~~acquired ~~become~~parcels ~~payable as~~we ~~TRS~~do ~~net~~not ~~operating~~intend ~~loss~~to ~~carryforwards~~develop ~~are~~or ~~exhausted~~for ~~and temporary differences~~which ~~reverse~~development ~~(primarily~~is ~~due~~complete toat ~~completion~~the date of ~~land development projects)~~acquisition.

14(f) Derivative financial instruments

We ~~had~~use derivative financial ~~previously~~instruments ~~recorded~~to ~~valuation~~reduce ~~allowances~~risk ~~related~~associated with movements in interest rates. We may choose to ~~certain~~reduce ~~deferred~~cash ~~tax~~flow ~~assets~~and ~~that~~earnings wevolatility ~~could~~associated ~~not~~with ~~conclude~~interest ~~were~~rate ~~more~~risk ~~likely~~exposure ~~than~~on variable-rate ~~not~~borrowings toand/or beforecasted ~~realized~~fixed-rate borrowings. AIn ~~significant~~some ~~portion~~instances, oflenders ~~these~~may ~~assets~~require us to ~~related~~do so. In order to ~~temporary~~limit ~~differences~~interest rate risk on variable-rate borrowings, ~~primarily~~we ~~net~~may ~~operating~~enter ~~loss~~into ~~carryforwards, attributed~~pay tofixed-receive avariable interest ~~TRS~~rate ~~that~~swaps isor aninterest ~~investor~~rate incaps ~~the~~to ~~planned~~hedge ~~community~~specific ~~of Fairwood~~risks. ~~Land~~In ~~sales~~order atto ~~Fairwood~~limit ~~began~~interest rate risk on inforecasted ~~the~~borrowings, ~~third~~we ~~quarter~~may ofenter ~~2002. Our experience~~into ~~over~~forward-rate ~~the~~agreements, ~~past~~forward starting ~~twelve~~swaps, ~~months~~interest ~~and~~rate ~~our~~locks ~~latest~~and ~~projections~~interest ~~indicate~~rate ~~that it~~collars. isWe ~~now~~may ~~more~~also enter ~~likely~~into ~~than~~pay ~~not~~variable-receive ~~that~~fixed weinterest ~~will~~rate ~~realize~~swaps ~~substantially~~to ~~all~~hedge ofthe ~~these~~fair ~~deferred~~values ~~tax~~of ~~assets~~fixed-rate borrowings. ~~Accordingly~~ In addition, ~~in the~~we ~~third~~may ~~quarter~~use ofderivative ~~2003,~~financial instruments weto ~~eliminated~~reduce ~~$9.9~~risk ~~million~~associated ofwith ~~the~~movements ~~valuation~~in currency exchange rates ~~allowance~~if ~~related~~and when we are exposed to ~~these~~such ~~deferred~~risk. We ~~tax~~do ~~assets~~not use derivative financial instruments for speculative purposes.

~~(3) Discontinued~~Under interest ~~operations~~rate cap agreements, we make initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates exceed specified levels during the agreement period. Under interest rate swap agreements, we 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.

Under the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” we report the operating results of properties that we have either disposed of or classified as held for sale as discontinued operations for all periods presented. Additionally, we present other assets and liabilities of properties classified as held for sale separately in the balance sheet, if material.9

~~During the~~Part ~~three months ended September 30, 2003, we sold The Jacksonville Landing, a retail center in Jacksonville, Florida, for net proceeds of $4~~I.8 Financial million. We recognized a gain of $2.8 million relating to this sale. We recorded an impairment loss of $3.3 million in the fourth quarter of 2002 related to this property. We also sold three small neighborhood retail properties in Columbia, Maryland for aggregate proceeds of $2.2 million and recognized aggregate gains of $0.9 million. We sold these properties because they no longer met our investment criteria.Information

~~During the~~Item ~~nine months ended September 30, 2003, we sold six retail centers in the Philadelphia metropolitan area and, in a related transaction, acquired Christiana Mall from a party related to the purchaser~~1. ~~In connection with these transactions, we~~ Financial ~~received net cash proceeds of $218~~Statements.3 million, the purchaser assumed or repaid at settlement $276.6 million of property debt, and we assumed a participating mortgage secured by Christiana Mall. We recognized net gains on dispositions of interests in operating properties of $65.4 million relating to the monetary portions of these transactions. We recorded an impairment loss of $38.8 million in the fourth quarter of 2002 related to one of the retail centers which we sold. We entered into these transactions to enhance the overall quality of our portfolio of retail centers.

~~During the~~THE ~~nine~~ROUSE ~~months~~COMPANY ~~ended~~AND September 30, 2003, we also sold eight office and industrial buildings in the Baltimore-Washington corridor for net proceeds of $46.6 million. We recognized gains on operating properties of $4.4 million relating to the sales of these properties. We sold these properties because they no longer met our investment criteria.SUBSIDIARIES

15Notes to Condensed Consolidated Financial Statements (Unaudited), continued

WeParties ~~also~~to ~~recorded~~interest arate ~~net~~exchange ~~gain~~agreements ofare ~~$26.9~~subject ~~million related~~ to ~~the~~market ~~extinguishment~~risk offor ~~debt~~changes in ~~secured~~interest byrates ~~two~~and risk of credit loss in the ~~properties~~event ~~subsequently~~of ~~sold~~nonperformance inby the counterparty. We ~~Philadelphia~~do not require any ~~metropolitan~~collateral ~~area~~under ~~and~~these ~~held~~agreements bybut adeal ~~lender~~only with highly rated financial institution counterparties (which, ~~released~~in ~~the~~certain ~~mortgages~~cases, ~~for~~are aalso ~~cash~~the lenders on ~~payment~~the ofrelated ~~less~~debt) ~~than~~and ~~their~~expect ~~aggregate~~that ~~carrying~~all ~~amount~~counterparties will meet their obligations.

WeAll ~~classified~~of the ~~operating~~pay ~~results~~fixed-receive ofvariable ~~all~~interest ~~properties~~rate ~~sold~~swaps and other pay fixed-receive variable derivative financial instruments we used in 2004 and 2003 qualified as cash flow hedges and hedged our exposure to forecasted interest payments on variable-rate LIBOR-based debt or the forecasted issuance of fixed-rate debt. Accordingly, the effective portion of the instruments’ gains or losses is reported as a component of other comprehensive income and reclassified into earnings when the related forecasted transactions affect earnings. If we discontinue a cash flow hedge because it is probable that the original forecasted transaction will not occur, the net gain or loss in ~~discontinued~~accumulated other comprehensive income is immediately ~~operations~~reclassified ~~for~~into ~~all~~earnings. If ~~periods~~we discontinue ~~presented~~a cash flow hedge because the variability of the probable forecasted transaction has been eliminated, the net gain or loss in accumulated other comprehensive income is reclassified to earnings over the term of the designated hedging relationship. Any subsequent changes in the fair value of the derivative are immediately recognized in earnings.

In ~~April 2002~~2004, we ~~sold~~entered ~~our~~into ~~interests~~pay invariable-receive 12fixed ~~community~~interest ~~retail~~rate ~~centers~~swaps indesignated ~~Columbia,~~as ~~Maryland~~fair ~~for~~value ~~net~~hedges ~~proceeds~~ of ~~$111.1~~fixed-rate ~~million. We~~debt ~~recorded a gain on this transaction of approximately $32~~instruments.~~0 million, net of deferred income taxes of $18.4 million.~~ ~~Our~~These ~~interests~~hedges inand ~~one of~~ the ~~community~~ ~~retail~~hedged ~~centers~~instruments ~~were reported in unconsolidated real estate ventures~~are ~~and~~carried ~~the~~at ~~gain~~their onfair ~~the~~values ~~sale~~with ofchanges ~~our interests~~ in ~~this~~their ~~property~~fair ~~($4.3~~values ~~million,~~recorded ~~net of deferred income taxes of $2.0 million) is included~~ in ~~continuing operations~~ ~~(see note 9)~~earnings. ~~The~~ ~~remaining~~Because ~~gain~~the ~~on this~~hedges ~~transaction~~are ~~($27.7~~highly ~~million~~effective, ~~net of deferred income taxes of $16.4 million) is classified as a component of discontinued operations. In anticipation of~~ the ~~sale~~changes ofin ~~the~~their ~~community~~values ~~retail~~are ~~centers,~~substantially weequal ~~repaid debt secured by these properties in March 2002~~ and ~~incurred a loss on this repayment of $5~~offsetting.~~3 million, including prepayment penalties of $4.6 million.~~

~~The~~We ~~operating~~have ~~results~~not recognized any losses as a result of hedge discontinuance, and the expense ~~properties~~that ~~sold~~we recognized related to changes in ~~2003~~the ~~and~~time ~~2002~~value ~~included~~of ininterest ~~discontinued~~rate ~~operations~~cap ~~are~~agreements ~~summarized~~was asinsignificant ~~follows~~for ~~(in~~2004 ~~thousands):~~and 2003.

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Revenues	$	559		$	30,644		$	43,748		$	89,190
Operating expenses, exclusive of provision for bad debts, ground rent expense, depreciation and amortization	(484		)	(12,646		)	(20,855		)	(39,095		)
(Provision for) recovery of bad debts	54			(459		)	(822		)	(1,761		)
Ground rent expense	—			(334		)	(603		)	(993		)
Interest expense	(174		)	(6,840		)	(9,979		)	(21,537		)
Depreciation and amortization	(241		)	(5,067		)	(7,109		)	(16,306		)
Other gains (losses), net	—			—			26,896			(5,346		)
Net gains on dispositions of interests in operating properties	3,908			—			73,710			27,658
Income tax benefit (provision):
Current	(1		)	(33		)	(144		)	(106		)
Deferred	(45		)	(20		)	(81		)	1,304
Discontinued operations	$	3,576		$	5,245		$	104,761		$	33,008

Amounts receivable or payable under interest rate cap and swap agreements are accounted for as adjustments to interest expense on the related debt.

1610

~~(4) Unconsolidated~~Part ~~real estate ventures~~I. Financial Information

WeItem ~~own interests in unconsolidated real estate ventures that own and/or develop properties~~1. ~~We use these ventures to~~ Financial ~~limit our risk associated with individual properties and to reduce our capital requirements~~Statements. We may also contribute our interests in properties to unconsolidated ventures for cash distributions and interests in the ventures to provide liquidity as an alternative to outright property sales. We account for the majority of these ventures using the equity method because we have joint interest and control of properties with our venture partners. For those ventures where we own less than 5% interest and have virtually no influence on the venture’s operating and financial policies, we account for our investment using the cost method.

~~At September 30,~~THE ~~2003~~ROUSE ~~and~~COMPANY ~~December 31,~~AND 2002, these ventures were primarily partnerships and corporations which own retail centers and a joint venture that is developing the planned community of Fairwood in Prince George’s County, Maryland. Most of the properties owned by these ventures are managed by our affiliates for fees and the ventures reimburse us for certain direct costs.SUBSIDIARIES

~~In August 2003,~~Notes weto ~~acquired~~Condensed ~~the~~Consolidated ~~remaining interests in Staten Island Mall, a~~Financial ~~retail~~Statements ~~center in New York~~(Unaudited), for approximately $148 million and the assumption of approximately $53 million in debt. Prior to this transaction, we held a noncontrolling interest in the property and accounted for our investment as an investment in unconsolidated real estate ventures. We consolidated the property in our financial statements from the date of the acquisition.continued

(5g) Debt Stock-based compensation

~~Debt~~We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for stock-based employee compensation plans. Under this method, compensation cost is recognized ~~summarized~~for asawards ~~follows~~of shares of common stock or stock options to our officers and employees only if the quoted market price of the stock at the grant date (inor other measurement date, if later) is greater than the amount the grantee must pay to acquire the stock. The following table summarizes the pro forma effects on net earnings (in thousands): and earnings per share of common stock of using the fair value-based method, rather than the intrinsic value-based method, to account for stock-based compensation awards made since 1995.

	September 30, 2003						December 31, 2002
	Three months ended June 30,						Six months ended June 30,
	Total			Due in one year			Total			Due in one year
	2004			2003			2004			2003
Mortgages and bonds	$	2,964,140		$	425,978		$	3,410,257		$	304,737
Net earnings, as reported	$	61,239		$	138,092		$	128,353		$	162,232
Medium-term notes	45,500			—			48,500			—
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects and amounts capitalized	735			1,259			1,668			3,095
Credit facility borrowings	505,000			—			242,690			242,690
Deduct: Total stock-based employee compensation expense determined under fair value-based method, net of related tax effects and amounts capitalized	(3,093		)	(2,418		)	(5,514		)	(5,754		)
Other loans	771,288			20,616			740,030			1,014
Pro forma net earnings	$	58,881		$	136,933		$	124,507		$	159,573
Total	$	4,285,928		$	446,594		$	4,441,477		$	548,441
Earnings per share of common stock:
Basic:
As reported	$	.60		$	1.54		$	1.28		$	1.79
Pro forma	$	.57		$	1.53		$	1.24		$	1.76
Diluted:
As reported	$	.58		$	1.50		$	1.24		$	1.75
Pro forma	$	.56		$	1.49		$	1.21		$	1.73

The ~~amounts~~ ~~due~~per inshare ~~one~~weighted-average ~~year~~estimated ~~represent~~fair ~~maturities~~values ~~under~~of ~~existing~~options ~~loan~~granted ~~agreements,~~during ~~except~~2004 ~~where~~and ~~refinancing~~2003 ~~commitments~~were ~~from~~$6.83 ~~outside~~and ~~lenders~~$3.37, ~~have been obtained~~respectively. In These ~~these~~fair ~~instances,~~values ~~maturities~~were ~~are determined~~estimated ~~based~~ on the ~~terms~~dates of each grant using the Black-Scholes ~~refinancing~~option-pricing ~~commitments.~~model with the following assumptions:

We expect to repay the debt due in one year with operating cash flows, proceeds from property refinancings (including refinancings of maturing mortgages), proceeds from the issuance of unsecured debt, credit facility borrowings or other available corporate funds.

	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004		2003
Risk-free interest rate	3.9	%	2.0	%	3.5	%	3.2	%
Dividend yield	4.5	%	4.5	%	4.0	%	5.4	%
Volatility factor	20.0	%	20.0	%	20.0	%	20.0	%
Expected life in years	5.4		4.0		6.4		6.5

1711

~~At September 30,~~Part ~~2003 and December 31, 2002, approximately $83 million of our debt provided for payments of additional interest based on operating results of the related properties in excess of stated levels~~I. ~~The participating debt primarily relates to~~ Financial a retail center where the lender receives a fixed interest rate of 7.625% and a 5% participation in cash flows. The lender also will receive a payment at maturity (September 2004) equal to the greater of 5% of the value of the property in excess of the debt balance or the amount required to provide an internal rate of return of 8.375% over the term of the loan. The internal rate of return of the lender is limited to 12.5%. We recognize interest expense on this debt at a rate required to provide the lender the required minimum internal rate of return (8.375%) and monitor the accrued liability and the fair value of the projected payment due on maturity. Based on our analysis, we believe that the payment at maturity will be the balance needed to provide the specified minimum internal rate of return.Information

~~(6) Pension~~Item ~~plans~~1. Financial Statements.

~~We have~~THE aROUSE ~~defined~~COMPANY ~~benefit~~AND pension plan (“funded plan”) covering substantially all employees and separate, nonqualified unfunded defined benefit pension plans covering directors and participants in the funded plan whose defined benefits exceed the plan’s limits. In February 2003, we modified our defined benefit pension plans so that covered employees will not earn additional benefits for future service. Earned benefits will be paid upon a participant’s separation or retirement from the Company. In a related action, our Board of Directors also approved a new defined contribution plan under which we may make discretionary contributions to covered employees’ 401(k) retirement accounts.SUBSIDIARIES

18Notes to Condensed Consolidated Financial Statements (Unaudited), continued

Due to the modification of the pension plan, we measured our benefit obligations as of March 31, 2003, including the impact of the curtailment. Information relating to the obligations, assets and funded status of the plans at March 31, 2003 and December 31, 2002 and for the three months ended March 31, 2003 and year ended December 31, 2002 is summarized as follows (dollars in thousands2): TAX MATTERS

	March 31, 2003						December 31, 2002
	Funded			Unfunded			Funded			Unfunded
Change in benefit obligations:
Benefit obligations at beginning of period	$	70,491		$	19,799		$	64,208		$	21,767
Service cost	—			2			4,744			1,069
Interest cost	1,091			317			4,592			1,663
Plan amendment	—			—			2,398			96
Actuarial loss (gain)	(22		)	60			4,532			2,315
Benefits paid	(72		)	(32		)	(226		)	(135		)
Benefit obligations before special events	71,488			20,146			80,248			26,775
Special events:
Curtailment	(8,734		)	(1,105		)	—			—
Settlements	(5,119		)	(2,251		)	(9,757		)	(6,976		)
Benefit obligations at end of period	57,635			16,790			70,491			19,799
Change in plan assets:
Fair value of plan assets at beginning of period	63,625			—			57,808			—
Actual return on plan assets	(495		)	—			(8,183		)	—
Employer contributions	592			2,925			24,165			8,056
Benefits paid, including settlements	(5,966		)	(2,925		)	(10,165		)	(8,056		)
Fair value of plan assets at end of period	57,756			—			63,625			—
Funded status	121			(16,790		)	(6,866		)	(19,799		)
Unrecognized net actuarial loss	29,564			3,279			39,925			4,823
Unamortized prior service cost	—			165			5,655			4,919
Unrecognized transition obligation	—			—			199			—
Asset (liability) recognized in the condensed consolidated balance sheet	$	29,685		$	(13,346	)	$	38,913		$	(10,057	)
Amounts recognized in the balance sheets consist of:
Prepaid benefit cost	$	29,685		$	—		$	38,913		$	—
Accrued benefit liability	—			(17,176		)	—			(18,641		)
Intangible asset	—			165			—			4,919
Accumulated other comprehensive income item – minimum pension liability adjustment	—			3,665			—			3,665
Net amount recognized	$	29,685		$	(13,346	)	$	38,913		$	(10,057	)
Weighted-average assumptions as of end of period:
Discount rate	6.50		%	6.50		%	6.50		%	6.50		%
Lump sum rate	6.50			6.50			6.50			6.50
Expected rate of return on plan assets	8.00			—			8.00			—
Rate of compensation increase	—			4.50			4.50			4.50

We elected to be taxed as a real estate investment trust (“REIT”) pursuant to the Internal Revenue Code of 1986, as amended, effective January 1, 1998. We believe that we met the qualifications for REIT status as of June 30, 2004 and intend to meet the qualifications in the future.

19A REIT is permitted to own securities of taxable REIT subsidiaries (“TRS”) in an amount up to 20% of the fair value of its assets. TRS are taxable corporations that are used by REITs generally to engage in nonqualifying REIT activities or perform nonqualifying services. We own and operate several TRS that are principally engaged in the development and sale of land for residential, commercial and other uses, primarily in and around Columbia, Maryland, Summerlin, Nevada and Houston, Texas. The TRS also operate and/or own several retail centers and office and other properties. Except with respect to the TRS, management does not believe that we will be liable for significant income taxes at the Federal level or in most of the states in which we operate in 2004 and future years. Current Federal income taxes of the TRS are likely to increase in future years as we exhaust the net loss carryforwards of certain TRS and complete certain land development projects. These increases could be significant.

~~The~~In ~~assets~~connection ofwith ~~the~~our ~~funded~~election ~~plan~~to ~~consist~~be ~~primarily~~taxed ofas ~~fixed~~a ~~income~~REIT, ~~and~~we ~~marketable equity~~also ~~securities. The~~elected ~~curtailment~~to ofbe ~~the~~subject ~~defined benefit pension plan required us~~ to ~~immediately~~the ~~adjust~~“built-in ~~the~~gain” ~~asset~~rules. ~~(liability)~~Under ~~recognized~~these inrules, during the ~~condensed~~ten-year ~~consolidated~~period ~~financial~~following ~~statements. The~~conversion, ~~adjustment~~a corporate ~~was~~level ~~equal~~tax towill ~~substantially all~~be ~~unamortized~~payable, ~~prior~~at ~~service~~the ~~cost~~time and ~~unrecognized~~to ~~transition~~the ~~obligation~~extent ~~and resulted~~that inthe anet unrealized ~~loss~~gains ofon ~~$10.2~~our ~~million~~assets ~~for~~at the ~~three~~date ~~months~~of ~~ended~~our ~~March 31, 2003. We~~conversion ~~also~~to ~~incurred~~REIT ~~additional~~status ~~settlement~~(January 1, 1998) ~~losses~~are ofrecognized ~~$2.2~~in ~~million~~taxable ~~for~~dispositions ~~the~~of ~~three~~such assets. Such ~~months~~net ~~ended~~unrealized ~~September 30,~~gains were ~~2003~~approximately ~~and~~ $92.5 ~~million~~billion ~~for~~on ~~the~~January ~~nine months ended September 30~~1, ~~2003 related~~1998. toWe ~~lump-sum~~believe ~~distributions~~that ~~made~~we ~~primarily~~will tonot ~~employees~~be ~~retiring~~required asto amake ~~result~~significant payments of ~~early~~taxes ~~retirement~~on ~~programs offered~~ built-in ~~2002~~gains ~~and~~throughout ~~2003, a change in~~ the ~~senior management~~ten-year ~~organizational~~period ~~structure~~due into ~~March 2003, and~~ the ~~sale~~ availability of ~~six retail~~our ~~centers~~net inoperating ~~the~~loss ~~Philadelphia~~carryforward ~~metropolitan~~to ~~area~~offset ~~(see note 3). The lump~~built-~~sum~~in ~~distributions~~gains ~~were~~which ~~paid~~might tobe ~~participants~~recognized ~~primarily~~and ~~from~~ the ~~assets~~potential offor ~~our~~us ~~funded~~to ~~pension~~make ~~plan~~nontaxable ~~or,~~dispositions ~~with~~through ~~respect~~like-kind ~~to the unfunded plan~~exchanges, byif ~~contributions~~necessary. It may ~~made~~be bynecessary ~~us. The~~to ~~curtailment~~recognize ~~loss~~a ~~and~~liability ~~settlement~~for ~~charges are~~such ~~included~~taxes in ~~other~~the ~~provisions~~future if our plans and ~~losses,~~intentions ~~net~~with inrespect ~~the~~to ~~condensed~~our ~~consolidated statement~~REIT ofasset ~~operations~~dispositions ~~(see~~or ~~note~~the 8)related tax laws change.

Our net deferred tax assets were $81.0 million and our deferred tax liabilities were $112.0 million at June 30, 2004. Our net deferred tax assets were $91.0 million and our deferred tax liabilities were $86.4 million at December 31, 2003. Deferred income taxes will become payable as temporary differences reverse (7primarily due to the completion of land development projects) ~~Segment~~ ~~information~~and TRS net operating loss carryforwards are exhausted.

We have five business segments: retail centers, office and other properties, community development, commercial development and corporate. The retail centers segment includes the operation and management of regional shopping centers, downtown specialty marketplaces, the retail components of mixed-use projects and community retail centers. The office and other properties segment includes the operation and management of office and industrial properties and the nonretail components of the mixed-use projects. The community development segment includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland and Summerlin, Nevada. The commercial development segment includes the evaluation of all potential new projects (including expansions of existing properties3) andDISCONTINUED acquisition opportunities and the management of them through the development or acquisition process. The corporate segment is responsible for shareholder and director services, financial management, strategic planning and certain other general and support functions. Our business segments offer different products or services and are managed separately because each requires different operating strategies or management expertise.OPERATIONS

~~The operating~~We ~~measure~~may ~~used~~sell tointerests ~~assess~~in ~~operating results for the business segments is~~retail ~~Net~~centers ~~Operating~~that ~~Income~~are ~~(“NOI”). We~~not ~~define NOI~~consistent aswith ~~segment~~our ~~revenues~~long-term ~~(exclusive~~business ofstrategies ~~corporate~~or ~~interest income) less segment~~not ~~operating~~meeting ~~expenses~~our ~~(including~~investment ~~provisions~~criteria ~~for bad debts, losses (gains) on marketable securities~~ and ~~net~~office ~~losses (gains) on sales of properties developed for sale, but excluding income taxes, ground rent expense, distributions on Company-obligated mandatorily redeemable preferred securities~~ and other ~~subsidiary~~ ~~preferred~~properties ~~stock~~that ~~and real estate depreciation and amortization). Additionally, discontinued operations, equity in earnings of unconsolidated real estate ventures and minority interests~~ are ~~adjusted to reflect NOI on the same basis. Prior to July 1,~~not ~~2003,~~located ~~we included certain income taxes~~ in our ~~definition~~master-planned ofcommunities ~~NOI.~~or ~~Effective July 1,~~not ~~2003,~~part ~~we revised our definition to exclude these amounts from NOI, affecting primarily the presentation~~ of ~~our~~urban ~~community development~~mixed-use ~~activities~~properties. We ~~made~~may ~~this~~also ~~change~~dispose ~~because~~of weproperties ~~now assess the operating results of our segments on a pre-tax basis. Amounts~~ for ~~prior~~other ~~periods have been reclassified and conform to the current definition~~reasons.

20In May 2004, we agreed to sell our interests in two office buildings in Hunt Valley, Maryland. These sales are expected to settle by the end of 2004. We recorded aggregate impairment losses of $1.4 million in the fourth quarter of 2003 and $0.3 million in the second quarter of 2004 related to these properties. These properties are classified as held for sale at June 30, 2004.

In May 2004, we sold our interest in one office building in Hughes Center, a master-planned business park in Las Vegas, Nevada, as part of the 2003 agreements under which we acquired interests in entities developing The ~~accounting~~Woodlands, ~~policies~~a master-planned community in the Houston, Texas metropolitan area, for cash of $7.0 million and the ~~segments~~assumption ~~are~~by the ~~same~~buyer asof ~~those~~$3.5 ~~used~~million of mortgage debt. We recorded a gain on this sale of $5.5 million. In January and February 2004, we sold interests in five office buildings and seven parcels subject to ~~prepare~~ground ~~our~~leases in Hughes Center as part of the same 2003 agreements, ~~condensed~~for ~~consolidated~~cash ~~financial~~of ~~statements~~$64.3 ~~except~~million ~~that:~~and the assumption by the buyer of $107.3 million of mortgage debt. We recorded aggregate gains on these sales in the first quarter of 2004 of approximately $35.3 million (net of deferred income taxes of $2.7 million). In December 2003, in related transactions, we sold interests in two office buildings and two parcels subject to ground leases in Hughes Center.

~~• we~~We ~~account~~also ~~for~~recorded, ~~real~~in ~~estate~~the ~~ventures~~three inmonths ~~which~~ended weJune ~~have~~30, ~~joint~~2004, ~~interest~~net ~~and~~gains ~~control and~~of ~~certain~~$2.8 ~~other~~million (net ~~minority~~of ~~interest~~deferred ~~ventures~~income ~~(“proportionate~~taxes ~~share~~of ~~ventures”~~$0.4 million) ~~using~~ related to the ~~proportionate~~resolutions ~~share~~of certain ~~method~~contingencies ~~rather~~related ~~than~~to ~~the~~disposals ~~equity~~of ~~method;~~properties in 2002, 2003 and 2004.

• we include our share of NOI less interest expense and ground rent expense of other unconsolidated minority interest ventures (“other ventures”) in revenues; and12

~~• we include~~Part ~~discontinued operations and minority interests in NOI rather than presenting separately~~I. Financial Information

~~These differences~~Item ~~affect only the reported revenues and operating expenses of the~~1. Financial ~~segments and have no effect on our reported net earnings~~Statements.

~~Operating results~~THE ~~for~~ROUSE ~~the~~COMPANY ~~segments~~AND ~~are summarized as follows (in thousands):~~SUBSIDIARIES

	Retail Centers		Office and Other Properties		Community Development		Commercial Development			Corporate			Total
Three months ended September 30, 2003
Revenues	$	198,924	$	49,738	$	62,833	$	—		$	—		$	311,495
Operating expenses *	80,959		20,160		29,473		2,727			4,685			138,004
NOI	$	117,965	$	29,578	$	33,360	$	(2,727	)	$	(4,685	)	$	173,491
Three months ended September 30, 2002
Revenues	$	204,836	$	50,836	$	72,161	$	—		$	—		$	327,833
Operating expenses *	81,782		20,838		46,322		3,313			3,540			155,795
NOI	$	123,054	$	29,998	$	25,839	$	(3,313	)	$	(3,540	)	$	172,038
Nine months ended September 30, 2003
Revenues	$	622,102	$	149,955	$	221,760	$	—		$	—		$	993,817
Operating expenses *	250,145		59,609		129,192		10,702			15,106			464,754
NOI	$	371,957	$	90,346	$	92,568	$	(10,702	)	$	(15,106	)	$	529,063
Nine months ended September 30, 2002
Revenues	$	545,023	$	151,327	$	175,310	$	—		$	—		$	871,660
Operating expenses *	220,347		59,722		112,641		10,026			11,020			413,756
NOI	$	324,676	$	91,605	$	62,669	$	(10,026	)	$	(11,020	)	$	457,904

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

* OperatingIn ~~expenses~~March ~~include~~2004, ~~provisions~~we ~~for~~sold ~~bad~~our ~~debts~~interests in Westdale Mall, ~~losses~~a ~~(gains)~~retail oncenter ~~marketable~~in Cedar ~~securities~~Rapids, ~~and~~Iowa, ~~net~~for ~~losses~~cash ~~(gains)~~of on$1.3 million ~~sales~~and ofthe ~~properties~~assumption ~~developed~~by ~~for~~the ~~sale~~buyer ~~and~~of ~~exclude~~$20.0 ~~income~~million ~~taxes,~~of ~~ground~~mortgage ~~rent~~debt. ~~expense,~~We ~~distributions~~recognized ona ~~Company-obligated~~gain of $0.8 million relating ~~mandatorily~~to ~~redeemable~~this ~~preferred~~sale. ~~securities~~We ~~and~~recorded ~~other~~an ~~subsidiary~~impairment ~~preferred~~loss of $6.5 million in the third ~~stock~~quarter ~~and~~of ~~real~~2003 ~~estate~~related ~~depreciation~~to ~~and~~this ~~amortization~~property.

21In August 2003, we sold The Jacksonville Landing, a retail center in Jacksonville, Florida.

~~Reconciliations~~In ofMay ~~total~~and ~~revenues~~June ~~and~~2003, ~~operating~~we ~~expenses~~sold ~~reported~~eight ~~above~~office toand ~~the~~industrial ~~related~~buildings ~~amounts~~ in the Baltimore-Washington ~~condensed~~corridor ~~consolidated~~for ~~financial~~net ~~statements~~proceeds ~~and~~ of ~~NOI~~$46.6 ~~reported~~million ~~above~~and torecorded ~~earnings~~aggregate ~~before net~~ gains ~~on dispositions~~ of ~~interests~~$4.4 ~~in operating properties and discontinued operations in the condensed consolidated financial statements are summarized as follows (in thousands):~~million.

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Revenues:
Total reported above	$	311,495		$	327,833		$	993,817		$	871,660
Our share of revenues of unconsolidated real estate ventures	(36,478		)	(29,830		)	(108,944		)	(79,514		)
Revenues of discontinued operations	(559		)	(30,644		)	(43,748		)	(89,190		)
Other	70			147			157			642
Total in condensed consolidated financial statements	$	274,528		$	267,506		$	841,282		$	703,598
Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Total reported above	$	138,004		$	155,795		$	464,754		$	413,756
Our share of operating expenses of unconsolidated real estate ventures	(12,717		)	(9,568		)	(37,973		)	(25,182		)
Operating expenses of discontinued operations	(430		)	(13,105		)	(21,677		)	(40,856		)
Other	1,404			2,411			13,659			8,871
Total in condensed consolidated financial statements	$	126,261		$	135,533		$	418,763		$	356,589
Operating results:
NOI	$	173,491		$	172,038		$	529,063		$	457,904
Interest expense	(56,933		)	(58,303		)	(172,003		)	(159,426		)
NOI of discontinued operations	(129		)	(17,539		)	(22,071		)	(48,334		)
Other provisions and losses, net	(3,788		)	(11,017		)	(30,517		)	(21,701		)
Depreciation and amortization	(45,627		)	(35,190		)	(129,339		)	(96,356		)
Impairment losses on operating properties	(6,500		)	—			(6,500		)	—
Income taxes, primarily deferred	(1,625		)	(8,700		)	(28,177		)	(25,553		)
Our share of interest expense, ground rent expense, depreciation and amortization, other provisions and losses, net, income taxes and gains on operating properties of unconsolidated real estate ventures, net	(17,899		)	(9,475		)	(50,828		)	(30,531		)
Other	(4,346		)	(4,921		)	(13,741		)	(12,845		)
Earnings before net gains on dispositions of interests in operating properties and discontinued operations in condensed consolidated financial statements	$	36,644		$	26,893		$	75,887		$	63,158

In April and May 2003, we sold six retail centers in the Philadelphia metropolitan area and, in a related transaction, acquired Christiana Mall from a party related to the purchaser. In connection with these transactions, we received net cash proceeds of $218.4 million, the purchaser assumed $276.6 million of property debt, and we assumed a participating mortgage secured by Christiana Mall. We recognized aggregate gains of $65.4 million relating to the monetary portions of these transactions. We recorded an impairment loss of $38.8 million in the fourth quarter of 2002 related to one of the retail centers sold.

22We also recorded a net gain of $26.9 million related to the extinguishment of debt secured by two of the properties sold in the Philadelphia metropolitan area when the lender released the mortgages for a cash payment by us of less than the aggregate carrying amount of the debt.

The ~~assets~~operating byresults ~~segment and the reconciliation~~ of ~~total segment assets to~~ the ~~total assets~~properties included in ~~the~~discontinued ~~condensed~~operations ~~consolidated financial statements~~ are summarized as follows (in thousands):

	September 30, 2003			December 31, 2002
	Three months ended June 30,						Six months ended June 30,
Retail centers	$	5,080,390		$	5,181,205
	2004			2003			2004			2003
Office and other properties	1,038,306			1,105,656
Revenues	$	599		$	24,884		$	3,604		$	65,220
Community development	568,327			461,403
Operating expenses, exclusive of depreciation and amortization	(294		)	(12,574		)	(1,490		)	(31,342		)
Commercial development	105,392			67,228
Interest expense	(11		)	(5,832		)	(737		)	(15,197		)
Corporate	260,581			148,070
Depreciation and amortization	(84		)	(4,445		)	(979		)	(12,013		)
Total segment assets	7,052,996			6,963,562
Other provisions and losses, net	—			26,896			—			26,896
Our share of assets of unconsolidated proportionate share ventures	(1,019,019		)	(923,372		)
Impairment losses on operating properties	(270		)	—			(270		)	—
Investment in and advances to unconsolidated proportionate share ventures	382,034			345,978
Gains on dispositions of interests in operating properties, net	8,278			69,760			44,714			69,802
Total assets in condensed consolidated financial statements	$	6,416,011		$	6,386,168
Income tax benefit (provision), primarily deferred	(55		)	(131		)	85			(153		)
Discontinued operations	$	8,163		$	98,558		$	44,927		$	103,213

Investments in(4) andUNCONSOLIDATED advancesREAL toESTATE unconsolidated real estate ventures, by segment, are summarized as follows (in thousands):VENTURES

	September 30, 2003		December 31, 2002
Retail centers	$	377,624	$	320,849
Office and other properties	95,087		98,005
Community development	32,786		23,551
Total	$	505,497	$	442,405

We own interests in unconsolidated real estate ventures that own and/or develop properties, including master-planned communities. We use these ventures to limit our risk associated with individual properties and to reduce our capital requirements. We may also contribute interests in properties we own to unconsolidated ventures for cash distributions and interests in the ventures to provide liquidity as an alternative to outright property sales. We account for the majority of these ventures using the equity method because the ventures do not meet the definition of a variable interest entity and we have joint interest and control of these properties with our venture partners. For those ventures where we own less than a 5% interest and have virtually no influence on the venture’s operating and financial policies, we account for our investments using the cost method.

23At December 31, 2003, these ventures were primarily partnerships and corporations which own retail centers (most of which we manage) and ventures developing the master-planned communities known as The Woodlands, near Houston, Texas, and Fairwood, in Prince George’s County, Maryland. In January 2004, we acquired our partners’ interests in the joint venture that is developing Fairwood, increasing our ownership interest to 100%. Prior to this transaction, we held a noncontrolling interest in this venture and accounted for our investment as an investment in unconsolidated real estate ventures. We consolidated the venture in our financial statements from the date of the acquisition.

~~(8) Other~~In December ~~provisions~~2003, we acquired a 50% interest in the retail and ~~losses~~certain office components of Mizner Park, ~~net~~a mixed-use project in Boca Raton, Florida. In January 2004, we acquired a 50% interest in additional office components of Mizner Park.

~~Other provisions and losses, net consist of the following (in thousands):~~13

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Pension plan curtailment loss (see note 6)	$	—		$	—		$	(10,212	)	$	—
Pension plan settlement losses (see note 6)	(2,172		)	—			(9,536		)	—
Provision for organizational changes and early retirement costs	(901		)	(8,617		)	(7,873		)	(8,617		)
Losses on early extinguishment of debt	(715		)	—			(6,442		)	(195		)
Impairment provision – MerchantWired	—			—			—			(11,623		)
Gain on foreign exchange derivatives	—			—			—			1,134
Other	—			(2,400		)	3,546			(2,400		)
	$	(3,788	)	$	(11,017	)	$	(30,517	)	$	(21,701	)

Part I. Financial Information

~~The provision~~Item for organizational changes related primarily to costs incurred to reduce the size of our workforce in 2003 and to our consolidation of the management of our Property Operations and Commercial and Office Development divisions into a single Asset Management Group in 20021. ~~In connection with these changes, we~~ Financial ~~initiated plans to reduce the size of our workforce and adopted voluntary early retirement programs in which employees who met certain criteria were eligible to participate~~Statements. The costs incurred for the three and nine months ended September 30, 2003, primarily pension plan settlements for employees electing early retirement (see note 6) and severance and other benefit costs for certain retiring executives, aggregated $3.1 million and $17.4 million, respectively.

~~During the~~THE ~~three~~ROUSE ~~and~~COMPANY ~~nine~~AND months ended September 30, 2003, we recognized net losses, primarily prepayment penalties, of $0.7 million and $6.4 million, respectively, related to the extinguishment of debt prior to scheduled maturity.SUBSIDIARIES

~~The other~~Notes ~~amount for the nine months ended September 30, 2003 consists primarily of a fee of $3.8 million that we earned on the facilitation of a real estate transaction between two parties that are unrelated~~ to ~~us. The~~Condensed ~~other~~Consolidated ~~amount for the three and nine~~Financial ~~months~~Statements ~~ended September 30~~(Unaudited), 2002 consists of an amount we agreed to pay for costs incurred by an entity that sold us a portfolio of office and industrial buildings in 1998 to resolve certain tax related matters arising from the transaction.continued

~~MerchantWired~~In ~~was~~April an2004, ~~unconsolidated~~we ~~joint~~sold ~~venture~~most ~~with~~of ~~other~~our ~~real~~interest ~~estate~~in ~~companies~~Westin toNew ~~provide broadband telecommunication services to tenants. In the second quarter of 2002~~York, wea ~~and~~hotel ~~the~~in ~~other real estate~~New ~~companies~~York ~~decided~~City, tofor ~~discontinue~~net ~~the~~proceeds ~~operations~~ of ~~MerchantWired~~$15. ~~Accordingly,~~8 wemillion ~~recorded~~and anrecognized ~~impairment~~a ~~provision~~gain of ~~for~~approximately ~~the~~$1.4 ~~entire~~million ~~amount~~(net of ~~our~~deferred ~~net~~income ~~investment~~taxes inof ~~the~~$0.8 ~~venture~~million).

24(5) DEBT

~~A portion~~Debt ofis ~~the~~summarized ~~purchase~~as ~~price for the acquisition of assets from Rodamco North~~follows ~~America N.V.~~ (~~“Rodamco”) was payable~~ in euros. In January 2002, we acquired options to purchase 601 million euros at a weighted-average per euro price of $0.8819. These transactions were executed to reduce our exposure to movements in currency exchange rates between the date of the purchase agreement and the closing date. The contracts were scheduled to expire in May 2002 and had an aggregate cost of $11.3 million. At March 31, 2002, the value of the contracts had declined to $3.1 million, and we recorded a loss of $8.2 million in the three months then ended. In April 2002, we sold the contracts for net proceeds of $10.2 million, and we recorded a gain of $7.1 million for the three months ended June 30, 2002. For the nine months ended September 30, 2002, we recognized a realized loss of $1.1 million. We also executed and subsequently sold a euro forward contract and realized a gain of $2.2 million during the nine months ended September 30, 2002.thousands):

(9) Net gains on dispositions of interests in operating properties

	June 30, 2004				December 31, 2003
	Total		Due in one year		Total		Due in one year

Mortgages and bonds	$	2,725,227	$	603,960	$	3,025,802	$	484,588
Medium-term notes	45,500		43,500		45,500		—
Credit facility borrowings	182,000		—		271,000		—
3.625% Notes due March 2009	378,999		—		—		—
8% Notes due April 2009	200,000		—		200,000		—
7.2% Notes due September 2012	399,579		—		399,553		—
5.375% Notes due November 2013	453,864		—		350,000		—
Other loans	179,747		64,762		152,637		32,147
Total	$	4,564,916	$	712,222	$	4,444,492	$	516,735

~~Net~~The ~~gains~~amounts ondue ~~dispositions~~in ofone ~~interests~~year inrepresent ~~operating~~maturities ~~properties~~under ~~are~~existing ~~summarized~~loan asagreements, ~~follows~~except ~~(in~~where ~~thousands):~~refinancing commitments from outside lenders have been obtained. In these instances, maturities are determined based on the terms of the refinancing commitments.

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
Net gains (losses) on dispositions of interests in unconsolidated real estate ventures:
Regional retail centers	$	—	$	(74	)	$	21,561	$	42,590
Community retail center	—		—			—		4,316
Other, net	272		235			515		2,079
	$	272	$	161		$	22,076	$	48,985

We expect to repay the debt due in one year with operating cash flows, proceeds from property financings (including refinancings of maturing mortgages), credit facility borrowings, proceeds from corporate debt offerings or other available corporate funds.

25During the first quarter of 2004, we repaid approximately $443 million of mortgage loans with proceeds from borrowings under our credit facility. In March 2004, we issued $400 million of 3.625% Notes due in March 2009 and $100 million of 5.375% Notes due in November 2013 for net proceeds of approximately $503 million. The proceeds were primarily used to repay credit facility borrowings.

~~In a~~At ~~transaction~~June ~~related~~30, to2004 ~~the~~and ~~sale~~December of31, ~~retail~~2003, ~~centers~~approximately in$82 ~~the~~million ~~Philadelphia~~and $83 million, ~~metropolitan~~respectively, ~~area~~of ~~(see~~our ~~note~~debt ~~3),~~provided wefor ~~acquired~~payments ~~Christiana~~of ~~Mall~~additional ~~from~~interest abased ~~party~~on ~~related~~operating toresults of the ~~purchaser~~related ~~and~~properties ~~assumed~~in aexcess ~~participating~~of ~~mortgage~~stated ~~secured by Christiana Mall~~levels. The participating ~~mortgage~~ ~~had~~debt aprimarily ~~fair~~relates ~~value~~to ~~of $160.9 million.~~ a ~~The~~retail ~~holder~~center ofwhere ~~this~~the ~~mortgage~~lender ~~had~~receives ~~the~~a ~~right~~fixed tointerest ~~receive~~rate ~~$120~~of ~~million~~7.625% ~~in cash~~ and a 5% participation in cash flows. The lender ~~and~~also ~~the~~will ~~right~~receive toa ~~convert~~payment ~~this participation~~at ~~feature~~maturity ~~into~~(November a2004) ~~50%~~equal ~~equity~~to ~~interest~~the greater inof ~~Christiana~~5% ~~Mall. The~~of ~~holder~~the ~~exercised~~value ~~this~~of ~~right~~the property in ~~June 2003. We~~excess ~~were~~of the debt balance or the amount required to ~~record~~provide aan ~~portion~~internal rate of ~~the cost~~return of ~~Christiana~~8.375% ~~Mall~~over ~~based~~the onterm of the ~~historical~~loan. The ~~cost~~internal rate of return of the ~~properties~~lender ~~we exchanged~~is limited to ~~acquire~~12.5%. We recognize interest expense on this ~~property~~debt ~~because~~at a ~~portion~~rate ofrequired to provide the lender ~~transaction~~the ~~was~~required minimum internal rate of return (8.375%) and monitor the ~~considered~~accrued ~~nonmonetary~~liability ~~under~~and ~~EITF~~the ~~01-2,~~fair ~~“Interpretations~~value of ~~APB~~the ~~Opinion~~projected ~~No.~~payment due on 29maturity.” AsBased aon ~~consequence~~our analysis, ~~when~~ we ~~subsequently~~believe ~~disposed~~that of the ~~50%~~payment ~~interest~~at inmaturity will be the ~~property,~~balance weneeded ~~recognized~~to aprovide ~~gain~~the specified minimum internal rate of ~~$21~~return.~~6 million.~~

InAt ~~April 2002~~June 30, 2004, we ~~sold~~had ~~our~~ interest inrate ~~Franklin~~swap ~~Park,~~agreements aand ~~regional~~forward-starting ~~retail~~swap ~~center~~agreements in ~~Toledo,~~place ~~Ohio,~~that ~~for~~effectively ~~$20.5~~fix ~~million and~~ the ~~buyer~~LIBOR ~~assumed~~rate ~~our~~on ~~share~~a portion of our ~~the~~variable-rate ~~center’s~~ debt ~~($44.7~~through ~~million)~~December 2006. ~~Our~~ ~~interest~~Information inrelated ~~this~~to ~~property~~the ~~was reported~~ in-place ~~unconsolidated~~swap ~~real~~agreements ~~estate~~as ~~ventures and, accordingly, the gain~~ of ~~$42.7~~June ~~million~~30, ~~that we recorded on this~~2004 ~~transaction~~ is ~~included~~as infollows ~~continuing~~(dollars ~~operations. See note 3 for information relating to the $4.3 million gain on the sale of our interest~~ in ~~a community retail center.~~millions):

(10) Preferred Stock

Total notional amount	$	564.4
Average fixed effective rate (pay rate)	2.1		%
Average variable interest rate of related debt (receive rate)	1.3		%
Fair values of assets	$	1.9
Fair values of liabilities	$	2.1

The shares of Series B Convertible Preferred stock have a liquidation preference of $50 per share and earn dividends at an annual rate of 6% of the liquidation preference. At the option of the holder, the Series B Convertible Preferred stock is convertible into shares of our common stock at a conversion price of $38.125 per share (equivalent to a conversion rate of approximately 1.311 shares of common stock for each share of preferred stock). The conversion price is subject to adjustment in certain circumstances such as stock dividends, stock splits, rights offerings, mergers and similar transactions. We may redeem the preferred stock after April 1, 2000, in whole or in part, only if for 20 trading days, including the last trading day, within a period of 30 consecutive trading days, the current market price of each of such 20 trading days exceeds 120% of the conversion price, in effect on such trading day. Based on a conversion price of $38.125, 120% of the conversion price is $45.75. Upon redemption, each share of preferred stock will be converted into a number of shares of our common stock equal to the liquidation preference of the share of preferred stock being redeemed divided by the conversion price in effect on the date of redemption. There were 4,050,000 shares of preferred stock issued and outstanding at September 30, 2003 and December 31, 2002.14

26Part I. Financial Information

~~(11) Earnings~~Item ~~per share~~1. Financial Statements.

~~Information relating~~THE toROUSE ~~the~~COMPANY ~~calculations~~AND ~~of earnings per share (“EPS”) of common stock for the three months ended September 30, 2003 and 2002 is summarized as follows (in thousands):~~SUBSIDIARIES

	2003						2002
	Basic			Diluted			Basic			Diluted
Earnings from continuing operations	$	36,916		$	36,916		$	27,054		$	27,054
Dividends on unvested common stock awards and other	(163		)	(163		)	(202		)	(254		)
Dividends on convertible Preferred stock	(3,038		)	(3,038		)	(3,038		)	(3,038		)
Adjusted earnings from continuing operations used in EPS computation	$	33,715		$	33,715		$	23,814		$	23,762
Weighted-average shares outstanding	89,117			89,117			86,222			86,222
Dilutive securities:
Options, unvested common stock awards and other	—			2,560			—			1,643
Adjusted weighted-average shares used in EPS computation	89,117			91,677			86,222			87,865

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

27As discussed above, we issued $400 million of 3.625% Notes in March 2004. We simultaneously entered into agreements to effectively convert this fixed-rate debt to variable-rate debt for the term of these notes. Under these agreements, we receive a fixed rate of 3.625% and pay a variable rate based on the six-month LIBOR rate, set in arrears, plus an average spread of 19.375 basis points. The expected pay rate was 2.47% at June 30, 2004. The fair value of these agreements was a liability of $19.8 million at June 30, 2004.

Information relating to the calculations of earnings per share (“EPS”6) ofPENSION common stock for the nine months ended September 30, 2003 and 2002 is summarized as follows (in thousands):PLANS

	2003						2002
	Basic			Diluted			Basic			Diluted
Earnings from continuing operations	$	97,963		$	97,963		$	112,143		$	112,143
Dividends on unvested common stock awards and other	(506		)	(506		)	(663		)	(392		)
Dividends on convertible Preferred stock	(9,114		)	(9,114		)	(9,114		)	(9,114		)
Interest on convertible property debt	—			—			—			1,012
Adjusted earnings from continuing operations used in EPS computation	$	88,343		$	88,343		$	102,366		$	103,649
Weighted-average shares outstanding	87,841			87,841			84,504			84,504
Dilutive securities:
Options, unvested common stock awards and other	—			2,132			—			1,801
Convertible property debt	—			—			—			933
Adjusted weighted-average shares used in EPS computation	87,841			89,973			84,504			87,238

We have a qualified defined benefit pension plan (“funded plan”) covering substantially all employees, and separate nonqualified unfunded defined benefit pension plans primarily covering participants in the funded plan whose defined benefits exceed the plan’s limits (“supplemental plan”). In February 2003, our Board of Directors approved modifications to our funded plan and supplemental plan so that covered employees would not earn additional benefits for future services. The curtailment of the funded and supplemental plans required us to immediately recognize substantially all unamortized prior service cost and unrecognized transition obligation and resulted in a curtailment loss of $10.2 million for the six months ended June 30, 2003. We also incurred settlement losses of $2.9 million and $7.4 million for the six months ended June 30, 2004 and 2003, respectively, related to lump-sum distributions made primarily to employees retiring as a result of organizational changes and early retirement programs offered in 2003 and 2002 and a change in the senior management organizational structure in March 2003. The lump-sum distributions were paid to participants primarily from assets of our funded plan, or with respect to the supplemental plan, from contributions made by us.

~~Effects~~In February 2004, we adopted a proposal to terminate our funded and supplemental plans. When we complete the terminations, we will be required to settle the obligations of ~~potentially~~the ~~dilutive~~funded ~~securities~~plan by ~~are~~paying ~~presented~~accumulated ~~only~~benefits to eligible participants. Depending on the market value of the assets of the funded plan and the relevant interest rates at the time of settlement, we may be required to make additional contributions to that plan, which could be significant if we do not terminate the plan in ~~periods~~2004. At June 30, 2004, the funded plan had sufficient assets to settle its obligations without additional contributions by us. At the time of settlement of the obligations of the funded plan, we will recognize any unrecognized losses associated with that plan. At June 30, 2004, these unrecognized losses were approximately $26.5 million. The unrecognized losses may change depending on interest rates and other factors if we do not terminate the plan in 2004. We ~~which~~expect ~~they~~that a portion of these ~~are~~losses ~~dilutive~~will be recognized prior to the final distribution of plan assets as plan participants retire or otherwise terminate employment in the normal course of business. The review period for the Pension Benefit Guaranty Corporation has expired. We expect to settle all of the plan’s remaining obligations in the fourth quarter of 2004. In connection with the adoption of the proposal to terminate the plans, we transferred the assets of the funded plan to cash and cash equivalents to mitigate market risk during the period prior to distributions to participants.

~~(12) Impairment~~Concurrent with the distribution of funded plan assets, we will terminate the supplemental plan by merger into our nonqualified supplemental defined contribution plan and expect to establish and fund an irrevocable trust for benefits earned under that plan and recognize settlement losses equal to any unrecognized loss at that date. At June 30, 2004, these unrecognized losses were approximately $5.8 million and may change depending on interest ~~operating~~rates and other factors if we do not terminate the pension plan in ~~properties~~2004. The supplemental plan obligations were $17.7 million at June 30, 2004.

InWe ~~September 2003,~~have wea ~~recognized~~qualified andefined ~~impairment~~contribution ~~loss~~plan ofand ~~$6.5~~a ~~million~~nonqualified onsupplemental ~~Westdale~~defined ~~Mall,~~contribution aplan ~~retail~~available ~~center~~to insubstantially ~~Cedar~~all ~~Rapids, Iowa~~employees. WeIn ~~changed~~2004 ~~our plans~~ and ~~intentions~~2003, aswe tomatched ~~the~~100% ~~manner in which~~of ~~this~~participating ~~retail~~employees’ ~~center~~pre-tax ~~would~~contributions beup ~~operated~~to ina ~~the~~maximum ~~future~~of ~~and~~3% ~~revised estimates~~ of ~~the~~ ~~most~~eligible ~~likely~~compensation ~~holding~~and ~~period. As~~50% ~~a result, we evaluated the recoverability~~ of ~~the~~participating ~~carrying~~employees’ ~~amount~~pre-tax ~~of the center,~~contributions ~~determined~~up ~~that~~to ~~the~~an ~~carrying~~additional ~~amount~~maximum of ~~the~~2% ~~center~~of ~~was~~eligible ~~not recoverable from future cash flows and recognized an impairment loss~~compensation.

28In an action related to the curtailment of the funded and supplemental plans, we added new components to the defined contribution plans under which we either make or accrue discretionary contributions to the plans for all employees who were previously covered by the defined benefit pension plans. Expenses related to these plans were $1.4 million and $2.8 million for the three and six months ended June 30, 2004, respectively, and $2.5 million and $3.4 million for the three and six months ended June 30, 2003, respectively.

~~(13) Commitments and contingencies~~15

~~Other commitments~~Part ~~and contingencies (that are not reported in the condensed~~I. Financial ~~consolidated balance sheet) at September 30, 2003 and December 31, 2002 are summarized as follows (in millions):~~Information

	September 30, 2003		December 31, 2002
Guarantee of debt of unconsolidated real estate ventures:
Village of Merrick Park	$	176.8	$	175.2
Hughes Airport-Cheyenne Centers	28.8		28.8
Construction contracts for properties in development:
Consolidated subsidiaries, primarily related to Fashion Show and The Shops at La Cantera	113.8		51.4
Our share of unconsolidated real estate ventures, primarily related to the Village of Merrick Park	7.1		15.4
Contract to purchase land	—		20.8
Construction and purchase contracts for land development	75.1		36.0
Our share of long-term ground lease obligations of unconsolidated real estate ventures	58.2		58.6
Bank letters of credit and other	10.9		9.9
	$	470.7	$	396.1

Item 1. Financial Statements.

~~We have~~THE ~~guaranteed~~ROUSE ~~the~~COMPANY ~~repayment~~AND of a construction loan of the unconsolidated real estate venture that owns the Village of Merrick Park. At September 30, 2003, the outstanding balance under this loan was $176.8 million, all of which was guaranteed. The maximum amount that may be borrowed under the loan is $200 million. In October 2003, the venture repaid this loan with proceeds from a new $194 million mortgage. We have guaranteed $100 million of this loan. The amount of the guarantee may be reduced or eliminated upon the achievement of certain lender requirements. Additionally, venture partners have provided guarantees to us for their share (60%) of the new loan.SUBSIDIARIES

29Notes to Condensed Consolidated Financial Statements (Unaudited), continued

~~We and~~The ~~certain~~normal ofdate ~~our subsidiaries are defendants in various litigation matters arising in the ordinary course of business, some of which involve claims~~ for ~~damages~~ ~~that~~measurement ~~are substantial in amount. Some~~ of ~~these~~our ~~litigation~~pension ~~matters~~plan ~~are~~obligations ~~covered~~is byDecember ~~insurance. We~~31 ~~are also aware~~ of ~~claims arising from~~ ~~disputes~~each inyear, ~~the~~unless ~~ordinary~~more ~~course~~recent measurements of ~~business. We~~both ~~record~~plan ~~provisions~~assets ~~for litigation matters~~ and ~~other~~obligations are ~~claims~~available, ~~when~~or ~~we believe~~if a ~~loss~~significant isevent ~~probable~~occurs, ~~and~~such ~~can~~as bea ~~reasonably~~plan ~~estimated. At~~amendment ~~September 30~~or curtailment, ~~2003,~~that ~~recorded aggregate~~would ~~liabilities~~ordinarily ~~related~~call tofor ~~these~~such ~~claims were not significant~~measurements. WeIn ~~further~~February ~~believe~~2004, ~~that~~we ~~any~~adopted ~~losses~~a weplan ~~may~~to ~~suffer~~terminate ~~for~~our ~~litigation~~funded and ~~other~~supplemental ~~claims~~plans. Due to the ~~extent~~termination ~~in excess~~ of the ~~recorded aggregate liabilities is not material. Accordingly~~plans, inwe measured our ~~opinion,~~benefit ~~adequate provision has been made for losses~~obligations ~~with~~as ~~respect~~of toMarch ~~litigation~~31, ~~matters and other claims~~2004, ~~and~~including the ~~ultimate resolution~~impact of ~~these~~the ~~matters~~termination. Information isrelating ~~not likely~~ to ~~have~~the ~~a material effect on our~~obligations, ~~consolidated~~assets ~~financial~~and ~~position~~funded orstatus ~~results~~ of ~~operations. Our assessment of~~ the ~~potential~~plans ~~outcomes~~at ~~of these~~March ~~matters~~31, ~~involves~~2004 ~~significant~~and ~~judgment~~December ~~and~~31, 2003 is ~~subject~~summarized toas ~~change~~follows ~~based~~(dollars ~~on future~~in ~~developments.~~thousands):

(14) New financial accounting standards

	Pension Plans												Postretirement
	Funded						Supplemental and Other						Plan
	March 31, 2004			December 31, 2003			March 31, 2004			December 31, 2003			March 31, 2004			December 31, 2003
Projected benefit obligation at end of period	$	64,862		$	56,228		$	18,441		$	17,855		$	N/A		$	N/A
Accumulated benefit obligation at end of period	64,862			56,228			18,441			17,846			17,645			17,555

Benefit obligations at end of period	$	64,862		$	56,228		$	18,441		$	17,855		$	17,645		$	17,555
Fair value of plan assets at end of period	65,304			65,339			—			—			—			—
Funded status	$	442		$	9,111		$	(18,441	)	$	(17,855	)	$	(17,645	)	$	(17,555	)

Weighted-average assumptions at period end:
Discount rate	5.12		%	6.00		%	5.16		%	6.00		%	6.00		%	6.00		%
Lump sum rate	5.12			6.00			5.16			6.00			—			—
Expected rate of return on plan assets	5.12			8.00			—			—			—			—
Rate of compensation increase	N/A			N/A			N/A			N/A			N/A			N/A

Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate	6.00		%	6.50		%	6.00		%	6.50		%	6.00		%	6.50		%
Lump sum rate	6.00			6.00			6.00			6.00			—			—
Expected rate of return on plan assets	8.00			8.00			8.00			—			—			—
Rate of compensation increase	N/A			4.50			N/A			4.50			N/A			N/A

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards, No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Our adoption of SFAS 146 in January 2003 did not have a material effect on our results of operations or financial condition.16

~~In November 2002,~~Part ~~the FASB issued Financial Interpretation No~~I. ~~45,~~ Financial “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures required by a guarantor in its interim and annual financial statements about obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize liabilities for the fair values of obligations undertaken in issuing guarantees issued or modified after December 31, 2002. As of September 30, 2003, we had not entered into guarantees since January 1, 2003 that have had a material effect on our balance sheet, and the adoption of FIN 45 did not have a material effect on our financial position or results of operations.Information

30Item 1. Financial Statements.

InTHE ~~January~~ROUSE ~~2003,~~COMPANY ~~the~~AND FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses the consolidation of variable interest entities (“VIEs”) in which the equity investors lack one or more of the essential characteristics of a controlling financial interest or where the equity investment at risk is not sufficient for the entity to finance its activities without subordinated financial support from other parties. FIN 46 applied immediately to VIEs created after January 31, 2003 and to VIEs in which we acquire an interest after that date. Effective December 31, 2003, it also applies to VIEs in which we acquired an interest before February 1, 2003. We may apply FIN 46 prospectively, with a cumulative effect adjustment as of December 31, 2003, or by restating previously issued financial statements with a cumulative effect adjustment as of the beginning of the first year restated. We are in the process of evaluating the effects of applying FIN 46 in 2003.SUBSIDIARIES

InNotes ~~April~~to ~~2003,~~Condensed ~~the~~Consolidated ~~FASB issued Statement of~~ Financial ~~Accounting Standards No. 149, “Amendment of~~ ~~Statement~~Statements ~~133 on Derivative Instruments and Hedging Activities”~~ (~~“SFAS 149”~~Unaudited)~~. SFAS 149 was effective for contracts entered into or modified after June 30~~, ~~2002, and~~ ~~implementation had no effect on our reported results of operations or financial position.~~continued

~~In May 2003, the FASB~~The ~~issued~~assets ~~Statement~~ of ~~Financial~~the ~~Accounting~~funded ~~Standards~~plan ~~No.~~historically ~~150,~~consisted ~~“Accounting~~primarily ~~for Certain Financial Instruments with Characteristics~~ of ~~both~~fixed ~~Liabilities~~income and ~~Equity”~~marketable ~~(“SFAS~~equity ~~150”)~~securities. ~~We implemented~~The ~~SFAS~~primary ~~150~~investment onobjective ~~July~~for 1,the ~~2003.~~funded Onplan ~~October~~had ~~29,~~been ~~2003,~~to ~~the~~provide ~~FASB~~for ~~announced~~growth of ~~that~~capital itwith ~~had deferred~~a ~~indefinitely~~moderate ~~the~~level ~~application~~ of ~~SFAS~~volatility. ~~150~~In toconnection ~~minority~~with ~~interests~~the ~~related~~approval to ~~limited~~terminate ~~life~~the ~~entities~~plans, ~~consolidated~~we intransferred ~~financial~~the ~~statements. As~~assets ~~applied,~~of ~~implementation~~the ~~had~~funded noplan ~~effect~~to oncash ~~our~~and ~~reported~~cash ~~results~~equivalents ofto ~~operations~~mitigate ormarket ~~financial~~risk ~~position~~during the period prior to distributions to participants.

The net pension cost includes the following components (~~15) Subsequent~~in ~~events~~thousands):

On November 10, 2003, we agreed to sell our investments in Kravco Investments, L.P. and its affiliates to an affiliate of Simon Property Group, Inc. for approximately $51.8 million. We acquired these investments in the acquisition of the assets of Rodamco in 2002. We expect to record a gain, net of taxes, of approximately $4.9 million. We expect these transactions to close in the fourth quarter of 2003.

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003

Service cost	$	—		$	(1	)	$	—		$	—
Interest cost on projected benefit obligations	1,044			1,179			2,121			2,587
Expected return on funded plan assets	(818		)	(1,154		)	(2,108		)	(2,433		)
Prior service cost recognized	6			8			15			388
Net actuarial loss recognized	401			634			779			1,462
Amortization of transition obligation	—			—			—			17
Net pension cost before special events	633			666			807			2,021
Special events:
Settlement losses	2,086			2,951			2,868			7,419
Curtailment loss	—			—			—			10,212
Net pension cost	$	2,719		$	3,617		$	3,675		$	19,652

OnThe curtailment ~~November~~loss ~~12,~~in 2003, ~~we announced that we had reached an agreement in principle to acquire from Crescent Real Estate Equities Limited Partnership~~ and ~~its~~ ~~affiliates~~settlement ~~(collectively,~~losses ~~“Crescent”)~~for ~~a 52.5% economic interest in entities (~~the ~~“Woodlands~~three ~~Entities”)~~and ~~that~~six ~~own The Woodlands, a master-planned community~~months inended ~~the~~June ~~Houston~~30, ~~Texas~~2004 ~~metropolitan~~and ~~area. The~~2003 ~~transactions~~ are ~~subject~~included toin ~~definitive~~other ~~documentation~~provisions and ~~customary conditions including lender approvals. Assets owned by the Woodlands Entities include approximately 5~~losses,~~500 saleable~~ ~~acres of land~~net, ~~seven office buildings totaling 520,000 square feet of~~ ~~space,~~in ~~three golf course complexes, a resort conference center,~~ the ~~Marriott Waterway~~condensed ~~Hotel,~~consolidated ~~five~~statements ~~office buildings that are being marketed for sale and other miscellaneous assets. If the contemplated transactions are consummated, our share~~ of ~~the assets and related debt of the Woodlands Entities would be $387 million and $185 million, respectively~~operations. ~~The purchase price is approximately $202 million and will be paid as follows:~~

· The ~~Transfer to~~net ~~Crescent~~postretirement ofbenefit ~~Hughes~~cost ~~Center,~~includes athe ~~master-planned~~following ~~business~~components ~~park~~ (in ~~Las Vegas, with~~ eight office buildings totaling approximately 1.1 million square feet, nine ground leases and approximately 13 acres of developable land. For purposes of the transaction, Hughes Center is valued at $233 million less encumbering debt of approximately $137.5 million, which will be assumed by Crescent.thousands):

· $106.5 million cash at closing.

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003

Service cost	$	121		$	99		$	241		$	198
Interest cost on accumulated benefit obligations	255			259			509			516
Net actuarial loss recognized	35			28			71			56
Amortization of prior service cost	(61		)	(61		)	(121		)	(121		)
Net postretirement benefit cost	$	350		$	325		$	700		$	649

We(7) expectSEGMENT to execute binding agreements within 30 days and expect the transactions to close in 2003. We anticipate funding the cash required at closing with credit facility borrowings or other corporate funds, and expect to receive a distribution from the Woodlands Entities of approximately $26 million shortly after closing.INFORMATION

31We have five business segments: retail centers, office and other properties, community development, commercial development and corporate. The retail centers segment includes the operation and management of regional shopping centers, downtown specialty marketplaces, the retail components of mixed-use projects and community retail centers. The office and other properties segment includes the operation and management of office and industrial properties and the nonretail components of the mixed-use projects. The community development segment includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland, Summerlin, Nevada and Houston, Texas. The commercial development segment includes the evaluation of all potential new development projects (including expansions of existing properties) and acquisition opportunities and the management of them through the development or acquisition process. The corporate segment is responsible for shareholder and director services, financial management, strategic planning and certain other general and support functions. Our business segments offer different products or services and are managed separately because each requires different operating strategies or management expertise.

~~Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation:~~17

~~THE~~Part ~~ROUSE COMPANY AND~~I. Financial ~~SUBSIDIARIES~~Information

~~The~~Item following discussion and analysis covers any material changes in our financial condition since December 31, 2002 and any material changes in our results of operations for the three and nine months ended September 30, 2003 as compared to the same periods in 20021. ~~This discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of~~ Financial ~~Condition and Results of Operations included in our 2002~~ ~~Annual Report to Shareholders~~Statements.

~~General:~~THE ROUSE COMPANY AND SUBSIDIARIES

~~Through~~Notes ~~our~~to ~~subsidiaries and~~Condensed ~~affiliates,~~Consolidated ~~we acquire, develop and manage a diversified portfolio of~~Financial ~~income-producing~~Statements ~~properties located throughout the United States and develop and sell land for residential~~(Unaudited), ~~commercial and other uses, primarily in master-planned communities.~~continued

The operating measure used to assess operating results for the business segments is Net Operating Income (“NOI”). Prior to April 1, 2004, we excluded certain expenses related to organizational changes and early retirement costs from our definition of NOI. Effective April 1, 2004, we revised our definition to include these amounts in our corporate segment. We made these reclassifications because these expenses are neither infrequent nor unusual and are becoming a normal cost of doing business. Prior to July 1, 2003, we included certain income taxes in our definition of NOI. Effective July 1, 2003, we revised our definition to exclude these amounts from NOI, affecting primarily the presentation of our community development activities. We made this change because we now assess the operating results of our segments on a pre-~~Producing~~tax basis and believe this revised ~~Properties~~measure better reflects the performance of the underlying assets. Amounts for prior periods have been reclassified to conform to the current definition.

~~Our primary~~The ~~business~~accounting ~~strategies~~policies ~~relating~~of ~~to income-producing properties include (1) owning and operating premier properties — shopping centers and large-scale mixed-use projects in major markets across~~ the ~~United~~segments States and (2) owning and operating geographically concentrated office and industrial buildings, principally complementing community development activities. We believe that space in high-quality, dominant retail centers in densely populated, affluent areas will continue to be in demand by retailers and that these retail centers are ~~better able to withstand difficult conditions in~~ the ~~overall~~same ~~economy,~~as ~~specifically~~those inused ~~the real estate and retail industries. In order~~ to ~~execute~~prepare our ~~strategies,~~condensed ~~with~~consolidated ~~respect~~financial ~~to income-producing properties~~statements, weexcept evaluate opportunities to acquire or develop properties and to redevelop, expand and/or renovate properties in our portfolio. We have made and plan to continue making substantial investments to acquire, develop and expand and/or renovate properties as followsthat:

• Inwe ~~August~~consolidate ~~2003,~~the weventure ~~acquired~~developing the ~~remaining~~community ~~interest~~of inThe ~~Staten~~Woodlands ~~Island~~and ~~Mall, a~~reflect ~~regional~~the ~~retail~~other ~~center~~partner’s inshare ~~Staten Island,~~of ~~New~~NOI ~~York.~~as an operating expense rather than using the equity method;

• ~~In April 2003,~~ we ~~acquired~~account for ~~Christiana~~other ~~Mall,~~real aestate ~~regional~~ventures ~~retail center~~ in ~~Newark, Delaware. We~~which ~~subsequently~~we ~~conveyed~~have ~~a 50%~~joint interest inand ~~this~~control ~~property~~and certain inother ~~June~~minority ~~2003~~interest ~~pursuant~~ventures to(“proportionate ~~the~~share ~~terms~~ventures”) ~~of a~~using ~~participating~~the ~~mortgage~~proportionate ~~that~~share wemethod ~~assumed~~rather inthan the ~~acquisition.~~equity method;

• ~~We acquired~~we include our ~~partners’~~share ~~interests~~of inNOI ~~Ridgedale~~less ~~Center~~interest expense and ~~Southland~~ground ~~Center,~~rent expense of other ~~regional~~unconsolidated ~~retail~~minority ~~centers,~~interest ventures (“other ventures”) in ~~November~~revenues; ~~2002.~~and

• Wewe include ~~acquired~~discontinued ~~interests~~operations inand ~~eight~~minority ~~high-quality~~interests ~~operating~~in ~~properties~~NOI ~~and~~rather ~~other~~than ~~assets~~presenting inthem ~~May 2002 from Rodamco North America N~~separately.~~V. (“Rodamco”).~~

~~• We~~These ~~are~~differences anaffect ~~investor~~only inthe areported ~~joint~~revenues ~~venture~~and ~~that~~operating isexpenses ~~developing~~of ~~The~~the segments ~~Shops~~and athave Lano ~~Cantera, a~~effect ~~regional~~on ~~retail~~our ~~center~~reported innet ~~San Antonio, Texas~~earnings.

~~• We~~Operating ~~are~~results ~~redeveloping~~for ~~Fashion Show, a retail center on “~~the ~~Strip”~~segments inare ~~Las~~summarized ~~Vegas, Nevada,~~as ~~and~~follows ~~opened the first phase of this project~~ (in ~~November 2002. Other phases of this project are expected to open in late 2003 and early 2004.~~thousands):

• We are an investor in a joint venture that owns the Village of Merrick Park, a large-scale mixed-use project in Coral Gables, Florida, that opened in September 2002.

	Retail Centers		Office and Other Properties		Community Development		Commercial Development			Corporate			Total
Three months ended June 30, 2004
Revenues	$	219,109	$	59,566	$	124,963	$	—		$	—		$	403,638
Operating expenses	84,054		33,430		85,601		2,466			6,114			211,665
NOI	$	135,055	$	26,136	$	39,362	$	(2,466	)	$	(6,114	)	$	191,973

Three months ended June 30, 2003
Revenues	$	206,821	$	50,370	$	88,452	$	—		$	—		$	345,643
Operating expenses	82,476		19,482		59,157		3,047			10,055			174,217
NOI	$	124,345	$	30,888	$	29,295	$	(3,047	)	$	(10,055	)	$	171,426

Six months ended June 30, 2004
Revenues	$	424,788	$	119,943	$	256,053	$	—		$	—		$	800,784
Operating expenses	166,189		67,270		175,359		5,092			11,835			425,745
NOI	$	258,599	$	52,673	$	80,694	$	(5,092	)	$	(11,835	)	$	375,039

Six months ended June 30, 2003
Revenues	$	423,178	$	100,217	$	158,927	$	—		$	—		$	682,322
Operating expenses	169,186		39,449		99,719		7,975			14,353			330,682
NOI	$	253,992	$	60,768	$	59,208	$	(7,975	)	$	(14,353	)	$	351,640

3218

~~Income-Producing Properties,~~Part ~~continued~~I. Financial Information

WeItem ~~continually assess whether properties in which we own interests are consistent with our business strategies~~1. ~~We have disposed of interests in more than 50 retail~~ Financial centers and numerous other properties since 1993 (at times using tax-deferred exchanges or joint ventures) and may continue to dispose of selected properties that are not meeting or are not considered to have the potential to continue to meet our investment criteriaStatements. ~~We may also dispose of interests in properties for other reasons. We have disposed of interests in the following properties during 2002 and 2003:~~

~~• We sold~~THE ~~The~~ROUSE ~~Jacksonville~~COMPANY ~~Landing,~~AND ~~a retail center in Jacksonville, Florida, in August 2003.~~SUBSIDIARIES

~~• We sold~~Notes ~~six~~to ~~retail~~Condensed ~~centers~~Consolidated inFinancial Statements ~~the Philadelphia metropolitan area~~ (~~Cherry Hill Mall~~Unaudited), ~~Echelon Mall, Exton Square, Gallery at Market East, Moorestown Mall, and Plymouth Meeting) during the second quarter of 2003.~~continued

• Segment Weoperating ~~sold~~expenses ~~eight~~include ~~office~~provision for bad debts, losses (gains) on marketable securities classified as trading, net losses (gains) on sales of properties developed for sale and ~~industrial~~our ~~buildings~~partner’s inshare of NOI of the ~~Baltimore~~venture developing The Woodlands and exclude income taxes, ground rent expense, distributions on Parent Company-~~Washington~~obligated mandatorily redeemable preferred ~~corridor~~securities inand ~~June~~other ~~2003~~subsidiary preferred stock and real estate depreciation and amortization.

• Reconciliations Weof ~~sold~~total ~~our~~revenues ~~interests~~and operating expenses reported above to the related amounts in ~~twelve~~the ~~community~~condensed ~~retail~~consolidated ~~centers~~financial statements and of NOI reported above to earnings before net gains on dispositions of interests in ~~Columbia,~~operating ~~Maryland~~properties and ~~our~~discontinued ~~interest~~operations in ~~Franklin~~the ~~Park~~condensed (aconsolidated ~~retail~~financial ~~center~~statements are insummarized ~~Toledo,~~as ~~Ohio)~~follows (in ~~April 2002.~~thousands):

Disposition decisions and related transactions and changes in expected holding periods or use may cause us to recognize gains or losses that could have material effects on reported net earnings in future quarters or fiscal years, and, taken together with the use of sales proceeds, may have a material effect on our overall consolidated financial position.

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenues:
Total reported above	$	403,638		$	345,643		$	800,784		$	682,322
Our share of revenues of proportionate share and other ventures and revenues of The Woodlands community development venture	(83,743		)	(37,576		)	(156,836		)	(72,466		)
Revenues of discontinued operations	(599		)	(24,884		)	(3,604		)	(65,220		)
Other	—			37			—			87
Total in condensed consolidated financial statements	$	319,296		$	283,220		$	640,344		$	544,723
Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Total reported above	$	211,665		$	174,217		$	425,745		$	330,682
Our share of operating expenses of proportionate share ventures and operating expenses of The Woodlands community development venture and partner’s share of its NOI	(58,055		)	(12,637		)	(107,884		)	(25,256		)
Operating expenses of discontinued operations	(294		)	(12,082		)	(1,372		)	(30,102		)
Other	232			7,467			754			13,389
Total in condensed consolidated financial statements	$	153,548		$	156,965		$	317,243		$	288,713

Operating results:
NOI	$	191,973		$	171,426		$	375,039		$	351,640
Interest expense	(59,963		)	(52,931		)	(118,247		)	(109,678		)
NOI of discontinued operations	(305		)	(12,802		)	(2,232		)	(35,118		)
Depreciation and amortization	(48,521		)	(40,567		)	(96,346		)	(78,567		)
Other provisions and losses, net	(2,086		)	(8,631		)	(6,180		)	(19,757		)
Income taxes, primarily deferred	(20,498		)	(15,993		)	(39,114		)	(26,578		)
Our share of interest expense, ground rent expense, depreciation and amortization, other provisions and losses, net, income taxes and gains on operating properties of unconsolidated real estate ventures, net	(20,351		)	(18,158		)	(40,317		)	(32,929		)
Other	(1,269		)	(4,383		)	(3,065		)	(11,798		)
Earnings before net gains on dispositions of interests in operating properties and discontinued operations in condensed consolidated financial statements	$	38,980		$	17,961		$	69,538		$	37,215

~~Community Development~~19

~~Our~~Part primary business strategy relating to community development projects is to develop and sell land in our planned communities in a manner that increases the value of the remaining land to be developed and sold and to provide current cash flowsI. ~~Our~~ Financial major land development projects include communities in and around Columbia in Howard County, Maryland and in Summerlin, Nevada. In addition, we are an investor in an unconsolidated real estate venture that is developing Fairwood, a planned community in Prince George’s County, Maryland. To leverage our experience and provide further growth, we are continuing to seek and evaluate opportunities to acquire new and/or existing community development projects. In May 2003, we purchased approximately 8,060 acres of investment land and land to be held for development and sale in the Houston, Texas metropolitan area. In September 2003, we purchased an additional 642 acres of land contiguous to this parcel. We expect to begin significant development activities on this land in 2004 and to begin selling this land in 2005.Information

33Item 1. Financial Statements.

~~Operating~~THE ~~results:~~ROUSE COMPANY AND SUBSIDIARIES

~~The~~Notes ~~discussion~~to ~~of operating~~Condensed ~~results~~Consolidated ~~covers~~Financial Statements ~~each of our business segments~~(Unaudited), as management believes that a segment analysis provides the most effective means of understanding the business. It also provides information about other elements of the condensed consolidated statement of operations that are not included in the segment results.continued

The ~~operating~~assets ~~measure~~by ~~used to~~segment ~~assess~~and ~~operating results for~~ the ~~business~~reconciliation ~~segments is Net Operating Income (“NOI”). We define NOI as segment revenues (exclusive~~ of ~~corporate~~total ~~interest income) less~~ segment ~~operating~~ ~~expenses~~assets (including provisions for bad debts, losses (gains) on marketable securities and net losses (gains) on sales of properties developed for sale, but excluding income taxes, ground rent expense, distributions on Company-obligated mandatorily redeemable preferred securities and other subsidiary preferred stock and real estate depreciation and amortization). Additionally, discontinued operations, equity in earnings of unconsolidated real estate ventures and minority interests are adjusted to ~~reflect NOI on~~ the ~~same~~total ~~basis. Prior~~assets ~~to July 1, 2003, we included certain income taxes~~ in ~~our definition of NOI. Effective July 1, 2003, we revised our definition to exclude these amounts from NOI, affecting primarily~~ the ~~presentation~~condensed ofconsolidated ~~our~~financial ~~community development activities. We made this change because we now assess~~statements ~~the~~are ~~operating~~as ~~results~~follows of(in ~~our segments on a pre-tax basis. Amounts for prior periods have been reclassified and conform to the current definition.~~thousands):

The accounting policies of the segments are the same as those used to prepare our condensed consolidated financial statements except that:

	June 30, 2004			December 31, 2003

Retail centers	$	5,607,595		$	5,069,644
Office and other properties	1,054,129			1,165,599
Community development	833,199			835,525
Commercial development	143,255			114,439
Corporate	241,084			327,294
Total segment assets	7,879,262			7,512,501
Our share of assets of unconsolidated proportionate share ventures	(1,481,827		)	(1,464,329		)
Investments in and advances to unconsolidated proportionate share ventures	572,123			591,072
Total assets in condensed consolidated financial statements	$	6,969,558		$	6,639,244

~~• we account~~Investments ~~for real estate ventures~~ in ~~which we have joint interest~~ and ~~control and~~advances ~~certain~~to ~~other~~unconsolidated ~~minority~~real ~~interest~~ estate ventures, ~~(“proportionate~~by ~~share~~segment, ~~ventures”) using~~are ~~the~~summarized ~~proportionate~~as ~~share~~follows ~~method~~(in ~~rather than the equity method;~~thousands):

• we include our share of NOI less interest expense and ground rent expense of other unconsolidated minority interest ventures (“other ventures”) in revenues; and

	June 30, 2004		December 31, 2003

Retail centers	$	309,754	$	345,486
Office and other properties	158,738		158,360
Community development	119,271		144,021
Total	$	587,763	$	647,867

• we include(8) discontinuedOTHER operationsPROVISIONS andAND minorityLOSSES, interests in NOI rather than presenting separately.NET

~~These~~Other ~~differences~~provisions ~~affect only the reported revenues~~ and ~~operating~~losses, ~~expenses~~net consist of the ~~segments~~following ~~and have no~~(in ~~effect on our reported net earnings.~~thousands):

	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004		2003

Pension plan settlement losses (see note 6)	$	2,086	$	2,898	$	2,868	$	7,364
Pension plan curtailment loss (see note 6)	—		—		—		10,212
Net losses on early extinguishment of debt	—		5,733		3,312		5,727
Other, net	—		—		—		(3,546		)
Total	$	2,086	$	8,631	$	6,180	$	19,757

~~Operating~~As ~~results~~discussed ~~for~~in ~~the segments~~note ~~are~~6 ~~summarized~~above, aswe ~~follows~~curtailed (our defined benefit pension plans in ~~millions):~~the first quarter of 2003 and recognized a loss.

	Retail Centers		Office and Other Properties		Community Development		Commercial Development			Corporate			Total
Three months ended September 30, 2003
Revenues	$	198.9	$	49.7	$	62.9	$	—		$	—		$	311.5
Operating expenses *	80.9		20.2		29.6		2.7			4.6			138.0
NOI	$	118.0	$	29.5	$	33.3	$	(2.7	)	$	(4.6	)	$	173.5
Three months ended September 30, 2002
Revenues	$	204.8	$	50.8	$	72.2	$	—		$	—		$	327.8
Operating expenses *	81.7		20.8		46.4		3.3			3.6			155.8
NOI	$	123.1	$	30.0	$	25.8	$	(3.3	)	$	(3.6	)	$	172.0
Nine months ended September 30, 2003
Revenues	$	622.1	$	149.9	$	221.8	$	—		$	—		$	993.8
Operating expenses *	250.1		59.6		129.2		10.7			15.1			464.7
NOI	$	372.0	$	90.3	$	92.6	$	(10.7	)	$	(15.1	)	$	529.1
Nine months ended September 30, 2002
Revenues	$	545.0	$	151.3	$	175.3	$	—		$	—		$	871.6
Operating expenses *	220.3		59.7		112.6		10.0			11.1			413.7
NOI	$	324.7	$	91.6	$	62.7	$	(10.0	)	$	(11.1	)	$	457.9

During the six months ended June 30, 2004, we recognized net losses of $3.3 million, primarily unamortized issuance costs, related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity and to the redemption of the Parent Company-obligated mandatorily redeemable securities. During the three and six months ended June 30, 2003, we recognized net losses of $5.7 million, primarily prepayment penalties related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity.

* Operating expensesThe ~~include~~other ~~provisions~~amount for ~~bad~~the ~~debts,~~six ~~losses~~months ~~(gains)~~ended onJune 30, ~~marketable~~2003 ~~securities~~consists ~~and~~primarily ~~net~~of ~~losses~~a ~~(gains)~~fee ~~on sales~~ of ~~properties~~$3.8 ~~developed~~million ~~for~~that ~~sale~~we ~~and exclude~~earned ~~income taxes, ground rent expense, distributions~~ on ~~Company-obligated~~the facilitation ~~mandatorily~~of ~~redeemable~~a ~~preferred~~real ~~securities~~estate ~~and~~transaction ~~other~~between ~~subsidiary~~two ~~preferred stock~~parties ~~and~~that ~~real~~are ~~estate~~unrelated ~~depreciation~~to ~~and amortization~~us.

3520

~~Reconciliations~~Part ofI. Financial total revenues and operating expenses reported above to the related amounts in the condensed consolidated financial statements and of NOI reported above to earnings before net gains on dispositions of interests in operating properties and discontinued operations in the condensed consolidated financial statements are summarized as follows (in millions):Information

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Revenues:
Total reported above	$	311.5		$	327.8		$	993.8		$	871.6
Our share of revenues of unconsolidated real estate ventures	(36.4		)	(29.8		)	(108.9		)	(79.5		)
Revenues of discontinued operations	(0.6		)	(30.6		)	(43.7		)	(89.1		)
Other	—			0.1			0.1			0.6
Total in condensed consolidated financial statements	$	274.5		$	267.5		$	841.3		$	703.6
Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Total reported above	$	138.0		$	155.8		$	464.7		$	413.7
Our share of operating expenses of unconsolidated real estate ventures	(12.7		)	(9.6		)	(38.0		)	(25.2		)
Operating expenses of discontinued operations	(0.5		)	(13.1		)	(21.6		)	(40.8		)
Other	1.5			2.4			13.7			8.9
Total in condensed consolidated financial statements	$	126.3		$	135.5		$	418.8		$	356.6
Operating results:
NOI	$	173.5		$	172.0		$	529.1		$	457.9
Interest expense	(56.9		)	(58.3		)	(172.0		)	(159.4		)
NOI of discontinued operations	(0.1		)	(17.5		)	(22.1		)	(48.3		)
Other provisions and losses, net	(3.8		)	(11.0		)	(30.5		)	(21.7		)
Depreciation and amortization	(45.6		)	(35.2		)	(129.3		)	(96.4		)
Impairment losses on operating properties	(6.5		)	—			(6.5		)	—
Income taxes, primarily deferred	(1.6		)	(8.7		)	(28.2		)	(25.6		)
Our share of interest expense, ground rent expense, depreciation and amortization, other provisions and losses, net, income taxes and gains on operating properties of unconsolidated real estate ventures, net	(17.9		)	(9.4		)	(50.8		)	(30.5		)
Other	(4.5		)	(5.0		)	(13.8		)	(12.8		)
Earnings before net gains on dispositions of interests in operating properties and discontinued operations in condensed consolidated financial statements	$	36.6		$	26.9		$	75.9		$	63.2

Item 1. Financial Statements.

~~The~~THE ~~reasons~~ROUSE ~~for~~COMPANY ~~significant~~AND ~~changes in revenues and expenses comprising NOI and other elements of net earnings are discussed below.~~SUBSIDIARIES

36Notes to Condensed Consolidated Financial Statements (Unaudited), continued

Business(9) SegmentNET InformationGAINS ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES

~~Income-Producing~~Net ~~Properties: We~~gains ~~report~~on ~~the~~dispositions ~~results~~ of ~~our income-producing~~interests ~~properties~~ in ~~two segments: (1) retail centers and (2) office and other properties. Our tenant leases provide the foundation for the performance of our~~ operating properties~~. In~~ ~~addition to minimum rents, the majority of retail and office tenant~~included ~~leases provide for other rents which reimburse us for certain operating expenses. Substantially all of our retail leases also provide for additional rent (percentage rent) based on tenant sales~~ in ~~excess~~earnings offrom ~~stated~~continuing ~~levels. As~~operations ~~leases expire, space is re-leased, minimum rents~~ are ~~generally adjusted~~summarized toas ~~market~~follows rates, expense reimbursement provisions are updated and new percentage rent levels are established for retail leases. Some portions of our discussion and analysis focus on “comparable” properties. In general, comparable properties exclude those that have been acquired or disposed of, newly developed or undergone significant expansion (in ~~either of~~ ~~the two periods being compared.~~thousands):

Retail Centers: Operating results of retail centers are summarized as follows (in millions):

	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004			2003

Regional retail centers	$	—	$	21,561	$	—		$	21,561
Office and other properties	14,096		—		14,096			—
Other	—		12		(208		)	243
Total	$	14,096	$	21,573	$	13,888		$	21,804

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Revenues	$	198.9	$	204.8	$	622.1	$	545.0
Operating expenses, exclusive of ground rents and depreciation and amortization	80.9		81.7		250.1		220.3
NOI	$	118.0	$	123.1	$	372.0	$	324.7

In 2000, we contributed our ownership interests in 37 buildings in two industrial parks to a joint venture in exchange for cash and a minority interest in the venture. We also guaranteed $44.0 million of indebtedness of the venture and, because of the nature of our continuing involvement in the venture, deferred gains of approximately $14.4 million. In June 2004, we redeemed our interest in the venture and terminated our guarantee of its indebtedness. Accordingly, we recognized the previously deferred gain, net of deferred income taxes of approximately $1.7 million.

~~The~~In ~~$5.9~~April 2004, ~~million~~we ~~decrease in~~sold ~~revenues~~most ~~for~~of ~~the~~our ~~three~~interest ~~months~~in ~~ended~~Westin New ~~September 30~~York, ~~2003~~a ~~and~~hotel ~~$77.1~~in ~~million increase~~New inYork ~~revenues~~City, for ~~the~~net ~~nine~~proceeds ~~months~~of ~~ended~~$15.8 ~~September~~million ~~30,~~and recognized ~~2003~~a ~~compared~~gain ~~to the~~of ~~same~~$1.4 ~~periods~~million in(net ~~2002~~of ~~were~~deferred ~~attributable~~income ~~primarily~~taxes ~~to:~~of $0.8 million).

• In 2003, in a transaction related to the ~~dispositions~~ sale of ~~interests~~retail centers in ~~properties~~the inPhiladelphia ~~2002~~metropolitan area (see note 3), we acquired Christiana Mall from a party related to the purchaser and ~~2003~~assumed ~~(decreases~~a participating mortgage secured by Christiana Mall. The participating mortgage had a fair value of $27160.9 million. The holder of this mortgage had the right to receive $120 million in cash and ~~$46~~participation in cash flows and the right to convert this participation feature into a 50% equity interest in Christiana Mall.6 The ~~million~~holder ~~for~~exercised this right in June 2003. We recorded a portion of the ~~three~~cost ~~and~~of ~~nine~~Christiana ~~months~~Mall based on the historical cost of the properties we exchanged to acquire this property because a portion of the transaction was considered nonmonetary under EITF Issue 01-2, “Interpretations ~~respectively);~~of APB Opinion No. 29.” As a consequence, when we subsequently disposed of the 50% interest in the property, we recognized a gain of $21.6 million.

• the acquisitions of interests in properties in 2002 and 2003 (increases10) ofPREFERRED $13.7 million and $98.2 million for the three and nine months, respectively);STOCK

• The shares of Series B Convertible Preferred stock had a liquidation preference of $50 per share and earned dividends at an annual rate of 6% of the ~~2002~~liquidation ~~openings~~preference. At the option of the holders, each share of the ~~first~~Series ~~phase~~B Convertible Preferred stock was convertible into shares of ~~Fashion~~our ~~Show~~common ~~expansion~~stock ~~and~~at ~~Village~~a conversion price of $38.125 ~~Merrick~~per ~~Park~~share (~~increases~~equivalent to a conversion rate of ~~$6.~~approximately 1.311 ~~million~~shares of common stock for each share of Preferred stock). The conversion price was subject to adjustment in certain circumstances such as stock dividends, stock splits, rights offerings, mergers and ~~$19~~similar transactions.7 In addition, these shares of Preferred stock were redeemable for shares of common stock at our option, subject to certain conditions related to the market price of our common stock. There were 4,047,555 shares of Preferred stock issued and outstanding at December ~~million~~31, 2003. On January 7, 2004, we called for the ~~three~~redemption of all outstanding shares of the Series B Convertible Preferred stock pursuant to the terms of its issuance and ~~nine~~established ~~months~~February 10, ~~respectively);~~2004 as the redemption date. In the first quarter of 2004, we issued 5,308,199 shares of common stock upon conversion or redemption of all of the outstanding shares of Series B Convertible Preferred stock.

• receipt of a management contract termination payment for Town & Country Center in Miami, Florida during the three months ended in March 31, 2002 ($4.8 million); and21

~~• higher rents~~Part ~~on re-leased space at comparable retail centers~~I. Financial Information

~~Our~~Item ~~comparable properties~~1. Financial ~~had average occupancy levels of approximately 92% during the nine months ended September 30, 2003 and 2002~~Statements.

37THE ROUSE COMPANY AND SUBSIDIARIES

~~The~~Notes ~~$0.8~~to ~~million~~Condensed ~~decrease and~~Consolidated ~~$29.8 million increase in operating expenses, exclusive of ground rent~~Financial ~~expense~~Statements ~~and depreciation and amortization~~(Unaudited), ~~for the three and nine months ended September 30, 2003, respectively, compared to the same periods in 2002 were attributable primarily to:~~continued

~~• the acquisitions~~Information ofrelating ~~interests~~to inthe ~~properties~~calculations inof ~~2002~~earnings ~~and~~per ~~2003~~share (~~increases~~ “EPS”) of ~~$5.7 million~~common ~~and~~stock ~~$36.6 million~~ for the three ~~and~~months ~~nine~~ended ~~months~~June 30, ~~respectively~~2004 and 2003 is summarized as follows (in thousands);:

• the openings of the first phase of Fashion Show expansion and the Village of Merrick Park (increases of $4.4 million and $10.6 million for the three and nine months, respectively); and

	2004						2003
	Basic			Diluted			Basic			Diluted

Earnings from continuing operations	$	53,076		$	53,076		$	39,534		$	39,534
Dividends on unvested common stock awards and other	(164		)	(548		)	(165		)	(165		)
Dividends on Series B Convertible Preferred stock	—			—			(3,038		)	(3,038		)
Adjusted earnings from continuing operations used in EPS computation	$	52,912		$	52,528		$	36,331		$	36,331

Weighted-average shares outstanding	102,436			102,436			87,628			87,628
Dilutive securities:
Options, unvested common stock awards and other	—			1,883			—			2,296
Series B Convertible Preferred stock	—			—			—			—
Adjusted weighted-average shares used in EPS computation	102,436			104,319			87,628			89,924

~~• lower bad~~Information ~~debt~~relating ~~expenses~~to atthe ~~comparable~~calculations ~~retail~~of ~~centers~~earnings per share (~~decrease~~“EPS”) of ~~$1.2~~common ~~million~~stock for the ~~nine~~six months ended June 30, 2004 and 2003 is summarized as follows (in thousands).:

We expect a decline in overall NOI from retail centers in the fourth quarter of 2003 as compared to the same period in 2002 similar to the decline in the third quarter of 2003 as compared to the third quarter of 2002, primarily as a result of the dispositions of retail centers in the second quarter of 2003. We expect this decline to be partially offset by the NOI from the opening of additional space at Fashion Show and the Village of Merrick Park and from the acquisitions of interests in Christiana Mall and Staten Island Mall.

	2004						2003
	Basic			Diluted			Basic			Diluted

Earnings from continuing operations	$	83,426		$	83,426		$	59,019		$	59,019
Dividends on unvested common stock awards and other	(335		)	(335		)	(343		)	(343		)
Dividends on Series B Convertible Preferred stock	—			—			(6,076		)	(6,076		)
Adjusted earnings from continuing operations used in EPS computation	$	83,091		$	83,091		$	52,600		$	52,600

Weighted-average shares outstanding	100,191			100,191			87,180			87,180
Dilutive securities:
Options, unvested common stock awards and other	—			1,978			—			1,918
Series B Convertible Preferred stock	—			938			—			—
Adjusted weighted-average shares used in EPS computation	100,191			103,107			87,180			89,098

~~Office~~Effects ~~and Other Properties: Operating results~~ of ~~office~~potentially ~~and~~dilutive ~~other~~securities ~~properties~~ are ~~summarized~~presented asonly ~~follows~~in (periods in ~~millions):~~ which they are dilutive.

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Revenues	$	49.7	$	50.8	$	149.9	$	151.3
Operating expenses, exclusive of ground rents and depreciation and amortization	20.2		20.8		59.6		59.7
NOI	$	29.5	$	30.0	$	90.3	$	91.6

~~The~~Part ~~decrease in net operating income of $0~~I.5 Financial million and $1.3 million for the three and nine months ended September 30, 2003 compared to the same periods in 2002 is attributable to the sale of eight office and industrial buildings in the Baltimore-Washington corridor and lower average occupancy levels at comparable properties. The effect of the sale of properties and lower occupancy levels at comparable properties for the nine months ended September 30 (88.3% in 2003 and 89.8% in 2002) more than offset the effects of the property interests acquired from Rodamco in 2002.Information

~~Difficult~~Item ~~general economic conditions and weakening office demand led to higher vacancy rates in our office portfolio~~1. ~~We expect the~~ Financial ~~annual NOI from our office and other properties segment to decline in 2003 compared to 2002, due to the sale of the properties and the national trend of weakened demand for office space~~Statements.

38THE ROUSE COMPANY AND SUBSIDIARIES

~~Community~~Notes ~~Development: Community development operations relate primarily~~ to ~~the~~Condensed ~~communities~~Consolidated ~~of Summerlin, Nevada; Columbia, Emerson and Stone~~Financial ~~Lake~~Statements in Howard County, Maryland; and Fairwood in Prince George’s County, Maryland. 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, levels of homebuilder inventory, availability of saleable land for particular uses and our decisions to sell, develop or retain land. Operating results of community development are summarized as follows (~~in millions~~Unaudited):, continued

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Nevada Operations:
Revenues:
Summerlin	$	31.6	$	49.1	$	164.9	$	115.7
Other	0.2		5.1		0.7		10.6
Operating costs and expenses:
Summerlin	17.6		33.9		107.2		83.9
Other	1.4		5.4		2.4		9.9
NOI	$	12.8	$	14.9	$	56.0	$	32.5
Columbia Operations:
Revenues	$	31.1	$	18.0	$	56.2	$	49.0
Operating costs and expenses	10.6		7.1		19.6		18.8
NOI	$	20.5	$	10.9	$	36.6	$	30.2
Total:
Revenues	$	62.9	$	72.2	$	221.8	$	175.3
Operating costs and expenses	29.6		46.4		129.2		112.6
NOI	$	33.3	$	25.8	$	92.6	$	62.7

(12) COMMITMENTS AND CONTINGENCIES

~~Revenues~~Other ~~and~~commitments ~~NOI from Summerlin decreased $17.5 million~~ and ~~$1.2~~contingencies ~~million,~~(that ~~respectively,~~are ~~for~~not ~~the~~reflected ~~three months ended September 30, 2003 and increased $49.2 million and $25.9 million, respectively, for the nine months ended September 30, 2003. The decrease~~ in ~~revenues and NOI for~~ the ~~three~~condensed ~~months~~consolidated isbalance ~~attributable~~sheets) toat ~~fewer land sales in the third quarter as compared to the same period in the prior year.~~June ~~However~~30, 2004 ~~for the nine month period in 2003, there were higher prices on land sold for residential~~ and ~~commercial purposes. The increase in operating margins in the nine months ended~~ ~~September~~December 3031, 2003 ~~was~~are ~~due~~summarized ~~primarily~~as tofollows ~~the effects of favorable pricing resulting from higher demand and the limited availability of land for similar uses~~ (in ~~the area.~~millions):

Revenues and NOI from other Nevada operations decreased $4.9 million and $0.9 million, respectively, for the three months ended September 30, 2003 and decreased $9.9 million and $2.4 million, respectively, for the nine months ended September 30, 2003. These decreases were attributable primarily to sales of investment land in 2002. There were no significant sales of investment land in 2003.

	June 30, 2004		December 31, 2003
Guarantee of debt of unconsolidated real estate ventures:
Village of Merrick Park	$	100.0	$	100.0
Hughes Airport-Cheyenne Centers	—		28.8
Construction contracts for properties in development:
Consolidated subsidiaries, primarily related to Fashion Show and The Shops at La Cantera	106.1		103.1
Our share of unconsolidated real estate ventures, primarily related to the Village of Merrick Park and the venture developing The Woodlands	14.6		9.5
Contract to purchase an interest in Mizner Park	—		18.0
Construction contracts for land development:
Consolidated subsidiaries, primarily Columbia and Summerlin operations	67.0		83.1
Our share of the unconsolidated venture developing The Woodlands	21.4		—
Our share of long-term ground lease obligations of unconsolidated real estate ventures	120.6		121.1
Bank letters of credit and other	16.1		14.9
	$	445.8	$	478.5

~~Revenues~~We ~~and~~have ~~NOI~~guaranteed ~~from Columbia~~up ~~operations~~to ~~increased~~ $~~13.1~~100 million ~~and~~for ~~$9.6~~the ~~million,~~repayment ~~respectively,~~of ~~for~~a ~~the~~mortgage ~~three~~loan ~~months~~of ~~ended~~the ~~September~~unconsolidated ~~30,~~real ~~2003~~estate ~~and~~venture ~~$7.2~~that ~~million~~owns ~~and~~the $6Village of Merrick Park.4 The ~~million, respectively,~~amount ~~for~~of the guarantee ~~nine~~may ~~months~~be ~~ended~~reduced ~~September~~or ~~30,~~eliminated ~~2003~~upon the achievement of certain lender requirements. ~~These~~The ~~increases~~fair ~~were~~value ~~attributable~~of ~~primarily~~the toguarantee ~~increased~~is ~~residential~~not ~~land~~material. ~~sales~~Additionally, ~~offset~~venture bypartners ~~lower~~have ~~levels~~provided guarantees ofto ~~sales~~us for ~~commercial~~ ~~uses~~their share (60%) of the loan guarantee.

39We determined that several of our consolidated partnerships are limited-life entities. We estimate the fair values of minority interests in these partnerships at June 30, 2004 aggregated approximately $54.4 million. The aggregate carrying values of the minority interests were approximately $29.4 million at June 30, 2004.

We ~~expect~~and ~~that~~certain ~~NOI~~of ~~from~~our subsidiaries are defendants in various ~~community~~litigation ~~development~~matters arising in the ~~fourth~~ordinary ~~quarter~~course of ~~2003~~business, ~~will~~some ~~exceed~~of which involve claims for damages that are substantial in amount. Some of ~~the~~these litigation matters are covered ~~fourth~~by ~~quarter~~insurance. We are also aware of ~~2002~~claims arising ~~assuming~~from ~~continued~~disputes ~~favorable~~in ~~market~~the ~~conditions~~ordinary course of business. We record provisions for litigation matters and other claims when we believe a loss is probable and can be reasonably estimated. We continuously monitor these claims and adjust recorded liabilities as developments warrant. We further believe that any losses we may suffer for litigation and other claims in excess of the recorded aggregate ~~Las~~liabilities ~~Vegas~~are not material. Accordingly, ~~Nevada~~in our opinion, adequate provision has been made for losses with respect to litigation matters and ~~Howard~~other ~~County~~claims, ~~Maryland~~and ~~regions~~the ultimate resolution of these matters is not likely to have a material effect on our consolidated financial position or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.

Commercial(13) Development: CommercialSUBSEQUENT development expenses consist primarily of preconstruction expenses and new business costs, net of gains on sales of properties we developed for sale. Preconstruction expenses relate to retail and office and other property development opportunities which may not go forward to completion. New business costs relate primarily to the evaluation of potential acquisition and development projects.EVENTS

~~Corporate: Corporate operating~~In ~~expenses~~August 2004, ~~consist~~we ofagreed ~~costs~~to ~~associated~~purchase ~~with~~Oxmoor ~~Company-wide activities which include shareholder relations~~Center, ~~the~~a ~~Board~~regional retail ofcenter ~~Directors,~~in ~~financial management~~Louisville, ~~strategic~~Kentucky. ~~planning~~We ~~and~~expect ~~equity~~to inassume ~~operating~~mortgage ~~results~~debt ofwith ~~miscellaneous~~a ~~corporate~~face ~~investments. Corporate operating~~value ~~expenses~~of ~~increased~~approximately $~~1.0~~60 million and to pay $~~4.0~~63 million ~~for~~in ~~the~~cash ~~three~~to ~~and~~the seller, ~~nine~~using ~~months~~the ~~ended~~proceeds ~~September~~of ~~30,~~borrowings ~~2003,~~under ~~respectively,~~our asrevolving ~~compared~~credit tofacility ~~the same~~and/or ~~periods~~other ~~in 2002~~borrowings. ~~The~~ ~~increases~~We inexpect ~~2003 were~~this ~~primarily~~transaction, ~~attributable~~which tois ~~higher~~subject ~~information~~to ~~technology~~lender consent ~~expenses~~ and ~~expenses~~ ~~incurred~~other ~~relating~~customary toclosing ~~corporate~~conditions, ~~governance~~to ~~initiatives~~close in September 2004.

~~Other Operating Information~~23

~~Interest~~Part ~~expenses: Interest expense decreased $1~~I.4 Financial million for the three months ended September 30, 2003 and increased $12.6 million for the nine months ended September 30, 2003, compared to the same periods in 2002. The decrease for the three month period was primarily attributable to lower interest costs due to a lower weighted-average interest rate. This decrease was partially offset by lower interest capitalization due to the openings of phases of Fashion Show and the Village of Merrick Park. The increase for the nine month period is attributable primarily to interest costs on debt issued and assumed related to the acquisition of the assets of Rodamco in May 2002 and to lower interest capitalization due to the openings described above.Information

~~Depreciation~~Item ~~and amortization: Depreciation and amortization expense increased $10~~1.~~4 million and $33.0 million for the three and nine months ended~~ Financial ~~September 30, 2003, respectively, as compared to the same periods in 2002~~Statements. ~~The increases were attributable primarily to depreciation of the properties acquired in 2002 and 2003.~~

40THE ROUSE COMPANY AND SUBSIDIARIES

~~Other~~Notes ~~provisions~~to ~~and~~Condensed ~~losses,~~Consolidated ~~net: The other provisions and losses, net are~~Financial ~~summarized~~Statements ~~as follows~~ (~~in millions~~Unaudited):, continued

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Pension plan curtailment loss	$	—		$	—		$	(10.2	)	$	—
Pension plan settlement losses	(2.2		)	—			(9.5		)	—
Provision for organizational changes and early retirement costs	(0.9		)	(8.6		)	(7.9		)	(8.6		)
Losses on early extinguishment of debt	(0.7		)	—			(6.4		)	(0.2		)
Impairment provision – MerchantWired	—			—			—			(11.6		)
Gain on foreign exchange derivatives	—			—			—			1.1
Other	—			(2.4		)	3.5			(2.4		)
	$	(3.8	)	$	(11.0	)	$	(30.5	)	$	(21.7	)

(14) NEW FINANCIAL ACCOUNTING STANDARDS

In ~~February~~ January 2003, ~~we modified~~the ~~our~~Financial ~~defined~~Accounting ~~benefit~~Standards ~~pension~~Board ~~plans so that covered employees will not~~(“FASB”) ~~earn~~issued ~~additional~~Interpretation ~~benefits for future services~~No. As a46, ~~result~~“Consolidation of ~~the~~Variable ~~modification,~~Interest weEntities” (“FIN ~~were~~46”). FIN ~~required~~46 toaddresses ~~immediately adjust~~ the consolidation ~~pension~~of ~~plan~~variable ~~related~~interest ~~asset~~entities ~~and~~(“VIEs”) ~~liability recognized~~ in which the ~~condensed~~equity ~~consolidated~~investors ~~financial~~lack ~~statements.~~one ~~The~~or ~~adjustment~~more ~~was equal to substantially all~~ of the ~~unamortized~~essential ~~prior~~characteristics ~~service~~of ~~cost~~a ~~and~~controlling financial ~~unrecognized~~interest ~~transition obligation~~or ofwhere the ~~plans~~equity ~~and~~investment ~~resulted~~at inrisk ais ~~$10.2~~not ~~million~~sufficient ~~curtailment loss. At~~for ~~some~~the ~~point,~~entity weto ~~may~~finance ~~decide~~its toactivities ~~terminate~~without ~~our~~additional ~~defined~~subordinated ~~benefit~~financial support. In ~~pension~~December 2003, ~~plans~~the ~~and~~FASB ~~settle~~issued ~~our~~Interpretation ~~benefit~~No. ~~obligations~~46 by(revised ~~paying~~December 2003), ~~full~~“Consolidation ~~benefits~~of Variable toInterest ~~eligible participants~~Entities” (“FIN 46R”). FIN ~~These~~46R ~~settlements~~or ~~could,~~FIN ~~depending~~46 onapplies in the ~~market~~fourth ~~value~~quarter of ~~the assets~~2003 ofto ~~the~~all ~~plans~~special purpose ~~and~~entities ~~the~~(“SPEs”) ~~relevant~~and ~~interest~~to ~~rates~~VIEs atformed ~~the~~after ~~time~~January 31, ~~require~~2003 usand toin ~~make~~the ~~additional~~first ~~contributions~~quarter toof ~~the~~2004 ~~plans,~~to ~~which~~all ~~could~~other ~~be significant~~VIEs. ~~These~~ ~~settlements~~Application ~~would~~of ~~also~~FIN ~~require~~46 usin to2003 ~~recognize~~and ~~any~~2004 ~~then~~had ~~unrecognized~~no ~~losses related~~effect toon ~~the~~our ~~plans.~~financial statements ~~Based~~as onwe previously consolidated the ~~March~~SPE ~~31,~~that ~~2003~~issued ~~valuation~~our ofParent Company-obligated ~~the~~mandatorily ~~plans~~redeemable preferred securities and, ~~these~~at ~~unrecognized~~June 30, ~~losses~~2004, ~~were~~held ~~approximately~~no ~~$33~~interests ~~million. These~~in ~~unrecognized~~other ~~losses~~VIEs ~~may~~formed ~~change~~after January 31, ~~depending~~2003. Full onapplication of ~~the~~FIN ~~market value~~46R ofin ~~the~~2004 ~~plan~~did ~~assets,~~not ~~interest~~have ~~rates~~a ~~and~~material ~~other~~effect ~~factors~~on asour results of ~~the measurement~~operations ~~dates~~or financial condition.

The provision for organizational changes related primarily to costs incurred to reduce the size of our workforce in 2003 and to our consolidation of the management of our Property Operations and Commercial and Office Development divisions into a single Asset Management Group in 2002. In connection with these changes, we initiated plans to reduce the size of our workforce and adopted voluntary early retirement programs in which employees who met certain criteria were eligible to participate. The costs incurred for the three and nine months ended September 30, 2003, primarily pension plan settlements for employees electing early retirement and severance and other benefit costs for certain retiring executives, aggregated $3.1 million and $17.4 million, respectively. We expect to continue to incur pension plan settlement losses as retired employees elect lump-sum distributions of their pension benefits. Additional settlement losses in the fourth quarter of 2003 are expected to be in the range of $1 million to $3 million.24

~~During~~Part ~~the three and nine months ended September 30, 2003, we recognized net losses, primarily prepayment penalties, of $0~~I.~~7 million and $6.4 million, respectively, related to the~~ Financial ~~extinguishment of debt prior to scheduled maturity.~~Information

~~The~~Item ~~other amount for the nine months ended September 30, 2003 consists primarily of a fee of $3~~2.8 Management’s ~~million~~Discussion ~~that~~and weAnalysis ~~earned on the facilitation~~ of aFinancial ~~real~~Condition ~~estate transaction between two parties that are unrelated to us. The other amount for the three~~ and ~~nine months~~Results ~~ended September 30, 2002 consists~~ of ~~an amount we agreed to pay for costs incurred by an entity that sold us a portfolio of office and industrial buildings in 1998 to resolve certain tax related matters arising from the transaction~~Operations.

41THE ROUSE COMPANY AND SUBSIDIARIES

~~MerchantWired~~Management’s ~~was~~Discussion ~~an unconsolidated joint venture with other real estate companies to provide broadband telecommunication services to tenants. In the second quarter of 2002, we~~ and ~~the~~Analysis ~~other real estate companies decided to discontinue the operations~~ of ~~MerchantWired. Accordingly, we recorded an impairment~~ ~~provision~~Financial ~~for~~Condition ~~the~~and ~~entire~~Results ~~amount~~ of ~~our net investment in the venture.~~Operations

AThe ~~portion~~following ofdiscussion ~~the~~and ~~purchase price~~analysis ~~for~~covers ~~the~~any ~~acquisition~~material ofchanges ~~assets from Rodamco North America N.V. (“Rodamco”) was payable~~ in ~~euros. In January 2002,~~ ~~we acquired options to purchase 601 million euros at a weighted-average per euro price of $0.8819. These transactions were executed to reduce~~ our ~~exposure~~financial tocondition ~~movements~~since inDecember 31, 2003 ~~currency exchange rates between the date of the purchase agreement~~ and ~~the~~any ~~closing~~material ~~date. The~~changes ~~contracts were scheduled to expire~~ in ~~May~~our ~~2002~~results ~~and had an aggregate cost~~ of ~~$11.3~~operations ~~million.~~for ~~At March 31, 2002,~~ the ~~value~~three ~~of the contracts had declined to $3.1 million,~~ and wesix ~~recorded a loss of $8.2 million in the three~~ months ~~then~~ ended~~. In April 2002, we sold the~~ ~~contracts for net proceeds of $10.2~~June ~~million~~30, 2004 ~~and~~as wecompared ~~recorded~~to ~~a gain of $7.1 million for~~ the ~~three~~same ~~months~~period ~~ended~~in ~~June 30, 2002~~2003. ~~For~~This ~~the~~discussion ~~nine~~and ~~months~~analysis ~~ended~~should ~~September~~be ~~30,~~read ~~2002,~~in weconjunction ~~recognized~~with aManagement’s ~~realized~~Discussion ~~loss of $1.1 million. We also executed~~ and ~~subsequently~~Analysis ~~sold~~of aFinancial ~~euro forward contract~~Condition and ~~realized~~Results aof ~~gain~~Operations ofincluded ~~$2.2~~in ~~million~~our ~~during~~2003 ~~the~~Annual ~~three~~Report ~~months~~to ~~ended September 30, 2002~~Shareholders.

Net gains on dispositions of interests in operating properties: Net gains on dispositions of interests in operating properties are summarized as follows (in millions):GENERAL

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
Net gains (losses) on dispositions of interests in unconsolidated real estate ventures:
Regional retail centers	$	—	$	(0.1	)	$	21.6	$	42.6
Community retail center	—		—			—		4.3
Other, net	0.3		0.3			0.5		2.1
	$	0.3	$	0.2		$	22.1	$	49.0

Through our subsidiaries and affiliates, we acquire, develop and manage a diversified portfolio of operating properties located throughout the United States and develop and sell land for residential, commercial and other uses, primarily in our master-planned communities.

In a transaction related to the sale of retail centers in the Philadelphia metropolitan area, we acquired Christiana Mall from a party related to the purchaser and assumed a participating mortgage secured by Christiana Mall. The participating mortgage had a fair value of $160.9 million. The holder of this mortgage had the right to receive $120 million in cash and participation in cash flows and the right to convert this participation feature into a 50% equity interest in Christiana Mall. The holder exercised this right in June 2003. We ~~were~~ ~~required~~have tothree ~~record a portion of the cost of Christiana Mall based on the~~operating ~~historical~~lines ~~cost~~ of the properties we exchanged to acquire this property because a portion of the transaction was considered non-monetary under EITF 01-2, “Interpretations of APB Opinion No. 29.” As a consequence, when we subsequently disposed of the 50% interest in the property, we recognized a gain of $21.6 million.business:

42• retail center operations;

~~In April 2002~~• mixed-use, ~~we sold~~office ~~our interest in Franklin Park, a regional retail center in Toledo, Ohio, for $20.5 million~~ and ~~the~~industrial ~~buyer~~operations; ~~assumed our share of the center’s debt ($44.7 million). Our interest in this property was reported in unconsolidated real estate ventures~~ and~~, accordingly, the gain of $42.7 million that we recorded on this transaction is included in continuing operations.~~

~~Impairment losses on operating properties: In September 2003, we~~• community ~~recognized~~development ~~an impairment loss of $6.5 million on Westdale Mall, a retail center in Cedar Rapids, Iowa. We changed our plans~~ and ~~intentions~~land ~~as to the manner in which this retail center would be operated in the future and revised estimates of the most likely holding period~~sales. As a result, we evaluated the recoverability of the carrying amount of the center, determined that the carrying amount of the center was not recoverable from future cash flows and recognized an impairment loss.

~~Income taxes:~~ We ~~own~~are ~~and~~one ~~operate~~of ~~several~~the ~~taxable REIT~~largest ~~subsidiaries~~publicly ~~(“TRS”),~~traded ~~which~~real ~~allow~~estate uscompanies toin ~~engage~~the inUnited ~~certain~~States ~~non-qualifying~~of ~~REIT activities~~America. ~~With~~ ~~respect~~We ~~to the TRS, we~~have ~~are~~been ~~liable~~publicly ~~for~~traded ~~income~~since ~~taxes~~1957 atand ~~the~~began ~~Federal~~operating ~~and~~as ~~state~~a ~~levels,~~real ~~and~~estate ~~the current~~investment ~~and~~trust ~~deferred~~(“REIT”) ~~income~~on ~~tax~~January 1, ~~provisions~~1998. ~~relate~~We ~~primarily~~engage toin ~~the~~our ~~earnings~~real ofestate ~~the~~business through ~~TRS~~subsidiaries and affiliates.

~~Our~~We ~~deferred~~elected ~~tax~~to ~~asset~~be taxed as ~~was~~a ~~$95.1~~REIT ~~million~~pursuant ~~and~~to ~~our~~the ~~deferred~~Internal ~~tax~~Revenue ~~liability~~Code ~~was~~of ~~$75.2~~1986, ~~million~~as atamended, ~~September~~effective 30January 1, ~~2003~~1998. ~~Our~~In ~~deferred~~general, ~~tax asset was~~a ~~$3.8~~corporation ~~million~~that ~~and~~distributes ~~our~~at ~~deferred~~least ~~tax~~90% ~~liability~~of ~~was~~its ~~$96.2~~REIT ~~million~~taxable atincome to ~~December 31, 2002. In September~~shareholders ~~2003,~~in weany ~~acquired~~taxable ayear ~~controlling~~and ~~financial~~complies ~~interest~~with incertain another ~~entity (in~~requirements ~~which~~(relating weprimarily ~~previously~~to ~~held~~the anature ~~minority~~of ~~interest~~its ~~acquired~~assets ~~from~~and ~~Rodamco)~~the ~~whose~~sources of its ~~assets~~revenues) ~~include,~~is ~~among~~not ~~other~~subject ~~things,~~to ~~approximately~~Federal ~~$400~~income ~~million~~taxation to the extent of ~~temporary~~the income ~~differences~~which it distributes. We believe that ~~it is more~~we ~~likely~~met ~~than~~the ~~not~~qualifications ~~that~~for weREIT ~~will~~status ~~realize~~as ~~these~~of ~~assets and~~June 30, ~~accordingly,~~2004 ~~recorded~~and aintend to ~~deferred~~meet ~~tax~~the ~~asset~~qualifications ofin ~~approximately~~the ~~$140~~future ~~million. We~~and ~~also~~to ~~recorded~~distribute aat ~~deferred~~least ~~credit~~90% of ~~approximately~~our ~~$122 million~~REIT intaxable ~~accordance~~income ~~with~~(determined ~~EITF 98-11,~~after ~~“Accounting~~taking ~~for~~into ~~Acquired Temporary~~account ~~Differences~~any innet ~~Certain~~operating loss ~~Purchase~~deductions) ~~Transactions~~to ~~That~~shareholders ~~Are~~in ~~Not~~2004 ~~Accounted for~~and assubsequent ~~Business Combinations~~years.” ~~This deferred~~In ~~credit~~2001, ~~will~~we ~~reduce~~elected ~~income~~to ~~tax~~treat ~~expense~~certain ~~when the deferred tax asset is~~subsidiaries ~~realized. Deferred~~as ~~tax~~Taxable ~~liabilities~~REIT ~~will become~~Subsidiaries ~~payable as~~ (“TRS”), ~~net~~which ~~operating~~are ~~loss~~subject ~~carryforwards~~to ~~are~~Federal ~~exhausted~~ and state ~~temporary~~income ~~differences~~taxes. We ~~reverse~~conduct ~~(primarily~~our ~~due~~community development toactivities ~~completion~~in ~~of land development projects)~~TRS.

We ~~had~~own ~~previously~~most of our ~~recorded~~interests ~~valuation~~in ~~allowances~~our ~~related~~operating toproperties ~~certain~~through ~~deferred~~The ~~tax~~Rouse ~~assets~~Company ~~that~~LP, which we ~~could~~refer ~~not~~to ~~conclude~~as ~~were~~the ~~more~~“operating ~~likely~~partnership.” One ~~than~~of ~~not~~our towholly beowned ~~realized. A~~subsidiaries ~~significant~~is ~~portion~~the sole general partner and another wholly owned subsidiary is the sole limited partner of ~~these~~the ~~assets~~operating partnership. We ~~related~~own tointerests ~~temporary~~in ~~differences,~~our ~~primarily~~master-planned ~~net~~communities, some operating ~~loss~~properties ~~carryforwards,~~and ~~attributed~~our tomanagement acompany (which manages operating properties not wholly owned by us) through TRS. This ~~that~~operating partnership structure is andesigned ~~investor~~to inallow ~~the~~us ~~planned~~to ~~community~~acquire ofproperties in exchange ~~Fairwood~~for limited partnership interests in the operating partnership. ~~Land~~Using ~~sales~~this atstructure, ~~Fairwood~~we ~~began~~could issue limited inpartnership interests of the ~~third~~operating ~~quarter~~partnership ofto ~~2002. Our~~persons transferring ~~experience~~properties ~~over~~to ~~the~~us ~~past~~who ~~twelve~~wish ~~months~~to ~~and~~defer ~~our~~taxes ~~latest~~on ~~projections~~the ~~indicate~~transfers, ~~that it~~and iswho ~~now~~want ~~more~~to receive ~~likely~~a ~~than~~right ~~not~~to ~~that~~convert wetheir ~~will~~limited ~~realize~~partnership ~~substantially~~interests ~~all~~into ofshares ~~these~~of ~~deferred~~our ~~tax~~common ~~assets~~stock at a future date in a taxable transaction. ~~Accordingly,~~We in have agreed with the ~~third~~lenders ~~quarter~~under some of our ~~2003,~~credit wefacilities ~~eliminated~~that, ~~$9.9~~when ~~million~~and ofif the ~~valuation~~operating ~~allowance~~partnership issues ~~related~~limited partnership interests to ~~these~~unrelated ~~deferred~~parties ~~tax~~in ~~assets. The~~exchange ~~decrease~~for inproperties or ~~income~~we ~~tax~~transfer ~~expense~~to inthe operating partnership all or substantially all of the properties ~~three~~not ~~months~~held ~~ended~~by the operating partnership, the operating partnership ~~September~~will 30become jointly and severally liable for all of our obligations under those credit facilities. Concurrently, ~~2003~~we ~~compared~~will cause the operating partnership to ~~the~~become ~~same~~jointly ~~period~~and inseverally ~~2002~~liable isfor ~~attributable~~our ~~primarily~~obligations tounder ~~this~~all ~~change~~of inour ~~the~~outstanding ~~valuation~~public ~~allowance~~debt.

4325

~~Equity~~Part ~~in earnings of unconsolidated real~~I. Financial ~~estate ventures: Equity in earnings of unconsolidated real estate ventures is summarized as follows (in millions):~~Information

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Net operating income	$	23.7		$	20.2		$	70.9		$	54.3
Ground rent expense	(0.4		)	(0.3		)	(1.2		)	(0.9		)
Interest expense	(8.7		)	(5.2		)	(24.9		)	(18.5		)
Depreciation and amortization	(8.7		)	(3.9		)	(24.6		)	(10.7		)
Other provisions and losses	(0.1		)	—			(0.1		)	(0.4		)
Equity in earnings of unconsolidated real estate ventures	$	5.8		$	10.8		$	20.1		$	23.8

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

~~For~~Revenues ~~segment~~from ~~reporting~~our retail ~~purposes~~center, ~~our~~office, ~~share~~mixed-use ofand ~~the~~industrial ~~NOI~~operations ofare ~~unconsolidated~~derived ~~real~~primarily ~~estate~~from tenant ~~ventures~~rents. Tenant ~~is included~~leases in ~~the~~our retail ~~operating~~centers ~~results~~generally ofprovide ~~retail~~for ~~centers~~minimum rent, ~~office~~additional ~~and~~rent ~~other~~based on ~~properties,~~tenant ~~community~~sales ~~development~~in ~~and~~excess ~~commercial~~of ~~development~~stated aslevels ~~discussed~~and ~~above in~~reimbursement ~~this~~of ~~Management’s~~real ~~Discussion~~estate taxes and ~~Analysis~~other operating expenses. Tenant ~~The~~leases ~~increase~~ in ~~NOI~~our ~~and~~office ~~depreciation~~ and ~~amortization~~other ~~expense~~properties ~~was primarily~~generally ~~attributable~~provide tofor ~~the~~minimum ~~acquisition~~rent and reimbursement of ~~assets~~real ~~from~~estate ~~Rodamco. In~~taxes ~~connection~~and ~~with~~other ~~this~~operating ~~transaction,~~expenses ~~we acquired interests~~ in ~~several~~excess of ~~properties~~stated ~~and~~amounts. The ~~other~~profitability ~~investments~~of our ~~that~~retail ~~are accounted~~centers ~~for~~depends asprimarily ~~unconsolidated~~on ~~real~~occupancy ~~estate~~and ~~ventures~~rent ~~(Oakbrook~~levels ~~Center~~which, ~~Water~~in ~~Tower Place~~turn, ~~River~~are ~~Ridge,~~affected ~~Kravco~~by ~~Investments,~~the ~~L.P.~~profitability ~~and~~of ~~Westin~~the ~~Hotel)~~tenants. WeTenant ~~also~~profitability ~~acquired~~depends ~~from~~on ~~Rodamco~~a ~~the~~number ~~remaining~~of ~~interests~~factors, inincluding ~~properties~~consumer ~~(Collin Creek~~spending, ~~North~~business ~~Star,~~and ~~Perimeter~~consumer ~~Mall~~confidence, competition and ~~Willowbrook)~~ ingeneral ~~which~~economic weconditions ~~previously~~in ~~had~~the amarkets ~~non-controlling~~in ~~interest~~which they and ~~accounted~~ ~~for as unconsolidated real estate ventures~~we operate. ~~Also,~~The weprofitability ~~disposed~~ of aour ~~50% tenancy in common interest in Franklin~~office ~~Park~~and inother ~~April~~properties ~~2002,~~also ~~opened~~depends ~~the~~on ~~Village~~occupancy ofand ~~Merrick~~rent ~~Park~~levels inand ~~September~~is ~~2002,~~affected ~~admitted~~by a ~~50%~~number ~~joint~~of ~~venture~~factors, ~~partner~~including intenants’ ~~Perimeter~~profitability ~~Mall~~and inspace ~~October~~needs ~~2002,~~due to ~~acquired~~growth ~~the~~or ~~controlling~~contraction ~~financial~~in ~~interests~~employment inlevels, ~~Ridgedale~~business ~~Center~~confidence and ~~Southland~~competition ~~Center~~and ingeneral ~~November~~economic ~~2002~~conditions ~~and, beginning~~ in the ~~second~~markets ~~quarter~~in ofwhich ~~2003,~~they ~~own~~and awe ~~50% interest in Christiana Mall~~operate.

44Revenues from our community development and land sales business are derived primarily from land sales to developers and homebuilders and participations with homebuilders in their sales of finished homes to homebuyers. The profitability of our community development business is affected by demand for housing, mortgage interest rates, consumer confidence, and general economic conditions in the Baltimore-Washington, Las Vegas and Houston metropolitan areas.

~~Discontinued~~Our ~~operations:~~strategies ~~The~~include ~~operating~~improving ~~results~~the quality of ~~discontinued~~our ~~operations~~retail ~~are~~portfolio ~~summarized~~through asacquisitions ~~follows~~and development, ~~(in~~expanding and diversifying our community development business and ~~millions)~~increasing the number of our operating properties unencumbered by mortgage debt. Actions we have taken or plan to take to implement these strategies include the following:

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Net operating income	$	0.1		$	17.5		$	22.1		$	48.3
Ground rent expense	—			(0.3		)	(0.6		)	(1.0		)
Interest expense	(0.2		)	(6.9		)	(10.0		)	(21.6		)
Depreciation and amortization	(0.2		)	(5.1		)	(7.1		)	(16.3		)
Other gains (losses), net	—			—			26.9			(5.3		)
Net gains on dispositions of interests in operating properties	3.9			—			73.7			27.7
Income tax benefit (provision), primarily deferred	—			—			(0.2		)	1.2
Discontinued operations	$	3.6		$	5.2		$	104.8		$	33.0

• Acquiring or developing premier retail properties and disposing of other retail properties as appropriate. Since the early 1990’s, we have upgraded the quality of our portfolio of retail properties by acquiring interests in premier retail centers, expanding and improving our existing centers and disposing of properties that were not consistent with our long-term business strategies or not meeting our investment criteria. We use an internal rating system based on sales volume, productivity, anchor performance, regional demographics, quality of tenancy and competitive position in the local market to evaluate each of our shopping centers.

~~Discontinued~~• Realigning ~~operations~~our ~~include the operating results of one retail center and three other retail properties sold during the three months ended September 30, 2003 and the operating results of six retail centers and eight~~ office and industrial ~~buildings~~ ~~sold~~portfolio ~~during~~by ~~the~~disposing ~~nine~~of ~~months~~interests ~~ended September 30, 2003 and properties sold during 2002~~ in ~~which~~buildings ~~we do~~ not ~~have significant continuing~~ ~~involvement. For~~located ~~segment~~in ~~reporting purposes,~~ our ~~share~~master-planned ofcommunities ~~the NOI~~ of ~~the properties in discontinued operations is included in the operating results of retail centers~~Columbia, ~~office~~Maryland and ~~other~~Summerlin, ~~properties~~Nevada, or ~~commercial~~not ~~development~~part asof ~~discussed~~class ~~above~~“A” inurban ~~this~~mixed-use ~~Management’s Discussion and Analysis~~projects.

~~During~~• Acquiring strategically ~~the~~located ~~three~~landholdings ~~months~~in and around major metropolitan areas in ~~ended~~the ~~September~~United ~~30,~~States. During 2003, we purchased ~~sold~~land for community development near Houston, Texas (which we have named “Bridgelands”) and an interest in The ~~Jacksonville~~Woodlands, ~~Landing~~a master-planned community also near Houston. In 2004, we acquired our partners’ interests in a joint ~~retail~~venture ~~center~~that is developing Fairwood, a master-planned community in Prince ~~Jacksonville~~George’s County, ~~Florida~~Maryland, ~~for~~increasing ~~net~~our ~~proceeds~~ownership ofinterest ~~$4.8~~to ~~million~~100%. We ~~recognized~~intend to ause ~~gain~~our ofexperience ~~$2.8~~and ~~million relating~~resources to ~~this~~develop ~~sale. We~~and ~~recorded~~sell ~~an impairment~~finished ~~loss~~lots ofor tracts, ~~$3.3~~including ~~million~~infrastructure inand ~~the~~amenities ~~fourth~~within ~~quarter~~our ofplanned ~~2002~~communities, in ~~related~~addition to ~~this~~ undeveloped property., ~~During~~to ~~the~~housing ~~quarter,~~developers. We we also ~~sold~~intend ~~three~~to ~~small~~continue ~~neighborhood~~to ~~retail~~sell finished ~~properties~~and inundeveloped ~~Columbia,~~lots ~~Maryland~~to ~~for~~commercial ~~aggregate~~developers ~~proceeds~~and ofdevelop ~~$2.2 million~~commercial properties ~~and~~ourselves. In ~~recognized~~addition, ~~aggregate~~we ~~gains~~have increased the profitability of ~~$0.9~~our ~~million. We~~community ~~sold~~development ~~these~~business ~~properties~~by implementing ~~because~~and ~~they~~increasing noparticipations ~~longer~~with ~~met~~builders ~~our~~in their sales of ~~investment~~finished ~~criteria~~homes to homebuyers.

~~During~~• Increasing the number ~~nine~~of ~~months ended~~our ~~September~~operating ~~30,~~properties ~~2003~~unencumbered by mortgage debt. By doing so, we ~~sold~~expect ~~six~~that ~~retail~~we ~~centers~~will inbe ~~the Philadelphia~~able ~~metropolitan~~to ~~area~~receive ~~and,~~a inhigher asenior ~~related~~unsecured ~~transaction,~~debt ~~acquired~~credit ~~Christiana~~rating. ~~Mall~~In ~~from~~June 2004, aStandard ~~party~~& ~~related~~Poor’s toRatings ~~the~~Services ~~purchaser. In~~announced that it was assigning a ~~connection~~“positive” ~~with~~outlook ~~these~~to ~~transactions,~~our weunsecured ~~received~~debt ~~net~~rating ~~cash~~and ~~proceeds~~stated ofthat ~~$218.3~~“as additional ~~million~~high quality malls become unencumbered, the ~~purchaser~~senior ~~assumed~~unsecured ordebt ~~repaid~~rating atcould be ~~settlement~~raised ~~$276~~to BBB from BBB-.6” ~~million~~We ofcannot ~~property~~make any assurances that such a change ~~debt,~~will ~~and~~occur. In the near term, we ~~assumed~~intend ato ~~participating~~refinance ~~mortgage~~a ~~valued~~portion atof ~~approximately~~the ~~$160~~Company’s ~~million~~maturing secured bydebt ~~Christiana~~on ~~Mall~~an unsecured basis. We ~~recognized~~We ~~net~~also ~~gains~~may onuse proceeds from dispositions of ~~interests~~assets into ~~operating~~reduce ~~properties of~~our ~~$65~~overall leverage.4 In ~~million~~the ~~relating~~first tosix months ~~the~~of ~~monetary~~2004, ~~portions~~we ofused ~~these~~borrowings ~~transactions.~~under ~~We recorded~~our ancredit ~~impairment~~facility ~~loss~~to ofrepay approximately $38442.89 million inof ~~the~~debt ~~fourth~~secured ~~quarter~~by ofour ~~2002~~operating properties and ~~related~~later torepaid ~~one~~those ofborrowings using proceeds from the ~~retail~~issuance ~~centers~~of ~~which~~unsecured notes. In 2003, we ~~sold~~repaid $215. We4 ~~entered~~million ~~into~~of ~~these~~debt ~~transactions~~secured toby ~~enhance~~our ~~the~~operating properties ~~overall~~using ~~quality of~~proceeds ~~our~~from ~~portfolio~~the issuance of ~~retail~~unsecured ~~centers~~notes.

During the nine months ended September 30, 2003, we also sold eight office and industrial buildings in the Baltimore-Washington corridor for net proceeds of $46.6 million. We recognized gains on operating properties of $4.4 million relating to the sales of these properties. We sold these properties because they no longer met our investment criteria.26

45Part I. Financial Information

WeItem ~~also recorded a net~~2. Management’s ~~gain~~Discussion ofand ~~$26.9~~Analysis ~~million related to the extinguishment~~ of ~~debt~~Financial ~~secured~~Condition ~~by two of the properties subsequently sold in the Philadelphia metropolitan area~~ and ~~held by~~Results ~~a lender which released the mortgages for a cash payment~~ of ~~less than their aggregate carrying amount~~Operations.

InOur ~~April~~strategies ~~2002,~~and ~~we sold~~ our ~~interests~~plans ~~in 12 community retail centers in Columbia, Maryland~~ for ~~net proceeds of $111.1 million. We recorded a gain on this transaction of approximately $32.0 million, net of deferred income taxes of $18.4 million. Our interests in one of~~ the ~~community retail centers were reported in~~ ~~unconsolidated~~future ~~real~~are ~~estate~~based ~~ventures and the gain~~ on ~~the sale of~~ our ~~interests in~~beliefs this property ($4.3 million, net of deferred income taxes of $2.0 million) is included in continuing operations. The remaining gain on this transaction ($27.7 million, net of deferred income taxes of $16.4 million) is classified as a component of discontinued operations. In anticipation of the sale of the community retail centers, we repaid debt secured by these properties in March 2002 and incurred a loss on this repayment of $5.3 million, including prepayment penalties of $4.6 million.that:

~~Net~~• space ~~earnings: The~~in high-quality, ~~increase~~dominant retail centers in ~~net~~densely ~~earnings~~populated, ~~for~~affluent ~~the~~areas ~~nine~~will ~~months~~continue ~~ended~~to ~~September~~be ~~30,~~in ~~2003~~demand asby ~~compared~~retailers toand ~~the~~that ~~same~~these ~~period~~retail incenters ~~2002~~are ~~was~~better ~~attributable~~able to withstand difficult conditions in the ~~factors~~overall ~~discussed~~economy ~~above.~~and in the real estate and retail industries;

~~Funds~~• demand ~~From Operations: We use Funds From Operations (“FFO”) as a supplement to our reported net earnings. Historical cost accounting~~ for ~~real estate~~housing ~~assets~~in ~~implicitly assumes that~~ the ~~value~~metropolitan ofareas ~~real estate assets diminishes over time as reflected through depreciation and amortization expenses. We believe that the value~~ of ~~real~~Las ~~estate assets does not diminish predictably over time~~Vegas, asHouston ~~historical cost accounting implies,~~ and instead fluctuates due to market and other conditions. Accordingly, we believe FFO provides investors with useful information about our operating performance because it excludes real estate depreciation and amortization expense. We use the ~~definition of FFO adopted by the~~Baltimore-Washington ~~National~~corridor ~~Association~~will ofremain ~~Real Estate Investment Trusts (“NAREIT”). Accordingly~~strong, ~~FFO~~particularly is defined as net earnings (computed in accordance with accounting principles generally accepted in the United States of America), excluding gains (losses) on sales of depreciated operating properties and real estate depreciation and amortization expense. Also, beginning July 1, 2003, we include impairment losses on operating properties in FFO. FFO for ~~all~~housing ~~periods presented conforms to this definition. Our calculation of FFO may not be comparable to similarly titled measures reported by other companies because all companies do not calculate FFO~~ in the same manner. FFO is not a liquidity measure and should not be considered as an alternative to cash flows or indicative of cash available for distribution. It also should not be considered an alternative to net earningshigh-quality, ~~as determined in~~ ~~accordance~~master-planned ~~with~~communities; ~~GAAP, as an indication of our financial performance.~~and

~~Net~~• office ~~earnings~~and industrial isproperties ~~reconciled~~will toprovide ~~FFO~~capacity ~~as follows~~for (employment growth in ~~millions):~~our master-planned communities.

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Net earnings	$	40.5		$	32.3		$	202.7		$	145.2
Depreciation and amortization	54.5			44.2			161.1			123.4
Net gains on dispositions of interests in operating properties	(4.2		)	(0.2		)	(95.8		)	(76.7		)
Funds From Operations	$	90.8		$	76.3		$	268.0		$	191.9

Operating Properties

46Our primary business strategies relating to operating properties include (1) owning and operating premier properties – shopping centers and large-scale mixed-use projects in major markets across the United States and (2) owning and operating geographically concentrated office and industrial buildings, principally complementing community development activities. In order to execute our strategies, with respect to operating properties, we evaluate opportunities to acquire or develop properties and to redevelop, expand and/or renovate properties in our portfolio. We have made and plan to continue making substantial investments to acquire, develop and expand and/or renovate properties as follows:

~~Depreciation~~• In ~~and~~April 2003, ~~amortization~~we ~~and~~acquired ~~net~~Christiana ~~gains~~Mall, ona ~~dispositions~~regional ofretail ~~interests~~center in ~~operating~~Newark, ~~properties include~~Delaware. We ~~our~~subsequently ~~share~~conveyed ofa ~~the~~50% ~~depreciation~~interest ~~and~~in this ~~amortization~~property ~~and~~in ~~net~~June 2003 ~~gains~~pursuant ~~on dispositions~~to ofthe ~~interests~~terms ~~in operating properties~~ of ~~unconsolidated~~a ~~real estate~~participating ~~ventures~~mortgage ~~and~~that ofwe ~~those~~assumed ~~properties classified~~ in ~~discontinued~~the ~~operations~~acquisition.

~~The~~• In August 2003, ~~increase~~we inacquired ~~FFO for~~ the ~~three~~remaining ~~and~~interest ~~nine~~in ~~months~~Staten ~~ended~~Island ~~September 30~~Mall, ~~2003 compared to the same periods~~a inregional ~~2002~~retail ~~was~~center ~~attributable to factors discussed above~~ in ~~this~~Staten ~~Management’s Discussion~~Island, ~~and~~New ~~Analysis~~York.

~~Financial condition~~• In December 2003, ~~liquidity~~we acquired a 50% interest in the retail component and certain ~~capital~~office ~~resources:~~components of Mizner Park, a mixed-use property in Boca Raton, Florida. In January 2004, we acquired a 50% interest in the remaining office components of Mizner Park.

~~Shareholders’ equity~~• In ~~increased~~December 2003, bywe ~~$147.4~~acquired ~~million~~certain ~~from~~office ~~December~~buildings ~~31,~~and ~~2002~~a to52.5% ~~September~~economic interest ~~30,~~in ~~2003. The~~entities ~~increase~~(which ~~was~~we ~~primarily~~refer ~~attributable~~ to ~~net~~ ~~earnings~~as ~~for~~ the ~~nine~~“Woodlands ~~months~~Entities”) ~~ended~~that ~~September~~own The 30Woodlands, ~~2003~~a ~~and~~master-planned community in the ~~effect~~Houston, ofTexas ~~the~~metropolitan ~~exercise~~area. ofIn ~~stock~~addition ~~options~~to ~~and~~developable ~~lapse~~land, ofwe ~~restrictions~~acquired oninterests ~~common~~in ~~stock~~operating properties ~~granted~~owned ~~to executives. These~~by ~~increases~~the ~~were~~Woodlands ~~partially~~Entities, including three golf course ~~offset~~complexes, bya ~~the~~resort ~~payment~~conference ofcenter, ~~regular~~a ~~quarterly~~hotel, ~~dividends~~interests onin ~~our~~seven ~~common~~office buildings and ~~Preferred~~ ~~stocks~~other assets.

We• In ~~had cash and cash equivalents and investments in marketable securities of $80.4 million at September~~March 302004, ~~2003, including $2.2 million of investments held for~~ ~~restricted~~we ~~uses.~~acquired OnProvidence ~~September 29~~Place, ~~2003, we announced that we will use approximately $26 million of cash resulting from the exercise of stock options to redeem~~ a ~~portion~~regional ofretail ~~the~~center ~~outstanding Company-obligated mandatorily redeemable preferred securities~~ in ~~November~~Providence, ~~2003~~Rhode Island.

• We ~~have~~are aan ~~credit facility~~investor ~~with~~in a ~~group~~consolidated ofjoint ~~lenders~~venture that ~~provides~~is ~~for~~developing ~~unsecured borrowings. In July 2003, we negotiated an amendment to the facility.~~ The ~~amount~~Shops ~~that~~at ~~may~~La ~~be borrowed under this facility increased from $450 million to $900 million and the amended facility will be available until July 2006~~Cantera, ~~subject to~~ a ~~one-year~~ ~~renewal~~regional ~~option. The~~retail ~~facility~~center bears interest at LIBOR plus a margin. The margin is determined based on the ratings assigned to our senior unsecured long-term debt securities by Moody’s Investors Service, Inc. (Moody’s) and/or Standard & Poor’s Credit Market Services (S&P) and may range from 0.6% to 1.25%. At September 30, 2003 our rating was Baa3 by Moody’s and BBB- by S&P. These ratings resulted in aSan ~~margin of 0.90% on our credit facility. The revolving credit facility may be used for various purposes~~Antonio, ~~including~~ ~~land and project development costs~~Texas, ~~property~~expected ~~acquisitions, liquidity and other corporate needs. It may also be used~~ to ~~pay~~open ~~some~~in ~~portion of existing debt, including secured debt~~2005. ~~Availability under the facility was $395 million at September 30, 2003.~~

• We ~~have~~are adeveloping ~~shelf~~a ~~registration~~regional ~~statement~~retail ~~for~~center the sale of up to an aggregate of approximately $2.25 billion (based on the public offering price) of common stock, preferred stock and debt securities. At September 30, 2003, we had issued approximately $1.22 billion in ~~aggregate~~Miami-Dade ~~of common stock and debt securities under the shelf registration statement~~County, ~~with a remaining availability of approximately $1~~Florida.~~03 billion.~~

~~Our~~• We ~~debt~~are atdeveloping ~~September 30,~~a ~~2003~~regional isretail ~~summarized~~center ~~as follows (~~in ~~millions):~~Summerlin, Nevada.

	Total		Due in one year
Mortgages and bonds	$	2,964.1	$	426.0
Medium-term notes	45.5		—
Credit facility borrowings	505.0		—
Other loans	771.3		20.6
Total	$	4,285.9	$	446.6

47Part I. Financial Information

AsItem ~~of September 30, 2003, our debt due in one year includes balloon payments of $370~~2.~~6 million that are~~ Management’s ~~expected~~Discussion toand beAnalysis ~~made at or before the scheduled maturity dates~~ of ~~the~~Financial ~~related loans~~Condition ~~from proceeds of property refinancings (including refinancings of the maturing mortgages), proceeds from the issuance of unsecured debt, borrowings under our credit facility~~ and ~~other~~Results ~~available corporate funds. We may obtain extensions~~ of ~~maturities on certain loans~~Operations. We may use distributions of financing proceeds from unconsolidated real estate ventures to provide liquidity. We may also sell interests in operating properties or contribute operating properties or development projects to joint ventures in exchange for cash distributions from and ownership interests in the joint ventures.

We ~~expect~~continually toassess whether ~~spend~~properties ~~more than~~in ~~$97.0~~which ~~million~~we ~~for~~own ~~new~~interests ~~developments,~~are ~~expansions~~consistent ~~and~~with ~~improvements~~our tobusiness ~~existing~~strategies. ~~properties~~We ~~and~~have ~~investments~~disposed inof ~~unconsolidated~~interests ~~real~~in ~~estate~~more ~~joint ventures~~than in50 ~~the~~retail ~~remainder~~centers ~~of 2003. These~~and ~~expenditures~~numerous ~~will~~other beproperties ~~financed~~since ~~primarily~~1993 by(at ~~operating~~times ~~cash~~using ~~flows,~~tax-deferred ~~the~~exchanges ~~proceeds~~or ofjoint ~~construction~~ventures) ~~loans~~and ~~secured~~may bycontinue ~~the~~to ~~projects~~dispose ~~and~~of ~~credit~~selected ~~facility borrowings. We~~properties ~~may~~that ~~also~~are ~~acquire~~not ~~interests~~meeting inor ~~income-producing~~are ~~properties~~not ~~and/or~~considered ~~community~~to ~~development~~have ~~projects that~~the potential to continue to meet our investment criteria. We ~~are~~may ~~continually~~also ~~evaluating~~dispose of ~~sources~~interests ofin properties for other reasons. ~~capital,~~We ~~and~~have wedisposed ~~believe~~of ~~there~~interests ~~are~~in ~~satisfactory~~the ~~sources~~following ~~available~~properties ~~for~~during ~~all~~2003 ~~requirements.~~and 2004:

~~Net~~• In ~~cash provided by operating activities was $304.7 million~~ April and ~~$259.9 million for the nine months~~ ~~ended~~May ~~September 30,~~ 2003 ~~and 2002~~, ~~respectively. The~~we ~~level~~sold ofsix ~~cash~~retail ~~flows~~centers ~~provided~~in bythe ~~operating~~Philadelphia ~~activities~~metropolitan isarea ~~affected~~(Cherry byHill ~~the~~Mall, ~~timing~~Echelon ofMall, ~~receipts~~Exton ~~of rents~~Square, ~~proceeds~~Gallery ~~from~~at ~~land~~Market sales and other revenues and payment of operating and interest expenses and land development costs. The increase in net cash provided of $44.8 million was attributable primarily to proceeds from land sales and the operating cash flows of the properties acquired in 2002 and 2003East, ~~partially~~Moorestown ~~offset~~Mall ~~by the effects of the properties sold in 2002~~ and ~~2003~~Plymouth ~~and the acquisition of investment land and land to be held for development and sale in the Houston, Texas metropolitan area in May 2003~~Meeting).

~~Net~~• In ~~cash~~May ~~used by investing activities was $108.0 million for the nine months ended September 30, 2003~~ and ~~net cash used by investing activities was $862.1 million for the nine~~ ~~months ended September 30~~June 2003, ~~2002. The decrease~~we ofsold ~~$754.1~~eight ~~million~~office ~~was due primarily to a decrease in purchases of property interests~~ and anindustrial ~~increase~~buildings in ~~proceeds from dispositions of interests~~the inBaltimore-Washington ~~properties~~corridor. ~~These were partially offset by an increase in expenditures for properties in development (primarily the redevelopment of Fashion Show).~~

~~Net~~• In August 2003, ~~cash~~we ~~used~~sold ~~by investing~~The ~~activities~~Jacksonville inLanding, ~~2003~~a ~~was~~retail ~~primarily:~~center in Jacksonville, Florida.

• ~~Acquisition~~In ofDecember 2003, ~~remaining~~we ~~interest~~sold inour ~~Staten~~investment ~~Island~~in ~~Mall~~Kravco ~~($148.3~~Investments, ~~million) and~~L.P.

• ~~Expenditures~~In ~~for~~December 2003 and January, February and May 2004, we disposed of interests in eight office properties and nine parcels subject to ground leases in ~~development~~Hughes ~~(primarily~~Center, ~~Fashion~~a ~~Show)~~master-planned business park in Las Vegas, Nevada, in connection with our acquisition of a 52.5% economic interest in The Woodlands.

• ~~These expenditures~~In ~~were partially offset by proceeds from dispositions of interests in properties, primarily the net proceeds of the sale of six retail centers in the Philadelphia metropolitan area ($218.3~~March ~~million~~2004, ~~net of the acquisition~~ ofwe ~~Christiana~~sold Westdale Mall), ~~The~~a ~~Jacksonville~~retail ~~Landing~~center ~~($4.8 million) and eight office and industrial buildings~~ in ~~the~~Cedar ~~Baltimore-Washington~~Rapids, ~~corridor ($46~~Iowa.~~6 million).~~

48• In April 2004, we sold most of our interest in Westin New York, a hotel in New York City.

NetCommunity cash used by investing activities in 2002 was primarily:Development

~~• Acquisition~~Our primary business strategy relating to community development is to expand and diversify this line of ~~eight~~business ~~high-quality~~and ~~operating~~to ~~properties~~develop and ~~other~~sell ~~assets~~land in ~~May~~our planned ~~2002~~communities ~~from~~in a manner that increases the value of the remaining land ~~Rodamco~~to ~~North~~be ~~America~~developed Nand sold and to provide current cash flows.V Our major land development projects include communities in and around Columbia, Maryland, Summerlin, Nevada, and Houston, Texas. In ~~($810~~addition, at December 31, 2003, we were an investor in an unconsolidated real estate venture that is developing Fairwood, a planned community in Prince George’s County, Maryland.2 In ~~million)~~January 2004, we acquired our partners’ interests in this joint venture, increasing our ownership interest to 100%. With a view toward using our experience and diversifying and enhancing our community development business, we seek and evaluate opportunities to acquire new and/or existing community development projects. In May 2003, we purchased approximately 8,060 acres of investment land and land to be held for development and sale in the Houston, Texas metropolitan area on which we intend to develop Bridgelands, a master-planned community. We have also acquired a total of 947 acres of contiguous land in separate transactions executed in the second half of 2003 and early 2004. We expect to begin significant development activities at Bridgelands in 2004 and to begin selling this land in 2005. In December 2003, we acquired a 52.5% economic interest in The Woodlands, an existing master-planned community in the Houston, Texas metropolitan area, which includes, among other assets, approximately 5,500 acres of saleable land.

~~• Expenditures~~We acquired Summerlin, ~~for~~our ~~properties~~master-planned community in suburban Las Vegas, Nevada, in the acquisition of The Hughes Corporation (“Hughes”) in 1996. In connection with the acquisition of Hughes, we entered into a Contingent Stock Agreement (“Contingent Stock Agreement”) for the benefit of the former Hughes owners or their successors (“beneficiaries”). Under terms of the Contingent Stock Agreement, shares of Rouse common stock are issuable to the beneficiaries based on the appraised values of defined asset groups, including Summerlin, at specified termination dates to 2009 and/or cash flows from the development and/or sale of those assets prior to the termination dates. We account for the beneficiaries’ share of earnings from the assets as an operating expense. We account for any distributions to the beneficiaries as of the termination dates related to assets we own as of the termination dates as additional investments in ~~unconsolidated~~the ~~ventures~~ related assets (~~primarily~~that ~~Fashion~~is, ~~Show~~contingent consideration). At the time of acquisition of Hughes, we reserved 20 million shares of common stock for possible issuance under the Contingent Stock Agreement, of which 9,359,217 common shares remain reserved after giving effect to issuances under the Contingent Stock Agreement through June 30, 2004. The number of shares initially reserved was determined based on estimates made at the time of the acquisition. The actual number of shares issuable will be determined only from events occurring over the term of the Contingent Stock Agreement, including the values of the remaining assets on the termination dates, cash flows prior to the termination dates and ~~Village~~the value of ~~Merrick~~our ~~Park)~~common stock, and could substantially exceed the number of shares reserved.

• These expenditures were partially offset by proceeds from disposition of interests in 12 community retail centers in Columbia, Maryland ($111.1 million) and our interest in Franklin Park ($20.5 million).28

~~Net~~Part ~~cash used by financing activities was $177~~I.~~6 million for the nine months ended September 30,~~ Financial 2003 and net cash provided by financing activities was $744.0 million for the nine months ended September 30, 2002. The change of $921.6 million relates to our issuance of 16.675 million shares of common stock for net proceeds of $456.4 million under our shelf registration statement in January and February 2002 and the issuance of a $392.5 million bridge loan facility in May 2002. We used a portion of the proceeds from the stock issuance to repay borrowings under our credit facility and to repay property debt. The remaining proceeds from the common stock issuance ($279.3 million) and the proceeds from borrowings under the bridge loan facility were used to fund a portion of the acquisition of assets from Rodamco in May 2002. The change was also attributable to repayments of property debt in 2003, offset by increased borrowings under our line of credit and proceeds from the exercise of stock options.Information

~~Net~~Item ~~cash~~2. Management’s Discussion ~~used~~and ~~by financing~~Analysis ~~activities~~of inFinancial ~~2003~~Condition ~~was~~and ~~primarily:~~Results of Operations.

• Repayment ofOPERATING property debt, primarily North Star ($155 million) and Christiana Mall ($120 million);RESULTS

~~• Repayments~~The following discussion and analysis of operating results covers each of ~~Company-obligated~~our ~~mandatorily~~business ~~redeemable~~segments, ~~preferred~~as ~~securities~~management ~~($32~~believes that a segment analysis provides the most effective means of understanding our business.1 It also provides information about other elements ~~million);~~of the condensed consolidated statements of operations that are not included in the segment results. You should refer to the condensed consolidated statements of operations and note 7 to the condensed consolidated financial statements when reading this discussion and analysis.

~~• Payment~~ Comparisons of ~~dividends~~Net Operating onIncome ~~common~~and ~~stock~~net ~~and~~earnings ~~preferred~~from ~~stock~~one ~~($120.4~~year ~~million)~~to another are affected significantly by property acquisition, disposition and development activity. As discussed in more detail below, other factors that have contributed to our operating results in 2004 and 2003 include the following:

• ~~These payments~~maintenance ~~were partially offset by proceeds from the exercise~~ of ~~stock options~~high ~~($61.9~~occupancy ~~million),~~levels ~~net~~in ~~borrowings~~retail ~~under our line of credit facility ($263 million) and proceeds from the issuance of property debt (primarily Christiana Mall, $120 million).~~properties;

~~Net~~• higher ~~cash~~rents ~~provided by~~on ~~financing~~re-leased ~~activities in 2002 was primarily:~~space;

• ~~Proceeds from~~strong ~~issuance~~demand offor land ~~16.675 million shares of common stock ($456.4 million)~~ in ~~January~~ and ~~February~~around ~~2002~~Columbia and Summerlin;

• ~~Issuance~~ refinancings of project-related ~~$392.5~~debt ~~million~~at ~~bridge~~lower ~~loan~~interest ~~facility in May 2002 and $400 million public debt in September 2002.~~rates;

• ~~These proceeds were partially offset by the payment of dividends on common stock and preferred stock ($110.3 million),~~ repayments of ~~property~~ debt ~~($119.5 million), repayment of the bridge loan facility ($220.4 million) and net repayment of our line of credit facility ($117 million).~~;

49• redemption of Parent Company-obligated mandatorily redeemable securities;

~~Unconsolidated~~• cost ~~real estate ventures:~~reduction measures;

We• costs ~~have~~related ~~interests in unconsolidated real estate ventures that own and/or develop properties. We use these ventures~~ to ~~limit our risk~~ ~~associated~~organizational ~~with~~changes; ~~individual properties~~ and to reduce our capital requirements. We may also contribute our interests in properties to unconsolidated ventures for cash distributions and interests in the ventures. In general, these ventures own retail centers managed by us for a fee and are controlled jointly by our venture partners and us. These ventures also include a joint venture that is developing the planned community of Fairwood in Prince George’s County, Maryland.

We• pension ~~have guaranteed the~~plan ~~repayment~~curtailment ofand asettlement ~~construction loan of the unconsolidated real estate venture that owns the Village of Merrick Park~~losses. At September 30, 2003, the outstanding balance under this loan was $176.8 million, all of which was guaranteed. The maximum amount that may be borrowed under the loan is $200 million. In October 2003, the venture repaid this loan with proceeds from a new $194 million mortgage. We have guaranteed $100 million of this loan. The amount of the guarantee may be reduced or eliminated upon the achievement of certain lender requirements. Additionally, venture partners have provided guarantees to us for their share (60%) of the new loan.

InThe ~~August~~operating ~~2003~~measure used to assess operating results for the business segments is Net Operating Income (“NOI”). We define NOI as segment revenues less segment operating expenses (including provision for bad debts, losses we(gains) on marketable securities classified as trading, net losses ~~acquired~~(gains) on sales of properties developed for sale and our partner’s share of NOI of the ~~remaining~~venture ~~interests~~developing inThe ~~Staten~~Woodlands, ~~Island~~but ~~Mall~~excluding income taxes, aground rent ~~retail~~expense, ~~center~~distributions inon ~~New~~Parent Company-obligated mandatorily redeemable ~~York~~preferred securities and other subsidiary preferred stock and real estate depreciation and amortization). Additionally, ~~for~~discontinued ~~approximately~~operations, ~~$148~~equity ~~million~~in earnings of unconsolidated real estate ventures and minority interests are adjusted to reflect NOI on the same ~~assumption~~basis. Prior to April 1, 2004, we excluded certain expenses related to organizational changes and early retirement costs from our definition of ~~approximately~~NOI. ~~$53~~Effective April 1, 2004, we ~~million~~revised our definition to include these amounts in ~~debt~~our corporate segment. We made these reclassifications because these expenses are neither infrequent nor unusual and are becoming a normal cost of doing business. Prior to ~~this transaction~~July 1, 2003, we ~~held~~included acertain ~~noncontrolling~~income ~~interest~~ taxes in ~~the~~our ~~property~~definition ~~and~~of ~~accounted~~NOI. ~~for~~Effective July 1, 2003, we revised our ~~investment~~definition asto anexclude ~~investment~~these inamounts from NOI, ~~unconsolidated~~affecting ~~real~~primarily ~~estate~~the ~~ventures.~~presentation of our community development activities. We ~~consolidated~~made this change because we now assess the ~~property~~operating inresults of our segments on a pre-tax basis and ~~financial~~believe ~~statements~~this ~~from~~revised measure better reflects the ~~date~~performance of the ~~acquisition~~underlying assets. Amounts for prior periods have been reclassified and conform to the current definition.

~~Subsequent~~The ~~events~~accounting policies of the segments are the same as those used to prepare our condensed consolidated financial statements, except that:

~~On November 10, 2003,~~ • we ~~agreed~~ toconsolidate ~~sell our investments in Kravco Investments, L.P. and its affiliates~~the toventure andeveloping ~~affiliate of Simon Property Group, Inc. for approximately $51.8 million. We acquired these investments in~~ the ~~acquisition~~community of ~~the~~The ~~assets~~Woodlands ofand ~~Rodamco~~reflect inthe ~~2002. We~~other partner’s ~~expect~~share ~~to record a gain, net~~ of ~~taxes,~~NOI ofas ~~approximately~~an ~~$4.9 million. We~~operating ~~expect~~expense ~~these~~rather ~~transactions to~~than ~~close~~using in the ~~fourth~~equity ~~quarter of 2003.~~method;

~~On November 12, 2003,~~ • we ~~announced~~account ~~that~~for other wereal ~~had~~estate ~~reached~~ventures ~~an agreement~~ in ~~principle to~~which ~~acquire~~we ~~from~~have ~~Crescent~~joint ~~Real~~interest ~~Estate~~and ~~Equities~~control ~~Limited Partnership~~ and ~~its~~ ~~affiliates~~certain ~~(collectively,~~other ~~“Crescent”)~~minority ~~a 52.5% economic~~ interest inventures ~~entities~~ (~~the~~ “~~Woodlands~~proportionate ~~Entities~~share ventures”) ~~that own The Woodlands, a master-planned community~~using in the ~~Houston,~~proportionate Texas metropolitan area. The transactions are subject to definitive documentation and customary conditions including lender approvals. Assets owned by the Woodlands Entities include approximately 5,500 saleable acres of land, seven office buildings totaling 520,000 square feet of space, three golf course complexes, a resort conference center, the Marriott Waterway Hotel, five office buildings that are being marketed for sale and other miscellaneous assets. If the contemplated transactions are consummated, our share ofmethod ~~the~~rather ~~assets~~than ~~and related debt of~~ the ~~Woodlands~~equity ~~Entities would be $387 million and $185 million, respectively. The purchase price is approximately $202 million and will be paid as follows:~~method;

~~· Transfer to~~• we ~~Crescent~~include ~~of Hughes Center, a master-planned business park in Las Vegas, with~~our ~~eight~~share ~~office~~of ~~buildings~~NOI ~~totaling~~less ~~approximately~~interest ~~1.1~~expense ~~million~~and ~~square feet, nine~~ ground ~~leases~~rent ~~and~~expense ~~approximately 13 acres~~ of ~~developable land. For purposes of~~other ~~the~~unconsolidated ~~transaction,~~minority ~~Hughes~~interest ~~Center~~ventures is(“other ~~valued~~ventures”) atin ~~$233~~revenues; ~~million less encumbering debt of approximately $137.5 million, which will be assumed by Crescent.~~and

· • we include ~~$106.5 million~~discontinued ~~cash~~operations atand ~~closing~~minority interests in NOI rather than presenting separately.

~~We expect~~These todifferences ~~execute binding agreements within 30 days and expect the transactions~~affect toonly ~~close in 2003. We anticipate funding~~ the ~~cash~~reported ~~required~~revenues ~~at closing with credit facility borrowings or other corporate funds,~~ and ~~expect~~operating toexpenses ~~receive~~of ~~a distribution from~~ the ~~Woodlands~~segments ~~Entities~~and ofhave no ~~approximately~~effect ~~$26~~on ~~million~~our ~~shortly~~reported ~~after~~net ~~closing~~earnings.

We believe the transactions may reduce net earnings and FFO in 2004, but that they should increase net earnings and FFO in 2005 and thereafter. We cannot assure that actual results will not differ from our expectation.29

50Part I. Financial Information

~~Critical~~Item ~~accounting~~2. Management’s Discussion ~~policies:~~and Analysis of Financial Condition and Results of Operations.

~~Critical accounting~~Operating ~~policies~~results ~~are~~for ~~those that are both important to~~ the ~~presentation of~~ ~~our~~segments ~~financial condition and results of operations and require management’s most difficult, complex or subjective judgments. Our critical accounting policies~~ are ~~those~~summarized ~~applicable~~as tofollows ~~the evaluation~~(in ~~of impairment of long-lived assets, the evaluation of the collectibility of accounts and notes receivable and profit recognition on land sales.~~millions):

Impairment of long-lived assets: If events or changes in circumstances indicate that the carrying values of operating properties, properties in development or land held for development and sale may be impaired, a recovery analysis is performed based on the estimated undiscounted future cash flows to be generated from the property. If the analysis indicates that the carrying value of the tested property is not recoverable from estimated future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount and capitalization rates. The estimated cash flows used for the impairment analyses and to determine estimated fair values are based on our plans for the tested asset and our views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the tested property and comparable properties and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of impairment losses which, under the applicable accounting guidance, could be substantial.

	Retail Centers		Office and Other Properties		Community Development		Commercial Development			Corporate			Total
Three months ended June 30, 2004
Revenues	$	219.1	$	59.5	$	125.0	$	—		$	—		$	403.6
Operating expenses	84.0		33.4		85.6		2.5			6.1			211.6
NOI	$	135.1	$	26.1	$	39.4	$	(2.5	)	$	(6.1	)	$	192.0
Three months ended June 30, 2003
Revenues	$	206.9	$	50.3	$	88.4	$	—		$	—		$	345.6
Operating expenses	82.5		19.4		59.1		3.1			10.1			174.2
NOI	$	124.4	$	30.9	$	29.3	$	(3.1	)	$	(10.1	)	$	171.4
Six months ended June 30, 2004
Revenues	$	424.8	$	119.9	$	256.1	$	—		$	—		$	800.8
Operating expenses	166.2		67.3		175.4		5.1			11.8			425.8
NOI	$	258.6	$	52.6	$	80.7	$	(5.1	)	(11.8		)	$	375.0
Six months ended June 30, 2003
Revenues	$	423.2	$	100.2	$	158.9	$	—		$	—		$	682.3
Operating expenses	169.2		39.4		99.7		8.0			14.4			330.7
NOI	$	254.0	$	60.8	$	59.2	$	(8.0	)	$	(14.4	)	$	351.6

Properties held for sale, including land held for sale, are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. Accordingly, decisions by us to sell certain operating properties, properties in development or land held for development and sale will result in impairment losses if carrying values of the specific properties exceed their estimated fair values less costs to sell. The estimates of fair value consider matters such as recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with prospective purchasers. These estimates are subject to revision as market conditions and our assessment of them change.Note:

~~Collectibility of~~Segment ~~accounts~~operating ~~and~~expenses ~~notes~~include ~~receivable: The~~provision ~~allowance~~ for ~~doubtful~~bad ~~accounts~~debts, ~~and~~losses ~~notes~~(gains) ~~receivable is established based~~ on ~~quarterly~~marketable ~~analysis~~securities ofclassified ~~the~~as ~~risk~~trading, ofnet ~~loss on~~losses ~~specific~~(gains) ~~accounts. The analysis~~on ~~places~~sales ~~particular~~of ~~emphasis~~properties ondeveloped ~~past-due~~for ~~accounts~~sale and ~~considers~~our ~~information~~partner’s ~~such as~~share ~~the nature and age~~ of ~~the~~NOI ~~receivables, the payment history~~ of the ~~tenants or~~ ~~other~~venture ~~debtors,~~developing ~~the~~The ~~financial~~Woodlands ~~condition of the tenants~~ and ~~management’s assessment~~exclude ofincome ~~their~~taxes, ~~ability~~ground torent ~~meet~~expense, distributions ~~their~~on ~~lease~~Parent ~~obligations,~~Company-obligated ~~the~~mandatorily ~~basis~~redeemable ~~for any~~preferred ~~disputes~~securities and ~~the status of related negotiations, among~~ other ~~things. Our~~subsidiary ~~estimate~~preferred ofstock ~~the required allowance is subject to revision as these factors change~~ and isreal ~~sensitive~~estate ~~to the effects of~~depreciation ~~economic~~ and ~~market conditions on tenants~~amortization.

Profit recognition on land sales: Cost of land sales is determined as a specified percentage of land sales revenues recognized for each development project. The cost ratios are based on actual costs incurred and estimates of development costs and sales revenues to completion of each project and are reviewed regularly and revised periodically for changes in estimates or development plans. Significant changes in these estimates or development plans, whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project.30

51Part I. Financial Information

~~New~~Item ~~financial~~2. Management’s Discussion ~~accounting~~and ~~standards:~~Analysis of Financial Condition and Results of Operations.

InReconciliations ~~June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement~~ of ~~Financial~~total ~~Accounting~~revenues ~~Standards~~and ~~No.~~operating ~~146,~~expenses ~~“Accounting~~reported ~~for~~above ~~Costs~~to ~~Associated~~the ~~with~~related ~~Exit~~amounts ~~or Disposal~~in ~~Activities” (“SFAS 146”).~~ the ~~SFAS 146~~condensed ~~addresses~~consolidated financial ~~accounting~~statements and ~~reporting~~of ~~for~~NOI ~~costs associated~~reported ~~with~~above ~~exit~~to ~~or disposal activities and requires that a liability for a~~earnings ~~cost~~before ~~associated~~net ~~with~~gains anon ~~exit~~dispositions orof ~~disposal~~interests ~~activity~~in beoperating ~~recognized~~properties ~~when the~~and ~~liability~~discontinued isoperations ~~incurred. The~~in ~~provisions of~~the ~~SFAS~~condensed ~~146~~consolidated ~~are~~financial ~~effective~~statements ~~for exit or disposal activities initiated after~~are ~~December~~summarized ~~31,~~as ~~2002. Our~~follows ~~adoption of SFAS 146~~ (in ~~January 2003 did not have a material effect on our results of operations or financial condition.~~millions):

In November 2002, the FASB issued Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures required by a guarantor in its interim and annual financial statements about it obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize liabilities for the fair values of obligations undertaken in issuing guarantees issued or modified after December 31, 2002. We have not entered into guarantees since January 1, 2003 that have a material effect on our balance sheet and the adoption of FIN 45 did not have a material effect on our financial position or results of operations.

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenues:
Total reported above	$	403.6		$	345.6		$	800.8		$	682.3
Our share of revenues of proportionate share and other ventures and revenues of The Woodlands community development venture	(83.7		)	(37.6		)	(156.9		)	(72.5		)
Revenues of discontinued operations	(0.6		)	(24.9		)	(3.6		)	(65.2		)
Other	—			0.1			—			0.1
Total in condensed consolidated financial statements	$	319.3		$	283.2		$	640.3		$	544.7
Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Total reported above	$	211.6		$	174.2		$	425.8		$	330.7
Our share of operating expenses of proportionate share ventures and operating expenses of The Woodlands community development venture and partner’s share of its NOI	(58.1		)	(12.7		)	(107.9		)	(25.3		)
Operating expenses of discontinued operations	(0.3		)	(12.1		)	(1.4		)	(30.1		)
Other	0.3			7.6			0.7			13.4
Total in condensed consolidated financial statements	$	153.5		$	157.0		$	317.2		$	288.7
Operating results:

(a) Basis of presentation

Portions(c) ofAcquisitions the purchase price of acquisitionsoperating completed in 2002 and in the nine months ended September 30, 2003 were allocated to intangible assets and liabilities as follows (in millions):properties

(2e) Tax Revenue recognition and related matters

(5g) Debt Stock-based compensation

Investments in(4) andUNCONSOLIDATED advancesREAL toESTATE unconsolidated real estate ventures, by segment, are summarized as follows (in thousands):VENTURES

24(5) DEBT

Information relating to the calculations of earnings per share (“EPS”6) ofPENSION common stock for the nine months ended September 30, 2003 and 2002 is summarized as follows (in thousands):PLANS

• we include(8) discontinuedOTHER operationsPROVISIONS andAND minorityLOSSES, interests in NOI rather than presenting separately.NET

Business(9) SegmentNET InformationGAINS ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES

• the acquisitions of interests in properties in 2002 and 2003 (increases10) ofPREFERRED $13.7 million and $98.2 million for the three and nine months, respectively);STOCK

• the dispositions of interests in properties in 2002 and 2003 (decreases of $11.7 million) andEARNINGS $18.6PER million for the three and nine months, respectively);SHARE

(12) COMMITMENTS AND CONTINGENCIES

(14) NEW FINANCIAL ACCOUNTING STANDARDS

Net gains on dispositions of interests in operating properties: Net gains on dispositions of interests in operating properties are summarized as follows (in millions):GENERAL

Operating Properties

NetCommunity cash used by investing activities in 2002 was primarily:Development

• Repayment ofOPERATING property debt, primarily North Star ($155 million) and Christiana Mall ($120 million);RESULTS

Filing Compare · ROUSE COMPANY