<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K

 X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
---         of 1934 for the fiscal year ended December 31, 1998, or

   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
---      Act of 1934 for the period from ____________ to ______________

            Commission File Number:  1934 Act File Number:  1-13174

                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
             (Exact name of registrant as specified in its charter)

                  Maryland                              54-1681655
     (State or other jurisdiction of                 (I.R.S. Employer
      incorporation or organization)               Identification No.)

           2345 Crystal Drive
       Crystal City, Arlington, VA                        22202
 (Address of principal executive offices)               (Zip Code)

      Registrant's telephone number, including area code:  (703) 920-8500

          Securities registered pursuant to Section 12(b) of the Act:
 
   Title of each class               Name of each exchange on which registered
   -------------------               -----------------------------------------
 Shares of Common Stock                         New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X   No    
                                               ---     ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 
           ----

     The aggregate market value of the 18,216,170 Shares of Common Stock held by
non-affiliates of the Registrant was approximately $535,099,994 based upon the
closing price on the New York Stock Exchange for such stock on March 1, 1999.

     As of March 1, 1999, there were 18,411,540 Shares of Common Stock of the
Registrant issued and outstanding.

                      Documents Incorporated by Reference

     Portions of the proxy statement for the annual shareholders meeting to be
held in 1999 are incorporated by reference into Part III.
<PAGE>
 
                           FORWARD-LOOKING STATEMENTS

     When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forward-looking
statements.  Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.,
Chicago and Boston metropolitan areas; the Company's ability to identify and
secure additional properties and sites that meet its criteria for acquisition or
development; the acceptance of the Company's financing plans by the capital
markets, and the effect of prevailing market interest rates and the pricing of
the Company's stock; and other risks described from time-to-time in the
Company's filings with the Securities and Exchange Commission. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.


                                     PART I

Item 1.   Business.

     Charles E. Smith Residential Realty, Inc. (the "Company") is a self-
administered and self-managed equity real estate investment trust ("REIT") that
is engaged primarily in the acquisition, development, management and operation
of multifamily properties. The Company, together with its subsidiaries as
described below, is a fully integrated real estate organization with in-house
acquisition, development, financing, marketing, leasing and property management
expertise. The Company's primary strategy for growth is to acquire, develop,
own and manage high quality multifamily properties for income generation and
long-term value appreciation.

     The Company is structured as an umbrella partnership REIT whereby all of
the Company's properties, property interests, and business assets are owned by,
and its operations are conducted through, Charles E. Smith Residential Realty
L.P., a Delaware limited partnership (the "Operating Partnership") of which the
Company is the sole general partner and holder of approximately 62% of the
common and preferred units of limited partnership interest ("Units") as of March
1, 1999. The other limited partners of the Operating Partnership (the "Minority
Interest") primarily consist of the former limited and general partners of
properties and the former owners of the property service businesses acquired by
the Operating Partnership (see "History of the Company" below). The Operating
Partnership owns 100% of the nonvoting common stock, which represents 99% of the
total economic interest, of three operating companies (collectively, the
"Property Service Businesses") which provide property services to the properties
owned by the Operating Partnership and to other multifamily, retail, and office

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properties. The three Property Service Businesses are: Smith Realty Company,
which directly provides management, leasing, financing, development and
insurance services and indirectly provides furnished corporate apartments
through a wholly-owned subsidiary; Consolidated Engineering Services, Inc.,
which provides engineering and technical services; and Smith Management
Construction, Inc., which provides construction and interior renovation
services. As the sole general partner of the Operating Partnership, the Company
has the exclusive power to manage and conduct the business of the Operating
Partnership, subject to the consent of the holders of Units in connection with
the sale of all or substantially all of the assets of the Operating Partnership.
Some references made herein to the Company include the Operating Partnership and
the Property Service Businesses, as the context requires.

     As of March 1, 1999, the Company, through the Operating Partnership and its
subsidiaries, owned 50 operating multifamily apartment properties containing a
total of 19,852 units (the "Multifamily Properties"),  two retail centers
containing approximately 436,000 square feet of retail space (the "Retail
Properties"), and had four properties under construction containing
approximately 2,100 units  ("Development Properties").  All properties,
excluding five in Chicago, Illinois and two in Boston, Massachusetts, are
located in the Washington, D.C. metropolitan area (collectively, the
"Properties").

     The Company's executive offices are located at 2345 Crystal Drive, Crystal
City, Arlington, Virginia 22202, and its telephone number is (703) 920-8500.
The Company is a Maryland corporation formed in 1993. The Company completed its
initial public offering of common stock on June 30, 1994. The Operating
Partnership is a Delaware limited partnership formed in 1993; it commenced
business operations on June 30, 1994.

History of the Company

     The Company and the Operating Partnership were formed to succeed to the
property assets of 38 partnerships (the "Property Partnerships") and certain
asset management and property service businesses of the Charles E. Smith
Companies (the "Smith Companies").  On June 30, 1994, the Company consummated an
initial public offering (the "Initial Public Offering") of 8,632,800 shares of
its common stock, $.01 par value per share (the "Common Stock"), and a private
placement of 416,667 shares of its Common Stock.  The Company contributed the
net proceeds of such offerings to the Operating Partnership in return for
9,049,467 Units of general and limited partnership interest therein.  On that
same date, (i) the Operating Partnership acquired, in exchange for 12,131,292
Units, 30  Properties (reflects the combination of  three buildings into one for
operational and statistical purposes), partial interests in two additional
properties, all of the non-voting common stock of the Property Service
Businesses (representing 99% of the economic interest), and notes of the
Property Service Businesses in the aggregate amount of $44.5 million; (ii) the
Operating Partnership, through its partnership subsidiaries, issued $352.4
million of fixed-rate indebtedness secured by certain of the Properties in
private placements to institutional investors and assumed certain other
indebtedness (the "Mortgage Loans"); (iii) the Operating Partnership applied the
proceeds of the

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Mortgage Loans and the Company's contribution of offering proceeds to repay
approximately $454 million of mortgage indebtedness, $26.2 million in related
party indebtedness and $11.1 million in notes payable to a bank, to pay $13.8
million in prepayment penalties related to the early extinguishment of debt, to
pay $14.7 million in transfer taxes and other costs associated with the
formation of the Company and the Operating Partnership, and to pay $18.5 million
of mortgage recording taxes, origination fees and other expenses associated with
the Mortgage Loans, and to supply $15.4 million of working capital; and (iv) the
Operating Partnership established a $100 million line of credit to fund
development activities and property acquisitions and for general corporate
purposes (collectively, the "Formation Transactions").

     Since the Formation Transactions and through March 1, 1999, the Operating
Partnership developed one and acquired 24 operating Multifamily Properties
totaling 9,351 apartment units and sold three properties totaling 1,334 units.
In addition, the Operating Partnership had approximately 2,100 units under
construction in four Development Properties as of March 1, 1999 (see "Recent
Developments" below).

Business Strategy

     The Company seeks growth in funds from operations (a common measure of
equity real estate investment trust performance, defined as net income [loss]
computed in accordance with generally accepted accounting principles, excluding
gains or losses from debt restructuring and other non-recurring items, plus
depreciation and amortization of assets unique to the real estate industry)
while preserving and enhancing property values by pursuing the following
strategies: (i) maximizing cash flow from operations of the Properties by
seeking to maintain high occupancy levels, obtain rent increases, manage tenant
turnover efficiently, make strategic capital investments, expand the
availability of furnished rental apartments, initiate new tenant fees and
control operating expenses; (ii) acquiring additional multifamily properties for
Common Stock, Units, or cash in situations where, in the judgment of management,
the Company's business strengths have the potential to increase property
performance and value; (iii) developing new multifamily properties consistent
with the predecessor Smith Companies' historical policies of constructing and
maintaining high quality properties for long-term income and value enhancement;
and (iv) actively promoting the comprehensive property services of the Property
Service Businesses to unaffiliated property owners.  In addition to its
activities in the Washington, D.C. metropolitan area, the Company also seeks to
acquire additional properties or portfolios in Chicago, Boston, southeast
Florida and other markets with characteristics similar to the Company's current
portfolio that offer opportunities for profitable investment and long-term
growth.

Financing Strategy

     To the extent that the Company's board of directors determines to seek
additional capital for acquisitions or otherwise, the Company may raise such
capital through additional equity offerings, debt financing or retention of cash
flow (subject to provisions of the Internal Revenue

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Code of 1986, as amended, requiring the distribution by a REIT of a certain
percentage of taxable income and taking into account taxes that would be imposed
on undistributed taxable income), or a combination of these methods.

Equity

     During 1998 and through March 1, 1999, the Company completed several equity
transactions.

     In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, to
Cobalt Capital, L.L.C.

     The Company amended the Articles of Incorporation to designate and
establish the rights and privileges of the Series C Preferred Shareholders which
include certain voting, dividend and liquidation preferences over the common
shareholders.  The Series C Preferred Shares have a liquidation preference of
$100,000 per share and an initial annual dividend of $7,910 per share (7.91% of
purchase price).  If the securities receive an investment grade rating, the
dividend  will decrease to $7,660 per share.  Dividends are cumulative and are
payable quarterly.  The Company may redeem Series C Preferred Shares after
February 1, 2028, at the liquidation price plus accrued dividends.

     In April 1998, the Company sold the remaining 978,581 shares of Series
A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred
Shares") to Security Capital Preferred Growth Inc. under the May 1997 agreement.

     In July 1998, the Company completed the sale of 1,400,000 shares of
common stock (par value of $0.01 per share) under its existing shelf
registration statement.

     During 1998, 502,038 shares of Series B Cumulative Convertible
Redeemable Preferred Stock ("Series B Preferred Shares") were converted to
common shares on a one-for-one basis.

     The Company currently has on file with the Securities and Exchange
Commission an effective registration statement which allows the sale of up to
$450,000,000 in debt or equity securities, of which approximately $312,000,000
remains available. As long as the Operating Partnership is in existence, the net
proceeds of all equity capital raised by the Company will be contributed to the
Operating Partnership in exchange for limited partnership interests in the
Operating Partnership.  The Company and the Operating Partnership also may issue
securities senior to the Common Stock or Units, including additional preferred
stock or debt securities (either of which may be convertible into Common Stock
or Units or may be accompanied by warrants to purchase Common Stock or Units).

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Debt

     The Company's policy is to incur debt (including debt incurred under its
lines of credit) only if upon such incurrence its ratio of debt to total market
capitalization would be 60% or less. The Company and its Board of Directors may
reevaluate or modify this financing policy from time to time in light of
economic conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors.  At 
December 31, 1998, the Company's debt to total market capitalization ratio was
40.3%.

Property Management

     The Company and its Property Service Businesses are experienced in the
management and leasing of multifamily and retail properties. The Company
believes that the management and leasing of its own portfolio has resulted in
consistent income growth and reduced operating expenses. The Property Service
Businesses have provided the Company both with a source of cash flow and with
economies of scale in conjunction with the management and leasing of its own
Properties.  These Property Service Businesses also allow the Company and its
subsidiaries to establish additional relationships with tenants that benefit the
Properties.

Property Service Businesses

     Multifamily Property Management Services.  The residential property
management business of Smith Realty Company ("SRC"), an operating subsidiary of
the Company, is a long-established, integrated business with extensive
experience in leasing and managing multifamily properties. This subsidiary has
been managing and leasing multifamily housing in the Washington, D.C.
metropolitan area since 1946 and, as of March 1, 1999, manages 63 apartment
properties of which 50 are owned by the Operating Partnership. It also assists
in the development and acquisition of additional multifamily properties and
carries out a periodic inspection program that addresses all aspects of the
property and property management.

     During 1998, Multifamily and Retail Property Management Services expanded
the corporate apartment program as a result of the acquisition by Smith Realty
Company of Noel Enterprises, Inc. ( d.b.a. "Presidential Villas"), a provider of
furnished corporate apartments in Chicago, Illinois.  A portion of the total
purchase price of $8.5 million is contingent upon achievement by Presidential
Villas of certain earnings targets over the next two years.  The Operating
Partnership lent to Smith Realty Company the initial payment of $6.75 million in
exchange for a five year note.

     Retail Property Management Services.  The retail management and leasing
business, also conducted through Smith Realty Company, approaches the management
and leasing of its retail portfolio with an integrated program of regular direct
communication with retail tenants, proactive assistance with marketing,
merchandising and monitoring store operations, and

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maintenance. A retail marketing staff works to promote the shopping centers as a
whole and to work with individual tenants to ensure the effectiveness of store
design, marketing, merchandising and sales efforts. The retail management and
leasing group, in addition to providing complete property management and leasing
services for the Company's two Retail Properties totaling approximately 436,000
square feet, also provides such services for a fee to three retail properties
owned by affiliated parties totaling approximately 293,000 square feet. Smith
Realty Company also provides retail leasing and brokerage services for
additional, unaffiliated third parties on a fee-for-service basis.
 
          Financing Services.  Historically, the Company solicited, procured and
arranged financing for a fee on behalf of commercial office properties, the
majority of which are affiliated with Robert H. Smith and Robert P. Kogod, the
Co-Chief Executives and Co-Chairmen of the Board of the Company and the owners
of approximately 13% of the Shares and Units of the Company.  During the fourth
quarter of 1997, many of these commercial office properties were rolled up into
a master partnership, Charles E. Smith Commercial Realty L.P. ("CESCR"), an
affiliate of Messrs. Smith and Kogod.  In 1998 most of the remaining commercial
office properties were rolled up into CESCR.  In connection with the formation
of CESCR, the Company entered into a 14-month agreement to continue to provide
financing services for certain of the properties of CESCR through December 31,
1998.  Management does not expect any significant future income from Financing
Services.

     Engineering and Technical Services.  The engineering and technical services
business is conducted through Consolidated Engineering Services, Inc., an
operating subsidiary of the Company, which manages, operates, maintains and
repairs the "physical plant" of office, multifamily, and retail properties.
Through its staff of on-site and off-site engineers, supervisors, technical
specialists and maintenance personnel, this subsidiary provides various
services, including on-site building systems operations and maintenance,
engineering and technical consulting, automated environmental monitoring and
controls, preventive maintenance, management of building environmental systems
and repair and replacement of mechanical/electrical systems.  This business
serves the Properties and also provides facilities management services for both
affiliated and unaffiliated third parties, including condominium, bank,
university and government buildings. During 1998, services were provided with
respect to approximately 46 million square feet of facilities.

     Interior Construction and Renovation Services.  The construction services
business, conducted through Smith Management Construction, Inc., an operating
subsidiary of the Company, is a construction management and general contracting
company that provides interior construction and renovation services to the
Properties and various other affiliated and unaffiliated third party clients.
This business focuses primarily on capital improvement projects and office and
retail tenant space construction and alteration, and provides the expertise
necessary to take a project from the initial planning and preconstruction stage
through the completion of construction. In 1998, oversight was provided to
approximately $80 million of construction activity.

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     Corporate Services. The corporate services businesses, conducted through
Smith Realty Company, enable a central office to provide supporting services in
the areas of  insurance, legal advice, accounting, information systems, human
resources, office  administration and marketing to the Company and its
subsidiaries, as well as to other affiliated third parties, including CESCR.
Services are provided at cost (including overhead) in accordance with cost and
executive sharing agreements. In management's opinion, the allocation methods
provide reasonable estimates of the costs that would have been incurred by the
Company had the services been provided by the Company.

     The accounting department is responsible for all accounting, auditing and
controls, procedures and management information systems as they relate to the
Company and the Properties, and for certain other partnerships and corporate
entities (including affiliates of Messrs. Smith and Kogod). The legal department
provides real estate and corporate advice to management, performs legal services
and in some cases coordinates representation by outside counsel.  The marketing
department develops and implements a variety of marketing programs for the
Company and its subsidiaries.  The human resources department administers all
personnel functions.  The insurance subsidiary provides property and casualty
insurance placement services for both corporate and individual property
requirements.

Employees

     As of March 1, 1999, the Company and its subsidiaries had approximately
1,820 full-time and part-time employees, the latter primarily employed in
on-site clerical positions. This total includes 680 employees who provide
on-site property services and, in the Property Service Businesses, 690 persons
in its engineering and technical services subsidiary, 120 persons in its
interior construction and renovation subsidiary, and 330 persons in its
residential and retail leasing and management, finance, and corporate services
subsidiary.

Recent Developments

     Acquisition Properties.   During 1998, the Company, through the Operating
Partnership, acquired five operating multifamily properties containing 
1,942 apartment units, as further described below.

     Tunlaw Park.  In January 1998, this 120-unit mid-rise property in northwest
Washington, D.C. was acquired in for $0.8 million in cash and 123,818 Operating
Partnership units valued at $4.4 million.  The property was developed and
managed by the Smith Companies and the Company previously owned a 20% minority
interest.

     Tunlaw Gardens.  In January 1998, this 167-unit, garden property in
northwest Washington, D.C.  was acquired for $6.9 million consisting of 
$2.5 million cash and 130,371 Operating Partnership units valued at 
$4.4 million. The property was previously managed by the Company.

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     Parc Vista.    In April 1998, this 299-unit, 16-story high-rise built in
1990 was acquired for approximately  $39 million of cash funded by $4.3 million
in proceeds from the sale of Oxford Manor with the balance drawn on the line of
credit.  During the fourth quarter of 1998, the property had an average economic
occupancy of 98.4% and average monthly rental revenue per apartment unit of
approximately $1,430.

     McClurg Court.  In May 1998, the Company  acquired a 1,075-unit multifamily
property in Chicago, Illinois.  The cost of approximately $70 million cash was
funded from the line of credit and proceeds from the sale of Series A Preferred
Shares totaling $26.5 million. Approximately 13% of the underlying land is
included in the purchase, with the balance subject to ground leases expiring in
2067.  The total capitalized cost of approximately $74 million reflects 
$4 million of planned initial capital improvements. During the fourth quarter of
1998, the property had an average economic occupancy of 93.4% and average
monthly rental revenue per apartment unit of approximately $1,287.

     Cronin's Landing.   In July 1998, the Company acquired a newly-constructed
281-unit mid-rise multifamily property in Boston, Massachusetts.  The total
capitalized cost of approximately $63.5 million was comprised of $27.0 million
cash, $31.5 million in assumed debt, a fair value adjustment to debt of 
$2.0 million, and 92,793 Operating Partnership units valued at $3.0 million.
During the fourth quarter of 1998, the property had an average economic
occupancy of 89.5% and average monthly rental revenue per apartment unit of
approximately $1,733.

     In January 1999, the Company, through the Operating Partnership acquired
three additional properties as further described below.

     Buchanan House.  This 442-unit property in Crystal City, Virginia was
acquired for a total capitalized cost of $65.5 million which includes assumed
debt of $7.4 million, initial capital improvement costs of $5.0 million and 
$0.4 million in acquisition related costs. Cash of $52.7 million was provided by
$17.7 million in proceeds from the sale of Marbury with the balance drawn on the
line of credit. In February 1999, the Company repaid the assumed debt of 
$7.4 million through a draw on the line of credit. The Company paid a prepayment
penalty of $0.9 million which was recognized as an extraordinary loss.

     Parkwest.  This 139-unit property in Chicago, Illinois was acquired for a
total capitalized cost of approximately $14.1 million, consisting of 201,950
Operating Partnership Units valued at $6.3 million, assumed debt of 
$6.0 million, a fair value adjustment to debt of $0.4 million, initial capital
improvement costs of $0.8 million, and $0.6 million in other related
costs.

     Terrace.  This 427-unit property in Chicago, Illinois was acquired for a
total capitalized cost of approximately $26.1 million, consisting of 320,304
Operating Partnership Units valued at $10.0 million, assumed debt of 
$13.7 million, a fair value adjustment to debt of $0.7 million, initial capital
improvement costs of $0.4 million, and $1.3 million in other related
costs.

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     In March 1999, the Company acquired the land beneath the Crystal Square
property and the 5.1% net profits interest in the Crystal Plaza property.  The
purchase price of $10 million consisted of 32,258 Operating Partnership Units
valued at $1 million and $9 million cash drawn upon the line of credit.

     Disposition Properties.  During 1998, the Company sold two properties
("Oxford Manor" and "Marbury Plaza") in southeast Washington, D.C. for a total
of $22.0 million.  The Company recognized  gains on the sales totaling  
$18.2 million.

     In February 1999, the Company sold The Manor, a 435-unit property located
in suburban Maryland for $23.0 million.   The Company recognized a gain on the
sale of $1.9 million.

     Development Properties. During 1998, the Company had four properties
totaling 2,146 apartment units under construction.

     Springfield Station.   The Company is nearing completion on the
construction of its 631-unit mid-rise and garden apartment property in
Springfield, Virginia. The project is located adjacent to a new Metrorail and
commuter rail station and a regional shopping mall and offers convenient access
to major transportation routes. Initial delivery was in May 1998, with final
delivery projected in the second quarter of 1999.

     Courthouse Place.   The Company is nearing completion on the construction
of  its 564-unit high-rise apartment property in Arlington, Virginia. The
initial delivery of 103 units was in December 1998.   Final delivery is expected
in December 1999.

     One Superior Place.   During 1997, the Company began construction on a
52-story, 809-unit  high-rise apartment and commercial center in downtown
Chicago.  Initial occupancy is expected in the third quarter of 1999 with final
delivery in mid-2000.

     Park Connecticut.  During 1998, the Company began  construction on a 
142-unit high-rise apartment property in downtown Washington, D.C. The project
is expected to deliver initial units in the first quarter of 2000 with
stabilization in the fourth quarter of 1999.

     As of March 1, 1999, the Company owned $14.5 million of land for future
development.


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Prepurchase Agreements

     During 1998, the Company entered into four contracts to purchase to-be-
constructed multifamily properties totaling approximately 1,200 apartment units
("Prepurchase Agreements"). The maximum aggregate purchase price totals 
$151 million with projected closing dates between July 2000 and May 2001.
Further details of each project are reflected below.

     Reston Landing.  This 400-unit property is expected to be completed in the
fourth quarter of 1999.  The Company expects to acquire the property in the
third quarter of 2000 at a cost of $44 million, including earn-out payments.

     New River Village.  This 240-unit property is expected to be completed in
the second quarter of 2000.  The Company expects to acquire the property in the
fourth quarter of 2000 at a cost of $32 million, including earn-out payments.

     Wilson Boulevard.  This 220-unit property is expected to be completed in
the second quarter of 2000.  The Company expects to acquire the property in the
fourth quarter of 2000 at a cost of $28 million, including earn-out payments.

     Pollard Gardens.  This 383-unit property is expected to be completed in the
fourth quarter of 2000.  The Company expects to acquire the property in the
second quarter of 2001 at a cost of $47 million, including earn-out payments.

     These acquisitions are contingent upon satisfactory completion of
construction and attainment of final certificates of occupancy by the owners. At
December 31, 1998, the Company had posted three letters-of-credit totaling $7.7
million in accordance with three of the contracts to be drawn upon only if the
Company defaults on its contractual obligations to purchase the completed
assets.

Tax Status

     The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ended December 31,
1994. The Company believes that it qualifies for taxation as a REIT, in which
case the Company generally will not be subject to federal income tax on income
that it distributes to shareholders provided it distributes at least 95% of its
REIT taxable income to its shareholders. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local taxes
on its income and property and to Federal income and excise taxes on its
undistributed income. In addition, the Property Service Businesses, which do not
qualify as REITs, are subject to federal, state, and local taxes on their net
taxable income.

Financial Information

     For information relating to the Company's operating segments, please refer
to Footnote 14 in the Financial Statements.

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Executive Officers of the Company

     The following is a biographical summary of the experience of the executive
officers of the Company:

     Robert H. Smith.  Mr. Smith is Co-Chief Executive Officer and Co-Chairman
of the Board of the Company and Co-Chairman of the Board of each of the Property
Service Businesses.  Since 1962, Mr. Smith has been the President, Chief
Executive Officer and a director of  Charles E. Smith Construction, Inc. and its
predecessor companies, where he oversees and directs all phases of development
and construction of the Smith Companies' office, retail and residential real
estate projects.  He is also Co-Chairman of the Board and  a director of 
Charles E. Smith Commercial Realty, Inc. which together with its subsidiaries
and affiliates is engaged in the ownership, operation, and management of
commercial office buildings. Mr. Smith joined the Smith Companies in 1950. 
Mr. Smith is 70 years old and the brother-in-law of Robert P. Kogod.

     Robert P. Kogod.  Mr. Kogod is Co-Chief Executive Officer and Co-Chairman
of the Board of the Company and Co-Chairman of the Board of each of the Property
Service Businesses. From 1964 to 1997, Mr. Kogod was the President, Chief
Executive Officer and a director of Charles E. Smith Management, Inc., where he
oversaw and directed all phases of the leasing and management of the Smith
Companies' commercial real estate portfolio. He is now the Co-Chairman of the
Board and a director of Charles E. Smith Commercial Realty, Inc., a successor to
Charles E. Smith Management, Inc., and the owner, operator, and manager of
commercial office buildings.  He is also Secretary/Treasurer and a director of
Charles E. Smith Construction, Inc., an affiliated company that specializes in
the development and construction of office, retail and residential projects.
Mr. Kogod joined the Smith Companies in 1959. Mr. Kogod is 67 years old and the
brother-in-law of Robert H. Smith.

     Ernest A. Gerardi, Jr.  Mr. Gerardi is President, Chief Operating Officer
and a Director of the Company, and is President, Chief Executive Officer, and a
director of each of the Property Service Businesses. From 1985 until 1994, 
Mr. Gerardi was a member of the Executive Committee of Charles E. Smith
Management, Inc., where he had overall responsibility for all day-to-day
business operations and long-range planning. From 1985 through 1993, he served
as Executive Vice President and Senior Executive Vice President of Charles E.
Smith Management, Inc. Prior to joining the Smith Companies in 1985, Mr. Gerardi
was with Arthur Andersen and Co., where he served as senior partner in charge of
the firm's accounting and financial practice for over 250 professionals in
Washington, D.C. During his 27 years with Arthur Andersen, he specialized in
management consultation and strategic planning. He is also a member of the
American Institute of Certified Public Accountants and the D.C. Institute of
Certified Public Accountants. Mr. Gerardi is 63 years old.

     Wesley D. Minami.  Mr. Minami is Senior Vice President and Chief  Financial
Officer of the Company and Smith Realty Company, one of the Property Service
Businesses, and is responsible for the Company's debt portfolio, corporate
financial planning, local acquisitions, and its treasury, accounting, controls
and information systems departments.  Prior to joining the

                                       11
<PAGE>
 
Company in 1997, Mr. Minami was the Chief Financial Officer for Ascent
Entertainment Company where he was responsible for an $86 million initial public
offering spin-off of Ascent, which had been a wholly-owned subsidiary of Comsat
Corporation. Formerly, he had served as the Treasurer of Comsat Corporation.
From 1985 to 1993, Mr. Minami held several positions, including Senior Vice
President, Chief Financial Officer at Oxford Realty Services Corporation which
developed and managed a portfolio of over 45,000 apartment units. Mr. Minami is
42 years old.

     Robert D. Zimet.  Mr. Zimet is Senior Vice President, General Counsel and
Secretary of the Company and Smith Realty Company, one of the Property Service
Businesses.  He was the General Counsel and a Senior Vice President of 
Charles E. Smith Management, Inc., since joining the Smith Companies in 1983,
and became a Group Senior Vice President in 1991. He continues in these
capacities for Charles E. Smith Commercial Realty, Inc., a successor to 
Charles E. Smith Management, Inc., and the owner, operator, and manager of
commercial office buildings. Mr. Zimet is responsible for the legal affairs of
the Company and the Smith Companies, as well as supervision of the Human
Resources and Office Services departments of Smith Realty Company. Mr. Zimet is
60 years old.

     John T. Gray.  Mr. Gray is the Senior Vice President-Residential Management
of the Company and Smith Realty Company, one of the Property Service Businesses.
Prior to joining the Smith Companies in November 1998, he was President for two
years of Walter V. Clark Associates, a human resources consulting firm.  Prior
to that, Mr. Gray was with Summit Properties, Inc. for ten years.  As President
of the Management Company, he was an active participant in Summit's initial
public offering and had total responsibility for the residential portfolio of
over 20,000 apartment units.  Mr. Gray is responsible for the overall
management, leasing and operation of Smith's multifamily portfolio.  Mr. Gray is
43 years old.

     Matthew B. McCormick.  Mr. McCormick is the Senior Vice President-
Residential Marketing of the Company and Smith Realty Company, one of the
Property Service Businesses. Prior to January 1998, Mr. McCormick was the Senior
Vice President and Department Head of the Retail Group, where he was responsible
for retail property management and leasing, as well as outside retail brokerage
services.  Prior to joining the Smith Companies in 1988, Mr. McCormick was a
retail specialist with the Washington, D.C. office of Coldwell Banker.  
Mr. McCormick is 38 years old.

     Alfred G. Neely.  Mr. Neely is Senior Vice President-Development of the
Company, responsible for the zoning, planning and development of all multifamily
buildings.  Since joining Charles E. Smith Construction, Inc., in 1989 as a
Senior Vice President and now as a Group Senior Vice President, Mr. Neely has
been responsible for zoning, planning and development. Prior to joining the
Smith Companies, Mr. Neely was Executive Vice President and Managing General
Partner of the New Height Group, a real estate and development company in
Denver, Colorado.  During his nine years with this company, Mr. Neely has been
responsible for development and management of mixed-use properties.  Mr. Neely
is 53 years old.

                                       12
<PAGE>
 
Item 2.   Properties

General

     The 56 Properties as of March 1, 1999 consist of 50 Multifamily Properties,
four Development Properties and two Retail Properties, as described in more
detail below. Twenty-eight of the Multifamily Properties (reflecting the
combination of three buildings into one for operational and statistical
purposes) and both Retail Properties were acquired in connection with the
Formation Transactions. In addition, the Company held a minority limited
partnership interest in one other multifamily property in the Washington
metropolitan area, acquired in the Formation Transactions and increased in a
subsequent transaction.

     All of the Company's properties are located in developed areas that include
other residential and retail properties.  The number of competitive residential
properties in a particular area could have a material effect on the Company's
ability to lease apartment units and on the rents charged.  In addition, other
forms of single and multifamily residential properties provide housing
alternatives to tenants and potential tenants of the Company's residential
properties.  The Company's retail properties face similar competition with other
retail properties with respect to tenant leases.  The Company believes that the
properties are well located in their markets and are well constructed and
designed.  In the opinion of management, the Company's properties are adequately
covered by insurance.

Multifamily Properties

     The 48 operating Multifamily Properties owned as of December 31, 1998
contain a total of 19,279 garden, mid-rise, and high-rise apartment units,
ranging in size from 115 to 1,075 apartment units.  Two of the properties are
located in Chicago, Illinois, two are located in Boston, Massachusetts with the
balance in the Washington D.C. metropolitan area. All of the Multifamily
Properties are 100% owned by the Company and its subsidiaries. In 1998, the
average monthly rental revenue per core unit was $970 and the average economic
occupancy was 96.6% for the Core Residential Portfolio (Multifamily Properties
owned as of December 31, 1996.) As of December 31, 1998, the average age of the
operating Multifamily Properties, weighted by 1998 revenues, was 25 years.

     Each of the Multifamily Properties is established in its local market and
provides residents with numerous amenities and services, which may include
24-hour desk service,

                                       13
<PAGE>
 
swimming pools, tennis courts, exercise rooms and/or saunas, day care centers,
party or meeting rooms, tenant newsletters, and laundry facilities. Nearly all
units are wired for cable television, and many units also offer additional
features, such as washer/dryer, microwave, fireplace, and patio/balcony. The
Company maintains an ongoing program of regular maintenance and capital
improvements and renovations, including roof replacement and exterior
maintenance, kitchen and bath renovations, balcony repairs, and replacements
of various building systems.

     The following table sets forth certain additional information relating to
the Multifamily Properties as of December 31, 1998 (in the following table,
occupancy is based upon economic occupancy, which measures occupancy beginning
on the rent commencement date; monthly revenue per unit is total property
revenue divided by the number of apartment units; and certain data may be
omitted for properties not operated by the Company for the entire year):

                                       14
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
    Residential  Portfolio  Statistics for the Year Ended December 31, 1998

<TABLE> 
<CAPTION> 
                                                       Number of       Average       Monthly       Average
                                         Property      Apartment       Sq. Ft.       Revenue       Economic
Property Type/Property Name                Type          Units         Per Unit      Per Unit      Occupancy  
---------------------------              --------      ---------       --------      --------      --------- 
<S>                                      <C>           <C>             <C>           <C>           <C> 
Core Residential Portfolio
 
NW Washington, D.C.
  1841 Columbia Road                    High-rise         115             634        $  955          99.0%
  2501 Porter Street                    High-rise         202             760         1,472          97.5%
  Albemarle                             High-rise         235           1,097         1,226          98.9%
  Calvert-Woodley                       High-rise         136           1,001         1,169          99.0%
  Cleveland House                       High-rise         216             894         1,138          99.2% 
  Connecticut Heigh                     High-rise         519             536           889          95.6%
  Corcoran House                        High-rise         138             464           832          99.2%
  Statesman                             High-rise         281             593           798          97.7%
  Van Ness South                        High-rise         625             956         1,109          98.7%
                                                       ------           -----        ------          -----
                                                        2,467             778         1,051          98.0%

Other NE & SE Washington, D.C.
  Car Barn                              Garden            196           1,311           888          96.6%
  Fort Chaplin                          Garden            549             983           673          98.2%   
                                                       ------           -----        ------          -----
                                                          745           1,069           729          97.6%

Other Northern Virginia - Inside Beltway
  Crystal City
  ------------
  The Bennington                        High-rise         348             804         1,059          96.0% 
  Crystal House I                       High-rise         426             917         1,010          97.2%
  Crystal House II                      High-rise         402             938           987          96.6%
  Crystal Square                        High-rise         378           1,121         1,179          99.0%
  Crystal Place                         High-rise         180             894         1,310          97.7%
  Gateway Place                         High-rise         162             826         1,792          94.7%
  Water Park Towers                     High-rise         360             881         1,436          92.9%
                                                       ------           -----        ------          -----
                                                        2,256             923         1,190          96.2%

  Rosslyn/Ballston
  ----------------
  Courthouse Plaza                      High-rise         396             772         1,299          96.9%

  Other
  -----
  Arlington Overlook                    Mid-rise          711             877           780          95.6%
  Bedford Village                       Garden            752           1,070           914          95.0%
  Berkeley                              Mid-rise          138             891           744          97.4%
  Boulevard of Old Town                 Garden            159             603           934          98.3%
  Columbia Crossing                     Garden            247             976         1,122          95.8%
  Columbian Stratford                   Mid-rise          227             942           767          97.8% 
  Concord Village                       Garden            531           1,025           820          95.4%
  Newport Village                       Garden            937           1,115           911          97.1%
  Orleans Village                       Garden            851           1,061           828          94.6%
  Patriot Village                       Garden          1,065           1,162           915          96.6%
  Skyline Towers                        High-rise         940           1,221           988          95.5%
  Windsor Towers                        Mid-rise          280           1,025           812          98.0%
                                                       ------           -----        ------          -----
                                                        6,838           1,063           887          96.0%

Other Northern Virginia - Outside Beltway
  Charter Oak                           Garden            262           1,097           956          96.8%
  Oaks of Tysons                        Garden            218             968         1,047          97.2%
  Potomac View                          Garden            192             965           791          97.8%
  Westerly at Worldgate                 Garden            320             921         1,120          95.5%             
                                                       ------           -----        ------          -----
                                                          992             986           997          96.6%

Suburban Maryland
  The Manor                             Garden            435             999           774          96.9% 
  Suburban Tower                        High-rise         172             677           830          98.1%       
                                                       ------           -----        ------          -----
                                                          607             908           790          97.2%
                                                       ------           -----        ------          -----
                                
     Subtotal/Average                                  14,301             972        $  970          96.6%
                                                       ------           -----        ------          -----
</TABLE> 

                                       15
<PAGE>
 
<TABLE>
<CAPTION>
                                                       Number of       Average       Monthly       Average
                                         Property      Apartment       Sq. Ft.       Revenue       Economic
Property Type/Property Name                Type          Units         Per Unit      Per Unit      Occupancy  
---------------------------              --------      ---------       --------      --------      --------- 
<S>                                      <C>           <C>             <C>           <C>           <C> 
Acquisition Portfolio
 
  The Kenmore (NW Washington, D.C.)     High-rise         376             725           756          97.8%
  Crystal Plaza (Crystal City)          High-rise         540           1,129         1,254          98.4%
  Crystal Towers (Crystal City)         High-rise         912           1,107         1,139          97.5%
  Lincoln Towers (Rosslyn/Ballston)     High-rise         714             879         1,276          93.5%
  2000 Commonwealth (Boston)            High-rise         188             878         1,649          96.2%
  One East Delaware (Chicago)           High-rise         306             704         1,886          98.0%
  Tunlaw Gardens (NW Washington, D.C.)  Garden            167             850           767          97.0%
  Tunlaw Park (NW Washington, D.C.)     Mid-rise          120             856         1,105          97.8%
  Parc Vista (Crystal City)             High-rise         299             770           n/a           n/a  
  McClurg Court (Chicago)               High-rise       1,075             688           n/a           n/a
  Cronin's Landing (Boston)             Mid-rise          281           1,129           n/a           n/a
                                                       ------           -----        ------          -----
     Sub-Total/Average                                  4,978             890           n/a           n/a
                                                       ------           -----        ------          -----
 
 
Development Portfolio
 
 Springfield Station
  (Other Northern Virginia)             Mid-rise/Garden   631
 Courthouse Place (Rosslyn/Ballston)    High-rise         564
 One Superior Place (Chicago)           High-rise         809
 Park Connecticut
  (NW Washington, D.C.)                 High-rise         142
                                                       ------ 
     Sub-Total                                          2,146
                                                       ------   
All Residential Properties                             21,425
                                                       ======
</TABLE>

                                       16
<PAGE>
 
     The following table sets forth the total number of apartment units in the
Core Residential Portfolio, the economic occupancy, and the average monthly
rental revenue per unit as of the end of 1998 and in each of the previous five
years:
 
Multifamily Properties

<TABLE>
<CAPTION>
                                                   Average Monthly
Year          Number of Units  Percent Occupied*   Revenue Per Unit
-------       ---------------  ------------------  ----------------
<S>           <C>              <C>                 <C>
 
1998              14,301             96.6%                $970
1997              14,198             96.4%                $901
1996              12,462             97.0%                $883
1995              11,834             97.2%                $862
1994              11,834             97.8%                $845
1993              11,834             97.8%                $818
</TABLE>
* Based on economic occupancy


Retail Properties

     The Company's two Retail Properties, Skyline Mall and Worldgate Centre, are
enclosed malls containing a total of approximately 436,000 square feet of retail
space.   Until December  1997, both Retail Properties leased  health club
facilities to entities controlled by Messrs. Smith and Kogod pursuant to leases
expiring on December 31, 2015.  In December 1997, the health clubs were sold by
Messrs. Smith and Kogod.  In conjunction with that sale, the Company agreed to
restructure the two leases, including reduced base rent on the Worldgate lease,
and extended terms on both leases for ten years, through 2025, in exchange for a
$2.3 million cash payment.

     Worldgate Centre.  Worldgate Centre is a community retail center located in
Herndon, Virginia, at the intersection of two major Northern Virginia traffic
arteries, the Dulles Airport Access Highway and Centreville Road.  Developed by
the Smith Companies in 1991, it is a part of a mixed-use development which
includes the 320-unit Multifamily Property which the Company constructed in
1995. The town of Herndon is located in Fairfax County, one of the highest
median income counties in the country. The Property contains the 108,670 square
foot Worldgate Athletic Club, a Loew's Cinema, and a mix of approximately 
40 other food service, fashion and specialty retailers and various business and
general service tenants. Worldgate Centre has 230,926 square feet of leasable
area and had an average occupancy rate of 99.5% during 1998. Approximately 16%
of the leases, based on net rentable area, are scheduled to expire prior to the
year 2003.

     Skyline Mall.  Skyline Mall is a two-level, enclosed community retail
center located on Route 7 in Northern Virginia, at the intersection of  Fairfax
County, Arlington County, and the City of Alexandria, Virginia. Originally
developed by the Smith Companies in 1977, it is part of a mixed-use community
which also includes over two million square feet of office space and over 3,300
high-rise condominium and apartment units (including Skyline Towers, a 940-unit
Multifamily Property 

                                       17
<PAGE>
 
owned by the Company), all within walking distance. The Property has 204,914
square feet of leasable area and had an average occupancy rate of 97.2% in 1998.
It contains the 79,920 square foot Skyline Racquet and Health Club, an AMC
Cinema, and approximately 40 other stores, including restaurants, fashion and
specialty retailers, and various business and general services. Approximately
12% of the leases, based on net rentable area, are scheduled to expire prior to
the year 2003.

     The following table sets forth certain additional information relating to
the Retail Properties as of December 31, 1998:

Retail Properties

<TABLE>
<CAPTION>
                                             Gross                      Average     Average
                                           Leasable  Number   Average  Base Rent  Gross Rent
Property                          Year       Area     of     % Leased   Per SF      Per SF
 Name             Location      Completed    (SF)    Stores    1998     Leased      Leased
--------------------------------------------------------------------------------------------
<S>            <C>              <C>        <C>       <C>     <C>       <C>        <C>
Skyline Mall   Fairfax Co., VA     1977    204,914     40      97.2%    $12.13      $16.42
                                                                                  
Worldgate                                                                         
 Centre        Herndon, VA         1991    230,926     40      99.5%    $20.19      $26.92
                                           -------            -----     ------      ------
                                           435,840             98.4%    $16.40      $21.98
                                           =======            =====     ======      ======
</TABLE>

Property Markets

     The Company believes that economic trends and market conditions in the
locations where the Company currently operates -- Chicago, Boston, Northern
Virginia, and Washington, D.C. -- and locations where the Company will 
operate -- southeast Florida -- indicate an excellent potential for continued
high occupancy and rental rate growth in 1999 and beyond. These markets have all
experienced strong employment growth in 1998, as shown in the table below, and
are projected to be among the top U.S. markets in total employment growth over
the period 1993 to 2005, with a projected average annual increase in each market
of 45,000 jobs or more, according to projections prepared by the U.S. Dept. of
Commerce, Bureau of Economic Analysis and released in mid-1996.

Employment Growth - 1998

<TABLE>
<CAPTION>
                                     Employment     % Employment
Market                              Increase-1998     Increase
------                              -------------   ------------- 
<S>                                 <C>             <C>
Washington D.C. MSA                    53,500            2.2%
 - Northern Virginia                   41,300            4.1%
Chicago - MSA                          61,200            1.5%
Boston - MSA                           50,100            2.6%
Southeast Florida                      60,000            3.0%
 - Ft. Lauderdale/Broward              20,600            3.3%
                                                         --- 
USA Average                                              2.6% 
</TABLE>

                                       18
<PAGE>
 
     In the Washington D.C. metropolitan area, employment and population growth
in recent years, and expected in future years, has been strongest in the
Northern Virginia segment of the metropolitan area, which is the sector where
the majority (68%) of the Company's Properties are located.  The growth in
Northern Virginia is substantially attributable to continuing strong growth 
in the technology sector, particularly the Internet technology and
telecommunications segments.  The Company believes that this trend will continue
due to the concentration of technology firms in Northern Virginia and the growth
outlook for the Internet technology and telecommunications industries.  The
outlook for the District of Columbia economy has improved  significantly due to
the return to positive employment growth late in 1998 after several years of
federal government cutbacks and the election of a new mayor.

     Demand for multifamily rental apartments continues to be strong in all of
the Company's markets as evidenced by high occupancy and rent growth rates.
Surveys of comparable investment grade apartment properties are conducted in
each these markets annually by The REIS Reports, Inc. The results of these
surveys are shown in the following tables:

Apartment Occupancy and Rental Rate Growth for Smith Residential Markets

<TABLE>
<CAPTION>
Metro area market                       Occupancy       % Rental Rate Growth
------------------                 -------------------  ---------------------
<S>                               <C>         <C>       <C>          <C> 
                                   1997        1998        1997        1998
                                   ----        ----        ----        ----
Boston                             97.6%       98.0%        5.7%        6.7%
                                                                       
Chicago                            97.2%       97.3%        4.7%        3.0%
- Downtown                         97.0%       97.2%        5.5%        7.0%
                                                                       
Washington D.C. area                                                   
- Northern Virginia                96.2%       96.6%        3.5%        3.5%
- Washington D.C.                  96.9%       97.0%        3.4%        4.7%
                                
Southeast Florida             
- Fort Lauderdale                  96.1%       96.1%        4.0%        3.6%
</TABLE>
-------------------------
Source: The REIS Reports, Inc., February, 1999, and Appraisal Research Corp.,
March 1999


     The supply of new rental apartment properties in the more urbanized
portions of the Company's markets has been extremely limited in recent years,
particularly in the more desirable submarkets where the Company concentrates its
focus. In the Washington metro area the supply of new multifamily properties has
been increasing moderately over the past several years and is likely to continue
to do so based on multifamily permits data compiled by the U.S. Census Bureau.
These data show that the number of multifamily permits issued in the area were,
7,786 in 1996, 6,907 in 1997, and 8,935 in 1998, which includes both for-sale
condominium and rental apartment properties. These levels remain well below the
peak of over 13,000 in 1987. Most of the new supply of rental apartments is
occurring in the outer suburban areas and does not compete directly with the
Company's properties, which are predominantly in the vicinity of and within
Interstate 495, the 

                                       19
<PAGE>
 
Capital Beltway. Downtown Chicago has actually experienced a net decrease in
higher end rental apartments in recent years due to condo conversions, and the
Company's 809-unit Superior Place property is currently the only new apartment
property under construction in the downtown area.

     Overall, the Company believes that the anticipated increases in employment
and population projected for the Boston, Chicago, Northern Virginia, Washington
D.C. and southeast Florida markets, together with limited increases in supply of
new rental units in locations competitive with the Company's properties, will
result in the Company's multifamily rental submarkets remaining in a strong
occupancy position for at least the next 18-24 months.  As a result, the Company
believes that these conditions will provide an opportunity to improve apartment
rent levels, and will also allow additional development and acquisition
opportunities.

Mortgage Financing

     As of  December 31, 1998, 30 of the 54 Properties were subject to Mortgage
Loans aggregating approximately $592,386,000. The Mortgage Loans are
collateralized by first lien mortgages or deeds of trust on Properties organized
into three pools ("Mortgage Pool Three," "FNMA" and "Prudential" as shown in the
chart below) and ten individual loans (the "Individual Mortgages").  The
Mortgage Loans bear interest at a weighted average interest rate of 7.1% at
December 31, 1998. The Properties collateralizing each Mortgage Loan, the
outstanding principal balances as of December 31, 1998, the applicable interest
rates, and the maturity dates for each Mortgage Loan are set forth in the chart
below.

                                       20
<PAGE>
 
<TABLE>
                                                     12/31/98                            
Mortgage Pool/                                       Outstanding      Interest       Maturity
Collateral                        Location           Principal          Rate         Date
------------------------------------------------------------------------------------------------------- 
                                                      (000's)                
<S>                        <C>                       <C>                <C>           <C>  
FNMA                                                  $ 140,000         6.75%        October 30, 2013 (2)
-------------------------                                             
  Bedford Village          Fairfax County, Virginia                   
  Car Barn                 Washington, D.C.                           
  Concord Village          Arlington, Virginia                        
  Crystal Place            Arlington, Virginia                        
  Crystal Square           Arlington, Virginia                        
  Arlington Overlook (1)   Arlington, Virginia                        
  Fort Chaplin             Washington, D.C.                           
  Newport III (1)          Alexandria, Virginia                       
  Orleans Village          Fairfax County, Virginia                   
                                                                      
Mortgage Pool Three                                     117,000         7.99%        June 30, 2009 (3)
-------------------------                                             
  Berkeley                 Arlington, Virginia                        
  Calvert Woodley          Washington, D.C.                           
  Cleveland House          Washington, D.C.                           
  Columbia Crossing        Arlington, Virginia                        
  Courthouse Plaza         Arlington, Virginia                        
  Gateway Place            Arlington, Virginia                        
  Newport I/II (1)         Alexandria, Virginia                       
  Skyline Mall             Fairfax County, Virginia                   
  2501 Porter Street       Washington, D.C.                           
                                                                      
Prudential                                               53,000         6.88%        June 5, 2008 (2)
-------------------------                                             
  Waterpark                Arlington, Virginia                        
  Parc Vista               Arlington, Virginia                        
                                                                      
Individual Mortgages                                                  
-------------------------                                             
   1841 Columbia Road      Washington, D.C.               3,173          9.00%       August 1, 1999 (6)
   Crystal Towers          Arlington, Virginia           44,198          7.16%       January 1, 2006 (6)
   2000 Commonwealth       Boston, Massachusetts         17,100          6.30%       December 3, 2006 (2)
   Connecticut Heights     Washington, D.C.              20,000          7.10%       March 18, 2008 (2)
   Cronin's Landing        Boston, Massachusetts         33,208          6.90%       March 1, 2009 (7)
   Patriot Village         Fairfax County, Virginia      31,095          8.24%       August 1, 2009 (4)
   Crystal Plaza           Arlington, Virginia           33,615          6.86%       November 1, 2009 (6)
   Crystal House I / II    Arlington, Virginia           38,250          6.29%       December 30, 2010 (5)
   Skyline Towers          Fairfax County, Virginia      49,300          6.45%       December 10, 2010 (5)
   The Bennington          Arlington, Virginia           12,447          7.50%       October 1, 2020 (7)
                                                      ---------          ----
                                                                      
                                                      $ 592,386          7.10%
                                                      =========          ==== 
------------------------------------------------------------------------------------------------------
</TABLE> 
(1) Operated as a single property, but divided for collateralization purposes.
(2) Interest only.
(3) Twenty-five year amortization begins June 30, 1999.
(4) Thirty-year amortization begins in August 2004.
(5) Thirty-year amortization begins in December 2008.
(6) Thirty-year amortization.
(7) Twenty-five year amortization.
    The loan secured by Mortgage Pool Three is interest only through June 30,
1999, at which time amortization begins using a 25-year amortization schedule
with a balloon payment at maturity. In addition, this loan may not be prepaid
until May 1, 1999, at which time it would be subject to a yield maintenance
premium. The loan is cross-collateralized with the $83 million line of credit
from 

                                       21
<PAGE>
 
the same lender, as described below. Certain predecessor partners executed
guarantees for $42 million of the mortgage loans secured by Mortgage Pool Three.

    The Company announced a standby credit facility in 1998 of up to 
$300 million with Fannie Mae which provides for non-recourse, long-term debt for
up to fifteen years. The initial draw on this facility was $140 million at 6.75%
for fifteen years. The bulk of the proceeds were used to retire Mortgage Pool
Two of $125.2 million and the associated prepayment penalty of $9.5 million.
Terms and rates of subsequent draws on this facility will be determined at the
time of use. Closing of the facility is expected during the second quarter of
1999.

    During 1998, the Company obtained a $53 million, ten year secured loan from
Prudential at a fixed coupon rate of 6.88%. The loan is secured by two
Multifamily Properties. In conjunction with this loan, the Company terminated a
$20 million (notional value) treasury lock contract at a gain of $0.4 million
which will be amortized over the term of the new loan.

    The Individual Mortgages relate to debt secured by  individual Multifamily
Properties.  The loans  require monthly payments of interest and, in certain
cases, principal. The loan secured by Patriot Village was refinanced in
September 1996 and was obtained jointly with a ground lessor, with a portion of
the principal allocated to each of them.  The ground lessor has been allocated
$9.9 million of the refinanced loan (of the total of $41.0  million outstanding
as of December 31, 1998), for which the Operating Partnership is contingently
liable.  The loan requires the payment of interest only through August 2004, at
which time amortization begins using a 30-year amortization schedule with a
balloon payment due in August 2009.  The Company remits full debt service to the
lender and reduces its ground rent payment by the corresponding amount of debt
service relating to the principal assigned to the ground lessor.

Lines of Credit

    The Company terminated its $100 million line of credit in 1998 and entered
into two new unsecured lines of credit -- a $100 million line and a $185 million
line --  with PNC Bank, NationsBank, and U.S. Bank, as agents, which mature in
March 2001.  Draws upon the new lines are subject to certain unencumbered asset
requirements and bear interest at a selected London Interbank Offer Rate (LIBOR)
plus 75 to 120 basis points based on the leverage ratio of the Company.  As of
December 31, 1998, the weighted average interest rate on outstanding draws was
6.22%.  If the Company receives an investment grade rating on its unsecured
debt, the interest rate will decrease to 60 to 90 basis points over LIBOR based
on the rating.  The Company pays a fee of 0.20% on the full amount available
under the lines of credit.  The line of credit agreements contain certain
restrictive covenants, including maintenance of minimum equity value, debt to
equity ratios and debt service coverage requirements.  The maximum amounts
outstanding during 1998 and 1997 were $251.5 million and $97.0 million,
respectively.

    The Company also has an $83 million acquisition credit facility which allows
for debt maturities up through July 2004.  The line of credit provides for an
interest rate that is fixed at the 

                                       22
<PAGE>
 
time of each borrowing at 150 basis points over 10-year Treasury Bills and is
cross-collateralized with Mortgage Pool Three. Debt outstanding of $30 million
at December 31, 1998 bears interest at a weighted-average fixed rate of 7.27%
and is collateralized by two Properties. The agreement contains certain
restrictive covenants including a limit on debt to asset value and maintenance
of debt service coverage ratios. In February 1999, the unused portion, or 
$53 million, of the line expired.

Construction Loans

    In October 1997, the Company obtained a variable rate, unsecured
construction loan of $46.3 million to finance the construction of an acquired
development property.  The loan is recourse to the Operating Partnership, bears
interest at LIBOR plus 130 basis point (6.85% at December 31, 1998), and matures
in October 2000 with three six-month extension options based on certain
conditions. The loan balance at December 31, 1998 was $31.6 million.

    During 1998, the Company obtained a $90 million variable rate, secured
construction loan in connection with the development of One Superior Place in
Chicago, Illinois, with interest currently at LIBOR plus 135 basis points (6.93%
at December 31, 1998), payable monthly, due July 1, 2001. At the Company's
option, maturity may be extended for two one-year periods based on certain
conditions.  The loan is collateralized by the property and is recourse to the
Operating Partnership. The loan balance at December 31, 1998 was $31.6 million.
 
Item 3.   Legal Proceedings.

    The Company and/or the Property Service Businesses are presently subject to
legal actions or claims for damages that arise in the ordinary course of
business.  In the opinion of management and counsel to the Company, the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's financial  position, results of operations or cash flows.


Item 4.   Submission of Matters to a Vote of Security Holders.

    None.

                                       23
<PAGE>
 
                                    Part II

Item 5.   Market for Registrant's Common Equity and Related Shareholder
          Matters.

    The Company's shares of Common Stock have been listed on the New York Stock
Exchange ("NYSE") since June 24, 1994, trading under the symbol "SRW." Prior to
that date, the Company's shares of Common Stock were not publicly traded.

                                       24
<PAGE>

    In December 1998, the Company adopted a Shareholder Rights Plan (the "Rights
Plan") in which certain stock purchase rights were granted as a distribution to
holders of common stock. The Rights Plan is designed to deter coercive or unfair
takeover tactics. In implementing the Rights Plan, the Board of Directors
declared a distribution of one Right for each share of the Company's outstanding
common stock. Each Right initially entitles the holder thereof to purchase one
one-thousandth of a share of preferred stock for $108. One one-thousandth of a
share of preferred stock is intended to be approximately the economic equivalent
of one share of common stock. The Rights expire on December 13, 2008. At the
time of adoption of the Rights Plan, the Rights are neither exercisable nor
traded separately from the common stock. The Rights are exercisable only if a
person or group in the future becomes the beneficial owner of 15% or more of the
common stock or announces a tender or exchange offer which would result in its
ownership of 15% or more of the common stock.

    The following table sets forth the high and low closing sale prices for the
shares of Common Stock for the periods indicated as reported by the New York
Stock Exchange Composite Tape, and the dividends paid by the Company with
respect to each such period:

<TABLE>
<CAPTION>
                                                           Dividend
Period                                    High      Low    Per Share
------                                    ----    -------  ---------
<S>                                      <C>      <C>      <C>
January 1, 1997, to March 31, 1997       $29.000  $27.125     $0.505
April 1, 1997, to June 30, 1997          $28.750  $26.125     $0.505
July 1, 1997, to September 30, 1997      $34.000  $28.625     $0.520
October 1, 1997, to December 31, 1997    $35.625  $33.000     $0.520
 
January 1, 1998, to March 31, 1998       $35.625  $29.750     $0.520
April 1, 1998, to June 30, 1998          $33.500  $31.000     $0.520
July 1, 1998, to September 30, 1998      $33.938  $29.125     $0.535
October 1, 1998, to December 31, 1998    $32.125  $28.500     $0.535
</TABLE>

On March 1, 1999, the last reported sale price of the shares of Common Stock 
on the NYSE was $29.375.  On March 1, 1999, the Company had approximately 
500 shareholders of record.

                                       25
<PAGE>
 
Item 6.   Selected Financial Data.

     The following table sets forth selected financial and operating information
on a historical basis for the Company and the Predecessor (as hereinafter
defined in the Notes to Consolidated Financial Statements). The following
information should be read in conjunction with all of the financial statements
and notes thereto included elsewhere in this Form 10-K. The historical operating
data for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 have been
derived from the financial statements of the Company and the Predecessor audited
by Arthur Andersen LLP, independent accountants.

                                       26
<PAGE>
 

Charles E. Smith Residential Realty, Inc. and CES Group
Selected Financial Data

<TABLE>
<CAPTION>
                                                              Charles E. Smith Residential Realty, Inc.               CES Group
                                                           ------------------------------------------------------  ----------------
                                                                       Year Ended December 31,      June 30, 1994 
(Dollars in Thousands, Except Per Unit/Share Data)         ------------------------------------------ December 31,  January 1, 1994 
                                                                1998       1997     1996       1995        1994     to June 29, 1994
                                                           ------------------------------------------------------   --------------- 
<S>                                                           <C>      <C>      <C>        <C>        <C>             <C>
OPERATING DATA
     Rental properties
         Revenues                                            $  250,211 $ 200,104 $163,959  $143,464    $ 66,683       $ 63,496
         Expenses                                               130,593   104,493   89,156    78,514      36,571         36,039
     Equity in income of Property Service Businesses              8,433     7,597    7,846     6,868       3,785          2,798
     Corporate general & administrative expenses                  8,947     6,563    5,255     4,768       2,089          1,550
     Interest income                                              1,257     1,063    1,029     1,424         825            970
     Interest expense                                            47,334    45,411   43,606    37,421      17,392         24,798
     Income/(loss)  before gain on sale, loss on unused                                                                 
         treasury lock, and extraordinary item                   73,027    52,297   34,817    31,053      15,241        (10,700)  
     Net income/(loss) of the Operating Partnership              69,870    52,210   34,817    31,053      15,241        (25,895) 
                                                             ---------------------------------------------------        ------- 
     Net income attributable to common shareholders (1)      $   30,407 $  24,712 $ 10,977  $  7,529    $  6,532           
                                                             ---------------------------------------------------   
     Earnings per common share - basic                       $     1.86 $    1.87 $   1.11  $   0.81    $   0.72           
     Earnings per common share - diluted                     $     1.85 $    1.86 $   1.11  $   0.81    $   0.72               
                                                                
OTHER DATA

      Funds from Operations (2):

     Net income of the Operating Partnership                 $   69,870 $  52,210 $ 34,817  $ 31,053    $ 15,241             
     Less                                                                                                              
         Perpetual preferred dividends                           (3,647)        -        -         -           - 
         Gain on sale of property                               (18,150)        -        -         -           -            
     Plus                                                                                                                
         Depreciation and amortization of rental property        28,958    20,666   17,931    16,258       7,738             
         Amortization of goodwill                                   250         -        -         -           -             
         Loss on unused treasury lock                             4,923         -        -         -           -            
         Extraordinary item - loss on extinguishment of debt     16,384        87        -         -           -
                                                             ---------------------------------------------------   
     Funds from Operations of the Operating                                                                           
         Partnership                                         $   98,588 $  72,963 $ 52,748  $ 47,311    $ 22,979            
                                                             =================================================== 
     Funds from Operations attributable to                                                                                
         shareholders (3)                                    $   58,034 $  37,164 $ 23,869  $ 20,391    $  9,848            
                                                                                                     
     Net cash flows provided by (used in):                                                           
         Operating activities                                $  118,566 $  75,223 $ 50,958  $ 54,283    $ 19,877
         Investing activities                                  (289,995) (196,924) (72,742)  (68,495)    (26,666)
         Financing activities                                   171,429   117,803   16,204     5,340      25,139
                                                           
                                                           
     Cash dividends per share                                $    2.095 $   2.035 $  1.975  $  1.915    $   0.48
                                                                        
     Average residential occupancy rate (4)                        96.6%     96.4%    97.0%     97.2%       97.8%
     Number of apartment units - core portfolio (5)              14,301    14,198   12,462    11,834      11,834
     Number of apartment units - total portfolio                 19,279    18,236   15,200    14,198      12,462
                                                          
BALANCE SHEET DATA                                        
     Rental properties, net (6)                              $1,093,963 $ 804,323 $470,093  $414,490    $315,213
     Total assets                                             1,185,399   865,506  522,211   469,322     391,189
     Total mortgage loans and notes payable (7)                 790,579   610,971  546,544   483,177     404,971
     Shareholders' equity/partners' (deficit) (6)               264,977   158,314  (37,379)  (31,623)    (37,520)

</TABLE>
                        
                                      27

<PAGE>
 
                     FOOTNOTES TO SELECTED FINANCIAL DATA

1.   Represents the Company's pro rata share of 58.9% in 1998, 50.9% in 1997,
     45.3% in 1996, 43.1% in 1995 and 42.9% in 1994 net of distributions in
     excess of  earnings allocated to Minority Interest.

2.   Funds from Operations (FFO) is defined by the National Association of Real
     Estate Investment Trusts (NAREIT) as  net income (loss) (computed in
     accordance with generally accepted accounting principles) excluding gains
     (or losses) from debt restructuring and other non-recurring items, plus
     depreciation/amortization of assets unique to the real estate industry.
     Depreciation/amortization of assets not unique to the industry, such as
     amortization of deferred financing costs and non-real estate assets, is not
     added back. FFO does not represent cash flow from operating activities in
     accordance with generally accepted accounting principles (which, unlike
     Funds from Operations, generally reflects all cash effects of transactions
     and other events in the determination of net income) and should not be
     considered an alternative to net income as an indication of the Company's
     performance or to cash flow as a measure of liquidity or ability to make
     distributions. The Company considers FFO a meaningful, additional measure
     of operating performance because it primarily excludes the assumption that
     the value of real estate assets diminishes predictably over time, and
     because industry analysts have accepted it as a performance measure.
     Comparison of the Company's presentation of FFO, using the NAREIT
     definition, to similarly titled measures for other REITs may not
     necessarily be meaningful due to possible differences in the application of
     the NAREIT definition used by such REITs.

3.   Represents the Company's pro rata share of 58.9% in 1998,  50.9% in 1997,
     45.3% in 1996, 43.1% in 1995, and 42.9% in 1994.

4.   Average occupancy is defined as gross potential rent for the core portfolio
     less vacancy allowance divided by gross potential rent for the period,
     expressed as a percentage.

5.   Core portfolio represents properties owned or stabilized by the Company as
     of December 31 two years prior to the current reporting date.

6.   At the formation of the Company, all rental properties were recorded at
     predecessor partners' historical cost basis which is significantly less
     than current value and, therefore,  results in dilution of  shareholders'
     book value. Shareholders' equity for each year presented is net of
     $(244,208) contribution by Predecessors of assets at historical cost, net
     of  liabilities.

7.   Represents mortgage loans, lines of credit and construction loans.

                                       28

<PAGE>
 
Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

BACKGROUND

     The following discussion compares historical results of operations for the
years ended December 31, 1998 and 1997 as well as the years ended December 31,
1997 and 1996.  The discussion should be read in conjunction with the "Selected
Financial Data," and the financial statements and notes thereto included
elsewhere in this annual report.

THE COMPANY

     Charles E. Smith Residential Realty, Inc. is a public equity real estate
investment trust ("REIT") that is engaged primarily in the acquisition,
development, management and operation of multifamily properties. Together with
its subsidiaries, the Company is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing, leasing and
property management expertise. The Company is structured as an umbrella
partnership REIT, under which all property ownership and business operations are
conducted through Charles E. Smith Residential Realty L. P. (the "Operating
Partnership") and its subsidiaries. The Company is the sole general partner of
the Operating Partnership.

     On June 30, 1994, the Company raised net equity of approximately 
$201.4 million through an initial public offering and a private placement 
(the "Offerings") of approximately 9.0 million common shares, including the
subsequent exercise of the underwriters' over-allotment option. The Company used
the proceeds to purchase a proportionate limited partnership interest in the
Operating Partnership, which is the successor entity of the CES Group.
Simultaneous with the Offerings, the Operating Partnership, through financing
partnerships, issued mortgage debt secured by certain properties.

     As of December 31, 1998, the Company, through the Operating Partnership and
its subsidiaries, owned 48 operating multifamily properties, four multifamily
properties under construction and two retail shopping centers (collectively, the
"Properties").   Three of the properties are located in Chicago, Illinois and
two are located in Boston, Massachusetts; all other properties are located in
the Washington, D.C. metropolitan area. The Company also had conditional
agreements to purchase four additional to-be-constructed multifamily properties.

                                       29
<PAGE>
 
     The operating multifamily properties consist of the following:

<TABLE>
<CAPTION>
                                              Number of    
                                         ------------------
                         Type            Properties  Units 
                -----------------------  ----------  ------
                <S>                      <C>         <C>    
                                                           
                Core Portfolio                             
                 High-Rise/Mid-Rise          23       7,587 
                 Garden                      14       6,714
                                         ----------  ------
                                             37      14,301
                                         ----------  ------
                Acquisition Portfolio                      
                 High-Rise/Mid-Rise          10       4,811
                 Garden                       1         167
                                         ----------  ------
                                             11       4,978
                                         ----------  ------
                                             48      19,279
                                         ==========  ====== 
</TABLE>

    The Company's two free standing retail properties are enclosed malls
containing a total of approximately 436,000 square feet of retail space.

    Additionally, the Operating Partnership owned substantially all the equity
in the following entities (collectively, the "Property Service Businesses")
which provide a range of services to the owned Properties, essentially at cost
(including overhead), and for a fee to other properties including commercial
office partnerships which have Messrs. Smith and Kogod as the general partners
("Affiliates"):

    .  Multifamily and Retail Property Management Services provides property
       management and leasing services to multifamily and retail properties. In
       addition, this entity leases furnished corporate apartments through a
       subsidiary.

    .  Interior Construction and Renovation Services provides construction and
       project management services for capital improvement and tenant renovation
       projects of office, retail and residential properties.

    .  Engineering and Technical Services provides on-site building systems
       operations and maintenance; engineering and technical consulting;
       automated environmental monitoring and controls; repair and replacement
       of mechanical/electrical systems; and facilities management services.

    .  Financing Services provides negotiation, administration and execution of
       debt refinancing.

                                       30
<PAGE>
 
RENTAL PROPERTIES

    Revenue, expenses and income from the multifamily and retail properties were
as follows (in thousands):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,                          
                                          -------------------------------------------
                                              1998            1997/(2)/      1996/(2)/        
                                          -----------     -----------     ----------- 
<S>                                       <C>             <C>             <C>        
Multifamily Properties - Core/(1)/                                        
  Revenues                                 $ 166,465      $  158,785      $   147,522   
  Expenses                                   (67,070)        (66,264)         (63,386)
                                           ---------      ----------      -----------
  Income before depreciation               $  99,395      $   92,521      $    84,136
                                           =========      ==========      ===========
Multifamily Properties -                                                  
  Acquisitions/Dispositions                                               
  Revenues                                 $  72,499      $   31,277      $     6,639
  Expenses                                   (30,061)        (13,896)          (4,308)
                                           ---------      ----------      -----------
  Income before depreciation               $  42,438      $   17,381      $     2,331
                                           =========      ==========      ===========
Multifamily Properties - Development                                      
  Revenues                                 $   1,258      $      ---      $       ---
  Expenses                                    (1,300)            (97)             ---
                                           ---------      ----------      -----------
  Income before depreciation               $     (42)     $      (97)     $       ---
                                           =========      ==========      ===========
Retail Properties                                                         
  Revenues                                 $   9,989      $   10,042      $     9,798
  Expenses                                    (3,204)         (3,570)          (3,531)
                                           ---------      ----------      -----------
  Income before depreciation               $   6,785      $    6,472      $     6,267
                                           =========      ==========      ===========
Total Rental Properties                                                   
  Revenues                                 $ 250,211      $  200,104      $   163,959
  Expenses                                  (101,635)        (83,827)         (71,225)
  Depreciation                               (28,958)        (20,666)         (17,931)
                                           ---------      ----------      -----------
Income from Rental Properties              $ 119,618      $   95,611      $    74,803
                                           =========      ==========      ===========
</TABLE> 
/(1)/ "Core" represents properties owned as of December 31, 1996.
/(2)/ Certain prior year balances have been reclassified to conform with current
      year presentation.

Occupancy Rates

   Average occupancy of the Company's core multifamily properties in the
Washington, D.C. metropolitan area, where over 90% of the Company's portfolio is
located, is consistent with the area's market-wide average occupancy, based on
annual surveys of approximately 80% of comparable investment grade apartment
properties conducted by The REIS Reports, Inc. as follows:

<TABLE>
<CAPTION>
                                     Occupancy Percent             
                         -------------------------------------------
                              Company            Washington DC Area
                         ------------------      -------------------
        <S>              <C>                     <C>               
                                                                   
         1998                 96.6%                   97.0%        
         1997                 96.4%                   96.4%        
         1996                 97.0%                   96.5%         
</TABLE>

                                       31
<PAGE>
 
  It is important to note that market data from The REIS Reports, Inc. is
determined on a physical occupancy basis, whereas the Company's occupancy data
is calculated on an economic basis. Physical occupancy data commonly yields a
slightly higher percentage than economic occupancy because apartment units are
considered physically rented when a rental applicant's deposit is received, a
point in time generally prior to the actual rent commencement date used in
computing economic occupancy.

Rental Revenue

  Average revenue per apartment unit for the Company's core multifamily
properties increased approximately 4.8% in 1998 as compared with 1997, and 3.5%
in 1997 (based on properties owned as of December 31, 1995) as compared with
1996.

  A schedule of portfolio statistics follows:

                                       32
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
--------------------------------------------------------------------------------
    Residential  Portfolio  Statistics for the Year Ended December 31, 1998

<TABLE>
<CAPTION>


                                              Number of        Average       Monthly       Average
                                Property      Apartment        Sq. Ft.       Revenue       Economic
Property Type/Property Name       Type          Units          Per Unit      Per Unit      Occupancy
----------------------------   -----------    ----------     ----------    ----------     ----------   
<S>                            <C>            <C>            <C>            <C>            <C>         
 
Core Residential Portfolio
 
NW Washington, D.C.
  1841 Columbia Road            High-rise        115              634        $   955        99.0%  
  2501 Porter Street            High-rise        202              760          1,472        97.5%
  Albemarle                     High-rise        235            1,097          1,226        98.9%  
  Calvert-Woodley               High-rise        136            1,001          1,169        99.0%
  Cleveland House               High-rise        216              894          1,138        99.2%  
  Connecticut Heights           High-rise        519              536            889        95.6%
  Corcoran House                High-rise        138              464            832        99.2%
  Statesman                     High-rise        281              593            798        97.7%
  Van Ness South                High-rise        625              956          1,109        98.7%
                                             -------           ------        -------      ------
                                               2,467              778          1,051        98.0%
Other NE & SE Washington, D.C.
  Car Barn                       Garden          196            1,311            888        96.6%
  Fort Chaplin                   Garden          549              983            673        98.2%              
                                             -------           ------        -------      ------
                                                 745            1,069            729        97.6%

Other Northern Virginia -
  Inside Beltway
 
  Crystal City
  ------------
  The Bennington                High-rise        348              804          1,059        96.0%  
  Crystal House I               High-rise        426              917          1,010        97.2%  
  Crystal House II              High-rise        402              938            987        96.6%
  Crystal Square                High-rise        378            1,121          1,179        99.0%
  Crystal Place                 High-rise        180              894          1,310        97.7%
  Gateway Place                 High-rise        162              826          1,792        94.7%
  Water Park Towers             High-rise        360              881          1,436        92.9%
                                             -------         --------      ---------     -------
                                               2,256              923          1,190        96.2%
  Rosslyn/Ballston                                                                     
  ----------------                                                                     
  Courthouse Plaza              High-rise        396              772          1,299        96.9%
                                                                                       
  Other                                                                                
  -----                                                                                
  Arlington Overlook            Mid-rise         711              877            780        95.6%
  Bedford Village                Garden          752            1,070            914        95.0%
  Berkeley                      Mid-rise         138              891            744        97.4%  
  Boulevard of Old Town          Garden          159              603            934        98.3%
  Columbia Crossing              Garden          247              976          1,122        95.8%
  Columbian Stratford           Mid-rise         227              942            767        97.8%  
  Concord Village                Garden          531            1,025            820        95.4%
  Newport Village                Garden          937            1,115            911        97.1%
  Orleans Village                Garden          851            1,061            828        94.6%  
  Patriot Village                Garden        1,065            1,162            915        96.6%
  Skyline Towers                High-rise        940            1,221            988        95.5%
  Windsor Towers                 Mid-rise        280            1,025            812        98.0%
                                             -------         --------      ---------     -------      
                                               6,838            1,063            887        96.0%
Other Northern Virginia -                                                              
 Outside Beltway                                                                       
  Charter Oak                    Garden          262            1,097            956        96.8%
  Oaks of Tysons                 Garden          218              968          1,047        97.2%
  Potomac View                   Garden          192              965            791        97.8%
  Westerly at Worldgate          Garden          320              921          1,120        95.5%              
                                             -------         --------       --------     -------
                                                 992              986            997        96.6%
                                             -------         --------       --------     -------
Suburban Maryland                                                                      
  The Manor                      Garden          435              999            774        96.9%  
  Suburban Tower                High-rise        172              677            830        98.1%                      
                                             -------         --------       --------     -------
                                                 607              908            790        97.2%
                                             -------         --------       --------     -------
     Subtotal/Average                         14,301              972        $   970        96.6%
                                             -------         --------       --------     -------
</TABLE> 

                                       33
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                         Number of       Average      Monthly       Average
                                          Property       Apartment       Sq. Ft.      Revenue      Economic
Property Type/Property Name                 Type           Units        Per Unit      Per Unit     Occupancy
---------------------------              -----------    ----------     ----------    ----------    ----------    
<S>                                       <C>            <C>            <C>            <C>            <C>         
Acquisition Portfolio
 The Kenmore (NW Washington, D.C.)        High-rise         376             725          756           97.8%
 Crystal Plaza (Crystal City)             High-rise         540           1,129        1,254           98.4%
 Crystal Towers (Crystal City)            High-rise         912           1,107        1,139           97.5%
 Lincoln Towers (Rosslyn/Ballston)        High-rise         714             879        1,276           93.5%
 2000 Commonwealth (Boston)               High-rise         188             878        1,649           96.2%
 One East Delaware (Chicago)              High-rise         306             704        1,886           98.0%
 Tunlaw Gardens (NW Washington, D.C.)       Garden          167             850          767           97.0%
 Tunlaw Park (NW Washington, D.C.)        Mid-rise          120             856        1,105           97.8%
 Parc Vista (Crystal City)                High-rise         299             770          n/a            n/a   
 McClurg Court (Chicago)                  High-rise       1,075             688          n/a            n/a
 Cronin's Landing (Boston)                Mid-rise          281           1,129          n/a            n/a 
                                                        -------        --------      -------       --------   
     Sub-Total/Average                                    4,978             890          n/a            n/a
                                                        -------        --------      -------       --------   
 
Development Portfolio
 Springfield Station (Other Northern
  Virginia)                               Mid-rise          631
                                           /Garden
 Courthouse Place (Rosslyn/Ballston)      High-rise         564
 One Superior Place (Chicago)             High-rise         809
 Park Connecticut (NW Washington, D.C.)   High-rise         142
                                                        -------
  Sub-Total                                               2,146
                                                        -------
 
All Residential Properties                               21,425
                                                        =======
</TABLE> 
   
   

                                       34
<PAGE>
 
PROPERTY SERVICE BUSINESSES

     Revenues, expenses and income from the Property Service Businesses were as
follows (in thousands):
<TABLE>
<CAPTION>
 
                                            Year Ended December 31,
                                        -------------------------------
                                          1998       1997       1996
                                        ---------  ---------  ---------
<S>                                     <C>        <C>        <C>
Multifamily and Retail Property
  Management Services/(1)/
  Revenues                              $ 28,412   $ 10,546   $ 11,465
  Expenses                               (26,441)    (9,756)    (9,169)
                                        --------   --------   --------
  Income before depreciation            $  1,971   $    790   $  2,296
                                        ========   ========   ========
 
Interior Construction and Renovation
  Services
  Net fee revenues                      $  8,267   $  6,614   $  5,650
  Expenses                                (6,441)    (5,547)    (4,670)
                                        --------   --------   --------
 
  Income before depreciation            $  1,826   $  1,067   $    980
                                        ========   ========   ========
 
Engineering and Technical Services
  (including reimbursed costs)
  Revenues                              $ 67,988   $ 50,597   $ 42,179
  Expenses                               (63,811)   (46,759)   (38,516)
                                        --------   --------   --------
 
  Income before depreciation            $  4,177   $  3,838   $  3,663
                                        ========   ========   ========
 
Financing Services
  Revenues                              $  2,623   $  3,798   $  2,640
  Expenses                                  (778)      (670)      (687)
                                        --------   --------   --------
 
  Income before depreciation            $  1,845   $  3,128   $  1,953
                                        ========   ========   ========
 
Total Property Service Businesses
  Revenues                              $107,290   $ 71,555   $ 61,934
  Expenses                               (97,471)   (62,732)   (53,042)
                                        --------   --------   --------
 
  Income before depreciation               9,819      8,823      8,892
  Depreciation                            (1,386)    (1,226)    (1,046)
                                        --------   --------   --------
  Income from Property
  Service Businesses                    $  8,433   $  7,597   $  7,846
                                        ========   ========   ========
</TABLE>
/(1)/Includes May 1998 purchase of Presidential Villas.

                                       35
<PAGE>
 
  Multifamily and Retail Property Management Services provide management
services to the Operating Partnership at cost plus 5% in accordance with the
management agreement. In addition to 50 owned Properties (operating Multifamily
and Retail), management services were also provided to 13 third-party owned
multifamily properties of approximately 3,800 apartment units and to three
third-party owned retail properties of approximately 293,000 square feet. Of the
16 third-party management agreements, eleven are with Affiliates and five are
with unaffiliated property owners. The management agreements with Affiliates are
for initial terms of three years or more while the management agreements with
unaffiliated owners generally have one-year terms.

  During 1998, Multifamily and Retail Property Management Services expanded the
corporate apartment program as a result of the acquisition by Smith Realty
Company of Noel Enterprises, Inc. ( d.b.a. "Presidential Villas"), a provider of
furnished corporate apartments in Chicago, Illinois.  A portion of the total
purchase price of $8.5 million is contingent upon achievement by Presidential
Villas of certain earnings targets over the next two years.  The Operating
Partnership lent to Smith Realty Company the initial payment of $6.75 million in
exchange for a five year note.

  Interior Construction and Renovation Services provided oversight to
approximately $80 million of gross construction activity in 1998 compared to
approximately $66 million in 1997 and $58 million in 1996. Services are provided
to the Operating Partnership at cost and to Affiliates and third parties at cost
plus a fee.

  Engineering and Technical Services provides on-site building systems
operations, maintenance and inspection to the Operating Partnership and
Affiliates at cost and to third parties at cost plus a fee. Services were
provided to approximately 46 million square feet of facilities in 1998, 30
million square feet in 1997, and 28 million square feet in 1996.

  Financing Services performed $335 million of refinancings in 1998 compared to
$489 million in 1997 and $242 million in 1996.


RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998

Comparison to Year Ended December 31, 1997

  Summary.  Net income of the Operating Partnership increased 33.8%, or 
$17.7 million, from $52.2 million for the year ended December 31, 1997 to 
$69.9 million for the year ended December 31, 1998. Funds from Operations
("FFO") of the Operating Partnership increased $25.6 million, or 35.1% during
the same period. Net income of the Company increased from $24.7 million, or
$1.87 per basic common share ($1.86 per diluted common share), for the year
ended December 31, 1997 to $30.4 million, or $1.86 per basic common share 
($1.85 per diluted common share), for the year ended December 31, 1998. The
Company's FFO for 1998 was $58.0 million, a 56.2% increase over the Company's
FFO for 1997. The increase in both net income and FFO is due to increases in
income from the rental properties, primarily the multifamily acquisition and
development properties. These increases were partially offset by higher interest
and other expenses related to acquisitions and

                                       36
<PAGE>
 
development. The decrease in net income per share is attributable to the loss on
an unused treasury lock and extraordinary losses associated with extinguishment
of debt.

  Rental Properties.  Revenue from rental properties increased $50.1 million, or
25.0%, from $200.1 million for 1997 to $250.2 million for 1998. Expenses
(including depreciation) from all rental operations increased $26.1 million, or
25.0%, from $104.5 million in 1997 to $130.6 million in 1998.

  Core Portfolio.  Revenue from the core portfolio increased $7.7 million, or
4.8% over the prior year due to rent increases in all submarkets, slightly
improved occupancy and additional cable and telephone revenues.  Average monthly
revenue per core apartment unit increased from $925 in 1997  to $970 per month
during 1998. Revenue growth by submarket over 1997 ranged from 3.7% in the
Maryland properties to 6.5% in northwest Washington, D.C.  Average economic
occupancy for the portfolio increased to 96.6% in 1998 from 96.5% in 1997. The
Company also continues to expand and aggressively market its furnished apartment
program. As a result, revenues from this program increased $0.4 million, or
19.4%, over the prior year period.  Operating expenses on the core portfolio
increased 1.2% over the prior year.  This was primarily due to higher personnel
costs (including outsourcing) and real estate tax expenses partially offset by
utility savings and lower repair and maintenance costs both related to a mild
winter.

  Operating margins of the Company's core portfolio of approximately 60% and 58%
for the years ended December 31, 1998 and 1997, respectively, are generally
lower in comparison to industry averages due primarily to the Company's method
of recovering utility costs.  Apartment rents, for the most part, include
utility services such as electricity and gas since the Company bears utility
costs. The majority of the Company's competitors, however, require their tenants
to pay utilities directly. Management estimates that the Company's operating
margins would be approximately 63% on a comparable basis.

  Acquisition/Disposition Portfolio. The eleven acquisition  properties and two
disposition properties, contributed $41.2 million, or 82.3%, of the total rental
revenue increase and $16.2 million, or 90.8%, of the increase in operating
expenses resulting in a contribution to net operating income of $25.0 million.
The balance of the portfolio reflects operations of the two properties sold
during 1998 - Oxford Manor and Marbury Plaza.

  Development Portfolio.  Springfield Station delivered initial units in May
1998 and has a total of 280 units delivered as of December 31, 1998.  Estimated
completion and stabilization is expected in late 1999.  Courthouse Place
delivered 103 initial units in December 1998.  Estimated completion and
stabilization is expected by early 2000.

     Retail Portfolio.  Retail revenues decreased by $0.1 million, or 0.5%,
during 1998 compared to the prior year due primarily to the restructuring of the
Worldgate health club lease in 1997 partially offset by other rent increases.
Average occupancy at the two retail properties increased from 97.4% in 1997 to
98.4% in 1998.

  Property Service Businesses.  Income from the Property Service Businesses
increased $0.8 million, or 11.0%, during 1998 compared to 1997.

                                       37
<PAGE>
 
     Income before depreciation for Multifamily and Retail Property Management
Services increased $1.2 million, or 149.5%, primarily due to the acquisition in
the second quarter of Presidential Villas.

     Income before depreciation for Interior Construction and Renovation
Services increased $0.8 million, or 71.1%, due to an increase of $1.7 million in
net fee revenue offset by an increase of $0.9 million in related expenses. This
was due primarily to an increase in the volume of projects completed on behalf
of Affiliated commercial office property partnerships, partially offset by a
loss incurred during the first quarter of 1998 associated with cost overruns and
unrecovered owner change orders on a large outside contract. The Company is
currently pursuing an arbitration claim which may result in a partial recovery
of the loss.

     Revenue from Engineering and Technical Services increased 34.4%, or 
$17.4 million, in 1998 with a corresponding increase of $17.1 million in
expenses compared to 1997 due primarily to significant additional facilities
management contracts obtained in 1997 and 1998. Income before depreciation for
Engineering and Technical Services increased 8.8% to $4.2 million for 1998
compared to $3.8 million in 1997. The lower margin in 1998 reflects a decrease
in higher margin HVAC repair and replacement projects.

     Income before depreciation for Financing Services decreased $1.3 million,
or 41.0%, due primarily to an unusually high level of fees in 1997 in connection
with the roll-up of Affiliated commercial properties into a single partnership -
Charles E. Smith Commercial Realty L.P. ("CESCR"). At the formation of CESCR,
the Company entered into a 14-month agreement to continue providing financing
services through December 31, 1998 for certain properties owned by CESCR. The
1998 fees were earned in connection with debt refinancings arranged for
properties owned or managed by CESCR. Fees on properties owned by CESCR were
earned in accordance with the Company's agreement while fees on properties
managed by CESCR were separately negotiated. Management does not expect any
significant future income from Financing Services.

     Other.  Corporate general and administrative expenses increased by 
$2.4 million, or 36.3%, due primarily to additional personnel added in mid-1997
to expand the Company's acquisition and development program and write-offs of
capitalized costs on terminated acquisition and development projects. Interest
expense increased by $1.9 million, or 4.2%, primarily due to financing of
acquisition and development activities.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997

Comparison to Year Ended December 31, 1996

     Summary. Net income of the Operating Partnership increased 50.0%, or 
$17.4 million, from $34.8 million for the year ended December 31, 1996 to 
$52.2 million for the year ended December 31, 1997. Funds from Operations of the
Operating Partnership increased $20.2 million, or 38.3%, during the same period.
Net income of the Company increased from $11.0 million, or $1.11 per basic and
diluted common share, for the year ended December 31, 1996 to $24.7 million, or
$1.87 per basic common share ($1.86 per diluted common share), for the year
ended December 31, 1997. The Company's FFO for 1997 was $37.2 million, a 55.7%
increase over the Company's FFO

                                       38
<PAGE>
 
for 1996. The increase in both net income and FFO is due to increases in income
from the rental properties, primarily the multifamily acquisition and
development properties. These increases were partially offset by higher interest
and expenses related to acquisitions and development.

     Rental Properties. Revenue from rental properties increased $36.1 million,
or 22.0%, from $164.0 million for 1996 to $200.1 million for 1997. Expenses from
rental properties (including depreciation) increased $15.3 million, or 17.2%,
from $89.2 million in 1996 to $104.5 million in 1997.

     1997 Core Portfolio.  Revenue from the 1997 core portfolio (based on
properties owned as of December 31, 1995) increased $5.2 million, or 3.5%, from
$148.2 million in 1996 to $153.4 in 1997.  Based on the 1998 core, revenue was
$158.8 million for the year ended December 31, 1997. The difference of 
$5.4 million represents the transfer of three properties into core on January 1,
1998 and two properties out of core that were sold in 1998. Expenses increased
$0.3 million, or 0.4%, over the prior year primarily due to expected increases
in payroll and related costs, partially offset by savings from management
restructuring and the outsourcing of janitorial services.

     Average monthly revenue per apartment unit of the 1997 core portfolio
increased 3.5% from $870 in 1996 to $901 per month during 1997. Average economic
occupancy decreased slightly to 96.4% in 1997 from 96.9% in 1996. The decrease
in occupancy was not unexpected given the aggressive efforts initiated by
management to increase rents as well as the implementation during the third
quarter of 1996 of several revenue-enhancing initiatives, including a premium
for month-to-month leases and the charging of a non-refundable move-in fee in
lieu of security deposits.

     1997 Acquisition Portfolio.  The 1997 acquisition portfolio, consisting of
4,038 apartment units contributed $30.4 million, or 84.2% of the rental revenue
increase.  This growth was primarily due to the fact that six of the nine
properties, or 3,036 units, were acquired during 1997.  The acquisition
properties added $12.3 million in property operating expenses compared to the
prior year.
 
     Retail Portfolio. Retail revenues increased by $0.2 million, or 2.5%,
during the year ended December 31, 1997 compared to the prior year due primarily
to rent increases and improved vacancy at Skyline Mall. Average occupancy at
Skyline Mall increased from 95.1% in 1996 to 97.2% in 1997.

     In December 1997, Messrs. Smith and Kogod sold their health club facilities
which lease retail space from the Company.  In conjunction with that sale, the
Company agreed to restructure the leases by reducing base rent on the Worldgate
lease and extending the terms on both leases by ten years, through 2025, in
exchange for a $2.3 million cash payment which is being amortized over the lives
of the revised leases. The Company used the funds to retire 65,000 Operating
Partnership units.
 
     Property Service Businesses.  Income from the Property Service Businesses
decreased $0.2 million, or 3.2%, during 1997 compared to 1996.

     Income before depreciation for Multifamily and Retail Property Management
Services decreased $1.5 million, or 65.6%, primarily due to a non-recurring fee
of $0.6 million earned in 1996 

                                       39
<PAGE>
 
in connection with the termination of a management agreement with a hotel owned
by a related party. In addition, revenue decreased by an additional $0.9 million
due to the February 1997 acquisition of two properties previously managed by the
Company.

     Income before depreciation for Interior Construction and Renovation
Services increased $0.1 million, or 8.9%, due to an increase of $1.0 million in
net fee revenue offset by an increase of $0.9 million in related expenses.

     Revenue from Engineering and Technical Services increased 20.0%, or 
$8.4 million, in 1997 with a corresponding increase of $8.2 million in expenses
compared to 1996 due primarily to additional HVAC systems operations and
preventative maintenance contracts obtained throughout 1997. Due to start-up
costs on the new contracts, operating margins during 1997 were lower than 1996.
Consequently, income before depreciation for Engineering and Technical Services
increased a moderate 4.8% to $3.8 million for 1997 compared to $3.7 million in
1996.

     Income before depreciation for Financing Services increased $1.2 million,
or 60.2%, due primarily to fees earned on an unusually high level of
refinancings performed during the fourth quarter of 1997. Such refinancings were
related to the roll-up of Affiliated commercial properties into a single
partnership. In conjunction with the roll-up, Financing Services personnel
transferred to the new entity, Charles E. Smith Commercial Realty L.P.

     Other.  Corporate general and administrative expenses increased by 
$1.3 million, or 24.9%, due primarily to additional personnel added during the
year to expand the Company's acquisition and development program. Interest
expense increased by $1.8 million, or 4.1%, primarily due to assumed debt on
acquisitions of multifamily properties. Distributions in excess of earnings
allocated to Minority Interest decreased $4.8 million. Such charges are no
longer necessary as a result of the February 1997 stock offering and the related
elimination of the Minority Interest deficit.
 

LIQUIDITY AND CAPITAL RESOURCES

Summary

     Net cash flow provided by operating activities was $118.6 million for 1998
compared to $75.2 million for 1997. The increase of $43.4 million was primarily
due to higher cash flow contributed by the acquisition portfolio as well as core
revenue growth.

     Net cash flow used by the Company for investing activities increased 
$93.1 million in 1998, from $196.9 million in 1997 to $290.0 million in 1998 due
primarily to the substantial increase in development volume during the year as
well as increased capital expenditures.

     Net cash flow provided by financing activities was $171.4 million in 1998
compared to $117.8 million in 1997.  During 1998, the Company raised
approximately $120 million through sales of common and preferred stock.  In
addition, the Company completed a number of debt financing transactions which
resulted in net cash inflows of $122.4 million which is net of prepayment
penalties and other related costs.  In 1998, the Company and the Operating
Partnership also paid 

                                       40
<PAGE>
 
dividends/distributions of $73.5 million, or $2.095 per share/unit representing
three quarters of dividends at $0.52 per share/unit and one quarter at $0.535, a
3.0% increase.

Equity Activity

     During 1997, the Company entered into an agreement with a private investor
to sell 2.6 million shares of Series A Cumulative Convertible Redeemable
Preferred Stock ("Series A Preferred Shares") for $71.5 million. In 1997, the
Company issued 1.6 million shares of Series A Preferred Shares at $27.08 per
share resulting in proceeds of $44.5 million, net of underwriting discounts and
other expenses totaling $0.5 million. The Company used the proceeds to repay on
the line of credit. In April 1998, the Company issued the remaining 1.0 million
shares of Series A Preferred Shares at $27.08 per share resulting in proceeds of
$26.1 million, net of expenses of $0.4 million, which were also used to repay
the line of credit.

     In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares") for $48.6 million, net
of offering costs of $1.4 million. The Series C Preferred Shares have a
liquidation preference of $100,000 per share and an initial annual dividend rate
of $7,910 per share. If the securities receive an investment grade rating, the
dividend rate will decrease by $250 per share. The Company used the proceeds to
repay outstanding amounts under its lines of credit.

     In July 1998, the Company completed the sale of 1.4 million shares of
common stock (par value of $0.01 per share) under its existing shelf
registration statement at a net purchase price of $32.625 per share. The net
proceeds of approximately $45.4 million have been used to retire outstanding
debt and for working capital needs.

     During 1998, 0.5 million Series B Cumulative Convertible Redeemable
Preferred Stock ("Series B Preferred Shares") were converted to common shares on
a one-for-one basis.

     During 1998, the Operating Partnership issued approximately 0.3 million
Operating Partnership units valued at $11.8 million in connection with property
acquisitions.

Funds from Operations

     FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income (loss) (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring, and
other non-recurring items, plus depreciation/amortization of assets unique to
the real estate industry. Depreciation/amortization of assets not unique to the
industry, such as amortization of deferred financing costs and non-real estate
assets, is not added back. FFO does not represent cash flow from operating
activities in accordance with generally accepted accounting principles (which,
unlike FFO, generally reflects all cash effects of transactions and other events
in the determination of net income) and should not be considered an alternative
to net income as an indication of the Company's performance or to cash flow as a
measure of liquidity or ability to make distributions. The Company considers FFO
a meaningful, additional measure of operating performance because it primarily
excludes the assumption that the value of real estate assets diminishes
predictably over time, and because industry analysts have 

                                       41
<PAGE>
 
accepted it as a performance measure. Comparison of the Company's presentation
of FFO, using the NAREIT definition, to similarly titled measures for other
REITs may not necessarily be meaningful due to possible differences in the
application of the NAREIT definition used by such REITs.

     The Company's FFO for the years ended December 31, 1998, 1997 and 1996 was
as follows (in thousands):

<TABLE>
<CAPTION>
                                     Year Ended December 31,
                                 -------------------------------
                                   1998       1997       1996
                                 ---------  ---------  ---------
<S>                              <C>        <C>        <C>
Net Income of the
   Operating Partnership         $ 69,870   $ 52,210   $ 34,817
Perpetual preferred dividends      (3,647)        --         --
Gain on sale of property          (18,150)        --         --
Depreciation of real property      28,958     20,666     17,931
Amortization of goodwill              250         --         --
Loss on unused treasury lock        4,923         --         --
Extraordinary item - loss on
debt extinguishment                16,384         87         --
                                 --------   --------   --------
 
Funds from Operations of
   the Operating Partnership       98,588     72,963     52,748
Minority Interest                 (40,554)   (35,799)   (28,879)
                                 --------   --------   --------
 
Attributable to Shareholders     $ 58,034   $ 37,164   $ 23,869
                                 ========   ========   ========
</TABLE>









                                       42
<PAGE>
 
Acquisitions/Dispositions

     The Company acquired the following operating properties during 1998 and
1997:

<TABLE>
<CAPTION>
                                    Total Cost (Dollars in Thousands)
                                   -----------------------------------
                                             1998     1997
                                           --------  --------
<S>                                        <C>       <C>     
   120-unit mid-rise apartment             $  6,700  $      -  
   167-unit garden apartment                  7,100         -  
   299-unit high-rise apartment              39,100         -
   1,075-unit high-rise apartment /(1)/      74,100         -  
   281-unit mid-rise apartment               63,500         -
   376-unit high-rise apartment                   -    16,300
   540-unit high-rise apartment                   -    43,000
   912-unit high-rise apartment                   -    69,800
   714-unit high-rise apartment                   -    88,900
   306-unit high-rise apartment                   -    43,100
   188-unit high-rise apartment                   -    27,500
                                           --------  --------
                                           $190,500  $288,600
                                           ========  ========
</TABLE>
/(1)/ Purchase included approximately 13% of underlying land.  Balance of land
      is subject to ground leases expiring in 2067.

     During 1998, the Company sold two properties (Oxford Manor and Marbury
Plaza) in southeast Washington, D.C. for a total of $22.0 million. The sales
were completed as tax-deferred I.R.C. Section 1031 exchanges. In the financial
statements, the Company recognized gains on the sales totaling $18.2 million.

     In January 1999, the Company completed the acquisition of three multifamily
properties totaling 1,008 apartment units.  The total capitalized cost of
$105.7 million was comprised of approximately $55.0 million cash, initial
capital improvement costs of $6.2 million, 0.5 million Operating Partnership
units valued at approximately $16.3 million, assumed debt of $27.1 million and
fair market value adjustments of $1.1 million.

     In February, 1999, the Company sold The Manor, a 435-unit multifamily
property located in suburban Maryland for $23.0 million. The Company recognized
a gain on the sale of $1.9 million.

     In March 1999, the Company acquired the land beneath the Crystal Square
property and the 5.1% net profits interest in the Crystal Plaza property.  The
purchase price of $10.0 million consisted of 32,258 Operating Partnership Units
valued at $1.0 million and $9.0 million cash drawn upon the line of credit.

                                       43
<PAGE>
 
Development

     The Company's development pipeline as of December 31, 1998 consists of the
following projects:

<TABLE>
<CAPTION> 

                         Number     Units       Initial           Estimated   Estimated      Estimated
                         of Units   Delivered   Delivery         Completion  Stabilization   Cost
                         --------   ---------  ----------       -------------  ------------   -----------
                                                                                              (in millions) 
<S>                      <C>        <C>        <C>                <C>         <C>            <C>
Springfield Station                     
  (Northern Virginia)        631        280    May, 1998          Q2  1999       Q4 1999             $ 60 
Courthouse Place                                                                                     
  (Rosslyn/Ballston)         564        103    December, 1998     Q4  1999       Q1 2000               68         
One Superior Place                                                                                   
  (Chicago)                  809        n/a    Q3  1999           Q2  2000       Q4 2000              115 
Park Connecticut                        
  (Washington, DC)           142        n/a    Q4  1999           Q1  2000       Q2 2000               26 
                           -----      -----                                                         -----
                           2,146        383                                                          $269
                           =====      =====                                                         =====
</TABLE>                                        

Commitments                                     
                                                
     As of December 31, 1998, the Company had executed four contracts to
purchase to-be-constructed multifamily properties as follows:

<TABLE>
<CAPTION>
                                Number          Units         Estimated    Purchase  Estimated
                                of Units        Delivered     Completion    Date     Purchase Price
                             ---------         ----------     ---------  --------    --------------
                                                                                      (in millions)
<S>                          <C>                <C>           <C>         <C>        <C>   
New River Village                  240               n/a         Q2 2000   Q4 2000       $   32   
 (Ft. Lauderdale 
Wilson Boulevard                   220               n/a         Q2 2000   Q4 2000           28  
 (Rosslyn/Ballston) 
 Pollard Gardens                   383               n/a         Q4 2000   Q2 2001           47  
 (Rosslyn/Ballston)
Reston Landing                     400               n/a         Q4 1999   Q3 2000           44
                              --------                                                  -------- 
  (Northern Virginia)
                                 1,243                                                    $ 151
                              ========                                                  ========
</TABLE>

     These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. At December 31,
1998, the Company had posted three letters-of-credit totaling $7.7 million in
accordance with three of the contracts to be drawn upon only in the event the
Company defaults on its contractual obligations to purchase the completed
assets.

     Numerous other acquisition and development projects are being pursued by
the Company. The Company anticipates meeting the related funding requirements
through draws on its lines of

                                       44
<PAGE>
 
credit, long-term borrowings and public or private issuances of equity,
including Operating Partnership unit exchanges.

Debt

     As of December 31, 1998, the Company had the following mortgage
indebtedness and other borrowings carrying a weighted average interest rate of
6.97% and collateralized by 33 of the 54 Properties:

<TABLE>
<CAPTION>
                                       Dollars in 
                                        Thousands  Percent of Total
                                       ----------  -----------------
<S>                                    <C>         <C>
  Fixed rate debt:
     Mortgages                           $592,386              74.9%
     $83M Acquisition Line of Credit       30,000               3.8%
  Variable rate debt:
     $185M Line of Credit                  53,000               6.7%
     $100M  Line of Credit                 52,000               6.6%
     Construction loans                    63,193               8.0%
                                         --------             -----
                                         $790,579             100.0%
                                         ========             =====
</TABLE>

     As of December 31, 1998, the Company's Debt to Total Market Capitalization
Ratio was 40.3% (based on 18.2 million common shares, 3.4 million preferred
shares and 13.3 million partnership units outstanding at a stock price of
$32.125 and $50 million of perpetual preferred stock) versus 35.0% at 
December 31, 1997. The Company's Interest Coverage Ratios for the years ended
December 31, 1998 and 1997 were 3.24:1 and 2.78:1, respectively.

     Outstanding debt matures as follows (in thousands):

<TABLE>
           <S>                        <C>
             1999                     $   3,173
             2000                        31,574
             2001                       136,621
             2002                            --
             2003                            --
             Thereafter                 619,211
                                      ---------
                                      $ 790,579
                                      =========
</TABLE>

     At December 31, 1998, the Company had $306.1 million of unused borrowing
capacity available.  Amounts outstanding under lines of credit averaged $202.9
million and $80.1 million for the years ended December 31, 1998 and 1997,
respectively.

     The Company anticipates meeting principal repayment requirements through
long-term borrowings, public or private issuances of debt securities or public
or private equity offerings.

     During 1998, the Company completed several debt financing transactions as
follows:

    .  The Company terminated its existing $100 million line of credit and
       entered into two new unsecured lines of credit - a $100 million line
       and a $185 million line - 

                                       45
<PAGE>
 
        with PNC Bank, NationsBank, and U.S. Bank which mature in March 2001.
        The Company repaid the balance outstanding under the $100 million line
        and recognized an extraordinary loss of $0.3 million related to the
        extinguishment of such debt.
        
     .  The Company repaid $110.1 million outstanding on Mortgage Pool One by
        drawing on the new line of credit. The Company recognized an
        extraordinary loss of $4.1 million related to the repayment. The
        Company refinanced part of the draw through a $53 million, ten year
        secured loan with Prudential at a fixed coupon rate of 6.88%. The loan
        is secured by two of the multifamily properties. In conjunction with
        this loan, the Company terminated a $20 million (notional value)
        treasury lock contract at a gain of $0.4 million which will be
        amortized over the term of the new loan.
        
     .  The Company repaid mortgage loans totaling $9.2 million and recognized
        an extraordinary loss of $0.3 million due to extinguishment of debt.
        
     .  In connection with the development of One Superior Place in Chicago,
        Illinois, the Company obtained a $90 million interest-only
        construction loan in July 1998 with interest currently at LIBOR plus
        135 basis points, payable monthly, due July 1, 2001. The loan is
        collateralized by the property.
        
     .  The Company assumed a $31.5 million mortgage loan in connection with 
        the Cronin's Landing acquisition in July 1998. The loan has an effective
        fixed interest rate of 6.9% with principal amortized using a 25-year
        amortization schedule and a final payment due March 2009. A fair value
        adjustment of $2.0 million was recorded upon assumption of this loan.
        
     .  In September 1998, the Company terminated a $50 million (notional
        value) treasury lock contract at a loss of $4.9 million. The treasury
        lock was put in place in the first quarter of 1998 to hedge interest
        rate risk associated with an anticipated 10-year, unsecured financing
        which ultimately did not occur. Therefore, this amount has been
        charged to current year earnings.
        
     .  The Company announced a standby credit facility of up to $300 million
        with Fannie Mae which provides for non-recourse, long-term debt for up
        to fifteen years. The initial draw on this facility was $140 million
        at 6.75% for fifteen years. The bulk of the proceeds were used to
        retire Mortgage Pool Two of $125.2 million and the associated
        prepayment penalty of $9.7 million. Terms and rates of subsequent
        draws on this facility will be determined at the time of use. Closing
        of the facility is expected during the second quarter of 1999.
        
     .  The Company obtained an interest-only $17.1 million mortgage on 2000
        Commonwealth at a fixed interest rate of 6.3% due December 3, 2006.

                                       46
<PAGE>
 
     .    The Company obtained a $38.3 million mortgage on Crystal House I & II
          at a fixed interest rate of 6.29%. The loan is interest only through
          December 2008, at which time principal amortization begins using a
          30-year amortization schedule with a balloon payment due December 30,
          2010.

     .    The Company obtained a $49.3 million mortgage on Skyline Towers at a
          fixed interest rate of 6.45%. The loan is interest only through
          December 2008, at which time principal amortization begins using a 30-
          year amortization schedule with a balloon payment due December 10,
          2010.

     .    In February 1999, the unused portion, or $53 million, of the Company's
          $83 million line of credit with Northwestern Mutual expired.

     .    In February 1999, the Company repaid $7.4 million of mortgage debt.
          The Company paid a prepayment penalty of $0.9 million which was
          recognized as an extra ordinary loss.

Other

    Capital Improvements.  In 1998, total capital improvements were $16.9
million, of which $12.4 million, or $871 per apartment unit, was for the core
portfolio.  Approximately 55% of the capital expenditures on the core portfolio
are considered by management to generate net operating income ("NOI") by
increasing revenue or decreasing expenses ("NOI generating"). The remaining
capital expenditures on the core portfolio indirectly influence the Company's
ability to generate NOI ("non-NOI generating").  A summary of core capital
expenditures during 1998 follows:
 
                               Total $      Average $ Per
Expenditure Type                Spent         Core Unit
----------------               -------      -------------
                           (in thousands)
 
Installations                 $ 2,643           $185
Water saving devices            1,016             71
Renovations                     1,075             75
Redevelopment                   1,435            100
Other                             681             48
                              -------           ----
Total NOI-Generating
 Improvements                   6,850            479
Non-NOI Generating
 Improvements                   5,605            392
                              -------           ----
Total Capital Expenditures
  - Core Portfolio            $12,455           $871
                              =======           ====
 
     Income Taxes. The Company is taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended. As such, the Company generally
is not subject to Federal corporate income taxes on net income it distributes
currently to shareholders provided that

                                       47
<PAGE>
 
the Company distributes at least 95% of its taxable income each year. REITs are
subject to certain organizational requirements and asset and income tests in
order to maintain their REIT status. The Property Service Businesses are taxable
corporations, and thus, pay Federal and state income taxes on their net income.
Such taxes amounted to $ 0.6 million, $0.4 million and $0.4 million for 1998,
1997 and 1996.

     Effect of Inflation. Substantially all of the leases at the Multifamily
Properties are for a term of one year or less, which enables the Company to seek
increased rents upon renewal or reletting of apartments. Retail tenant leases
provide for pass-through of common area maintenance, real estate taxes and other
operating costs to tenants, which reduces the impact of inflation.

     Year 2000.  In 1997, the Company began a comprehensive review of its year
2000 compliance issues utilizing an overlapping, three-phased approach.  Phase I
involves assessments of building infrastructure and internal computer systems
including both hardware and software to identify possible compliance failures.
Phase II involves vendor compliance and actual testing of hardware and software
applications including significant electronic interfaces.  Phase III involves
identifying remaining company-wide risks and development of contingency plans.
The Company expects to complete Phases I and II of its year 2000 review in mid-
1999.  Phase III is expected to run from March 1999 through December 1999.
Based on the review plan as well as the expected success of remediation efforts
currently underway, management believes the Company has no material risks
related to the ability of its hardware and software to recognize the year 2000
and beyond as valid dates.

     The Company's primary financial and operational software programs are
purchased from outside vendors who have already resolved year 2000 issues.  The
Company has received letters from these vendors indicating that their software
is year 2000 compliant.  The Company is in the process of replacing one computer
system, however, which is not currently year 2000 compliant at an estimated cost
of approximately $1.6 million.  The new system was implemented in January 1999
and is expected to be fully operational in early 1999.  The related cost will be
depreciated over its estimated useful life.

     As part of Phase II, the Company has initiated steps to identify and
contact key vendors whose inability to provide service in the year 2000 could
have a material adverse effect on the Company's business operations.  With the
exception of utility services, the Company believes that there are no other
critical suppliers whose inability to provide service would materially affect
business operations.  This is due primarily to the physical nature of the
Company's product as well as the availability of multiple suppliers of property
services.  The Company does not have a contingency plan to address the
possibility that utility services may not be available.  However, management
believes that this is a very unlikely scenario.  Readers are cautioned that
these conclusions involve numerous subjective assumptions and there can be no
assurances that management has adequately identified or addressed all possible
contingencies.

                                       48
<PAGE>
 
     Excluding the replacement system, the Company's year 2000 compliance
efforts have been primarily conducted with internal staff.   Accordingly, the
costs have been immaterial and are expensed as incurred.


Item 7a.     Quantitative and Qualitative Disclosures of Market Risk.

     None.


Item 8.      Financial Statements and Supplementary Data.

     See Index to Consolidated and Combined Financial Statements on Page F-1 of
this Form 10-K.


Item 9.      Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure.

     None.


                                    Part III


Item 10.     Directors and Executive Officers of the Registrant.

     The information required by this item with respect to directors is hereby
incorporated by reference to the material appearing under the caption "Election
of Directors" in the Company's definitive proxy statement for the annual meeting
of shareholders to be held in 1999 (the "Proxy Statement"). Information required
by this item with respect to executive officers is provided in Item 1 of this
report. See "Executive Officers of the Company."

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission and the NYSE.  To the best of the Company's knowledge, all
required reports were timely filed during and with respect to the fiscal year
ended December 31, 1998, except for the following reports which were filed late:
Ernest A. Gerardi, Jr. (one report, one transaction); John T. Gray (Form 3); 
John W. Guinee (two reports, two transactions); Steven E. Gulley (Form 3 and an 
amendment to Form 3); Charles R. Hagen (one report, five transactions); 
Matthew B. McCormick (one report, one transaction); Alfred G. Neely (four 
reports, nine transactions); Roger L. Weeks (two reports, two transactions); 
Robert D. Zimet (one transaction, one report).

Item 11.     Executive Compensation.

                                      49
<PAGE>
 
     The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Executive Compensation" in the
Proxy Statement.

Item 12.     Security Ownership of Certain Beneficial Owners and Management.

     The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.

Item 13.     Certain Relationships and Related Transactions.

     The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.


                                    Part IV

Item 14.     Exhibits, Financial Schedules, and Reports on Form 8-K.

14(a)(1)     Financial Statements

             Reference is made to the Index to Financial Statements and Schedule
             on Page F-1 of this Form 10-K.

14(a)(2)     Financial Statement Schedules

             Reference is made to the Index to Financial Statements and Schedule
             on Page F-1 of this Form 10-K.

             All other schedules have been omitted because the required
             information of such other schedules is not present in amounts
             sufficient to require submission of the schedule or because the
             required information is included in the consolidated financial
             statements.

14(a)(3)     Exhibits

     2.1     Third Party Management and Leasing, Hotel Asset Management and
             Corporate Services Business Transfer Agreement by and between
             Charles E. Smith Residential Realty, Inc. and Smith Property
             Management, Inc. (Incorporated by reference to Exhibit No. 2.1 of
             the Company's Form 10-K for the year ended December 31, 1994)

     2.2     REIT Properties Management and Leasing Business Transfer Agreement
             by and between Charles E. Smith Management, Inc. and Charles E.
             Smith Residential Realty L.P. (Incorporated by reference to Exhibit
             No. 2.2 of the Company's Form 10-K for the year ended December 31,
             1994)

     2.3     Assignment by Robert H. Smith, Clarice R. Smith, Robert P. Kogod
             and Arlene R. Kogod to Charles E. Smith Management, Inc. of 99% of
             all Partnership Interests of Residential Associates Limited
             Partnership (Incorporated by reference to Exhibit No. 2.3 of the
             Company's Form 10-K for the year ended December 31, 1994)

                                      50
<PAGE>
 
  2.4   Assignment and Assumption Agreement by Residential Associates Limited
        Partnership and Charles E. Smith Residential Realty L.P. (Incorporated
        by reference to Exhibit No. 2.4 of the Company's Form 10-K for the year
        ended December 31, 1994)

  2.5   Debt Assumption Agreement and Accord and Satisfaction of Debt by Charles
        E. Smith Management, Inc. and Charles E. Smith Residential Realty L.P.
        (Incorporated by reference to Exhibit No. 2.5 of the Company's Form 10-K
        for the year ended December 31, 1994)

  2.6   Debt Contribution Agreement between Charles E. Smith Management, Inc.
        and Charles E. Smith Residential Realty L.P. (the "Operating
        Partnership") (Incorporated by reference to Exhibit No. 2.6 of the
        Company's Form 10-K for the year ended December 31, 1994)

  3.1   Amended and Restated Articles of Incorporation of Charles E. Smith
        Residential Realty, Inc. (the "Company") (Incorporated by reference to
        Exhibit No. 3.1 of the Company's Registration Statement on Form S-11,
        No. 33-75288)

                                       51
<PAGE>
 
  3.2   Articles of Amendment to Articles of Amendment and Restatement of
        Articles of Incorporation of Charles E. Smith Residential Realty, Inc.
 
  3.3   Amended and Restated Bylaws of the Company (Incorporated by reference to
        Exhibit 3.2 in the Company's Registration Statement on Form S-3 (File
        No. 33-93986)
 
  3.4   Articles Supplementary to Amended and Restated Articles of Incorporation
        of the Company (Incorporated by reference to Exhibit No. 3.1 of
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1997)
 
  3.5   Articles Supplementary of the Company for Classifying and Designating
        Series B Cumulative Convertible Redeemable Preferred Stock (Incorporated
        by reference to Exhibit No. 4.1 of the Company's Report on Form 8-K
        dated October 3, 1997 and filed October 20, 1997)
 
  3.6   Certificate of Correction relating to Articles Supplementary for Series
        B Cumulative Convertible Redeemable Preferred Stock (Incorporated by
        reference to Exhibit No. 4.2 of the Company's Report on Form 8-K dated
        October 3, 1997 and filed October 20, 1997)
 
  3.7   Articles Supplementary for Series C Cumulative Redeemable Preferred
        Stock (Incorporated by reference to Exhibit No. 3.5 in the Company's
        Registration Statement on Form S-3, File No. 333-17053)
 
  3.8   Articles Supplementary of the Company for Classifying and Designating a
        Series of Preferred Stock as Series D Junior Participating Preferred
        Stock and Fixing Distribution and Other Preferences and Rights of Such
        Series

  4.1   First Amended and Restated Agreement of Limited Partnership of the
        Operating Partnership, as amended (Incorporated by reference to Exhibit
        No. 4.1 of the Company's Form 10-K for the year ended December 31, 1994)

                                       52
<PAGE>
 
  4.2   Certificate of Limited Partnership of the Operating Partnership
        (Incorporated by reference to Exhibit No. 4.2 of the Company's Form 10-K
        for the year ended December 31, 1994)
 
  4.3   Ninth Amendment to Amended and Restated Agreement of Limited Partnership
        of the Operating Partnership (Incorporated by reference to Exhibit No.
        4.1 of the Company's Quarterly Report on Form 10-Q for the Quarter Ended
        June 30, 1997)
 
  4.4   Tenth Amendment to Amended and Restated Agreement of Limited Partnership
        of the Operating Partnership (Incorporated by reference to Exhibit No.
        4.4 of the Company's Form 10-K for the year ended December 31, 1997)

  4.5   Fifteenth Amendment to First Amended and Restated Agreement of Limited
        Partnership of the Operating Partnership (Incorporated by reference to
        Exhibit 99.1 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended March 31, 1998)
 
  4.6   Seventeenth Amendment to First Amended and Restated Agreement of Limited
        Partnership of the Operating Partnership
 
 10.1   Noncompetition Agreement by and among the Company, the Operating
        Partnership and Robert P. Kogod and Robert H. Smith (Incorporated by
        reference to Exhibit No. 10.1 of the Company's Form 10-K for the year
        ended December 31, 1994)

 10.2   Registration Rights and Lock-up Agreement (Incorporated by reference to
        Exhibit No. 10.2 of the Company's Form 10-K for the year ended December
        31, 1994)

 10.3   Pledge Agreement (Incorporated by reference to Exhibit No. 10.3 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.4   First Amended and Restated 1994 Employee Stock and Unit Option Plan
        (Incorporated by reference to Exhibit No. 10.4 of the Company's Form 10-
        K for the year ended December 31, 1994)

 10.5   First Amended and Restated 1994 Employee Restricted Stock and Restricted
        Unit Plan (Incorporated by reference to Exhibit No. 10.5 of the
        Company's Form 10-K for the year ended December 31, 1994)

                                       53
<PAGE>
 
 10.6   Non-Employee Directors Stock Option Plan (Incorporated by reference to
        Exhibit No. 10.6 of the Company's Form 10-K for the year ended December
        31, 1994)

 10.7   Subscription Agreement (Incorporated by reference to Exhibit No. 10.7 of
        the Company's Form 10-K for the year ended December 31, 1994)

 10.8   Voting Stock Partnership Agreement for Smith Property Management
        Partnership (Incorporated by reference to Exhibit No. 10.8 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.9   Voting Stock Partnership Agreement for Smith Management Construction
        Partnership (Incorporated by reference to Exhibit No. 10.9 of the
        Company's Form 10-K for the year ended December 31, 1994)

10.10   Voting Stock Partnership Agreement for Consolidated Engineering Services
        Partnership (Incorporated by reference to Exhibit No. 10.10 of the
        Company's Form 10-K for the year ended December 31, 1994)

10.11   Amended and Restated Articles of Incorporation of Smith Realty Company
        (Incorporated by reference to Exhibit No. 10.11 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.12   By-Laws of Smith Property Management, Inc. (Incorporated by reference to
        Exhibit No. 10.12 of the Company's Registration Statement on Form S-11,
        No. 33-75288)

10.13   Articles of Incorporation of Smith Management Construction, Inc.
        (Incorporated by reference to Exhibit No. 10.13 of the Company's
        Registration Statement on Form S-11, No. 33-75288)

10.14   By-Laws of Smith Management Construction, Inc. (Incorporated by
        reference to Exhibit No. 10.14 of the Company's Registration Statement
        on Form S-11, No. 33-75288)

10.15   Articles of Incorporation of Consolidated Engineering Services, Inc.
        (Incorporated by reference to Exhibit No. 10.15 of the Company's
        Registration Statement on Form S-11, No. 33-75288)

10.16   By-Laws of Consolidated Engineering Services, Inc. (Incorporated by
        reference to Exhibit No. 10.16 of the Company's Registration Statement
        on Form S-11, No. 33-75288)

                                       54
<PAGE>
 
10.17   Certificate of Incorporation of Smith One, Inc. (Incorporated by
        reference to Exhibit No. 10.17 of the Company's Registration Statement
        on Form S-11, No. 33-75288)

10.18   By-Laws of Smith One, Inc. (Incorporated by reference to Exhibit No.
        10.18 of the Company's Registration Statement on Form S-11, No. 33-
        75288)

10.19   Agreement of Limited Partnership of Smith Property Holdings One L.P.
        (Incorporated by reference to Exhibit No. 10.19 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.20   Agreement of Limited Partnership of Smith Property Holdings One (D.C.)
        L.P. (Incorporated by reference to Exhibit No. 10.20 of the Company's
        Form 10-K for the year ended December 31, 1994)

10.21   Certificate of Incorporation of Smith Two, Inc. (Incorporated by
        reference to Exhibit No. 10.21 of the Company's Registration Statement
        on Form S-11, No. 33-75288)

10.22   By-Laws of Smith Two, Inc. (Incorporated by reference to Exhibit No.
        10.22 of the Company's Registration Statement on Form S-11, No. 33-
        75288)

10.23   Agreement of Limited Partnership of Smith Property Holdings Two
        L.P.(Incorporated by reference to Exhibit No. 10.23 of the Company's
        Form 10-K for the year ended December 31, 1994)

10.24   Agreement of Limited Partnership of Smith Property Holdings Two (D.C.)
        L.P. (Incorporated by reference to Exhibit No. 10.24 of the Company's
        Form 10-K for the year ended December 31, 1994)

10.25   Certificate of Incorporation of Smith Three, Inc. (Incorporated by
        reference to Exhibit No. 10.25 of the Company's Registration Statement
        on Form S-11, No. 33-75288)

10.26   By-Laws of Smith Three, Inc. (Incorporated by reference to Exhibit No.
        10.26 of the Company's Registration Statement on Form S-11, No. 33-
        75288)

10.27   Agreement of limited Partnership of Smith Property Holdings Three L.P.
        (Incorporated by reference to Exhibit No. 10.27 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.28   Agreement of Limited Partnership of Smith Property Holdings Three (D.C.)
        L.P.(Incorporated by reference to Exhibit No. 10.28 of the Company's
        Form 10-K for the year ended December 31, 1994)

                                       55
<PAGE>
 
10.29   Certificate of Incorporation of Smith Four, Inc. (Incorporated by
        reference to Exhibit No. 10.29 of the Company's Registration Statement
        on Form S-11, No. 33-75288)

10.30   By-Laws of Smith Four, Inc. (Incorporated by reference to Exhibit No.
        10.30 of the Company's Registration Statement on Form S-11, No. 33-
        75288)

10.31   Agreement of Limited Partnership of Smith Property Holding Four L.P.
        (Incorporated by reference to Exhibit No. 10.31 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.32   Amended and Restated Certificate of Incorporation of Smith Five, Inc.
        (Incorporated by reference to Exhibit No. 10.32 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.33   By-Laws of Smith Five, Inc. (Incorporated by reference to Exhibit No. 
        10.33 of the Company's Registration Statement on Form S-11, No. 33-
        75288)

10.34   Agreement of Limited Partnership of Smith Property Holdings Five (D.C.)
        L.P. (Incorporated by reference to Exhibit No. 10.34 of the Company's
        Form 10-K for the year ended December 31, 1994)

10.35   License Agreement between Charles E. Smith Management, Inc. and the
        Company (Incorporated by reference to Exhibit No. 10.35 of the Company's
        Form 10-K for the year ended December 31, 1994)

10.36   License Agreement between Charles E. Smith Management, Inc. and the
        Operating Partnership (Incorporated by reference to Exhibit No. 10.36 of
        the Company's Form 10-K for the year ended December 31, 1994)

10.37   Agreement of Limited Partnership of Smith Property Holdings Five L.P.
        (Incorporated by reference to Exhibit No. 10.0 of the Company's
        Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1994)

10.38   Certificate of Limited Partnership of Smith Property Holdings Five L.P.
        (Incorporated by reference to Exhibit No. 10.38 of the Company's Form 
        10-K for the year ended December 31, 1994)
 
10.39   Deed of Trust and Security Agreement between Smith Property Holdings
        Three L.P. ("Smith Three") and The Northwestern Mutual Life Insurance
        Company ("Northwestern") (Incorporated by reference to Exhibit No. 10.2
        of the Company's Quarterly Report on Form 10-Q for the Quarter Ended
        June 30, 1994)

                                       56
<PAGE>
 
10.40   Guarantee of Recourse Obligations by Smith Three and the Operating
        Partnership (Incorporated by reference to Exhibit No. 10.3 of the
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.41   Absolute Assignment of Leases and Rents between Smith Three and
        Northwestern (Incorporated by reference to Exhibit No. 10.4 of the
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.42   Promissory Note of Smith Three to Northwestern (Incorporated by
        reference to Exhibit No. 10.5 of the Company's Quarterly Report on Form
        10-Q for the Quarter Ended June 30, 1994)

10.43   Purchase Money Deed of Trust and Security Agreement between Smith
        Property Holdings Three (D.C.) L.P. ("Smith Three D.C.") and
        Northwestern (Incorporated by reference to Exhibit No. 10.6 of the
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.44   Guarantee of Recourse Obligations by Smith Three D.C. and the Operating
        Partnership (Incorporated by reference to Exhibit No. 10.7 of the
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.45   Absolute Assignment of Leases and Rents between Smith Three D.C. and
        Northwestern (Incorporated by reference to Exhibit No. 10.8 of the
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.46   Purchase Money Promissory Note of Smith Three D.C. to Northwestern
        (Incorporated by reference to Exhibit No. 10.9 of the Company's
        Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)

10.47   Supplemental Loan Agreement by and among Smith Property Holdings Two
        L.P. ("Smith two"), Smith Property Holdings Two (D.C.) L.P. ("Smith Two
        D.C.") and Green Park Financial Limited Partnership ("Green Park")

                                       57
<PAGE>
 
10.48   Supplemental Loan Agreement by and among Smith Property Holdings One
        L.P. ("Smith One D.C."), Smith Property Holdings One (D.C.) L.P. ("Smith
        One D.C.") and GMAC (Incorporated by reference to Exhibit No. 10.13 of
        the Company's Quarterly Report on Form 10-Q for the Quarter Ended June
        30, 1994)

10.49   Multifamily Note of Smith One to GMAC (Incorporated by reference to
        Exhibit No. 10.14 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1994)

10.50   Multifamily Note of Smith One D.C. to GMAC (Incorporated by reference to
        Exhibit No. 10.15 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1994)

10.51   Absolute Assignment of Leases and Rents by Smith One D.C. to GMAC
        (Incorporated by reference to Exhibit No. 10.16 of the Company's
        Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1994)

10.52   Property Management Agreement by and between Smith One and the Operating
        Partnership (Incorporated by reference to Exhibit No. 10.17 of the
        Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.53   Multifamily Deed of Trust, Assignment of Rents and Security Agreement
        between Smith One D.C. and GMAC (Incorporated by reference to Exhibit
        No. 10.18 of the Company's Quarterly Report on Form 10-Q for the Quarter
        Ended June 30, 1994)

10.54   Commercial Leasing and Property Management Agreement between Smith Three
        and the Operating Partnership (Incorporated by reference to Exhibit No.
        10.19 of the Company's Quarterly Report on Form 10-Q for the Quarter
        Ended June 30, 1994)

10.55   Agreement of Limited Partnership of Smith Employment Services L.P.
        (Incorporated by reference to Exhibit No. 10.58 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.56   Certificate of Limited Partnership of Smith Employment Services L.P.
        (Incorporated by reference to Exhibit No. 10.59 of the Company's Form 
        10-K for the year ended December 31, 1994)

10.57   Second Restated and Amended Agreement of Limited Partnership of First
        Herndon Associated Limited Partnership (Incorporated by reference to
        Exhibit No. 10.1 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1995)

                                       58
<PAGE>
 
10.58   Second Amendment to the Certificate of Limited Partnership of First
        Herndon Associates Limited Partnership (Incorporated by reference to
        Exhibit No. 10.2 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1995)

10.59   Certificate of Incorporation of Smith Six, Inc. (Incorporated by
        reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form
        10-Q for the Quarter Ended March 31, 1995)

10.60   By-Laws of Smith Six, Inc. (Incorporated by reference to Exhibit No.
        10.2 of the Company's Quarterly Report on Form 10-Q for the Quarter
        Ended March 31, 1995)

10.61   Agreement of Limited Partnership of Smith Property Holdings Six L.P.
        (Incorporated by reference to Exhibit No. 10.3 of the Company's
        Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1995)

10.62   Agreement of Limited Partnership of Smith Property Holdings Six (D.C.)
        L.P. (Incorporated by reference to Exhibit No. 10.4 of the Company's
        Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1995)

10.63   Certificate of Incorporation of Smith Seven, Inc. (Incorporated by
        reference to Exhibit No. 10.66 of the Company's Form 10-K for the year
        ended December 31, 1995)

10.64   By-Laws of Smith Seven, Inc. (Incorporated by reference to Exhibit No.
        10.67 of the Company's Form 10-K for the year ended December 31, 1995)

10.65   Agreement of Limited Partnership of Smith Property Holdings Seven L.P.
        (Incorporated by reference to Exhibit No. 10.68 of the Company's Form 
        10-K for the year ended December 31, 1995)

                                       59
<PAGE>
 
10.66   Commitment for Mortgage Loan to the Operating Partnership from
        Northwestern Mutual Life Insurance Company (Incorporated by reference to
        Exhibit No. 10.69 of the Company's Form 10-K for the year ended December
        31, 1995)
 
10.67   Third Amended and Restated Credit Agreement by and between the Operating
        Partnership and PNC Bank, National Association, et. al. (Incorporated by
        reference to Exhibit No. 10.71 of the Company's Form 10-K for the year
        ended December 31, 1997)
 
10.68   First Amendment to Third Amended and Restated Credit Agreement between
        the Operating Partnership and PNC Bank, National Association, et. al.
        (Incorporated by reference to Exhibit 99.1 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1998)
 
10.69   Second Amendment to Third Amended and Restated Credit Agreement between
        the Operating Partnership and PNC Bank, National Association, et. al.
        (Incorporated by reference to Exhibit 99.2 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1998)
 
10.70   First Amendment to First Amended and Restated Agreement of 1994 Employee
        Stock and Unit Option Plan of Charles E. Smith Residential Realty, Inc.
        (Incorporated by reference to Exhibit 4.9 in the Company's Registration
        Statement on Form S-8, File No. 333-67421)
 
10.71   Second Amendment to First Amended and Restated Agreement of 1994
        Employee Stock and Unit Option Plan of Charles E. Smith Residential
        Realty, Inc.
 
10.72   Rights Agreement between Charles E. Smith Residential Realty, Inc. and
        First Union National Bank, as Rights Agent
 
   21   Subsidiaries of the Registrant

 23.1   Consent of Arthur Andersen LLP
 
   27   Financial Data Schedule

      ___________________________________

                                       60
<PAGE>
 
14(b)   Reports on Form 8-K

        A report on Form 8-K was filed on April 22, 1998 (and subsequently
        amended on Form 8-K/A filed April 23, 1998) providing information on a
        Property acquired by the Company during the second quarter of 1998,
        including certain unaudited proforma balance sheets and statements of
        operations of the Company reflecting the acquisition and statements of
        revenue and certain expenses for the McClurg Court Property for the year
        ended December 31, 1997, and applicable subsequent periods.

        A report on Form 8-K was filed on July 2, 1998 providing information on
        a Property (Cronin's Landing) acquired by the Company during the third
        quarter of 1998.

        A report on Form 8-K was filed on December 8, 1998 providing information
        on the Rights Plan.

        A report on Form 8-K was filed on January 20, 1999 providing information
        on a Property (Buchanan House) acquired by the Company during the first
        quarter of 1999.

        A report on Form 8-K was filed on February 12, 1999 providing
        information on two Properties (Park West and Terrace) acquired by the
        Company during the first quarter of 1999.

14(c)   Exhibits

        The list of Exhibits filed with this report is set forth in response
        to Item 14(a)(3). The required exhibit index has been filed with the
        exhibits.

14(d)   Financial Statements

        See Index to Financial Statements and Schedules on Page F-1 of this
        Form 10-K.

                                       61
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
18th day of March, 1999.


                    CHARLES E. SMITH RESIDENTIAL REALTY, INC.



                    By   /s/Ernest A. Gerardi, Jr.
                         ------------------------------------
                         Ernest A. Gerardi, Jr.
                         President and Chief Operating Officer
 


     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 18th day of March, 1999.

       Signature                                       Title
       ---------                                       -----



   /s/Robert H. Smith                     Co-Chairman of the Board, Co-Chief
--------------------------------
Robert H. Smith                           Executive Officer, and Director



   /s/Robert P. Kogod                     Co-Chairman of the Board, Co-Chief
--------------------------------
Robert P. Kogod                           Executive Officer, and Director
 


   /s/Ernest A. Gerardi, Jr.              President, Chief Operating
--------------------------------                            
Ernest A. Gerardi, Jr.                    Officer, and Director



   /s/Wesley D. Minami                    Senior Vice President and
--------------------------------                            
Wesley D. Minami                          Chief Financial Officer

                                      62

<PAGE>
 
   /s/ Steven E. Gulley                   Vice President, Controller,
--------------------------------                             
Steven E. Gulley                          and Chief Accounting Officer



   /s/Fred J. Brinkman                    Director
--------------------------------         
Fred J. Brinkman



   /s/Charles B. Gill                     Director
--------------------------------           
Charles B. Gill



   /s/Mandell J. Ourisman                 Director
--------------------------------
Mandell J. Ourisman



   /s/Mallory Walker                      Director
--------------------------------
Mallory Walker

                                       63
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.

                  Index to Financial Statements and Schedules
                  -------------------------------------------


CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT

                                                             Pages
                                                             -----
 
     Report of Independent Public Accountants                 F-2

     Consolidated Balance Sheets                              F-3
 
     Consolidated Statements of Operations                    F-4
 
     Consolidated Statements of Shareholders' Equity          F-5
 
     Consolidated Statements of Cash Flows                    F-6
 
     Notes to Consolidated Financial Statements               F-7 to F-33
 

SCHEDULES FILED AS PART OF THIS REPORT

     Schedule III - Real Estate and Accumulated Depreciation  S-1 to S-2


     All other Schedules have been omitted because the required information of
     such other Schedules is not present in amounts sufficient to require
     submission of the schedule or because the required information is included
     in the consolidated financial statements.

                                      F-1
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Charles E. Smith Residential Realty, Inc.:


We have audited the accompanying consolidated balance sheets of Charles E. Smith
Residential Realty, Inc. (a Maryland real estate investment trust) and
subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three years ended December 31, 1998. These consolidated financial
statements and the schedule referred to below are the responsibility of the
management of Charles E. Smith Residential Realty, Inc. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Charles E. Smith
Residential Realty, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of its operations and its cash flows for each of the
years in the three years ended December 31, 1998, in conformity with generally
accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

                                                   Arthur Andersen LLP
Washington, D.C.
February 9, 1999

                                      F-2
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                          CONSOLIDATED BALANCE SHEETS
                 (Dollars in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                          As of December 31,
                                                                       ------------------------- 
                                                                         1998              1997
                                                                       --------         -------- 
<S>                                                                     <C>              <C>
   ASSETS

Rental property, net                                                 $  926,749         $751,230
Rental property under construction                                      167,214           53,093
Escrow funds                                                             23,819            7,606
Investment in and advances to Property Service Businesses                28,633           14,141
Deferred charges, net                                                    18,081           16,047
Security deposits                                                         2,408            2,453
Other assets                                                             18,495           20,936
                                                                     ==========         ======== 
                                                                     $1,185,399         $865,506
                                                                     ==========         ======== 

  LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
  Mortgage loans and notes payable:
       Mortgage loans                                                $  592,386         $500,435
       Construction loans                                                63,193            5,536
       Lines of credit                                                  135,000          105,000
                                                                     ----------         -------- 
            Total mortgage loans and notes payable                      790,579          610,971
   Accounts payable and accrued expenses                                 22,830           13,732
   Security deposits                                                      2,408            2,453
                                                                     ----------         -------- 
        Total liabilities                                               815,817          627,156
                                                                     ----------         --------                         

Commitments and contingencies

Minority Interest                                                       104,605           80,036

Shareholders' equity
   Preferred stock - $0.01 par value; 2,640,325 shares authorized;
      Series A Cumulative Convertible Redeemable Preferred
      Stock, liquidation preference of $27.08; 2,640,325 and
      1,661,743 shares issued and outstanding at December 31,
      1998 and 1997, respectively                                        71,500           45,000
   Preferred stock - $ 0.01 par value;  1,216,666 shares authorized;
      Series B Cumulative Convertible Redeemable Preferred
      Stock, liquidation preference of $28.50; 714,628 and
      1,216,666 shares issued and outstanding at December 31,
      1998 and 1997, respectively                                        20,367           34,675
   Preferred stock - $0.01 par value; 500 shares authorized;
      Series C Cumulative Redeemable Preferred Stock,
      liquidation preference of $100,000; 500 shares issued and
      outstanding                                                        50,000             -
   Common stock - $0.01 par value; 95,000,000 shares
      authorized; 18,212,600 and 14,942,429 shares issued
      and outstanding at December 31, 1998 and 1997,
      respectively                                                          182              150
   Additional paid-in capital - includes contributed                               
      deficit of $244,208                                               132,669           84,861
   Retained deficit                                                      (9,741)          (6,372)
                                                                     ----------         -------- 
      Total shareholders' equity                                        264,977          158,314
                                                                     ----------         -------- 
                                                                                   
                                                                                   
                                                                     $1,185,399         $865,506
                                                                     ==========         ========  
</TABLE>

        The accomanying notes are an integral part of these statements.

                                      F-3
<PAGE>
 

                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Dollars in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                        --------------------------------------------------
                                                                               1998            1997            1996
                                                                        --------------------------------------------------
<S>                                                                     <C>               <C>              <C>
Rental Properties:
  Revenues                                                              $    250,211      $   200,104      $   163,959

  Expenses
    Operating costs                                                          (84,381)         (71,425)         (60,796)
    Real estate taxes                                                        (17,254)         (12,402)         (10,429)
    Depreciation and amortization                                            (28,958)         (20,666)         (17,931)
                                                                        ------------      -----------      -----------
              Total expenses                                                (130,593)        (104,493)         (89,156)

Equity in income of Property Service Businesses                                8,433            7,597            7,846

Corporate general and administrative expenses                                 (8,947)          (6,563)          (5,255)
Interest income                                                                1,257            1,063            1,029
Interest expense                                                             (47,334)         (45,411)         (43,606)
                                                                        ------------      -----------      -----------
Income before gain on sale, loss on unused treasury lock,
  and extraordinary item                                                      73,027           52,297           34,817

Gain on sale of property                                                      18,150               -                -

Loss on unused treasury lock                                                  (4,923)              -                -
                                                                        ------------      -----------      -----------
Income before extraordinary item                                              86,254           52,297           34,817

Extraordinary item - loss on extinguishment of debt                          (16,384)             (87)              -
                                                                        ------------      -----------      -----------
Net income of the Operating Partnership                                       69,870           52,210           34,817

Minority Interest                                                            (28,741)         (25,617)         (19,062)

Distributions in excess of earnings allocated to
  Minority Interest                                                               -                -            (4,778)
                                                                        ------------      -----------      -----------
Net income                                                                    41,129           26,593           10,977

Less: Income attributable to preferred shares                                (10,722)          (1,881)              -
                                                                        ------------      -----------      -----------
Net income attributable to common shares                                $     30,407      $    24,712      $    10,977
                                                                        ------------      -----------      -----------


Earnings per common share - basic

  Income before extraordinary item                                      $       2.4        $     1.87      $      1.11
  Extraordinary item                                                          (0.54)               -                -
                                                                        ------------      -----------      -----------
  Net income                                                            $      1.86       $      1.87      $      1.11
                                                                        ------------      -----------      -----------
Earnings per common share - diluted

  Income before extraordinary item                                      $      2.39       $      1.86      $      1.11
  Extraordinary item                                                          (0.54)               -                -
                                                                        ------------      -----------      -----------
  Net income                                                            $      1.85       $      1.86      $      1.11
                                                                        ============      ===========      ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
 

                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 (Dollars in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>

Common                                                                   Series A        Series B        Series C                  
Stock                                                                    Preferred       Preferred       Preferred       Common    
Outstanding                                                              Stock           Stock           Stock           Stock     
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>            <C>             <C> 
 9,708,123  Balance, December 31, 1995                                   $       -      $       -       $       -     $    97  
                Operating Partnership equity exchanged                                                                            
                   for acquisitions                                              -              -               -           -
                Conversion of Operating Partnership units                                                                       
   261,484         to common stock                                               -              -               -           3  
                Adjustment for unit grants                                       -              -               -           -    
                Net income                                                       -              -               -           -  
                Dividends                                                        -              -               -           - 
 ---------                                                               ---------      ---------       ---------     --------
 9,969,607  Balance, December 31, 1996                                           -              -               -         100  
                                                               
                Operating Partnership equity exchanged                                                                          
                   for acquisitions                                              -              -               -           -
                Proceeds from issuance of Series A                                                                              
                Preferred Stock                                             45,000              -               -           -  
                Proceeds from issuance of Series B                                                                              
                   Preferred Stock                                               -         34,675               -           -  
                Offering costs associated with Preferred Stock                   -              -               -           -  
                Proceeds from issuance of Common Stock,                                                                         
 4,555,000         net of offering costs of $5,249                               -              -               -          46  
                Conversion of Operating Partnership units                                                                       
   407,822         to common stock                                               -              -               -           4  
                Repurchase and cancellation of Operating                                                                        
                   Partnership units                                             -              -               -           -  
                Amortization of unit grants                                      -              -               -           -  
    10,000      Exercise of options                                              -              -               -           -  
                Net income                                                       -              -               -           -  
                Dividends                                                        -              -               -           -  
                Adjustment for Minority Interest                                 -              -               -           -  
----------                                                                --------       --------         -------     ------- 
14,942,429  Balance, December 31, 1997                                      45,000         34,675               -         150  
                                                                                                                               
                Operating Partnership equity exchanged                                                                          
                   for acquisitions                                              -              -               -           -  
                Proceeds from issuance of Series A                                                                              
                   Preferred Stock                                          26,500              -               -           -  
                Proceeds from issuance of Series C                                                                              
                   Preferred Stock                                               -              -          50,000           -  
                Offering costs associated with Preferred Stock                   -              -               -           -  
                Proceeds from issuance of Common Stock,                                                                         
 1,400,000         net of offering costs of $221                                 -              -               -          14  
                Conversion of Preferred Stock to Common                                          
   502,038         Stock                                                         -        (14,308)              -           5  
                Conversion of Operating Partnership units                                        
 1,342,133         to common stock                                               -              -               -          13  
                Repurchase and cancellation of Operating                                         
                   Partnership units                                             -              -               -           -  
                Amortization of unit grants                                      -              -               -           -  
     5,000      Exercise of options                                              -              -               -           -  
    21,000      Stock grants awarded                                             -              -               -           -   
                Net income                                                       -              -               -           -  
                Dividends                                                        -              -               -           -  
                Adjustment for Minority Interest                                 -              -               -           -   
----------                                                               ---------      ---------        --------     -------
18,212,600  Balance, December 31, 1998                                   $  71,500      $  20,367        $ 50,000     $   182 
==========                                                               =========      =========        ========     =======

<CAPTION> 

Common                                                                      Additional          Retained        
Stock                                                                           Paid-in         Earnings
Outstanding                                                                     Capital         (Deficit)         Total
------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>               <C> 
 9,708,123  Balance, December 31, 1995                                       $  (26,585)     $   (5,135)       $ (31,623)
                Operating Partnership equity exchanged         
                   for acquisitions                                               2,403               -            2,403      
                Conversion of Operating Partnership units                                                                      
   261,484         to common stock                                                   (3)              -                -       
                Adjustment for unit grants                                          333               -              333       
                Net income                                                            -          10,977           10,977        
                Dividends                                                             -         (19,469)         (19,469)       
 ---------                                                                   ----------       ---------        ---------        
 9,969,607  Balance, December 31, 1996                                          (23,852)        (13,627)         (37,379)       
                                                                                                                                 
                Operating Partnership equity exchanged                                                                          
                   for acquisition                                               75,019               -           75,019
                Proceeds from issuance of Series A                                                                              
                   Preferred Stock                                                    -               -           45,000        
                Proceeds from issuance of Series B                                                                              
                   Preferred Stock                                                    -               -           34,675        
                Offering costs associated with Preferred Stock                     (562)              -             (562)       
                Proceeds from issuance of Common Stock,                                                                         
 4,555,000         net of offering costs of $5,249                              124,134               -          124,180        
                Conversion of Operating Partnership units                                                                       
   407,822         to common stock                                                   (4)              -                -        
                Repurchase and cancellation of Operating                                                                        
                   Partnership units                                             (2,206)              -           (2,206)       
                Amortization of unit grants                                         579               -              579        
    10,000      Exercise of options                                                 350               -              350        
                Net income                                                            -          26,593           26,593        
                Dividends                                                             -         (27,151)         (27,151)       
                Adjustment for Minority Interest                                (88,597)          7,813          (80,784)       
 ---------                                                                   ----------       ---------        ---------        
14,942,429  Balance, December 31, 1997                                           84,861          (6,372)         158,314        
                                                                                                                                 
                Operating Partnership equity exchanged                                                                          
                   for acquisitions                                              11,820               -           11,820        
                Proceeds from issuance of Series A                                                                              
                   Preferred Stock                                                    -               -           26,500        
                Proceeds from issuance of Series C                                                                              
                   Preferred Stock                                                    -               -           50,000        
                Offering costs associated with Preferred Stock                   (1,874)              -           (1,874)       
                Proceeds from issuance of Common Stock,                                                                         
 1,400,000         net of offering costs of $221                                 45,440               -           45,454        
                Conversion of Preferred Stock to Common                                                                         
   502,038         Stock                                                         14,303               -                -        
                Conversion of Operating Partnership units                                                                       
 1,342,133         to common stock                                                  (13)              -                -         
                Repurchase and cancellation of Operating                                                                        
                   Partnership units                                               (594)              -             (594)       
                Amortization of unit grants                                         521               -              521        
     5,000      Exercise of options                                               2,999               -            2,999        
    21,000      Stock grants awarded                                                  -               -                -        
                Net income                                                            -          41,129           41,129        
                Dividends                                                             -         (44,498)         (44,498)        
                Adjustment for Minority Interest                                (24,794)              -          (24,794)       
----------                                                                   ----------       ---------       ----------        
18,212,600  Balance, December 31, 1998                                       $  132,669       $  (9,741)      $  264,977        
==========                                                                   ==========       =========       ==========         
</TABLE> 

       The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                ---------------------------------- 
                                                                                   1998         1997        1996
                                                                                ----------   ----------   -------- 
<S>                                                                             <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                                        
    Net income                                                                  $  41,129    $  26,593    $ 10,977
    Minority Interest                                                              28,741       25,617      19,062
    Adjustments to reconcile net income to net cash provided                                 
      by operating activities:                                                               
        Extraordinary item - loss on extinguishment of debt                        16,384            -           -
        Loss on unused treasury lock                                                4,923            -           -
        Gain on sale of property                                                  (18,150)           -           -
        Depreciation and amortization                                              31,118       23,543      21,039
        Distributions in excess of earnings allocated to Minority Interest              -            -       4,778
        Decrease (increase) in escrow funds                                         1,490       (1,519)       (716)
        Decrease (increase) in other assets                                         3,833       (3,218)     (1,014)
        Increase (decrease) in accounts payable and accrued expenses                9,098        4,207      (3,168)
                                                                                ---------    ---------    -------- 
               Net cash provided by operating activities                          118,566       75,223      50,958
                                                                                ---------    ---------    -------- 
                                                                                             
CASH FLOWS FROM INVESTING ACTIVITIES:                                                        
    Acquisitions and development of rental property                              (255,695)    (173,205)    (60,173)
    Additions to rental property                                                  (16,852)     (12,811)     (7,425)
    Decrease in related party payables                                                  -            -      (1,441)
    Increase in investment in and advances to Property Service Businesses         (14,492)      (5,111)     (2,408)
    Acquisition deposits and other                                                 (2,956)      (5,797)     (1,295)
                                                                                ---------    ---------    -------- 
               Net cash used by investing activities                             (289,995)    (196,924)    (72,742)
                                                                                ---------    ---------    -------- 
                                                                                             
CASH FLOWS FROM FINANCING ACTIVITIES:                                                        
    Additions to deferred charges                                                  (6,149)      (1,033)       (402)
    Net proceeds from sale of common stock                                         45,454      124,180           -
    Net proceeds from sale of preferred stock                                      74,626       79,113           -
    Mortgage loans:                                                                          
        Proceeds                                                                  317,650       34,000      31,095
        Repayments                                                               (259,155)     (43,847)    (31,520)
    Lines of credit:                                                                         
        Proceeds                                                                  296,000       92,350      75,500
        Repayments                                                               (266,000)     (99,400)    (16,000)
    Construction loans:                                                                      
        Proceeds                                                                   66,157        5,536       1,032
        Repayments                                                                 (8,500)     (17,686)          -
    Prepayment penalties                                                          (12,672)           -           -
    Loss on unused treasury lock                                                   (4,923)           -           -
    Repurchase of units                                                              (594)      (2,206)          -
    Dividends and distributions - Common                                          (63,253)     (52,619)    (43,309)
    Dividends and distributions - Preferred                                       (10,207)        (901)          -
    Other, net                                                                      2,995          316        (192)
                                                                                ---------    ---------    -------- 
               Net cash provided by financing activities                          171,429      117,803      16,204
                                                                                ---------    ---------    -------- 
                                                                                             
NET DECREASE IN CASH AND CASH EQUIVALENTS                                               -       (3,898)     (5,580)
                                                                                             
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                          -        3,898       9,478
                                                                                ---------    ---------    -------- 
                                                                                             
CASH AND CASH EQUIVALENTS, END OF PERIOD                                        $       -    $       -    $  3,898
                                                                                =========    =========    ========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  ORGANIZATION AND FORMATION OF COMPANY

     Charles E. Smith Residential Realty, Inc. (the "Company"), formed in June
1993, is a self-administered and self-managed equity real estate investment
trust ("REIT").  On June 30, 1994, the Company raised equity through an initial
public offering and a private placement (the "Offerings"), and issued debt in a
series of concurrent private financing transactions.

     The proceeds were used to acquire the sole general partnership and a
proportionate limited partnership interest in Charles E. Smith Residential
Realty L.P. (the "Operating Partnership") which is the successor entity to the
CES Group (the "Predecessor"). Simultaneous with the Offerings, the entities
that owned the properties and the related service businesses included in the 
CES Group contributed the properties (the "Predecessor Properties") and the
management, development, leasing, interior construction, engineering, and
financing services business segments of the Predecessor to the Operating
Partnership (or corporations in which the Operating Partnership owns
substantially all of the equity) and received in exchange, directly or
indirectly, units of limited partnership in the Operating Partnership. (The
contributing entities and their owners, which include Robert H. Smith and Robert
P. Kogod and their families, and other former owners of indirect interests in
contributed properties, are referred to collectively as the "Minority
Interest"). The contributed assets and liabilities were recorded at historical
net book value which transferred a net carry-over deficit of $244.2 million to
the Operating Partnership.

     The Company, through the Operating Partnership and its subsidiaries, is
engaged in the ownership, operation, management, leasing, acquisition, and
development of real estate properties, primarily residential multifamily
properties. As of December 31, 1998, the Operating Partnership owned 48
operating multifamily properties containing 19,279 apartment units (the
"Properties"), had approximately 2,100 units under construction at four owned
sites and had agreements to purchase approximately 1,200 units at four
additional sites.  In addition, the Operating Partnership owned two free-
standing community retail shopping centers aggregating 436,000 square feet.
The properties are located in the following metropolitan areas:

<TABLE>
<CAPTION>
                           Washington, D.C.
                                Area            Chicago    Boston    Ft. Lauderdale    Total
                           ----------------     -------    ------    --------------    -----
Multi-Family
------------
<S>                        <C>                  <C>        <C>       <C>               <C>
  Operating                      44                2          2             -            48
  Under Construction              6                1          -             1             8
 
Retail Centers                    2                -          -             -             2  
--------------                   --               --         --            --            -- 
                                 52                3          2             1            58
                                 ==               ==         ==            ==            ==
</TABLE>

                                      F-7
<PAGE>
 
     Additionally, the Operating Partnership owned substantially all of the
equity in entities which provide multifamily and retail property management and
leasing, furnished corporate apartments, interior construction and renovation,
building engineering and technical services, and financial advisory services
(collectively, the "Property Service Businesses").


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The accompanying consolidated financial statements include all of the
accounts of the Company, the Operating Partnership and its subsidiaries and
affiliates. The Company consolidates the Operating Partnership due to the
Company's control as sole general partner. The Company uses the equity method of
accounting for its 99% non-voting interest in the Property Service Businesses.

     All significant intercompany balances and transactions have been
eliminated.

Rental Property

     The Company recorded the contributed Predecessor Properties at the
Predecessor's historical cost.  Rental property subsequently acquired or
developed is recorded at the Company's actual cost, including interest and real
estate taxes incurred during development.  Ordinary repairs and maintenance,
such as minor replacements and painting, are expensed as incurred.  Major
improvements, such as new HVAC equipment and kitchen/bath renovations, are
capitalized when they extend the useful life, increase capacity or improve the
efficiency of the asset. Depreciation on buildings and improvements is computed
using the straight-line method over estimated useful asset lives as follows:

<TABLE> 
<S>                                               <C> 
          Base building                           40 years
          Land improvements                       20 years
          Building improvements                   7 to 20 years
          Tenant improvements                     Shorter of remaining lease term or useful life
          Furniture, fixtures and equipment       5 to 10 years
</TABLE> 

Deferred Charges

    Deferred charges consist primarily of permanent loan fees, which are
amortized to interest expense over the terms of the notes using the effective
interest rate method, and retail lease acquisition costs, which are amortized
over the terms of the related leases.

                                      F-8
<PAGE>
 
Revenue Recognition

     Rental income attributable to residential leases is recognized when due
from tenants. The Company requires residential tenants to initially execute a
one-year lease. At the expiration of the lease term, if not renewed, the lease
converts to a month-to-month basis.

     Minimum rental income attributable to retail leases is recognized on a
straight-line basis over the term of the lease regardless of when payments are
due. Minimum rental income recognized in excess of payments due was $5.4 million
and $5.0 million at December 31, 1998 and 1997, respectively, and is included in
other assets. The lease agreements contain provisions that provide for
additional rentals based on the tenants' sales volume and reimbursement from the
tenants for their share of real estate taxes and certain common area maintenance
costs. Additional rentals are recognized on the accrual basis.

     The future minimum lease payments to be received by the Company under
noncancelable retail leases as of December 31, 1998, are as follows (in
thousands):

            Year Ending 
           December 31, 
           ------------
               1999                     $  7,162
               2000                        6,980
               2001                        6,822
               2002                        7,102
               2003                        6,808
            Thereafter                    87,684
                                        --------
                                        $122,558
                                        ========
 
Income Taxes

     Federal income taxes are not provided because the Company qualifies as a
REIT under the provisions of the Internal Revenue Code of 1986, as amended. As a
REIT, the Company is required to distribute at least 95% of its taxable income
to shareholders and meet certain other organizational and operational
requirements.  If the Company fails to qualify as a REIT in any year, its income
may be subject to income tax at regular corporate rates.

     The Company's income tax basis in its assets and liabilities was 
$966 million and $879 million, respectively, at December 31, 1998 and 
$702 million and $635 million, respectively, at December 31, 1997.

                                      F-9
<PAGE>
 
     For the three years ended December 31, 1998, 1997, and 1996, dividends paid
per common share were characterized for income tax purposes as follows:

                            1998             1997              1996
                       -------------    -------------     -------------
                       Per Share   %    Per Share   %     Per Share   %
                       ---------   -    ---------   -     ---------   -
 
Taxable Income          $1.362    65%     $1.638  80.5%     $1.264   64%
Return of Capital        0.733    35%      0.397  19.5%      0.711   36%
                        ------  ----      ------  ----      ------  ---
                        $2.095   100%     $2.035   100%     $1.975  100%
                        ======  ====      ======  ====      ======  ===

Minority Interest

     At the initial public offering, the Minority Interest contributed a net
deficit of $244.2 million versus the equity raised by the Company of $201.4
million which created an initial equity deficit of $42.8 million. In accordance
with generally accepted accounting principles, the Minority Interest's share of
this deficit, $24.5 million, and all subsequent Minority Interest activity was
charged to the Company as General Partner of the Operating Partnership until the
deficit was eliminated in early 1997. To the extent that distributions paid
exceeded earnings allocated to the Minority Interest, the excess was charged to
the Company as General Partner of the Operating Partnership. When earnings
allocated to the Minority Interest exceeded distributions, the excess was
credited to the Company's retained earnings. The Minority Interest activity for
the three years ended December 31, 1998 consisted of the following (in
thousands):

   Balance at December 31, 1995              $ (17,993)
     Earnings allocated to
      Minority Interest            19,062
     Distributions paid to
      Minority Interest           (23,840)      (4,778)
                                  -------  
     Other equity activity/(1)/                  1,501
                                             ---------

   Balance at December 31, 1996                (21,270)
     Earnings allocated to
      Minority Interest            25,617
     Distributions paid to
      Minority Interest           (26,369)        (752)
                                  -------  
     Other equity activity/(1)/                102,058
                                             ---------

   Balance at December 31, 1997                 80,036
     Earnings allocated to
      Minority Interest            28,741  
     Distributions paid to   
      Minority Interest           (28,962)        (221) 
                                  -------  
     Other equity activity/(1)/                 24,790
                                             ---------
   
   Balance at December 31, 1998              $ 104,605
                                             =========

/(1)/ Primarily reflects the Minority Interest's share of equity issued
during the year.

                                      F-10
<PAGE>
 
Cash and Cash Equivalents

     Cash and cash equivalents include all cash and cash equivalent investments
with original maturities of three months or less.

Use of Estimates in the Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions related to the net realizable value of rental property, the
collectibility of accounts and notes receivable, and the outcome of asserted and
unasserted claims that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.  Actual results could differ from those estimates.

Impairment of Long-Lived Assets

     Management assesses for impairment any property whenever events or
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized when the sum of the estimated undiscounted future
cash flows before interest charges is less than its carrying value. The loss is
measured as the difference between the carrying value and the fair value of the
property.

Stock-based compensation

     The Company accounts for stock-based compensation programs under Accounting
Principles Board Opinion No. 25 whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock at the grant date over
the exercise price.

New Accounting Pronouncements

     During 1998, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which had no
impact, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", which is reflected in Note 14.

     During 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for years beginning after June 15, 1999.  The standard is not expected
to have a significant impact on the Company's financial statements since the
Company has no derivative instruments.

                                      F-11
<PAGE>
 
Reclassifications

     Certain reclassifications of the prior years' information have been made
to conform to the current year's presentation.

3.  RENTAL PROPERTY

Rental Property

     Rental property consists of the following as of December 31 (in thousands):
 
                                            1998        1997
                                         ----------  ----------
 
          Land                           $  157,337  $  129,213
          Buildings and improvements        997,868     832,203
          Property under construction       167,441      53,093  
                                         ----------  ----------
                                          1,322,646   1,014,509
 
        Less: Accumulated depreciation     (228,683)   (210,186) 
                                         ----------  ----------
                                         $1,093,963  $  804,323
                                         ==========  ==========

     Depreciation expense of the Company was $28.6 million,  $20.3 million and
$17.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Repairs and maintenance expense of the Company was $13.6  million,
$13.2 million and $11.8 million for the years ended December 31, 1998, 1997 and
1996, respectively.

Acquisitions

     During 1998, the Company acquired five properties for $190.5 million,
adding 1,942 apartment units.  The Operating Partnership issued a total of
approximately 0.3 million Operating Partnership units valued at $11.8 million
and assumed a $31.5 million mortgage loan which was adjusted to its fair value
of $33.5 million.  The balance was funded from available cash and draws on the
line of credit.  The conversion of these Operating Partnership units into
Company common stock is restricted for up to two years.  One of the properties
acquired included 13% of the underlying land with the balance subject to ground
leases expiring in 2067.

     During 1997, the Company acquired six properties for $288.6 million, adding
3,036 apartment units.  The Operating Partnership issued a total of
approximately 2.1 million Operating Partnership units valued at $61.1 million
and assumed $93.5 million in mortgage loans.  The balance was funded from
available cash and draws on the line of credit. The conversion of these
Operating Partnership units into Company common stock is restricted for up to
one year.

     During 1996, the Company acquired four properties for $64.1 million, adding
1,049 apartment units.  The Operating Partnership issued a total of
approximately 0.1 million Operating Partnership units valued at approximately
$2.4 million and assumed a $3.3 million mortgage loan. The balance was funded
from available cash and draws on the line of credit.

                                      F-12
<PAGE>
 
Dispositions

     During 1998, the Company sold two properties in southeast Washington, D.C.
for a total of $22.0 million.  The sales were completed as tax-deferred I.R.C.
Section 1031 exchanges.  Under generally accepted accounting principles, the
Company recognized  gains on the sales totaling  $18.2 million.

Development
 
     At December 31, 1998, the Company had approximately 2,100 apartment units
under construction at four sites.  Total estimated cost (including land) is
approximately $269 million.


4.  INVESTMENT IN AND ADVANCES TO PROPERTY SERVICE BUSINESSES

     The Company uses the equity method of accounting for its 99% non-voting
interest in the Property Service Businesses, which include Smith Realty Company
("SRC"), Consolidated Engineering Services, Inc. ("CES") and Smith Management
Construction, Inc. ("SMC"). These companies provide services which include
property management, leasing, engineering and technical, financing and property
construction and renovation. Under the equity method, the Company's investment
is adjusted for its proportionate share of earnings or losses of the Property
Service Businesses and by dividends received. The Operating Partnership
recognized its 99% interest in the earnings of each of the Property Service
Businesses which aggregated $8.4 million, $7.6 million and $7.8 million for the
years ended December 31, 1998, 1997 and 1996, respectively. The Operating
Partnership received distributions aggregating $10.5 million, $8.9 million and
$8.9 million for the years ended December 31, 1998, 1997 and 1996, respectively.

     The Property Service Businesses provide services to the Company under one-
year agreements which are automatically renewable. Such services are generally
provided at cost (including a proportionate share of total overhead) except
property management and leasing services which are provided at cost plus five
percent. The Property Service Businesses also provide services to certain
partnerships which own multifamily and commercial office properties and have
Messrs. Smith and Kogod as the general partners ("Affiliates"). Such services
are generally provided at cost (including overhead) plus a fee, except for
certain engineering and technical services which are provided at cost and
overhead.

     In November 1997, certain commercial office Affiliates combined into a
single partnership, Charles E. Smith Commercial Realty L.P. ("CESCR").  In
conjunction with the combination, CES and SMC each entered into eight-year
agreements with CESCR to continue providing services under the same terms and
conditions in place prior to the business combination.  In addition, certain
Financing Services personnel of SRC transferred to CESCR.  SRC entered into an
agreement which expired December 31, 1998 to provide Financing Services for
certain properties owned by CESCR. Services were provided by SRC in 1998
utilizing CESCR personnel on a negotiated cost basis.  SRC

                                      F-13
<PAGE>
 
separately negotiated revenue and cost sharing agreements for Financing Services
provided to properties managed but not owned by CESCR.

     In addition to the above, SRC provided administrative services such as
accounting, systems and human resources services to the Operating Partnership
and Affiliates at cost and overhead in accordance with cost and executive
sharing agreements. In management's opinion, the allocation methods provide
reasonable estimates of the costs that would have been incurred had the services
been provided by the Operating Partnership.
 
     Total fees and administrative services charged by the Property Service
Businesses to the Operating Partnership and Affiliates follows (in thousands):

<TABLE>
<CAPTION>
                                                        Year Ended December 31
                                                       -------------------------
                                                        1998     1997     1996
                                                       -------  -------  -------
<S>                                                    <C>      <C>      <C>
 
Fees Charged by Property Services Businesses to:
------------------------------------------------
 
Operating Partnership                                  $12,789  $ 8,762  $ 7,969
Affiliates                                              32,512   29,841   31,321
 
Costs of Administrative Services Charged by SRC to:
---------------------------------------------------
 
Operating Partnership                                   11,845    9,629    7,459
Affiliates                                               4,806    5,632    5,630
 
</TABLE>

    The Operating Partnership had net working capital advances to the Property
Service Businesses of $25.9 million and $10.6 million at December 31, 1998 and
1997, respectively, which are reflected in the investment balance.

    Combined summarized balance sheet information for the Property Service
Businesses follows (in thousands):

                                          As of December 31,
                                         -------------------
                                           1998        1997
                                         -------     -------
     Assets/(1)/
       Accounts receivable               $42,356     $27,827
       Property, net                       6,910       5,475
       Other, net                          7,123       3,091   
                                         -------     -------     
                                         $56,389     $36,393
                                         =======     =======
     Liabilities/(1)/
       Accounts payable                  $19,468     $17,422
       Deferred revenue                    5,050       5,120
       Due to related parties             29,800      11,529
       Other                               3,403       1,552
     Equity                               (1,332)        770
                                         -------     -------
                                         $56,389     $36,393
                                         =======     =======

/(1)/ Balance sheets exclude $44.5 million of notes due to the Operating
Partnership which, under the equity method, are eliminated for purposes of
carry-over basis accounting.

                                      F-14
<PAGE>
 
    Combined summarized income statement information for the Property Service
Businesses follows (in thousands):
 

                                                 Year Ended December 31,
                                     --------------------------------------
                                       1998           1997           1996
                                     --------       --------       --------
 Revenues                            $108,199       $ 72,277       $ 62,559
 Operating expenses                   (98,072)       (62,976)       (53,245)
 Depreciation/amortization             (1,401)        (1,238)        (1,056)
 Other expense, net                      (274)          (447)          (391)
                                     --------       --------       --------
  Net income/(1)/                    $  8,452       $  7,616       $  7,867
                                     ========       ========       ========

/(1)/ Represents 100% of the Property Service Businesses' net income, of which
the Company's share was  $8.4 million, $7.6 million and $7.8 million,
respectively, for the years ended December 31, 1998, 1997 and 1996.


5.  DEFERRED CHARGES

     Deferred charges consist of the following as of December 31 (in thousands):
 
                                                     1998      1997
                                                   --------  ---------
 
        Permanent loan fees                        $16,619   $ 20,513 
        Retail lease acquisition costs               4,395      4,170
        Acquisition/development costs and other      2,258      1,742
                                                   -------   --------
                                                    23,272     26,425
        Less: Accumulated amortization              (5,191)   (10,378) 
                                                   -------   --------
                                                   $18,081   $ 16,047
                                                   =======   ========

     Amortization of permanent loan fees (which is charged to interest expense)
was $1.6 million, $2.3 million and $2.7 million for the years ended December 31,
1998, 1997 and 1996, respectively. Other amortization expense was $0.3 million,
$0.4 million and $0.2 million for the years ended December 31, 1998, 1997 and
1996, respectively.

                                      F-15
<PAGE>
 
6.  MORTGAGE LOANS AND NOTES PAYABLE

     The Operating Partnership, through its subsidiary financing partnerships,
has mortgage loans and notes payable as follows as of December 31:

<TABLE>
<CAPTION>
                                         Balance as of  December 31,
                                         ---------------------------
                                                                       Interest
                                          1998              1997         Rate                   Maturity
                                          ----              ----       --------                 --------
                                               (In Thousands)
<S>                                    <C>               <C>           <C>                   <C> 
Mortgage Pools
--------------
 Pool One                                    --           $110,140          --                   --
 Pool Two                                    --            125,214          --                   --
 Pool Three                            $117,000            117,000        7.99%              June 30, 2009
 FNMA                                   140,000                 --        6.75%              October 30, 2013
 Prudential                              53,000                 --        6.88%              June 5, 2008
 
Individual Mortgages
--------------------
 1841 Columbia Road                       3,173              3,211        9.00%              August 1, 1999
 Kenmore                                     --              1,165          --                   --
 Crystal Towers                          44,198             44,610        7.16%              January 1, 2006
 2000 Commonwealth                       17,100             13,310        6.30%              December 3, 2006
 Connecticut Heights                     20,000              8,053        7.10%              March 18, 2008
 Cronin's Landing                        33,208                 --        6.90%              March 1, 2009
 Patriot Village                         31,095             31,095        8.24%              August 1, 2009
 Crystal Plaza                           33,615             33,971        6.86%              November 1, 2009
 Crystal House I & II                    38,250                 --        6.29%              December 30, 2010
 Skyline Towers                          49,300                 --        6.45%              December 10, 2010
 Bennington                              12,447             12,666        7.50%              October 1, 2020
 
Secured Construction Loans
--------------------------
 One Superior Place                      31,620                 --        6.93%              July 1, 2001
 
Secured Lines of Credit
-----------------------
 $83 million
  Northwestern Mutual                    30,000             30,000        7.27%              July 1, 2004
 
Unsecured Lines of Credit
-------------------------
 $185 million
  PNC revolver                           53,000                 --        6.31%              March 1, 2001
 $100 million
  PNC revolver                           52,000             75,000        6.12%              March 1, 2001
 
Unsecured Construction Loans
----------------------------
 Courthouse Place                        31,573              5,536        6.85%              October 9, 2000
                                       --------          ---------  
                                       $790,579          $610, 971
                                       ========          =========
</TABLE>

     These loans require monthly interest and, where applicable, principal
payments and are collateralized by first lien mortgages or deeds of trust on 33
of the 54 Properties, bear interest at a weighted-average interest rate of 6.97%
as of December 31, 1998 and have a weighted-average maturity of 9.3 years.

                                      F-16
<PAGE>
 
Mortgage Pools

     The $110.1 million principal balance of Mortgage Pool One was partially
repaid on February 28, 1998, in conjunction with the sale of Oxford Manor, and
fully repaid on March 31, 1998.  An extraordinary loss of $4.1 million was
recognized which consisted of a $2.9 million yield maintenance premium and a
$1.2 million non-cash write-off of unamortized loan fees.

     The $125.2 million principal balance of Mortgage Pool Two was repaid on
October 31, 1998. An  extraordinary loss of $11.7 million was recognized
consisting of  a $9.7 million prepayment penalty and a $2.0 million non-cash
write-off of unamortized loan fees.

     The loan for Mortgage Pool Three is interest only, at a fixed rate of 7.99%
paid monthly, through June 30, 1999, at which time principal amortization begins
using a 25-year amortization schedule with a balloon payment due June 30, 2009.
The loan requires a capital and repair escrow. Certain Predecessor partners
guaranteed $42 million of the mortgage loan secured by Mortgage Pool Three.

     During 1998, the Company obtained a $53 million, ten year secured loan from
Prudential at a fixed coupon rate of 6.88%.  The loan is secured by two of the
multifamily properties with an aggregate book value of $71.7 million.  In
conjunction with this loan, the Company terminated a $20 million (notional
value) treasury lock contract at a gain of $0.4 million which will be amortized
over the term of the new loan.

     The Company announced  a standby credit facility in 1998 of up to $300
million with Fannie Mae which provides for non-recourse, long-term debt for up
to fifteen years.  The initial draw on this facility was $140 million at 6.75%
for fifteen years.  The bulk of the proceeds were used to retire Mortgage Pool
Two of $125.2 million and the associated prepayment penalty of $9.7 million.
Terms and rates of subsequent draws on this facility will be determined at the
time of use.  Closing of the facility is expected during the second quarter of
1999.

Individual Mortgages

      Individual mortgages have fixed interest rates ranging from 6.3% to 9.0%.

      During 1998, in connection with the Cronin's Landing acquisition, the
Company assumed a $31.5 million mortgage loan which was adjusted to its fair
value of $33.5 million.  The loan has  an effective fixed interest rate of 6.9%
with principal amortized using a 25-year amortization schedule and a final
payment due March 2009.

     During 1998, the Company also obtained a $38.3 million mortgage on the
Crystal House properties at a fixed interest rate of 6.29% and a $49.3 million
mortgage on the Skyline Towers property at a fixed interest rate of 6.45%.  The
Crystal House loan is interest only through December 2008, at which time
principal amortization begins using a 30-year amortization schedule with a

                                      F-17
<PAGE>
 
balloon payment due December 30, 2010.  The Skyline loan is interest only
through December 2008, at which time principal amortization begins using a 30-
year amortization schedule with a balloon payment due December 10, 2010.  The
Company also refinanced mortgages on 2000 Commonwealth and Connecticut Heights
in 1998.

     In September, 1998, the Company terminated a $50 million (notional value)
treasury lock contract at a loss of $4.9 million.  The treasury lock was put in
place in the first quarter of 1998 to hedge interest rate risk associated with
an anticipated 10-year, unsecured financing which ultimately did not occur.
Therefore, this amount has been charged to current year earnings.

     In September 1996, the outstanding loan balance of $40.6 million for
Mortgage Pool Four was refinanced for a new loan amount of $41 million.  The
ground lessor (see Note 8) has been allocated $9.9 million of the refinanced
loan for which the Operating Partnership is contingently liable. The remaining
$31.1 million of debt is allocated to the Operating Partnership.  The loan bears
interest at a fixed rate of 8.24%, paid monthly through August, 2004, at which
time principal amortization begins, using a 30-year amortization schedule with a
final payment due August 1, 2009.

Lines of Credit

     The Company terminated its $100 million line of credit in 1998 and entered
into two new  unsecured lines of credit -- a $100 million line and a $185
million line -- with PNC Bank, NationsBank, and U.S. Bank, as agents, which
mature in March 2001.  Draws upon the new lines are subject to certain
unencumbered asset requirements and bear interest at a selected London Interbank
Offer Rate (LIBOR) plus 75 to 120 basis points based on the leverage ratio of
the Company.  As of December 31, 1998, the weighted average interest rate on
outstanding draws was 6.22%.  If the Company receives an investment grade rating
on its unsecured debt, the interest rate will decrease to 60 to 90 basis points
over LIBOR based on the rating.  The Company pays a fee of 0.20% on the full
amount available under the line of credit.  The line of credit agreements
contain certain restrictive covenants, including maintenance of minimum equity
value, debt to equity ratios and debt service  coverage requirements.  The
maximum amounts outstanding during 1998 and 1997 were $251.5 million and $97.0
million, respectively.

     The Company also has an $83 million acquisition credit facility which
allows for debt maturities up through July 2004.  The line of credit provides
for an interest rate that is fixed at the time of each borrowing at 150 basis
points over 10-year Treasury Bills and is cross-collateralized with Mortgage
Pool Three.  Borrowings outstanding of $30 million at December 31, 1998 bear
interest at a weighted-average fixed rate of 7.27% and are collateralized by two
Properties with an aggregate book value of $30.5 million.  The agreement
contains certain restrictive covenants including a limit on debt to asset value
and maintenance of debt service coverage ratios.

                                      F-18
<PAGE>
 
Construction Loans

     In October 1997, the Company obtained a variable rate, unsecured
construction loan of $46.3 million to finance the construction of an acquired
development property.  The loan is recourse to the Operating Partnership, bears
interest at LIBOR plus 130 basis point (6.85% at December 31, 1998), and matures
in October 2000 with three six-month extension options based on certain
conditions. The loan balance at December 31, 1998 was $31.6 million.

     During 1998, the Company obtained a $90 million interest-only construction
loan in connection with the development of One Superior Place in Chicago,
Illinois, with interest currently at LIBOR plus 135 basis points (6.93% at
December 31, 1998), payable monthly, due July 1, 2001. At the Company's option,
maturity may be extended for two one-year periods based on certain conditions.
The loan is collateralized by the property, which has a net book value of
$54.8 million, and is recourse to the Operating Partnership.  The loan balance 
at December 31, 1998 was $31.6 million.

     The scheduled principal payments for all mortgage loans and notes payable
are as follows (in thousands):
 
                Year Ending
                December 31,
                ------------
  
                 1999              $  5,960
                 2000                35,000
                 2001               140,317
                 2002                 3,984
                 2003                 4,294
                Thereafter          601,024
                                   --------
                                   $790,579
                                   ========
 
7.  SHAREHOLDERS' EQUITY

     During the first quarter of 1997, the Company completed an equity offering
and issued 3.1 million shares of common stock at $28.375 per share totaling
$82.9 million, net of underwriting discount and other expenses totaling
$5.2 million.  Net proceeds were used to repay $72.1 million of notes payable 
and $9 million of mortgage debt and to fund property acquisitions.

          In May 1997, the Company entered into an agreement with Security
Capital Preferred Growth Inc. ("Security Capital") to sell 2.6 million shares of
Series A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred
Shares"), $0.01 par value (liquidation preference of $27.08 per share), at
$27.08 per share for a total of $71.5 million.  During 1997, the Company sold
1.6 million Series A Preferred Shares for proceeds of $44.5 million, net of 
$0.5 million in offering costs. In April 1998, the Company sold the remaining
1.0 million shares of Series A Preferred Shares for $26.1 million, which is net
of offering costs of $0.4 million.


                                      F-19
<PAGE>
 
      Series A Preferred Shareholders have certain voting, dividend and
liquidation preferences over the common shareholders.  Dividends are cumulative
from the date of original issue and are payable quarterly at the greater of the
rate declared on the common shares or the annual rate of $2.02 per share.  The
Series A Preferred Shares are not redeemable prior to May 15, 2003.  On or after
May 15, 2003, the Company, at its option, may redeem the Series A Preferred
Shares for cash at a redemption price of $27.08 per share, plus accrued and
unpaid dividends.  Under certain circumstances, the Company may elect to make
such redemption with common stock at the then market price of the common stock.
On or after January 31, 1999, Security Capital may convert the Series A
Preferred Shares into shares of common stock on a one-for-one basis subject to
certain limitations.  Prior to January 31, 1999, the Series A Preferred Shares
will not be convertible unless the Company undergoes a change in control, as
defined by the agreement, or fails to qualify as a REIT for tax purposes.

     In October 1997, the Company sold 1.45 million shares of common stock and
1.22 million shares of Series B Cumulative Convertible Redeemable Preferred
Stock ("Series B Preferred Shares"), $0.01 par value, to the Prudential
Insurance Company of America ("Prudential") for approximately $76 million in
connection with a property acquisition.  During 1998, 0.5 million shares of
Series B Preferred Shares were converted to common shares on a one-for-one
basis.

     Series B Preferred Shareholders have certain voting, dividend and
liquidation preferences over the common shareholders.  The Series B Preferred
Shares have a liquidation preference of $28.50 per share.  Dividends are
cumulative and are payable quarterly at the greater of the rate declared on the
shares of common stock of the Company or the annual rate of $2.02 per share.
Prudential may convert the Series B Preferred Shares into shares of common stock
on a one-for-one basis, subject to certain adjustments and limitations related
to its ownership of common stock of the Company.  The Company may redeem Series
B Preferred Shares at any time for common shares, plus accrued and unpaid
dividends.

     In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value,  for
$48.6 million, net of offering costs of $1.4 million.  The Company amended the
Articles of Incorporation to designate and establish the rights and privileges
of the Series C Preferred Shareholders which include certain voting, dividend
and liquidation preferences over the common shareholders. The Series C Preferred
Shares have a liquidation preference of $100,000 per share and an initial annual
dividend rate of $7,910 per share. If the securities receive an investment grade
rating, the dividend rate will decrease by $250 per share. Dividends are
cumulative and are payable quarterly.  The Company may redeem Series C Preferred
Shares after February 1, 2028, at the liquidation price plus accrued dividends.

     In July 1998, the Company completed the sale of 1.4 million shares of
common stock (par value of $0.01 per share) under its existing shelf
registration statement at a net purchase price of $32.625 per share.  The net
proceeds of approximately $45.4 million have been used to retire outstanding
debt and for working capital needs.

                                      F-20
<PAGE>
 
     In December 1998, the Company adopted a Shareholder Rights Plan (the
"Rights Plan") in which certain stock purchase rights were granted as a
distribution to holders of common stock.  The Rights allow the holder to
purchase preferred stock only if a person or group becomes the owner of 15% or
more of the common stock or announces an offer to acquire 15% or more of the
common stock.  The Rights expire on December 13, 2008.

     During 1998, the Operating Partnership issued approximately 0.3 million
Operating Partnership units valued at $11.8 million in connection with property
acquisitions.

     Operating Partnership units held by the Minority Interest may be redeemed
at the Unitholders' sole discretion. At the option of the Company, such
redemption may be made for cash at the then fair value of the Company's stock,
or for shares of common stock of the Company on a one-for-one basis which does
not have a dilutive effect. During 1998 and 1997, approximately 1.3 million and
0.4 million units, respectively, were redeemed for shares of common stock.
Operating Partnership units held by the Minority Interest as of December 31,
1998 and 1997 were 13.3 million and 14.2 million, respectively.

     As of December 31, 1998, approximately 17.3 million shares of the Company's
authorized common stock had been reserved for redemption of Operating
Partnership units and 1.0 million shares were reserved under the Company's
Dividend and Distribution Investment and Share Purchase Plan, respectively.


8.  COMMITMENTS AND CONTINGENCIES

Purchase Commitments

     As of December 31, 1998, the Company had executed four contracts to
purchase to-be-constructed multifamily properties totaling approximately 1,200
apartment units.  The maximum aggregate purchase price totals $151 million with
projected closing dates between July 2000 and May 2001.
 
     These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners.  At December
31, 1998, the Company had posted three letters-of-credit totaling $ 7.7 million
in accordance with three of the contracts to be drawn upon only if the Company
defaults on its contractual obligations to purchase the completed assets.

Land Leases

     Eight of the Properties have ground leases expiring at various dates
between December 2032 and April 2067.  (See Note 16 for related subsequent
event.)  Generally, each ground lease provides for a nominal annual rental and
an additional rental calculated from the results of Property operations after
capital expenditures.

                                      F-21
<PAGE>
 
     The base rental expense to the Company under the ground leases was
$1.7 million for 1998 and $0.5 million for each of the years ended 
December 31, 1997 and 1996. The additional rental expense to the Company under
the ground leases was $4.1 million, $3.2 million and $2.6 million for the years
ended December 31, 1998, 1997 and 1996, respectively. At the expiration of the
ground leases, the land and all of the improvements thereon will revert to the
land owner. In most cases, the leases are subordinated to the mortgage debt on
the related rental property.

     The future nominal base annual rentals as of December 31, 1998 for the
ground leases are as follows (in thousands):

                 Year Ending
                 December 31,
                 ------------
 
                     1999          $  1,630             
                     2000             1,630
                     2001             1,630
                     2002             1,630
                     2003             1,630
                  Thereafter         93,718
                                   --------
                                   $101,868
                                   ========

Net Profits Interest

    An unaffiliated third party has a 5.1% interest in the net profits of one of
the Properties acquired in 1997. Net profit is calculated based on the results
of Property operations less capital expenditures.  (See Note 16 for related
subsequent event).

Litigation

    The Company and/or the Property Service Businesses are presently subject to
legal actions or claims for damages that arise in the ordinary course of
business. In the opinion of management and counsel to the Company, the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.

401 (k)  Retirement Plan

    Substantially all of the personnel employed at the Properties are eligible
and participate in the Charles E. Smith 401 (k)  Retirement Plan, a defined
contribution, tax-qualified savings  plan (the "Plan"). These personnel are
employed by Smith Employment Services, L.P. ("Employment Services"), a limited
partnership owned by the Operating Partnership, which is the primary employer in
the Plan. Previously, such employees were participants in the Charles E. Smith
Building Employees Retirement Plan which was merged into the Plan effective 
July 1, 1998. Employment Services generally contributes 4% of employee-qualified
earnings. The total contributions were $0.2 million in 1998, $ 0.4 million in
1997, and $ 0.3 million in 1996. Employees of the Property Service Businesses
are also covered by the Plan.

                                      F-22
<PAGE>
 
9.  RELATED-PARTY TRANSACTIONS

    The Company conducts business with entities in which Messrs. Smith and Kogod
exercise control.  In each case, the Company's Board of Directors reviews the
transaction and obtains, as required, independent assurance as to the arms-
length nature of the terms.  The following is a description of these
transactions.

 . For the years ended December 31, 1998, 1997 and 1996, the Company paid
  approximately $2.3 million, $0.7 million and $0.7 million, respectively,  in
  payroll reimbursements to an entity controlled by Messrs. Smith and Kogod for
  efforts on development properties and potential development sites.  The 
  increase in 1998 reflects the higher level of activity associated with 
  expanding the Company's development pipeline during the year.

 . In January, 1998, the Company purchased a multifamily property (Tunlaw Park)
  for $6.7 million from a partnership in which Messrs. Smith and Kogod had
  ownership interests.

 . In connection with the development of Springfield Station, a contract was
  executed with an entity controlled by Messrs. Smith and Kogod to manage the
  construction of the apartments at a fee of 4% of hard construction costs.
  Construction management fees were $0.7 million and $0.4 million for the years
  ended December 31, 1998 and 1997, respectively.

 . In November 1998, the Company purchased land for future development for 
  $5.4 million from a partnership in which Messrs. Smith and Kogod had ownership
  interests.

 . Prior to December 1997, the two retail properties leased health club
  facilities to entities controlled by Messrs. Smith and Kogod. Rental income
  earned under these leases approximated $5.0 million for each of the years
  ended December 31, 1997 and 1996.  In December 1997, the health clubs were
  sold.  In conjunction with that sale, the Company agreed to restructure the
  leases by reducing base rent on the Worldgate lease and extending the terms
  of both leases for ten years, through 2025, in exchange for a $2.3 million
  cash payment which is amortized over the lives of the revised leases.
  


10.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. Based on the borrowing rates
currently available to the Operating Partnership for mortgages with similar
terms and remaining maturities, the fair value of mortgages payable was
approximately $619 million and $527 million at December 31, 1998 and 1997,
respectively. The fair values of lines of credit and construction loans
approximate the carrying values.

                                      F-23
<PAGE>
 
11.  EARNINGS PER SHARE

     For the years ended December 31, 1998, 1997 and 1996, basic earnings per
common share is computed based on 16.3 million, 13.2 million and 9.9 million
weighted average shares outstanding during the year, respectively, and diluted
earnings per common share is computed based on 16.5 million, 13.4 million, and
9.9 million weighted average shares outstanding during the year adjusted for the
assumed conversion of dilutive securities, respectively.  In 1998, the per-share
impact of the extraordinary item was $0.54 per common share (basic and diluted).

     Weighted average Operating Partnership units not held by the Company were
13.9 million, 13.5 million and 12.0 million units for the years ended 
December 31, 1998, 1997 and 1996, respectively.

     A reconciliation of income (before extraordinary item) and shares used to
calculate basic and diluted earnings per share for 1998 and 1997 follows
(dilutive securities had no effect on earnings in 1996):

<TABLE>
<CAPTION>
 
                                                                Weighted       Per-Share
                                                 Income      Average Shares     Amount
                                                 ------      --------------    ---------
Year Ended December 31, 1998                 (In Thousands)  (In Thousands)
----------------------------
<S>                                          <C>             <C>              <C>
Income before extraordinary item                  $ 86,254
Minority Interest                                  (36,267)
Income Attributable to Preferred Shares            (10,722)
                                                  --------
 
Earnings per share - Basic
   Income attributable to common
   shareholders before extraordinary item         $ 39,265           16,318     $  2.40
Effect of Dilutive Securities
    Options /(1)/                                      181              165        (.01)
                                                  --------           ------     -------
Earnings per share - Diluted                      $ 39,446           16,483     $  2.39
                                                  ========           ======     =======

<CAPTION>
 
Year Ended December 31, 1997
----------------------------
<S>                                          <C>             <C>              <C>
Income before extraordinary item                  $ 52,297
Minority Interest                                  (25,661)
Income attributable to Preferred Shares             (1,881)
                                                  --------
 
Earnings per Share - Basic
   Income attributable to common
   shareholders before extraordinary item         $ 24,755           13,218     $  1.87
 
Effect of Dilutive Securities
   Options /(1)/                                       150              161        (.01)
                                                  --------           ------     -------
Earnings per share - Diluted                      $ 24,905           13,379     $  1.86
                                                  ========           ======     =======
</TABLE>

/(1)/Adjustment to numerator reflects change in the Minority Interest share of
income based on ownership calculation including common stock equivalents.

     Options to purchase 771,750 shares of common stock were not included in the
computation of diluted earnings per share because the options' exercise price
was higher than the average price 

                                      F-24
<PAGE>
 
of the common shares. All convertible preferred shares were also excluded from
the calculation of diluted earnings per share since the preferred dividends paid
per share exceeded basic earnings per share.

12.  INCENTIVE PLANS

     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
plans.  Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards.  Had compensation cost for the Company's other stock option plans been
determined based on the fair value at the grant date consistent with the
methodology prescribed under SFAS 123, the Operating Partnership's net income
would have been reduced by approximately $499,000 for the year ended 
December 31, 1998 ($0.02 per basic and diluted common share), $65,000 (less than
$0.01 per basic and diluted common share) for the year ended December 31, 1997
and $8,000 for the year ended December 31, 1996. The fair value of options
granted during 1998, 1997 and 1996 is estimated at approximately $305,000,
$2,111,000 and $23,000, respectively, based on the date of grant using the 
Black-Scholes option-pricing model. The following assumptions were used:

                             1998      1997      1996
                           --------  --------  --------
 
Dividend yield               6.2%      6.8%      8.3%
Volatility                    13%       14%        9%
Risk-free interest rate      5.1%      5.7%      6.3%
Expected life                4 years   3 years   7 years

Option Plans

     The Company maintains an employee stock and unit option plan designed for
executive officers and other key employees of the Company, the Operating
Partnership and the Property Service Businesses. The Company also maintains a
Director's stock option plan which provides for automatic grants of vested
options, exercisable for 5,000 shares of common stock, to newly appointed non-
employee directors. The plans authorize the issuance of up to 3,150,000 shares
of common stock and/or units pursuant to options granted. Options outstanding
under both plans are as follows:

 

                                      F-25
<PAGE>
 
<TABLE>
<CAPTION>
                                                            Weighted Average  
                                                                Exercise          Options 
                                                  Number          Price       Exercisable/(1)/
                                                  ------        --------      ----------------
<S>                                              <C>           <C>            <C>
 Shares under option, December 31, 1995           895,000      $     24           199,000
                                                                         
 Options granted                                   40,000            24  
 Options canceled                                (100,000)           24  
                                                ---------                
                                                                         
 Shares under option, December 31, 1996           835,000            24           351,000
                                                                         
 Options granted                                  918,000            34  
 Options canceled                                 (12,000)           24  
 Options exercised                                (25,000)           24  
                                                ---------                
                                                                         
 Shares under option, December 31, 1997         1,716,000            29           677,000
                                                           
 Options granted                                  189,000            31
 Options canceled                                (164,000)           32
 Options exercised                               (125,000)           24
                                                ---------  
                                                           
 Shares under option, December 31, 1998         1,616,000      $     30/(2)/      707,000
                                                =========
</TABLE>

/(1)/ Weighted average exercise price is $27
/(2)/ Range of exercise prices is $24-$35

     The exercise price of options granted under the plans may not be less than
the fair market value of the common stock on the date of grant. Payment for
shares and/or units granted under the plans may be made either in cash, or, if
permitted by the option agreement, by exchanging shares of common stock of the
Company having a fair market value equal to the option exercise price. The
weighted average remaining contractual life of options outstanding as of
December 31, 1998 was 7.7 years.

     Options granted under the employee plan have a maximum term of ten years
and vest generally in three to five equal annual installments beginning on the
first anniversary of the date of grant. Generally, options terminate three
months after the optionee's termination of employment with the Company. The
Executive Compensation Committee of the Board of Directors may provide, however,
that an option may be exercised over a longer period following termination of
employment, but in no event beyond the expiration date of the option.

                                      F-26
<PAGE>
 
Restricted Stock and Unit Plan

     The Company maintains a restricted stock and unit plan for executive
officers and other key employees of the Company, the Operating Partnership and
the Property Service Businesses.  Messrs. Smith and Kogod are not eligible to
participate under the plan. A maximum of 300,000 shares of common stock and/or
units may be issued under the plan.  Restricted shares and/or units that have
not vested at the time of an employee's termination of employment with the
Company will be forfeited, except where such termination occurs by reason of
death or disability. Any restricted shares and/or units forfeited pursuant to
the vesting provisions of the plan will again be available for award under the
plan. During 1997, 24,000 grants were awarded and 20,700 units vested. During
1996, 7,500 grants were canceled and 23,750 units vested. During 1995, 23,750
units vested. During 1994, 95,000 grants were awarded. For the years ended
December 31, 1998, 1997 and 1996, compensation expense relating to the plan was
$0.5 million, $0.6 million and $0.5 million, respectively, based on the market
value of the Company's stock at the date of grant.

13.  SUPPLEMENTAL CASH FLOW DATA

     Information on non-cash investing and financing activities and cash
interest paid is as follows (in thousands):

                                          Year Ended December 31,
                                         -------------------------
                                           1998     1997     1996
                                         -------  -------  -------
Cash paid during the period
 for interest                            $52,242  $44,420  $41,078
Capitalized interest                       6,520    1,306       60
Purchase of properties
 for Operating Partnership units          11,820   75,019    2,403
Assumption of debt on acquisitions        33,456   93,474    3,260
Sale proceeds held in 1031 escrow         22,011        -        -
Purchase of property with 1031 escrow
  proceeds                                 4,308        -        -
 
14.  SEGMENT REPORTING

     The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during 1998.  SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders.  It also established standards

                                      F-27
<PAGE>
 
for related disclosures about products and services, and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
senior management in deciding how to allocate resources and in assessing
performance.

Property Segments

     The Company's primary business is the ownership and operation of
multifamily residential real estate.  As such, the residential rental properties
constitute the three primary operating segments --Core, Acquisition and
Development portfolios -- depending upon the maturity of each property.  Core
consists of all multifamily properties which have been owned more than one full
calendar year. Therefore, the 1998 Core represents properties owned as of
December 31, 1996.  Acquisition consists of purchased properties which have not
yet reflected one full calendar year of operations. Development consists of
properties which the Company has constructed or is in the process of
constructing which have not yet had a full calendar year of stabilized operating
results.  On the first of January each year, Acquisition and Development
properties that meet the one year requirements are transferred to the Core
portfolio.

     The Company's fourth property segment is the Retail portfolio which
consists of the two free-standing retail properties.

     The Company evaluates performance for the Property Segments based on Net
Operating Income ("NOI") which is the difference between Rental Revenue and
Operating Expenses (which primarily excludes interest expense, general and
administrative costs and depreciation.)

Property Service Business Segments

     The Company also evaluates the separate financial information of its equity
investment in the Property Service Businesses.  Therefore, the Company has three
additional segments based on service type -- Multifamily and Retail Management,
Engineering and Technical Services and Interior Construction and Renovation.
The Company evaluates performance for the Property Service Business segments
based on Funds from Operations ("FFO").  Funds from Operations is defined under
the revised definition adopted by the National Association of Real Estate
Investment Trusts ("NAREIT") as net income (loss) (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring and sale of property, plus depreciation/amortization of assets
unique to the real estate industry.  Depreciation/amortization of assets not
unique to the industry, such as amortization of deferred financing costs and
non-real estate assets, is not added back.

     The accounting policies for all seven segments are the same as those
described in the summary of significant accounting policies.

                                      F-28
<PAGE>
 
     Information concerning operations by segment for each of the three years
ended December 31, was as follows (in thousands):

<TABLE>
<CAPTION>
 
Property Segments
 
                                1998          1997        1996
                                ----          ----        ----
<S>                          <C>          <C>          <C>
Net Operating Income
--------------------
 
Core Portfolio               $   99,395   $   92,521   $  84,136
Acquisition Portfolio            42,438       17,381       2,331
Development Portfolio               (42)         (97)         --
Retail Portfolio                  6,785        6,472       6,267
                             ----------   ----------   ---------
 Sub-total                      148,576      116,277      92,734
Adjustments                          --           --          --
                             ----------   ----------   ---------
 Consolidated total          $  148,576   $  116,277   $  92,734

Depreciation and 
  amortization                  (28,958)     (20,666)    (17,931)
Equity in income of Property 
  Service Businesses              8,433        7,597       7,846
Corporate general and 
  administrative expenses        (8,947)      (6,563)     (5,255)
Net interest expense            (46,077)     (44,348)    (42,577)
                             ----------   ----------   ---------
Income before gain on sale,
  loss on unused treasury
  lock and extraordinary 
  items                      $   73,027   $   52,297   $  34,817
                             ==========   ==========   =========

Revenues
--------
 
Core Portfolio               $  166,465   $  158,785   $ 147,522
Acquisition Portfolio            72,499       31,277       6,639
Development Portfolio             1,258           --          --
Retail Portfolio                  9,989       10,042       9,798
                             ----------   ----------   ---------
 Sub-total                      250,211      200,104     163,959
Adjustments                          --           --          --
                             ----------   ----------   ---------
 Consolidated total          $  250,211   $  200,104   $ 163,959
                             ==========   ==========   =========
 
Real Estate Assets, gross
-------------------------
 
Core Portfolio               $  610,066   $  597,611   $ 586,807
Acquisition Portfolio           485,108      303,904      13,548
Development Portfolio           167,441       53,093          --
Retail Portfolio                 60,031       59,901      59,645
                             ----------   ----------   ---------
 Sub-total                    1,322,646    1,014,509     660,000
Accumulated Depreciation       (228,683)    (210,186)   (189,907)
                             ----------   ----------   ---------
Consolidated total, net      $1,093,963   $  804,323   $ 470,093
                             ==========   ==========   =========
</TABLE> 

                                      F-29
<PAGE>
 
Property Service Business Segments

                                          1998     1997     1996
                                        --------  -------  -------
Funds from Operations
---------------------
 
Multifamily and Retail Management       $  1,464  $    22  $ 1,590
Interior Construction and Renovation       1,763    1,027      948
Engineering and Technical Services         3,611    3,420    3,355
Other                                      1,845    3,128    1,953
                                        --------  -------  -------
     Total                              $  8,683  $ 7,597  $ 7,846
                                        ========  =======  =======
Revenues
--------
 
Multifamily and Retail Management       $ 28,412  $10,546  $11,465
Interior Construction and Renovation       8,267    6,614    5,650
Engineering and Technical Services        67,988   50,597   42,179
Other                                      2,623    3,798    2,640
                                        --------  -------  -------
     Total                              $107,290  $71,555  $61,934
                                        ========  =======  =======
Depreciation
------------
 
Multifamily and Retail Management       $    757  $   768  $   706
Interior Construction and Renovation          63       40       32
Engineering and Technical Services           566      418      308
                                        --------  -------  -------
     Total                              $  1,386  $ 1,226  $ 1,046
                                        ========  =======  =======
 
15.  EXTRAORDINARY ITEM

     The Company recognized an extraordinary loss of $16.4 million in connection
with debt extinguishments in 1998. Losses of $4.1 million and $11.7 million were
recognized in connection with the repayment of Mortgage Pool One and Mortgage
Pool Two, respectively. The losses consisted of $2.9 million and $9.7 million in
yield maintenance premiums and $1.2 million and $2.0 million in non-cash write-
offs of unamortized loan fees. In addition, a loss of $0.6 million was
recognized on the write-off of unamortized loan fees associated with the
termination of the $100 million line of credit and the refinancing of $9.2
million of mortgage loans.

16.  SUBSEQUENT EVENTS (Unaudited)

    In January 1999, the Company acquired a 442-unit multifamily property in
Crystal City, Virginia ("Buchanan House") for a capitalized cost of $65.5
million which includes assumed debt of $7.4 million, initial capital improvement
costs of $5.0 million, $0.4 million in acquisition related costs and $17.7
million in proceeds from the sale of Marbury.  The balance was funded by the
Company's bank line of credit.  In February 1999, the Company repaid the assumed
debt through a draw on its line of credit.  The Company paid a prepayment
penalty of $0.9 million which was recognized as an extraordinary loss.

                                      F-30
<PAGE>
 
     In January 1999, the Company acquired a 139-unit multifamily property in
Chicago, Illinois ("Parkwest") for a capitalized cost of approximately 
$14.1 million, consisting of 201,950 Operating Partnership Units valued at 
$6.3 million, assumed debt of $6.0 million, a fair value adjustment to debt of
$0.4 million, initial capital improvement costs of $0.8 million, and 
$0.6 million in other related costs.

     In January 1999, the Company acquired a 427-unit multifamily property in
Chicago, Illinois ("Terrace") for a capitalized cost of approximately 
$26.1 million, consisting of 320,304 Operating Partnership Units valued at 
$10.0 million, assumed debt of $13.7 million, a fair value adjustment to debt of
$0.7 million, initial capital improvement costs of $0.4 million, and 
$1.3 million in other related costs.

     In February 1999, the Company sold The Manor, a 435-unit multifamily
property located in suburban Maryland for $23.0 million.  The Company recognized
a gain on the sale of $1.9 million.

     In February 1999, the unused portion, or $53 million, of the Company's 
$83 million line of credit with Northwestern Mutual expired.

     In March 1999, the Company acquired the land beneath the Crystal Square
property and the 5.1% net profits interest in the Crystal Plaza property.  The
purchase price of $10 million consisted of 32,258 Operating Partnership Units
valued at $1 million and $9 million cash drawn upon the line of credit.  This
transaction was reviewed and approved by the Company's Board of Directors as it
was completed concurrently with the purchase by CESCR of commercial land and
partnership interests.


                                      F-31
<PAGE>
 
17.  QUARTERLY FINANCIAL INFORMATION (Unaudited)

  Quarterly financial information for 1998 and 1997 is as follows (in thousands
except per share data):

<TABLE>
<CAPTION>
                                                                Three Months Ended
                                               ---------------------------------------------------
                                               March 31,   June 30,   September 30,   December 31,
                                               ---------   --------   -------------   ------------
                                                  1998       1998         1998            1998
                                               ---------   --------   -------------   ------------ 
<S>                                            <C>         <C>        <C>             <C>
Revenues                                        $ 55,831   $ 62,063        $ 66,449       $ 67,125
Operating expenses
  (including depreciation)                       (28,685)   (32,212)        (35,752)       (33,944)
Equity in income of Property
  Service Businesses                                 664      2,227           2,693          2,849
Interest expense                                 (10,888)   (11,601)        (12,582)       (12,263)
Corporate general and administrative
  expenses                                        (2,025)    (2,203)         (2,177)        (2,542)
                                                --------   --------        --------       --------
Income before gain on sale, loss on unused
 treasury lock, and extraordinary item            14,897     18,274          18,631         21,225
Gain on sale of property                           3,120         --              --         15,030
Loss on unused treasury lock                          --         --          (4,923)            --
                                                --------   --------        --------       --------
Income before extraordinary item                  18,017     18,274          13,708         36,255
Extraordinary item - loss on extinguishment
 of debt                                          (4,702)        --              --        (11,682)
                                                --------   --------        --------       --------
Net income of Operating Partnership               13,315     18,274          13,708         24,573
Minority Interest                                 (5,871)    (7,672)         (5,434)        (9,764)
                                                --------   --------        --------       --------
Net Income                                         7,444     10,602           8,274         14,809
Income attributable to preferred
   shares                                         (1,490)    (3,580)         (2,868)        (2,784)
                                                --------   --------        --------       --------
Net income attributable to common
  shares                                        $  5,954   $  7,022        $  5,406       $ 12,025
                                                ========   ========        ========       ========
 
Earnings per common share-basic                 $   0.39   $   0.46        $   0.32       $   0.68
                                                ========   ========        ========       ========
 
Earnings per common share-diluted               $   0.39   $   0.45        $   0.32       $   0.68
                                                ========   ========        ========       ========
</TABLE>

                                      F-32
<PAGE>
 
<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                      -----------------------------------------------------
                                                      March 31,    June 30,    September 30,   December 31,
                                                      ---------    --------    -------------   ------------
                                                         1997        1997          1997            1997
                                                      ---------    --------    -------------   ------------
<S>                                                   <C>          <C>         <C>             <C>
Revenues                                              $ 45,007    $ 49,784      $ 51,065        $ 55,311
Operating expenses                                                             
  (including depreciation)                             (24,202)    (25,708)      (26,688)        (27,895)
Equity in income of Property                                                                 
  Service Businesses                                       809         896         1,931           3,961
Interest expense                                       (11,427)    (11,256)      (10,981)        (11,747)
Corporate general and                                                                        
  administrative expenses                               (1,391)     (1,648)       (1,544)         (1,980)
                                                      --------    --------      --------        --------
Income before extraordinary item                         8,796      12,068        13,783          17,650
Extraordinary item -                                                                         
 Loss on extinguishment of debt                              -           -             -             (87)
                                                      --------    --------      --------        --------
Net income of the Operating  Partnership                 8,796      12,068        13,783          17,563
Minority Interest                                       (4,613)     (6,098)       (6,724)         (8,182)
                                                      --------    --------      --------        --------
Net income                                               4,183       5,970         7,059           9,381
Income attributable to preferred shares                      -           -          (384)         (1,497)
                                                      --------    --------      --------        --------
Net income attributable to                                                                   
  common shares                                       $  4,183    $  5,970      $  6,675        $  7,884
                                                      ========    ========      ========        ========
                                                                                             
Earnings per common share-basic                       $   0.37    $   0.45      $   0.50        $   0.54
                                                      ========    ========      ========        ========
                                                                                             
Earnings per common share-diluted                     $   0.36    $   0.45      $   0.49        $   0.54
                                                      ========    ========      ========        ========
</TABLE>

                                      F-33
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                                 SCHEDULE III
                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 1998
                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      
                                                                            Capitalized Costs Before 
                                                                          Accumulated Depreciation at
                                     Initial Cost          Costs              December 31, 1998     
                              -----------------------    Capitalized     ---------------------------
                                         Building and   Subsequent To                   Building and   
Properties                       Land    Improvements    Acquisition       Land         Improvements   
---------------------         -----------------------   -------------    ---------------------------
<S>                             <C>       <C>           <C>              <C>            <C> 
Operating Properties:                                                                  
                                                                                                  
Albemarle                     $    418     $      -      $  5,311      $    418       $    5,311   
Bedford Village                  1,062            -        14,214         1,062           14,214   
Bennington                       6,922       22,641           458         6,922           23,099   
Berkeley                           108            -         2,074           108            2,074   
Boulevard of Old Town            2,653        6,391           256         2,653            6,647   
Calvert-Woodley                    172            -         2,613           172            2,613   
Car Barn                         3,576            -        13,998         3,576           13,998   
Charter Oaks                     4,387       10,058           838         4,387           10,896   
Cleveland House                    325            -         4,578           325            4,578   
Columbia Crossing                4,701            -        18,607         4,701           18,607   
Columbian-Stratford                242            -         4,672           242            4,672   
2000 Commonwealth                3,827       23,703           113         3,827           23,816   
Concord Village                      -            -         9,230             -            9,230   
Connecticut Heights              6,956       18,700         1,167         6,956           19,867   
Corcoran House                     230            -         2,199           230            2,199   
Courthouse Plaza                     -            -        44,349             -           44,349   
Cronin's Landing                 9,114     $ 54,427            44         9,114           54,471   
Crystal House I                      -            -        11,579             -           11,579   
Crystal House II                     -            -        10,007             -           10,007   
Crystal Place                    1,245            -        18,794         1,245           18,794   
Crystal Plaza                    7,710       35,355           738         7,710           36,093   
Crystal Square                       -            -        15,229             -           15,229   
Crystal Towers                  12,607       57,189         1,808        12,607           58,997  
1841 Columbia Road               3,611        2,000           376         3,611            2,376  
Arl Overlook Central               262            -        14,757           262           14,757  
Arl Overlook North                 245            -           299           245              299  
Arl Overlook South                 303            -           773           303              773  
Fort Chaplin                        97            -         8,163            97            8,163  
Gateway Place                    1,660            -        17,755         1,660           17,755  
Kenmore                          4,456       11,837           363         4,456           12,200  
Lincoln Towers                  12,471       76,480           700        12,471           77,180  
Manor                            5,809       15,576         1,144         5,809           16,720  
McClurg Court                   10,637       63,487           810        10,637           64,297  
Newport Village                    281            -        16,850           281           16,850  
Oakwood                          3,819       12,567           592         3,819           13,159  
One East Delaware                6,851       36,576           212         6,851           36,788  
Orleans Village                    700            -        14,654           700           14,654  
Parc Vista                       5,830       33,222           149         5,830           33,371  
Patriot Village                     -             -        29,667             -           29,667  
Potomac View                     2,520        6,449           714         2,520            7,163  
Skyline Mall                       482            -        14,617           482           14,617  
Skyline Towers                     360            -        27,342           360           27,342  
Statesman                          600            -         4,599           600            4,599  
Suburban Tower                   1,815        5,027           244         1,815            5,271  
Tunlaw Gardens                   1,530        5,609           192         1,530            5,801  
Tunlaw Park                      1,251        5,414           144         1,251            5,558  
2501 Porter Street               1,126            -        18,400         1,126           18,400  
Van Ness                        12,699       29,997           498        12,699           30,495  
Water Park Towers                2,500            -        42,064         2,500           42,064  
Westerly                         4,700       19,313           240         4,700           19,553  
Windsor Towers                     362            -         5,827           362            5,827  
Worldgate Centre                 4,105            -        40,829         4,105           40,829  
Development Properties:                                                            
Courthouse Place                 7,130       45,920             -         7,130           45,920  
One Superior Place               8,471       46,293             -         8,471           46,293  
Park Connecticut                 3,160        3,561             -         3,160            3,561  
Springfield Station              9,100       38,382             -         9,100           38,382  
Undeveloped Land                 5,424            -             -         5,424                0  
                               -------      -------       -------       -------        ---------
                              $190,622     $686,174      $445,850      $190,622       $1,132,024  
                              ========     ========      ========      ========       ==========
<CAPTION>
                                          
                                        Accumulated     Net        Date of           Date         Depreciable
Properties                      Total  Depreciation   Property   Construction      Acquired          Lives
---------------------       ---------  ------------  ---------   ------------      --------       -----------
<S>                        <C>           <C>         <C>           <C>             <C>            <C>
Operating Properties:                                            

Albemarle                  $    5,729     $ (3,677)  $    2,052        1966              -        5 - 40 years
Bedford Village                15,276       (9,117)       6,159        1967              -        5 - 40 years
Bennington                     30,021       (1,882)      28,139           -           1995        5 - 40 years
Berkeley                        2,182       (1,644)         538        1961              -        5 - 40 years
Boulevard of Old Town           9,300         (566)       8,734           -           1995        5 - 40 years
Calvert-Woodley                 2,785       (1,974)         811        1962              -        5 - 40 years
Car Barn                       17,574       (5,528)      12,046      1982/1986           -        5 - 40 years
Charter Oaks                   15,283         (818)      14,465        1970           1996        5 - 40 years
Cleveland House                 4,903       (3,240)       1,663        1962              -        5 - 40 years
Columbia Crossing              23,308       (4,905)      18,403      1990/1991           -        5 - 40 years
Columbian-Stratford             4,914       (3,508)       1,406        1959              -        5 - 40 years
2000 Commonwealth              27,643         (720)      26,923           -           1997        5 - 40 years
Concord Village                 9,230       (6,117)       3,113        1967              -        5 - 40 years
Connecticut Heights            26,823       (1,769)      25,054           -           1995        5 - 40 years
Corcoran House                  2,429       (1,695)         734        1961              -        5 - 40 years
Courthouse Plaza               44,349      (12,415)      31,934      1988/1990           -        5 - 40 years
Cronin's Landing               63,585         (611)      62,974        1997           1998        5 - 40 years
Crystal House I                11,579       (6,694)       4,885        1969              -        5 - 40 years
Crystal House II               10,007       (6,687)       3,320        1964              -        5 - 40 years
Crystal Place                  20,039       (6,945)      13,094        1986              -        5 - 40 years
Crystal Plaza                  43,803       (1,692)      42,111           -           1997        5 - 40 years
Crystal Square                 15,229       (8,714)       6,515        1975              -        5 - 40 years
Crystal Towers                 71,604       (2,748)      68,856           -           1997        5 - 40 years
1841 Columbia Road              5,987         (126)       5,861        1923           1996        5 - 40 years
Arl Overlook Central           15,019      (10,617)       4,402        1960              -        5 - 40 years
Arl Overlook North                544         (532)          12        1960              -        5 - 40 years
Arl Overlook South              1,076          (62)         455        1960              -        5 - 40 years
Fort Chaplin                    8,260       (6,397)       1,863        1963              -        5 - 40 years
Gateway Place                  19,415       (5,627)      13,788        1987              -        5 - 40 years
Kenmore                        16,656         (542)      16,114           -           1997        5 - 40 years
Lincoln Towers                 89,651       (2,321)      87,330           -           1997        5 - 40 years
Manor                          22,529       (1,848)      20,681           -           1994        5 - 40 years
McClurg Court                  74,934       (1,136)      73,798        1972           1998        5 - 40 years
Newport Village                17,131      (10,019)       7,112        1971              -        5 - 40 years
Oakwood                        16,978       (1,010)      15,968           -           1995        5 - 40 years
One East Delaware              43,639       (1,103)      42,536           -           1997        5 - 40 years
Orleans Village                15,354       (9,953)       5,401      1965/1966           -        5 - 40 years
Parc Vista                     39,201         (592)      38,609        1990           1998        5 - 40 years
Patriot Village                29,667      (16,060)      13,607    1973/1975/1977        -        5 - 40 years
Potomac View                    9,683         (828)       8,855           -           1994        5 - 40 years
Skyline Mall                   15,099       (8,275)       6,824        1977              -        5 - 40 years
Skyline Towers                 27,702      (16,705)      10,997        1972              -        5 - 40 years
Statesman                       5,199       (3,659)       1,540        1961              -        5 - 40 years
Suburban Tower                  7,086         (517)       6,569           -           1995        5 - 40 years
Tunlaw Gardens                  7,331         (112)       7,219        1941           1998        5 - 40 years
Tunlaw Park                     6,809         (111)       6,698        1953           1998        5 - 40 years
2501 Porter Street             19,526       (5,475)      14,051      1987/1988           -        5 - 40 years
Van Ness                       43,194       (1,842)      41,352        1970           1996        5 - 40 years
Water Park Towers              44,564      (11,448)      33,116        1989              -        5 - 40 years
Westerly                       24,253       (1,615)      22,638        1995              -        5 - 40 years
Windsor Towers                  6,189       (4,350)       1,839        1965              -        5 - 40 years
Worldgate Centre               44,934      (11,349)      33,585        1990              -        5 - 40 years
Development Properties                                                                       
Courthouse Place               53,050          (12)      53,038   Under construction     -            N/A 
One Superior Place             54,764            -       54,764   Under construction     -            N/A 
Park Connecticut                6,721            -        6,721   Under construction     -            N/A  
Springfield Station            47,482         (215)      47,267   Under construction     -            N/A
Undeveloped Land                5,424            -        5,424   Future developmennt    -            N/A 
                           ----------    ---------   ---------- 
                           $1,322,646    $(228,683)  $1,093,963
                           ==========    =========   ==========
</TABLE>

                                      S-1

<PAGE>
 
     The aggregate cost for Federal income tax purposes of the Company's
investment in real estate was approximately $1,054 million and $896 million at
December 31, 1998 and 1997, respectively. The changes in total real estate and
accumulated depreciation for the three years ended December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
 
                                    Total Real Estate Assets
                               -----------------------------------
                                   1998         1997       1996
                               ------------  ----------  ---------
<S>                            <C>           <C>         <C>
 
BALANCE, beginning of year      $1,014,509   $  660,000  $587,114
 Acquisitions                      190,933      288,605    65,836
 Development                       114,347       53,093        --
 Improvements                       16,852       12,811     7,425
 Retirements and write-offs        (13,995)          --      (375)
                                ----------   ----------  --------
BALANCE, end of year            $1,322,646   $1,014,509  $660,000
                                ==========   ==========  ========
 
 <CAPTION> 
                                     Accumulated Depreciation
                                ---------------------------------
                                   1998         1997       1996
                                ----------   ----------  --------
<S>                             <C>          <C>         <C>    
BALANCE, beginning of year      $  210,186   $  189,907  $172,624
 Depreciation expense               28,616       20,279    17,658
 Retirements and write-offs        (10,119)           -      (375)
                                ----------   ----------  --------
 
BALANCE, end of year            $  228,683   $  210,186  $189,907
                                ==========   ==========  ========
 
</TABLE>

                                      S-2
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Item                                  Document                                   Page
 ----                                  --------                                   ----
 <S>    <C>                                                                   <C>
   2.1  Third Party Management and Leasing, Hotel Asset Management                 -
        and Corporate Services Business Transfer Agreement by and
        between Charles E. Smith Residential Realty, Inc. and Smith
        Property Management, Inc. (Incorporated by reference to Exhibit
        No. 2.1 of the Company's Form 10-K for the year ended
        December 31, 1994)

   2.2  REIT Properties Management and Leasing Business Transfer                   -
        Agreement by and between Charles E. Smith Management, Inc.
        and Charles E. Smith Residential Realty L.P. (Incorporated by
        reference to Exhibit No. 2.2 of the Company's Form 10-K for the
        year ended December 31, 1994)

   2.3  Assignment by Robert H. Smith, Clarice R. Smith, Robert P.                 -
        Kogod and Arlene R. Kogod to Charles E. Smith Management,
        Inc. of 99% of all Partnership Interests of Residential Associates
        Limited Partnership (Incorporated by reference to Exhibit No. 2.3
        of the Company's Form 10-K for the year ended December 31,
        1994)

   2.4  Assignment and Assumption Agreement by Residential Associates              -
        Limited Partnership and Charles E. Smith Residential Realty L.P.
        (Incorporated by reference to Exhibit No. 2.4 of the Company's
        Form 10-K for the year ended December 31, 1994)

   2.5  Debt Assumption Agreement and Accord and Satisfaction of                   -
        Debt by Charles E. Smith Management, Inc. and Charles E. Smith
        Residential Realty L.P. (Incorporated by reference to Exhibit No.
        2.5 of the Company's Form 10-K for the year ended December
        31, 1994)

   2.6  Debt Contribution Agreement between Charles E. Smith                       -
        Management, Inc. and Charles E. Smith Residential Realty L.P.
        (the "Operating Partnership") (Incorporated by reference to
        Exhibit No. 2.6 of the Company's Form 10-K for the year ended
        December 31, 1994)

   3.1  Amended and Restated Articles of Incorporation of Charles E.               -
        Smith Residential Realty, Inc. (the "Company") (Incorporated by
        reference to Exhibit No. 3.1 of the Company's Registration
        Statement on Form S-11, No. 33-75288)
</TABLE> 
<PAGE>
<TABLE> 
<CAPTION> 
 
Item                                  Document                                   Page
----                                  --------                                   ----
 <S>    <C>                                                                       <C>
   3.2  Articles of Amendment to Articles of Amendment and                        E-1
        Restatement of Articles of Incorporation of Charles E. Smith
        Residential Realty, Inc.
 
   3.3  Amended and Restated Bylaws of the Company (Incorporated by
        reference to Exhibit 3.2 in the Company's Registration Statement           -
        on Form S-3 (File No. 33-93986)
 
        Articles Supplementary to Amended and Restated Articles of
   3.4  Incorporation of the Company (Incorporated by reference to
        Exhibit No. 3.1 of Company's Quarterly Report on Form 10-Q for             -
        the Quarter Ended June 30, 1997)
 
        Articles Supplementary of the Company for Classifying and
   3.5  Designating Series B Cumulative Convertible Redeemable
        Preferred Stock   (Incorporated by reference to Exhibit No. 4.1 of
        the Company's Report on Form 8-K dated October 3, 1997 and                 -
        filed October 20, 1997)
 
        Certificate of Correction relating to Articles Supplementary for
   3.6  Series B Cumulative Convertible Redeemable Preferred Stock
        (Incorporated by reference to Exhibit No. 4.2 of the Company's
        Report on Form 8-K dated October 3, 1997 and filed October 20,             -
        1997)
 
        Articles Supplementary for Series C Cumulative Redeemable
   3.7  Preferred Stock   (Incorporated by reference to Exhibit No. 3.5 in
        the Company's Registration Statement on Form S-3, File No.
        333-17053)
 
        Articles Supplementary of the Company for Classifying and
   3.8  Designating a Series of Preferred Stock as Series D Junior                E-2
        Participating Preferred Stock and Fixing Distribution and Other
        Preferences and Rights of Such Series
  
   4.1  First Amended and Restated Agreement of Limited Partnership of             -
        the Operating Partnership, as amended (Incorporated by reference
        to Exhibit No. 4.1 of the Company's Form 10-K for the year
        ended December 31, 1994)
</TABLE> 
<PAGE>
<TABLE> 
<CAPTION> 
 
Item                                  Document                                   Page
----                                  --------                                   ----
 <S>    <C>                                                                     <C>
   4.2  Certificate of Limited Partnership of the Operating Partnership            -
        (Incorporated by reference to Exhibit No. 4.2 of the Company's
        Form 10-K for the year ended December 31, 1994)                            -
 
   4.3  Ninth Amendment to Amended and Restated Agreement of                       -
        Limited Partnership of the Operating Partnership (Incorporated
        by reference to Exhibit No. 4.1 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1997)
 
   4.4  Tenth Amendment to Amended and Restated Agreement of                       -
        Limited Partnership of the Operating Partnership (Incorporated
        by reference to Exhibit No. 4.4of the Company's Form 10-K for
        the year ended December 31, 1997)
 
   4.5  Fifteenth Amendment to First Amended and Restated Agreement                -
        of Limited Partnership of the Operating Partnership (Incorporated
        by reference to Exhibit 99.1 of the Company's Quarterly Report
        on Form 10-Q for the Quarter Ended March 31, 1998)
 
   4.6  Seventeenth Amendment to First Amended and Restated                       E-3
        Agreement of Limited Partnership of the Operating Partnership
   
  10.1  Noncompetition Agreement by and among the Company, the                     -
        Operating Partnership and Robert P. Kogod and Robert H. Smith
        (Incorporated by reference to Exhibit No. 10.1 of the Company's
        Form 10-K for the year ended December 31, 1994)

  10.2  Registration Rights and Lock-up Agreement (Incorporated by                 -
        reference to Exhibit No. 10.2 of the Company's Form 10-K for
        the year ended December 31, 1994)

  10.3  Pledge Agreement (Incorporated by reference to Exhibit No. 10.3            -
        of the Company's Form 10-K for the year ended December 31,
        1994)

  10.4  First Amended and Restated 1994 Employee Stock and Unit                    -
        Option Plan (Incorporated by reference to Exhibit No. 10.4 of the
        Company's Form 10-K for the year ended December 31, 1994)

  10.5  First Amended and Restated 1994 Employee Restricted Stock and              -
        Restricted Unit Plan (Incorporated by reference to Exhibit No.
        10.5 of the Company's Form 10-K for the year ended December
        31, 1994)

  10.6  Non-Employee Directors Stock Option Plan (Incorporated by                  -
        reference to Exhibit No. 10.6 of the Company's Form 10-K for
        the year ended December 31, 1994)
</TABLE> 
<PAGE>
<TABLE> 
<CAPTION> 
 
Item                                  Document                                   Page
----                                  --------                                   ----
 <S>    <C>                                                                      <C>
  10.7  Subscription Agreement (Incorporated by reference to Exhibit               -
        No. 10.7 of the Company's Form 10-K for the year ended
        December 31, 1994)

  10.8  Voting Stock Partnership Agreement for Smith Property                      -
        Management Partnership (Incorporated by reference to Exhibit
        No. 10.8 of the Company's Form 10-K for the year ended
        December 31, 1994)

  10.9  Voting Stock Partnership Agreement for Smith Management                    -
        Construction Partnership (Incorporated by reference to Exhibit
        No. 10.9 of the Company's Form 10-K for the year ended
        December 31, 1994)

 10.10  Voting Stock Partnership Agreement for Consolidated                        -
        Engineering Services Partnership (Incorporated by reference to
        Exhibit No. 10.10 of the Company's Form 10-K for the year
        ended December 31, 1994)

 10.11  Amended and Restated Articles of Incorporation of Smith Realty             -
        Company (Incorporated by reference to Exhibit No. 10.11 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.12  By-Laws of Smith Property Management, Inc. (Incorporated by                -
        reference to Exhibit No. 10.12 of the Company's Registration
        Statement on Form S-11, No. 33-75288)

 10.13  Articles of Incorporation of Smith Management Construction,                -
        Inc. (Incorporated by reference to Exhibit No. 10.13 of the
        Company's Registration Statement on Form S-11, No. 33-75288)

 10.14  By-Laws of Smith Management Construction, Inc. (Incorporated               -
        by reference to Exhibit No. 10.14 of the Company's Registration
        Statement on Form S-11, No. 33-75288)

 10.15  Articles of Incorporation of Consolidated Engineering Services,            -
        Inc. (Incorporated by reference to Exhibit No. 10.15 of the
        Company's Registration Statement on Form S-11, No. 33-75288)

 10.16  By-Laws of Consolidated Engineering Services, Inc.                         -
        (Incorporated by reference to Exhibit No. 10.16 of the Company's
        Registration Statement on Form S-11, No. 33-75288)

 10.17  Certificate of Incorporation of Smith One, Inc. (Incorporated by           -
        reference to Exhibit No. 10.17 of the Company's Registration
        Statement on Form S-11, No. 33-75288)
</TABLE> 
<PAGE>
<TABLE> 
<CAPTION> 
 
Item                                  Document                                   Page
----                                  --------                                   ----
 <S>    <C>                                                                      <C>
10.18   By-Laws of Smith One, Inc. (Incorporated by reference to Exhibit           -
        No. 10.18 of the Company's Registration Statement on Form S-
        11, No. 33-75288)

 10.19  Agreement of Limited Partnership of Smith Property Holdings                -
        One L.P. (Incorporated by reference to Exhibit No. 10.19 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.20  Agreement of Limited Partnership of Smith Property Holdings                -
        One (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.20
        of the Company's Form 10-K for the year ended December 31,
        1994)

 10.21  Certificate of Incorporation of Smith Two, Inc. (Incorporated by           -
        reference to Exhibit No. 10.21 of the Company's Registration
        Statement on Form S-11, No. 33-75288)

 10.22  By-Laws of Smith Two, Inc. (Incorporated by reference to                   -
        Exhibit No. 10.22 of the Company's Registration Statement on
        Form S-11, No. 33-75288)

 10.23  Agreement of Limited Partnership of Smith Property Holdings                -
        Two L.P.(Incorporated by reference to Exhibit No. 10.23 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.24  Agreement of Limited Partnership of Smith Property Holdings                -
        Two (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.24
        of the Company's Form 10-K for the year ended December 31,
        1994)

 10.25  Certificate of Incorporation of Smith Three, Inc. (Incorporated by         -
        reference to Exhibit No. 10.25 of the Company's Registration
        Statement on Form S-11, No. 33-75288)

 10.26  By-Laws of Smith Three, Inc. (Incorporated by reference to                 -
        Exhibit No. 10.26 of the Company's Registration Statement on
        Form S-11, No. 33-75288)

 10.27  Agreement of limited Partnership of Smith Property Holdings                -
        Three L.P. (Incorporated by reference to Exhibit No. 10.27 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.28  Agreement of Limited Partnership of Smith Property Holdings                -
        Three (D.C.) L.P.(Incorporated by reference to Exhibit No. 10.28
        of the Company's Form 10-K for the year ended December 31,
        1994)
</TABLE> 
<PAGE>
<TABLE> 
<CAPTION> 
 
Item                                  Document                                   Page
----                                  --------                                   ----
 <S>    <C>                                                                     <C>
 10.29  Certificate of Incorporation of Smith Four, Inc. (Incorporated by         -
        reference to Exhibit No. 10.29 of the Company's Registration
        Statement on Form S-11, No. 33-75288)

 10.30  By-Laws of Smith Four, Inc. (Incorporated by reference to                  -
        Exhibit No. 10.30 of the Company's Registration Statement on
        Form S-11, No. 33-75288)

 10.31  Agreement of Limited Partnership of Smith Property Holding                 -
        Four L.P. (Incorporated by reference to Exhibit No. 10.31 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.32  Amended and Restated Certificate of Incorporation of Smith Five,           -
        Inc. (Incorporated by reference to Exhibit No. 10.32 of the
        Company's Form 10-K for the year ended December 31, 1994)

 10.33  By-Laws of Smith Five, Inc. (Incorporated by reference to                  -
        Exhibit No. 10.33 of the Company's Registration Statement on
        Form S-11, No. 33-75288)

 10.34  Agreement of Limited Partnership of Smith Property Holdings                -
        Five (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.34
        of the Company's Form 10-K for the year ended December 31,
        1994)

 10.35  License Agreement between Charles E. Smith Management, Inc.                -
        and the Company (Incorporated by reference to Exhibit No. 10.35
        of the Company's Form 10-K for the year ended December 31,
        1994)

 10.36  License Agreement between Charles E. Smith Management, Inc.                -
        and the Operating Partnership (Incorporated by reference to
        Exhibit No. 10.36 of the Company's Form 10-K for the year
        ended December 31, 1994)

 10.37  Agreement of Limited Partnership of Smith Property Holdings                -
        Five L.P. (Incorporated by reference to Exhibit No. 10.0 of the
        Company's Quarterly Report on Form 10-Q for the Quarter
        Ended September 30, 1994)

 10.38  Certificate of Limited Partnership of Smith Property Holdings              -
        Five L.P. (Incorporated by reference to Exhibit No. 10.38 of the
        Company's Form 10-K for the year ended December 31, 1994)
</TABLE> 
<PAGE>
<TABLE> 
<CAPTION> 
 
Item                                  Document                                   Page
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 <S>    <C>                                                                     <C>
 10.39  Deed of Trust and Security Agreement between Smith Property                -
        Holdings Three L.P. ("Smith Three") and The Northwestern
        Mutual Life Insurance Company ("Northwestern") (Incorporated
        by reference to Exhibit No. 10.2 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1994)

 10.40  Guarantee of Recourse Obligations by Smith Three and the                   -
        Operating Partnership (Incorporated by reference to Exhibit No.
        10.3 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1994)

 10.41  Absolute Assignment of Leases and Rents between Smith Three                -
        and Northwestern (Incorporated by reference to Exhibit No. 10.4
        of the Company's Quarterly Report on Form 10-Q for the Quarter
        Ended June 30, 1994)

 10.42  Promissory Note of Smith Three to Northwestern (Incorporated               -
        by reference to Exhibit No. 10.5 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1994)

 10.43  Purchase Money Deed of Trust and Security Agreement between                -
        Smith Property Holdings Three (D.C.) L.P. ("Smith Three D.C.")
        and Northwestern (Incorporated by reference to Exhibit No. 10.6
        of the Company's Quarterly Report on Form 10-Q for the Quarter
        Ended June 30, 1994)
 10.44  Guarantee of Recourse Obligations by Smith Three D.C. and the              -
        Operating Partnership (Incorporated by reference to Exhibit No.
        10.7 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1994)

 10.45  Absolute Assignment of Leases and Rents between Smith Three                -
        D.C. and Northwestern (Incorporated by reference to Exhibit No.
        10.8 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1994)

 10.46  Purchase Money Promissory Note of Smith Three D.C. to                      -
        Northwestern (Incorporated by reference to Exhibit No. 10.9 of
        the Company's Quarterly Report on Form 10-Q for the Quarter
        Ended June 30, 1994)

 10.47  Supplemental Loan Agreement by and among Smith Property                   E-4 
        Holdings Two L.P. ("Smith Two"), Smith Property Holdings Two
        (D.C.) L.P. ("Smith Two D.C.") and Green Park Financial Limited 
        Parnership ("Green Park")
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<S>     <C>                                                                      <C>

10.48   Supplemental Loan Agreement by and among Smith Property                      -
        Holdings One L.P. ("Smith One D.C."), Smith Property Holdings
        One (D.C.) L.P. ("Smith One D.C.") and GMAC (Incorporated
        by reference to Exhibit No. 10.13 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1994)

10.49   Multifamily Note of Smith One to GMAC (Incorporated by                       -
        reference to Exhibit No. 10.14 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1994)

10.50   Multifamily Note of Smith One D.C. to GMAC (Incorporated by                  -
        reference to Exhibit No. 10.15 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1994)

10.51   Absolute Assignment of Leases and Rents by Smith One D.C. to                 -
        GMAC (Incorporated by reference to Exhibit No. 10.16 of the
        Company's Quarterly Report on Form 10-Q for the Quarter
        Ended June 30, 1994)

10.52   Property Management Agreement by and between Smith One and                   -
        the Operating Partnership (Incorporated by reference to Exhibit
        No. 10.17 of the Company's Quarterly Report on Form 10-Q for
        the Quarter Ended June 30, 1994)

10.53   Multifamily Deed of Trust, Assignment of Rents and Security                  -
        Agreement between Smith One D.C. and GMAC (Incorporated
        by reference to Exhibit No. 10.18 of the Company's Quarterly
        Report on Form 10-Q for the Quarter Ended June 30, 1994)

10.54   Commercial Leasing and Property Management Agreement                         -
        between Smith Three and the Operating Partnership
        (Incorporated by reference to Exhibit No. 10.19 of the Company's
        Quarterly Report on Form 10-Q for the Quarter Ended June 30,
        1994)

10.55   Agreement of Limited Partnership of Smith Employment Services                -
        L.P. (Incorporated by reference to Exhibit No. 10.58 of the
        Company's Form 10-K for the year ended December 31, 1994)
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<S>     <C>                                                                      <C>
10.56   Certificate of Limited Partnership of Smith Employment Services              -
        L.P. (Incorporated by reference to Exhibit No. 10.59 of the
        Company's Form 10-K for the year ended December 31, 1994)

10.57   Second Restated and Amended Agreement of Limited Partnership                 -
        of First Herndon Associated Limited Partnership (Incorporated by
        reference to Exhibit No. 10.1 of the Company's Quarterly Report
        on Form 10-Q for the Quarter Ended June 30, 1995)

10.58   Second Amendment to the Certificate of Limited Partnership of                -
        First Herndon Associates Limited Partnership (Incorporated by
        reference to Exhibit No. 10.2 of the Company's Quarterly Report
        on Form 10-Q for the Quarter Ended June 30, 1995)

10.59   Certificate of Incorporation of Smith Six, Inc. (Incorporated by             -
        reference to Exhibit No. 10.1 of the Company's Quarterly Report
        on Form 10-Q for the Quarter Ended March 31, 1995)

10.60   By-Laws of Smith Six, Inc. (Incorporated by reference to Exhibit             -
        No. 10.2 of the Company's Quarterly Report on Form 10-Q for
        the Quarter Ended March 31, 1995)

10.61   Agreement of Limited Partnership of Smith Property Holdings Six              -
        L.P. (Incorporated by reference to Exhibit No. 10.3 of the
        Company's Quarterly Report on Form 10-Q for the Quarter
        Ended March 31, 1995)

10.62   Agreement of Limited Partnership of Smith Property Holdings Six              -
        (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.4 of the
        Company's Quarterly Report on Form 10-Q for the Quarter
        Ended March 31, 1995)

10.63   Certificate of Incorporation of Smith Seven, Inc. (Incorporated by           -
        reference to Exhibit No. 10.66 of the Company's Form 10-K for
        the year ended December 31, 1995)

10.64   By-Laws of Smith Seven, Inc. (Incorporated by reference to                   -
        Exhibit No. 10.67 of the Company's Form 10-K for the year
        ended December 31, 1995)

10.65   Agreement of Limited Partnership of Smith Property Holdings                  -
        Seven L.P. (Incorporated by reference to Exhibit No. 10.68 of the
        Company's Form 10-K for the year ended December 31, 1995)
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<S>     <C>                                                                      <C>
10.66   Commitment for Mortgage Loan to the Operating Partnership                    -
        from Northwestern Mutual Life Insurance Company
        (Incorporated by reference to Exhibit No. 10.69 of the Company's
        Form 10-K for the year ended December 31, 1995)
 
10.67   Third Amended and Restated Credit Agreement by and between                   -
        the Operating Partnership and PNC Bank, National Association,
        et. al. (Incorporated by reference to Exhibit No. 10.71 of the
        Company's Form 10-K for the year ended December 31, 1997)
 
10.68   First Amendment to Third Amended and Restated Credit
        Agreement between the Operating Partnership and PNC Bank,                    -
        National Association, et. al. (Incorporated by reference to Exhibit
        99.1 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1998)
                                                                                     -
10.69   Second Amendment to Third Amended and Restated Credit
        Agreement between the Operating Partnership and PNC Bank,
        National Association, et. al. (Incorporated by reference to Exhibit
        99.2 of the Company's Quarterly Report on Form 10-Q for the
        Quarter Ended June 30, 1998)                                                 -
 
10.70   First Amendment to First Amended and Restated Agreement of
        1994 Employee Stock and Unit Option Plan of Charles E. Smith
        Residential Realty, Inc. (Incorporated by reference to Exhibit 4.9
        in the Company's Registration Statement on Form S-8, File No.
        333-67421)                                                                   -
 
10.71   Second Amendment to First Amended and Restated Agreement                  E-5
        of 1994 Employee Stock and Unit Option Plan of Charles E.
        Smith Residential Realty, Inc.
 
10.72   Rights Agreement between Charles E. Smith Residential Realty,             E-6
        Inc. and First Union National Bank, as Rights Agent
 
   21   Subsidiaries of the Registrant                                            E-7

 23.1   Consent of Arthur Andersen LLP                                            E-8
 
   27   Financial Data Schedule                                                   E-9
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