<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, 1996,  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 12,982,883 Shares of Common Stock held by
non-affiliates of the Registrant was approximately $365,143,584 based upon the
closing price on the New York Stock Exchange for such stock on March 20, 1997.

     As of March 20, 1997, there were 13,232,953 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 1997 are incorporated by reference into Part III.
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                           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.
  metropolitan area; 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 in the Washington, D.C. metropolitan area.
  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 UPREIT, and 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 49.4% of the
  units of limited partnership interest ("Units") as of March 20, 1997, and its
  subsidiaries. The other limited partners of the Operating Partnership are the
  former limited and general partners of properties and the former owners of the
  property service businesses acquired by the Operating Partnership either at
  the time of its formation in June 1994 or thereafter (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 properties. The three Property Service
  Businesses are:

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  Smith Realty Company, which provides management, leasing, financing,
  development and insurance services; Consolidated Engineering Services, Inc.,
  which provides engineering and technical services; and Smith Management
  Construction, Inc., which provides tenant construction and 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, 1997, the Company, through the Operating Partnership and
  its subsidiaries, owned 44 multifamily apartment properties containing a total
  of 17,028 units (the "Multifamily Properties") and two retail centers
  containing approximately 436,000 square feet of retail space (the "Retail
  Properties"), all 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, 32 Properties, 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 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

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  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").

       On February 19, 1997, the Company consummated a second stock offering,
  issuing an additional 3,105,000 shares of Common Stock. Since the Formation
  Transactions and through March 15, 1997, the Operating Partnership developed
  one and acquired 14 Multifamily Properties with a total of 5,193 apartment
  units; 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 sales of property and
  distributions in excess of earnings allocated to minority interests, 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 will seek to acquire properties or portfolios with
  characteristics similar to the Company's portfolio in other markets that offer
  opportunities for profitable investment and long-term growth.


  FINANCING STRATEGY

       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 may reevaluate this
  financing policy from time to time in light of then current economic
  conditions, relative costs of debt and equity capital, market values of
  properties, growth and acquisition opportunities and other factors.  At
  December 31, 1996, the Company's debt to total market capitalization ratio was
  45.9%, and this ratio was reduced

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  further with the Company's stock offering in the first quarter of 1997.  The
  Company's board of directors may modify this financing policy and may increase
  or decrease the targeted ratio of debt to total market capitalization.  To the
  extent that the Company's board of directors determines to seek additional
  capital, the Company may raise such capital through additional equity
  offerings, debt financing or retention of cash flow (subject to provisions in
  the Internal Revenue Code of 1986, as amended [the "Code"] 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.  The Company currently has on file with the
  Securities and Exchange Commission an effective registration statement which
  allows the sale of up to $200,000,000 in debt or equity securities, of which
  approximately $112,000,000 remains after the secondary stock offering which
  occurred in the first quarter of 1997. 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 preferred stock and 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).  The Company's board of directors may decide
  to finance acquisitions through the exchange of properties or the issuance of
  additional shares of Common Stock, Units or other securities.


  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 that is
  relatively stable 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

       RESIDENTIAL MANAGEMENT AND LEASING.  The residential management and
  leasing business of Smith Realty Company, an operating subsidiary of the
  Company, is a long-established, integrated property management 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 20, 1997,
  manages 59 apartment properties (including the 44 Multifamily Properties and
  15 other multifamily communities with approximately 4200 apartment units). It
  also assists in the development and acquisition of additional multifamily
  properties and carries out a

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  periodic inspection program that addresses all aspects of the property and
  property management.

       RETAIL MANAGEMENT, LEASING, AND DEVELOPMENT.  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 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 two Retail Properties, with approximately 436,000 square feet
  of retail space, also provides such services for a fee to three other retail
  properties with approximately 293,000 square feet of retail space that are
  owned by affiliated third parties, and provides retail leasing and brokerage
  services for additional, unaffiliated third parties on a fee-for-service
  basis. Beginning in 1995, Smith Realty Company also contracted with an
  unaffiliated third party to provide development services for a proposed
  660,000 square foot retail project on a fee-for-service basis.
 
            FINANCING AND CORPORATE SERVICES.  The financing and corporate
  services businesses, also conducted through Smith Realty Company, enable a
  central office to provide supporting services in the areas of financing,
  insurance, legal advice, accounting, information systems, human resources,
  office services and marketing services to the Company and its subsidiaries, as
  well as to other companies. The finance department negotiates and administers
  all debt financing for the Company and its subsidiaries, and, for a fee, other
  properties owned by third parties (the majority of which are affiliated with
  Robert H. Smith and Robert P. Kogod, the Co-Chief Executive Officers and Co-
  Chairmen of the Board of the Company and the owners of approximately 12.4% of
  the shares and Units).  This responsibility includes obtaining new sources of
  funding by actively soliciting prospective lenders, monitoring, analyzing and
  negotiating changes in loan status and/or structure, and satisfying reporting
  requirements of lenders. Financing services were performed for approximately
  $242 million of refinancing in 1996. 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, and for specific properties.  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.

       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

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  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 1996, services were provided with
  respect to approximately 28 million square feet of facilities.

       INTERIOR CONSTRUCTION AND RENOVATION SERVICES.  The management
  construction 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 subsidiary 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 the construction phase. In
  1996, oversight was provided to over $58 million of construction activity.


  EMPLOYEES

       As of February 28, 1997, the Company and its subsidiaries had
  approximately 1,324 full-time and part-time employees, the latter primarily
  employed in on-site clerical positions. This total includes 614 employees who
  provide on-site property services and, in the Property Service Businesses, 430
  persons in its engineering and technical services subsidiary, 85 persons in
  its interior or construction and renovation subsidiary, and 192 persons in its
  residential and retail leasing and management, finance, and corporate services
  subsidiary.


  RECENT DEVELOPMENTS

       DEVELOPMENT PROPERTY.  The Company has executed a contract to purchase
  for $9.1 million approximately 17 acres of land for the development of an
  approximately 630-unit, multi-phase, mid-rise and garden apartment community
  in Springfield, Virginia.  The site is strategically located adjacent to a new
  Metrorail and commuter rail station which is under construction and a
  regional shopping mall, and offers convenient access to the I-495 Capital
  Beltway and I-395, a major route into Washington, D.C.  Budgeted costs for
  this project are expected to be approximately $60 million and construction is
  scheduled to commence early in the summer of 1997.  In addition, the Company
  is currently engaged in pre-development activities on two additional sites
  which are in desirable submarkets: a residential development site in Reston,
  Virginia, and an infill site in northwest Washington, D.C.

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       ACQUISITION PROPERTIES.  During 1996, the Company, through the Operating
  Partnership, acquired four properties containing 1,049 apartment units, as
  further described below.

       Charter Oak.  This 262-unit, garden-style, multifamily complex located in
  Reston, Virginia was acquired in March 1996 for approximately $13.7 million
  cash and 22,059 Operating Partnership Units valued at $0.5 million (based on
  the market price of the Company's stock on the date of the acquisition).  It
  is located in Virginia's fast growing high-tech corridor along the Dulles
  Access Road, adjacent to a golf course and within walking distance of Reston
  Town Center (a major retail and office complex).  During the fourth quarter of
  1996, Charter Oak had an average occupancy of approximately 97.1% and average
  monthly rental revenue per apartment unit of approximately $873.

       Governor Spotswood.  This 47-unit, garden-style, multifamily apartment
  complex located  in Old Town, Alexandria was acquired in March, 1996 for
  approximately $2.8 million in cash.  It was combined for management purposes
  with its sister property, Boulevard of Old Town, which the Company acquired in
  1995, and renamed Boulevard of Old Town Phase II.  It is adjacent to specialty
  boutique retailers and first class restaurants in the historic Old Towne area
  of  Alexandria.  During the fourth quarter of 1996, this property had an
  average occupancy of approximately 96.2% and average monthly rental revenue
  per apartment unit of approximately $798.

       Van Ness South.  This 625-unit, high-rise, multifamily apartment building
  in northwest Washington, D.C. was acquired in July, 1996 for approximately
  $41.8 million in cash.  This 11-story, luxury high-rise is located within
  walking distance of the Van Ness Metrorail station.  Its amenities include
  three levels of underground parking, a large outdoor swimming pool and a new
  fitness center.  During the fourth quarter of 1996, Van Ness South had an
  average occupancy of approximately 98.4% and average monthly rental revenue
  per apartment unit of approximately $994.

       1841 Columbia Road.  This 115-unit, high-rise, multifamily apartment
  building in northwest Washington, D.C. was acquired in August 1996 for
  approximately $5.3 million, consisting of assumed debt of approximately $3.3
  million and 79,600 Operating Partnership Units valued at $2.0 million (based
  on the market price of the Company's stock on the date of the acquisition).
  This eight-story high-rise is located near the Woodley Park Metrorail station
  in Washington, D.C.'s Adams Morgan neighborhood.  The Property includes
  approximately 16,000 square feet of street-level retail space, and among the
  tenants are a NationsBank branch office and several restaurants.  During the
  fourth quarter of 1996, the Property had an average occupancy of approximately
  97.5% and average monthly rental revenue per apartment unit of approximately
  $600.

       In addition to the above-described properties, the Company also acquired
  three multifamily properties with 1,828 apartment units in the first quarter
  of 1997, as further described below.

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       Crystal Plaza.  This 540-unit, high-rise, multifamily apartment building
  located in Crystal City, Arlington, Virginia, was acquired in February 1997
  for 307,079 Operating Partnership Units with an approximate value of $8.7
  million (based upon the price of the Company's stock on the date of the
  acquisition), and the assumption of an existing mortgage, for an approximate
  total cost of $43.1 million.  The property was developed and managed by the
  Smith Companies, predecessor to the Company, and remains subject to a 5.1% net
  profits interest in favor of an unaffiliated third party.  During 1996, this
  property had an average occupancy of 98.7% and average monthly rental revenue
  per apartment unit of approximately $1,167.

       Crystal Tower.  This 912-unit, high-rise, multifamily apartment building
  located in Crystal City, Arlington, Virginia, was acquired in February 1997
  for 842,544 Operating Partnership Units with an approximate value of $23.9
  million (based upon the price of the Company's stock on the date of the
  acquisition), $1.6 million in cash, and the assumption of an existing
  mortgage for an approximate total cost of $71.8 million.  The property was
  developed and managed by the Smith Companies, predecessor to the Company.
  During 1996, the property had an average occupancy of 97.6% and average
  monthly rental revenue per apartment unit of approximately $1,047.

       Kenmore.  This 376-unit, high-rise multifamily apartment building located
  in northeast Washington, D.C., was acquired in March, 1997 for 510,674
  Operating Partnership Units with an approximate value of $14.5 million
  (based upon the price of the Company's stock on the date of the acquisition)
  and the assumption of an existing mortgage, for an approximate total cost of
  $15.8 million.


  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.


  EXECUTIVE OFFICERS OF THE COMPANY

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

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       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 Secretary/Treasurer and a
  director of Charles E. Smith Management, Inc., which specializes in the
  management of office buildings.  Mr. Smith joined the Smith Companies in 1950.
  Mr. Smith is 68 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. Since 1964, Mr. Kogod has been the President,
  Chief Executive Officer and a director of Charles E. Smith Management, Inc.
  where he oversees and directs all phases of the leasing and management of the
  Smith Companies' office real estate portfolios.  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 65 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 61 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, and its treasury, accounting,
  controls and information systems departments.  Prior to joining the Company,
  Mr. Minami was the Chief Financial Officer for Ascent Entertainment Company
  since 1995,  and previous to that had been the Treasurer of Comsat Corporation
  and the Senior Vice President, Finance and Administration and Chief Financial
  Officer for Oxford Realty Services Corporation.  Mr. Minami is 40 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

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  Businesses.  Mr. Zimet has been a member of the Executive Committee of Charles
  E. Smith Management, Inc. for at least the last five years.  He has been the
  General Counsel and a Senior Vice President of Charles E. Smith Management,
  Inc. since joining the Smith Companies in 1983, and he became a Group Senior
  Vice President of Charles E. Smith Management, Inc. in 1991.  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 58 years old.

       ROGER L. WEEKS.  Mr. Weeks is Senior Vice President-Residential of the
  Company and Smith Realty Company, one of the Property Service Businesses.
  Since 1980, Mr. Weeks has been Senior Vice President and Department Head of
  the Residential Management Department for which he had overall property
  management and leasing responsibility for the entire multifamily residential
  management portfolio.  Mr. Weeks was also a member of the Executive Committee
  of Charles E. Smith Management, Inc. until 1994.  He joined the Smith
  Companies in 1967.  Mr. Weeks is a member of the Building Owners and Managers
  Association, former Treasurer of the National Apartment Association and past
  President of the Apartment and Office Building Association. Mr. Weeks is 55
  years old.

       MATTHEW B. MCCORMICK.  Mr. McCormick is the Senior Vice President-Retail
  of the Company and Smith Realty Company, one of the Property Service
  Businesses.  Since 1988, Mr. McCormick has been the Senior Vice President and
  Department Head of the Retail Group, where he is 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 36 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 was responsible for development and management of mixed-use
  properties. Mr. Neely is 51 years old.


  ITEM 2.  PROPERTIES

  GENERAL

       The 46 Properties consist of 44 Multifamily Properties and two Retail
  Properties, as described in more detail below. Thirty of the Multifamily
  Properties and both Retail Properties were acquired in connection with the
  Formation Transactions, two additional Multifamily Properties were acquired in
  1994, five additional Multifamily Properties were

                                       10
<PAGE>
 
  acquired and one additional Multifamily Property was developed and delivered
  in 1995, four additional Multifamily Properties were acquired in 1996 (one of
  which was later combined with another Property for operational and statistical
  purposes), and three additional Multifamily Properties were acquired in the
  first quarter of 1997.  In addition, the Company holds minority limited
  partnership interests in two other multifamily apartment properties 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 44 Multifamily Properties are located in the Washington, D.C.
  metropolitan area and contain a total of 17,028 garden, mid-rise, and high-
  rise apartment units, ranging in size from 115 to 1,065 units.  All of the
  Multifamily Properties are 100% owned by the Company and its subsidiaries. The
  Smith Companies developed and built 27 of the Multifamily Properties owned by
  the Company (not including the recently-completed Westerly at Worldgate, which
  was developed by the Company but constructed by an affiliate of the Smith
  Companies). In 1996, the average monthly rental revenue per unit was $883 and
  the average economic occupancy was 97.0% for the Core Residential Portfolio
  (Multifamily Properties acquired in the Formation Transaction or in other
  transactions prior to December 31, 1994.)

       Each of the Multifamily Properties is established in its local market and
  provides residents with numerous amenities and services, which may include as
  24-hour desk service, 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, 1996 (in the following table,
occupancy is based upon economic occupancy, which measures occupancy beginning
on the rent commencement

                                       11
<PAGE>
 
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):

                                       12
<PAGE>

                    CHARLES E. SMTIH RESIDENTIAL REALTY, INC.
 Residential Portfolio Statistics for the Twelve Months Ended December 31, 1996

<TABLE>
<CAPTION>
                                                                Number of       Number of       Monthly          Average
Property Type /                       Property        Year      Apartment        Sq. Ft.        Revenue          Economic    
Property Name                         Location        Built       Units         Per Unit       Per Unit         Occupancy     
--------------------------------  ----------------  ---------  -----------     -----------   ------------     ------------- 
<S>                               <C>               <C>        <C>             <C>            <C>             <C>           
Core Residential Portfolio                                                                                                
                                                                                                                          
  High-Rise                                                                                                               
    Albemarle                     Washington, D.C.     1959         235           1,097         $1,126           99.3%    
    Calvert - Woodley             Washington, D.C.     1954         136           1,001          1,046           99.8%    
    Cleveland House               Washington, D.C.     1955         216             894          1,001           98.3%    
    Corcoran House                Washington, D.C.     1961         138             464            757           99.5%    
    Courthouse Plaza              Arlington, VA       1988/90       396             772          1,134           97.8%    
    Crystal House I               Arlington, VA        1964         426             917            933           96.7%    
    Crystal House II              Arlington, VA        1965         402             938            905           96.3%    
    Crystal Place                 Arlington, VA        1987         180             894          1,210           97.6%    
    Crystal Square                Arlington, VA       1973/75       378           1,121          1,080           98.4%    
    Gateway Place                 Arlington, VA        1987         162             826          2,023           93.1%    
    Marbury Plaza                 Washington, D.C.     1966         672             997            621           95.3%    
    Skyline Towers                Fairfax Co., VA     1970/72       940           1,221            950           97.1%    
    Statesman                     Washington, D.C.     1961         281             593            739           98.6%    
    2501 Porter Street            Washington, D.C.     1988         202             760          1,356           96.7%    
    Water Park Towers             Arlington, VA       1988/89       360             881          1,486           97.8%    
                                                               ---------       ---------      ---------      ---------      
      Sub-Total / Average                                         5,124             956          1,018           97.3%    

   Mid-Rise   
     Berkeley                     Arlington, VA        1960         138             891            704           97.6%    
     Columbian Stratford          Arlington, VA        1959         227             942            719           98.2%    
     Executive Central            Arlington, VA        1960         230             903            749           98.8%    
     Executive North              Arlington, VA        1959         215             892            748           97.6%    
     Executive South              Arlington, VA        1961         266             842            727           98.1%    
     Windsor Towers               Arlington, VA        1965         280           1,025            760           96.9%    
                                                               ---------       ---------      ---------      ---------  
       Sub-Total / Average                                        1,356             920            737           97.9%    
                                                                                                                          
   Garden                                                                                                                 
     Bedford Village              Fairfax Co., VA      1967         752           1,070            859           96.1%    
     Car Barn                     Washington, D.C.    1981/87       196           1,311            823           96.9%    
     Columbia Crossing            Arlington, VA       1990/91       247             976          1,116           98.2%    
     Concord Village              Arlington, VA        1968         531           1,025            762           93.9%    
     Fort Chaplin                 Washington, D.C.    1963/65       549             983            603           96.5%    
     The Manor                    Montgomery Co., MD   1969         435             999            729           95.6%    
     Newport Village              Alexandria, VA      1969/71       937           1,115            862           98.3%    
     Orleans Village              Fairfax Co., VA     1965/67       851           1,061            787           96.9%    
     Oxford Manor                 Washington, D.C.     1968         227           1,005            596           94.7%    
     Patriot Village              Fairfax Co., VA     1973-77     1,065           1,162            851           96.7%    
     Potomac View                 Loudoun Co., VA      1978         192             965            708           97.8%    
                                                               ---------       ---------      ---------      ---------  
       Sub-Total / Average                                        5,982           1,073            801           96.6%    
                                                               ---------       ---------      ---------      ---------   
         Sub-Total / Average                                     12,462           1,008            883           97.0% 
                                                                                                                          
Residential Acquisition /                                                                                                 
 Development Portfolio                                                            
                                                                                  
  High-Rise                                                                       
    Suburban Tower                                                                   
     (acquired 1/95)              Montgomery Co., MD   1960         172             677            762           97.4%    
    Connecticut Heights                                                             
     (acquired 6/95)              Washington, D.C.   1920s/74       519             536            761           95.9%    
    The Bennington                                                                   
     (acquired 9/95)              Arlington, VA        1982         348             804            986           97.3%    
    Van Ness South                                                                  
     (acquired 7/96)              Washington, D.C.     1970         625             956            N/A            N/A              
    1841 Columbia Road                                                               
     (acquired 8/96)              Washington, D.C.     1923         115             634            N/A            N/A              
                                                               ---------       ---------      ---------      ---------    
      Sub-Total / Average                                         1,779             756            837           96.7%    

  Garden   
    Blvd. of Old Town /                                                              
     Gov. Spotswood                                                               
     (acquired 4/95,3/96)         Alexandria, VA       1941         159             603            723           96.8%    
    Westerly at Worldgate                                                                                                
     (opened 5/95)                Fairfax Co., VA      1995         320             921          1,063           92.8%    
    Oakwood                                                                          
     (acquired 12/95)             Vienna, VA           1980         218             968          1,001           93.9%    
    Charter Oak                                                                               
     (acquired 3/96)              Reston, VA           1970         262           1,097            N/A            N/A   
                                                               ---------       ---------      ---------      ---------    
      Sub-Total / Average                                           959             927            966           93.9%  
                                                               ---------       ---------      ---------      ---------    
        Sub-Total / Average                                       2,738             816            889           95.5%  
                                                               =========       =========      =========      =========  
All Residential Properties                                       15,200             974            884           96.9%  
                                                               =========       =========      =========      =========  

</TABLE> 

                                       13
<PAGE>
 
       The following table sets forth the total number of apartment units in the
  Core Residential Portfilio, the economic occupancy, and the average monthly
  rental revenue per unit as of the end of 1996 and in each of the previous five
  years:

<TABLE>
<CAPTION>
 
                   MULTIFAMILY PROPERTIES
                                                               Average Monthly
Year               Number of Units         Percent Occupied*   Revenue Per Unit
-----------------  ----------------------  -----------------   ----------------
<S>                <C>                     <C>                 <C>
1996                      12,462                  97.0%              $883
1995                      11,834                  97.2%              $862
1994                      11,834                  97.8%              $845
1993                      11,834                  97.8%              $818
1992                      11,587                  97.2%              $802
1991                      10,831                  96.2%              $768
</TABLE>

  * Based on the economic occupancy of stabilized properties in the portfolio
  for one year prior to the commencement of the specified year.


  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.  Both Retail Properties lease health club facilities to entities
  controlled by Messrs. Smith and Kogod pursuant to leases which expire on
  December 31, 2015.

       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 development project of the
  Company that was completed in the spring of 1995. In addition to this
  immediate market, this Property is located in Fairfax County, the highest
  median income county in the country. It contains the 108,670 square foot
  Worldgate Athletic Club, a Loews 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 99.8% during 1996. Approximately 17.3% of
  the leases, based on net rentable area, are scheduled to expire prior to the
  year 2001.

       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 owned by the Company), all within
  walking distance.  The Property has 204,914 square feet of leasable area and
  had an average

                                       14
<PAGE>
 
  occupancy rate of 95.1% in 1996.  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 20.1% of the leases, based on net rentable
  area, are scheduled to expire prior to the year 2001.

       The following table sets forth certain additional information relating to
  the Retail Properties as of December 31, 1996 (figures include space leased to
  two health clubs affiliated with Messrs. Smith and Kogod):

<TABLE>
<CAPTION>
 
RETAIL PROPERTIES
                                                                                  Average     Average   
                                              Gross                   Average     Base Rent   Gross Rent 
                                     Year     Leasable    Number      % Leased    Per SF      Per  SF     
Property Name    Location          Completed  Area (SF)   of Stores   1996        Leased      Leased
---------------------------------------------------------------------------------------------------------
<S>              <C>               <C>        <C>         <C>         <C>         <C>         <C>

Skyline Mall     Fairfax Co., VA     1977     204,914          40       95.1%      $11.40       $16.06

Worldgate        Herndon, VA         1991     230,926          40       99.8%      $19.57       $26.45
 Centre                                       -------                   ----       ------       ------
                                              435,840                   97.6%      $15.83       $21.69
                                                                                   ------       ------
</TABLE>

  LAND

       The Company has executed a contract to purchase an unimproved 17.03
  acre site in Springfield, Virginia for the construction thereon of a 630-unit,
  multi-phase, low-rise and mid-rise multifamily apartment complex. The Company
  also has a contract and intends to acquire a 36-acre site in Reston, Virginia
  for the construction thereon of an approximately 375-unit multifamily
  apartment complex.  The Company may, from time-to-time, acquire unimproved
  land for the purpose of future development.


  PROPERTY MARKETS

       The Company believes that the demographic and economic trends and
  conditions in the Washington, D.C. metropolitan area, the market where the
  Properties are located, indicate a potential for continued high occupancy and
  moderate rental rate growth in 1997.

       All of the Company's Properties are located in the Washington, D.C.
  metropolitan area, which traditionally has been, and which the Company
  believes will continue to be, among the strongest regions in the United States
  for multifamily rental properties and one of the most stable markets compared
  to many other markets which encounter significant fluctuations over time.  The
  region is the country's fifth largest employment market with over 2.9 million
  jobs, and is projected to add 648,000 jobs over the period 1993 to 2005, an
  average increase of over 50,000 jobs annually, according to projections
  prepared by the U.S. Dept. of Commerce, Bureau of Economic Analysis, and
  released in mid-1996.  This is the

                                       15
<PAGE>
 
  third largest projected employment increase of all U.S. cities as indicated on
  the following table:

  PROJECTED JOB GROWTH FOR MAJOR U.S. CITIES 1993 TO 2005
  -------------------------------------------------------

<TABLE>
<CAPTION>
 
 
Metro Area (MSA)                Job Increase Rank  Projected Jobs Added
------------------------------  -----------------  --------------------
<S>                             <C>                <C>
Chicago, IL                           1.               763,000
Los Angeles-Long Beach, CA            2.               685,000
WASHINGTON, DC-MD-VA                  3.               648,000
Boston, MA                            4.               600,000
Atlanta, GA                           5.               598,000
Orange County, CA                     6.               525,000
Houston, TX                           7.               515,000
Dallas, TX                            8.               486,000
Phoenix-Mesa, AZ                      9.               469,000
San Diego, CA                        10.               429,000
</TABLE>
------------------
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis, May, 1996


       According to the same Department of Commerce projections, the Washington
  D.C. metro area is also projected to have the third largest population
  increase of all U.S. cities as shown in the following table:

  PROJECTED POPULATION GROWTH FOR MAJOR U.S. CITIES 1993 TO 2005
  --------------------------------------------------------------
<TABLE>
<CAPTION>
 
                                    Population        Projected Total
Metro Area (MSA)                 Increase Rank (1)  Population Increase
-------------------------------  -----------------  -------------------
<S>                              <C>                <C>
Riverside-San Bernadino, CA              1.               928,000
Los Angeles, Long Beach, CA              2.               927,000
WASHINGTON, D.C.-MD-VA                   3.               744,000
Atlanta, GA                              4.               732,000
Chicago, IL                              5.               716,000
Houston, TX                              6.               673,000
Phoenix-Mesa, AZ                         7.               617,000
San Diego, CA                            8.               595,000
Orange County, CA                        9.               531,000
Boston, MA, NH                          10.               518,000
</TABLE>
-------------------
(1) Reflects rank increase in population by number of people
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis, May 1996

        A significant factor contributing to the employment and population
  increases projected for the Washington D.C. metropolitan area is the
  continuing growth of the

                                       16
<PAGE>
 
  technology sector, particularly the information technology segment.  The
  Washington area is estimated to be similar in number of technology jobs
  (256,000) to San Jose/Silicon Valley in California (283,000) and Boston/Route
  128 in Massachusetts (311,500), according to a study conducted by The Center
  for Regional Analysis, George Mason University, using 1992 data.  This study
  also concluded that the technology segment in the Washington D.C. area is
  "...most likely, the fastest growing" of the three regions.

       The continuing strength of the technology sector has been a key factor
  enabling the region to maintain economic growth notwhithstanding Federal
  Government downsizing over the past three years. Over the three-year period
  1994 through and including 1996, 131,900 new wage and salary jobs were added
  in the region, which more than offset 44,100 Federal government jobs
  "downsized" over the same period, resulting in a net job increase of 87,800
  jobs over the period, according to data derived by the governments of the
  District of Columbia, Maryland and Virginia from original data compiled by the
  Bureau of Labor Statistics. Economic growth in the Washington metro area in
  1996 was adversely affected by the 1996 Federal budget stalemate and related
  government shutdowns, however 27,400 new jobs were added during the year,
  which offset the loss of 14,800 Federal government jobs during this period,
  resulting in a net job increase of 12,600. In recent years employment growth
  has been considerably stronger in the Northern Virginia segment of the
  metropolitan area (33,600 net increase in 1996), which is the sector where the
  majority of the Company's properties are located (76% of units), and the
  Company believes that this trend will continue due to the concentration of
  technology firms in Northern Virginia.

       Demand for multi-family rental apartments continues to be strong in the
  Washington, D.C. metropolitan area as evidenced by high occupancy rates.
  Annual surveys of approximately 80% of comparable investment grade apartment
  properties conducted by the REIS Reports, Inc. have indicated that the overall
  market-wide occupancy rates were 96.4% in January 1997, 96.5% in the first
  quarter of 1996, and 95.9% in the first quarter of 1995. The average occupancy
  rate of the Company's Core Residential Portfolio was 97.0% in 1996, which is
  higher than the overall market average (which was determined on a physical
  occupancy basis that typically yields a slightly higher occupancy percentage
  than the economic basis on which the Company's occupancy percentage is
  calculated). The REIS Reports, Inc. forecast in March 1996 that average annual
  apartment occupancy in the Washington metropolitan area in the 1997-2001
  period will be between 95.7% and 96.9%, and annual rental rate increases will
  average between 3.8% and 4.6%, in both cases above its forecast for the U.S.
  averages.

       The supply of multifamily properties has been increasing moderately in
  the Washington metropolitan area 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 numbers of multifamily permits issued
  in the area were 5,202 in 1994, 5,952 in 1995 and 7,786 in 1996, and these
  data include 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 Highway 495, the Capital Beltway.

                                       17
<PAGE>
 
       Overall, the Company believes that the anticipated increases in
  employment and population projected for the Washington D.C. area, together
  with moderate 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 investment values,
  and will also allow new development opportunities.

  MORTGAGE FINANCING

       Thirty-three of the 43 Properties owned at December 31, 1996 were
  subject to Mortgage Loans aggregating approximately $416,808,000 as of
  December 31, 1996. The Mortgage Loans are collateralized by nonrecourse first
  lien mortgages or deeds of trust on Properties organized into four pools
  ("Mortgage Pool One," "Mortgage Pool Two," "Mortgage Pool Three," and
  "Mortgage Pool Four", as shown in the chart below) and three individual loans
  (the "Acquisition Mortgages"), and bear interest at a weighted average
  interest rate of 8.01% at December 31, 1996. The Properties collateralizing
  each Mortgage Loan, the outstanding principal balances as of December 31,
  1996, the applicable interest rates, and the maturity dates for each Mortgage
  Loan are set forth in the chart below.

       Each of the related loan agreements for Mortgage Pool One and Mortgage
  Pool Two requires the payment of interest only and contains cross-collateral
  and cross-default provisions among the separate financing partnership
  borrowers in each pool.  Prepayment of these loans would be subject to a yield
  maintenance premium. 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. In January, 1996 this financing was modified
  to extend the term for an additional five years to June 30, 2009, and was
  cross-collateralized with a new $83 million permanent line of credit from the
  same lender, as described below.  Certain predecessor partners executed
  guarantees for $42 million of the mortgage loans secured by Mortgage Pool
  Three.  The loan secured by Mortgage Pool Four 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, 1996), 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.

       The Acquisition Mortgages relate to the 1995 and 1996 acquisitions of
  three Properties by the Company. The Acquisition Mortgage for Connecticut
  Heights was assumed in connection with the purchase of this Property on June
  30, 1995. The outstanding balance as of December 31, 1996, was $17,245,000 (it
  has subsequently been significantly reduced) and it matures on June 30, 1997.
  The loan amortizes through maturity and has a variable

                                       18
<PAGE>
 
  interest rate equal to a blended LIBOR rate plus 1.70% (7.2% as of December
  31, 1996). The Acquisition Mortgage for the Bennington was assumed in
  connection with the purchase of this Property on September 29, 1995. The
  outstanding balance as of December 31, 1996, was $12,870,000, and it matures
  on October 31, 2020. The loan amortizes through maturity and carries a fixed
  interest rate of 7.50%.  The Acquisition Mortgage for 1841 Columbia Road was
  assumed in connection with the purchase of this Property on August 1, 1996.
  The outstanding balance as of  December 31, 1996, was $3,244,000, at a fixed
  interest rate of 9.00% per annum and a maturity date of August 1, 1999.

       In addition to the mortgage debt shown on the chart below, a construction
  loan is secured by the Westerly, a property developed by the Company. This
  interest-only loan had an outstanding balance of $17,686,000 on December 31,
  1996, carried a blended floating interest rate of 7.32% at year end, and was
  to have matured on June 1, 1997; it has subsequently been repaid in full.

<TABLE> 
<CAPTION> 

                                                    12/31/96
  Mortgage Pool/                                    Outstanding     Interest     Maturity
  Collateral              Location                  Principal       Rate         Date
  ------------------------------------------------------------------------------------------
  <S>                     <C>                       <C>             <C>        <C> 
  Mortgage Pool One                                 $110,140,000    8.01%      June 30, 1999
  -----------------                                                     
    Columbian Stratford   Arlington, Virginia
    Corcoran House        Washington, D.C.
    Crystal House I       Arlington, Virginia
    Crystal House II      Arlington, Virginia
    Executive North       Arlington, Virginia
    Marbury Plaza         Washington, D.C.
    Oxford Manor          Washington, D.C.
    Skyline Towers        Fairfax County, Virginia
    Statesman             Washington, D.C.
    Water Park Towers     Arlington, Virginia
    Windsor Towers        Arlington, Virginia

  Mortgage Pool Two                                 $125,214,000    8.27%      June 30, 2001
  -----------------                                                     
     Bedford Village      Fairfax County, Virginia
     Car Barn             Washington, D.C.
     Concord Village      Arlington, Virginia
     Crystal Place        Arlington, Virginia
     Crystal Square       Arlington, Virginia
     Executive Central    Arlington, Virginia
     Executive South      Arlington, Virginia
     Fort Chaplin         Washington, D.C.
     Newport III (1)      Alexandria, Virginia
     Orleans Village      Fairfax County, Virginia
</TABLE> 

                                       19
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                    12/31/96
  Mortgage Pool/                                    Outstanding     Interest     Maturity
  Collateral              Location                  Principal       Rate         Date
  ------------------------------------------------------------------------------------------------
  <S>                     <C>                       <C>             <C>          <C> 
  Mortgage Pool Three                               $117,000,000    7.99%        June 30, 2009 (2)
  --------------------                                                       
     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.
 
  Mortgage Pool Four                                $ 31,095,000   8.24%         August 1, 2009 (3)
  --------------------
     Patriot Village      Fairfax County, Virginia
 
  Acquisition Mortgages
  ---------------------
     Connecticut Heights  Washington, D.C.          $ 17,245,000   Variable(4)   June 30, 1997
     The Bennington       Arlington, Virginia       $ 12,870,000   7.5%          October 31, 2020
     1841 Columbia Road   Washington, D.C.          $  3,244,000   9.00%         August 1, 1999
                                                    ------------   --------
                                                    $416,808,000   8.01%
  ------------------------------------------------------------------------------------------------
</TABLE> 

  (1)  Operated as a single property, but divided for collateralization
       purposes.
  (2)  Twenty-five year amortization begins June 30, 1999.  Also, reflects a
       five year extension agreed to in January 1996.
  (3)  Thirty-year amortization begins in August 2004.
  (4)  Interest rate is based on LIBOR plus 1.70%.


  LINES OF CREDIT

       The Company has a $100,000,000 revolving line of credit with PNC Bank,
  NationsBank, and First Bank, of which $82,050,000 was outstanding at December
  31, 1996. Amounts outstanding bear interest at a selected LIBOR rate plus
  1.625% (7.155% at December 31, 1996). The Company pays a fee of .125% on any
  unused portions of the line of credit plus the costs of setting up the credit
  facility. The facility expires on June 30, 1997, with two one-year extension
  options thereafter on the same terms. Borrowings under this line of credit are
  collateralized by the Albemarle, Worldgate Centre, Manor, Potomac View,
  Suburban Tower, Boulevard of Old Town/Governor Spotswood, and Van Ness South
  apartments properties. This line of credit was repaid in the amount of $54.4
  million in the first quarter of 1997. See

                                       20
<PAGE>
 
  "Management's Discussion and Analysis of Financial Condition and Results of
  Operations" below.

       In January, 1996, the Company secured a new $83 million credit facility
  from Northwestern Mutual Life to be used for property acquisitions. It expires
  in June 2004 and for the first two years provides for an interest rate that is
  fixed at the time of each acquisition at a spread of 1.50% over the rate of
  10-year Treasury Bills. Any properties acquired in this fashion will secure
  the facility, and it is cross-collateralized with Mortgage Pool Three.  In
  January 1996, the Company drew $16,000,000 under this credit facility (and
  reduced by a like amount the outstanding balance under its other line of
  credit) and collateralized it with the Oakwood property; this line component
  bears interest at a fixed rate of 7.09%. In March, 1996, the Company drew
  $14,000,000 under this credit facility and collaterized it with the Charter
  Oaks property; this line component bears interest at a fixed rate of 7.48%.
  The blended rate for the two components is 7.2%.  See "Management's Discussion
  and Analysis of Financial Condition and Results of Operations" below.

       Subsequent to the Company's stock offering in the first quarter of 1997 
  and the related debt repayment, the Company had approximately $126 million of 
  unused borrowing capacity available on lines of credit.

  ITEM 3.   LEGAL PROCEEDINGS.

       The Company previously reported on a suit filed against Smith Realty
  Company, alleging sexual harassment and employment discrimination based on
  sexual preference pursuant to Title VII of the Civil Rights Act of 1964, and
  the Company's motion for summary judgment, which was granted in full on June
  7, 1996, resulting in a dismissal of all claims.  Although the plaintiff has
  appealed to the United States Court of Appeals for the Fourth Circuit for a
  review of the judgment, and such request is not expected to be considered
  until early 1997, the Registrant reaffirms its belief that an adverse outcome
  in the remaining litigation would not have a material adverse impact on the
  Registrant's financial condition or results of operations, and, accordingly,
  the Company will no longer report on these proceedings in its filings with the
  Commission.

       The Company has previously reported on two lawsuits brought in 1994 by
  Alder Branch Realty Limited Partnership, a limited partner in Plaza Associates
  Limited Partnership ("Plaza") and Tower Associates Limited Partnership
  ("Tower"), whose multifamily properties are currently being managed by Smith
  Realty Company ("SRC"), one of the Company's Property Services Businesses,
  against Robert H. Smith, as a general partner of Plaza and Tower, its managing
  agent, Charles E. Smith Management, Inc. ("CES"), whose residential management
  business was purchased by the Registrant in the Formation Transactions, and
  other present or former officers of CES.  These suits alleged breaches of
  fiduciary duties by the general partners and the payment of unfair and
  excessive management fees.  Because the Registrant did not believe that the
  outcome of the suits would jeopardize the continued management of Plaza's and
  Tower's multifamily properties by SRC or have a material impact on other
  properties which are managed by SRC but which did not participate in the
  Formation Transactions, or that an adverse outcome in such litigation would
  have a material adverse effect on the Registrant's financial condition or
  results of operations, the Registrant previously stated that it would no
  longer report on these proceedings in its filings with the Commission.  It
  also previously reported a lawsuit filed

                                       21
<PAGE>
 
  on May 31, 1996, by the same plaintiff against the Registrant and its general
  partners, Charles E. Smith Residential Realty, Inc., as well as two of the
  three general partners of Tower, alleging the payment of unfair and excessive
  management fees and breaches of fiduciary duties by the named general partners
  of Tower.  The latter suit sought the restitution of fees paid to SRC by
  Tower, a rescission of the management agreement, and compensatory and punitive
  damages in unspecified amounts.  All three of these lawsuits have been
  withdrawn with prejudice pursuant to a settlement agreement entered into on
  November 8, 1996 which did not require any contribution by the Company or its
  subsidiaries, and, accordingly, the Company will no longer report on these
  proceedings in its filing with the Commission.

       Other than as set forth above, neither the Company nor the Property
  Service Businesses is presently subject to any material litigation nor, to the
  Company's knowledge, is any material litigation threatened against the Company
  or the Property Service Businesses other than routine litigation arising in
  the ordinary course of business expected to be covered by liability insurance,
  which 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.

                                       22
<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.

       On June 30, 1994, the Company sold 416,667 shares of Common Stock for a
  total of $10,000,000 in cash in a private placement of securities.  The
  Purchasers were Robert H. Smith and Robert P. Kogod (Co-Chairmen of the Board
  and Co-Chief Executive Officers of the Company), their spouses, children, and
  other family members, and the sale was completed without an underwriter, the
  payment of sales commissions, or discounts.  The Company believes that such
  sale was exempt from registration under the Securities Act of 1933, as amended
  (the "Securities Act") by virtue of Section 4(2) of the Securities Act and the
  provisions of Rule 506 of Regulation D promulgated thereunder, the conclusion
  of the Company, after diligent investigation, that all purchasers were
  "accredited investors" as defined in Rule 501 and met the other requirements
  of Registration D, the delivery to each prospective purchaser of appropriate
  written materials, and the execution by each purchaser of a qualifying
  subscription agreement.

       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, 1995, to March 31, 1995        $25.375   $21.875   $0.475
April 1, 1995, to June 30, 1995           $24.250   $22.250   $0.475
July 1, 1995, to September 30, 1995       $24.000   $22.500   $0.490
October 1, 1995, to December 31, 1995     $23.750   $22.250   $0.490
 
January 1, 1996, to March 31, 1996        $24.375   $23.000   $0.490
April 1, 1996, to June 30, 1996           $24.125   $22.500   $0.490
July 1, 1996, to September 30, 1996       $24.875   $22.875   $0.505
October 1, 1996, to December 31, 1996     $29.875   $23.875   $0.505
 
</TABLE>

       On March 20, 1997, the last reported sale price of the shares of Common
  Stock on the NYSE was $28.125. On March 20, 1997, the Company had
  approximately 428 shareholders of record.

                                       23
<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, 1996, 1995, 1994,
  1993 and 1992 have been derived from the financial statements of the Company
  and the Predecessor audited by Arthur Andersen LLP, independent accountants.

                                       24
<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    January 1, 1994  Year Ended December 31, 
(Dollars in Thousands,              ----------------------          to                 to        -----------------------  
Except Per Unit/Share Data)           1996          1995     December 31, 1994   June 29, 1994    1993            1992
---------------------------         --------      --------   -----------------  ---------------  -------       ---------
<S>                                 <C>           <C>        <C>                <C>              <C>           <C> 
OPERATING DATA
  Rental properties
    Revenues (1)                    $166,283      $144,909           $67,391        $ 63,496     $124,187      $122,815
    Expenses                          93,710        81,885            38,197          36,039       70,681        69,766
  Equity in income of Property 
   Service Businesses                  7,846         6,868             3,785           2,798        7,098         3,482
  Corporate general & 
   administrative expenses             3,025         2,842             1,171           1,550        3,137         3,014
  Interest income                      1,029         1,424               825             970        1,940         1,711
  Interest expense                    43,606        37,421            17,392          24,798       46,815        46,281
  Income/(loss) before 
   extraordinary items                34,817        31,053            15,241         (10,700)      12,592         8,947
  Net income/(loss) of the                                                                                     
   Operating Partnership            $ 34,817      $ 31,053          $ 15,241        $(25,895)    $ 14,691      $  8,947
                                    --------      --------          --------        --------     --------      ---------
  Net income attributable 
   to shareholders (2)              $ 10,977      $  7,529          $  6,532        
                                    --------      --------          --------                                            
  Net income per share (3)          $   1.11      $   0.81          $   0.72
                                                     
OTHER DATA                                           
                                                     
  Funds from Operations (4):                         
                                                     
  Net Income of the Operating 
   Partnership 
   Plus                             $ 34,817      $ 31,053          $ 15,241
    Depreciation and amortization 
      of rental property              17,931        16,258             7,738
                                    --------      --------          --------                                            
  Funds from Operations of the 
   Operating Partnership            $ 52,748      $ 47,311          $ 22,979
                                    ========      ========          ========                                            

  Funds from Operations 
   attributable to shareholders (5) $ 23,869      $ 20,391          $  9,848

  Net cash flows provided by
   (used in):
    Operating activities            $ 50,981      $ 53,858          $ 19,877
    Investing activities             (71,447)      (67,675)          (26,666)
    Financing activities              14,886         4,945            25,139

  Cash dividends per share          $  1.975      $  1.915          $   0.48

  Average residential occupancy
   rate (6)                             97.0%         97.2%             97.8%                        97.8%         97.2%  
  Average monthly revenue                                                           
   per apartment unit (7)           $    883      $    862          $    845                     $    818      $    802    
  Number of apartment units -                                                       
   core portfolio (6) (7)             12,462        11,834            11,834                       11,834        11,587
                                                                                                                         
BALANCE SHEET DATA                                                                                                       
  Rental properties, net (8)        $470,093      $414,490          $315,213                     $295,544      $303,545  
  Total assets                       522,211       469,322           391,189                      357,861       366,430       
  Mortgage loans                     416,808       413,973           383,821                      573,867       549,060       
  Shareholders' equity/                                                             
   partners' (deficit) (8)           (37,379)      (31,623)          (37,520)                    (216,006)     (182,630)        
</TABLE> 

                                       25
<PAGE>
 
                     FOOTNOTES TO SELECTED FINANCIAL DATA

1.   Includes revenues from the two retail properties of $10,176 in 1996, 
     $10,418 in 1995, $8,990 in 1994, $8,048 in 1993 and $8,827 in 1992.

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

3.   Per share amounts are based on weighted average shares outstanding of 
     9,913,308 in 1996, 9,310,929 in 1995, and 9,098,504 in 1994.

4.   Funds from Operations (FFO) 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 distributions in excess of earnings allocated to Minority Interest,
     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.

5.   Represents the Company's pro rata share of 45.3% in 1996, 43.1% in 1995,
     and 42.9% in 1994.

6.   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 percentage.

7.   Average monthly revenue per apartment unit consists of total residential
     property revenue for the core portfolio divided by the respective number of
     apartment units divided by the number of months in the period.

8.   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 of $(37,379), $(31,623) and $(37,520) as
     of December 31, 1996, 1995 and 1994, respectively, is net of $(244,208)
     contribution by Predecessors of assets at historical cost, net of
     liabilities.


                                       26
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.

BACKGROUND

     The following 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 results of operations presented in the
Consolidated Statements of Operations and discussed below for the years ended
December 31, 1996 and 1995, and for the period from June 30, 1994 to December
31, 1994 represent the results of operations of Charles E. Smith Residential
Realty, Inc. (the "Company"). The results presented in the financial statements
for the CES Group (the "Predecessor") cover the period from January 1, 1994 to
June 29, 1994.

     The following discussion compares historical results of operations for the
years ended December 31, 1996 and 1995 and compares historical results for the
years ended December 31, 1995 and 1994. In analyzing the results for 1994,
management has summarized the Company's and CES Group's results of operations
for 1994.

THE COMPANY

     Charles E. Smith Residential Realty, Inc. is a public equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. 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 ("UPREIT"), under which all of the Company's properties,
property interests, and business assets are owned by, and its operations are
conducted through, the Operating Partnership and its subsidiaries.

     On June 30, 1994, the Company raised net proceeds of approximately $201.4
million in equity through an initial public offering and a private placement
(the "Offerings") totaling approximately 9.0 million 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.  The
Company is the sole general partner of the Operating Partnership. In addition,
simultaneous with the above transaction, the Operating Partnership, through the
financing partnerships, issued mortgage debt secured by the properties.

     As of December 31, 1996, the Company, through the Operating Partnership and
its subsidiaries, owns 41 multifamily properties and two retail properties which
are located in the Washington, D.C. metropolitan area. The multifamily
properties consist of the following:

                                       27
<PAGE>
 
<TABLE>
<CAPTION>
 
                                    Number of
                             ---------------------
            Type              Properties    Units
---------------------------   ----------  --------
<S>                           <C>         <C>
Core Portfolio                 
   High-Rise                       15      5,124
   Mid-Rise                         6      1,356
   Garden/Townhomes                11      5,982
                               ------     ------
                                   32     12,462
                               ------     ------
Acquisitions & Development     
   High-Rise                        5      1,779
   Garden/Townhomes                 4        959
                               ------     ------
                                    9      2,738
                               ------     ------
                                   41     15,200
                               ======     ======
</TABLE>

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

        The Operating Partnership, through the Property Service Businesses,
provides a range of services to the properties on essentially a cost basis and
to third-party clients and affiliated partnerships on a fee basis as follows:

        .  Multifamily and Retail Property Management Services provides property
           management and leasing services to multifamily and retail properties.

        .  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; preventive
           maintenance; management of building environmental systems; and repair
           and replacement of mechanical/electrical systems. This business also
           provides facilities management services for outside parties including
           condominium associations, banks, universities, and government
           agencies.

        .  Financing Services provides negotiation, administration and execution
           of debt refinancing including sourcing funding alternatives,
           soliciting prospective lenders, monitoring, analyzing and negotiating
           changes in loan status and/or structure, and satisfying reporting
           requirements of lenders.

                                       28
<PAGE>
 
RENTAL PROPERTIES

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

<TABLE> 
<CAPTION> 

                                                             CES Residential Realty, Inc.         CES Group
                                                          --------------------------------        ---------
                                                          Year Ended December 31,                 
                                                          -----------------------            
                                                                                     6/30/94       1/1/94  
                                                                                        to           to    
                                                            1996           1995      12/31/94      6/29/94 
                                                          --------       --------    --------     -------- 
<S>                                                       <C>            <C>         <C>          <C>      
Multifamily Properties - Core/(1)/                                                                        
           Revenues                                       $132,111       $127,745     $ 62,269    $ 59,628 
           Expenses                                        (61,248)       (58,566)     (29,037)    (26,867)
                                                          --------       --------     --------    --------
           Income before depreciation                      $70,863       $ 69,179     $ 33,232    $ 32,761
                                                          ========       ========     ========    ======== 
Multifamily Properties -                                                                                  
Acquisitions & Development                                                                                
           Revenues                                       $ 23,996       $  6,746     $      -    $      -
           Expenses                                        (10,964)        (3,614)           -           -
                                                          --------       --------     --------    --------
           Income before depreciation                     $ 13,032       $  3,132     $      -    $      - 
                                                          ========       ========     ========    ========
Retail Properties                                                                                         
           Revenues                                       $ 10,176       $ 10,418     $  5,122    $  3,868
           Expenses                                         (3,567)        (3,447)      (1,422)     (1,546)
                                                          --------       --------     --------    --------
           Income before depreciation                     $  6,609       $  6,971     $  3,700    $  2,322
                                                          ========       ========     ========    ========
Total Rental Properties                                                                                   
           Revenues                                       $166,283       $144,909     $ 67,391    $ 63,496
           Expenses                                        (75,779)       (65,627)     (30,459)    (28,413)
           Depreciation and amortization                   (17,931)       (16,258)      (7,738)     (7,626)
                                                          --------       --------     --------    --------
Income from Rental Properties                             $ 72,573       $ 63,024     $ 29,194    $ 27,457
                                                          ========       ========     ========    ======== 
</TABLE>

/(1)/ "Core" represents properties owned as of December 31, 1994.

OCCUPANCY RATES

          Average occupancy of the Company's core multifamily properties
compares favorably with the Washington, D.C. metropolitan area 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:

                                       29
<PAGE>
 
<TABLE>          
<CAPTION>
                                 Occupancy Percent
                               ---------------------
                    Company    Washington DC Market
                  -----------  ---------------------
<S>               <C>          <C>
             
 1996             97.0% /(1)/         96.4%
 1995             97.2% /(2)/         95.8%
 1994             97.8% /(2)/         95.2%
</TABLE>

/(1)/  Includes 32 properties containing 12,462 apartment units
/(2)/  Includes 30 properties containing 11,834 apartment units


     Market-wide data from the surveys conducted by The REIS Reports, Inc. are
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 3.4% in 1996 as compared with 1995, and 2.1%
in 1995 (based on properties owned as of June 30, 1994) as compared with 1994.

     A schedule of portfolio statistics follows:

                                       30
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                        RESIDENTIAL PORTFOLIO STATISTICS
                      For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
                                                              Number of   Average    Monthly   Average    
                                                    Property  Apartment   Sq. Ft.    Revenue   Economic
Property Name                                        Type       Units    Per Unit   Per Unit   Occupancy
---------------------------  -                     ---------  ---------  ---------  ---------  ---------
<S>                                                <C>        <C>        <C>        <C>        <C>     
CORE RESIDENTIAL PORTFOLIO                                                                             
                                                                                                       
 VIRGINIA                                                                                              
    Bedford Village                                Garden        752     1,070      $  859        96.1%
    Berkeley                                       Mid-Rise      138       891         704        97.6%
    Columbia Crossing                              Garden        247       976       1,116        98.2%
    Columbian Stratford                            Mid-Rise      227       942         719        98.2%
    Concord Village                                Garden        531     1,025         762        93.9%
    Courthouse Plaza                               High-Rise     396       772       1,134        97.8%
    Crystal House I                                High-Rise     426       917         933        96.7%
    Crystal House II                               High-Rise     402       938         905        96.3%
    Crystal Place                                  High-Rise     180       894       1,210        97.6%
    Crystal Square                                 High-Rise     378     1,121       1,080        98.4%
    Executive Central                              Mid-Rise      230       903         749        98.8%
    Executive North                                Mid-Rise      215       892         748        97.6%
    Executive South                                Mid-Rise      266       842         727        98.1%
    Gateway Place                                  High-Rise     162       826       2,023        93.1%
    Newport Village                                Garden        937     1,115         862        98.3% 
    Orleans Village                                Garden        851     1,061         787        96.9%
    Patriot Village                                Garden      1,065     1,162         851        96.7%
    Potomac View                                   Garden        192       965         708        97.8%
    Skyline Towers                                 High-Rise     940     1,221         950        97.1%
    Water Park Towers                              High-Rise     360       881       1,486        97.8%
    Windsor Towers                                 Mid-Rise      280     1,025         760        96.9%
                                                              ------     -----      ------       ------
          Subtotal/Average                                     9,175     1,032         920        97.1%
                                                                                                       
 WASHINGTON, D.C.                                                                                      
    Albemarle                                      High-Rise     235     1,097       1,126        99.3%
    Calvert-Woodley                                High-Rise     136     1,001       1,046        99.8%
    Car Barn                                       Garden        196     1,311         823        96.9%
    Cleveland House                                High-Rise     216       894       1,001        98.3%
    Corcoran House                                 High-Rise     138       464         757        99.5%
    Fort Chaplin                                   Garden        549       983         603        96.5%
    Marbury Plaza                                  High-Rise     672       997         621        95.3%
    Oxford Manor                                   Garden        227     1,005         596        94.7%
    Statesman                                      High-Rise     281       593         739        98.6%
    2501 Porter Street                             High-Rise     202       760       1,356        96.7%
                                                              ------     -----      ------       ------
          Subtotal/Average                                     2,852       935         790        97.2%
                                                              ------     -----      ------       ------
 MARYLAND                                                                                              
   The Manor                                       Garden        435       999         729        95.6%
                                                              ------     -----      ------       ------ 
          Subtotal/Average                                    12,462     1,008         883        97.0% 
 
RESIDENTIAL
 ACQUISITION/DEVELOPMENT PORTFOLIO
 
   Suburban Tower (acquired 1/95)                  High-Rise     172       677         762        97.4%
   Boulevard of Old Town/
     Governor Spotswood (acquired 4/95,3/96)       Garden        159       603         723        96.8%
   Connecticut Heights (acquired 6/95)             High-Rise     519       536         761        95.9%
   The Bennington (acquired 9/95)                  High-Rise     348       804         986        97.3%
   Oakwood (acquired 12/95)                        Garden        218       968       1,001        93.9%
   Westerly at Worldgate (opened 5/95)             Garden        320       921       1,063        92.8%
   Charter Oak (acquired 3/96)                     Garden        262     1,097         N/A          N/A
   Van Ness South (acquired 7/96)                  High-Rise     625       956         N/A          N/A
   1841 Columbia Road (acquired 8/96)              High-Rise     115       634         N/A          N/A
                                                              ------     -----      ------       ------  
          Subtotal/Average                                     2,738       816         889        95.5%
                                                              ------     -----      ------       ------   
ALL RESIDENTIAL PROPERTIES                                    15,200       974      $  884        96.9%
                                                              ======     =====      ======       ======
</TABLE>


                                       31
<PAGE>
 
PROPERTY SERVICE BUSINESSES

             Revenues, expenses and income from the various Property Service
Businesses were as follows (in thousands):

<TABLE>
<CAPTION>
 
                                                            CES Residential Realty, Inc        CES Group       
                                                        -----------------------------------    ----------  
                                                        Year Ended December 31,     
                                                        -----------------------
                                                                                  6/30/94        1/1/94
                                                                                     to            to     
                                                           1996         1995      12/31/94       6/29/94 
                                                        ----------    ---------   --------     ----------
<S>                                                     <C>           <C>         <C>          <C>
Multifamily and Retail Property
 Management Services
  Revenues                                              $ 11,465      $  9,672    $  5,238     $  2,095
  Expenses                                                (9,169)       (7,664)     (4,149)      (1,004)
                                                        --------      --------    --------     --------
  Income before
   depreciation/amortization                            $  2,296      $  2,008    $  1,089     $  1,091
                                                        ========      ========    ========     ========
Interior Construction and
 Renovation Services
  Net fee revenues                                      $  5,650      $  5,901    $  2,712     $  1,987
  Expenses                                                (4,670)       (4,795)     (1,990)      (1,987)
                                                        --------      --------    --------     -------- 
  Income before
   depreciation/amortization                            $    980      $  1,106    $    722      $     -
                                                        ========      ========    ========     ========
 
Engineering and Technical Services
 (including reimbursed costs)
  Revenues                                              $ 42,179      $ 40,186    $ 18,667     $ 18,341
  Expenses                                               (38,516)      (36,701)    (17,310)     (15,919)
                                                        --------      --------    --------     -------- 
  Income before
   depreciation/amortization                            $  3,663      $  3,485    $  1,357     $  2,422
                                                        ========      ========    ========     ========
Financing Services
  Revenues                                              $  2,640      $  3,018    $  1,668     $    441
  Expenses                                                  (687)       (1,439)       (497)        (393)
                                                        --------      --------    --------     -------- 
  Income before
   depreciation/amortization                            $  1,953      $  1,579    $  1,171     $     48
                                                        ========      ========    ========     ========
Total Property Service Businesses
  Revenues                                              $ 61,934      $ 58,777    $ 28,285     $ 22,864
  Expenses                                               (53,042)      (50,599)    (23,946)     (19,303)
                                                        --------      --------    --------     -------- 
  Income before
   depreciation/amortization                               8,892         8,178       4,339        3,561
  Depreciation/amortization                               (1,046)       (1,310)       (554)        (763)
                                                        --------      --------    --------     -------- 
Income from Property Service Businesses                 $  7,846      $  6,868    $  3,785     $  2,798
                                                        ========      ========    ========     ========
 
</TABLE>

                                       32
<PAGE>
 
          Multifamily and Retail Property Management Services provide management
services to the Operating Partnership at cost plus 10% in accordance with the
management agreement. In 1996, management services were provided to 18 third-
party owned multifamily properties which own approximately 6,400 apartment units
and to three retail properties which own approximately 293,000 square feet of
retail space. Of the 21 management agreements, 14 are with affiliated
partnerships and seven are with unaffiliated property owners. One management
agreement was terminated by the Company in January, 1997. The management
agreements with affiliated partnerships are for initial terms of three years or
more and the multifamily management agreements with unaffiliated owners
generally have one-year terms. The average term for which the Company and its
predecessors have managed these properties is 20 years.

          Interior Construction and Renovation Services provided oversight to
approximately $58 million of gross construction activity in 1996 compared to
approximately $45 million in 1995, and approximately $40 million in 1994.
Services are provided to the Operating Partnership at cost (including overhead)
and at cost plus a fee to affiliated partnerships and third parties.

          Engineering and Technical Services provides on-site building systems
operations, maintenance and inspection to affiliated partnerships at cost,
including overhead, and to third parties at cost, including overhead, plus a
fee. Services were provided to approximately 28 million square feet of
facilities in 1996 and 1995, and to approximately 25 million square feet in
1994.

          Financing Services performed $242 million of refinancings in 1996
compared to $261 million in 1995, and $168 million in 1994.


RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996

COMPARISON TO YEAR ENDED DECEMBER 31, 1995

          Summary.  Net income of the Operating Partnership increased 12.1%, or
$3.8 million,  from $31.1 million for the year ended December 31, 1995 to $34.8
million for the year ended December 31, 1996.  Funds from Operations ("FFO") of
the Operating Partnership increased $5.4 million, or 11.5%  during the same
period.  Net income of the Company increased from $7.5 million, or $0.81 per
share, for the year ended December 31, 1995 to $11.0 million, or $1.11 per
share, for the year ended December 31, 1996.  The Company's FFO for 1996 was
$23.9 million, a 17.1% increase over the Company's FFO for 1995. Weighted
average shares outstanding during 1996 and 1995 were 9.9 million and 9.3
million, respectively.  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, as well as increased income from the
Property Service Businesses. These increases were partially offset by an
increase in expense related to multifamily acquisitions and development.


                                       33
<PAGE>
 
          RENTAL PROPERTIES.  Revenue from rental properties increased $21.4
million, or 14.7%, from $144.9 million for 1995 to $166.3 million for 1996.  The
nine multifamily acquisition and development properties, consisting of 2,738
apartment units (note that two properties purchased in 1994 totaling 627
apartment units were transferred into the core portfolio on January 1, 1996),
contributed $17.3 million, or 80.7% of the rental revenue increase. The core
portfolio contributed an increase of $4.4 million, or 3.4%, over 1995 offset by
a $0.2 million decrease in revenue from the retail properties.

          Average monthly revenue per apartment unit of the core portfolio
increased from $854 in 1995 to $883 per month during 1996. Average economic
occupancy decreased slightly to 97.0% in 1996 from 97.2% in 1995.  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. The Company also continues to expand and aggressively
market its furnished apartment program. As a result, revenues on this product
increased $0.3 million, or 12.7%, over the prior year period.

          Retail revenues decreased by $0.2 million, or 2.3%, during the year
ended December 31, 1996 compared to the prior year due to lower base and
percentage rents as well as higher vacancy at Skyline Mall.  Average occupancy
at Skyline Mall declined from 97.3% in 1995 to 95.1% in 1996 due to several
stores remaining vacant during the last six months of 1996. In addition, repairs
and maintenance expenses which cannot be passed through to tenants were higher
in 1996 than in 1995.

          Expenses from rental properties (including depreciation) increased
$11.8 million, or 14.4%, from $81.9 million in 1995 to $93.7 million in 1996.
The increases resulted primarily from the acquisition/development of 2,738
apartment units subsequent to December 31, 1994 which added $9.0 million in
property operating expenses compared to the prior year.  The increase of $2.7
million, or 4.6%, in operating expenses for the core portfolio was primarily due
to expected increases in payroll and related costs, higher furnished apartment
expenses and related marketing costs due to product expansion in 1996, increased
repairs and maintenance costs and increased snow removal costs caused by the
record snowfall in the first quarter of 1996. In addition, real estate taxes
were significantly higher in 1996 primarily in the Virginia submarkets which
constitute the majority of the portfolio.  Assessments averaged 5.5% higher in
1996 than in 1995 for the Virginia properties while local property tax rates for
Arlington and Fairfax counties increased by 2.1% and 5.9%, respectively.  The
substantial increase in utility costs during the first quarter of 1996 was
mostly offset in the third quarter by an unseasonably cool summer.

          The Company's core operating margins of approximately 54% for the
years ended December 31, 1996 and 1995, respectively, are generally lower in
comparison to industry averages due primarily to the cost of utilities.  The
Company, for the most part, owns properties that do not meter utilities such as
electricity and gas separately by apartment unit, thereby requiring the Company
to bear utility costs. The majority of the Company's competitors, however, own

                                       34
<PAGE>
 
properties with separately metered apartment units which require the tenants to
pay utilities. Management estimates that operating margins would be closer to
57% or 58% on a comparable basis.

          PROPERTY SERVICE BUSINESSES.  Income from the Property Service
Businesses increased $1.0 million, or 14.2%, during 1996 compared to 1995.

          Income before depreciation/amortization for Multifamily and Retail
Property Management Services increased $0.3 million, or 14.3%, resulting
primarily from the impact of a non-recurring fee of $0.6 million related to the
termination of a management agreement with a hotel owned by a related party.
The hotel was sold during the first quarter of 1996.  In addition, retail
leasing income increased by approximately $0.2 million due primarily to retail
leases for a third party development project.  These increases were offset by
approximately $0.5 million of increased marketing expenditures for furnished
corporate apartments, Smith Advantage and other tenant services.  Also, although
income from residential management services increased approximately $0.2 million
due to the growth in the size of the portfolio, the increase was offset by the
cost of severance and other benefits related to a late 1996 management
reorganization in this group.

          Income before depreciation/amortization for Interior Construction and
Renovation Services decreased $0.1 million, or 11.4%, due primarily to a 4.3%
decrease in net fee revenue caused by a shift to lower margin, third-party
construction management services compared to higher margin general contracting
services provided to affiliated partnerships. The decrease in revenues was
partially offset by a 2.6% decrease in operating expenses resulting primarily
from worker's compensation insurance savings due to favorable claims experience.

          Revenue from Engineering and Technical Services increased 5.0%, or
$2.0 million, in 1996 to $42.2 million compared to 1995 due primarily to
additional HVAC systems operations and preventative maintenance contracts
obtained in late 1995 and throughout 1996.  As a result of the growth in
revenue, expenses increased by $1.8 million, or 4.9%, due primarily to
additional payroll and related benefit costs associated with performing the
additional work as well as increased information technology costs.
Consequently, income before depreciation/amortization for Engineering and
Technical Services increased 5.1% to $3.7 million for 1996 compared to $3.5
million in 1995.

          Income before depreciation/amortization for Financing Services
increased $0.4 million, or 23.7%,  due primarily to savings in payroll and
related expenses during the latter half of 1996. These savings were partially
offset by reduced revenue associated with the $19 million decrease in
refinancings performed in 1996 compared to 1995.

          OTHER.  Corporate general and administrative expenses increased by
$0.2 million, or 6.4%, due primarily to costs incurred in connection with the
Company's ongoing acquisition and development efforts including write-offs of
capitalized costs for terminated acquisition efforts. Interest expense increased
by $6.2 million, or 16.5%, due to the assumption of debt and additional

                                       35
<PAGE>
 
borrowings under the lines of credit related to the acquisition and development
of multifamily properties.  Distributions in excess of earnings allocated to
Minority Interest decreased from $5.9 million for 1995 to $4.8 million for 1996.
Such charges will no longer be necessary as a result of the stock offering and
the related elimination of the Minority Interest deficit. (See LIQUIDITY AND
CAPITAL RESOURCES.)

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995

COMPARISON TO YEAR ENDED DECEMBER 31, 1994

          SUMMARY. Net income of the Operating Partnership increased $ 41.8
million from a loss in 1994 of $10.7 million to income of $31.1 million due
primarily to consolidation costs of $15.6 million and debt extinguishment costs
of $15.2 million in 1994 in conjunction with the Offerings. In addition,
interest expense was $4.8 million lower in 1995 due to lower rates achieved
through the Offerings, and income from rental properties was $6.4 million higher
than 1994 primarily due to property acquisitions. The Company's share of the
1995 increase in net income, however, was reduced by a $5.9 million charge for
distributions in excess of earnings allocated to Minority Interest.

          RENTAL PROPERTIES.  Revenue from rental properties increased $14.0
million, or 10.7%, from $130.9 million for 1994 to $144.9 million for 1995. The
acquisition properties, consisting of 1,369 apartment units, contributed $5.8
million to the rental revenue increase, excluding the $3.4 million impact of the
two properties transferred into Core on January 1, 1996.  The Westerly at
Worldgate, a 320-unit garden apartment property developed by the Company, opened
in May, 1995 and was completed in December, 1995. As of December 31, 1995, it
was 75.6% occupied and contributed approximately $0.9 million in revenue in
1995. Revenue from the core portfolio increased $2.5 million, or 2.1%, from 1994
to 1995, excluding the $3.4 million impact of the two properties transferred
into Core on January 1, 1996. The lower than expected level of core portfolio
rental increase was caused by higher economic vacancies and increased time
between vacancy and subsequent lease-up in garden apartments in certain
submarkets of northern Virginia and the southeast section of the Washington,
D.C. submarket, especially in the second quarter of 1995. As a consequence of
this slower demand in these submarkets, occupancy in the core portfolio
decreased from 97.8% for 1994 to 97.2% for 1995, and average monthly revenue per
apartment unit increased 2.0%, from $845 in 1994 to $862 in 1995 (based on
properties owned as of June 30, 1994).

          Expenses from rental properties (including depreciation) increased
$7.0 million, or 9.4%, from $74.8 million for pro forma 1994 to $81.9 million
for 1995. The increase resulted primarily from the acquisition of 1,369 units
and the development of 320 units which together added $3.6 million (excluding
the $1.7 million impact of transferring two properties to Core on January 1,
1996) in operating costs, primarily payroll and utility expenses, as well as
depreciation expense. Expenses from the core residential portfolio increased
$0.9 million (excluding the $1.7 million impact of transferring two properties
to Core on January 1, 1996) from $55.1 million for 1994 to $55.9
million for 1995.

                                       36
<PAGE>
 
          PROPERTY SERVICE BUSINESSES. Income from the Property Service
Businesses increased from $6.6 million for 1994 to $6.9 million for 1995.

          Income before depreciation/amortization from Interior Construction and
Renovation increased $0.4 million compared to 1994 due to increased activity in
tenant build-out and renovation projects at office buildings owned by affiliated
partnerships and by increases in a major third party contract.

          Income before depreciation/amortization from Financing Services
increased $0.4 million in 1995 compared to 1994  due to an increase in finance
fee revenues. Revenue from Financing Services increased $0.9 million as $261
million of refinancings were closed in 1995, versus $168 million in 1994, and an
affiliate was billed $0.3 million for financial advisory services.

          Income before depreciation/amortization from Engineering and Technical
Services decreased $0.3 million while revenue increased $3.2 million.  These
results are attributed to more HVAC systems operations and preventative
maintenance contracts, which carry lower margins. Additionally, 1994 included an
unusually high level of incremental repair and replacement services for
mechanical and electrical systems associated with third party contracts, which
typically earn higher margins.

          OTHER. Corporate general and administrative expenses increased $0.1
million due to fees and expenses incurred in connection with the preparation of
the Company's initial annual report, its filings pursuant to the Exchange Act,
the registration with the SEC of the dividend reinvestment plan, and the
Company's shelf registration.

          FUNDS FROM OPERATIONS. FFO 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
distributions in excess of earnings allocated to Minority Interest, 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 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.

                                       37
<PAGE>
 
          The Company's FFO for the years ended December 31, 1996 and 1995 and
the period June 30,1994 to December 31, 1994 was as follows (in thousands):


<TABLE>
<CAPTION>
 
 
                                      Year Ended
                                      December 31,      6/30/94
                                    ----------------       to
                                     1996      1995    12/31/94
                                    -------  -------  ----------
<S>                                 <C>      <C>      <C>
Net Income of the
 Operating Partnership              $34,817  $31,053  $  15,241
 
Depreciation of Real Property        17,931   16,258      7,738
                                    -------  -------  ---------
Funds from Operations of
 the Operating Partnership           52,748   47,311     22,979
 
Minority Interest                    28,879   26,920     13,131
                                    -------  -------  ---------
 
Attributable to Shareholders        $23,869  $20,391  $   9,848
                                    =======  =======  =========
 
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

          SUMMARY

          Net cash flow provided by operating activities was $51.0 million for
1996 compared to $53.9 million for 1995. The decrease was primarily due to a
reduction in  accounts payable  compared to the prior year, reflecting revised
payment terms to vendors, offset by higher operating income contributed by
acquisitions and core growth.

          Net cash flow used by the Company for investing activities increased
$3.8 million in 1996, from $67.7 million in 1995 to $71.4 million in 1996 due
primarily to increases  in rental properties acquired and capital expenditures.

          Net cash flow provided by financing activities was $14.9 million in
1996 compared to $4.9 million in 1995 due to $12.5 million of additional line of
credit draws in 1996 to fund cash acquisitions offset by an increase of $2.1
million in dividends and distributions.  In 1996, the Company and the Operating
Partnership paid dividends/distributions of $43.3 million, or $1.975 per
share/unit representing three quarters of dividends at $.49 per share/unit and
one quarter at $.505, a 3.1% increase.

                                       38
<PAGE>
 
STOCK OFFERING

          On February 19, 1997, the Company issued 2.7 million shares of common
stock ("the Offering") at a price of $28.375 per share resulting in total
proceeds of $72.2 million, net of underwriting discounts and other estimated
Offering costs.  Net proceeds from the Offering were used to repay $61.2 million
of outstanding notes payable and $9 million of mortgage debt. The balance was
used to fund the property acquisitions discussed below and for general corporate
purposes.

          During February and March 1997, the Company completed the acquisition
of three multifamily properties totaling 1,828 apartment units for a total cost
of approximately $129 million consisting of Operating Partnership Units valued
at approximately $47 million, assumed debt of approximately $80 million, and
cash of approximately $2 million. One of the properties is subject to a 5.1% net
profits interest in favor of an unaffiliated third party. The acquisition of
these three properties brings to 5,193 the total number of apartment units
acquired since the Company's initial public offering in mid-1994 which
represents a 44% increase in the owned portfolio.

          On March 12, 1997, the underwriters of the Offering exercised their
option to purchase an additional 0.4 million shares of common stock at $28.375
per share, less underwriting discount. Net proceeds to the Company of $10.9
million were used to repay outstanding amounts on the lines of credit.

ACQUISITIONS AND DEVELOPMENT

          The Company acquired and developed the following properties during
1996 and 1995:
<TABLE>
<CAPTION>
 
 
Total Cost (Dollars in Thousands)            1996     1995
---------------------------------           -------  -------
<S>                                         <C>      <C>
Acquisitions
 262-unit garden apartment                  $14,200  $     -
 47-unit garden apartment                     2,800        -
 625-unit high-rise apartment                41,800        -
 115-unit high-rise apartment                 5,300        -
 172-unit high-rise apartment                     -    6,500
 112-unit garden apartment                        -    5,895
 519-unit high-rise apartment                     -   24,900
 348-unit high-rise apartment                     -   29,000
 218-unit garden apartment                        -   16,000
Development of 320-unit garden apartment          -   16,700
                                            -------  -------
                                            $64,100  $98,995
                                            =======  =======
</TABLE>

                                       39
<PAGE>
 
The 1996 and 1995 acquisitions and development were funded as follows (in
thousands):

<TABLE>
<CAPTION>
 
                                            1996     1995
                                           -------  -------
<S>                                        <C>      <C>
 
Line of credit/construction loan draws     $58,437  $48,054
Assumption of mortgage debt                  3,260   30,618
Issuance of Operating Partnership units      2,403   13,727
Cash on hand                                     -    6,596
                                           -------  -------
                                           $64,100  $98,995
                                           =======  =======
 
</TABLE>

  The Company has executed a contract to purchase for $9.1 million approximately
17 acres of land for the development of an estimated 630-unit mid-rise and
garden apartment property in Springfield, Virginia.  The site is located
adjacent to a new Metrorail and commuter rail station which are under
construction and a regional shopping mall and offers convenient access to major
transportation routes.  Budgeted costs for this project are expected to be
approximately $60 million and construction is expected to commence early in the
summer of 1997, as soon as proffer agreements are concluded with government
agencies.  Numerous other acquisition and development projects are being pursued
by the Company.

DEBT

  As of December 31, 1996, the Company had mortgage indebtedness and other
borrowings collateralized by all 43 of the Properties as follows:

<TABLE>
<CAPTION>
 
                                     Dollars in
                                     Thousands   Interest Rate
                                     ---------   -------------
<S>                                  <C>         <C>

Long-term, fixed rate debt:
 Mortgages                           $399,563       8.05%
 $83M Acquisition Line of Credit       30,000       7.27%
Short-term, variable rate debt:                          
 Mortgages                             17,245       7.20%
 $100M Acquisition Line of Credit      82,050       7.16%
 Construction Loan                     17,686       7.32%
                                     --------       ---- 
                                     $546,544       7.82%
                                     ========       ====  
</TABLE>

  As of December 31, 1996, the Company's Debt to Total Market Capitalization
Ratio was 45.9%, based on 9,969,607 shares and 12,029,857 partnership units
outstanding at a stock price of $29.25. The Company's Debt Coverage Ratios for
the years ended December 31, 1996 and 1995 were 2.53 and 2.44, respectively.

                                       40
<PAGE>
 
          Subsequent to the Offering, the related repayment of debt and the
property acquisitions, principal payments on outstanding debt are due in the
following years (in millions):

<TABLE>
<CAPTION>
 
<S>           <C> 
1997          $ 36.7
1998            34.6 
1999           115.1
2000             2.5
2001           127.9
Thereafter     228.4
              ------
              $545.2
              ======
 
</TABLE>

  Subsequent to the Offering and the related debt repayment, the Company had
$126 million of unused borrowing capacity available on lines of credit.

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

OTHER

  CAPITAL IMPROVEMENTS.  In 1996, total capital improvements were $7.4 million,
of which $6.1 million, or $489 per apartment unit, was for the core portfolio.
Approximately 40% of the capital expenditures on the core portfolio are
considered by management to be revenue generating or economic improvements, as
shown below, which management believes directly affect the Company's ability to
increase rents. The remaining capital expenditures on the core portfolio
indirectly influence the Company's ability to increase rents and are considered
non-revenue generating. A summary of core capital expenditures during 1996
follows:

                                       41
<PAGE>
 
<TABLE>
<CAPTION>
 
                                          Total $       Actual # of   Average $ Per    Average $ Per  
Expenditure Type                           Spent      Units Improved  Unit Improved    Core Unit     
----------------                       ------------   --------------  ---------------  -------------  
                                      (in thousands)
<S>                                    <C>            <C>             <C>              <C>             
Installations/Replacements:
   Appliances                          $  612           1,169               $  523           $ 49
   Carpet                                 780             622                1,254             63
   Other                                   34              73                  466              3
Renovations:                                                         
   Kitchen                                463             183                2,531             37
   Bath                                   526             214                2,459             43
                                       ------          ------               ------           ----
Total Revenue-Generating                                             
 Improvements                           2,415                                                 195
Non-Revenue Generating                                               
 Improvements                           3,676                                                 294
                                       ------                                                ----
Total Capital Expenditures                                           
  - Core Portfolio                     $6,091                                                $489           
                                       ======                                                ==== 
 
</TABLE>

   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 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 $0.4 million
and $0.6 million for 1996 and 1995 and $0.4 million for the period from June 30,
1994 to December 31, 1994.

   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.

                                       42
<PAGE>
 
  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 1997 (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, 1996.


  ITEM 11.  EXECUTIVE COMPENSATION.

       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.

                                       43
<PAGE>
 
  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 and combined
            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.

          **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.

          **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

          **2.4     Assignment and Assumption Agreement by Residential
                    Associates Limited Partnership and Charles E. Smith
                    Residential Realty L.P.


                                       44
<PAGE>


          **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.

          **2.6     Debt Contribution Agreement between Charles E. Smith
                    Management, Inc. and Charles E. Smith Residential Realty
                    L.P. (the "Operating Partnership")

           *3.1     Amended and Restated Articles of Incorporation of Charles E.
                    Smith Residential Realty, Inc. (the "Company")

            3.2     Amended and Restated Bylaws of the Company (Incorporated by
                    reference to the same titled and numbered exhibit in the
                    Company's Registration Statement on Form S-3 (File No. 33-
                    93986).

          **4.1     First Amended and Restated Agreement of Limited Partnership
                    of the Operating Partnership, as amended

          **4.2     Certificate of Limited Partnership of the Operating
                    Partnership

         **10.1     Noncompetition Agreement by and among the Company, the
                    Operating Partnership and Robert P. Kogod

         **10.2     Registration Rights and Lock-up Agreement

         **10.3     Pledge Agreement

         **10.4     First Amended and Restated 1994 Employee Stock and Unit
                    Option Plan

         **10.5     First Amended and Restated 1994 Employee Restricted Stock
                    and Restricted Unit Plan

         **10.6     Non-Employee Directors Stock Option Plan

         **10.7     Subscription Agreement

         **10.8     Voting Stock Partnership Agreement for Smith Property
                    Management Partnership

         **10.9     Voting Stock Partnership Agreement for Smith Management
                    Construction Partnership

         **10.10    Voting Stock Partnership Agreement for Consolidated
                    Engineering Services Partnership

         **10.11    Amended and Restated Articles of Incorporation of Smith
                    Realty Company

          *10.12    By-Laws of Smith Property Management, Inc.

          *10.13    Articles of Incorporation of Smith Management Construction,
                    Inc.

          *10.14    By-Laws of Smith Management Construction, Inc.

          *10.15    Articles of Incorporation of Consolidated Engineering
                    Services, Inc.

          *10.16    By-Laws of Consolidated Engineering Services, Inc.

          *10.17    Certificate of Incorporation of Smith One, Inc.

          *10.18    By-Laws of Smith One, Inc.

         **10.19    Agreement of Limited Partnership of Smith Property Holdings
                    One L.P.

                                       45
<PAGE>
 
          **10.20   Agreement of Limited Partnership of Smith Property Holdings
                    One (D.C.) L.P.

           *10.21   Certificate of Incorporation of Smith Two, Inc.

           *10.22   By-Laws of Smith Two, Inc.

          **10.23   Agreement of Limited Partnership of Smith Property Holdings
                    Two L.P.

          **10.24   Agreement of Limited Partnership of Smith Property Holdings
                    Two (D.C.) L.P.

           *10.25   Certificate of Incorporation of Smith Three, Inc.

           *10.26   By-Laws of Smith Three, Inc.

          **10.27   Agreement of Limited Partnership of Smith Property Holdings
                    Three L.P.

          **10.28   Agreement of Limited Partnership of Smith Property Holdings
                    Three (D.C.) L.P.

           *10.29   Certificate of Incorporation of Smith Four, Inc.

           *10.30   By-Laws of Smith Four, Inc.

          **10.31   Agreement of Limited Partnership of Smith Property Holdings
                    Four L.P.
  
          **10.32   Amended and Restated Certificate of Incorporation of Smith
                    Five, Inc.
  
           *10.33   By-Laws of Smith Five, Inc.

          **10.34   Agreement of Limited Partnership of Smith Property Holdings
                    Five (D.C.) L.P.
  
          **10.35   License Agreement between Charles E. Smith Management, Inc.
                    and the Company

          **10.36   License Agreement between Charles E. Smith Management, Inc.
                    and the Operating Partnership

            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.

         ***10.39   Amended and Restated Credit Agreement by and between the
                    Operating Partnership and PNC Bank, National Association, et
                    al.

            10.40   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)

            10.41   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)

                                       46


<PAGE>
 
            10.42   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)

            10.43   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)

            10.44   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)

            10.45   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)

            10.46   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)

            10.47   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)

            10.48   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 GMAC Mortgage Corporation
                    of PA ("GMAC") (Incorporated by reference to Exhibit No.
                    10.10 of the Company's Quarterly Report on Form 10-Q for the
                    Quarter Ended June 30, 1994)

            10.49   Multifamily Note of Smith Two to GMAC (Incorporated by
                    reference to Exhibit No. 10.11 of the Company's Quarterly
                    Report on Form 10-Q for the Quarter Ended June 30, 1994)

            10.50   Multifamily Note of Smith Two D.C. to GMAC (Incorporated by
                    reference to Exhibit No. 10.12 of the Company's Quarterly
                    Report on Form 10-Q for the Quarter Ended June 30, 1994)

            10.51   Supplemental Loan Agreement by and among Smith Property
                    Holdings One L.P. ("Smith One"), 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)

            10.52   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)

                                       47


<PAGE>
 
            10.53   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)

            10.54   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)

            10.55   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)

            10.56   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)

            10.57   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)

          **10.58   Agreement of Limited Partnership of Smith Employment
                    Services L.P.

          **10.59   Certificate of Limited Partnership of Smith Employment
                    Services L.P.

            10.60   Second Restated and Amended Agreement of Limited Partnership
                    of First Herndon Associates Limited Partnership
                    (Incorporated by reference to Exhibit 10.1 of the Company's
                    Quarterly Report on Form 10-Q for the Quarter Ended June 30,
                    1995)

            10.61   Second Amendment to the Certificate of Limited Partnership
                    of First Herndon Associates Limited Partnership
                    (Incorporated by reference to Exhibit 10.2 of the Company's
                    Quarterly Report on Form 10-Q for the Quarter Ended June 30,
                    1995)

            10.62   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)

            10.63   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)

            10.64   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)

            10.65   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)

                                       48


<PAGE>
 
          ***10.66  Certificate of Incorporation of Smith Seven, Inc.

          ***10.67  By-Laws of Smith Seven, Inc.

          ***10.68  Agreement of Limited Partnership of Smith Property Holdings
                    Seven L.P.

          ***10.69  Commitment for Mortgage Loan to the Operating Partnership
                    from Northwestern Mutual Life Insurance Company

                21  Subsidiaries of the Registrant

              23.1  Consent of Arthur Anderson LLP
          ___________________________________
            *Incorporated by reference to the same titled and numbered exhibit
            in the Company's Registration Statement on Form S-11, No. 33-75288.

            **Incorporated by reference to the same titled and numbered exhibit
            in the Company's Form 10-K for the year ended December 31, 1994.
 
            ***Incorporated by reference to the same titled and numbered exhibit
            in the Company's Form 10-K for the year ended December 31, 1995.


  14(b)     REPORTS ON FORM 8-K

            A report on Form 8-K was filed on August 13, 1996 providing
            information on four Properties acquired by the Company during 1996,
            including certain unaudited balance sheets and statements of
            operations of the Company reflecting the acquisitions and statements
            of revenue and certain expenses for the Van Ness South, 1841
            Columbia Road, Charter Oak, and Governor Spotswood  Properties for
            the year ending in December, 1995, and applicable subsequent
            periods.

  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.

                                       49


<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 27th day of March, 1997.


                                      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 27th day of March,
  1997.

<TABLE> 
<CAPTION> 

     SIGNATURE                           TITLE
     ---------                           -----
<S>                                      <C> 
 /s/Robert H. Smith                      Co-Chairman of the Board, Co-Chief
-------------------------                Executive Officer, and Director
    Robert  H. Smith                  


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


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


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

</TABLE> 

                                       50
<PAGE>
 
<TABLE> 

<S>                                      <C> 

/s/Charles R. Hagen                      Vice President, Controller, and Chief
----------------------------             Accounting Officer
   Charles R. Hagen                  


/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

</TABLE> 

                                       51

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

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                  -------------------------------------------


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


<TABLE>
<CAPTION>
                                                               Pages
                                                           ------------- 
<S>                                                        <C>
Report of Independent Public Accountants                             F-2
                                                        
  Consolidated Balance Sheets                                        F-3
                                                        
  Consolidated Statements of Operations and             
   Combined Statement of Revenues and Expenses                       F-4
                                                        
  Consolidated Statement of Shareholders' Equity and    
   Combined Statement of Partners' Deficit                           F-5
 
  Consolidated and Combined Statements of Cash Flows                 F-6
 
  Notes to Consolidated and Combined Financial Statements    F-7 to F-25
 
</TABLE>

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 and combined financial statements.

                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of 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, 1996 and 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and for the period from June 30, 1994 to
December 31, 1994, and the combined statement of revenues and expenses,
partners' deficit and cash flows of CES Group for the period from January 1,
1994 to June 29, 1994. These consolidated and combined 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 and combined 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, 1996 and 1995, and
the consolidated results of operations and cash flows for the years ended
December 31, 1996 and 1995 and for the period from June 30, 1994 to December
31, 1994, and the combined statement of revenues and expenses and cash flows of
the CES Group for the period from January 1, 1994 to June 29, 1994, 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 a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.


Washington, D.C.                                        Arthur Andersen LLP
January 30, 1997

                                      F-2
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                          CONSOLIDATED BALANCE SHEETS
                              AS OF DECEMBER 31,
                            (Dollars in Thousands)



<TABLE> 
<CAPTION> 
                                                                                      1996                1995
                                                                                   --------              --------  
<S>                                                                                <C>                   <C>   
        ASSETS

Rental property, at predecessor cost, net                                          $267,658              $276,269
Rental property, acquired and developed, net                                        202,435               138,221
Cash and cash equivalents                                                             3,898                 9,478
Tenants' security deposits                                                            3,521                 3,634
Escrow funds                                                                          6,087                 5,371
Investment in and advances to Property Service Businesses                                           
    and other                                                                        10,756                 8,348
Deferred charges, net                                                                17,646                18,782
Other assets                                                                         10,210                 9,219
                                                                                   --------              --------  
                                                                                   $522,211              $469,322
                                                                                   ========              ========
                                                                                                    
        LIABILITIES AND EQUITY                                                                      
                                                                                                    
Liabilities                                                                                         
                                                                                                    
    Mortgage loans                                                                $ 416,808              $413,973
    Notes payable                                                                   129,736                69,204
    Accounts payable and accrued expenses                                             9,525                12,693
    Tenants' security deposits                                                        3,521                 3,634
    Due to related parties                                                                -                 1,441
                                                                                   --------              --------
        Total liabilities                                                           559,590               500,945
                                                                                   --------              --------

Minority Interest                                                                         -                     -

Commitments and contingencies                                                                       
                                                                                                    
Shareholders' equity                                                                                
                                                                                                    
    Common stock - $.01 par value; 95,000,000 shares 
        authorized; 9,969,607 and 9,708,123 shares issued 
        and outstanding at December 31, 1996 and 1995,                      
        respectively                                                                    100                    97 
    Additional paid-in capital - includes contributed                                               
        deficit of $244,208                                                         (23,852)              (26,585)
    Retained deficit                                                                (13,627)               (5,135)
                                                                                   --------              --------   
         Total shareholders' equity                                                 (37,379)              (31,623)
                                                                                   --------              --------   

                                                                                   $522,211              $469,322
                                                                                   ========              ========   
</TABLE> 

       The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                      AND
                                   CES GROUP
                  COMBINED STATEMENT OF REVENUES AND EXPENSES
                 (Dollars in Thousands, Except Per Share Data)
<TABLE> 
<CAPTION> 

                                                          Charles E. Smith Residential Realty, Inc. 
                                                         --------------------------------------------      CES Group 
                                                         Year Ended December 31,                       ----------------
                                                         ------------------------     June 30, 1994     January 1, 1994 
                                                                                            to                to
                                                             1996         1995      December 31, 1994    June 29, 1994
                                                         -----------  ------------  -----------------   ----------------
<S>                                                      <C>          <C>           <C>                 <C>      
Rental Properties:                                    
      Revenues                                           $166,283     $144,909         $ 67,391            $ 63,496
      Expenses                                        
           Operating costs                                 65,350       57,007           26,633              24,682
           Real estate taxes                               10,429        8,620            3,826               3,731
           Depreciation and amortization                   17,931       16,258            7,738               7,626
                                                         --------     --------         --------            --------   
                Total expenses                             93,710       81,885           38,197              36,039
                                                      
Property Service Businesses:                          
      Revenues                                                 -            -                -               27,792
      Expenses                                        
           Operating costs                                     -            -                -               24,231
           Depreciation and amortization                       -            -                -                  763
                                                         --------     --------         --------            --------   
                Total expenses                                 -            -                -               24,994
                                                      
      Equity in income of Property Service Businesses       7,846        6,868            3,785                  -
Corporate general and administrative expenses              (3,025)      (2,842)          (1,171)             (1,550)
Interest income                                             1,029        1,424              825                 970
Interest expense                                          (43,606)     (37,421)         (17,392)            (24,798)
Consolidation costs                                            -            -                -              (15,577)
                                                         --------     --------         --------            --------   
Income (loss) before extraordinary item                    34,817       31,053           15,241             (10,700)
Extraordinary item - loss on extinguishment of debt            -            -                -              (15,195)
                                                         --------     --------         --------            --------   
Net income (loss) of the Operating Partnership             34,817       31,053           15,241            $(25,895)
                                                                                                           ========   
Minority Interest                                          19,062       17,648            8,709
Distributions in excess of earnings allocated to      
      Minority Interest                                     4,778        5,876               -
                                                         --------     --------         --------                       
Net income                                               $ 10,977     $  7,529         $  6,532
                                                         ========     ========         ========                         
Net income per share                                     $   1.11     $   0.81         $   0.72
                                                         ========     ========         ========                         
</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
                                      AND
                                   CES GROUP
                    COMBINED STATEMENT OF PARTNERS' DEFICIT

<TABLE> 
<CAPTION> 
  Common                                                                     Additional    Retained     
   Stock                                                          Common      Paid-in      Earnings      Partners'
Outstanding  (Dollars in Thousands, Except Per Share Data)        Stock       Capital      (Deficit)      Deficit       Total     
-----------  ---------------------------------------------      --------     ----------    ---------     ---------    ---------  
<S>          <C>                                                <C>          <C>           <C>           <C>          <C>  
             CES GROUP

             Balance, December 31, 1993                           $ -        $      -      $      -      $(216,006)   $(216,006) 
              Investments in and advances, net                      -               -             -           (221)        (221) 
              Contributions                                         -               -             -            565          565  
              Distributions                                         -               -             -         (7,133)      (7,133) 
              Liabilities retained by predecessor partnerships      -               -             -          2,268        2,268  
              Expenses in excess of revenues                        -               -             -        (25,895)     (25,895)
                                                                  ----       ----------    ---------     ---------    ---------    
             Balance, June 29, 1994                               $ -        $      -      $      -      $(246,422)   $(246,422)   
                                                                  ====       ==========    =========     =========    =========   

             CHARLES E. SMITH RESIDENTIAL REALTY, INC.
           
             Balance, June 29, 1994                               $ -        $      -      $      -      $      -     $      -      
              Contribution by Predecessors of assets,                                                                              
               at historical cost, net of liabilities               -         (244,208)           -             -      (244,208)   
              Proceeds of Offerings, net of underwriting          
 9,049,667     discount and offering costs of $15,813               90         201,284            -             -       201,374  
              Adjustment for Unit Grants                            -              285            -             -           285  
              Earnings in Excess of Distributions to             
               Minority Interest                                    -               -          2,841            -         2,841  
              Net income                                            -               -          6,532            -         6,532  
              Dividends ($.48 per share)                            -               -         (4,344)           -        (4,344) 
-----------                                                       ----       ----------    ---------     ---------    ---------    
 9,049,667   Balance, December 31, 1994                             90         (42,639)        5,029            -       (37,520)   
              Operating Partnership equity                                                                                          
               exchanged for acquisitions                           -           15,491            -             -        15,491    
              Conversion of Operating Partnership units          
   658,456     to common stock                                       7              (7)           -             -            -      
              Adjustment for Unit Grants                            -              570            -             -           570     
              Net income                                            -               -          7,529            -         7,529     
              Dividends ($ 1.915 per share)                         -               -        (17,693)           -       (17,693)    
-----------                                                       ----       ----------    ---------     ---------    ---------     
 9,708,123   Balance, December 31, 1995                             97         (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              (3)           -             -            -     
              Adjustment for Unit Grants                            -              333            -             -           333    
              Net income                                            -               -         10,977            -        10,977    
              Dividends ($1.975 per share)                          -               -        (19,469)           -       (19,469)   
-----------                                                       ----       ----------    ---------     ---------    ---------  
 9,969,607   Balance, December 31, 1996                           $100       $ (23,852)    $ (13,627)    $      -     $ (37,379)    
==========                                                        ====       ==========    =========     =========    =========   
</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
                                      AND
                                   CES GROUP
                       COMBINED STATEMENT OF CASH FLOWS
                            (Dollars in Thousands)
<TABLE> 
<CAPTION> 

                                                    Charles E. Smith Residential Realty, Inc.          CES Group
                                                   -------------------------------------------   --------------------
                                                   Year Ended December 31,   June 30, 1994         January 1, 1994
                                                   -----------------------         to                    to       
                                                      1996         1995     December 31, 1994       June 29, 1994
                                                   ----------   ----------  ------------------   -------------------- 
<S>                                                <C>          <C>         <C>                  <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                $ 10,977     $  7,529        $  6,532             $(25,895)
  Minority Interest                                  19,062       17,648           8,709                    -
  Adjustments to reconcile net income         
    to net cash provided by                   
     operating activities:                    
      Extraordinary item                                  -            -               -               15,195
      Consolidation costs                                 -            -               -               15,577
      Depreciation and amortization                  21,039       19,547           9,257                8,847
      Distributions in excess of earnings                                                           
       allocated to  Minority Interest                4,778        5,876               -                    -
      (Increase) decrease in escrow funds              (716)       2,107          (6,464)                (999)
      Increase in other assets                         (991)      (1,721)         (1,656)              (5,738)
      (Decrease) increase in accounts                                                               
       payable and accrued expenses                  (3,168)       2,872           3,499                5,526
      Increase in other liabilities                       -            -               -                1,323
                                               ------------    ---------    ------------         ------------  
        Net cash provided by 
         operating activities                        50,981       53,858          19,877               13,836
                                               ------------    ---------    ------------         ------------  
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisitions and development 
    of rental property                              (60,173)     (55,152)        (40,005)                   -
  Additions to rental property                       (7,425)      (5,257)         (2,601)              (2,012)
  Decrease in notes receivable, 
    related parties                                       -            -               -                6,247
  (Decrease) increase in related 
    party payables:
    Property Service Businesses                        (635)      (8,535)          9,171                    -
    Affiliates                                         (469)        (703)          1,172                    -
    Predecessor                                        (337)          33            (681)                   -
  Cash transferred from predecessors                      -            -          15,395                    -
  (Increase) decrease in investment in
    and advances to Property Service 
     Businesses and other                            (2,408)       1,939          (9,117)                   -
                                               ------------    ---------    ------------         ------------  
      Net cash (used in) provided by
        investing activities                        (71,447)     (67,675)        (26,666)               4,235
                                               ------------    ---------    ------------         ------------  
CASH FLOWS FROM FINANCING ACTIVITIES:
  Additions to deferred charges                      (1,720)      (1,427)           (985)                   -
  Net proceeds from sale of common stock                  -            -         201,374                    -
  Mortgages:
    Proceeds                                         31,095            -         352,354                    -
    Repayments, including prepayment penalties      (31,520)        (466)       (479,075)              (2,699)
  Notes payable:
    Proceeds                                         76,532       48,054          21,150                    -
    Repayments                                      (16,000)           -               -                    -
  Net proceeds (repayment) of notes payable,
    related parties                                       -            -         (26,232)               1,242
  Financing fees and consolidation costs                  -            -         (33,235)              (6,891)
  Dividends and distributions                       (43,309)     (41,216)        (10,212)              (5,583)
  Other, net                                           (192)           -               -               (1,206)
                                               ------------    ---------    ------------         ------------  
      Net cash provided by (used in) 
       financing activities                          14,886        4,945          25,139              (15,137)
                                               ------------    ---------    ------------         ------------  
NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                   (5,580)      (8,872)         18,350                2,934

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                 9,478       18,350               -               13,663   
                                               ------------    ---------    ------------         ------------  

CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                $      3,898    $   9,478    $     18,350         $     16,597
                                               ============    =========    ============         ============
</TABLE> 

       The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                                 AND CES GROUP
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION AND FORMATION OF COMPANY

     Charles E. Smith Residential Realty, Inc. (the "Company") was organized in
Maryland on June 10, 1993. The Company had no operations prior to the completion
of the business combination (discussed below) which occurred on June 30, 1994.
The Company was formed with the intent of qualifying as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended. In
connection with the business combination, the Company, on June 30, 1994, 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"). The Operating Partnership is the
successor entity to CES Group (the "Predecessor"). Simultaneous with the
Offerings, the entities that owned the properties and the related service
businesses included in the CES Group transferred the properties (the
"Properties") and the management, development, leasing, interior construction
and renovation, engineering and technical services, 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 transferring entities and their
owners, which include Robert H. Smith and Robert P. Kogod and their families,
and other former owners of indirect interests in the Properties, are referred to
collectively as the "Minority Interest").

     The Company, through the Operating Partnership and its subsidiaries, is
engaged in the ownership, operation, management, leasing, acquisition, expansion
and development of real estate properties, primarily residential multifamily
properties. As of December 31, 1996, the Operating Partnership owned 41 existing
multifamily properties containing 15,200 apartment units, and owned and operated
two free-standing community retail shopping centers, aggregating 436,000 square
feet.  All properties are located in the Washington, D.C. metropolitan area.
Additionally, the Operating Partnership owned substantially all of the equity in
entities which provide multifamily and retail property management and leasing,
interior construction and renovation, building engineering and technical
services, and financial advisory services (collectively the "Property Service
Businesses").

                                      F-7
<PAGE>
 
     The following is a summary of the assets and liabilities contributed by the
Predecessor on June 30, 1994 (at historical net book value) for a 57.3% limited
partnership interest in the Operating Partnership (dollar amounts in millions):

<TABLE>
<S>                                                                       <C>   
Rental and other properties, at historical cost, net
  of accumulated depreciation and amortization                             $ 293.9
Mortgage and other debt                                                     (565.1)
Other assets, net                                                             24.8  
                                                                           -------
Net deficit of CES Group                                                    (246.4)
                                                                                            
Property Service Businesses
  accounted for using the equity method                                        2.2
                                                                           -------
Net carry-over deficit transferred to the
  Operating Partnership                                                    $(244.2)
                                                                           =======
 
</TABLE>

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

     The accompanying consolidated balance sheets as of December 31, 1996 and
December 31, 1995 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995 and for the period from June 30, 1994 to December 31, 1994 include all of
the accounts of the Company, the Operating Partnership and its subsidiary
financing partnerships. 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 investment in the Property Service Businesses.

     The accompanying combined statements of revenue and expenses, and of cash
flows of the CES Group for the period from January 1, 1994 to June 29, 1994
include all of the accounts of the CES Group. The CES Group financial statements
have been presented on a combined basis (including the Property Service
Businesses) because the majority of the entities which owned the Properties and
the Property Service Businesses had certain common general or limited partners
and/or stockholders.

     All significant intercompany balances and transactions have been 
eliminated.

RENTAL PROPERTY

     The assets (including the Properties) that were merged or transferred were
recorded at Predecessor cost. The Company records acquired or developed rental
property at cost, which includes cost of acquisition, development, construction
and interest and real estate taxes incurred during the original construction
period. Ordinary repairs and maintenance, such as minor replacements and
painting, are expensed as incurred; major improvements, such as new HVAC
equipment, carpeting 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:


  Base building         40 years
  Land improvements     20 years
  Building components   7 to 20 years
  Tenant improvements   Shorter of remaining lease term or useful life
  Furniture, fixtures 
   and equipment        5 to 10 years

                                      F-8
<PAGE>
 
DEFERRED CHARGES

     Deferred charges of the Company consist primarily of permanent loan fees,
which are being amortized over the term of the notes using the effective
interest rate method, and retail lease acquisition costs, which are being
amortized over the term of the related lease.

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 $6.8 million
and $5.9 million at December 31, 1996 and 1995, 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, 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
 
      Year Ending
      December 31,
----------------------
<S>                        <C>
          1997                $  7,589
          1998                   7,439
          1999                   7,067
          2000                   6,977
          2001                   6,598
       Thereafter               74,075
                              --------
                              $109,745
                              ========
 
</TABLE>

                                      F-9
<PAGE>
 
INCOME TAXES

     Federal income taxes are not provided because the Company qualifies as a 
real estate investment trust under the provisions of the Internal Revenue Code
of 1986, as amended. As a real estate investment trust, the Company is required
to distribute at least 95% of its taxable income to shareholders and meet
certain other requirements. The Company's income tax basis in its assets and
liabilities was $470 million and $558 million, respectively, at December 31,
1996 and $426 million and $498 million, respectively, at December 31, 1995.

     For the years ended December 31, 1996 and 1995, dividends paid per share 
were characterized for income tax purposes as follows:

<TABLE>
<CAPTION>
 
                                         1996                 1995
                                 -------------------  ------------------
                                 Per Share      %     Per Share    %
                                 ----------  -------  ----------   -----
<S>                              <C>         <C>      <C>          <C>
 
            Taxable Income          $1.264     64%     $1.206        63%
            Return of Capital        0.711     36%      0.709        37%
                                    ------   -----     ------      -----
                                    $1.975    100%     $1.915       100%
                                    ======   =====     ======      =====
 
</TABLE>
MINORITY INTEREST

     At the initial public offering, the Minority Interest contributed a
net deficit of $244.2 million (see Footnote 1) versus the initial equity raised
by the Company of $201.4 million which created a shareholders' deficit of $42.8
million. In accordance with generally accepted accounting principles, the
Minority Interest's share of this deficit, $24.5 million, as well as subsequent
Minority Interest activity are charged to the Company as General Partner of the
Operating Partnership until the shareholders' deficit is eliminated. The
Minority Interest activity consists of the following (in thousands):

<TABLE>
<CAPTION>
 
<S>                                            <C>       <C>
Balance at June 30, 1994                                 $(24,544)
 Earnings allocated to Minority Interest         8,709
 Distributions paid to Minority Interest        (5,868)     2,841
 Other activity                                -------        263
                                                         --------       

Balance at December 31, 1994                              (21,440)
 Equity exchanged for property acquisitions                 8,900
 Earnings allocated to Minority Interest        17,648
 Distributions paid to Minority Interest       (23,524)    (5,876)
 Other activity                                -------        423
                                                         --------
 
Balance at December 31, 1995                              (17,993)
 Equity exchanged for property acquisitions                 1,318
 Earnings allocated to Minority Interest        19,062
 Distributions paid to Minority Interest       (23,840)    (4,778)
 Other activity                                -------        183
                                                         --------
Balance at December 31, 1996                             $(21,270)
                                                         ========
</TABLE> 

                                      F-10
<PAGE>
 
     To the extent that distributions paid  exceed earnings allocated to
the Minority Interest, the excess is charged to the Company as General Partner
of the Operating Partnership. When earnings allocated to the Minority Interest
exceed distributions, the excess is credited to the Company's retained earnings.

PER SHARE DATA

     Earnings per share of the Company for the years ended December 31,
1996 and 1995 and for the period from June 30, 1994 to December 31, 1994 is
computed based on weighted average shares outstanding during the period of 9.9
million, 9.3 million and 9.1 million, respectively. Weighted average Operating
Partnership units not held by the Company (12 million, 12.3 million and 12.1
million units for the periods ended December 31, 1996, 1995 and 1994,
respectively) 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 1996 and 1995,
approximately 0.3 million and 0.7 million units, respectively, were redeemed for
shares of stock. Historical per share data for periods prior to the public
offering is not relevant.

     As of December 31, 1996, approximately 19.1 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.

                                      F-11
<PAGE>
 
CASH AND CASH EQUIVALENTS

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

CONSOLIDATION COSTS AND EXTRAORDINARY ITEMS

     Although the Predecessor was ultimately reimbursed for all costs
incurred related to the transfer of the Properties just prior to the Offerings,
such costs have been reflected by the Predecessor as an expense in the Combined
Statement of Revenues and Expenses for the period from January 1, 1994 to June
29, 1994, and the reimbursement has been treated as a distribution.
Additionally, the extraordinary item of $15.2 million, which represents the
prepayment penalties required by the lenders in retiring the mortgage debt, is
reflected by the Predecessor as an expense in the Combined Statement of Revenues
and Expenses as such debt retirement was required to transfer the Properties to
the Operating Partnership.

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.

NEW ACCOUNTING PRONOUNCEMENTS

     On January 1, 1996, the Company implemented Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" which provides guidance on
the carrying value of long-lived assets. Implementation of the standard had no
effect on the consolidated financial statements. 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 estimated future net cash flows from the properties are less than its
carrying value.

     The Company also implemented, on January 1, 1996,  Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires entities to measure compensation
costs related to awards of stock-based compensation using either the fair value
method or the intrinsic value method. Under the fair value method, compensation
expense is measured at the grant date based on the fair value of the award.
Under the intrinsic value method, compensation expense is equal to the excess,
if any, of the quoted market price of the stock at the grant date over the
amount the employee must pay to acquire the stock. Companies

                                      F-12
<PAGE>
 
electing to use the intrinsic value method must disclose the impact on net
income and earnings per share as if the fair value method had been used. The
Company elected to account for stock-based compensation programs using the
intrinsic value method consistent with existing accounting policies. (See
Footnote 11 for additional required disclosures.)

RECLASSIFICATIONS

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


3.   RENTAL PROPERTY AND ACQUISITIONS

RENTAL PROPERTY

     Rental property consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
 
                                    1996      1995
                                  --------  --------
<S>                               <C>       <C>      
 
Land, at Predecessor cost         $ 25,452  $ 25,452
Land, acquired                      55,891    34,325
Buildings and improvements,
 at Predecessor cost               427,333   421,577  
Buildings and improvements,
 acquired or developed             151,324   105,760
                                  --------  --------
                                   660,000   587,114
Less: Accumulated depreciation     189,907   172,624
                                  --------  --------
                                  $470,093  $414,490
                                  ========  ========
</TABLE>

     Depreciation expense of the Company was $17.7 million and $15.9
million for the years ended December 31, 1996 and 1995, respectively, and $7.7
million for the period from June 30, 1994 to December 31, 1994.  Depreciation
expense of the CES Group was $7.5 million for the period from January 1, 1994 to
June 29, 1994. Repairs and maintenance expense of the Company was $11.8 million
and $10.0 million for the years ended December 31, 1996 and 1995, respectively,
and $7.2 million for the period from June 30, 1994 to December 31, 1994. Repairs
and maintenance expense of the CES Group was $6.9 million for the period from
January 1, 1994 to June 29, 1994.


ACQUISITIONS

     During 1996, the Company acquired four properties for $64.1 million, adding
1,049 apartment units. In two of the transactions, the Operating Partnership
issued a total of approximately 102,000 Operating Partnership units valued at
approximately $2.4 million. The conversion of

                                      F-13
<PAGE>
 
these Operating Partnership units into Company common stock is restricted for up
to two years. In one of the transactions, the Company assumed a $3.3 million
mortgage loan.

     During 1995, the Company acquired five properties for $82.3 million
adding 1,369 apartment units. In two of the transactions, the Operating
Partnership issued a total of approximately 561,000 Operating Partnership units
valued at $13.7 million. The conversion of these Operating Partnership units
into Company common stock is restricted for up to two years. In two of the
transactions, the Company assumed a total of $30.6 million in mortgage loans.


4.   INVESTMENT IN AND ADVANCES TO PROPERTY SERVICE BUSINESSES AND OTHER

     The Company uses the equity method of accounting for its investment in
the Property Service Businesses, which include Smith Realty Company ("SRC"),
Consolidated Engineering Services, Inc., and Smith Management Construction, Inc.
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 $7.8
million, $6.9 million and $3.8 million for the years ended December 31, 1996 and
1995 and for the period from June 30, 1994 to December 31, 1994, respectively.
The Operating Partnership received distributions aggregating $8.9 million, $8.2
million and $4.3 million for the years ended December 31, 1996 and 1995 and for
the period from June 30, 1994 to December 31, 1994, 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
ten percent. The Property Service Businesses also provide services to certain
partnerships which own commercial office buildings and have Messrs. Smith and
Kogod as the general partners ("Affiliates"). Such services are generally
provided at cost and overhead plus a mark-up, except for certain engineering and
technical services which are provided at cost and overhead.

     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.

                                      F-14
<PAGE>
 
     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,                     
                                                 --------------------------------   June 30, 1994 to 
                                                       1996         1995            December 31, 1994
                                                 -----------------------------------------------------
Fees Charged by Property Service Businesses to:                                  
----------------------------------------------------                             
<S>                                                <C>          <C>                 <C>
  Operating Partnership                              $ 7,969      $ 7,950                 $5,774
  Affiliates                                          31,321       28,964                  9,978
 
Cost of Administrative Services charged by SRC to:
----------------------------------------------------
  Operating Partnership                                7,459        8,090                  3,333
  Affiliates (1)                                       5,630        4,948                  2,862
 
</TABLE>
(1)  Additionally, an Affiliate was charged $0.3 million in 1995 for financial
advisory services based upon estimated time incurred.

     At December 31, 1996, the Operating Partnership had net advances to
the Property Service Businesses of $3.9 million reflected in the investment
balance.  At December 31, 1995, the Operating Partnership had net payables to
the Property Service Businesses of $0.6 million reflected in Due to Related
Parties.
 
     Combined summarized balance sheet information for the Property Service 
Businesses follows (in thousands):

<TABLE> 
<CAPTION> 
                                       As of December 31,
                                    -----------------------
                                       1996         1995
                                     -------      -------
<S>                                  <C>          <C> 
 Assets/(1)/
   Accounts receivable               $20,699      $14,628
   Property, net                       4,140        3,651
   Other, net                            302        2,496
                                     -------      -------
                                     $25,141      $20,775
                                     =======      =======
 Liabilities/(1)/
   Accounts payable                  $10,494      $ 9,000
   Deferred revenue                    3,758        3,912
   Due to related parties              7,130        2,150
   Other                               1,774        2,671
 Equity                                1,985        3,042
                                     -------      -------
                                     $25,141      $20,775
                                     =======      =======
</TABLE>

   /(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-15
<PAGE>
 
     Combined summarized income statement information for the Property Service 
Businesses follows (in thousands):                                             

<TABLE>
<CAPTION>
 
                                     Year Ended December 31,                       
                                --------------------------------    June 30, 1994 to 
                                  1996                1995          December 31, 1994
                                -------              -------       -------------------
<S>                             <C>                  <C>           <C>  
 Revenues                       $62,559              $58,777               $28,245
 Operating expense               53,245               49,925                23,469
 Depreciation/amortization        1,056                1,325                   560
 Other expense, net                 391                  647                   418
                                -------              -------               -------
   Net income/(1)/              $ 7,867              $ 6,880               $ 3,798
                                =======              =======               =======
 
</TABLE>

/(1)/ Represents 100% of the Property Service Businesses' net income, of which
the Company's share amounted to $7.8 million, $6.9 million and $3.8 million,
respectively, for the years ended December 31, 1996 and 1995 and the period from
June 30, 1994 to December 31, 1994.

5.   DEFERRED CHARGES
     Deferred charges consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
 
                                            1996     1995
                                           -------  -------
<S>                                        <C>      <C>
 
Permanent loan fees                        $19,917  $20,257
Retail lease acquisition costs               3,693    3,579
Acquisition/development costs and other      1,729      454
                                           -------  -------
                                            25,339   24,290
Less: Accumulated amortization               7,693    5,508
                                           -------  -------
                                           $17,646  $18,782
                                           =======  =======
 
</TABLE>

     Amortization expense of the Company was $2.9 million and $3.1 million
for the years ended December 31, 1996 and 1995, respectively, and $1.3 million
for the period from June 30, 1994 to December 31, 1994.  Amortization expense
for the CES Group was $0.7 million for the period from January 1, 1994 to June
29, 1994.

6.   MORTGAGE LOANS

     The Operating Partnership, through its subsidiary financing partnerships, 
has mortgage loans consisting of the following as of December 31 (in thousands):

<TABLE>
<CAPTION>
 
                           1996      1995
                         --------  --------
<S>                      <C>       <C>
 
Mortgage Pool One        $110,140  $110,140
Mortgage Pool Two         125,214   125,214
Mortgage Pool Three       117,000   117,000
Mortgage Pool Four         31,095    31,141
Acquisition Mortgages      33,359    30,478
                         --------  --------
                         $416,808  $413,973
                         ========  ========
</TABLE>

                                      F-16
<PAGE>
 
     These loans require monthly interest and, where applicable, principal 
payments and are collateralized by non-recourse first lien mortgages or deeds of
trust on 33 of the 43 Properties, bear interest at a weighted-average interest
rate of 8.01% and 8.13% as of December 31, 1996 and 1995, respectively, and have
a weighted-average maturity of 7.2 years.

     The loan for Mortgage Pool One bears interest at a fixed rate of 8.0% and
is due June 30, 1999. The loan for Mortgage Pool Two bears interest at a fixed
rate of 8.3% and is due June 30, 2001. Both loans are interest only and require
the Company to establish escrows to fund capital improvements and repairs, and
to maintain minimum cash balances for interest and ground rent payments. The
loans for Mortgage Pools One and Two contain cross collateral and cross default
provisions among the separate financing partnership borrowers within each pool.

     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
guarantee $42 million of the mortgage loan secured by Mortgage Pool Three.

     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.

     In connection with two of the 1995 acquisitions discussed in Note 3, the
Company assumed a mortgage loan of $17.5 million with an interest rate of LIBOR
plus 170 basis points (7.2% as of December 31, 1996) due June 30, 1997, and a
$13.1 million mortgage loan with a fixed interest rate of 7.5% with principal
amortized over 25 years and a final payment due October 31, 2020. In connection
with one of the 1996 acquisitions, the Company assumed a $3.3  million mortgage
loan with a fixed interest rate of 9.0% with principal amortized using a 29-year
amortization schedule and a final payment due August 1, 1999.  The mortgage
loans are collateralized by the respective properties. (See Footnote 14 for
disclosures on subsequent events).

                                      F-17
<PAGE>
 
     The scheduled principal payments for all of the mortgage loans are as 
follows (in thousands):
<TABLE>
<CAPTION>
 
Year Ending
December 31,
------------
<S>               <C>  
1997               $ 17,483
1998                    257
1999                114,559
2000                  1,873
2001                127,241
Thereafter          155,395
                   --------
                   $416,808
                   ========
 
</TABLE>
7.   NOTES PAYABLE

     The Operating Partnership, through its subsidiary financing
partnerships, has notes payable consisting of the following as of December 31
(in thousands):
<TABLE>
<CAPTION>
 
                                                          1996     1995
                                                         -------  -------
<S>                                                      <C>      <C>      
 
              $100 million Acquisition Line of Credit    $ 82,050  $52,550
              $83 million Acquisition Line of Credit       30,000       --
              Construction Loan                            17,686   16,654  
                                                         --------  -------  
                                                         $129,736  $69,204
                                                         ========  ======= 
</TABLE>

     The Company has a $100 million revolving line of credit on which
borrowings bear interest at  LIBOR plus 1.625% (7.155% at December 31, 1996).
The line of credit matures on June 30, 1997 with two one-year extension options
exercisable by the Company. The Company pays a fee of .125% on any unused
portions of the line of credit. Borrowings under the line of credit are
collateralized by 7 of the 43 Properties. The line of credit agreement contains
certain restrictive covenants, including maintenance of minimum net worth, debt
to equity ratios and cash flow coverage requirements.  The maximum amounts
outstanding during each year never exceeded the December 31 balances.

     During 1996, the Company obtained an additional $83 million
acquisition credit facility with a term of eight and one half years.  The line
of credit provides for an interest rate that is fixed at the time of each
borrowing at 150 basis points over a pre-determined Treasury index and is cross-
collateralized with Mortgage Pool Three (Note 6).  Borrowings outstanding at
December 31, 1996 bear interest at a weighted-average fixed rate of 7.27% and
are 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 connection with the development of the Westerly at Worldgate
apartments, the Company obtained an interest-only construction loan in 1995 with
interest at LIBOR plus 180 basis points (7.32% at December 31, 1996), payable
monthly, due June 1, 1997. The loan is collateralized by

                                      F-18
<PAGE>
 
the property. Construction of the 320-unit community was completed in December,
1995. (See Footnote 14 for disclosures on subsequent events).


8.   COMMITMENTS AND CONTINGENCIES

LAND LEASES

     Nine of the Properties have ground leases expiring at various dates between
December, 2032 and July, 2064. Six of the ground leases are with parties who own
Operating Partnership units. Generally, each ground lease provides for a nominal
annual rental and an additional rental calculated from the results of Property
operations after capital expenditures.

     The base rental expense to the Company under the ground leases was $0.5
million for each of the years ended December 31, 1996 and 1995 and $0.3 million
for the period from June 30, 1994 to December 31, 1994. The base rental expense
for the CES Group was approximately $0.2 million for the period from January 1,
1994 to June 29, 1994. The additional rental expense to the Company under the
ground leases was $2.6 million and $1.8 million for the years ended December 31,
1996 and 1995, respectively, and $1.4 million for the period from June 30, 1994
to December 31, 1994.  Additional rental expense to the CES Group was
approximately $1.4 million for the period from January 1, 1994 to June 29, 1994.
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, 1996 for the
ground leases are as follows (in thousands):
<TABLE>
<CAPTION>
 
Year Ending
December 31,
------------
<S>            <C>  
1997             $   491
1998                 491
1999                 491
2000                 491
2001                 491
Thereafter        22,290
                 -------
                 $24,745
                 =======
</TABLE>

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.

                                      F-19
<PAGE>
 
BUILDING EMPLOYEES RETIREMENT PLAN

     Substantially all of the personnel employed at the residential
Properties are eligible and participate in the Charles E. Smith Building
Employees Retirement Plan, a defined contribution 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. Employment Services is required to contribute
4% of employee-qualified earnings. The total contributions were $0.3 million in
both 1996 and 1995, and $0.1 million for the six months ended December 31, 1994.
Prior to the business combination, these employees were employed by the
partnerships that owned the Properties. Employees of the Property Service
Businesses are covered by a separate defined contribution tax-qualified
retirement savings plan.


9.   RELATED-PARTY TRANSACTIONS

     The Operating Partnership conducts business with entities in which
Messrs. Smith and Kogod exercise control. The following is a description of
these transactions.

 .  In connection with the development of the Westerly at Worldgate apartments,
   the Operating Partnership purchased the land for $4.7 million from an
   affiliate controlled by Messrs. Smith and Kogod pursuant to an agreement with
   the Company at the time of the initial public offering. Also, 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 $0.5 million for the year ended December
   31, 1995 and $0.2 million for the period from June 30, 1994 to December 31,
   1994. The project was completed in December, 1995.

 .  For the years ended December 31, 1996 and 1995, the Company paid
   approximately $0.7 million and $0.3 million, respectively, in payroll
   reimbursements to an entity controlled by Messrs. Smith and Kogod for initial
   development efforts on development properties and potential development
   sites.

 .  The two retail properties lease health club facilities to entities controlled
   by Messrs. Smith and Kogod. Rental income earned under these leases
   approximated $5.0 million, $4.8 million, and $1.9 million for the years ended
   December 31, 1996 and 1995, and the period from June 30, 1994 to December 31,
   1994, and $1.9 million for the period from January 1, 1994 to June 29, 1994.
   The leases expire on December 31, 2015. Messrs. Smith and Kogod have
   guaranteed that the tenant for one of the facilities leased in 1991 will pay
   all minimum annual rent and expense pass-throughs in accordance with the
   terms of the agreement through June 10, 1999. In addition, one of the retail
   properties also leases health club equipment to the affiliated tenant under a
   capital lease. As of December 31, 1996 and 1995, the present value of the
   future minimum rental receivables approximated $0.2 million

                                      F-20
<PAGE>
 
   and $0.3 million, respectively, and are included in other assets in the
   accompanying consolidated balance sheets.

     At December 31, 1995, approximately $0.8 million was reflected in Due
to Related Parties for amounts due to Affiliates and Predecessor Partners.


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 $427 million and $459 million at December 31, 1996 and 1995,
respectively. The fair value of notes payable approximates the carrying value.


11.  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 Company's
net income would have been reduced by approximately $8,000 (less than $0.01 per
share)  for the year ended December 31, 1996.  The fair value of options granted
during 1996 is estimated at approximately $23,000 based on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 8.3%, volatility of 9%, risk-free interest rate of 6.3% and an
expected life of 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.  Messrs. Smith and Kogod are
not eligible to participate under this plan. 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 1,750,000 shares
of common stock and/or units pursuant to options granted under these plans.
Options outstanding under both plans are as follows:

                                      F-21
<PAGE>
 
<TABLE>
<CAPTION>
                                                                Exercise Price     Options
                                                    Number         Per Share      Exercisable
                                                  ----------    --------------   ------------
<S>                                               <C>           <C>              <C>        
 Shares under option, December 31, 1994             895,000          $24            20,000
 Options granted                                       --             --
 Options canceled                                      --             --
                                                   --------          ---
 
 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
                                                   ========          ===          =======
 
</TABLE>

     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.

     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. As of December 31, 1996, 351,000
options had vested.  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.

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. In July 1994, 95,000 restricted units were awarded to certain executive
officers and key employees.  These grants vest in four equal annual installments
beginning on the first anniversary of the date of grant, subject to acceleration
of vesting upon a change of control of the Company.  During 1996, 7,500 grants
were canceled and 23,750 units vested. No grants were canceled and 23,750 units
vested in 1995.  No grants were canceled or vested during the period from June
30, 1994 to December 31, 1994.  For the years ended

                                      F-22
<PAGE>
 
December 31, 1996 and 1995 and the period from June 30, 1994 to December 31,
1994, compensation expense relating to the plan was $0.5 million, $0.6 million
and $0.3 million, respectively, based on the market value of the Company's stock
at the date of grant.


12.  SUPPLEMENTAL CASH FLOW DATA

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

<TABLE>  
<CAPTION> 
                                              CES Residential Realty, Inc                  CES Group
                                              ---------------------------------------      ---------
                                              Year Ended December 31,
                                              -----------------------
                                                                          6/30/94 to       1/1/94 to
                                                1996          1995         12/31/94         6/29/94
                                              --------      -------       ----------       ---------
<S>                                           <C>           <C>           <C>              <C> 
Cash paid during the period
 for interest                                  $41,078      $35,376        $  16,457        $26,536
Capitalized interest                                60          675              200             --
Contribution of properties to the
 Operating Partnership                              --           --         (244,208)            --
Purchase of property in exchange
 for Operating Partnership units                 2,403       15,491               --             --
Assumption of debt on acquisitions               3,260       30,618               --             --
</TABLE>

13.  SEGMENT OPERATIONS

     The CES Group financial statements combine the results of operations of the
Properties (the rental operations) and the Property Service Businesses
(multifamily and retail property management and leasing, engineering and
technical, interior construction and renovation, financing services, and other
services).  Consequently, the following table presents operating and other
information divided between the two segments of the CES Group's business (in
thousands):

                                      F-23
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                Property
                                     Rental      Service                   Combined
                                   Operations  Businesses   Eliminations    Total
                                   ----------  -----------  -------------  --------
<S>                                <C>         <C>          <C>            <C>
 
PERIOD FROM JANUARY 1, 1994
 TO JUNE 29, 1994:
 Revenue                              $63,496     $27,792        $     -    $91,288
 Interest income                          663         307              -        970
 Intersegment revenue                       -       1,791         (1,791)         -
                                      -------     -------        -------    -------
  Total revenue                       $64,159     $29,890        $(1,791)   $92,258
                                      =======     =======        =======    =======
 Depreciation and amortization        $ 7,897     $   763        $  (271)   $ 8,389
                                      =======     =======        =======    =======
 Operating profit                     $27,171     $ 4,173        $  (119)   $31,225
 Intersegment expense (revenue)           947      (1,066)           119          -
                                      -------     -------        -------    -------
 Net profit                           $28,118     $ 3,107        $     -    $31,225
                                      =======     =======        =======    =======
 Capital expenditures                 $ 1,913     $   306        $  ( 98)   $ 2,121
                                      =======     =======        =======    =======
 
</TABLE>


14.  SUBSEQUENT EVENTS (UNAUDITED)

     On February 19, 1997, the Company issued 2.7 million shares of common
stock (the Offering) at $28.375 per share for total proceeds of $72.2 million,
net of underwriting discounts and other expenses totaling $4.5 million.  Net
proceeds from the Offering were used to repay $61.2 million of notes payable and
$9 million of mortgage debt. The balance was used to fund the property
acquisitions discussed below and for general corporate purposes.

     During February and March 1997, the Company completed the acquisition
of three multifamily properties totaling 1,828 apartment units, for a total cost
of approximately $129 million consisting of Operating Partnership Units valued
at approximately $47 million, assumed debt of approximately $80 million and cash
of approximately $2 million. One of the properties is subject to a 5.1% net
profits interest in favor of an unaffiliated third party.

     On March 12, 1997, the underwriters of the Offering exercised their
option to purchase an additional 0.4 million shares of common stock at $28.375
per share, less the underwriting discount. Net proceeds to the Company of $10.9
million were used to repay amounts outstanding on the lines of credit.

                                      F-24
<PAGE>
 
15.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Quarterly financial information for 1996 and 1995 is as
follows (in thousands except per share data):
<TABLE>
<CAPTION>
                                                                   Three Months Ended                               
                                        ----------------------------------------------------------------------------
                                          March 31, 1996     June 30, 1996    September 30,1996   December 31, 1996 
                                        -------------------  --------------  -------------------  ------------------
<S>                                     <C>                  <C>             <C>                  <C>                
 
Revenues                                          $ 39,810        $ 40,836             $ 42,894            $ 43,772
Operating expenses
 (including depreciation)                          (23,506)        (22,558)             (24,027)            (23,619)
Equity in income of Property
 Service Businesses                                  1,548           1,444                1,797               3,057
Interest expense                                   (10,411)        (10,631)             (11,206)            (11,358)
Corporate general and
 administrative expenses                              (745)           (795)                (667)               (818)
                                                  --------        --------             --------            --------
Income before Minority Interest                      6,696           8,296                8,791              11,034
Minority Interest                                   (3,687)         (4,542)              (4,818)             (6,015)
Distributions in Excess of Earnings
  Allocated to Minority Interest                    (2,268)         (1,364)              (1,094)                (52)
                                                  --------        --------             --------            --------
Net income                                        $    741        $  2,390             $  2,879            $  4,967
                                                  ========        ========             ========            ========
Net income per share                                  $.08            $.24                 $.29                $.49
                                                  ========        ========             ========            ========
 

                                                                   Three Months Ended                               
                                        ----------------------------------------------------------------------------
                                          March 31, 1995     June 30, 1995    September 30,1995   December 31, 1995 
                                        -------------------  --------------  -------------------  ------------------
<S>                                     <C>                  <C>             <C>                  <C>   
Revenues                                          $ 34,410        $ 35,069             $ 37,616            $ 39,238
Operating expenses
 (including depreciation)                          (19,470)        (19,512)             (21,322)            (21,581)
Equity in income of Property
 Service Businesses                                    561           1,586                1,994               2,727
Interest expense                                    (8,695)         (8,926)              (9,572)            (10,228)
Corporate general and administrative
 expenses                                             (653)           (770)                (611)               (808)
                                                  --------        --------             --------            --------
Income before Minority Interest                      6,153           7,447                8,105               9,348
Minority Interest                                   (3,545)         (4,303)              (4,611)             (5,189)
Distributions in Excess of Earnings
  Allocated to Minority Interest                    (2,263)         (1,583)              (1,249)               (781)
                                                  --------        --------             --------            --------
Net income                                        $    345        $  1,561             $  2,245            $  3,378
                                                  ========        ========             ========            ========
Net income per share                                  $.04            $.17                 $.24                $.35
                                                  ========        ========             ========            ========
 
</TABLE>

                                      F-25
<PAGE>
 
                   CHARLES E. SMITH RESIDENTIAL REALTY, INC.
                                 SCHEDULE III
                   REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>     
<CAPTION>   
                                                                                                  Capitalized Costs Before
                                                                                                 Accumulated Depreciation at
                                                       Initial Cost               Costs               December 31, 1996
                            Encumbrances/   ------------------------------     Capitalized     ------------------------------
                             Collateral                      Building and     Subsequent to                     Building and   
Properties                     Pools(1)         Land         Improvements      Acquisition         Land         Improvements   
------------------------   --------------   ------------------------------   ---------------   -------------   --------------  
<S> 
Albemarle                       LOC           $   418          $     --         $   4,686         $   418         $  4,686
Bedford village                 Two             1,062                --            12,903           1,062           12,903
Bennington                    $12,870           6,922            22,645                88           6,922           22,733
Berkeley                       Three              108                --             1,910             108            1,910
Boulevard of Old Town           --              2,653             4,269             2,302           2,653            6,571
Calvert-Woodley                Three              172                --             2,449             172            2,449
Car Barn                        Two             3,576                --            13,426           3,576           13,426
Charter Oaks(2)                 LOC             4,387            10,280               354           4,387           10,634
Cleveland House                Three              325                --             4,067             325            4,067
Columbia Crossing              Three            4,701                --            18,330           4,701           18,330
Columbian-Stratford             One               242                --             4,426             242            4,426
Concord Village                 Two                --                --             8,523              --            8,523
Connecticut Heights          $17,245            6,956            18,695               643           6,956           19,338
Corcoran House                  One               230                --             1,979             230            1,979
Courthouse Plaza               Three               --                --            44,121              --           44,121
Crystal House I                 One                --                --            10,123              --           10,123
Crystal House II                One                --                --             9,095              --            9,095 
Crystal Place                   Two             1,245                --            18,658           1,245           18,658  
Crystal Square                  Two                --                --            14,465              --           14,465
1841 Columbia Road(2)         $3,245            3,611             1,873                 4           3,611            1,877
Executive Central               Two               262                --             4,432             262            4,432   
Executive North                 One               245                --             4,871             245            4,871   
Executive South                 Two               303                --             3,849             303            3,849
Fort Chaplin                    Two                97                --             7,715              97            7,715
Gateway Place                  Three            1,660                --            17,564           1,660           17,564
Manor                           LOC             5,809            14,807             1,203           5,809           16,010
Marbury Plaza                   One                --                --            10,099              --           10,099
Newport Village              Two/Three            281                --            15,922             281           15,922
Oakwood                          --             3,819            12,551               143           3,819           12,694
Orleans Village                 Two               700                --            13,255             700           13,255
Oxford Manor                    One               290                --             3,140             290            3,140      
Patriot Village              $31,095               --                --            28,126              --           28,126 
Potomac View                    LOC             2,520             6,393               417           2,520            6,810   
Skyline Mall                   Three              482                --            14,476             482           14,476      
Skyline Towers                  One               360                --            24,687             360           24,687
Statesman                       One               600                --             4,187             600            4,187
Suburban Tower                  LOC             1,815             5,239              (137)          1,815            5,102
2501 Porter Street             Three            1,126                --            18,194           1,126           18,194 
Van Ness                        LOC            12,699            29,973                13          12,699           29,986
Water Park Towers               One             2,500                --            41,717           2,500           41,717
Westerly(3)                  $17,686            4,700            19,244               260           4,700           19,504
Windsor Towers                  One               362                --             5,421             362            5,421
Worldgate Centre                LOC             4,105                --            40,582           4,105           40,582
                                            ------------------------------   ------------------------------------------------
                                              $81,343          $145,969          $432,688         $81,343         $578,657
                                            ==============================   ================================================

<CAPTION>                
                                            Accumulated         Net          Date of            Date          Depreciable
Properties                    Total         Depreciation     Property      Construction       Acquired           Lives
------------------------  -------------   ---------------  ------------  ----------------   ------------   ---------------- 
<S>                       <C>             <C>              <C>           <C>                <C>            <C> 
Albemarle                    $  5,104           $(3,325)     $  1,779          1966                --          5-40 years  
Bedford village                13,965            (8,120)        5,845          1967                --          5-40 years  
Bennington                     29,655              (712)       28,943           --                1995         5-40 years  
Berkeley                        2,018            (1,450)          568          1961                --          5-40 years  
Boulevard of Old Town           9,224              (230)        8,994           --                1995         5-40 years  
Calvert-Woodley                 2,621            (1,758)          863          1962                --          5-40 years  
Car Barn                       17,002            (4,817)       12,185        1982/1986             --          5-40 years  
Charter Oaks(2)                15,021              (226)       14,795          1970               1996         5-40 years   
Cleveland House                 4,392            (2,832)        1,560          1962                --          5-40 years  
Columbia Crossing              23,031            (3,666)       19,365        1990/1991             --          5-40 years  
Columbian-Stratford             4,668            (3,169)        1,499          1959                --          5-40 years  
Concord Billage                 8,523            (5,437)        3,086          1967                --          5-40 years  
Connecticut Heights            26,294              (724)       25,570           --                1995         5-40 years  
Corcoran House                  2,209            (1,544)          665          1961                --          5-40 years  
Courthouse Plaza               44,121            (9,817)       34,304        1988/1990             --          5-40 years  
Crystal House I                10,123            (5,922)        4,201          1969                --          5-40 years   
Crystal House II                9,095            (5,785)        3,310          1964                --          5-40 years  
Crystal Place                  19,903            (6,055)       13,848          1986                --          5-40 years  
Crystal Square                 14,465            (7,786)        6,679          1975                --          5-40 years  
1841 Columbia Road(2)           5,488               (20)        5,468          1923               1996         5-40 years  
Executive Central               4,694            (3,374)        1,320          1960                --          5-40 years  
Executive North                 5,116            (3,843)        1,273          1960                --          5-40 years  
Executive South                 4,152            (3,089)        1,063          1960                --          5-40 years  
Fort Chaplin                    7,812            (5,750)        2,062          1963                --          5-40 years   
Gateway Place                  19,224            (4,737)       14,487          1987                --          5-40 years  
Manor                          21,819              (957)       20,862           --                1994         5-40 years  
Marbury Plaza                  10,099            (7,171)        2,928          1966                --          5-40 years  
Newport Village                16,203            (8,696)        7,507          1971                --          5-40 years  
Oakwood                        16,513              (321)       16,192           --                1995         5-40 years  
Orleans Village                13,955            (8,759)        5,196        1965/1966             --          5-40 years  
Oxford Manor                    3,430            (2,150)        1,280          1967                --          5-40 years  
Patriot Village                28,126           (14,075)       14,051     1973/1975/1977           --          5-40 years   
Potomac View                    9,330              (419)        8,911           --                1994         5-40 years  
Skyline Mall                   14,958            (7,347)        7,611          1977                --          5-40 years  
Skyline Towers                 25,047           (14,901)       10,146          1972                --          5-40 years  
Statesman                       4,787            (3,382)        1,405          1961                --          5-40 years  
Suburban Tower                  6,917              (248)        6,669           --                1995         5-40 years  
2501 Porter Street             19,320            (4,451)       14,869        1987/1988             --          5-40 years  
Van Ness                       42,685              (312)       42,373          1970               1996         5-40 years  
Water Park Towers              44,217            (9,151)       35,066          1989                --          5-40 years   
Westerly(3)                    24,204              (612)       23,592          1995                --          5-40 years  
Windsor Towers                  5,783            (3,823)        1,960          1965                --          5-40 years  
Worldgate Centre               44,687            (8,944)       35,743          1990                --          5-40 years  
                          -------------  ---------------  ------------  
                             $660,000         $(189,907)     $470,093
                         ==============  ===============  ============
</TABLE> 
                         


                                      S-1
<PAGE>
 
     The aggregate cost for Federal income tax purposes of the Company's
investment in real estate was approximately $652.4 million and $577.6 million at
December 31, 1996 and 1995, 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
                               ---------------------------------
                                 1996        1995         1994
                               --------    ---------    --------
<S>                            <C>         <C>          <C> 
                                                     
BALANCE, beginning of year     $587,114    $471,920     $437,019
 Acquisitions                    65,836     110,487       29,394
 Improvements                     7,425       4,709        5,507
 Retirements and write-offs        (375)         (2)          --
                               --------    --------     --------
BALANCE, end of year           $660,000    $587,114     $471,920
                               ========    ========     ========
<CAPTION> 
 
                                   Accumulated Depreciation
                               ---------------------------------
                                 1996        1995         1994
                               --------    --------     --------
<S>                            <C>         <C>          <C>  
BALANCE, beginning of year     $172,624    $156,707     $141,475
 Depreciation expense            17,658      15,917       15,232
 Retirements and write-offs        (375)         --           --
                               --------    --------     --------
                               $189,907    $172,624     $156,707
                               ========    ========     ========
 
</TABLE>



                                      S-2
<PAGE>
 
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
 
     ITEM                           DOCUMENT                                      PAGE (if included herein)
     ----                           --------                                      ----
<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.

     **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.

     **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

     **2.4  Assignment and Assumption Agreement by Residential
            Associates Limited Partnership and Charles E. Smith Residential
            Realty L.P.

     **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.

     **2.6  Debt Contribution Agreement between Charles E. Smith
            Management, Inc. and Charles E. Smith Residential Realty L.P.
            (the "Operating Partnership")

      *3.1  Amended and Restated Articles of Incorporation of Charles E.
            Smith Residential Realty, Inc. (the "Company")

       3.2  Amended and Restated Bylaws of the Company (Incorporated by
            reference to the same titled and numbered exhibit in the
            Company's Registration Statement on Form S-3 (File No. 33-
            93986)

     **4.1  First Amended and Restated Agreement of Limited Partnership
            of the Operating Partnership, as amended

     **4.2  Certificate of Limited Partnership of the Operating Partnership

    **10.1  Noncompetition Agreement by and among the Company, the
            Operating Partnership and Robert P. Kogod

    **10.2  Registration Rights and Lock-up Agreement

    **10.3  Pledge Agreement

</TABLE> 

<PAGE>
 
<TABLE> 
<CAPTION> 

     ITEM                           DOCUMENT                                      PAGE
     ----                           --------                                      ----
<S>         <C>                                                                   <C>
    **10.4  First Amended and Restated 1994 Employee Stock and Unit
            Option Plan

    **10.5  First Amended and Restated 1994 Employee Restricted Stock
            and Restricted Unit Plan

    **10.6  Non-Employee Directors Stock Option Plan

    **10.7  Subscription Agreement

    **10.8  Voting Stock Partnership Agreement for Smith Property
            Management Partnership

    **10.9  Voting Stock Partnership Agreement for Smith Management
            Construction Partnership

   **10.10  Voting Stock Partnership Agreement for Consolidated
            Engineering Services Partnership

   **10.11  Amended and Restated Articles of Incorporation of Smith Realty
            Company

    *10.12  By-Laws of Smith Property Management, Inc.

    *10.13  Articles of Incorporation of Smith Management Construction,
            Inc.

    *10.14  By-Laws of Smith Management Construction, Inc.

    *10.15  Articles of Incorporation of Consolidated Engineering Services,
            Inc.

    *10.16  By-Laws of Consolidated Engineering Services, Inc.

    *10.17  Certificate of Incorporation of Smith One, Inc.

    *10.18  By-Laws of Smith One, Inc.

   **10.19  Agreement of Limited Partnership of Smith Property Holdings
            One L.P.

   **10.20  Agreement of Limited Partnership of Smith Property Holdings
            One (D.C.) L.P.

    *10.21  Certificate of Incorporation of Smith Two, Inc.

    *10.22  By-Laws of Smith Two, Inc.

   **10.23  Agreement of Limited Partnership of Smith Property Holdings
            Two L.P.

</TABLE> 

<PAGE>
 
<TABLE> 
<CAPTION> 

     ITEM                           DOCUMENT                                      PAGE
     ----                           --------                                      ----
<S>         <C>                                                                   <C>
   **10.24  Agreement of Limited Partnership of Smith Property Holdings
            Two (D.C.) L.P.

    *10.25  Certificate of Incorporation of Smith Three, Inc.

    *10.26  By-Laws of Smith Three, Inc.

   **10.27  Agreement of limited Partnership of Smith Property Holdings
            Three L.P.

   **10.28  Agreement of Limited Partnership of Smith Property Holdings
            Three (D.C.) L.P.

    *10.29  Certificate of Incorporation of Smith Four, Inc.

    *10.30  By-Laws of Smith Four, Inc.

   **10.31  Agreement of Limited Partnership of Smith Property Holding
            Four L.P.

   **10.32  Amended and Restated Certificate of Incorporation of Smith
            Five, Inc.

    *10.33  By-Laws of Smith Five, Inc.

   **10.34  Agreement of Limited Partnership of Smith Property Holdings
            Five (D.C.) L.P.

   **10.35  License Agreement between Charles E. Smith Management, Inc.
            and the Company

   **10.36  License Agreement between Charles E. Smith Management, Inc.
            and the Operating Partnership

     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.

  ***10.39  Amended and Restated Credit Agreement by and between the
            Operating Partnership and PNC Bank, National Association, et
            al.

     10.40  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)
</TABLE> 

<PAGE>
 
<TABLE> 
<CAPTION> 

     ITEM                           DOCUMENT                                      PAGE
     ----                           --------                                      ----
<S>         <C>                                                                   <C> 
     10.41  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)

     10.42  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)

     10.43  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)

     10.44  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)

     10.45  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)

     10.46  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)

     10.47  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)

     10.48  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 GMAC Mortgage
            Corporation of PA ("GMAC") (Incorporated by reference to
            Exhibit No. 10.10 of the Company's Quarterly Report on Form
            10-Q for the Quarter Ended June 30, 1994)

     10.49  Multifamily Note of Smith Two to GMAC (Incorporated by
            reference to Exhibit No. 10.11 of the Company's Quarterly
            Report on Form 10-Q for the Quarter Ended June 30, 1994)

</TABLE> 

<PAGE>
 
<TABLE> 
<CAPTION> 

     ITEM                           DOCUMENT                                      PAGE
     ----                           --------                                      ----
<S>         <C>                                                                   <C>
     10.50  Multifamily Note of Smith Two D.C. to GMAC (Incorporated by
            reference to Exhibit No. 10.12 of the Company's Quarterly
            Report on Form 10-Q for the Quarter Ended June 30, 1994)

     10.51  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)

     10.52  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)

     10.53  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)

     10.54  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)

     10.55  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)

     10.56  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)

     10.57  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)

   **10.58  Agreement of Limited Partnership of Smith Employment
            Services L.P.

   **10.59  Certificate of Limited Partnership of Smith Employment Services
            L.P.

     10.60  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)

     10.61  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)

</TABLE> 

<PAGE>
 
<TABLE> 
<CAPTION> 

     ITEM                           DOCUMENT                                      PAGE
     ----                           --------                                      ----
<S>         <C>                                                                   <C>
     10.62  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)

     10.63  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)

     10.64  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)

     10.65  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)

  ***10.66  Certificate of Incorporation of Smith Seven, Inc.

  ***10.67  By-Laws of Smith Seven, Inc.

  ***10.68  Agreement of Limited Partnership of Smith Property Holdings
            Seven L.P.

  ***10.69  Commitment for Mortgage Loan to the Operating Partnership
            from Northwestern Mutual Life Insurance Company

        21  Subsidiaries of the Registrant                                        E-1

      23.1  Consent of Arthur Anderson LLP                                        E-2
 </TABLE>
---------------------
* Incorporated by reference to the same titled and numbered exhibit in the 
Company's Registration Statement on Form S-11, No. 33-75288.

** Incorporated by reference to the same titled and numbered exhibit in the 
Company's Form 10-K for the year ended December 31, 1994.

*** Incorporated by reference to the same titled and numbered exhibit in the 
Company's Form 10-K for the year ended December 31, 1995.