UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549
                                    FORM 10-K


  X      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----    EXCHANGE ACT OF 1934 (FEE REQUIRED)
         For the fiscal year ended December 31, 1997

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
         For the transition period from _____ to _____

                         Commission File Number 0-25230

                       FIRST WASHINGTON REALTY TRUST, INC.

             (Exact name of registrant as specified in its charter)

         Maryland                                  52-1879972
(State of Incorporation or Organization)           (I.R.S. employer
                                                   identification no.)

4350 East-West Highway                             (301) 907-7800
Suite 400                                          (Registrant's telephone
Bethesda, MD   20814                               number, including area code)
(Address of principal executive offices)

               Securities registered pursuant to Section 12(b) of
                                    the Act:

Title of Each Class                  Name of Each Exchange on Which Registered
Common Stock, $.01 par value                   New York Stock Exchange

9.75% Series A Cumulative Participating Convertible Preferred Stock
Liquidation Preference of $25 per Share        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 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. X

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  was  approximately  $195 million  based on the closing price of such
shares on the New York Stock Exchange as of March 27, 1998.

The number of shares of the Registrant's  Common Stock outstanding was 7,388,718
on March 30, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III - Portions of the definitive  proxy statement for the Annual Meeting of
Shareholders presently scheduled to be held on May 8, 1998, to be filed pursuant
to Regulation 14A.

This report including Exhibits, contains 57 pages.




<PAGE>








                       FIRST WASHINGTON REALTY TRUST, INC.
                         1997 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS







  Item
   No.                                                                    Page
                                     PART I

1.    Business........................................................      1
2.    Properties......................................................      9
3.    Legal Proceedings...............................................     16
4.    Submission of Matters to a
      Vote of Security Holders........................................     16

                                     PART II

5.    Market for the Registrant's Common
      Equity and Related Shareholder Matters..........................     17
6.    Summary of Selected Financial Data..............................     22
7.    Management's Discussion and Analysis
      of Financial Condition and
          Results of Operations.......................................     23
8.    Consolidated Financial Statements and
      Supplementary Data..............................................     29
9.    Changes in and Disagreements with
      Accountants on Accounting
          and Financial Disclosure....................................     29

                                    PART III

10.   Directors and Executive Officers
      of the Registrant...............................................     30
11.   Executive Compensation..........................................     30
12.   Security Ownership of Certain
      Beneficial Owners and Management................................     30
13.   Certain Relationships and
      Related Transactions............................................     30

                                     PART IV

14.   Exhibits, Financial Statement
      Schedules, and Reports on Form 8-K..............................     30






<PAGE>





                                                      PART I



Item 1.  Business

General (dollars in thousands)

      First Washington  Realty Trust, Inc. (the "Company") is a fully integrated
real estate  organization with expertise in acquisitions,  property  management,
leasing,   renovation  and   development  of  principally   supermarket-anchored
neighborhood  shopping  centers.  The Company  currently  owns a portfolio of 49
retail properties (the "Retail Properties")  containing a total of approximately
5.2  million  square  feet  of  gross  leasable  area  ("GLA")  located  in  the
Mid-Atlantic region and the Chicago, Illinois metropolitan area.

      The Retail  Properties are  strategically  located  neighborhood  shopping
centers principally  anchored by well known tenants such as Giant Food, Safeway,
Shoppers Food Warehouse,  Food Lion, A&P Superfresh,  Winn Dixie,  Weis Markets,
Acme Market,  Dominick's  Supermarket,  CVS/Pharmacy and Rite Aid.  Neighborhood
shopping  centers are typically open- air centers ranging in size from 50,000 to
150,000 square feet of GLA and anchored by supermarkets  and/or drug stores. The
Retail Properties range in size from  approximately  3,000 square feet of GLA to
approximately  335,000  square feet of GLA,  and average  approximately  106,000
square feet of GLA. The anchor tenants  typically  offer daily  necessity  items
rather than specialty goods.  Nine of the Retail Properties are relatively small
in size, with less than 50,000 square feet of GLA. Such properties do not have a
large  supermarket  or drug store anchor  tenant,  and as such may be subject to
greater variability in consumer traffic and operating performance.

Organization

      The  Company  was  formed  in  April  1994  to  continue  and  expand  the
neighborhood  shopping center acquisition,  management and renovation strategies
of First  Washington  Management,  Inc.  ("FWM"),  which has been engaged in the
business  since  1983.  FWM was  founded  by Stuart D.  Halpert,  the  Company's
Chairman,  William J. Wolfe,  President and Chief Executive Officer,  and Lester
Zimmerman, an Executive Vice President (the "Principals").

      The  Company's  assets  are  held  by,  and all its  operations  conducted
through,   First   Washington   Realty  Limited   Partnership   (the  "Operating
Partnership") and First Washington Management,  Inc. ("FWM"). The Company is the
sole general  partner of the  Operating  Partnership.  The limited  partners are
individuals,  partnerships and others who have  contributed  their properties in
exchange for partnership interests ("Units").  The limited partners may exchange
their Units for cash, or at the option of the Company,  for stock of the Company
on a 1 for 1  basis.  As of  December  31,  1997 and  1996,  the  Company  owned
approximately  79%  and 86% of the  Operating  Partnership,  respectively.  This
arrangement  is  commonly  referred to as an  Umbrella  Partnership  or "UPREIT"
structure. The Operating Partnership owns 100% of the non-voting preferred stock
of FWM  which  entitles  it to 99% of the cash  flow.  Certain  officers  of the
Company own 100% of the voting common stock of FWM which  entitles them to 1% of
the cash flow. In addition,  the Operating  Partnership  holds an FWM promissory
note in the amount of $4,000 with  interest  payable  quarterly in the amount of
$120.  FWM provides  management,  leasing and related  services to the Operating
Partnership and also provides such services to 15 third-party clients consisting
of 25  properties  and 2.9 million  square feet of GLA. As of December 31, 1997,
the Company and the Operating  Partnership,  including subsidiary  partnerships,
collectively owned 100% of the properties.  Due to the Company's ability, as the
general  partner,  to exercise both financial and  operational  control over the
Operating  Partnership,  the Operating Partnership is consolidated for financial
reporting purposes.  Allocation of net income and equity to the limited partners
of the Operating Partnership is based on their respective  partnership interests
and is  reflected  in the  accompanying  Consolidated  Financial  Statements  as
minority interests.  Losses allocable to the limited partners in excess of their
basis are allocated to the Common  Stockholders as the limited  partners have no
requirement to fund losses.

      The Company is incorporated in the State of Maryland with its headquarters
located at 4350 East-West Highway, Suite 400, Bethesda,  Maryland. The telephone
number is (301) 907-7800.  The Company has regional property  management offices
located  in  North  Carolina,   Pennsylvania  and  Virginia.   The  Company  has
approximately 70 employees.



                                                         1

<PAGE>







Operating Strategies

      The Company seeks to increase cash flow and distributions,  as well as the
value of its  portfolio,  through  intensive  property  management and strategic
renovation and expansion of its properties and the opportunistic  acquisition of
additional  neighborhood shopping centers within the Mid-Atlantic region and the
Chicago  metropolitan  area, where the Company has extensive  knowledge of local
market growth patterns and economic conditions.  The Company would also consider
acquisitions in other  metropolitan  markets which  management  determines to be
both attractive and conveniently accessible.

      Intensive Management.  A key aspect of the Company's strategy is improving
the operating performance of its properties over time through intensive property
management.   The  Company  seeks  to  increase   operating  margins  through  a
combination of increasing  revenues (through  increased  occupancy and/or rental
rates), maintaining high tenant retention rates (i.e., the percentage of tenants
who renew their leases upon  expiration),  and aggressively  managing  operating
expenses.

      The Company believes that, as a fully integrated real estate  organization
with both  owned  and  third-party  managed  properties,  it enjoys  significant
operating efficiencies relative to many of its competitors that operate smaller,
fragmented portfolios.  These operating efficiencies are the result of economies
of scale in operating  expenses,  more effective leasing and marketing  efforts,
and enhanced tenant retention levels. The Company also benefits from effectively
spreading  certain fixed  property  management and leasing costs over its entire
owned and third-party  managed portfolio.  Management believes that the scope of
the  Company's  portfolio,   combined  with  the  Principals'  professional  and
community ties to the  Mid-Atlantic  region and the Chicago  metropolitan  area,
enables  the  Company to  develop  long-term  relationships  with  national  and
regional  tenants  which occupy  multiple  properties  in its  portfolio,  which
improves occupancy rates and tenant retention levels.

      Strategic  Renovation  and  Expansion.   The  Company  seeks  to  increase
operating  results through the strategic  renovation and expansion of certain of
the Properties.  The Retail Properties are typically adaptable for varied tenant
layouts and can be reconfigured to accommodate new tenants or the changing space
needs of existing tenants.  In determining  whether to proceed with a renovation
or  expansion,  the  Company  considers  both  the  cost  of such  expansion  or
renovation  and  the  increase  in  rent   attributable  to  such  expansion  or
renovation.  The  Company  believes  that the  Retail  Properties  will  provide
opportunities for renovation and expansion.

      The following table sets forth  information  with respect to the Company's
recent and ongoing renovations and expansions:

                                                                    Additional
Name                   Description                        Cost      Square Feet

1997 Completed Projects:
 Centre Ridge          Expansion - In-line retail            $455      9,900
 Firstfield            Facade & common area renovation        122         -
 First State           Expansion - Shop Rite supermarket       (1)     2,075
 Laburnum Square       Expansion - Hannaford Bros.             (1)    14,000
 Takoma Park           Facade & common area renovation      1,082         -
 Valley Centre         Expansion - TJ Maxx                    585      8,000
 Brafferton            Facade & common area renovation        227         -
 Kenhorst Plaza        Expansion - Redner's supermarket        (1)     8,000
 Southside Marketplace Facade & common area renovation        208         -
 Valley Centre         Expansion - Weis supermarket            (1)     8,000
                                                          -------     ------

                                                           $2,679     49,975
                                                          =======     ======

       (1) Paid by tenant



                                                         2

<PAGE>






                                      Estimated
                                      Completion         Estimated  Additional
Name               Description        Date               Cost       Square Feet

1998 Projects:
 City Avenue       Expansion - Sears
                   Paint & Hardware   First Quarter 1998       $370 (1)  4,327
 City Avenue       Facade & common
                   area renovation    Second Quarter 1998     1,020         -
 Four Mile Fork    Facade & common
                   area renovation    Second Quarter 1998       151         -
 Kings Park        Facade & common
                   area renovation    Third Quarter 1998        200         -
 Laburnum Park     Expansion -
                   Ukrops Supermarket Second Quarter 1998        (2)    10,000
 Mallard Creek     Facade & common
                   area renovation    Third Quarter 1998        605         -
 McHenry Commons   Facade & common
                   area renovation    Third Quarter 1998        339         -
 Newtown Square    Expansion -
                   Acme supermarket   Third Quarter 1998         (2)    10,000
 Newtown Square    Facade & common
                   area renovation    Third Quarter 1998        650         -
 The Oaks          Facade & common
                   area renovation    Third Quarter 1998        529         -
 Pheasant Hill     Facade & common
                   area renovation    Third Quarter 1998        413         -
 Riverside Square/
  River's Edge     Facade & common
                   area renovation    Third Quarter 1998        458         -
 Spring Valley     Facade & common
                   area renovation    Third Quarter 1998        125         -
 Stonebrook        Facade & common
                   area renovation    Third Quarter 1998        323         -
 Valley Centre     Development of
                   pad site           First Quarter 1998        380     6,800
                                                            -------     -----

                                                             $5,563    31,127
                                                            =======    ======

(1)  Represents  amount due to seller of the  property  as an earn out  payment,
     payable in Operating Partnership Units.
(2)  To be paid by Tenant

     As a  fully-integrated  real estate  organization,  the  Company  maintains
expertise in the development of new retail properties, having developed three of
the  FWM  Properties  containing  approximately  525,000  square  feet  of  GLA.
Management believes the Company's principal anchor tenants and other real estate
professionals  present  the Company  with  development  opportunities  which the
Company may pursue.

     Opportunistic  Acquisitions.  Another principal  component of the Company's
strategy is the acquisition of additional  neighborhood  shopping centers within
the Mid-Atlantic region and Chicago,  Illinois. The Company will seek to acquire
properties  which are  strategically  located  along major  traffic  arteries in
well-established,  densely populated communities.  The Company typically selects
properties  in locations  where it believes the supply of  developable  land and
zoning  restrictions  impede the development of competing  shopping  centers and
where  tenants'  location  alternatives  are  limited.  The  Company  would also
consider  acquisitions in other metropolitan markets which management determines
to be both attractive and conveniently accessible.

     Through its third-party  management,  leasing and related service  business
and network of regional management and leasing offices,  the Company is familiar
with local  conditions in its given markets.  Because the Company's  third-party
clients  frequently seek assistance with the  revitalization  and disposition of
the  properties,  the Company  believes it is in a unique position to ultimately
acquire such  properties.  For example,  FWM provided  property  management  and
leasing  services for four properties  acquired from  third-party  clients.  The
Company believes opportunities for neighborhood shopping center acquisitions are
particularly  attractive at this time because of the  fragmentation in ownership
of  such   properties,   the   limited   amount   of   available   capital   for
non-institutional owners of retail property, and the decline in the construction
of new retail properties.

     When  evaluating  potential  acquisitions,  the Company will  consider such
factors  as:  (i)  economic,  demographic,  and  regulatory  conditions  in  the
property's local and regional market; (ii) the location,  construction  quality,
and design of the  property;  (iii) the current and  projected  cash flow of the
property and the potential to increase cash flow; (iv) the potential for capital
appreciation  of the  property;  (v) the terms of tenant  leases,  including the
relationship  between  the  property's  current  rents and market  rents and the
ability to increase rents upon lease rollover;  (vi) the occupancy and demand by
tenants

                                                         3

<PAGE>



for  properties  of a similar  type in the market area;  (vii) the  potential to
complete a strategic  renovation,  expansion,  or  retenanting  of the property;
(viii) the property's  current  expense  structure and the potential to increase
operating  margins;  and, (ix) competition from comparable  retail properties in
the market  area.  The Company  successfully  completed  the  acquisition  of 36
properties since its organization in April 1994.

Recent Developments

     In January 1998, the Company  acquired Bowie Plaza Shopping  Center located
in Bowie,  Maryland.  The total acquisition cost of $12,100 was financed through
the issuance of 130,626  Common Units to the seller of the property with a value
of approximately $3,600,  assumed mortgage indebtedness of $5,400, a draw on the
Company's  Line of Credit of $3,000 and cash of $100.  The mortgage loan carries
an all-in  effective  interest  rate of 7.2% and matures in December  2009.  The
Center  contains  104,036  square  feet of GLA and is anchored by Giant Food and
CVS/Pharmacy.

     In March 1998, the Company sold its two multi-family properties (Branchwood
and Park Place  Apartments) for a combined sales price of approximately  $8,050.
The estimated  gain on sale is  approximately  $1,400 and net proceeds after the
payment of the existing mortgage debt was  approximately  $3,900. In March 1998,
the Company sold one of the Georgetown  retail shops  consisting of 5,000 square
feet for $750. The estimated gain on sale is approximately $200 and net proceeds
after the payment of existing mortgage debt was approximately $300. The proceeds
of these sales were used to purchase Watkins Park Plaza  (described  below) in a
like-kind exchange as defined in Internal Revenue Code Section 1031.

     In  March  1998,  the  Company  acquired  Watkins  Park  Plaza  located  in
Mitchellville, Maryland. The total acquisition cost of $14,295 was financed with
proceeds from the sale of the Company's two multi-family properties and a retail
property of $4,200, a draw on the Company's Lines of Credit of $10,000, and cash
of $95.

     In January 1998, the Company closed on a $35,500  collateralized  revolving
Line of Credit with Union Bank of Switzerland.  This line is  collateralized  by
six properties (Kenhorst Plaza, Shoppes of Graylyn, Four Mile Fork, Takoma Park,
Centre Ridge Marketplace and Newtown Square).  The line which matures on January
31,  2001  replaces  the Lines of Credit the  Company  had with  Mellon Bank and
Corestates  Bank.  Loans  under this line will bear  interest  at LIBOR plus one
percent (1%).

Financing Strategies

     The Company intends to finance its  acquisition and development  activities
with the most  appropriate  sources of capital  available at the time, which may
include  undistributed funds from operations,  the net proceeds from issuance of
equity  securities  (including  Operating  Partnership  Units),  bank and  other
institutional  borrowings,  sale  of  investments,  and  the  issuance  of  debt
securities.

     Future  borrowings  may be either  on a secured  or  unsecured  basis.  The
Company's ratio of debt to total market  capitalization  as of December 31, 1997
was  approximately  40.0%  and 35.0%  assuming  conversion  of the  Exchangeable
Debentures  to equity.  The  Company is subject to a number of risks  associated
with  borrowing,  including the  uncertainty  associated with the ability of the
Company to refinance  mortgage  indebtedness  of  approximately  $120.3  million
(including  the  Exchangeable  Debentures)  maturing in 1999 and 2000,  that the
indebtedness  might be refinanced on less favorable terms,  that there is a lack
of limitations on the amount of  indebtedness  that the Company may incur,  that
interest  rates might increase on variable rate or refinanced  indebtedness  and
that the  Company's  level of  leverage  may limit its  ability to grow  through
additional debt financing.

Marketing and Promotion

     The  Company  engages  in  various  marketing  and  promotional  activities
designed to increase consumer traffic,  retail sales and percentage rents at its
Properties.

Environmental Regulations

     The  Company,   as  an  owner  of  real  estate,   is  subject  to  various
environmental laws of Federal and local  governments.  Compliance by the Company
with  existing  laws has not had a  material  adverse  effect  on its  financial
condition  and  management  does not  believe it will have such an effect in the
future. However, the Company cannot predict the impact of new or changed laws or
regulations on its current Properties.


                                                         4

<PAGE>





     All of the Properties have been subjected to Phase I environmental  audits.
Such audits have not  revealed,  nor is  management  aware of any  environmental
liability that management  believes would have a material  adverse impact on the
consolidated financial position, results from operations or liquidity, including
the seven situations discussed below.  Management is unaware of any instances in
which  it  would  incur  and  be  financially   responsible   for  any  material
environmental costs if any or all Properties were sold, disposed or abandoned.

     Contamination  caused  by  dry  cleaning  solvents  has  been  detected  in
groundwater  below  the  Penn  Station  Shopping  Center.   The  source  of  the
contamination  has not been determined.  Potential sources include a dry cleaner
tenant at the Penn  Station  Shopping  Center  and a dry  cleaner  located in an
adjacent   property.   Sampling   conducted  at  the  site  indicates  that  the
contamination is limited and is unlikely to have any effect on human health. The
Company  has made a request  for  closure to the State of  Maryland.  Management
believes  that there is minimal  exposure at this time,  and  therefore  has not
recorded an accrued environmental clean-up liability.

     Petroleum  has been  detected in the soil of a parcel  adjacent to Fox Mill
Shopping Center on property occupied by Exxon Corporation ("Exxon") for use as a
gas  station  (the "Exxon  Station").  Exxon has taken  steps to  remediate  the
petroleum in and around the Exxon  Station,  which is located down gradient from
the Fox Mill Shopping Center.  Exxon has agreed to take full  responsibility for
the  remediation of such petroleum.  Currently,  the company is not aware of any
contamination  of the  Company's  property  and none is  expected  to occur.  In
addition,  a dry cleaning solvent has been detected in the groundwater below the
Fox Mill Shopping Center. A groundwater pump and treatment  system,  approved by
the Virginia Water Control Board,  was installed in July 1992, and was operating
until recently when the Control Board ordered quarterly sampling to determine if
further  remediation  is  necessary.  The total  cost of  running  the pumps and
monitoring the  contamination is estimated to be approximately  $75,000 and will
be expended over the course of the next three to four years.  The previous owner
of the Fox Mill Shopping Center has agreed to pay for these costs and has agreed
to fully remediate the groundwater  contamination  to the extent required by the
applicable  regulatory  authority.  Management  believes  that  there is minimal
exposure at this time and, therefore,  has not recorded an accrued environmental
clean-up liability.

     A dry cleaning solvent has been detected in the soil and groundwater  below
the Four Mile Fork Shopping Center. Testing conducted at the site indicates that
the contamination is limited and is unlikely to have any effect on human health.
In  addition,  the  previous  owner of the Four Mile Fork  Shopping  Center  has
provided an  indemnification  for all costs and expenses to obtain  closure from
the responsible regulatory authority.  Management believes that there is minimal
exposure at this time and, therefore,  has not recorded an accrued environmental
clean-up liability.

     A dry  cleaning  solvent  has been  detected  in the soil below Bowie Plaza
Shopping  Center.  Testing done at the site indicates that the  contamination is
limited and is unlikely to have any effect on human  health.  In  addition,  the
previous owner of the property has provided an indemnification for all costs and
expenses to obtain  closure from the  responsible  regulatory  authority.  Also,
petroleum  has been  detected in the soil and  groundwater  beneath the property
arising from a release from an adjoining  Shell service station not owned by the
Company.  Shell is liable for the clean up and is currently  performing clean up
activities.  Also,  the  contamination  is  unlikely  to have an affect on human
health.  In  light of the  above,  management  believes  that  there is  minimal
exposure at this time and, therefore,  has not recorded an accrued environmental
clean-up liability for either of these items.

     Petroleum has been  detected in the soil and  groundwater  beneath  Newtown
Square  Shopping  Center arising from a release from an adjoining  Mobil service
station  not  owned by the  Company.  Mobil is  liable  for the  clean up and is
currently performing clean up activities. Also, the contamination is unlikely to
have an affect on human health. In light of the above,  management believes that
there is minimal  exposure  at this time and,  therefore,  has not  recorded  an
accrued environmental clean-up liability for either of these items.

     Dry cleaning solvent and hydraulic fuel has been detected in the soil below
Riverside  Square.  Testing done at the site indicates that the contamination is
limited and is unlikely to have any effect on human health.  Management believes
that there is minimal exposure at this time and, therefore,  has not recorded an
accrued environmental clean-up liability.

     Petroleum  has been detected in the soil and  groundwater  beneath an Exxon
service  station  not owned by the Company  which is  adjacent to Spring  Valley
Shopping  Center.  Exxon is liable for the clean up and is currently  performing
clean up activities.  Also, the  contamination  is unlikely to have an affect on
human health. In light of the above,  management  believes that there is minimal
exposure at this time and, therefore,  has not recorded an accrued environmental
clean-up liability.



                                                         5

<PAGE>



Insurance

     Under their leases,  the Company's  tenants are generally  responsible  for
providing  adequate insurance on the Properties they lease. The Company believes
the  Properties  are  covered by adequate  fire,  flood and  property  insurance
provided by reputable companies. However, some of the Properties are not covered
by disaster  insurance with respect to certain hazards (such as earthquakes) for
which coverage is not available or available only at rates which, in the opinion
of the Company, are prohibitive.

Policies with Respect to Certain Activities

     The following is a discussion of certain investment,  financing,  conflicts
of  interest  and  other  policies  of the  Company.  These  policies  have been
determined by the  Company's  Board of Directors and generally may be amended or
revised  from  time to time by the  Board  of  Directors  without  a vote of the
stockholders.

Investment Policies

     Investments in Real Estate or Interests in Real Estate. The Company intends
to conduct all its investment  activities through the Operating  Partnership for
as long as the Operating  Partnership exists. The Company's investment objective
is to achieve stable and increasing cash flow available for  distributions  and,
over time,  to  increase  portfolio  value  through  the  intensive  management,
expansion  and  renovation  of its  properties,  by  developing  or  selectively
acquiring  additional  retail  properties,   or  by  expanding  its  third-party
management, leasing and related service business.

     The Company expects to pursue its investment  objectives through the direct
or indirect ownership of properties.  The Company intends to primarily invest in
or acquire retail properties  concentrated in the Mid-Atlantic region,  Chicago,
Illinois or other  metropolitan  markets which management  determines to be both
attractive  and  conveniently   accessible.   However,   future  development  or
investment activities will not be limited to any geographic area or product type
or to a specified  percentage of the Company's assets. The Company will not have
any limit on the amount or  percentage  of its assets  invested in one property.
Subject to the percentage ownership limitations and gross income tests necessary
for REIT  qualification,  the Company also may invest in  securities of entities
engaged in real estate activities or securities or other issuers,  including for
the purpose of exercising  control over such entities,  although it has not done
so in  the  past.  The  Company  may  acquire  all or  substantially  all of the
securities or assets of other REITs or similar  entities where such  investments
would be consistent with the Company's investment policies.

     Investments in Others. The Company also may participate with other entities
in property  ownership,  through  joint  ventures  or other types of  ownership.
Equity  investments  may be subject to  existing  mortgage  financing  and other
indebtedness  which have  priority  over the equity of the Company.  The Company
will not enter into a joint venture or  partnership  to make an investment  that
would not otherwise meet its investment policies.

     Investments  in Real Estate  Mortgages.  While the  Company has  emphasized
equity real estate investments,  it may, in its discretion,  invest in mortgages
and other real  estate and  related  interests,  including  securities  of other
REITs.  The Company has not  previously  invested in mortgages or  securities of
other REITs and the Company does not presently intend to invest to a significant
extent in mortgages  or  securities  of other  REITs.  The Company may invest in
participating or convertible  mortgages if it concludes that it may benefit from
the cash flow or any appreciation in the value of the subject property.

     Interim Investments. The Company may invest funds in deposits at commercial
banks, money market accounts,  certificates of deposit, government securities or
other  liquid  investments  (including  GNMA,  FNMA,  and FHLMC  mortgage-backed
securities) as the Board of Directors deems appropriate.

Financing Policies

     The Company's  current policy is to maintain a ratio of debt (excluding the
Exchangeable  Debentures) to total market capitalization of approximately 50% or
less. As of December 31, 1997,  the ratio of the Company's  debt  (including the
Exchangeable  Debentures) to total market capitalization was approximately 40.0%
and the ratio of the Company's  debt  (assuming  conversion of the  Exchangeable
Debentures to equity) to total market  capitalization  was approximately  35.0%.
The Company may, however,  from time to time re-evaluate its borrowing  policies
in light of then current economic conditions,  relative costs of debt and equity
capital,   the  market  value  of  its   properties,   growth  and   acquisition
opportunities  and other  factors.  There is no limit on the Company's  ratio of
debt-to-total market capitalization,  and accordingly the Company may modify its
borrowing policy and may increase or decrease its ratio of debt-to-total  market
capitalization. The

                                                         6

<PAGE>



Company  may raise  such  capital  through  additional  equity  offerings,  debt
financing or retention of cash flow subject to provisions in the Code concerning
transferability of undistributed REIT income, or a combination of these methods.
The Company  has on file with the  Securities  and  Exchange  Commission  a $175
million shelf registration  statement,  which allows for the issuance of debt or
equity.

     The Company presently  anticipates that most additional borrowings would be
made  through  the  Operating  Partnership,   although  the  Company  may  incur
indebtedness,   the  proceeds  of  which  may  be  reloaned  to  the   Operating
Partnership.  Borrowings may be unsecured or may be secured by any or all of the
Properties  and may have full or  limited  recourse  to all or any assets of the
Company,  the Operating  Partnership or any new  property-owning  partnership or
limited liability company. The Company anticipates that all or substantially all
of the  proceeds  of any  future  sale  of  shares  of  capital  stock  will  be
transferred to the Operating  Partnership in exchange for Units in the Operating
Partnership.

     The  Company  intends  to  finance  future   acquisitions   with  the  most
advantageous  sources  of  capital  available  at the time,  which  may  include
undistributed  cash or the  reinvestment of the proceeds from the disposition of
assets.  The Company may incur additional  indebtedness to finance  acquisitions
through secured or unsecured borrowings.  The Company may finance the properties
through  the  issuance  of  additional   partnership   units  in  the  Operating
Partnership,  shares  of  Common  Stock,  shares  of  Preferred  Stock  or other
securities. In addition to the Exchangeable Debentures, which rank senior to the
Common Stock and the  Convertible  Preferred  Stock,  the Company may also issue
additional  securities  senior to the  shares of  Common  Stock and  Convertible
Preferred Stock, including preferred shares and debt securities (either of which
may be convertible into beneficial interests in the Company or be accompanied by
warrants  to  purchase  beneficial  interest  in the  Company).  The Company may
acquire  properties  subject  to seller  financing,  existing  loans  secured by
mortgages, deeds of trust or similar liens. The Company may also obtain mortgage
financing for properties it acquires and refinance its existing properties.

     To the extent the Company  determines to obtain  additional debt financing,
the Company  may do so  generally  through  mortgage  loans  secured by liens on
Properties.  These  mortgage  loans may be recourse or  non-recourse  and may be
cross- collateralized or contain cross-default provisions.  The Company does not
have a policy  limiting the number or amount of mortgages  that may be placed on
any  particular  property,  but mortgage  financing  instruments  usually  limit
additional  liens on such  properties.  Future  credit  facilities  and lines of
credit  may  be  used  for  the  purpose  of  making   acquisitions  or  capital
improvements or to provide working capital.

     The Company may incur  indebtedness for purposes other than the acquisition
of properties when it deems it advisable to do so. For example,  the Company may
borrow to meet the REIT taxable income  distribution  requirement under the Code
if the Company has taxable  income  without  receipt of cash  sufficient to meet
these distribution requirements.  For short-term purposes, from time to time the
Company  may  borrow  under  lines of credit  or  arrange  for other  short-term
borrowings from banks or other sources.  The Company's financing strategy may be
reviewed from time to time and changed by the Board of Directors  without a vote
of the stockholders.

Conflict of Interest Policies

     The Company  has  adopted  certain  policies  designed to reduce  potential
conflicts  of  interest.  In general,  the Company  will not:  (i) engage in any
transaction with any director,  officer or affiliate  thereof involving the sale
or disposition  of any equity  interest in Company  property to such person;  or
(ii) sell any of the Properties, without approval of a majority of the Company's
disinterested  directors,  and other  transactions  between  the Company and any
director or  officer,  or  affiliate  thereof,  generally  must be approved by a
majority  vote (or in certain  cases by a unanimous  vote) of the  disinterested
directors  (including a majority of the  independent  directors)  as being fair,
competitive,  and  commercially  reasonable and no less favorable to the Company
than  similar   transactions   between   unaffiliated  parties  under  the  same
circumstances.  Such  restrictions do not apply where such director,  officer or
affiliate  has acquired the  property for the sole purpose of  facilitating  its
acquisition by the Company, and the total consideration paid by the Company does
not exceed the cost of the property to such person  (where the cost is increased
by the person's holding costs and decreased by any income received by the person
from the property) and no special benefit results to such person.

     Stuart D.  Halpert,  the  Company's  Chairman of the Board,  and William J.
Wolfe,  the Company's  President  and Chief  Executive  Officer,  are subject to
certain  conflict  of  interest  restrictions  as set forth in their  employment
agreements  with the Company.  Certain of the  Company's  independent  directors
generally  may  engage  in real  estate  transactions  which  may be of the type
conducted by the Company,  but it is not anticipated that such transactions will
have a material affect upon the Company's operations.

     There can be no assurance  that these  conflicts of interest  policies will
successfully eliminate the influence of potential conflicts of interest, and, if
they are not  successful,  decisions  could be made that  might  fail to reflect
fully the interests of all stockholders.

                                                         7

<PAGE>




Development Policies

     The Company  anticipates  that it will invest  primarily in existing retail
properties,  although  it also may  invest in newly  constructed  properties  or
properties under development.

Policies with Respect to Other Activities

     The Company has  authority to offer shares of Common Stock and  Convertible
Preferred Stock or other securities and to repurchase or otherwise reacquire its
shares of Common Stock and Convertible  Preferred Stock or any other  securities
and may engage in such activities in the future. The Company expects (but is not
obligated)  to issue  shares of Common  Stock to holders of Common  Units in the
Operating Partnership upon exercise of their exchange rights. The Company has no
outstanding  loans to other  entities or persons,  including  its  officers  and
trustees.  The Company may in the future  make loans to other  persons  with the
approval of the independent  directors.  The Company has not engaged in trading,
underwriting or agency  distribution or sale of securities of other issues other
than the Operating  Partnership,  nor has the Company invested in the securities
of other issuers other than the Operating Partnership and Management Company for
the purpose of exercising control, and does not intend to do so.

     The Company  intends to make  investments in such a way that it will not be
treated as an Investment Company under the Investment Company Act of 1940.

     The Company has delivered and intends to continue to deliver annual reports
to its  stockholders.  At all times,  the Company intends to make investments in
such a manner as to  qualify  as a REIT,  unless  because  of  circumstances  or
changes  in the Code  (or the  Treasury  Regulations),  the  Board of  Directors
determines  that it is no longer in the best  interest of the Company to qualify
as a REIT.

     The Company's  policies with respect to all of the above  activities may be
reviewed  and  modified  from time to time by the  Company's  Board of Directors
without a vote of the stockholders.

     Certain  statements in this Form 10-K may be deemed to be  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended.
Such forward-looking  statements involve known and unknown risks,  uncertainties
and other  factors  which may cause the  actual  results  of the  Company  to be
materially  different from historical  results or from any results  expressed or
implied by such forward-looking  statements. Such risks, uncertainties and other
factors include,  but are not limited to, the following risks:  risks associated
with borrowing;  limitations on the level of distributions payable on the Common
Stock;  the level of  distributions  on Common Stock that  represent a return of
capital for federal  income tax  purposes;  general real estate  investment  and
financing  risks;  risks  associated  with the Company's  third-party  business;
possible  conflicts of interest;  limitations  on the  stockholders'  ability to
change control of the Company and failure of the Company to qualify as a REIT.

                                                         8

<PAGE>


Item 2  Properties
      The  following  table  sets  forth  certain  information  relating  to the
Properties as of December 31, 1997.

                       FIRST WASHINGTON REALTY TRUST, INC.
                             PROPERTY SUMMARY TABLE


                                                  Land
                                        Year      Area   Leasable
Property            Location         Constructed (acres) Area (Sf)  % Leased
Maryland
Bryans Road
 Shopping Center    Bryans Road, MD      1972     11.8   118,676       86.7
Capital Corner
 Shopping Center    Landover, MD         1987      4.1    42,625       91.6
Clinton Square
 Shopping Center    Clinton, MD          1979      2.0    18,961       68.7
Clopper's Mill
 Shopping Center    Germantown, MD       1995     14.2   137,952       98.2
Festival At
 Woodholme          Baltimore, MD        1986      7.1    81,027      100.0
Firstfield
 Shopping Center    Gaithersburg, MD     1978      2.4    22,327      100.0
Mitchellville
 Plaza Shopping
 Center             Mitchellville, MD    1991     14.5   154,160       98.6
Northway
 Shopping Center    Millersville, MD     1987      9.6    91,116      100.0
P.G. County
 Commercial Park    Beltsville, MD       1988      9.7   146,422       98.0
Penn Station
 Shopping Center(1) District Heights, MD 1989     22.5   334,970       98.4
Rosecroft
 Shopping Center    Temple Hills, MD     1963      8.3   119,010       87.4
Southside
 Marketplace        Baltimore, MD        1990      9.1   126,646       88.2
Takoma Park
 Shopping Center    Takoma Park, MD      1960      9.8   105,156       88.8
Valley Centre       Owings Mills, MD     1987     33.0   237,449       99.0

Virginia
Ashburn Farm
 Village Center     Ashburn, VA          1996     10.2    88,942      100.0
Brafferton Center   Garrisonville, VA    1974      9.4    94,731       94.2
Centre Ridge
 Marketplace        Centreville, VA      1996     10.9   104,154      100.0
Chesapeake Bagel
 Building           Alexandria, VA    Late 1800's  0.1    11,288      100.0
Davis Ford
 Crossing           Manassas, VA         1988     20.8   147,622       95.2
Four Mile Fork
 Shopping Center    Fredericksburg, VA   1975     10.3   101,262       84.6
Fox Mill
 Shopping Center    Reston, VA           1977     14.0   103,269       96.1
Glen Lea
 Shopping Center    Richmond, VA         1969      9.2    78,823      100.0


Property            Significant Tenants (Lease Expiration Date)
Maryland
Bryans Road
 Shopping Center    Safeway (2014), CVS/Pharmacy (2001)
Capital Corner
 Shopping Center    Burger King (2007), Dollar Bills (2001), Gallo
                    Clothing (2001)
Clinton Square
 Shopping Center
Clopper's Mill
 Shopping Center    Shoppers Food Warehouse (2015), CVS/Pharmacy (2006)
Festival At
 Woodholme          Sutton Place Gourmet (2006), Pier One Imports (1999)
Firstfield
 Shopping Center
Mitchellville
 Plaza Shopping
 Center             Food Lion (2016)
Northway
 Shopping Center    Metro Foods (2007), Rite Aid (1997)
P.G. County
 Commercial Park
Penn Station
 Shopping Center(1) Safeway (N/A), Service Merchandise (2006), Kid City
                    Clothing (2003)
Rosecroft
 Shopping Center    Food Lion (2015), Rite Aid (1998)
Southside
 Marketplace        Metro Foods (2016), Rite Aid (2001)
Takoma Park
 Shopping Center    Shoppers Food Warehouse (2011)
Valley Centre       Weis Markets (2002), TJ Maxx (2007), Ross (2003),
                    Sony Theatres (2005)

Virginia
Ashburn Farm
 Village Center     A&P Superfresh (2016)
Brafferton Center   Giant Food (2009)
Centre Ridge
 Marketplace        A&P Superfresh (2016), Sears Paint & Hardware (2007)
Chesapeake Bagel
 Building
Davis Ford
 Crossing           Weis Markets (2010), CVS/Pharmacy (2000)
Four Mile Fork
 Shopping Center    Safeway (2000), CVS/Pharmacy (2001)
Fox Mill
 Shopping Center    Giant Food (2018), Blockbuster (2001)
Glen Lea
 Shopping Center    Winn Dixie (2005), Eckerd Drug (2000)

                                                                     9

<PAGE>


Item 2  Properties



                      FIRST WASHINGTON REALTY TRUST, INC.
                             PROPERTY SUMMARY TABLE
                                   (Continued)


                                                       Land
                                            Year       Area  Leasable
Property            Location             Constructed (acres) Area (Sf) % Leased
Hanover Village
 Shopping Center    Mechanicsville, VA      1971       9.5     95,331     98.3
Kings Park          Burke, VA               1966       8.6     76,212    100.0
Laburnum Park (2)   Richmond, VA            1988       9.3    113,992    100.0
Laburnum Square     Richmond, VA            1975      11.4    109,405     95.4
Potomac Plaza       Woodbridge, VA          1963       5.4     85,400     88.3

North Carolina
Shoppes Of Kildaire Cary, NC                1986      14.0    148,205    100.0

Pennsylvania
Allen Street
 Shopping Center    Allentown, PA           1958       4.1     46,503     95.5
City Avenue
 Shopping Center    Philadelphia, PA     1950's-60's  12.2    161,454     95.0
Colonial Square
 Shopping Center    York, PA                1955       2.9     27,488     89.0
Kenhorst Plaza
 Shopping Center    Reading, PA             1990      19.2    164,434     98.0
Mayfair
 Shopping Center    Philadelphia, PA        1988       5.7    112,267    100.0
Newtown Square      Newtown Square, PA   1960's-70's  14.4    137,569     98.0
Stefko Boulevard    Bethlehem, PA        1958-60-75   10.3    135,864     98.8

Illinois
Mallard Creek       Round Lake Beach, IL    1987      14.9    143,759     98.9
McHenry Commons     McHenry, IL             1988      11.5    100,526     98.6
The Oaks            Des Plaines, IL         1983      16.7    138,274     92.2
Pheasant Hill Plaza Bolingbrook, IL         1983      14.4    111,190    100.0
Riverside Square/
 River's Edge       Chicago, IL             1986      17.7    169,434     90.0



Property            Significant Tenants (Lease Expiration Date)
Hanover Village
 Shopping Center    Rack `N Sack (2008), Rite Aid (1998)
Kings Park          Giant (2013), CVS/Pharmacy (1998)
Laburnum Park (2)   Ukrops Supermarket (N/A), Rite Aid (2007)
Laburnum Square     Hannaford Brothers (2013), CVS/Pharmacy (1999)
Potomac Plaza

North Carolina
Shoppes Of Kildaire Winn Dixie (2006)

Pennsylvania
Allen Street
 Shopping Center    Laneco (2003), Eckerd Drug (2004)
City Avenue
 Shopping Center    Acme Market (1999), Eckerd Drug (1999), T.J. Maxx (2001),
                    Sears Paint & Hardware (2007)
Colonial Square
 Shopping Center    Minich Pharmacy (1999)
Kenhorst Plaza
 Shopping Center    Redners (2009), Rite Aid (2000), Sears Paint &
                    Hardware (2007)
Mayfair
 Shopping Center    Shop 'N Bag Supermarket (2013), Eckerd Drug (2006)
Newtown Square      Acme Market (1999), Eckerd Drug (1999)
Stefko Boulevard    Laneco (2003)

Illinois
Mallard Creek       Dominick's Finer Foods (2008)
McHenry Commons     Dominick's Finer Foods (2018)
The Oaks            Dominick's Finer Foods (2017)
Pheasant Hill Plaza Dominick's Finer Foods (2005)
Riverside Square/
 River's Edge       Dominick's Finer Foods (2017)


                                                                    10

<PAGE>



                                                      Land
                                            Year      Area   Leasable
Property           Location              Constructed (acres) Area (Sf) % Leased
Stonebrook Plaza   Merrionette Park, IL     1984      8.1     95,825      95.3

Delaware
First State Plaza  New Castle County, DE    1988     21.0    162,404     100.0
Shoppes of Graylyn Wilmington, DE           1971      5.0     65,476      97.7

South Carolina
James Island
 Shopping Center   Charleston, SC           1967      6.5     88,557      98.9

Washington, D.C.
The Georgetown
 Shops (3)         Washington, DC       Late 1800's   0.3     17,052     100.0
Connecticut
 Avenue Shops      Washington, DC           1954      0.1      3,000     100.0
Spring Valley
 Shopping Center   Washington, DC           1930      0.9     16,834     100.0
                                                    -----  ---------     -----
                   Subtotal/Average                 487.1  4,993,043      96.2

Post December 31, 1997

Acquisitions:

Bowie Plaza        Bowie, MD                1966     10.8    104,036     100.0
Watkins Park Plaza Mitchellville, MD        1985     12.8    113,643      98.7
                                                    -----  ---------     -----
                   Subtotal/Average                  23.6    217,679      99.3
                                                    -----  ---------
                   Total/Average                    510.7  5,210,722
                                                    =====  =========


Property           Significant Tenants (Lease Expiration Date)

Stonebrook Plaza   Dominick's Finer Foods (2005)

Delaware
First State Plaza  Shop Rite Supermarket (2009), Cinemark USA (2011)
Shoppes of Graylyn Rite Aid (2016)

South Carolina
James Island
 Shopping Center   Piggly Wiggly (2010), Kerr Drug (2002)

Washington, D.C.
The Georgetown
 Shops (3)
Connecticut
 Avenue Shops
Spring Valley
 Shopping Center   CVS (1999)

Post December 31, 1997

Acquisitions:
Bowie Plaza        Giant (2002), CVS (1998)
Watkins Park Plaza Safeway (2007), CVS/Pharmacy (2001)



(1) Includes  Safeway  (50,000 sq.ft) and Bowling Alley (40,000 sq.ft) pad sites
owned by others. (2) Includes Ukrops  Supermarket  (49,000 sq ft) pad site owned
by the tenant.
(3) Represents  four (4) historic  retail shops all clustered in close proximity
in the central shopping district in Georgetown, Washington, D.C.


                                                                    11

<PAGE>




Competition

      There are numerous commercial developers,  real estate companies and other
owners of real estate that  operate in the  Mid-Atlantic  region and the Chicago
metropolitan  area  which  compete  with  the  Company  in  seeking  acquisition
opportunities  and tenants for its  properties.  In  addition,  retailers at the
shopping centers face competition from malls,  factory outlet centers,  discount
shopping clubs, direct mail, telemarketing and the Internet.

      Retail Properties.  The Properties consist of 49 Retail Properties located
in Maryland, Virginia, North Carolina,  Pennsylvania,  Delaware, South Carolina,
Illinois and the  District of  Columbia.  The Retail  Properties  are  primarily
neighborhood  shopping centers  containing a total of approximately  5.2 million
square  feet  of  GLA  occupied  by  approximately  1,000  tenants.  The  Retail
Properties  range  in  size  from  approximately  3,000  square  feet  of GLA to
approximately  335,000  square feet of GLA,  and average  approximately  106,000
square  feet of GLA. A  substantial  portion of the income  from the  Properties
consists of rent received  under long term leases.  Most of these leases provide
for the payment of fixed  minimum rent monthly in advance and for the payment by
tenants of a pro-rata share of the real estate taxes,  insurance,  utilities and
common area maintenance of the shopping centers.  Certain of these tenant leases
provide  for  exclusion  from  some  or all of  these  expenses.  The  Company's
portfolio is  comprised of a  diversified  tenant  base,  with no single  tenant
representing more than 8.0% of the Company's annualized minimum rent. All of the
Retail  Properties  are managed by the Company.  As of December  31,  1997,  the
Retail Properties were 96.2% leased.

      Lease Expirations. The majority of leases on the Retail Properties provide
for lease terms of between three and 20 years.  The following  table shows lease
expirations (excluding renewal options) for the calendar years 1998 through 2007
and thereafter:
                           Percent
                           of Total                 Percent    Average
                 Approx    GLA                      of Total   Annual
         Number  GLA in    Represented   Annualized Annualized Minimum
           of    Square    by Expiring   Minimum    Minimum    Rent per
Year     Leases  Feet      Leases        Rent       Rent       Square Foot
                (in 000's)              (in 000's)

1998      167      421        9.0%         4,348       8.3%    $10.33
1999      148      459        9.8%         5,159       9.9%     11.24
2000      152      439        9.4%         5,084       9.7%     11.58
2001      151      466       10.0%         6,023      11.5%     12.92
2002      123      352        7.5%         4,933       9.4%     14.01
2003       71      339        7.3%         3,646       7.0%     10.76
2004       22       81        1.7%         1,144       2.2%     14.12
2005       29      306        6.5%         3,444       6.6%     11.25
2006       35      245        5.2%         3,100       5.9%     12.65
2007       25      271        5.8%         2,966       5.7%     10.44
Thereafter 55    1,294       27.8%        12,454      23.8%      9.62
           --    -----       -----        ------      -----      ----

          978    4,673      100.0%       $52,301     100.0%    $11.19
          ===    =====      ======       =======     ======    ======




                                                        12

<PAGE>





      Tenant  Diversification.   The  following  table  sets  forth  information
regarding the Company's leases with its 20 largest tenants based upon annualized
minimum rents:                                                       Percent of
                                                                     Aggregate
                                                        Annualized   Annualized
                                          Number        Minimum      Minimum
Tenant                     GLA (Sq.  Ft.) of Properties Rents        Rents
------                     -------------- ------------- ------------ ----------
                                                        (in 000's)

Dominick's Finer Foods         416,542        6           $4,162         8.0%
Shoppers Food Warehouse        133,700        2            1,082         2.1%
A&P Superfresh                 112,168        2            1,080         2.1%
Metro Foods                     93,292        2              872         1.7%
Weis Markets                    94,960        2              786         1.5%
Blockbuster Video               41,669        7              716         1.4%
Food Lion                       78,100        2              678         1.3%
Sears Paint & Hardware          65,816        3              670         1.3%
Rite Aid                        83,018        7              650         1.3%
Giant Food                     121,518        3              607         1.2%
CVS/Pharmacy                    90,538        8              596         1.1%
T.J. Maxx                       54,686        2              500         1.0%
Safeway                        124,851        3              485         0.9%
Winn Dixie                      79,000        2              482         0.9%
Shop Rite Supermarket           57,319        1              459         0.9%
Eckerd Drug                     45,752        5              431         0.8%
Hollywood Video                 22,366        3              425         0.8%
Redner's Supermarket            52,070        1              417         0.8%
Sony Theatres                   32,058        1              385         0.7%
Payless Shoes                   26,442        9              387         0.7%
                             ----------                 --------       ------
      Total                  1,825,865                   $15,870        30.5%
                             ==========                 ========       ======


      Significant  Properties.  As of December 31, 1996, two of the  Properties,
Penn Station Shopping Center and Valley Centre, either had a book value equal to
or greater than 10% of the total assets of the Company or gross  revenues  which
accounted for more than 10% of the Company's aggregate gross revenues. Set forth
below is additional information with respect to such Properties.

      Penn  Station  Shopping  Center.  Penn  Station is a 334,970  square  foot
shopping  center  occupied  by 45 tenants  and  located at the  intersection  of
Pennsylvania  Avenue and Silver Hill Road in Prince George's  County,  Maryland,
two miles outside of  Washington,  D.C. and one and one-half miles inside of the
Capital  Beltway.  The  center is  fully-integrated  with a Safeway  Supermarket
(50,000 square feet) and a bowling alley (40,000 square feet), both of which are
owned by third parties.  Other tenants include Service Merchandise,  Blockbuster
Video and Kid City  Clothing.  Penn  Station was 98.4% leased as of December 31,
1997.

      Service Merchandise, a catalogue showroom and retailer, is the only tenant
which  occupies  more than ten  percent  of the GLA at Penn  Station,  occupying
50,000  square  feet of GLA under a lease  which  expires in  February  2006 and
having five renewal  options of five years each.  The annual minimum rent of the
Service Merchandise lease is $325,000.

      The  following  table sets forth a schedule of lease  expirations  at Penn
Station, assuming none of the tenants exercise renewal options:

                                                        13

<PAGE>


                            Percent of              Percent
                            Total GLA               of Total
                            Represented  Annualized Annualized  Average Annual
       Number of  GLA       by Expiring  Minimum    Minimum     Minimum Rent
Year   Leases     in Sq Ft  Leases       Rent       Rent        per Square Foot
                 (in 000's)             (in 000's)

1998       6       12          5.2%        $198        7.1%              $16.50
1999      11       31         13.4%         540       19.3%               17.42
2000       6       31         13.4%         342       12.2%               11.03
2001       6       17          7.3%         270        9.7%               15.88
2002       6       21          9.1%         342       12.3%               16.29
2003       5       29         12.4%         331       11.9%               11.41
2004       2       21          9.1%         186        6.7%                8.86
2005       1       13          5.6%         135        4.8%               10.38
2006       1       50         21.5%         325       11.7%                6.50
2007       0        0          0.0%           0        0.0%                0.00
Thereafter 1        7          3.0%         119        4.3%               17.00
          --       --       -------      ------    --------            --------
          45      232        100.0%      $2,788      100.0%              $12.02
          ==      ===        ======      ======      ======              ======

         The following table sets forth the average annual rents per square foot
of GLA and the percentage of GLA leased at Penn Station:

                                       Average Annual
                                        Minimum Rent                Percentage
                                       per Square Foot                 Leased

            1993                            $11.68                      94.7%
            1994                            $11.64                      97.8%
            1995                            $11.94                      98.3%
            1996                            $11.70                      99.1%
            1997                            $11.87                      98.4%

      Depreciation (for tax purposes) on the Penn Station Property is taken on a
straight line basis over 39 years,  resulting in a rate of  approximately  2.56%
per year.  Depreciation for book purposes in calculated on a straight-line basis
over 31 1/2 years.  At  December  31,  1997,  the  federal tax basis of the Penn
Station Shopping Center was approximately $21.5 million.  The realty tax rate on
the property is $3.45 per $100 of assessed value, resulting in a 1997 realty tax
of approximately $269,000.

      Valley  Centre.  Valley Centre is a 237,449  square foot  shopping  center
occupied by 27 tenants and located on U.S.  Route 140,  approximately  two miles
from the Baltimore Beltway (1-695) in Owings Mills,  Maryland. The major tenants
are Weis  Supermarket,  T.J. Maxx, Ross Stores,  Annie Sez,  Cosmetic Center and
Sony Theatre. Valley Centre was 99.0% leased as of December 31, 1997.

      Four tenants, Weis Markets, T.J. Maxx, Ross Stores and Sony Theaters, each
occupy  in  excess  of  10% of  the  GLA  at  Valley  Centre.  Weis  Markets,  a
supermarket,  occupies  49,420 square feet of GLA under a lease which expires in
May 2002 and has three renewal  options of five years each.  The annual  minimum
rent is $330,800,  which is subject to a $1.00 per square foot increase for each
option period. T.J. Maxx, a ladies apparel retailer, occupies 32,148 square feet
of GLA under a lease which expires in April 2007 and has two renewal  options of
five years each.  The annual  minimum  rent of the T.J.  Maxx lease is $297,369,
plus  percentage  rent equal to 2% of gross  sales over $7.5  million.  The rent
increases  $0.50 per square foot for each option period.  Ross Stores,  a ladies
apparel retailer, occupies 27,618 square feet of GLA under a lease which expires
January 2003 and has one renewal  option of five years.  The annual minimum rent
of the Ross Stores

                                                        14

<PAGE>



lease  is  $243,240,  plus  percentage  rent  equal to 2% of  gross  sales  over
approximately $11 million. The rental amounts for the renewal option is set at a
fixed  amount  reflecting  an 8.6%  increase.  Sony  Theaters,  a movie  theatre
operator,  occupies  32,058  square  feet of GLA  under a  lease  which  expires
February,  2005 and has three  renewal  options of five years  each.  The annual
minimum rent of the Sony  Theaters  lease is $384,696  with an increase of $1.00
per square foot in the year 2000.  Under the terms of the lease, the tenant pays
percentage rent equal to 8% of gross sales over $4.8 million. The lease provides
for rental increases of $0.50 per square foot for each option period.

      The following  table sets forth a schedule of lease  expirations at Valley
Centre for the next ten years,  assuming  none of the tenants  exercise  renewal
options.

                              Percent of                  Percent    Average
                              Total GLA                   of Total   Annual
                              Represented by  Annualized  Annualized Minimum
        Number of  GLA in     Expiring        Minimum     Minimum    Rent per
Year     Leases    Sq Ft      Leases          Rent        Rent       Square Foot
                  (in 000's)                 (in 000's)

1998        1        5           2.1%          $  75       2.6%        $15.00
1999        2        7           2.9%            123       4.2%         17.57
2000        5       19           7.9%            354      12.0%         18.63
2001        3       19           7.9%            252       8.6%         13.26
2002        7       27          11.3%            458      15.6%         16.96
2003        3       35          14.6%            363      12.3%         10.37
2004        0        0           0.0%              0       0.0%          0.00
2005        1       32          13.3%            417      14.2%         13.03
2006        0        0           0.0%              0       0.0%          0.00
2007        4       91          37.9%            805      27.3%          8.85
Thereafter  1        5           2.1%             93       3.2%         18.60
           --     ----           ----        -------    -------         -----

           27      240         100.0%         $2,940     100.0%        $12.25
           ==      ===         ======         ======     ======        ======

      The  following  table sets forth the average  rents per square foot of GLA
and the percentage of GLA leased at Valley Centre:

                                      Average Rent                    Percentage
                                     per Square Foot                    leased

         1993                            $10.86                         100.0%
         1994                            $11.10                          99.4%
         1995                            $11.42                         100.0%
         1996                            $11.40                          95.9%
         1997                            $11.66                          99.0%

      Depreciation   (for  tax   purposes)  on  Valley  Centre  is  taken  on  a
straight-line  basis over 39 years,  resulting in a rate of approximately  2.56%
per year.  At December  31,  1997,  the  federal tax basis of Valley  Centre was
approximately  $25.1 million.  Depreciation for book purposes is calculated on a
straight-line  basis over 31 1/2 years.  The realty tax rate on Valley Centre is
approximately  $3.07 per $100 of assessed value,  resulting in a 1997 realty tax
of approximately $310,000.

Mortgages, Notes and Loans Payable

      Information  relating to future  maturities of mortgages,  notes and loans
payable  at  December  31,  1997 is set  forth in  Management's  Discussion  and
Analysis of Financial  Condition  and Results of Operation and footnotes 5 and 6
to the  Consolidated  Financial  Statements  included with this Form 10-K and is
incorporated by reference herein.



                                                        15

<PAGE>



Item 3.  Legal Proceedings

      The Company is not presently  involved in any material  litigation nor, to
its knowledge,  is any material litigation threatened against the Company or its
properties,  other than routine  litigation  arising in the  ordinary  course of
business  or  which  is  expected  to be  covered  by  the  Company's  liability
insurance.  In the opinion of management of the Company,  such litigation is not
expected to have a material adverse effect on the business,  financial condition
or results of operations of the Company.

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

      No  matter  was  submitted  to a vote  of  security  holders  through  the
solicitation  of proxies or otherwise  during the fourth  quarter of fiscal year
1997.










































                                                        16

<PAGE>



                                                      PART II


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

(a)  Market Information

      The Company's Common Stock and Preferred Stock began trading on the NASDAQ
National  Market  System on June 27,  1995.  On August 13, 1996,  the  Company's
common and preferred  stock began trading on the New York Stock  Exchange  under
the symbol FRW. The high and low market values of the Company's Common Stock for
1996 and 1997 are as follows:

                                                                Distributions
                            High              Low                 Per Share

1996
         First Quarter      $ 19.00           $ 17.75               $ .4875
         Second Quarter       20.50             18.25                 .4875
         Third Quarter        21.25             19.25                 .4875
         Fourth Quarter       23.63             20.13                 .4875

1997
         First Quarter      $ 24.13           $ 22.25               $ .4875
         Second Quarter       25.38             22.38                 .4875
         Third Quarter        25.25             22.88                 .4875
         Fourth Quarter       27.75             23.98                 .4875

(b)  Holders of Record

         As of March 30,  the  approximate  number of  holders  of record of the
Common Stock was 19.

(c)  Dividends

         The Company intends to make quarterly  distributions  to its common and
preferred stockholders. Quarterly distributions made during 1997 are as follows:

Record Date          Payment Date                           Amount Per Share

Common Stock
  February 1, 1997   February 15, 1997                         $0.4875
  May 1, 1997        May 15, 1997                              $0.4875
  August 1, 1997     August 15, 1997                           $0.4875
  November 1, 1997   November 15, 1997                         $0.4875

Preferred Stock
  February 1, 1997   February 15, 1997                         $0.6094
  May 1, 1997        May 15, 1997                              $0.6094
  August 1, 1997     August 15, 1997                           $0.6094
  November 1, 1997   November 15, 1997                         $0.6094

      The actual cash flow that the Company  will  realize will be affected by a
number of factors,  including the revenues received from rental properties,  the
operating  expenses of the Company,  the interest expense on its borrowing,  the
ability of  lessee's to meet their  obligations  to the  Company,  unanticipated
capital expenditures and dividends received from the

                                                        17

<PAGE>



Company's  interest in FWM. Future  distributions paid by the Company will be at
the  discretion  of the  Directors  of the Company and will depend on the actual
cash flow of the Company, its financial  condition,  capital  requirements,  the
annual  distribution  requirements  under the REIT  provisions  of the  Internal
Revenue  Code of 1986,  as amended  (the  "Code") and such other  factors as the
Directors of the Company deem relevant.

      For the fiscal year ended  December 31, 1997,  44.9% of the  distributions
made on the Common Stock  represented  a return of capital and 2.6%  represented
capital gain distributions for federal income tax purposes.




Recent Sales of unregistered equity securities

      (a)     Securities sold

              The following table sets forth the date of sale,  title and amount
              of   unregistered   securities  sold  by  the  Company  since  its
              incorporation on April 25, 1994:

                  Date of Sale    Title                      Amount

                  04/28/94        Common Stock                  100 shares
                  06/27/94        Common Stock            1,574,359 shares
                  06/27/94        Preferred Stock         1,920,000 shares
                  06/27/94        Preferred Units           352,000 units
                  06/27/94        Common Units              347,056 units
                  06/01/95        Common Units               95,877 units
                  06/30/95        Preferred Stock           358,000 shares
                  11/15/95        Preferred Stock            36,189 shares
                  01/04/96        Common Units              120,785 units
                  03/20/96        Common Units              171,910 units
                  03/20/96        Preferred Units            67,609 units
                  12/19/96        Common Units               36,266 units
                  12/30/96        Common Units               48,013 units
                  01/24/97        Common Units              143,385 units
                  03/19/97        Common Units               55,335 units
                  03/19/97        Preferred Units             9,538 units
                  09/01/97        Common Units              858,244 units
                  10/01/97        Common Units              184,865 units
                  12/01/97        Common Units              142,578 units
                  01/01/98        Common Units              130,626 units

      (b)     Underwriters and other purchasers

              i.  April  28,  1994  Sales.  Underwriters  were not  retained  in
      connection with the sale of these securities.  These shares were "founders
      shares" sold to officers and directors of the Company.

              ii. June 27, 1994 Sales.  Friedman,  Billings,  Ramsey & Co., Inc.
      ("FBR") acted as placement agent and as the initial purchaser with respect
      to such sales of Common Stock and Preferred Stock. Such sales were made in
      a private  placement  to  "accredited  investors".  Underwriters  were not
      retained in connection with the sale of Common Units and Preferred  Units.
      The Preferred  Units were issued to the sellers of Davis Ford Crossing and
      Mayfair Shopping  Center,  "accredited  investors".  The Common Units were
      issued to certain  investors in the partnership  that owned certain of the
      properties that were transferred to the Company at its formation.

                                                        18

<PAGE>



              iii.June  1,  1995  Sales.   Underwriters  were  not  retained  in
      connection with the sale of these securities. These units were sold to the
      seller of Festival at Woodholme Shopping Center, an "accredited investor".

              iv.  June  30,  1995  Sales.  Underwriters  were not  retained  in
      connection with the sale of these securities.  These shares were issued to
      the sellers of The UDR Properties, an "accredited investor".

              v.  November  15, 1995 Sales.  Underwriters  were not  retained in
      connection with the sale of these securities.  These shares were issued to
      the seller of Firstfield Shopping Center, an "accredited investor".

              vi.  January 4, 1996  Sales.  Underwriters  were not  retained  in
      connection with the sale of these securities. These units were sold to the
      seller of Stefko  Boulevard  Shopping  Center  and Allen  Street  Shopping
      Center, an "accredited investor".

              vii.March  20,  1996  Sales.  Underwriters  were not  retained  in
      connection with the sale of these securities. These units were sold to the
      seller  of  Clopper's  Mill  Village  Shopping   Center,   an  "accredited
      investor".

              viii.  December 19, 1996 Sales.  Underwriters were not retained in
      connection with the sale of these securities. These units were sold to the
      seller of Kings Park Shopping Center, an "accredited investor".

              ix.  December  30, 1996 Sales.  Underwriters  were not retained in
      connection with the sale of these securities. These units were sold to the
      seller of Northway Shopping Center, an "accredited investor".

              x.  January  26,  1997 Sales.  Underwriters  were not  retained in
      connection with the sale of these securities. These units were sold to the
      seller of City Line Shopping Center, an "accredited investor".

              xi.  March 19,  1997  Sales.  Underwriters  were not  retained  in
      connection with the sale of these securities. These units were sold to the
      seller of Ashburn Farm Village Shopping Center, an "accredited investor".

              xii.September  1, 1997 Sales.  Underwriters  were not  retained in
      connection with the sale of these securities.  These shares were issued to
      the sellers of McHenry Commons,  Mallard Creek,  The Oaks,  Pheasant Hill,
      Riverside  Square/River's  Edge and Stonebrook Plaza Shopping Centers,  an
      "accredited investor".

              xiii.  October 1, 1997 Sales.  Underwriters  were not  retained in
      connection with the sale of these securities. These units were sold to the
      seller of Mitchellville Plaza, an "accredited investor".

              xiv.December  1, 1997  Sales.  Underwriters  were not  retained in
      connection with the sale of these securities. These units were sold to the
      seller of Spring Valley Shopping Center, an "accredited investor".

              xv.  January 1, 1998  Sales.  Underwriters  were not  retained  in
      connection with the sale of these securities. These units were sold to the
      seller of Bowie Plaza, an "accredited investor".

      (c)     Consideration

              i. April 28,  1994  Sales.  The  aggregate  offering  price of the
      shares of Common Stock was $100.  There were no underwriting  discounts or
      commissions with respect to such securities.

              ii. June 27, 1994.

              a)  The   Company   received   approximately   $73.0   million  in
      consideration  for the  sale of  1,282,051  shares  of  Common  Stock  and
      1,920,000  shares of Convertible  Preferred  Stock.  As  compensation  for
      acting as initial  purchaser  and placement  agent in connection  with the
      sale of such shares, FBR received from the Company an initial purchaser

                                                        19

<PAGE>



      discount,  placement agent fees and a financial advisory fee which totaled
      $5.0 million in the aggregate.  The shares of Common Stock and Convertible
      Preferred Stock were sold to "accredited investors".

              b) 189,744  shares of Common  Stock were issued to four  executive
      officers and directors of the Company in exchange for the  contribution of
      promissory  notes (the "FWM Notes") having a value of  approximately  $3.7
      million.  No underwriting fees or commissions were paid in connection with
      the issuance of such shares.

              c) 102,564  shares of Common Stock were issued to Farallon and its
      affiliate in consideration for Farallon's  agreement to fund approximately
      $2.0 million of the expenses of June 1994  Offering.  Concurrent  with the
      issuance  of such  shares the Company  also made a cash  reimbursement  of
      approximately $1.1 million to Farallon.

              d) The Preferred Units were issued, in addition to debt assumption
      of $16.3  million,  in  consideration  for the  purchase  of two  shopping
      centers. These units were valued, at such time, at $8.8 million.

              e) The  Common  Units were  issued in  consideration  for  certain
      properties transferred to the Company at the time of its formation.  These
      units were valued, at such time, at approximately $6.8 million.

              iii.June  1, 1995 Sales.  These units were issued in exchange  for
      property  having a value of  approximately  $1.6  million,  net of assumed
      indebtedness.  There were no  underwriting  discounts or commissions  with
      respect to such securities.

              iv. June 30, 1995 Sales.  These shares were issued, in addition to
      cash payment of $12.2 million,  in  consideration  for the UDR Properties.
      These shares were valued,  at such time,  at $8.1  million.  There were no
      underwriting discounts or commissions with respect to such securities.

              v. November 15, 1995 Sales.  These shares were issued, in addition
      to a seller  purchase note of $2.5 million and a cash payment of $100,000,
      in consideration  for the purchase of Firstfield  Shopping  Center.  These
      shares  were  valued,  at  such  time,  at  $0.8  million.  There  were no
      underwriting discounts or commissions with respect to such securities.

              vi. January 4, 1996 Sales. These units were issued, in addition to
      cash payments of $9.4 million,  in  consideration  for the purchase of two
      shopping centers.  These units were valued, at such time, at approximately
      $2.2 million.  There were no  underwriting  discounts or commissions  with
      respect to such securities.

              vii.March 20, 1996 Sales.  These units were issued, in addition to
      cash payments of $14.5  million,  in  consideration  for the purchase of a
      property.  These units were valued,  at such time, at  approximately  $3.3
      million (Common Units) and $1.6 million (Preferred Units).

              viii. December 19, 1996 Sales. These units were issued in exchange
      for property having a value of approximately $1.4 million,  net of assumed
      indebtedness.  There were no  underwriting  discounts or commissions  with
      respect to such securities.

              ix.  December 30, 1996 Sales.  These units were issued in exchange
      for property having a value of approximately $1.3 million,  net of assumed
      indebtedness.  There were no  underwriting  discounts or commissions  with
      respect to such securities.

              x. January 24, 1997 Sales. These units were issued in exchange for
      property  having a value of  approximately  $4.8  million,  net of assumed
      indebtedness.  There were no  underwriting  discounts or commissions  with
      respect to such securities.


                                                        20

<PAGE>



              xi. March 19, 1997 Sales.  These units were issued in exchange for
      property  having a value of  approximately  $3.8  million,  net of assumed
      indebtedness.  There were no  underwriting  discounts or commissions  with
      respect to such securities.

              xii.September  1, 1997 Sales.  These units were issued in exchange
      for  properties  having a value of  approximately  $22.9  million,  net of
      assumed indebtedness.  There were no underwriting discounts or commissions
      with respect to such securities.

              xiii.  October 1, 1997 Sales.  These units were issued in exchange
      for  properties  having  a value of  approximately  $5.6  million,  net of
      assumed indebtedness.  There were no underwriting discounts or commissions
      with respect to such securities.

              xiv.December  1, 1997  Sales.  These units were issued in exchange
      for  properties  having  a value of  approximately  $5.9  million,  net of
      assumed indebtedness.  There were no underwriting discounts or commissions
      with respect to such securities.

              xv. January 1, 1998 Sales. These units were issued in exchange for
      properties  having a value of approximately  $6.7 million,  net of assumed
      indebtedness.  There were no  underwriting  discounts or commissions  with
      respect to such securities.

      (d)     Exemption from registration claimed.

              Each of the transactions is exempt from  registration  pursuant to
      Section 4(2) of the Securities Act of 1933, as amended (the "Act").

      (e)     Terms of Conversion

              The Preferred Units are  exchangeable for Preferred Stock on a one
      for one basis. The Common Units are exchangeable, at the Company's option,
      for cash equal to the fair market  value of a share of Common Stock at the
      time of exchange or one share of Common Stock.  Holders of the Convertible
      Preferred  Stock have the right,  exercisable on or after May 31, 1999, to
      convert  shares  of  Convertible  Preferred  Stock  (with  each  share  of
      Convertible  Preferred Stock valued at the current Liquidation  Preference
      Amount of $25.00 per share)  into shares of Common  Stock at a  conversion
      price of $19.50 per share of Common Stock,  subject to adjustment upon the
      occurrence of certain events.

Item 6.  Summary of Selected Financial Data

      The  following   table  sets  forth   selected   financial  and  portfolio
information  on the  Company,  and  on a  combined  basis  for  its  predecessor
business,  and should be read in  conjunction  with the  discussion set forth in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," and all of the consolidated  financial statements and notes thereto
included in this Form 10-K.













                                                        21

<PAGE>






                 SELECTED CONSOLIDATED FINANCIAL INFORMATION (1)

                                                Year Ended December 31,
                                    1997      1996      1995      1994      1993
                                   (dollars in thousands, except per share data)
OPERATING DATA
  Revenues:
    Minimum Rent                 $43,857   $31,398   $22,793   $14,701  $10,594
    Tenant reimbursements          9,506     6,704     4,362     2,823    1,889
    Percentage rent                1,060       664       495       255       68
    Third-party fees                   -         -         -     1,912    4,396
    Other income                   1,211     1,672     1,447       508      245
                                  ------    ------    ------    ------   ------
          Total revenues          55,634    40,438    29,097    20,199   17,192
                                  ------    ------    ------    ------   ------

  Expenses:
    Operating and maintenance     13,522     9,743     6,746     6,299    5,137
    General and administrative     3,363     3,137     2,831     1,356    2,665
    Interest                      18,416    14,986    11,230     9,301    7,909
    Depreciation and amortization 11,172     8,019     5,808     4,579    2,721
                                  ------    ------    ------    ------   ------
          Total expenses          46,473    35,885    26,615    21,535   18,432
                                  ------    ------    ------    ------   ------

Income (Loss) before gain on
 sale of properties, income
 from Management Company,
 extraordinary item, minority
 interest and distributions to
 Preferred Stockholders            9,161     4,553     2,482    (1,336)  (1,240)
Gain on Sale of Properties           549         -         -        -         -
Income from Management Company       433       221       449      500         -
                                  ------    ------    ------    ------   ------
Income (Loss) before
 extraordinary item, minority
 interest and distribution
 to Preferred Stockholders        10,143     4,774     2,931      (836)  (1,240)
Extraordinary item                  (954)        -         -     2,251    2,665
                                  ------    ------    ------    ------   ------
Net income                                                              $ 1,425
                                                                         ======
Income before minority
 interest and distributions
 to Preferred Stockholders         9,189     4,774     2,931     1,415
Income allocated to
 minority interest                (1,579)     (694)     (602)   (1,101)
                                  ------    ------    ------    ------
Income before distributions
 to Preferred Stockholders         7,610     4,080     2,329       314
Distributions to Preferred
 Stockholders                     (5,641)   (5,641)   (5,117)   (1,811)
                                  ------    ------    ------    ------
Income (loss) allocated to
 Common Stockholders              $1,969   $(1,561)  $(2,788)  $(1,497)
                                  ======   ========  ========  ========
Net income (loss) per
 Common Share - Basic (2)          $0.35    ($0.46)   ($1.19)   ($0.95)
                                  ======   ========  ========  ========
Net income (loss) per
 Common Share - Diluted            $0.34    ($0.46)   ($1.19)   ($0.95)
                                  ======   ========  ========  ========
Shares of Common Stock
 (in thousands) - Basic            5,663     3,367     2,351     1,574
                                  ======   ========  ========  ========
Shares of Common Stock
 (in thousands) - Diluted          5,730     3,367     2,351     1,574
                                  ======   ========  ========  ========

BALANCE SHEET DATA:
  Rental properties, gross      $456,798  $314,235  $228,092  $175,213  $87,749
  Total assets                  $439,141  $313,613  $227,405  $172,487  $81,056
  Mortgage and other
 notes payable                  $212,030  $167,047  $116,182  $ 89,858  $92,382
  Debentures                     $25,000   $25,000   $25,000  $ 25,000        -
  Total Liabilities             $247,944  $198,375  $145,241  $117,925  $96,216
  Minority Interest              $38,255   $16,661   $11,088    $8,580        -
  Stockholders equity (deficit) $152,942   $98,577   $71,076   $45,982 $(15,160)

PORTFOLIO PROPERTY DATA
(end of period):
  Retail Occupancy                  96.2%     96.4%     96.0%     96.4%    95.4%
  Number of retail properties         47        36        27        20       14
  Number of multi-family
  properties                           2         2         2         2        2
  Retail Properties GLA
    (thousands of square feet)     4,931     3,652     2,668     2,014    1,186
  Multi-family properties
  (number of units)                  401       401       401       401      401

OTHER DATA:
  Funds From Operations
   Diluted  (3) (4)              $23,947   $16,352   $12,601
  Cash flow from operating
   activities                    $23,441   $11,616   $10,003    $3,164     $831
  Cash flow (used in)
   investing activities          (25,689)  (56,994)  (29,884)  (56,236)    (450)
  Cash flow provided by
   (used in) financing activities (6,390)   49,352    26,574    53,615     (529)

(1) See Item 7 Management's  Discussion and Analysis of Financial  Condition and
Results of Operation.
(2) Net income (loss) per share is based on the weighted average total shares of
Common  Stock  outstanding.  Because  the  Company's  income  is  based  on  its
percentage interest in the Operating Partnership's income, the net income (loss)
per share would be unchanged for the periods  presented even if the Common Units
were exchanged for Common Stock of the Company.  (3) The Company considers Funds
From  Operations to be an  appropriate  measure of the  performance of an equity
REIT.  On March 3, 1995,  NAREIT  adopted  the NAREIT  White Paper on Funds From
Operations (the "NAREIT White Paper") which provided  additional guidance on the
calculation of Funds From Operations. Funds From Operations is defined by NAREIT
as net  income  (computed  in  accordance  with  generally  accepted  accounting
principles),  excluding gains (or losses) from debt  restructuring  and sales of
property,   plus   depreciation  and  amortization  and  after  adjustments  for
unconsolidated  partnerships and joint ventures.  Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect Funds of Operations on
the same basis.  Funds From  Operations  does not represent  cash generated from
operating activities in accordance with generally accepted accounting principles
and is not  necessarily  indicative  of cash  available  to fund cash  needs and
should not be  considered  an  alternative  to net income as an indicator of the
Company's  operating  performance or as an alternative to cash flow as a measure
of liquidity or of ability to make  distributions.  (4) Before minority interest
and distributions to Preferred Stockholders.

                                                            22

<PAGE>






Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operation

Overview

         The  following  discussion  should  be read  in  conjunction  with  the
Financial  Statements  and notes thereto of the Company  appearing  elsewhere in
this Annual Report. Dollars are in thousands except share data.

         Certain  information  included in the following section of this report,
other than historical information may contain forward-looking  statements within
the  meaning  of the  Private  Securities  Litigation  Reform  Act of 1995.  The
forward-looking  statements are identified by terminology such as "may", "will",
"believe",  "expect",  "estimate",  "anticipate",  "continue", or similar terms.
Although  the  Corporation  believes  that the  expectations  reflected  in such
forward-looking statements are reasonable,  actual results may differ materially
from those projected in the forward-looking statements.

Comparison  of the year ended  December 31, 1997 to the year ended  December 31,
1996

         For the year ended  December  31,  1997,  the net income  allocated  to
common  stockholders  increased  by  $3,530  from a net loss of  $1,561 to a net
income of $1,969,  when compared to the year ended December 31, 1996,  primarily
due to an  increase  in  revenues  and a gain on sale of  property  offset by an
increase in  expenses,  an item of  extraordinary  loss,  and an increase in the
amount of income allocated to minority interests.

         Total revenues  increased by $15,196 or 37.6%, from $40,438 to $55,634,
due   primarily  to  an  increase  in  minimum   rents  of  $12,459  and  tenant
reimbursements  of $2,802.  The increases  were primarily due to the purchase of
Centre Ridge  Marketplace  in March 1996,  Takoma Park Shopping  Center in April
1996, Southside Marketplace in June 1996, Kings Park Shopping Center in December
1996,  Newtown  Square  Shopping  Center in December 1996 and Northway  Shopping
Center in December  1996 (the "1996  Acquisitions")  (resulting  in partial year
revenues  being  included  in the year ended  December  31,  1996),  City Avenue
Shopping Center in January 1997, Four Mile Fork Shopping Center in January 1997,
Shoppes of Graylyn in January  1997,  Ashburn  Farm Village  Shopping  Center in
March 1997, the six properties in Chicago in September 1997, Mitchellville Plaza
in October 1997 and Spring  Valley  Shopping  Center in December 1997 (the "1997
Acquisitions").

         Property  operating and  maintenance  expense  increased by $3,779,  or
38.8%, from $9,743 to $13,522,  due primarily to the 1996 and 1997 Acquisitions.
General and  administrative  expenses  increased by $226 or 7.2%, from $3,137 to
$3,363,  due  primarily  to an  increase in the amount of  compensation  paid or
payable in Company stock of $310 offset by a decrease in NYSE fees of $95.

         Interest  expense  increased  by  $3,430,  or 22.9%,  from  $14,986  to
$18,416,  due  primarily  to the  increase in mortgage  indebtedness  of $74,657
associated with the 1996 and 1997 Acquisitions, offset by a decrease in mortgage
and line of credit  indebtedness  of $46,375  retired  with the  proceeds of the
September 1997 offering discussed below.

         Depreciation and amortization  expenses  increased by $3,153, or 39.3%,
from $8,019 to $11,172, primarily due to the 1996 and 1997 Acquisitions.

         During  1997,  a gain on sale of  properties  of $549 was  realized and
there was a $954  extraordinary  loss due to the early  extinguishment  of debt.
Debt in the amount of $46,375 was retired with  proceeds of the  September  1997
common stock offering. There were no such items in 1996.

         Income allocated to minority  interests  increased by $885 from $694 to
$1,579  due  to an  increase  in net  income  and an  increase  in the  minority
interests ownership of the Operating Partnership from 14.3% to 20.7%.

         Net cash flow provided by operating  activities  increased from $11,616
in 1996 to $23,441 in 1997  primarily due to the  acquisition  of new properties
during 1997 and realizing the full years operations from properties purchased in
1996 and  improved  property  performance.  Net  cash  flows  used in  investing
activities decreased from $56,994 in 1996 to $25,869 in 1997 primarily due to an
increase  in the amount of  property  acquisitions  financed  through the use of
assumed mortgage  indebtedness  during 1997. Net cash flow provided by financing
activities changed from net cash provided by financing  activities of $49,352 to
net cash used in financing  activities of $6,390 primarily due to an increase in
the amount of  mortgage  loans  retired  with  proceeds  of the  September  1997
offering and cash from  operations.  In 1996,  the proceeds of the December 1996
offering were primarily used for acquisitions of rental properties. In 1997, the
acquisition of rental  properties  were more heavily  financed  through  assumed
mortgage indebtedness.


                                                        23

<PAGE>






Comparison  of the year ended  December 31, 1996 to the year ended  December 31,
1995

         For the year ended  December  31,  1996,  net loss  allocated to common
shareholders  decreased  by  $1,227  from a net loss of  $2,788 to a net loss of
$1,561,  when compared to the year ended December 31, 1995,  primarily due to an
increase in  revenues  offset by  increases  in expenses  and  distributions  to
holders of Convertible Preferred Stock.

         Total revenues  increased by $11,341 or 39.0%, from $29,097 to $40,438,
due   primarily   to  an  increase  in  minimum   rents  of  $8,605  and  tenant
reimbursements of $2,342. The increases were primarily due to the acquisition of
Festival at Woodholme on June 1, 1995, Glen Lea, Hanover Village,  Laburnum Park
and Laburnum  Square on July 1, 1995,  Kenhorst  Plaza on October 12, 1995,  and
Firstfield  Shopping  Center on November  15, 1995  (resulting  in partial  year
revenues being included in the year ended December 31, 1995) (together the "1995
Acquisitions"),  Stefko  Boulevard and Allen Street Shopping  Centers in January
1996 and the 1996 Acquisitions.

         Property  operating and  maintenance  expense  increased by $2,997,  or
44.4%,  from $6,746 to $9,743,  due primarily to the purchase of the 1995,  1996
Acquisitions, Stefko Boulevard and Allen Street Shopping Centers.

         General and  administrative  expenses increased by $306, or 10.8%, from
$2,831 to $3,137,  due primarily to the accrual of  performance  bonuses of $155
and an initial NYSE listing fee of $115.

         Interest  expense  increased  by  $3,756,  or 33.4%,  from  $11,230  to
$14,986,  due primarily to the financing of the 1995, 1996 Acquisitions,  Stefko
Boulevard and Allen Street Shopping Centers.

         Depreciation and amortization  expenses  increased by $2,211, or 38.1%,
from $5,808 to $8,019,  primarily due to an increase in depreciable basis due to
the purchase of the 1995, 1996  Acquisitions,  Stefko Boulevard and Allen Street
Shopping Centers.

         During  1996,  distributions  payable  to  owners  of  the  Convertible
Preferred  Stock  increased by $524 from $5,117 to $5,641  primarily  due to the
issuance of an additional 358,000 shares in June 1995 and the issuance of 36,189
shares of Convertible Preferred Stock in November 1995.

         Net cash flow provided by operating  activities  increased from $10,103
in 1995 to $11,616 in 1996,  primarily due to the  acquisition of new properties
during 1996 and realizing the full years operations from properties purchased in
1995 and  improved  property  performance.  Net  cash  flows  used in  investing
activities increased from $29,984 in 1995 to $56,994 in 1996 primarily due to an
increase  in the amount of  property  acquisitions  during  1996.  Net cash flow
provided by financing activities increased from $26,574 to $49,352 primarily due
to an  increase  in the  amount of equity  capital  raised  and an  increase  in
proceeds  from  mortgage  notes  due to an  increase  in  acquisitions  in  1996
resulting in more financing needs.

Comparison  of the year ended  December 31, 1995 to the year ended  December 31,
1994

         For the year ended  December  31,  1995,  net loss  allocated to common
shareholders  increased  by  $1,291  from a net loss of  $1,497 to a net loss of
$2,788,  when compared to the year ended December 31, 1994,  primarily due to an
increase in  expenses  and  distributions  to holders of  Convertible  Preferred
Stock,  offset by increases  in revenues  and a decrease in income  allocated to
minority interest.

         Total revenues  increased by $8,898 or 44.1%,  from $20,199 to $29,097,
due   primarily   to  an  increase  in  minimum   rents  of  $8,092  and  tenant
reimbursements of $1,539,  partially offset by a decrease in third-party fees of
$1,912 due to the change in the ownership of the Management  Company from voting
to nonvoting  stock and the related  change in the method of accounting  for the
Management Company, effective June 27, 1994. The increases were primarily due to
the purchase of the six properties  ("the 1994  Acquisitions")  on June 27, 1994
resulting in only six months  revenues being included in the year ended December
31, 1994 and the purchase of the 1995 Acquisitions.

         Property operating and maintenance  expense increased by $447, or 7.1%,
from $6,299 to $6,746, due primarily to the purchase of the 1994 Acquisitions on
June 27, 1994  resulting  in only six months of expenses  being  included in the
year ended December 31, 1994 and the purchase of the 1995 Acquisitions. Property
operating and maintenance  expenses as a percentage of total revenues  decreased
from 31% in 1994 to 23% in 1995 primarily due to savings in property  management
fee  expenses  due to  the  increased  size  of the  Company's  portfolio  and a
reduction in the reserve for allowance for doubtful accounts.



                                                        24

<PAGE>



         General and  administrative  expenses  increased by $1,475,  or 108.8%,
from $1,356 to $2,831,  due primarily to compensation paid or payable in company
stock in the amount of $1,800 to key employees.

         Interest expense increased by $1,929, or 20.7%, from $9,301 to $11,230,
due primarily to the financing of the 1995 Acquisitions.

         Depreciation and amortization  expenses  increased by $1,229, or 26.8%,
from $4,579 to $5,808,  primarily due to an increase in depreciable basis due to
the purchase of the 1995 Acquisitions and a full years  depreciation on the 1994
Acquisitions.

         During  1995,  distributions  payable  to  owners  of  the  Convertible
Preferred Stock  increased by $3,306 from $1,811 to $5,117  primarily due to the
Convertible  Preferred  Stock being  outstanding for only six months in 1994 and
the issuance of an additional  358,000 shares during 1995.  Income  allocated to
minority  interest  decreased  by $499 from  $1,101  to $602 for the year  ended
December 31, 1995  primarily  because all pre-June 27, 1994 income was allocated
to minority  interests in 1994,  partially offset by increased earnings in 1995.
During  1994 there was  extraordinary  income of $2,251.  There was no such item
during 1995.

         Net cash flow provided by operating activities increased from $3,164 in
1994 to $10,103 in 1995,  primarily  due to the  acquisition  of new  properties
during 1995 and realizing the full years operations from properties purchased in
1994 and  improved  property  performance.  Net  cash  flows  used in  investing
activities  decreased from $56,236 in 1994 to $29,984 in 1995 primarily due to a
decrease  in the amount of  property  acquisitions  during  1995.  Net cash flow
provided by financing activities decreased from $53,615 to $26,574 primarily due
to a decrease in the amount of equity  capital raised and a decrease in proceeds
from mortgage notes due to a decrease in  acquisitions in 1995 resulting in less
financing needs.

Liquidity and Capital Resources

         In 1997, the Company  continued to expand its portfolio of neighborhood
shopping centers.  During the year, the Company acquired twelve shopping centers
for an aggregate  acquisition cost of $134,553.  The acquisitions were primarily
located in the metropolitan areas of Washington, D.C. and Chicago, Illinois. The
acquisitions  increased the Company's  portfolio by 1.3 million square feet. The
Company  financed  the  acquisitions  through  the  issuance  of both Common and
Preferred  Units  with a value of  $33,851,  assumed  mortgage  indebtedness  of
$78,747,  deferred  consideration  of $2,223 and cash of  $19,732.  The cash was
provided  by both  draws on the  Company's  lines of  credit  and from  proceeds
remaining from the December 1996 offering.

         In  September  1997,  the Company  completed  an offering of  2,070,000
shares of Common Stock priced at $24.00 per share. Net proceeds (after deducting
the underwriters discount and other offering expenses) of $46,900 were primarily
used to retire existing  mortgage debt ($25,875) and outstanding  amounts on the
Company's Line of Credit ($20,500).

         The Company  also  closed two sales  during the year  resulting  in net
proceeds of $900 after the repayment of associated debt. Thieves Market was sold
for $1,200 and .357 acres and 5,500  square feet of  building  of Laburnum  Park
Shopping Center was sold to Ukrops Supermarket for expansion space for $900.

         Subsequent to 1997, the Company acquired two additional  properties for
an aggregate acquisition cost of $26,395. The acquisitions were financed through
the  issuance  of 130,626  Common  Units with a value of  approximately  $3,600,
assumed mortgage  indebtedness of $5,400, draws on the Company's lines of credit
of 13,000 and cash of $4,395.

         In March 1998, the Company sold its two  multi-family  properties for a
combined  sales price of $8,050.  The net proceeds after payment of the existing
mortgage debt and closing costs amounted to $3,900. In addition,  in March 1998,
the Company sold one of its  Georgetown  retail shops for $750. The net proceeds
after payment of the existing  mortgage debt and closing costs amounted to $300.
The proceeds of these sales were used to finance the  acquisition  of one of the
rental properties discussed above.

         During 1997, the Company renovated four of its properties  (Brafferton,
Southside,  Takoma and Firstfield) for an aggregate cost of approximately $1,650
and expanded  five  properties  (50,000  square  feet) for an aggregate  cost of
$1,050.

         During  1998,  the  Company  expects  to  renovate  a minimum of eleven
properties for an aggregate cost of $4,900. The Company also plans to expend, at
a minimum, approximately $750 for the expansion of four of its properties. These
expansions will add  approximately  31,000 square feet to the properties.  These
expansions and renovations are expected to be financed  primarily  through draws
on the Company's Lines of Credit.

                                                        25

<PAGE>



         The Company expects to continue its renovation and acquisition  program
for the  remainder  of 1998.  However,  the  level  of  future  acquisitions  is
dependent on the  Company's  ability to raise  additional  capital  through debt
proceeds and equity offerings.

         On  April  17,  1997,  the  Company  filed  a $175  shelf  registration
statement  with the  Securities  and Exchange  Commission,  which allows for the
issuance of debt or equity.

Indebtedness

         The  following  table  sets forth  certain  information  regarding  the
indebtedness  of the  Company  (excluding  the  Exchangeable  Debentures)  as of
December 31, 1997:

                                                     Balance           Maturity
Mortgage Loans                  Interest Rate (1) (in thousands) (2    Date (3)


Ashburn Farm Village (4)              7.41%           6,730            01/01/01
Broadmoor Apartments                  9.90%           3,826            07/01/99
Chesapeake Bagel Building             6.59%             735            07/01/01
City Avenue Shopping Center           8.12%           9,909            10/18/05
Clopper's Mill                        7.22%          14,132            03/21/06
Davis Ford, First State Plaza,
  James Island,
  Valley Centre and Bryans Road (5)   8.93%          38,500            07/01/99
Festival at Woodholme                 9.82%          11,489            04/30/00
Allen Street and Stefko Boulevard (6) 7.86%           5,913            01/11/06
Firstfield                            7.50%           2,472            12/01/05
Glen Lea, Hanover Village,
  Laburnum Park
  and Laburnum Square (7)             8.76%          13,283            10/31/05
Kings Park Shopping Center            7.89%           4,783            11/01/14
McHenry Commons                       7.16%           6,643            03/01/99
Mallard Creek                         7.16%          11,824            02/10/99
Mayfair Shopping Center (8)(9)        6.33%           7,075            06/24/10
Mitchellville Plaza Shopping Center   7.10%          15,764            06/24/05
Northway Shopping Center              8.01%           6,282            01/01/07
Northway Shopping Center (10)         8.62%           1,827            08/01/99
Pheasant Hill Shopping Center         7.28%           8,128            07/15/00
Potomac Plaza Shopping Center         7.15%           3,656            07/01/99
Riverside Square/River's Edge         7.16%           2,505            07/10/99
Shoppes of Kildaire                   7.89%           7,774            05/31/06
Southside Marketplace                 8.75%           7,999            08/01/05
Stonebrook Plaza                      7.28%           6,226            07/15/00
The Georgetown Shops                  6.65%             411            07/01/01
The Oaks                              7.42%          10,144            05/01/03
Valley Centre                         7.75%             700            06/30/07
Lines of Credit (11)                  7.66%           3,300            01/31/00
                                     ------        --------
 TOTALS                               7.90%        $212,030
                                     ======        ========


(1) The effective  interest rate includes the amortization of deferred financing
costs and premiums over the term of the respective  loan. (2) Includes  premiums
on the  assumption  of  mortgage  debt in the amount of $5,330.  (3) Many of the
outstanding mortgages contain prepayment penalties, typically calculated using a
yield maintenance formula.
(4) The interest rate is adjusted monthly based on 30-day LIBOR plus 1.50%.
(5)      This debt (the Nomura  Mortgage Loan) is  collateralized  by these five
         properties.  The  Company  has  entered  into  an  interest  rate  swap
         agreement  which  fixes the rate at 7.09% for the  period  July 1, 1996
         through June 30, 1999.
(6)      This debt is  collateralized  by these two properties.  The loan can be
         extended  through  January 11, 2021.  The interest  rate adjusts to the
         greater of the initial interest rate plus five percentage points or the
         T-bill rate plus five percentage points.
(7) This debt is collateralized by these four properties.
(8)      The debt  service  on this  mortgage  loan is  determined  based upon a
         variable rate of interest,  plus a letter of credit  enhancement fee of
         2.0%.  The  variable  interest  rate is  determined  weekly at the rate
         necessary  to  produce a bid in the  process  of  remarketing  the Bond
         Obligations  equal to par plus accrued  interest,  based on  comparable
         issues in the market.
(9) This debt matures in the year 2010.  However,  the letter of credit enhancer
expires in June 1998.  (10) This loan is a second trust which is also secured by
a letter of credit. (11) Loan was subsequently refinanced with the proceeds of a
new 3 year Line of Credit in January 1998.

         As of  December  31,  1997,  the Company  had total  mortgage  notes of
approximately   $212,030,   which   consisted  of   approximately   $204,955  in
indebtedness  collateralized  by  35  of  the  Properties  and  tax-exempt  bond
financing  obligations  issued  by the  Philadelphia  Authority  for  Industrial
Development (the "Bond Obligations") of approximately  $7,075  collateralized by
one of the properties. Of the Company's indebtedness, $17,105 (8.1%) is variable
rate  indebtedness  and  $194,925  (91.9%)  is at a fixed  rate.  The fixed rate
indebtedness has interest rates ranging from 6.33% to 9.90%, with a

                                                        26

<PAGE>



weighted  average  interest rate (excluding the Bond  Obligations) of 8.10%, and
will mature  between 1999 and 2014,  with a weighted  average  remaining term to
maturity of 4.6 years. A large portion of the Company's indebtedness will become
due by 2000,  requiring balloon payments of $67,762 in 1999 and $27,522 in 2000.
From 1997  through  2014,  the Company  will have to  refinance  an aggregate of
approximately $183,459.  Since the Company anticipates that only a small portion
of the principal of such  indebtedness  will be repaid prior to maturity and the
Company  will  likely  not  have   sufficient   funds  on  hand  to  repay  such
indebtedness,  the Company  will need to  refinance  such  indebtedness  through
modification or extension of existing indebtedness, additional debt financing or
through an additional offering of equity securities.

         In June 1994,  the Company  borrowed  $38,500 under new mortgage  loans
(collectively,  the  "Nomura  Mortgage  Loan")  collateralized  by  five  of the
Properties.  These loans, which bear interest at 30-day LIBOR (5.97% at December
31, 1997) plus 2.0% and mature on July 1, 1999,  are closed to prepayment for 48
months  and can be  prepaid  thereafter  based on a 1.50%  declining  prepayment
penalty.  To mitigate its  exposure to these  variable  rate loans,  the Company
entered  into a five year  interest  rate  protection  agreement  for a notional
amount of $38,500 that is  effective  through the loans  maturity,  and caps the
interest rate at 7.70% through the maturity  date. The cost of the interest rate
protection  agreement of approximately  $3,200, is being amortized over the life
of the  agreement  using the  effective  interest  rate method  resulting  in an
effective  interest rate on the Nomura Mortgage Loan of approximately  8.93% per
annum.  The fair market value of the  interest  rate swap is  determined  by the
amounts at which they could be settled.  The estimated  fair market value of the
interest rate protection agreement was approximately $100 at December 31, 1997.

         In December  1995,  the  Company  entered  into an  interest  rate swap
contract  with a notional  amount of $38,500.  The Company  intends to hold such
contract  until  the  expiration  date.  The  purpose  of the swap is to fix the
interest  rate on the $38,500  Nomura loan through its  expiration  date of June
1999 at 7.09%.  Under the terms of the interest rate contract,  the Company will
be paying a fixed rate of 5.09% to the other party to the contract (the "Counter
Party") through June 1999. The Company will be receiving  variable payments from
the Counter Party based on 30-day LIBOR through June 1999. The Counter Party has
as collateral a $3,500  restriction on the $5,800 Line of Credit it provided the
Company  (see  below).  The fair  market  value  of the  interest  rate  swap is
determined  by the  amounts at which they could be  settled.  If the Company had
settled  these  agreements  with the Counter  Party on December  31,  1997,  the
Company would have received approximately $300.

         In  anticipation of the large amounts of mortgage debt maturing in 1999
and 2000, the Company has entered into forward interest rate swap contracts. The
Company intends to hold such contracts until their expiration dates. The purpose
of the swaps is to mitigate any exposure to fluctuations in interest rates until
the maturity dates of the mortgages when the Company  expects to refinance these
loans.  Under the terms of the swap  contract,  the Company pays a fixed rate to
the other party to the  contract  ("Counter  Party")  while  receiving  variable
payments from the Counter Party based on 30-day LIBOR.  This  effectively  fixes
the LIBOR rate for the  Company  during the  period of the swap  contracts.  The
following is a summary of the Company's swap contracts as of December 31, 1997:

  Notional         Date of             Period of         Fixed Rate  Fair Market
   Amount         Agreement             Contract           Payable       Value
 (In 000's)                                                           (In 000's)

  $38,500           12/95         07/01/99 - 12/01/03       6.37%        $(534)
   20,000           08/97         03/01/99 - 03/01/04       6.44%        $(366)
   15,000           11/97         06/01/99 - 06/01/04       6.18%        $(111)
   24,000           01/98         05/01/00 - 05/02/05       5.85%          N/A
   ------                                                   -----
  $97,500                                                   6.23%
  =======                                                   =====

Debentures

     In June 1994,  the Operating  Partnership  effected a private  placement of
$25,000 aggregate  principal amount of Exchangeable  Debentures.  The Debentures
are exchangeable in the aggregate for 1,000,000 shares of Preferred Stock of the
Company, subject to adjustment. Interest on the Debentures is payable quarterly,
in arrears. The Debentures mature

                                                        27

<PAGE>



on June 27, 1999. The rights of holders of Common Stock and Preferred  Stock are
effectively subordinated to the rights of holders of Debentures.  The Debentures
are collateralized by a first mortgage on two of the Properties.

Lines of Credit

     The Company currently has two collateralized revolving lines of credit (the
"Lines of Credit"). The Company has a collateralized revolving Line of Credit of
$35,500  with  Union Bank of  Switzerland.  This line is  collateralized  by six
properties  (Kenhorst Plaza,  Shoppes of Graylyn,  Four Mile Fork,  Takoma Park,
Centre Ridge  Marketplace and Newtown Square).  The line which closed on January
22,  1998 and  matures  on January  31,  2001  replaces  the Lines of Credit the
Company  had with Mellon Bank and  Corestates  Bank.  Loans under this line will
bear  interest at LIBOR plus one  percent  (1%).  The Company has an  additional
collateralized  revolving  Line of Credit of up to $5,775 from First Union Bank.
Loans  under this line will bear  interest  at LIBOR plus two  percent  (2%) per
annum,  and  will  mature  on June 30,  1998.  Loans  under  this  line  will be
collateralized  by a first mortgage lien on Brafferton  Shopping  Center.  As of
December 31, 1997, there was $3,300 outstanding under the Lines of Credit.

     The  Lines of  Credit  are  available  to fund  acquisitions,  renovations,
expansions and other working capital  requirements.  Definitive  agreements with
respect to the Lines of Credit contain customary representations, warranties and
covenants.

Liquidity

     The Company expects to meet its short-term liquidity requirements generally
through its working  capital,  net cash provided by operations  and draws on its
Lines of Credit.  The Company  believes that the foregoing  sources of liquidity
will be sufficient to fund liquidity for the foreseeable future.

     The Company expects to meet certain long-term  liquidity  requirements such
as development, property acquisitions,  scheduled debt maturities,  renovations,
expansions  and  other  non-recurring  capital  improvements  through  long-term
secured  and  unsecured  indebtedness,  including  the Lines of  Credit  and the
issuance of additional  equity and debt securities.  The Company also expects to
use funds available under the Lines of Credit to fund acquisitions,  development
activities and capital improvements on an interim basis.

     During 1999, $92,762 of the Company's  indebtedness  becomes due, including
the $25,000 Exchangeable  Debentures.  The Company believes that it will be able
to  retire  this  debt  through  either  a  refinancing  of the debt  using  the
properties  as  collateral,  an equity  offering or a combination  of both.  The
Company  currently  believes that the  loan-to-values on the properties are at a
level that will  enable  the  Company to fully  refinance  the loans  without an
additional  requirement  for  capital.  The company  has hedged its  exposure to
interest rate fluctuations through the use of forward swaps.

Other

     The Company has  considered  the effects that the year 2000 may have on its
computer hardware and software  applications.  The Company does not believe that
there will be a material effect on the Company's  operations or future financial
results.

     The  Company  has  elected  to  qualify  as a REIT for  federal  income tax
purposes. To maintain its status as a REIT, the Company is required, among other
items,  to pay  dividends  to its  shareholders  of at least 95% of its  taxable
income. The Company intends to make quarterly  distributions to its shareholders
from operating cash flow.

Inflation, Economic Conditions

     Most of the  Company's  leases  contain  provisions  designed to  partially
mitigate the adverse impact of inflation.  Such  provisions  include  escalation
clauses with fixed  increases  or  increased  related to changes in the Consumer
Price Index or similar  inflation  indices.  The leases may also contain clauses
enabling the Company to receive  percentage  rents based on tenant's gross sales
above predetermined levels, which generally increase as prices rise. Most of the
Company's  leases  require the tenant to pay its pro rata share of the  property
operating expenses, including common area maintenance, real

                                                        28

<PAGE>



estate taxes and insurance, thereby reducing the Company's exposure to increases
in costs and operating  expenses  resulting  from  inflation.  In addition,  the
Company periodically  evaluates its exposure to interest rate fluctuations,  and
may enter into interest rate protection  agreements  which mitigate,  but do not
eliminate,  the effect of changes in interest  rates on its floating rate loans.
The Company, as a general policy, endeavors to obtain fixed rate financing.

     The Company's financial results are affected by general economic conditions
in the markets in which its properties are located.  An economic  recession,  or
other adverse changes in general or local economic  conditions,  could result in
the  inability  of some  existing  tenants of the  Company  to meet their  lease
obligations  and could  otherwise  adversely  affect  the  Company's  ability to
attract or retain tenants.  The Company's  properties are typically  anchored by
supermarkets,  drug stores and other  consumer  necessity and service  retailers
which usually offer day-to-day necessities rather than luxury items. These types
of tenants, in the experience of the Company, generally maintain more consistent
sales performance during periods of adverse economic conditions.

Recent Accounting Developments

     Statements of Financial Accounting  Standards No.128,  "Earnings per Share"
became  effective for fiscal periods ending after December 31, 1997. The Company
has made all appropriate disclosures required under FAS 128 and has restated all
periods presented.

     Statements   No.  130   "Reporting   Comprehensive   Income"  and  No.  131
"Disclosures  about  Segments  of an  Enterprise  and Related  Information"  are
required for fiscal years  beginning  January 1, 1998 and will be adopted by the
Company in 1998. There will not be a material impact on the Company's  financial
position as a result of the new standards.

Item 8.  Financial Statements and Supplementary Data

     The  Consolidated  Financial  Statements  and  Supplementary  Data of First
Washington  Realty Trust,  Inc. and  Subsidiaries  are listed and included under
Item 14 of this report.

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

     None.






















                                                        29

<PAGE>



                                                     PART III

Item 10.  Directors and Executive Officers of the Company*

Item 11.  Executive Compensation*

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

Item 13.  Certain Relationships and Related Transactions*

     *The information called for by Part III, Items 10, 11, 12 and 13, is hereby
incorporated  by reference to the  Company's  definitive  Proxy  Statement to be
filed with the Securities and Exchange Commission within 120 days after the year
covered  by this Form 10-K with  respect  to the  Company's  Annual  Meeting  of
Shareholders presently scheduled for May 8, 1998.

                                                      PART IV

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

A.       The following documents are filed as part of this report.

     1. The Consolidated  Financial Statements of First Washington Realty Trust,
Inc. and Subsidiaries.

                    See  Index to  Financial  Statements  on Page  F-1  included
herein.

         2.         Financial Statement Schedules.

B.       Reports on Form 8-K

         Not applicable.

C.       Exhibits - pursuant to Item 601 of Regulation S-K

     3.1 Articles of Incorporation of the Company (1) (amendment and originals)

         3.2         Bylaws of the Company. (5)

     10.1 First Amended and Restated  Agreement of Limited  Partnership of First
Washington Realty Limited Partnership. (5)

     10.2 Promissory Note in the principal amount of $38,500 dated June 27, 1994
from the Company in favor of Nomura Asset Capital Corporation. (5)

         10.3        Cash  Collateral  Account  Security,  Pledge and Assignment
                     Agreement  among  JFD  Limited   Partnership,   Greenspring
                     Associates  Limited  Partnership and FW-Bryans Road Limited
                     Partnership   as   borrowers,   and  Nomura  Asset  Capital
                     Corporation, as Lender. (5)

     10.4 Indemnity,  Pledge and Security  Agreement dated June 27, 1994 between
the Operating Partnership, Stuart D. Halpert, William J. Wolfe, Lester Zimmerman
and Jack E. Spector. (5)

     10.5  Contribution  Agreement  dated  May 22,  1997,  by and  between  Dodi
Developments  L.L.C. and First Washington Realty Limited Partnership (The Oaks).
(3)


                                                        30

<PAGE>



     10.6 Letter Agreement dated July 11, 1997, by and between Dodi Developments
L.L.C. and First Washington Realty Limited Partnership (The Oaks). (3)

     10.7  Contribution  Agreement  dated May 22, 1997,  by and between  McHenry
Limited  Partnership and First Washington  Realty Limited  Partnership  (McHenry
Commons). (3)

     10.8 Letter  Agreement  dated July 11, 1997, by and between McHenry Limited
Partnership and First Washington Realty Limited  Partnership  (McHenry Commons).
(3)

     10.9  Contribution  Agreement  dated  May 22,  1997,  by and  between  Dodi
Developments L.L.C. and First Washington Realty Limited  Partnership  (Riverside
Square). (3)

     10.10  Letter   Agreement   dated  July  11,  1997,  by  and  between  Dodi
Developments L.L.C. and First Washington Realty Limited  Partnership  (Riverside
Square). (3)

         10.11       Contribution  Agreement  dated May 22, 1997, by and between
                     Dominick Dimatteo,  Jr. Irrevocable Family Trust f/b/o Mary
                     Ellen DiMatteo,  Dominick DiMatteo,  Jr. Irrevocable Family
                     Trust f/b/o Donna DiMatteo  Owen,  Dominick  DiMatteo,  Jr.
                     Irrevocable Family Trust f/b/o James S. DiMatteo,  Dominick
                     DiMatteo,  Jr.  Irrevocable  Family  Trust  f/b/o  Margaret
                     DiMatteo Bedford,  and Dominick  DiMatteo,  Jr. Irrevocable
                     Family  Trust  f/b/o  Katherine  DiMatteo  Crane  and First
                     Washington Realty Limited Partnership (River's Edge). (3)

         10.12       Letter  Agreement  dated  July  11,  1997,  by and  between
                     Dominick DiMatteo,  Jr. Irrevocable Family Trust f/b/o Mary
                     Ellen DiMatteo,  Dominick DiMatteo,  Jr. Irrevocable Family
                     Trust f/b/o Donna DiMatteo  Owen,  Dominick  DiMatteo,  Jr.
                     Irrevocable Family Trust f/b/o James S. DiMatteo,  Dominick
                     DiMatteo,  Jr.  Irrevocable  Family  Trust  f/b/o  Margaret
                     DiMatteo Bedford,  and Dominick  DiMatteo,  Jr. Irrevocable
                     Family  Trust  f/b/o  Katherine  DiMatteo  Crane  and First
                     Washington Realty Limited Partnership (River's Edge). (3)

     10.13 Contribution  Agreement dated May 22, 1997, by and between Round Lake
Beach  Development  Limited  Partnership  and First  Washington  Realty  Limited
Partnership (Mallard Creek). (3)

     10.14 Letter Agreement dated July 11, 1997, by and between Round Lake Beach
Development  Limited Partnership and First Washington Realty Limited Partnership
(Mallard Creek). (3)

     10.15  Contribution  Agreement  dated May 22,  1997,  by and  between  Dodi
Developments  L.L.C. and First Washington Realty Limited  Partnership  (Pheasant
Hill). (3)

     10.16  Letter   Agreement   dated  July  11,  1997,  by  and  between  Dodi
Developments  L.L.C. and First Washington Realty Limited  Partnership  (Pheasant
Hill). (3)

     10.17  Contribution  Agreement  dated May 22,  1997,  by and  between  Dodi
Developments L.L.C. and First Washington Realty Limited Partnership  (Stonebrook
Plaza). (3)

     10.18  Letter   Agreement   dated  July  11,  1997,  by  and  between  Dodi
Developments L.L.C. and First Washington Realty Limited Partnership  (Stonebrook
Plaza). (3)

     10.19 Contribution Agreement dated August 6, 1997, by and between Edward A.
St. John,  Philip E. Ratcliffe,  Ronald E. Harman,  James A. Clauson,  Robert C.
Becker, Gene E. McClain, Charles R. Phillips,  Lawrence F. Maykrantz,  Edward B.
Okonski and Rodger R. Reiswig and First  Washington  Realty Limited  Partnership
(Mitchellville). (3)


                                                        31

<PAGE>



     10.21  Contribution  Agreement dated October 8, 1997, by and between Spring
Valley Joint Venture and First  Washington  Realty Limited  Partnership  (Spring
Valley). (4)

     10.22  Revolving  Credit Loan  Agreement  dated  January  31, 1997  between
Corestates Bank, N.A. and First Washington Realty Limited Partnership. (1)

     10.23  Contribution  Agreement dated March 19, 1997, by and between Ashburn
Farms Village Center, L.L.C. and First Washington Limited Partnership. (1)

     10.24 Revolving  Credit Agreement dated January 22, 1998 between Union Bank
of Switzerland and First Washington Realty Limited Partnership. (4)

         21.1        List of Subsidiaries (4)

         23.1        Consent of Coopers & Lybrand L.L.P. (4)

         27          Financial Data Schedule (4)


(1) Incorporated herein by reference from the Company's Form 10-K filed on March
28, 1997.

     (3) Incorporated  herein by reference from the Company's  current report on
Form 8-K filed on September 17, 1997.

(4) Filed herewith.

(5) Incorporated herein by reference from the Company's  Registration  Statement
on Form S-11 (No. 33-83960).


































                                                        32

<PAGE>










                                                    SIGNATURES


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


                                     FIRST WASHINGTON REALTY TRUST, INC.


                                     By:   /s/ William J. Wolfe
                                         William J. Wolfe
                                         President and Chief Executive Officer
                                         March     30        , 1997

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the date indicated.


               Signature                           Date

 /s/ Stuart D. Halpert
     Chairman of the Board of Directors            March   30         , 1997

 /s/ William J. Wolfe
     President, Chief Executive Officer,           March   30         , 1997
     Director

/s/ Lester Zimmerman
    Executive Vice President, Director            March    30         , 1997

 /s/ James G. Blumenthal
     Chief Financial Officer                       March   30         , 1997

 /s/ Stanley T. Burns
     Director                                      March   30         , 1997

 /s/ Matthew J. Hart
     Director                                      March   30         , 1997

/s/ William M. Russell
    Director                                      March    30         , 1997

/s/ Heywood Wilansky
    Director                                      March    30         , 1997


                                                        33

<PAGE>





                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                           Page

-- Report of Independent Accountants...................................    F- 2
-- Consolidated Balance Sheets as of
   December 31, 1997 and 1996..........................................    F- 3
-- Consolidated Statements of Operations for the years
   ended December 31, 1997, 1996 and 1995..............................    F- 4
-- Consolidated Statements of Stockholders' Equity for
   the years ended December 31, 1997,
    1996 and 1995......................................................    F- 5
-- Consolidated Statements of Cash Flows for the
   years ended December 31, 1997, 1996 and 1995........................    F- 6
-- Notes to the Consolidated Financial Statements......................    F- 7
-- Schedule II -- Valuation and Qualifying Accounts....................    F-23
-- Schedule III -- Real Estate and Accumulated Depreciation............    F-24

                                                            F-1

<PAGE>














                                             REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors and Stockholders
  of First Washington Realty Trust, Inc.

       We have audited the consolidated  financial  statements and the financial
statement schedules of First Washington Realty Trust, Inc. and Subsidiaries,  as
more  fully  described  in Note 1,  listed  in the index on page F-1 of the Form
10-K.  These  financial  statements  and financial  statement  schedules are the
responsibility  of the  management of First  Washington  Realty Trust,  Inc. and
Subsidiaries.  Our  responsibility  is to express an opinion on these  financial
statements and financial statement schedules 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 First
Washington  Realty Trust, Inc. and Subsidiaries as of December 31, 1997 and 1996
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period  ended  December  31, 1997 in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial  statement schedules referred to above, when considered in relation to
the  basic  financial  statements  taken as a  whole,  present  fairly,  in all
material respects, the information required to be included therein.







                            COOPERS & LYBRAND L.L.P.



Washington, D.C.
January 31, 1998 except for Note 16,
as to which the date is March 26, 1998

                                                            F-2

<PAGE>



              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        as of December 31, 1997 and 1996
                    (dollars in thousands except share data)

                                   -----------



                                                1997                   1996
                                              --------                ------

                                     ASSETS

Rental properties:
  Land                                         $89,042                $61,959
  Buildings and improvements                   367,756                252,276
                                               -------                -------
                                               456,798                314,235
  Accumulated depreciation                     (40,839)               (30,450)
                                              --------               --------
  Rental properties, net                       415,959                283,785

Cash and equivalents                             3,142                 11,780
Tenant receivables, net                          7,274                  4,639
Deferred financing costs, net                    2,734                  4,403
Other assets                                    10,032                  9,006
                                                ------               --------
          Total assets                        $439,141               $313,613
                                              ========               ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Mortgage notes payable                      $212,030               $167,047
  Debentures                                    25,000                 25,000
  Accounts payable and accrued expenses         10,914                  6,328
                                                ------             ----------
          Total liabilities                    247,944                198,375

Minority interest                               38,255                 16,661

Stockholders' equity:
  Convertible  preferred  stock $.01
     par  value;  3,800,000  shares
     designated; 2,314,189 shares
     issued and outstanding
    (aggregate liquidation preference
     of $57,855)                                    23                     23
  Common stock $.01 par value;
     90,000,000 shares
     authorized; 7,291,732 and
     4,946,245 shares issued and
     outstanding, respectively                      72                     49
  Additional paid-in capital                   179,356                116,068
  Accumulated distributions in
     excess of earnings                        (26,509)               (17,563)
                                               --------               --------
          Total stockholders'
           equity                              152,942                 98,577
                                              ---------               --------
          Total liabilities and
           stockholders' equity               $439,141               $313,613
                                              =========              =========




                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.

                                                            F-3

<PAGE>



              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              for the years ended December 31, 1997, 1996 and 1995
                    (dollars in thousands, except share data)
                                   -----------

                                       1997              1996              1995


Revenues:
     Minimum rents                  $43,857           $31,398           $22,793
     Tenant reimbursements            9,506             6,704             4,362
     Percentage rents                 1,060               664               495
     Other income                     1,211             1,672             1,447
                                    -------           -------           -------
          Total revenues             55,634            40,438            29,097
                                    -------           -------           -------

Expenses:
     Property operating and
      maintenance                    13,522             9,743             6,746
     General and administrative       3,363             3,137             2,831
     Interest                        18,416            14,986            11,230
     Depreciation and amortization   11,172             8,019             5,808
                                    -------           -------           -------
          Total expenses             46,473            35,885            26,615
                                    -------           -------           -------

Income  before  gain on sale of
     properties,  income  from
     Management  Company,
     extraordinary item, minority
     interest and distributions to
     Preferred Stockholders           9,161             4,553             2,482

Gain on sale of properties              549                 -                 -

Income from Management Company          433               221               449
                                    -------           -------           -------

Income before extraordinary
     item, minority interest
     and distributions to
     Preferred Stockholders          10,143             4,774             2,931

Extraordinary item - Loss on
     early extinguishment of debt      (954)             -                  -
                                    -------           -------           -------

Income before minority interest
    and distributions
    to Preferred Stockholders         9,189             4,774             2,931

Income allocated to minority
    interest                         (1,579)             (694)             (602)
                                    -------           -------           -------

Income before distributions to
    Preferred Stockholders            7,610             4,080             2,329

Distributions to Preferred
    Stockholders                     (5,641)           (5,641)           (5,117)
                                    -------           -------           -------

Income (loss) allocated to
    Common Stockholders              $1,969           $(1,561)          $(2,788)
                                    =======           =======           =======

Earnings (loss) per Common
      Share - Basic
     Income (loss) before
      extraordinary item              $0.52            $(0.46)           $(1.19)
     Extraordinary item               (0.17)            -                  -
                                    -------           -------           -------
     Net income (loss)                $0.35            $(0.46)           $(1.19)
                                    =======           =======           =======

Earnings (loss) per Common
      Share - Diluted
     Income (loss) before
      extraordinary item              $0.51            $(0.46)           $(1.19)
     Extraordinary item               (0.17)             -                 -
                                    -------           -------           -------
     Net income (loss)                $0.34            $(0.46)           $(1.19)
                                    =======           =======           =======

Weighted average Common
     Shares - Basic                   5,663             3,367             2,351
Dilutive effect of employee
     stock options                       67              -                 -
                                    -------           -------           -------

Weighted average Common
     Shares - Diluted                 5,730             3,367             2,351
                                    =======           =======           =======

                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.

                                                            F-4

<PAGE>



              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              for the years ended December 31, 1997, 1996 and 1995
                             (dollars in thousands)
                                    ---------






                                                              Accumulated
                                Convertible        Additional Distributions
                                Preferred   Common Paid       in Excess of
                                Stock       Stock  in Capital Earnings     Total

Balance, December 31, 1994            $19    $16    $48,245   $(2,298)  $45,982

Net income                                                      2,329     2,329
Issuance of Common Stock
  (1,528,393 shares)                          15     24,306              24,321
Issuance of Preferred Stock
 (394,189 shares)                       4             8,838               8,842
Issuance of Common Stock
  for compensation
  (66,666 shares)                              1      1,182               1,183
Cash distributions                                             (9,709)   (9,709)
Exchange of common units for
  common shares (20,131 shares)                         119                 119
Adjustment for minority interests'
  ownership of the Operating
  Partnership                                        (1,991)             (1,991)
                                     ----   ----     ------    ------    ------

Balance, December 31, 1995             23     32     80,699    (9,678)   71,076

Net income                                                      4,080     4,080
Issuance of Common Stock
  (1,655,000 shares)                          17     33,418              33,435
Cash distributions                                            (11,965)  (11,965)
Exchange of common units for
  common shares (17,416 shares)                          83                  83
Adjustment for minority interests'
  ownership of the Operating
  Partnership                                         1,868               1,868
                                     ----   ----     ------    ------    ------

Balance, December 31, 1996             23     49    116,068   (17,563)   98,577

Net income                                                      7,610     7,610
Issuance of Common Stock
  (2,155,562 shares)                          22     48,850              48,872
Issuance of Common Stock for
  compensation
  (144,084 shares)                             1      3,447               3,448
Exercise of Stock Options
  (2,956 shares)                                         58                  58
Cash distributions                                            (16,556)  (16,556)
Exchange of common units for
  common shares (38,251)                                320                 320
Adjustment for minority interests'
  ownership of the Operating
  Partnership                                        10,613              10,613
                                     ----   ----     ------    ------    ------

Balance, December 31, 1997           $23     $72   $179,356  $(26,509) $152,942
                                     ====   ====   ========  ========  ========








                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.

                                                              F-5

<PAGE>



              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              for the years ended December 31, 1997, 1996 and 1995
                             (Dollars in thousands)
                                    --------





                                                1997         1996          1995
                                            ----------- ------------  ----------

Operating activities:
  Income before distributions
   to Preferred Stockholders                 $7,610       $4,080        $2,329
  Adjustment to reconcile to net
   cash provided by operating activities:
     Income allocated to minority interest    1,579          694           602
     Depreciation and amortization           11,172        8,019         5,808
     Gain on sale of rental properties         (549)         -             -
     Loss on early extinguishment of debt       954          -             -
     Amortization of deferred financing
      costs and loan premiums                   979        2,167         2,260
     Equity in earnings of Management Company    47          259           131
     Compensation paid or payable in
      Company stock                           1,866        1,649         1,800
     Provision for uncollectible accounts     1,285          527           483
     Recognition of deferred rent            (1,337)        (921)         (855)
     Net changes in
         Tenant receivables                  (2,582)      (1,032)         (292)
         Other assets                        (1,525)      (4,230)       (2,160)
         Accounts payable and accrued
          expenses                            3,942          404            (3)
                                            -------       ------        -------
           Net cash provided by operating
           activities                        23,441       11,616        10,103
                                            -------       ------        -------

Investing activities:
     Additions to rental properties          (7,891)      (4,476)       (2,067)
     Acquisition of rental properties       (19,864)     (52,518)      (27,917)
     Proceeds from sale of rental properties  2,066           -            -
                                            -------       ------        -------

          Net cash used in investing
          activities                        (25,689)     (56,994)      (29,984)
                                            -------       ------        -------

Financing activities:
     Proceeds from Line of Credit draws      23,800        9,867           -
     Proceeds from mortgage notes               398       31,376        16,720
     Proceeds from issuance of Common
      Stock                                  48,930       33,651        24,449
     Repayment of Line of Credit            (20,500)      (9,867)          -
     Repayment on mortgage notes            (38,704)        (823)       (2,260)
     Additions to deferred financing
      costs                                    (686)        (739)         (581)
     Prepayment Penalties                      (169)          -            -
     Repayment in Advances due Principals        -                        (447)
     Distributions paid to Preferred
      Stockholders                           (5,641)      (5,641)       (5,117)
     Distributions paid to Common
      Stockholders                          (10,915)      (6,324)       (4,593)
     Distributions paid to minority interest (2,903)      (2,148)       (1,597)
                                            -------       ------        -------

          Net cash provided by (used in)
          financing activities               (6,390)      49,352        26,574
                                            -------       ------        -------
     Net increase (decrease) in cash and
      equivalents                            (8,638)       3,974         6,693
     Cash and equivalents, beginning of year 11,780        7,806         1,113
                                            -------       ------        -------
     Cash and equivalents, end of year       $3,142      $11,780       $ 7,806
                                            =======       ======        =======





                     The accompanying notes are an integral
                      part of these consolidated financial
                                   statements.

                                                              F-6

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



1.      Organization and Business

                      First Washington  Realty Trust,  Inc. (the "Company") is a
        fully  integrated  real  estate  organization  that  acquires,  manages,
        leases,   renovates   and  develops   principally   supermarket-anchored
        neighborhood shopping centers. The Company currently owns a portfolio of
        50 properties (the "Properties") consisting of 48 retail properties (the
        "Retail  Properties")  containing a total of  approximately  5.1 million
        square  feet  of  gross  leasable  area  ("GLA")  and  two   multifamily
        properties (the  "Multifamily  Properties")  located in the Mid-Atlantic
        region and the Chicago, Illinois metropolitan area.

                      The   Retail   Properties   are   strategically    located
        neighborhood  shopping centers  principally  anchored by tenants such as
        Giant Food, Safeway, Shoppers Food Warehouse, Food Lion, A&P Superfresh,
        Winn  Dixie,  Weis  Markets,   Acme  Market,   Dominick's   Supermarket,
        CVS/Pharmacy and Rite Aid.  Neighborhood  shopping centers are typically
        open-air  centers  ranging in size from 50,000 to 150,000 square feet of
        GLA  and  anchored  by  supermarkets  and/or  drug  stores.  The  Retail
        Properties range in size from approximately  3,000 square feet of GLA to
        approximately  335,000  square feet of GLA,  and  average  approximately
        106,000 square feet of GLA.

                      The Company,  incorporated  in Maryland in April 1994,  is
        self-managed and self-administered and has elected to be taxed as a real
        estate  investment  trust  ("REIT")  under the Internal  Revenue Code of
        1986, as amended (the "Code").

                      The Company's  assets are held by, and all its  operations
        conducted  through,  First  Washington  Realty Limited  Partnership (the
        "Operating Partnership") and First Washington Management,  Inc. ("FWM").
        The Company is the sole general  partner of the  Operating  Partnership.
        The limited partners are  individuals,  partnerships and others who have
        contributed  their  properties  in exchange  for  partnership  interests
        ("Units"). The limited partners may exchange their Units for cash, or at
        the option of the Company,  for stock of the Company on a 1 for 1 basis.
        As of December 31, 1997 and 1996,  the Company owned  approximately  79%
        and 86% of the Operating Partnership,  respectively. This arrangement is
        commonly referred to as an Umbrella  Partnership or "UPREIT"  structure.
        The Operating Partnership owns 100% of the non-voting preferred stock of
        FWM which entitles it to 99% of the cash flow.  Certain  officers of the
        Company own 100% of the voting  common stock of FWM which  entitles them
        to 1% of the cash flow. In addition,  the Operating Partnership holds an
        FWM  promissory  note in the  amount of  $4,000  with  interest  payable
        quarterly in the amount of $120.  FWM provides  management,  leasing and
        related  services to the  Operating  Partnership  and also provides such
        services to 15 third-party  clients  consisting of 25 properties and 2.9
        million square feet of GLA. As of December 31, 1997, the Company and the
        Operating Partnership,  including subsidiary partnerships,  collectively
        owned  100% of the  properties.  Due to the  Company's  ability,  as the
        general partner, to exercise both financial and operational control over
        the Operating Partnership, the Operating Partnership is consolidated for
        financial reporting purposes. Allocation of net income and equity to the
        limited  partners  of  the  Operating  Partnership  is  based  on  their
        respective  partnership  interests and is reflected in the  accompanying
        Consolidated   Financial   Statements  as  minority  interests.   Losses
        allocable to the limited partners in excess of their basis are allocated
        to the Common  Stockholders as the limited  partners have no requirement
        to fund losses.

                      In June 1995, the Company  completed a public  offering of
        1,528,393 shares of common stock (the "June 1995 Offering").  The shares
        were priced at $17.75 per share, resulting in net proceeds of $24,300.




                                                        F-7

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------






                      In December 1996, the Company  completed a public offering
        of 1,655,000 shares of Common Stock (the "December 1996 Offering").  The
        shares of stock  were  priced  at $21.75  per  share,  resulting  in net
        proceeds of $30,200.

                      In September 1997, the Company completed a public offering
        of 2,070,000 shares of Common Stock (the "September 1997 Offering"). The
        shares  were  priced  at  $24.00  per share  resulting  in net  offering
        proceeds of $46,900.

                      The  Company's  financial  results are affected by general
        economic  conditions in the markets in which its properties are located.
        An  economic  recession,  or other  adverse  changes in general or local
        economic  conditions,  could result in the  inability  of some  existing
        tenants  of the  Company  to meet  their  lease  obligations  and  could
        otherwise  adversely  affect the Company's  ability to attract or retain
        tenants.  The Retail Properties are typically  anchored by supermarkets,
        drug stores and other  consumer  necessity and service  retailers  which
        usually offer  day-to-day  necessities  rather than luxury items.  These
        types of tenants,  in the experience of the Company,  generally maintain
        more consistent  sales  performance  during periods of adverse  economic
        conditions.

2.      Acquisition of Rental Properties

                      During 1997, the Company  acquired twelve shopping centers
        for an aggregate  acquisition  cost of approximately  $134,553.  All the
        acquisitions  were accounted for using the purchase method of accounting
        and the  operations  of  each  property  is  included  in the  Company's
        Statement of Operations from their respective dates of acquisition.  The
        following is a summary of the acquisitions:

                                                                         Total
            Date                                                     Acquisition
         Acquired Property Name       Location                 GLA       Cost

          1/97(a) Four Mile Fork      Fredericksburg, VA     101,262      $5,979
          1/97(a) Shoppes of Graylyn  Wilmington, VA          65,476       7,390
          1/97(a) City Avenue         Philadelphia, PA       161,454      15,675
          3/97    Ashburn Farm        Ashburn, VA             88,942       9,867
          9/97    McHenry Commons     McHenry, IL            100,526       8,345
          9/97    Mallard Creek       Round Lake Beach, IL   143,759      13,369
          9/97    The Oaks            Des Plaines, IL        138,274      14,462
          9/97    Pheasant Hill       Bolingbrook, IL        111,190      10,059
          9/97    Riverside/
                  River's Edge        Chicago, IL            169,434      13,858
          9/97    Stonebrook Plaza    Merrionette Park, IL    95,825       8,283
          10/97   Mitchellville Plaza Mitchellville, MD      154,160      21,393
          12/97   Spring Valley       Washington, DC          16,834       5,873
                                                          ----------  ----------
                                                           1,347,136    $134,553
                                                           =========    ========


                                      Anchor                  Anchor
                                      Tenant                  (GLA)

          1/97(a) Four Mile Fork      Safeway                 31,238
          1/97(a) Shoppes of Graylyn  Rite Aid                23,500
          1/97(a) City Avenue         Acme Supermarket        30,000
          3/97    Ashburn Farm        A&P Superfresh          57,030
          9/97    McHenry Commons     Dominick's Finer Foods  76,170
          9/97    Mallard Creek       Dominick's Finer Foods  76,258
          9/97    The Oaks            Dominick's Finer Foods  63,863
          9/97    Pheasant Hill       Dominick's Finer Foods  62,756
          9/97    Riverside/
                  River's Edge        Dominick's Finer Foods  74,494
          9/97    Stonebrook Plaza    Dominick's Finer Foods  63,000
          10/97   Mitchellville Plaza Food Lion               45,100
          12/97   Spring Valley       CVS/Pharmacy             6,838
                                                             -------
                                                             610,247
                                                           =========

          (a) This represents the closing dates of the acquisition,  however the
              contracts were executed and a substantial  amount of due diligence
              was performed during 1996.



                                                        F-8

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



          The acquisitions were funded as follows:

          Assumed Mortgage Debt (including premiums)                    $78,747
          Market Value of 1,384,407 common and 9,538
          preferred Operating Partnership Units                          33,851
          Deferred consideration                                          2,223
          Cash                                                           19,732
                                                                    -----------
          Total                                                        $134,553
                                                                     ==========

                   The deferred  consideration  will be paid upon the earlier of
          the  completion  of  certain  events or a specific  period of time.  A
          substantial amount of the deferred  consideration is to be paid in the
          form of common Operating Partnership Units. The number of units issued
          will be  based on the fair  market  value of the  units at the time of
          issuance.

                   The following  unaudited pro forma condensed combined results
          of  operations  for the years  ended  December  31,  1997 and 1996 are
          presented  as if  the  acquisitions  of  the  rental  properties  that
          occurred  during 1996 and 1997 had occurred on January 1 of the period
          presented. In preparing the pro forma data, adjustments have been made
          to assume that the September 1997 and December 1996 Offerings occurred
          on January 1, of the periods  presented.  The proforma  statements are
          provided for  information  purposes only. They are based on historical
          information  and do not  necessarily  reflect the actual  results that
          would have  occurred  nor are they  necessarily  indicative  of future
          results of operations of the Company.

                                                             1997          1996
                                                            --------      ------
                                                                (unaudited)

            Total revenues                                 $65,918       $63,381
                                                           =======       =======
            Income before minority interest and
             distributions to Preferred Stockholders       $13,821       $11,863
                                                           =======      ========
            Net income per common share - Basic              $0.74         $0.57
                                                          ========     =========
            Net income per common share - Diluted            $0.74         $0.57
                                                          ========     =========

3.      Summary of Significant Accounting Policies

Basis of Presentation

        The  consolidated  financial  statements  include  the  accounts  of the
Company,  the Operating  Partnership and other limited  partnerships and limited
liability companies which are majority owned by the Operating Partnership.
All significant intercompany balances and transactions have been eliminated.

        The Company's  investment in the preferred stock of FWM is accounted for
under the equity  method of  accounting.  In  addition to  receiving  fees under
third-party  management,  leasing and brokerage agreements,  FWM manages, leases
and provides other related services to all the properties owned by the Operating
Partnership and its affiliates in exchange for a fee.

Reclassification

        Certain  items of income and expense for the years  ended  December  31,
1996 and 1995 were  reclassified  to  conform to the  presentation  for the year
ended December 31, 1997.

                                                   F-9

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



Use of Accounting Estimates

        The  preparation  of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  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 period. These estimates involve judgments with respect to, among other
things,  various future economic  factors which are difficult to predict and are
beyond the control of the Company.  Therefore,  actual amounts could differ from
these estimates.

Rental Properties

        Rental  properties  are  carried  at the lower of cost less  accumulated
depreciation  or  net  realizable   value.   Depreciation  is  computed  on  the
straight-line  basis over the estimated useful lives of the assets.  The Company
uses a 27.5- to  31.5-year  estimated  life for  buildings  and 5- to  31.5-year
estimated life for capital  improvements.  Tenant  improvement  expenditures are
depreciated  over the  term of the  related  lease.  Expenditures  for  ordinary
maintenance and repairs are charged to operations as incurred while  significant
renovations and  improvements  that improve and/or extend the useful life of the
asset are capitalized and depreciated over the estimated useful life.

        In determining whether there has been any impairment losses, the Company
determines that the property's net projected  undiscounted cash flow before debt
service is sufficient to recover the cost of the asset. An impairment loss would
result if the carrying value were greater than the cumulative  undiscounted  net
cash flow. The amount of an impairment  would be calculated by  determining  the
difference  between the carrying  value and the  cumulative  discounted net cash
flow.

Cash and Equivalents

        All  demand,   money  market  accounts,   certificates  of  deposit  and
repurchase  agreement accounts with an original maturity of three months or less
at date of  purchase  are  considered  to be cash and  equivalents.  The Company
places its temporary cash investments with high quality financial  institutions.
The  deposits  at such  financial  institutions  are  guaranteed  by the Federal
Deposit Insurance  Corporation  ("FDIC") up to $100. At various times during the
year,  the  Company  has  deposits  in excess of the FDIC  insurance  limit.  In
addition,  the  Company is required to maintain  escrow  deposits  with  certain
lenders.  Such amounts which are included in other assets, are also in excess of
FDIC insurance limits.

Deferred Lease Costs

        Fees  and  costs  incurred  to  initiate  and  renew  operating  leases,
including  amounts  paid to FWM,  are  amortized  over  the  lease  term and are
included in other assets.

Deferred Financing Costs

        Costs of interest rate caps, interest rate buydowns and fees incurred to
obtain long-term  financing are being amortized over the terms of the respective
loans using the effective interest method.  Unamortized deferred financing costs
are  charged  to  expense  when  debt  is  retired  before  the  maturity  date.
Accumulated  amortization  of deferred  financing costs at December 31, 1997 and
1996 was $7,683 and $5,518, respectively. Deferred

                                                   F-10

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



financing cost amortization expense is included in interest expense and amounted
to $1,546, $2,167 and $2,260 during 1997, 1996, and 1995 respectively.

Revenue Recognition

        Rental income  attributable to leases is recorded when due from tenants.
Certain of the leases provide for escalating base rents, which are recognized on
a straight-line basis over the term of the agreement. Rents accrued, but not yet
paid, are included in accounts receivable. As of December 31, 1997 and 1996, the
amounts of these straight-line receivables were $4,689 and $3,317, respectively.
The amount of rental  income  from the  straight-  lining of rents  amounted  to
$1,337,  $921 and $855 for the years  ended 1997,  1996 and 1995,  respectively.
Certain of the leases also provide for additional  revenue to be paid based upon
the level of sales achieved by the lessee and are recorded as percentage  rents.
Most leases  provide for tenant  reimbursement  of common area  maintenance  and
other operating expenses.

        An allowance for doubtful accounts has been provided against the portion
of tenant accounts  receivable  which is estimated to be  uncollectible.  Tenant
accounts  receivable in the accompanying  consolidated  balance sheets are shown
net of an allowance for doubtful  accounts of $1,453 and $683 as of December 31,
1997, and 1996, respectively.

Income Taxes

        The  Company  operates  and  intends to  continue to operate in a manner
intended to qualify as a REIT under the Code. A trust which distributes at least
95% of its taxable income to its shareholders  each year and which meets certain
other  conditions  will not be taxed on that portion of its taxable income which
is distributed to its shareholders.  The following per share  distributions (and
their tax classifications) were paid during 1997:

                   Ordinary    Return       Capital         Total
                    Income   of Capital      Gain           Paid

   Preferred         $2.38     $0.00         $0.06          $2.44
   Common            $1.02     $0.88         $0.05          $1.95

        If the Company  fails to qualify as a REIT in any tax year,  the Company
will be subject to Federal  income tax  (including  any  applicable  alternative
minimum  tax) on its  taxable  income at regular  corporate  rates.  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 federal  income and excise
taxes on its undistributed income.

Income (Loss) per Share

        Basic income  (loss) per share is  calculated  by dividing  income after
minority interest,  less preferred  distributions by the weighted average number
of common shares  outstanding  during the  respective  periods.  Diluted  income
(loss) per share  reflects the dilutive  effect of  outstanding  employee  stock
options  using  the  treasury  stock  method.  The  assumed  conversion  of  the
partnership  units held by the limited  partners of the  Operating  Partnership,
which would  result in the  elimination  of  earnings  and losses  allocated  to
minority  interests  would  have  no  effect  for  the  periods  presented.  The
conversion  of  Preferred  Stock  and  the  Exchangeable   Debentures  would  be
anti-dilutive for the periods presented.

                                                   F-11

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------





        Statements  of Financial  Accounting  Standards  No.128,  "Earnings  per
Share" became  effective for fiscal  periods ending after December 31, 1997. The
Company  has made all  appropriate  disclosures  required  under FAS 128 and has
restated all periods presented.

Minority Interest

        Minority interest represents the limited partners' interest of 2,121,089
and 782,360  common units in the Operating  Partnership  as of December 31, 1997
and 1996, respectively,  and 429,147 and 419,609 Exchangeable Preferred Units in
the Operating  Partnership as of December 31, 1997 and 1996,  respectively.  The
Exchangeable  Preferred  Units  have  an  aggregate  liquidation  preference  of
$10,729.  At the date of formation,  the minority interest was established based
on their  interest  in the value of the  Operating  Partnership.  Annually,  the
income  is  assigned  to   Preferred   Stockholders   to  the  extent  of  their
distributions and amounts necessary to maintain their balance at its liquidation
value. Any remaining income is assigned to minority Common Stockholders based on
their percentage  interest during the period the income is generated.  Losses of
the Operating Partnership are allocated to minority Common Stockholders based on
their percentage interest to the extent that they have capital available. In the
event  that   consolidated   net  assets  decrease  below  the  Preferred  Stock
liquidation  value,  operating  losses are allocated to the  Preferred  minority
interest  based on their  percentage  ownership.  Additionally,  the  impact  on
stockholders equity of changes in minority interest percentage  ownership caused
by the  issuance  of  common  stock or the  issuance  of units of the  Operating
Partnership are reflected in additional paid in capital.

New Accounting Pronouncements

     Statements No. 130 "Reporting  Comprehensive  Income", No. 131 "Disclosures
about Segments of an Enterprise and Related Information" are required for fiscal
years  beginning  January 1, 1998 and will be  adapted  by the  Company in 1998.
There will not be a material  impact on the  Company's  financial  position as a
result of the new standards.

 4.     Rental Properties

                      Depreciation  expense for each of the years ended December
        31, 1997, 1996 and 1995 was $10,719, $7,675, and $5,534, respectively.

                      For each of the years ended  December 31, 1997,  1996, and
        1995,  maintenance  and repairs  expense was $3,501,  $2,767 and $1,872,
        respectively,  and real  estate  taxes were  $4,968,  $3,070 and $2,044,
        respectively.  Such  amounts  are  included in  property  operating  and
        maintenance  expense  in the  accompanying  consolidated  statements  of
        operations.

                      During  1997,  the Company sold  Thieves  Market  (January
        1997) and a portion of Laburnum Park  Shopping  Center  (October  1997).
        Thieves Market was sold to a tenant for an approximate  price of $1,200.
        The gain on sale was approximately  $45. The Company sold  approximately
        5,500 square feet of existing  building and .357 acres of land to Ukrops
        Supermarket,  the property's  anchor tenant.  Ukrops owns their land and
        building and is using the extra space to expand their  existing store by
        8,000 square feet. The sale price was approximately $900 and the Company
        reported a gain on sale of $504.


                                                   F-12

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



5.      Mortgage Debt

                      Mortgage  and  other  notes   payable   consisted  of  the
        following as of December 31, 1997 and 1996, respectively:

                                                                 1997      1996
                                                               --------   ------
             Mortgage and other notes with fixed interest
            (all-in effective rates):
              7.31%, maturing June 1998 (e)                    $   -     $4,151
              6.50%, maturing May 1999 (e)                         -      3,587
              9.90%, maturing July 1999                          3,826    3,826
              8.93%, maturing July 1999 (a)(b)(c)               38,500   38,500
              7.50%, maturing June 1999 (e)                        -      3,500
              7.15%, maturing July 1999                          3,656    3,656
              8.62%, maturing August 1999
               (includes $82 premium)                            1,827    1,759
              9.82%, maturing April 2000                        11,489   11,588
              8.03%, maturing July 2000 (e)                        -      4,449
              6.65%, to 7.75%,
               maturing through June 2007                        1,846    9,332
              8.75%, maturing July 2005                          7,999    8,065
              8.76%, maturing October 2005                      13,283   13,952
              7.50%, maturing December 2005                      2,472    2,497
              7.86%, maturing January 2006                       5,913    6,002
              7.22%, maturing March 2006                        14,132   14,358
              7.89%, maturing May 2006                           7,774    7,919
              8.01%, maturing January 2007
               (includes $349 premium)                           6,282    6,000
              7.89%, maturing November 2014
               (includes $569 premium)                           4,783    4,315
              8.12%, maturing October 2005                       9,909       -
              7.16%, maturing through July 1999
               (includes $796 premium)                          20,972       -
              7.10%, maturing June 2005
               (includes $1,934 premium)                        15,764       -
              7.28%, maturing July 2000
               (includes $878 premium)                          14,354       -
              7.42%, maturing May 2003
               (includes $722 premium)                          10,144       -
                                                              --------  --------
                        Total fixed rate notes                 194,925  147,456
                                                               -------   -------

              Mortgage notes with variable rates:
                Variable maturing June 2010 (d)                  7,075    7,265
                Variable maturing February 2020
                 (1 year T-bill + 2.75%) (e)                        -     1,530
                Variable maturing March 2002
                 (LIBOR + 2.25%)                                    -     7,851
                Variable maturing April 1999
                 (prime + .25%)                                     -     2,945
                Variable maturing January 2001
                 (LIBOR + 1.50%)                                10,030      -
                                                             ---------  --------
                         Total variable rate notes              17,105   19,591
                                                             ---------   -------

                                                              $212,030 $167,047
                                                             ========= =========





                                                   F-13

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------




(a)  As part of this loan the lender  required the Company to  establish  escrow
     accounts for real estate taxes,  insurance and a replacement reserve. These
     escrows, totaling $908 at December 31, 1997, are included in other assets.

(b)  On June 27, 1994,  the Company  borrowed  $38,500 under new mortgage  loans
     (collectively,  the "Nomura Mortgage Loan")  collateralized  by five of the
     Properties.  These  loans,  which bear  interest at 30-day  LIBOR (5.97% at
     December  31,  1997) plus 2.0% and  mature on July 1,  1999,  are closed to
     prepayment  until  July 1, 1998 and can be  prepaid  thereafter  based on a
     1.50%  declining  prepayment  penalty.  To mitigate  its  exposure to these
     variable  rate loans,  the Company  entered into a five year  interest rate
     protection  agreement  for a notional  amount of $38,500  that is effective
     through the loans  maturity,  and caps the interest  rate at 7.70%  through
     maturity.   The  cost  of  the  interest  rate   protection   agreement  of
     approximately  $3,200,  is being  amortized  over the life of the agreement
     using the effective interest rate method resulting in an effective interest
     rate on the Nomura  Mortgage  Loan of  approximately  8.9% per  annum.  The
     estimated fair market value of the interest rate protection  agreement,  as
     determined by the issuing financial institution,  was approximately $500 at
     December 31, 1997.

(c)  In December 1995,  the Company  entered into an interest rate swap contract
     with a  notional  amount  of  $38,500.  The  Company  intends  to hold such
     contract until the  expiration  date. The purpose of the swap is to fix the
     interest  rate on the $38,500  Nomura loan through its  expiration  date of
     June 1999 at 7.09%.  Under the terms of the  interest  rate  contract,  the
     Company  will be  paying a fixed  rate of 5.09% to the  other  party to the
     contract  (the  "Counter  Party")  through  June 1999.  The Company will be
     receiving  variable  payments  from the Counter Party based on 30-day LIBOR
     through June 1999. The Counter Party has as collateral a $3,500 restriction
     on the $5,800 Line of Credit it provided the Company (see below).  The fair
     market  value of the  interest  rate swap is  determined  by the amounts at
     which they could be settled.  If the Company had settled  these  agreements
     with the  Counter  Party on  December  31,  1997,  the  Company  would have
     received approximately $300.

(d)  The Company assumed Bond  Obligations of $7,600  collateralized  by Mayfair
     Shopping  Center.  The Bond  Obligations  bear interest at a variable rate,
     plus a letter of  credit  enhancement  fee of 2.0%.  The  variable  rate is
     determined  weekly at the rate necessary to produce a bid in the process of
     remarketing the Bond Obligations equal to par plus accrued interest,  based
     on comparable issues in the market.  The interest rate,  including the 2.0%
     credit   enhancement  fee,  was  4.25%  at  December  31,  1997.  The  Bond
     Obligations have a stated maturity of February 1, 2010, however, the letter
     of credit supporting the Bond Obligations expires on June 24, 1998.

     The  Nomura  Mortgage  Loan,  the  Debentures  (see  Note 6),  and the Bond
     Obligations,  contain affirmative and negative covenants, events of default
     and other provisions as are customarily required for such instruments.  The
     most restrictive covenants require the Company to maintain a leverage ratio
     (total indebtedness divided by net worth) of at least 2.50, maintain a debt
     service coverage ratio (net income before interest and depreciation divided
     by  scheduled  debt  service  payments)  of at least 1.50 and  require  the
     Operating  Partnership  to  maintain  a  net  worth  of at  least  $75,000.
     Management  believes that the Company is in compliance with all restrictive
     covenants.

(e)  During 1997,  the Company  retired  approximately  $25,900 of mortgage debt
     prior to their  scheduled  maturity  dates with  proceeds of the  September
     offering.   The  Company  incurred  prepayment   penalties  and  wrote  off
     unamortized  deferred financing costs resulting in an extraordinary loss of
     $954.

        Maturities  of the  existing  indebtedness  at December  31, 1997 are as
follows:

                          Principal      Amortization      Balloon
                          Curtailment    of Premiums       Amount      Total

         1998                 $2,635         $1,533     $     -         $4,168
         1999                  2,883            995         67,762      71,640
         2000                  2,856            675         27,522      31,053
         2001                  2,833            476          7,597      10,906
         2002                  3,079            472           -          3,551
         Thereafter            8,955          1,179         80,578      90,712
                            --------        -------      ---------    --------
                             $23,241         $5,330       $183,459    $212,030
                             =======         ======       ========    ========

                                                   F-14

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------








                      In  anticipation  of the large  amounts of  mortgage  debt
        maturing in 1999 and 2000, the Company has entered into forward interest
        rate swap  contracts.  The Company  intends to hold such contracts until
        their  expiration  dates.  The purpose of the swaps is to  mitigate  any
        exposure to  fluctuations  in interest rates until the maturity dates of
        the mortgages when the Company expects to refinance  these loans.  Under
        the terms of the swap  contract,  the  Company  pays a fixed rate to the
        other party to the contract  ("Counter Party") while receiving  variable
        payments from the Counter Party based on 30-day LIBOR.  This effectively
        fixes the  LIBOR  rate for the  Company  during  the  period of the swap
        contracts. The following is a summary of the Company's swap contracts as
        of December 31, 1997:

                          Date of                       Fixed Rate  Fair Market
         Notional Amount  Agreement Period of Contract  Payable     Value
           (In 000's)                                               (In 000's)

           $38,500         12/95    07/01/99 - 12/01/03  6.37%       $(534)
           $20,000         08/97    03/01/99 - 03/01/04  6.44%       $(366)
           $15,000         11/97    06/01/99 - 06/01/04  6.18%       $(111)
           $24,000         01/98    05/01/00 - 05/02/05  5.85%         N/A
           -------                                                    -----

           $97,500                                       6.23%
           =======                                       =====

     The Company currently has two collateralized revolving lines of credit (the
"Lines of Credit"). The Company has a collateralized revolving Line of Credit of
up to $35,500 with Union Bank of Switzerland. This line is collateralized by six
properties  (Kenhorst Plaza,  Shoppes of Graylyn,  Four Mile Fork,  Takoma Park,
Centre Ridge  Marketplace and Newtown Square).  The line which closed on January
22,  1998 and  matures  on January  31,  2001  replaces  the Lines of Credit the
Company  had with Mellon Bank and  Corestates  Bank.  Loans under this line will
bear  interest at LIBOR plus one  percent  (1%).  The Company has an  additional
collateralized  revolving  Line of Credit of up to $5,775 from First Union Bank.
Loans  under this line will bear  interest  at LIBOR plus two  percent  (2%) per
annum,  and will mature on June 30, 1998. This Line of Credit is  collateralized
by a first mortgage lien on Brafferton Shopping Center. As of December 31, 1997,
there was $3,300 outstanding under the Lines of Credit.

     The  Lines of  Credit  are  available  to fund  acquisitions,  renovations,
expansions and other working capital  requirements.  Definitive  agreements with
respect to the Lines of Credit contain customary representations, warranties and
covenants.

     Interest  paid for the years ended  December 31, 1997,  1996,  and 1995 was
$17,437, $12,471, and $8,965, respectively.





                                                   F-15

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------






  6.    Debentures

                      In June 1994,  the  Company  effected a private  placement
        with  respect  to  $25,000  of  aggregate   principal  amount  of  8.25%
        Debentures due June 27, 1999, with interest payable quarterly  beginning
        September 27, 1994. The Debentures are exchangeable in the aggregate for
        one  million  shares  of  Convertible   Preferred  Stock,   representing
        approximately   9.0%  of  all   shares   of   Common   Stock   (assuming
        exchange/conversion  of all Common Units and Convertible Preferred Stock
        (or securities  exchangeable into Convertible  Preferred Stock or Common
        Stock)). The Debentures are collateralized by two of the Properties.

  7.    Accounts Payable and Accrued Expenses

                      Accounts  payable and accrued  expenses  consisted  of the
        following as of December 31, 1997 and 1996, respectively:
                                                              1997         1996
              Accrued Real Estate Taxes                     $2,577          $52
              Deferred acquisition payments                  2,223         -
              Tenant Security Deposits                       1,767        1,223
              Accrued compensation payable in Company stock    682        2,265
              Accounts payable and other accrued expenses    3,665        2,788
                                                            ------       ------
              Total                                        $10,914       $6,328
                                                           =======       ======

 8.     Preferred Stock

                       The Company's  charter  authorizes  the issuance of up to
        10,000,000  shares  of  preferred  stock,  par  value  $.01  per  share.
        Currently  3,800,000  shares of preferred  stock are designated as 9.75%
        Convertible  Preferred  Stock, of which 2,314,189  shares are issued and
        outstanding.   The   Convertible   Preferred  Stock  has  a  liquidation
        preference equal to $25.00 per share plus an amount equal to any accrued
        and unpaid dividend,  (the "Convertible Preferred Liquidation Preference
        Amount").  Holders of the  Convertible  Preferred  Stock are entitled to
        receive cumulative preferential cash dividends in an amount per share of
        Convertible  Preferred  Stock  equal  to  $0.6094  per  quarter  plus  a
        participating  dividend  equal to the amount,  if any, of  dividends  in
        excess of $0.4875  per quarter  with  respect to the number of shares of
        Common Stock into which a share of Convertible  Preferred  Stock is then
        convertible. Shares of Convertible Preferred Stock are convertible on or
        after May 31, 1999 into 1.282051 shares of Common Stock. The Company may
        redeem the  Convertible  Preferred  Stock  commencing July 15, 1999 at a
        redemption  price of $27.44  per share.  The  redemption  price  reduces
        annually thereafter to $26.95, $26.46, $25.98, $25.49 and $25.00.

9.      Summary of Noncash Investing and Financing Activities

                       Significant  noncash  transactions  for the  years  ended
        December 31, 1997, 1996, and 1995 were as follows:

                                                   F-16

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



                                                        1997     1996      1995
                                                     --------- --------    -----

         Liabilities assumed in purchase
             of rental properties                      $74,657 $20,171   $11,723

         Common and Preferred Units in the Operating
             Partnership issued in connection with the
             purchase of rental properties             $33,851  $8,978    $1,630

         Convertible Preferred Stock issued in
             connection with the purchase of
             rental properties                             -       -      $8,842

         Accrual of tenant improvements                    -       -        $700

         Accrual of cost of raising capital                $55    $216      $128

         Decrease (increase) in adjustment
             for minority interest's
             ownership of the Operating Partnership   $(10,613)$(1,868)   $1,991

10.     Lease Agreements

                      The  Company  is the  lessor  of  retail  properties  with
        initial  lease terms  expiring  through  the year 2020.  Many leases are
        renewable for three to five years at the lessee's option. Future minimum
        lease receipts under  noncancelable  operating leases as of December 31,
        1997 are as follows:


                      1998                                       $49,076
                      1999                                        42,920
                      2000                                        38,245
                      2001                                        33,372
                      2002                                        27,581
                      Thereafter                                 164,298
                                                                --------
                                                                $355,492
                                                                ========

                      These future rentals do not include  additional rent which
        may be received  from  tenants  for  pass-through  provisions  in leases
        related to  increases in operating  expenses and  percentage  rentals or
        rentals on the multifamily properties due to their short duration.

11.     Commitments and Contingencies

        Environmental

                      The  Company,  as an owner of real  estate,  is subject to
        various environmental laws of Federal and local governments.  Compliance
        by the Company with existing laws has not had a material  adverse effect
        on its financial  condition and management does not believe it will have
        such an effect in the future.  However,  the Company  cannot predict the
        impact of new or changed laws or regulations on its current Properties.



                      All of the  Properties  have  been  subjected  to  Phase I
        environmental  audits. Such audits have not revealed,  nor is management
        aware of any environmental liability that management believes would have
        a  material  adverse  impact  on the  consolidated  financial  position,
        results  from  operations  or  liquidity.  Management  is unaware of any
        instances in which it would incur and be financially responsible for any
        material  environmental  costs  if  any  or all  Properties  were  sold,
        disposed or abandoned.


                                                   F-17

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



12.     Related-Party Transactions

                      The  Operating  Partnership  owns  100% of the  non-voting
        Preferred  stock of  First  Washington  Management,  Inc.  (FWM),  which
        entitles it to 99% of the cash flow of FWM.  Certain of the  officers of
        the Company own 100% of the Common Stock of FWM which  entitles  them to
        1% of the cash flow of FWM.  In  addition,  the  Company  received  $480
        annually of interest income, included in income from Management Company,
        on the FWM Note in 1997, 1996 and 1995. The Company's equity in earnings
        of FWM for the year ended  December 31,  1997,  1996 and 1995 was ($47),
        ($259) and ($31) respectively.

                      FWM  provides  property  management,   leasing  and  other
         related services to the Company.  Management and other fees paid by the
         Company in 1997, 1996 and 1995 amounted to $3,687, $1,955
        and $1,178, respectively.

13.     Stock and Stock Option Plans

        Stock Option Plans

                      Under  various  plans  and  agreements,  the  Company  has
        authorized  the issuance of stock and stock options to certain  officers
        and  employees  of the  Company.  In 1995,  the FASB  issued FAS No. 123
        "Accounting for Stock Based Compensation" (FAS 123). As permitted by FAS
        123,  the  Company  continues  to apply APB  Opinion  No. 25 and related
        Interpretations in accounting for its plans.

                      The Company  established  a Stock  Option Plan (the "Stock
        Option Plan") for the Company's directors,  executive officers and other
        key  employees.  The Stock Option Plan  provides  that the  compensation
        committee  of the Board of Directors  (or Board,  in the case of options
        granted to independent directors) may grant or issue stock options. Each
        grant or  issuance  will be set forth in a separate  agreement  with the
        person  receiving  the  award  and will  indicate  the  type,  terms and
        conditions of the award.  The plan provides for both  non-qualified  and
        incentive  stock  options.  The Stock Option Plan  provides that 801,540
        shares of Common Stock will be reserved for issuance.

                      FAS 123  requires  pro  forma  information  regarding  net
        income and earnings per share as if the Company  accounted for its stock
        options under the fair value method of that statement. The fair value of
        the options  issued in 1997 and 1996 are estimated to be $221.0 and $5.3
        respectively,  as of the date of the grant,  using a binomial model with
        the following weighted-average assumptions:  risk-free interest rates of
        7.37%; dividend rate of 8.71%; volatility factors of the expected market
        price of the Company's shares of 16.96%; and a weighted average expected
        life of the options of 3.82 years.




                      Because  option  valuation  models require input of highly
        subjective assumptions, such as the expected stock price volatility, and
        because  changes in these  assumptions  can  materially  affect the fair
        value  estimate,  the  existing  model  may not  necessarily  provide  a
        reliable single measure of the fair value of its stock options.


                                                   F-18

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



                      For purposes of pro forma disclosures,  the estimated fair
        value of the options are amortized to expense over the options'  vesting
        period. The pro forma income (loss) allocated to Common  Stockholders is
        as follows:

                                                               1997       1996
                                                               ----       ----

         Pro forma net income (loss)
          before extraordinary item                          $2,702     $(1,566)
         Extraordinary item                                    (954)        -
                                                            -------    --------
         Pro forma net income (loss)                         $1,748     $(1,566)
                                                             ======    ========
         Pro forma earnings (loss)
          per Common Share - Basic
            Income (loss) before extraordinary item           $0.48      $(0.47)
            Extraordinary item                                (0.17)        -
                                                             ------     -------
            Net income (loss)                                 $0.31      $(0.47)
                                                              =====     =======
         Pro forma earnings per Common Share - Diluted
            Income (loss) before extraordinary item           $0.47      $(0.47)
            Extraordinary item                                (0.17)        -
                                                             ------      ------
            Net income (loss)                                 $0.30      $(0.47)
                                                              =====     =======

     A summary  of the  Company's  stock  option  activity  for the years  ended
December 31 is as follows:
                                                Shares
                                                Available
                                                for        Weighted
                                                Future     Average   Ranged
                                   Options      Option     Exercise  Exercised
                                   Outstanding  Grants     Price     Price

     December 31, 1994             348,619       2,921     $19.50     $19.50

      Options expired/forfeited     (9,801)      9,801     $19.50     $19.50
                                  --------     -------

     December 31,1995              338,818      12,722     $19.50     $19.50

      Options granted                3,500      (3,500)    $19.50     $19.50
      Options expired/forfeited     (2,670)      2,670     $19.50     $19.50
                                  --------     -------

     December 31, 1996             339,648      11,892     $19.50     $19.50

      Amendment of 1994 plan                   450,000
      Options granted              145,500    (145,500)    $24.00     $24.00
      Options exercised             (2,956)                $19.50     $19.50
      Options expired/forfeited       (228)        228     $19.50     $19.50
                                   -------    --------

     December 31, 1997             481,964     316,620     $20.86  $19.50-$24.00
                                   =======     =======


                                                   F-19

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------






                  At December 31, 1997 and 1996  options for 334,131  shares and
         336,148 shares,  respectively were  exercisable.  The average remaining
         contractual  life of options  outstanding at December 31, 1997 and 1996
         were 7.9 years and 8.0 years, respectively.  The weighted average grant
         date fair value per  options  granted in 1997 was $1.52.  The  exercise
         price of options outstanding at December 31, 1997 ranged from $19.50 to
         $24.00 per share.

         Contingent and Restricted Stock Plans

                  Two of the  Company's  officers  have  entered into three year
         employment  agreements.  The agreements  call for a base salary plus an
         incentive compensation arrangement based on the Company meeting certain
         operating  result  requirements.  The incentive  compensation is in the
         form of  common  stock  grants.  Up to  100,000  shares of stock may be
         issued  to  each  of the  two  officers  (or  their  designees).  These
         additional shares of stock will be recorded as additional  compensation
         in the period earned. During 1995, 22,417 shares were issued to each of
         the two officers.  The weighted average fair value of the shares issued
         was $400. No additional shares were issued during 1996. In 1997, 47,380
         shares  were  issued  to each of the  officers  with a total  value  of
         $2,300.  Total compensation cost recognized under this plan was $1,100,
         $1,500 and $1,800 for the years ended December 31, 1997, 1996 and 1995,
         respectively.

                  In April 1996,  the  stockholders  of the  Company  approved a
         Contingent  Stock  Agreement  and a  Restricted  Stock Plan for each of
         these officers. The Contingent Stock Agreements have reserved for grant
         60,000 shares of common stock (30,000  shares each) for the period July
         1, 1997 through  December 31, 1999. The agreements are  administered by
         the Compensation Committee of the Board of Directors ("Committee"). The
         grants will be awarded if the Committee determines that the Company has
         materially met certain targeted performance criteria.  The two officers
         were issued 39,200 shares each under the restricted  stock plan,  which
         is also administered by the Compensation  Committee.  The shares issued
         under this plan are subject to a vesting schedule as follows:

                  Vesting Date      Number of Shares Vested

                  July 1, 1997                  5,000
                  March 31, 1998               11,400
                  March 31, 1999               11,400
                  March 31, 2000               11,400
                                               ------
                  TOTAL                        39,200
                                               ======

                  The  Company  will record  compensation  expense as the shares
         vest  based on the  fair  market  value of the  stock as of the date of
         issuance (i.e. $24.25 per share).

                  An additional 50,000 shares of common stock are reserved under
         the  Restricted  Stock Plan for grants to officers and employees of the
         Company, of which 21,264 were issued as of December 31, 1997.


                                                   F-20

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



14.      Condensed Quarterly Financial Information (Unaudited)

         1997                            First     Second     Third      Fourth
         ----                            -----     ------     -----      ------

         Total revenues                $12,404    $12,888   $14,071     $16,271

         Net income before
           extraordinary item,
           preferred distributions
           and minority interest        $1,822     $1,617    $2,633      $4,071

         Extraordinary item              $(134)       -       $(561)      $(259)

         Net income (loss) allocated
           to Common Stockholders          $21       $(35)     $323      $1,660

         Net income (loss)
          per share-Basic:
           Income before
            extraordinary item           $0.03     ($0.01)    $0.16       $0.34
           Extraordinary item             0.03        -        0.10        0.04
                                          ----      ------    -----       -----
           Net income (loss)             $0.00     $(0.01)    $0.06       $0.30
                                         =====     =======    =====       =====

         Net income (loss) per
          share-Diluted:
           Income (loss) before
            extraordinary item           $0.03     $(0.01)    $0.16       $0.33
           Extraordinary item            (0.03)       -       (0.10)      (0.04)
                                       -------    --------  -------     -------
           Net income (loss)             $0.00     $(0.01)    $0.06       $0.29
                                        ======     =======   ======      ======

         1996                            First     Second     Third      Fourth
         ----                            -----     ------     -----      ------

         Total revenues                 $9,369    $10,074   $10,442     $10,553

         Net income before
           preferred distributions
           and minority interest        $1,160       $984    $1,287      $1,343

         Net income (loss) allocated
           to Common Stockholders        $(422)     $(552)    $(311)      $(276)

         Net income (loss) per
           Common Share - Basic         $(0.13)    $(0.17)   $(0.09)     $(0.07)

         Net income (loss) per
           Common Share - Diluted       $(0.13)    $(0.17)   $(0.08)     $(0.07)

15.      Fair Value of Financial Instruments

         The following  methods and  assumptions  were used to estimate the fair
         values of the Company's financial instruments:

         Cash and Equivalents: The carrying amount approximates fair value.

         Mortgage notes payable and  Debentures:  The fair values were estimated
         by  discounting  the future  cash  flows  using the  current  rates for
         similar types of borrowing arrangements.

                                                   F-21

<PAGE>




              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (dollars in thousands, except share data)
                                    --------



         Interest  Rate Swaps:  The fair value of these  contracts was estimated
         based upon the amount the Company would have received/paid to terminate
         the swaps.

         The estimated  fair values of the Company's  financial  instruments  at
December 31 are as follows:

                                        1997                             1996
                                     ------------------------------------------
                                     Carrying     Fair         Carrying  Fair
    Financial Assets:                  Value      Value        Value     Value

    Cash and Equivalents              $3,142     $3,142        $11,780   $11,780

    Financial Liabilities:

    Mortgage notes payable          $212,030   $248,200       $167,047  $167,300

    Debentures                       $25,000    $35,256        $25,000   $27,300

    Off-Balance Sheet Assets/
    Liabilities:

    Interest Rate Swaps and
    Caps receive/(pay)                   -        $(612)          -       $1,200

16.      Subsequent Events

         On January 18, 1998, the Board of Directors declared a distribution of
         $0.4875  and  $.6094  per  Common  and   Preferred   share  of  stock,
         respectively  to  shareholders  of record as of February  1, 1998.  On
         February 15, 1998, distributions in the amount of $6,200 were paid.

         In January  1998,  the Company  acquired  Bowie Plaza  Shopping  Center
         located in Bowie,  Maryland.  The total acquisition cost of $12,100 was
         financed  through the issuance of 130,626 Common Units to the seller of
         the property with a value of  approximately  $3,600,  assumed  mortgage
         indebtedness  of  $5,400,  a draw on the  Company's  Line of  Credit of
         $3,000 and cash of $100. The mortgage loan carries an all-in  effective
         interest rate of 7.2% and matures in December 2009. The Center contains
         104,036  square  feet  of  GLA  and  is  anchored  by  Giant  Food  and
         CVS/Pharmacy.

         In  March  1998,  the  Company  sold  its two  multi-family  properties
         (Branchwood  and Park Place  Apartments)  for a combined sales price of
         approximately  $8,050.  The  estimated  gain on  sale is  approximately
         $1,400 and net proceeds after the payment of the existing mortgage debt
         was  approximately  $3,900.  In March 1998, the Company sold one of the
         Georgetown  retail shops  consisting of 5,000 square feet for $750. The
         estimated gain on sale is approximately $200 and net proceeds after the
         payment of existing mortgage debt was approximately  $300. The proceeds
         of these  sales were used to  purchase  Watkins  Park Plaza  (described
         below) in a  like-kind  exchange as defined in  Internal  Revenue  Code
         Section 1031.

         In March  1998,  the Company  acquired  Watkins  Park Plaza  located in
         Mitchellville,  Maryland.  The total  acquisition  cost of $14,295  was
         financed with proceeds from the sale of the Company's two  multi-family
         properties  and a retail  property of $4,200,  a draw on the  Company's
         Lines of Credit of $10,000, and cash of $95.

                                                   F-22

<PAGE>





                       FIRST WASHINGTON REALTY TRUST, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              for the years Ended December 31, 1997, 1996 and 1995

                                    --------




                                    Balance    Additions
                                       at       Charged   Deduction
                                    Beginning      to      Amounts     Balance
                                       of       Bad Debt   Written      at End
     Description                      Year      Expense      Off       of Year
     -----------                    ----------- --------- ---------- -----------

     Allowance for
     Doubtful Accounts:

     Year Ended December 31, 1997      $683      $1,285     $(515)      $1,453
                                       ====      ======     ======      ======

     Year Ended December 31, 1996      $418        $527     $(262)        $683
                                       ====        ====     ======        ====

     Year Ended December 31, 1995      $391        $483     $(456)        $418
                                       ====        ====     ======        ====



































                                                   F-23

<PAGE>


       SCHEDULE III - REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
                                December 31, 1997


                             (dollars in thousands)
                                                              Initial Cost
                                                                    Building &
Property                 Location            Encumbrance   Land     Improvements
Retail:
Allen Street (1)         Allentown, PA        $5,913         $867       $2,404
Ashburn Village          Ashburn, VA           6,730        1,973        7,894
Brafferton (2)           Garrisonville, VA         -        1,595        6,385
Bryans Road (3)          Bryans Road ,MD      38,500        1,214        3,314
Capital Corner           Landover, MD              -          966            0
Centre Ridge
 Marketplace (2)         Centreville, VA       3,300        4,847        3,807
Chesapeake Bagel
 Building                Alexandria, VA          735          191          804
City Avenue
 Shopping Center         Philadelphia, PA      9,909        3,135       12,540
Clinton Square           Clinton, MD               -          242        1,437
Clopper's Mill           Germantown, MD       14,132        4,011       16,006
4483 Connecticut         Washington, D.C.          -           91          932
Colonial Square          York, PA                  -          639        1,678
Davis Ford Crossing (3)  Manassas, VA              -        2,574       10,092
Festival at Woodholme    Baltimore, MD        11,489        2,915       11,660
Firstfield               Gaithersburg, MD      2,472          699        2,797
First State Plaza (3)    New Castle, DE            -        2,575       10,358
Four Mile Fork (2)       Fredericksburg, VA        -        1,196        4,783
Fox Mill (4)             Reston, VA           25,000        2,752       11,019
Georgetown Shops (5)     Washington ,D.C.        411          949        3,174
Glen Lea (6)             Richmond, VA         13,283          757        3,027
Hanover Village (6)      Mechanicsville, VA        -        1,081        4,323
James Island (3)         Charleston, SC            -        1,321        2,758
Kenhorst Plaza (2)       Reading, PA               -        2,253        9,013
Kings Park               Burke, VA             4,783        1,153        4,613
Laburnum Park (6)        Richmond, VA              -        1,194        4,774
Laburnum Square (6)      Richmond, VA              -        1,104        4,418
McHenry Commons          McHenry, IL           6,643        1,669        6,676
Mallard Creek            Round Lake Beach, IL 11,824        2,674       10,695
Mayfair                  Philadelphia, PA      7,075        2,463        9,860
Mitchellville Plaza      Mitchellville, MD    15,764        4,279       17,114
Newtown Square (2)       Newtown Square, PA        -        2,508       10,031
Northway                 Millersville, MD      8,109        1,838        7,400
Penn Station (4)         District Heights, MD      -        4,275            0
P.G. County Comm
 & Tech Pk.              Beltsville, MD            -        1,309          972
Pheasant Hill            Bolingbrook, IL       8,128        2,012        8,047
Potomac Plaza            Woodbridge, VA        3,656          795        4,235
Riverside Square /
River's Edge             Chicago, IL           2,505        2,772       11,086
Rosecroft                Temple Hills, MD          -          664        2,723
Shoppes of Graylyn (2)   Wilmington, DE            -        1,478        5,912
Shoppes of Kildaire      Cary, NC              7,774        2,202        8,833
Southside Marketplace    Baltimore, MD         7,999        2,209        8,835
Spring Valley Shopping
Center                   Washington, DC            -        1,175        4,698
Stefko Boulevard (1)     Bethlehem, PA             -        1,149        3,187
Stonebrook Plaza         Merrionette Park, IL  6,226        1,657        6,626
Takoma Park (2)          Takoma Park               -          957        3,829
The Oaks                 Des Plaines, IL      10,144        2,892       11,570
Valley Center (3)        Owings Mills, MD        700        4,718       18,938

Multi-family:
Branchwood Apts. (7)     Charleston, SC                       142        2,521
Park Place Apts. (7)     Charleston, SC        3,826          387        4,396
                                             -------     --------   ----------
                                            $237,030      $88,518     $312,194
                                            ========      =======     ========

(1) These  properties are encumbered by first deeds of trust as collateral for a
$5,913 mortgage loan.
(2) These  properties  serve as collateral for the Line of
Credit  facilities.
(3) These properties are encumbered by first deeds of trust
as collateral for the $38,500 Nomura mortgage loan.
(4) These  properties  serve
as  collateral  fro the $25,000  Exchangeable  Debentures.
(5) Consists of five
locations in the shopping district of Georgetown in Washington, DC.
    One property was subsequently sold in 1998.
(6) These  properties are encumbered by first deeds of trust as collateral for a
$13,283 mortgage loan.
(7) These properties were  subsequently sold in 1998.
(8) The retail properties and the multi-family properties have depreciable lives
of 31.5 years and 27.5 years respectively.

                    Capitalized   Gross Amounts
                     Subsequent      at which
                         to       carried at the                 Date
                    Acquisition   close of period        Accumul  of      Date
Property            Improvements  Land Improvement Total Depreci Constr Acquired
Retail:
Allen Street (1)         $1,014    $867   $3,418  $4,285    $221 1958       1996
Ashburn Village               0   2,373    7,494   9,867     198 1996       1997
Brafferton (2)              420   1,595    6,805   8,400     742 1974       1994
Bryans Road (3)           3,778   1,231    7,075   8,306   1,629 1972       1990
Capital Corner            3,498     989    3,475   4,464   1,375 1987       1986
Centre Ridge
 Marketplace (2)          2,240   5,108    5,786  10,894     287 1996       1996
Chesapeake Bagel
 Building                   660     192    1,463   1,655     648 1800's     1983
City Avenue
 Shopping Center             23   3,102   12,596  15,698     397 1950-60's  1997
Clinton Square              150     251    1,578   1,829     692 1979       1984
Clopper's Mill               59   4,011   16,065  20,076     915 1995       1996
4483 Connecticut            144      95    1,072   1,167     383 1954       1986
Colonial Square             188     646    1,859   2,505     478 1955       1990
Davis Ford Crossing (3)     201   2,543   10,324  12,867   1,146 1988       1994
Festival at Woodholme       207   2,915   11,867  14,782     993 1986       1995
Firstfield                   61     699    2,858   3,557     195 1978       1995
First State Plaza (3)       709   2,575   11,067  13,642   1,310 1988       1994
Four Mile Fork (2)           43   1,196    4,826   6,022     152 1975       1997
Fox Mill (4)                311   2,752   11,330  14,082   1,264 1988       1994
Georgetown Shops (5)        350     970    3,503   4,473   1,382 1800's1983-1989
Glen Lea (6)                190     757    3,217   3,974     259 1969       1995
Hanover Village (6)         182   1,081    4,505   5,586     362 1971       1995
James Island (3)            382   1,324    3,137   4,461     792 1967       1990
Kenhorst Plaza (2)        1,625   2,253   10,638  12,891     751 1990       1995
Kings Park                  628   1,153    5,241   6,394     173 1966       1996
Laburnum Park (6)          (372)  1,148    4,448   5,596     364 1988       1995
Laburnum Square (6)         877   1,105    5,294   6,399     425 1975       1995
McHenry Commons              12   1,609    6,748   8,357      71 1988       1997
Mallard Creek                29   2,560   10,838  13,398     115 1987       1997
Mayfair                     257   2,463   10,117  12,580   1,141 1988       1994
Mitchellville Plaza           0   3,877   17,516  21,393     140 1991       1997
Newtown Square (2)           34   2,508   10,065  12,573     319 1960-70's  1996
Northway                    562   1,838    7,962   9,800     253 1987       1996
Penn Station (4)         21,242   4,285   21,232  25,517   5,732 1989       1986
P.G. County Comm
 & Tech Pk.               5,474   1,342    6,413   7,755   2,337 1985       1985
Pheasant Hill                22   1,899    8,182  10,081      86 1983       1997
Potomac Plaza             1,162     733    5,459   6,192   1,719 1963       1985
Riverside Square /
River's Edge                 33   2,742   11,149  13,891     115 1986       1997
Rosecroft                 2,443     688    5,142   5,830   1,795 1963       1985
Shoppes of Graylyn (2)       48   1,478    5,960   7,438     192 1971       1997
Shoppes of Kildaire       1,924   2,208   10,751  12,959   3,520 1986       1986
Southside Marketplace        88   2,209    8,923  11,132     452 1990       1996
Spring Valley Shopping
Center                        0   1,175    4,698   5,873      13 1930       1997
Stefko Boulevard (1)      1,366   1,149    4,553   5,702     301 1958-60-75 1996
Stonebrook Plaza             19   1,570    6,732   8,302      71 1984       1997
Takoma Park (2)             974     957    4,803   5,760     226 1960       1996
The Oaks                     39   2,735   11,766  14,501     125 1983       1997
Valley Center (3)         1,440   5,550   19,546  25,096   2,175 1987       1994

Multi-family:
Branchwood Apts. (7)        266     143    2,786   2,929     853 1989       1989
Park Place Apts. (7)      1,084     393    5,474   5,867   1,555 1990       1990
                          -----   -----   ------   -----  ------
                        $56,086 $89,042 $367,756$456,798 $40,839
                       ======== ======= ======== ======= =======

(1) These  properties are encumbered by first deeds of trust as collateral for a
$5,913 mortgage loan.
(2) These  properties  serve as collateral for the Line of
Credit  facilities.
(3) These properties are encumbered by first deeds of trust
as collateral for the $38,500 Nomura mortgage loan.
(4) These  properties  serve
as  collateral  fro the $25,000  Exchangeable  Debentures.
(5) Consists of five
locations in the shopping district of Georgetown in Washington, DC.
    One property was subsequently sold in 1998.
(6) These  properties are encumbered by first deeds of trust as collateral for a
$13,283 mortgage loan.
(7) These properties were  subsequently sold in 1998.
(8) The retail properties and the multi-family properties have depreciable lives
of 31.5 years and 27.5 years respectively.
                                                                    F-24

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