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, 1998

____ 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

Class B Junior Participating Preferred Stock Purchase Rights 

                                                         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  $179 million  based on the closing price of such
shares on the New York Stock Exchange as of March 24, 1999.

The number of shares of the Registrant's  Common Stock outstanding was 8,578,218
on March 25, 1999.

                       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 7, 1999, to be filed pursuant
to Regulation 14A.

This report including Exhibits, contains 131 pages.



<PAGE>

                       FIRST WASHINGTON REALTY TRUST, INC.
                         1998 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS





Item
No.                                                                         Page

                                     PART I

1.    Business.................................................................1
2.    Properties...............................................................7
3.    Legal Proceedings.......................................................12
4.    Submission of Matters to a Vote of Security Holders.....................12

                                     PART II

5.    Market for the Registrant's Common Equity
        and Related Shareholder Matters.......................................13
6.    Summary of Selected Financial Data......................................14
7.    Management's Discussion and Analysis of Financial Condition and
          Results of Operations...............................................16
7a.   Qualitative and Quantitative Disclosures About Market Risk..............23
8.    Consolidated Financial Statements and Supplementary Data................23
9.    Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosures...........................................24

                                    PART III

10.   Directors and Executive Officers of the Company.........................25
11.   Executive Compensation..................................................25
12.   Security Ownership of Certain Beneficial Owners and Management..........25
13.   Certain Relationships and Related Transactions..........................25

                                     PART IV

14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K........25

<PAGE>

                                     PART I

Item 1. Business (dollars in thousands)

General

         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 56 retail properties (the "Retail  Properties")  containing a total
of approximately  6.0 million square feet of gross leasable area ("GLA") located
in the  Mid-Atlantic  region and the Chicago,  Illinois  metropolitan  area. The
Company has elected to be taxed as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code").

         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,  Eckerd Drug 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  108,000  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  and William J. Wolfe,  the  Company's  President  and Chief  Executive
Officer (the "Principals").

         The  Company's  assets  are held by, and all its  operations  conducted
through,   First   Washington   Realty  Limited   Partnership   (the  "Operating
Partnership")  and 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, 1998 and 1997, the Company owned  approximately  73% and 79% 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. Messrs.  Halpert and Wolfe 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
13 third-party  clients  consisting of 21 properties and 2.0 million square feet
of GLA. As of December  31,  1998,  the Company and the  Operating  Partnership,
including subsidiary entities, 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.  FWM has regional  property  management
offices located in Illinois, Pennsylvania and Virginia. FWM 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
managements'  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 Retail 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 many of the Retail  Properties  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
------------      -----------------------------------       ----     -----------

1998 Completed Projects:

Mallard Creek     Facade & common area renovation          $290                -
City Avenue       Facade & common area renovation           721                -
City Avenue       Expansion - Sears Paint and Hardware      520 (1)        4,327
Laburnum Park     Expansion - Ukrop's Supermarket             - (2)       10,000
Four Mile Fork    Facade & common area renovation           124                -
McHenry Commons   Common area renovation                    130                -
Riverside         Common area renovation                    169                -
Spring Valley     Facade & common area renovation           190                -
Stefko Blvd.      Common area renovation                    342                -
Stonebrook        Common area renovation                    204                -
The Oaks          Common area renovation                    405                -
Valley Centre     Development of Pad Site - T.G.I. Friday's 323            6,830
                                                           -----    ------------

                                                         $3,418           21,157
                                                         =======    ============

                                        2
<PAGE>
<TABLE>
<S>

<C>                <C>                                      <C>
                                                            Estimated Completion
Name              Description                                               Date
------------      -----------------------------------       --------------------

1999 Projects:

Bowie Plaza       Common area renovation                     Second Quarter 1999
Newtown Square    Expansion - Acme                            First Quarter 1999
Newtown Square    Facade & common area renovation             First Quarter 1999
Parkville         Facade & common area renovation             Third Quarter 1999
Parkville         Expansion - Superfresh                     Fourth Quarter 1999
Willston I & II   Facade & common area renovation             Third Quarter 1999
The Village       Facade renovation                          Second Quarter 1999


<C>                     <C>
Estimated               Additional
Cost                    Square Feet
--------------          --------------

$  520                             -
     - (2)                    10,000
   650                             -
   475                             -
 1,800                        22,500
 1,500                             -
   150                             -
--------------           -------------

$5,095                        32,500
==============           =============

</TABLE>

(1)  $370 of this  amount  represents  an earn out  payment,  paid in  Operating
     Partnership Units to the seller of the property.

(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 nine 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  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 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 43
properties since its organization in April 1994.

Recent Developments

         In January 1999, the Company  acquired Kamp Washington  Shopping Center
located in Fairfax, Virginia. The total acquisition cost of $15,300 was financed
through assumed mortgage indebtedness of $3,100, a draw on the

                                        3

<PAGE>

Company's Line of Credit of $9,800 and cash of $2,400,  which included $1,800 of
proceeds  from the sale of  properties  in 1998 which were  treated as a Section
1031  exchange for tax purposes.  The mortgage loan carries an all-in  effective
interest rate of 7.0% and matures in October 2002.  The Center  contains  71,825
square feet of GLA and is anchored by Borders Books.

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 properties,  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, 1998
was  approximately  41.8%  and 37.6%  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  $113.3  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. All of the Properties have been subjected
to Phase I environmental  audits. A summary of environmental issues is set forth
below:

         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 environmental clean-up liability.

         Petroleum has been detected in the soil of a parcel adjacent to the 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 the costs of running the
pumps and monitoring  the  contamination  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 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

                                        4

<PAGE>

for all costs and  expenses to obtain  closure from the  responsible  regulatory
authority,  and the Commonwealth of Virginia Department of Environmental Quality
has issued a Certificate of Satisfactory  Completion of Remediation.  Management
believes  that there is minimal  exposure at this time and,  therefore,  has not
recorded an environmental clean-up liability.

         A dry  cleaning  solvent has been  detected in the soil below the 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 environmental clean-up
liability for either of these items.

         Petroleum  has been  detected in the soil and  groundwater  beneath the
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
environmental clean-up liability for either of these items.

         Dry cleaning  solvent and hydraulic  fuel has been detected in the soil
below  the  Riverside  Square.  Testing  done at the  site  indicates  that  the
contamination is limited and is unlikely to have any effect on human health, and
the  environmental  consultant  recommended  that no  further  investigation  or
remediation  was  warranted  at that  time.  In light of the  above,  management
believes  that there is minimal  exposure at this time and,  therefore,  has not
recorded an 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 the 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 environmental
clean-up liability.

         Petroleum has been  detected in the soil below the  Parkville  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 Parkville Shopping Center provided an indemnification  for
all costs  and  expenses  to  obtain  closure  from the  responsible  regulatory
authority,  and the  Maryland  Department  of the  Environment  has issued a "no
further action" letter.  Management  believes that there is minimal  exposure at
this time and, therefore, has not recorded an environmental clean-up liability.

         Petroleum  and a dry cleaning  solvent  have been  detected in the soil
below The Village 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 Village  Shopping  Center  provided an
indemnification   for  all  costs  and  expenses  to  obtain  closure  from  the
responsible regulatory authority, and the Commonwealth of Virginia Department of
Environmental  Quality  has  issued a "no  further  action"  letter.  Management
believes  that there is minimal  exposure at this time and,  therefore,  has not
recorded an environmental clean-up liability.

         A dry  cleaning  solvent  has been  detected in the soil below the Kamp
Washington  Shopping  Center.  Testing  conducted at the site indicates that the
contamination  is largely  confined to the site and poses minimal risk to public
health  or the  environment.  In  addition,  the  previous  owner  of  the  Kamp
Washington  Shopping  Center has agreed to be  responsible  for a portion of the
costs and expenses to obtain  closure from the responsible regulatory authority.
However,  based on the available  information at this time, management is unable
to make a  judgement  as to the  outcome  and,  therefore,  has not  recorded an
environmental clean-up liability at this time.

                                        5

<PAGE>

Insurance

         The Company's tenants are generally  responsible for providing adequate
insurance on the Retail  Properties they lease.  The Company believes the Retail
Properties are covered by adequate fire, flood and property  insurance  provided
by reputable companies.  However,  some of the Retail 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.


         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.

                                        6

<PAGE>

Item 2  Properties

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

                       FIRST WASHINGTON REALTY TRUST, INC.
                             PROPERTY SUMMARY TABLE

<TABLE>
<S>

<C>                                <C>                   <C>            <C>
                                                            Year            Year
Property                            Location             Constructed    Acquired
---------                          ----------            -----------    --------

Maryland
Bowie Plaza                         Bowie, MD                 1966          1998
Bryans Road Shopping Center         Bryans Road, MD           1972          1990
Capital Corner Shopping Center      Landover, MD              1987          1986
Clinton Square Shopping Center      Clinton, MD               1979          1984
Clopper's Mill Shopping Center      Germantown, MD            1995          1996
Elkridge Corners Shopping Center    Elkridge, MD              1990          1998
Festival At Woodholme               Baltimore, MD             1986          1995
Firstfield Shopping Center          Gaithersburg, MD          1978          1995
Mitchellville Plaza Shopping Center Mitchellville, MD         1991          1997
Northway Shopping Center            Millersville, MD          1987          1996
P.G. County Commercial Park         Beltsville, MD            1988          1985
Parkville Shopping Center           Baltimore, MD             1961          1998
Penn Station Shopping Center (1)    District Heights, MD      1989          1986
Rosecroft Shopping Center           Temple Hills, MD          1963          1985
Southside Marketplace               Baltimore, MD             1990          1996
Takoma Park Shopping Center         Takoma Park, MD           1960          1996
Valley Centre                       Owings Mills, MD          1987          1994
Watkins Park Plaza                  Mitchellville, MD         1985          1998
Virginia
Ashburn Farm Village Center         Ashburn, VA               1996          1997
Brafferton Center                   Garrisonville, VA         1974          1994
Centre Ridge Marketplace            Centreville, VA           1996          1996


                                        7

<PAGE>

<C>       <C>            <C>       <C>                              <C>
Land
Area      Leasable                 Significant Tenants
(acres)   Area (Sf)        %       (Lease Expiration Date)          Encumbrances
-------   ---------      -----     ------------------------         ------------
10.8       104,836      95.1%      Giant (2002), CVS (2003)           $ 5,047
11.8       118,676       89.2      Safeway (2014), CVS/Pharmacy (2001) 38,500(4)
 4.1        42,625       96.5                                             -
 2.0        18,961       62.4                                             -
14.2       137,035      100.0      Shoppers Food Warehouse (2015),
                                     CVS/Pharmacy (2006)               13,888
 8.4        73,529      100.0      A & P Superfresh (2015),
                                     Rite Aid (2005)                    6,546
 7.1        81,027      100.0      Sutton Place Gourmet (2006)         11,364
 2.4        22,327      100.0                                           2,445
14.5       155,674       96.0      Food Lion (2016)                    15,026
 9.6        98,016       93.1      Metro Foods (2007), Rite Aid (1997)  7,928
 9.7       146,422       92.2                                             -
12.7       140,925       98.5      A & P Superfresh (2003),
                                     Rite Aid (2001)                    3,465
22.5       334,970       95.8      Safeway (N/A), Service
                                     Merchandise (2006)                25,000(5)
 8.3       119,010       81.5      Food Lion (2015)                       -
 9.1       126,646       84.7      Metro Foods (2016), Rite Aid (2001)  7,927
 9.8       108,168       91.3      Shoppers Food Warehouse (2011)         -  (6)
33.0       251,928       97.5      Weis Markets (2007), TJ Maxx (2007),
                                     Sony Theatres (2005)                 -  (4)
12.8       112,143       97.9      Safeway (2007), CVS (2001)             -  (6)
10.2        88,917      100.0      A&P Superfresh (2016)                6,637
 9.4        94,731       97.9      Giant Food (2009)                      -  (6)
10.9       104,154       98.8      A&P Superfresh (2016),
                                     Sears Paint & Hardware (2007)        -  (6)
</TABLE>

Item 2  Properties

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

<TABLE>
<S>

<C>                                <C>                   <C>            <C>
                                                            Year            Year
Property                            Location             Constructed    Acquired
---------                          ----------            -----------    --------

Chesapeake Bagel Building          Alexandria, VA        Late 1800's        1983
Davis Ford Crossing                Manassas, VA             1988            1994
Four Mile Fork Shopping Center     Fredericksburg, VA       1975            1997
Fox Mill Shopping Center           Reston, VA               1977            1994
Glen Lea Shopping Center           Richmond, VA             1969            1995
Hanover Village Shopping Center    Mechanicsville, VA       1971            1995
Kings Park                         Burke, VA                1966            1996
Laburnum Park (2)                  Richmond, VA             1988            1995
Laburnum Square                    Richmond, VA             1975            1995
Potomac Plaza                      Woodbridge, VA           1963            1985
Town Center at Sterling            Sterling, VA           1973-1978         1998
The Village Shopping Center        Richmond, VA             1948            1998
Willston Centre I                  Falls Church, VA         1952            1998
Willston Centre II                 Falls Church, VA         1986            1998
North Carolina
Shoppes Of Kildaire                Cary, NC                 1986            1986
Pennsylvania
Allen Street Shopping Center       Allentown, PA            1958            1996
City Avenue Shopping Center        Philadelphia, PA       1950's-60's       1997
Colonial Square Shopping Center    York, PA                 1955            1990


<C>       <C>             <C>      <C>                              <C>
Land
Area      Leasable                 Significant Tenants
(acres)   Area (Sf)        %       (Lease Expiration Date)          Encumbrances
-------   ---------      -----     ------------------------         ------------

 0.1        11,288      100.0                                             735
20.8       149,917       91.1      Weis Markets (2010),
                                     CVS/Pharmacy (2000)                   - (4)
10.3       101,360       83.6      Safeway (2000), CVS/Pharmacy (2001)     - (6)
14.0       103,269       98.1      Giant Food (2018)                       - (5)
 9.2        77,603      100.0      Winn Dixie (2005),
                                     Eckerd Drug (2000)                12,968(7)
 9.5        96,146       98.3      Rack `N Sack (2008), Rite Aid (2003)    - (7)
 8.6        78,712       97.4      Giant (2013), CVS/Pharmacy (2003)    4,625
 9.3       113,992      100.0      Ukrop's Supermarket (N/A),
                                     Rite Aid (2007)                       - (7)
11.4       109,405       95.4      Hannaford Brothers Supermarket (2013),
                                     CVS/Pharmacy (1999)                   - (7)
 5.4        85,400       93.3                                           3,656
14.3       179,002       83.5      Giant Food (2003)                    9,274
11.7       110,885       99.0      Ukrop's Super Market (2019),
                                     CVS (2003)                            -
 5.9        86,468       79.9      CVS (2003)                              -
10.6       127,434      100.0      Safeway (2015)                      10,576
14.0       148,204       99.3      Winn Dixie (2006)                    7,574
 4.1        46,503       98.1      Laneco (2003), Eckerd Drug (2004)    5,817(8)
12.2       161,454       96.6      Acme Market (1999), Eckerd
                                     Drug (2004), T.J. Maxx (2001)      9,752
 2.9        29,208       89.6      Minnichs Pharmacy (2003)                -

                                        8
</TABLE>
<PAGE>


Item 2  Properties

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

<TABLE>
<S>

<C>                                <C>                   <C>            <C>
                                                            Year            Year
Property                            Location             Constructed    Acquired
---------                          ----------            -----------    --------
Kenhorst Plaza Shopping Center     Reading, PA              1990            1995
Mayfair Shopping Center            Philadelphia, PA         1988            1994
Newtown Square                     Newtown Square, PA    1960's-70's        1996
Stefko Boulevard                   Bethlehem, PA         1958-60-75         1996
Illinois
Mallard Creek                      Round Lake Beach, IL     1987            1997
McHenry Commons                    McHenry, IL              1988            1997
The Oaks                           Des Plaines, IL          1983            1997
Pheasant Hill Plaza                Bolingbrook, IL          1983            1997
Riverside Square / River's Edge    Chicago, IL              1986            1997
Stonebrook Plaza                   Merrionette Park, IL     1984            1997
Delaware
First State Plaza                  New Castle County, DE    1988            1994
Shoppes of Graylyn                 Wilmington, DE           1971            1997
South Carolina
James Island Shopping Center       Charleston, SC           1967            1990
Washington, D.C.
The Georgetown Shops (3)           Washington, DC        Late 1800's     1981-89
Connecticut Avenue Shops           Washington, DC           1954            1986
Spring Valley Shopping Center      Washington, DC           1930            1997

<C>       <C>            <C>       <C>                              <C>
Land
Area      Leasable                 Significant Tenants
(acres)   Area (Sf)        %       (Lease Expiration Date)          Encumbrances
-------   ---------      -----     ------------------------         ------------

19.2       161,424       97.5      Redners (2009), Rite Aid (2000),
                                     Sears Paint & Hardware (2007)        -  (6)
 5.7       115,027       99.0      Shop 'N Bag Supermarket (2013),
                                     Eckerd Drug (2006)                 6,870
14.4       137,566       99.1      Acme Market (2014),
                                     Eckerd Drug (1999)                   -  (6)
10.3       135,864       94.2      Laneco (2003)                          -  (8)
14.9       143,759       94.6      Dominick's Finer Foods (2008)       11,443
11.5       100,526       96.6      Dominick's Finer Foods (2008)        6,355
16.7       138,274       95.5      Dominick's Finer Foods (2017)        9,706
14.4       111,190      100.0      Dominick's Finer Foods (2005)        7,834
17.7       169,435       94.6      Dominick's Finer Foods (2017)        2,384
 8.1        95,825      100.0      Dominick's Finer Foods (2005)        6,002
21.0       164,569       99.2      Shop Rite Supermarket (2009),
                                     Cinemark USA (2011)                  -  (4)
 5.0        65,746       97.7      Rite Aid (2016)                        -  (6)
 6.5        88,557      100.0      Piggly Wiggly (2010), Kerr Drug (2002) -  (4)
 0.3         9,052      100.0                                             -
 0.1         3,000      100.0                                             -
 0.9        16,834      100.0      CVS (2004)                             -

Total/Average

574.3    5,953,618      95.3%                                          $ 259,344

</TABLE>

                                        9
<PAGE>

                                                            Year            Year
Property                            Location             Constructed    Acquired
---------                          ----------            -----------    --------
Kamp Washington                    Fairfax, VA              1960            1999
===============                    ============          ===========    ========


Land
Area      Leasable                 Significant Tenants
(acres)   Area (Sf)        %       (Lease Expiration Date)          Encumbrances
-------   ---------      -----     ------------------------         ------------
 5.9      71,825         100.0                                           $ 3,100
=======   =========      =====     ========================         ============


(1)  Includes  Safeway (50,000 sq.ft) and Bowling Alley (40,000 sq.ft) pad sites
     owned by others.

(2)  Includes Ukrop's Supermarket (49,000 sq ft) pad site owned by Ukrop's.

(3)  Represents  two (2) historic  retail shops located in the central  shopping
     district of Georgetown, Washington, D.C.

(4)  These  properties  are encumbered by first deeds of trust as collateral for
     the $38,500 Nomura mortgage loan.

(5)  These  properties   serve  as  collateral  for  the  $25,000   Exchangeable
     Debentures.

(6)  These properties serve as collateral for the Line of Credit facilities.  As
     of December 31, 1998, $9,200 is outstanding on the Line of Credit.

(7)  These properties are encumbered by first deeds of trust as collateral for a
     $12,968 mortgage loan.

(8)  These properties are encumbered by first deeds of trust as collateral for a
     $5,817 mortgage loan.

                                       10

<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 Retail  Properties  are  located in  Maryland,
Virginia, North Carolina,  Pennsylvania,  Delaware, South Carolina, Illinois and
the District of Columbia.  The 56 Retail  Properties are primarily  neighborhood
shopping centers  containing a total of approximately 6.0 million square feet of
GLA occupied by approximately 1,200 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  108,000  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 8.2% of the Company's
annualized  minimum  rent.  All of the  Retail  Properties  are  managed  by the
Company. As of December 31, 1998, the Retail Properties were 95.3% 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 1999
through 2008 and thereafter:

<TABLE>
<S>

<C>        <C>            <C>              <C>                   <C>
            Number of       Approximate     Percent of Total        Annualized
             Leases             GLA          GLA Represented     Minimum Rent of
Year        Expiring      in Square Feet   by Expiring Leases    Expiring Leases
----      -------------  ----------------  ------------------   ----------------
                            (in 000's)                             (in 000's)

1999           255               729              13.1%             $ 7,932
2000           194               525               9.4%               6,362
2001           210               609              10.9%               7,923
2002           148               411               7.4%               5,786
2003           175               706              12.7%               8,670
2004            49               183               3.3%               2,484
2005            42               354               6.3%               4,301
2006            43               265               4.7%               3,522
2007            30               332               6.0%               2,553
2008            17               247               4.4%               2,421
 Thereafter     52             1,218              21.8%              12,148
                --             -----              -----              ------

Total        1,215             5,579             100.0%             $64,102
             =====             =====             ======             =======

<C>                <C>
Percent of Total   Average Annual
   Annualized       Minimum Rent
  Minimum Rent     per Square Foot
----------------   ----------------

     12.4%             $10.88
      9.9%              12.12
     12.4%              13.01
      9.0%              14.08
     13.5%              12.28
      3.9%              13.57
      6.7%              12.15
      5.5%              13.29
      4.0%               7.69
      3.7%               9.80
     19.0%               9.97
     -----               ----

    100.0%             $11.49
    ======             ======

</TABLE>
                                       11

<PAGE>

         Tenant  Diversification.  The  following  table sets forth  information
regarding the Company's leases with its 20 largest tenants based upon annualized
minimum rents as of December 31, 1998:

                                                                   Percentage of
                                                                       Aggregate
                                     Number of       Annualized       Annualized
Tenant               GLA (Sq.  Ft.)  Properties      Minimum Rent  Minimum Rents
------               --------------  -------------   ------------  -------------
                                                                    (in 000's)

Safeway/Dominick's      577,089          9             $5,162          8.22%
Richfood (1)            261,565          5              2,151          3.43%
A&P Superfresh          170,489          4              1,568          2.50%
Giant Food              182,455          5              1,125          1.79%
Blockbuster Video        58,949         10              1,007          1.61%
CVS/Pharmacy            124,636         11                871          1.39%
Rite Aid                 87,754          8                817          1.30%
Fashion Bug              73,273          9                804          1.28%
Weis Markets             94,960          2                786          1.25%
Food Lion                78,100          2                678          1.08%
Sears Paint & Hardware   65,816          3                670          1.07%
First Union Bank         19,963          8                641          1.02%
Ukrop's                  41,503          1                546          0.87%
McDonald's               22,548          8                512          0.82%
Dollar Bills             39,699         10                500          0.80%
T.J. Maxx                54,686          2                500          0.80%
Acme Markets             86,226          2                500          0.80%
Winn Dixie               79,000          2                482          0.77%
Shop Rite Supermarket    57,333          1                459          0.73%
Eckerd Drug              45,752          5                431          0.69%
                         -------                       --------      --------

     Total            2,221,796                       $20,210         32.22%
                      ==========                      ========       =======

(1)  Includes  Shoppers Food  Warehouse,  Metro Foods and Rack 'N Sack which are
     owned by Richfood, Inc.

Mortgages, Notes and Loans Payable

         Information relating to future maturities of mortgages, notes and loans
payable  at  December  31,  1998 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.

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
1998.

                                       12

<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 1997 and 1998 are as follows:

                                                                   Distributions
                                    High               Low             Per Share
                                   ------              ---         -------------

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

1998
         First Quarter            $ 28.00           $ 25.38              $ .4875
         Second Quarter             27.13             22.31                .4875
         Third Quarter              24.13             20.00                .4875
         Fourth Quarter             24.00             22.06                .4875

(b)  Holders of Record

         As of March 25,  the  approximate  number of  holders  of record of the
Common Stock was 190 and the approximate number of beneficial owners was 6,000.

(c)  Dividends

         The Company intends to make quarterly  distributions  to its common and
preferred stockholders. Quarterly distributions made during 1998 are as follows:

Record Date                     Payment Date                    Amount Per Share
-----------                     ------------                    ----------------

Common Stock
  February 1, 1998              February 15, 1998                        $0.4875
  May 1, 1998                   May 15, 1998                             $0.4875
  August 1, 1998                August 15, 1998                          $0.4875
  November 1, 1998              November 15, 1998                        $0.4875

Preferred Stock
  February 1, 1998              February 15, 1998                        $0.6094
  May 1, 1998                   May 15, 1998                             $0.6094
  August 1, 1998                August 15, 1998                          $0.6094
  November 1, 1998              November 15, 1998                        $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 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

                                       13

<PAGE>


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, 1998,  25% of the  distributions
made on the Common Stock represented a return of capital.

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 during the fourth quarter of fiscal
year 1998:

Date of Sale       Title             Amount            Consideration

10/01/98           Common Units      515,084 units     Retail properties having
                                                       a value of $13.1 million,
                                                       net of indebtedness.

11/01/98           Common Units      325,452 units     Retail property having a
                                                       value of $12.7 million,
                                                       net of indebtedness.

(b)  Underwriters and other purchasers

     There were no  underwriters  retained  in  connection  with the sale of the
above  securities  which were issued in  transactions  exempt from  registration
under Section 4(2) of the Securities Act.

(c)  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").

(d)  Terms of Conversion

     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.

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.

                                       14

<PAGE>


                 SELECTED CONSOLIDATED FINANCIAL INFORMATION (1)

<TABLE>
<S>
                                                         Year Ended December 31,
<C>                                                      <C>        <C>
                                                            1998       1997
                                                            ----       ----
                                   (dollars in thousands, except per share data)

OPERATING DATA:
  Revenues:
    Minimum Rent                                         $56,702    $43,857
    Tenant reimbursements                                 14,176      9,506
    Percentage rent                                        1,613      1,060
    Third-party fees                                        -          -
    Other income                                           1,573      1,211
                                                           -----      -----
          Total revenues                                  74,064     55,634
                                                          ------     ------

  Expenses:
    Property operating and maintenance                    17,934     13,522
    General and administrative                             3,789      3,363
    Interest                                              19,966     18,416
    Depreciation and amortization                         14,627     11,172
                                                          ------     ------
          Total expenses                                  56,316     46,473
                                                          ------     ------

Income (loss) before gain on sale of properties,
income from Management Company,
extraordinary item, minority interest
  and distributions to Preferred Stockholders             17,748      9,161
Gain on sale of properties                                 2,371        549
Income from Management Company                                82        433
                                                              --        ---
Income (loss) before extraordinary item, minority
 interest and distribution to Preferred Stockholders      20,201     10,143
Extraordinary item                                          (358)      (954)
                                                          -------    -------

Income before minority interest and distributions
 to Preferred Stockholders                                19,843      9,189
Income allocated to minority interest                     (4,521)    (1,579)
                                                          -------    -------
Income before distributions to Preferred Stockholders     15,322      7,610
Distributions to Preferred Stockholders                   (5,641)    (5,641)
                                                          -------    -------
Income (loss) allocated to Common Stockholders            $9,681     $1,969
                                                          ======     ======
Earnings (loss) per Common Share - Basic (2)               $1.21      $0.35
                                                           =====    =======
Earnings (loss) per Common Share - Diluted                 $1.20      $0.34
                                                           =====    =======
Weighted average shares of Common Stock
   (in thousands) - Basic                                  7,978      5,663
                                                           =====    =======

Weighted average shares of Common Stock
   (in thousands) - Diluted                                8,055      5,730
                                                           ======    ======
Cash dividends per Common Share                            $1.95      $1.95
                                                           =====      -----

<PAGE>
Year Ended December 31,
<C>              <C>      <C>
1996             1995     1994
----             ----     -----
(dollars in thousands, except per share data)

$31,398          $22,793  $14,701
  6,704            4,362    2,823
    664              495      255
    -                 -     1,912
 1,672             1,447      508
-------          -------  -------

 40,438           29,097   20,199
 ------          -------  -------

  9,743            6,746    6,299
  3,137            2,831    1,356
 14,986           11,230    9,301
  8,019            5,808    4,579
-------          -------  -------
 35,885           26,615   21,535

-------         --------  -------

  4,553            2,482   (1,336)
     -               -        -
    221              449      500
-------           -------  -------
 34,774            2,931     (836)
     -               -       2,251
-------           -------  -------

  4,774            2,931     1,415
   (694)            (602)   (1,101)
-------           -------  -------

  4,080            2,329       314
 (5,641)          (5,117)   (1,811)
--------          -------- --------
$(1,561)         $(2,788)  $(1,497)
========         ========= ========

 ($0.46)         $($1.19)  ($0.95)
========         ========= ========

 ($0.46)          ($1.19)  ($0.95)
========         ========  ========
  3,367            2,351    1,574
========         ========  ========
  3,367            2,351    1,574
=======          ========  ========
 $ 1.95           $1.95   $  0.51
=======          ========  ========

</TABLE>
<TABLE>
<S>
                                                         Year Ended December 31,

<C>                                                      <C>        <C>
                                                            1998       1997
                                                            ----       ----
                                   (dollars in thousands, except per share data)

BALANCE SHEET DATA:
  Rental properties                                      $556,146       $456,798
  Total assets                                           $532,954       $439,141
  Mortgage notes payable                                 $244,113       $212,030
  Debentures                                              $25,000        $25,000
  Total liabilities                                      $280,655       $247,944
  Minority interest                                       $66,218        $38,255
  Stockholders' equity                                   $186,081       $152,942

PORTFOLIO PROPERTY DATA (end of period):
  Retail occupancy                                         95.3%           96.2%
  Number of retail properties                                 55              47
  Number of multi-family properties                            -               2
  Retail Properties GLA
    (thousands of square feet)                             5,954           4,931
  Multi-family properties (number of units)                    -             401

OTHER DATA:
  Funds From Operations- Diluted  (3) (4)                $34,519         $23,949
  Cash flow from operating activities                    $27,149         $23,441
  Cash flow (used in) investing activities              $(28,230)      $(25,689)
  Cash flow provided by (used in) financing activities    $1,103        $(6,390)


Year Ended December 31,
<C>            <C>          <C>
1996           1995          1994
----           ----         -----

(dollars in thousands, except per share data)

$314,235      $228,092    $175,213
$313,613      $227,405    $172,487
$167,047      $116,182    $ 89,858
$ 25,000       $25,000    $ 25,000
$198,375      $145,241    $117,925
$ 16,661       $11,088    $  8,580
$ 98,577       $71,076    $ 45,982
  96.4%         96.0%       96.4%
  36            27          20
  2             2           2
   3,652         2,668       2,014
  401           401         401
$ 16,352       $12,601      N/A
$ 11,616       $10,003      $3,164
$(56,994)     $(29,884)   $(56,236)
$ 49,352       $26,574     $53,615

</TABLE>
(1)  See Item 7 Management's  Discussion and Analysis of Financial Condition and
     Results of Operation and Financial Statements.

(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.  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

                                       15

<PAGE>


to cash flow as a measure of liquidity or of ability to make distributions.  Our
calculation of FFO may differ from that used by other companies and,  therefore,
the amounts disclosed above for FFO may not be comparable  directly to similarly
titled measures used by other companies.

(4)  Before minority interest and distributions to Preferred Stockholders.



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 per 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  Company  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, 1998 to the year ended  December 31,
1997.

         For the year ended  December 31, 1998,  the income  allocated to common
stockholders  increased by $7,712 from a net income of $1,969 to a net income of
$9,681,  when  compared to the year ended  December 31, 1997,  primarily  due to
increases  in  revenues  and  gains on sale of  properties,  and a  decrease  in
extraordinary  losses  offset by an increase in expenses  and an increase in the
amount of income allocated to minority interests.

         Total revenues  increased by $18,430 or 33.1%, from $55,634 to $74,064,
due   primarily  to  an  increase  in  minimum   rents  of  $12,845  and  tenant
reimbursements  of $4,670.  The increases  were primarily due to the purchase of
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") (resulting in partial
year revenues being  included in the year ended December 31, 1997),  Bowie Plaza
in January 1998, Watkins Park Plaza in March 1998,  Parkville Shopping Center in
April 1998, Elkridge Corners and Village Center in June 1998, Willston Centres I
& II in October  1998 and Town Center at  Sterling  in November  1998 (the "1998
Acquisitions").

         Property  operating and  maintenance  expense  increased by $4,412,  or
32.6%, from $13,522 to $17,934, due primarily to the 1997 and 1998 Acquisitions.
General and  administrative  expenses increased by $426 or 12.7%, from $3,363 to
$3,789,  due  primarily to increases in  miscellaneous  administrative  costs of
$222,  legal fees of $135,  write off of  abandoned  project  costs of $75,  and
internal   acquisition  costs  of  $428  (prior  to  March  19,  1998,  internal
acquisition  costs were  capitalized  and  included in the cost of the  acquired
property), offset by a decrease in officers bonuses of $434.

         Interest expense increased by $1,550, or 8.4%, from $18,416 to $19,966,
due primarily to the increase in mortgage  indebtedness  of $100,135  associated
with the 1997 Acquisitions ($64,614) and the 1998 Acquisitions ($35,521), offset
by a decrease in mortgage  and Line of Credit  indebtedness  of $30,017  retired
with the proceeds of the sale of properties  and a public  offering of 1,150,000
shares of Common Stock in July 1998 (the "July 1998 Offering"). The average debt
outstanding increased from $216.6 million in 1997 to $251.0 million in 1998, and
the weighted average interest rate decreased from 8.5% to 8.0%.

         Depreciation and amortization  expenses  increased by $3,455, or 30.9%,
from $11,172 to $14,627, primarily due to the 1997 and 1998 Acquisitions.

         During 1998, a gain on sale of properties of $2,371 was realized due to
the sale of Branchwood  and Park Place  Apartments in March 1998  ($1,536),  the
sale of a  Georgetown  property in March 1998  ($147),  the sale of a Georgetown
property  in  September  1998  ($335) and the sale of a  Georgetown  property in
December  1998 ($353).  During 1997,  a gain on sale of  properties  of $549 was
realized  from the sale of Thieves  Market ($45) and a portion of Laburnum  Park
($504).  During 1998 the Mellon Bank and Corestates Lines of Credit were retired
with proceeds of the Union Bank of Switzerland Line of Credit and $3,826 of debt
was retired early due to the sale of Park Place Apartments resulting in

                                       16

<PAGE>

a loss on early  extinguishment of debt of $358. During 1997, debt in the amount
of $46,375  was  retired  with  proceeds  of the  September  1997  common  stock
offering, resulting in loss on early extinguishment of debt of $954.

         Income allocated to minority interests  increased by $2,942 from $1,579
to $4,521  due to an  increase  in net income and an  increase  in the  minority
interests ownership of the Operating Partnership from 20.7% to 27.0%.

         Net cash flow provided by operating  activities  increased from $23,441
in 1997 to $27,149 in 1998  primarily due to the  acquisition  of new properties
during 1998 and realizing the full years operations from properties purchased in
1997 and  improved  property  performance.  Net  cash  flows  used in  investing
activities  increased from $25,869 in 1997 to $28,230 in 1998 primarily due to a
decrease  in the amount of  property  acquisitions  financed  through the use of
assumed  mortgage  indebtedness  during  1998.  Net cash flow used in  financing
activities  changed from net cash used in financing  activities of $6,390 to net
cash provided by financing  activities of $1,103 primarily due to an increase in
Line of Credit proceeds used for the acquisition of rental properties.  In 1997,
the acquisition of rental  properties were more heavily financed through assumed
mortgage indebtedness.


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

         For the year ended  December 31, 1997,  the income (loss)  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 $120,677
associated  with  the 1996  Acquisitions  ($46,020)  and the  1997  Acquisitions
($74,657),  offset by a decrease in mortgage and line of credit  indebtedness of
$46,375  retired with the proceeds of the September 1997  offering.  The average
debt  outstanding  increased  from $176.4  million in 1996 to $216.6  million in
1997, and the weighted average interest rate of 8.5% remained the same.

         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

                                       17

<PAGE>

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.

Liquidity and Capital Resources

         In 1998, the Company  continued to expand its portfolio of neighborhood
shopping  centers.  During the year, the Company acquired eight shopping centers
for an aggregate  acquisition cost of $103,198.  The acquisitions were primarily
located in the metropolitan areas of Washington, D.C. The acquisitions increased
the  Company's  portfolio  by 935,000  square  feet.  The Company  financed  the
acquisitions  through  the  issuance  of Common  Units with a value of  $39,674,
assumed  mortgage  indebtedness of $35,521,  deferred  consideration of $828 and
cash of  $27,175.  The cash was  provided  by  draws on the  Company's  Lines of
Credit, proceeds from the sale of properties and cash on hand.

         In July 1998 the Company  completed an offering of 1,150,000  shares of
Common  Stock  priced at $23.75 per share.  Net proceeds  (after  deducting  the
underwriters  discount and other offering  expenses) of $25,781 were used to pay
down the existing Lines of Credit.

         The Company  also closed five sales  during the year  resulting  in net
proceeds of $6,071 after the repayment of associated  debt. The two multi-family
properties (Branchwood and Park Place Apartments) were sold for a combined sales
price of $8,050. Three of the Georgetown Shops were also sold. 3269 M Street was
sold for $750,  3033 M Street was sold for $800, and 1328  Wisconsin  Avenue was
sold for $1,075.

         Subsequent to 1998, the Company acquired an additional  Retail Property
(Kamp Washington) for an aggregate  acquisition cost of $15,200. The acquisition
was financed  through  assumed  mortgage  indebtedness  of $3,100,  draws on the
Company's  Lines of Credit of $9,800 and cash of $2,300 which included $1,800 of
proceeds  from the sale of  properties  in 1998 which were  treated as a Section
1031 exchange for tax purposes.

         During 1998,  the Company  renovated  nine of its  properties  (Mallard
Creek, McHenry Commons, Riverside,  Stonebrook, The Oaks, City Avenue, Four Mile
Fork,  Spring Valley and Stefko) for an aggregate cost of  approximately  $2,575
and expanded  three  properties  (21,157  square feet) for an aggregate  cost of
$843.

         During  1999,  the  Company  expects  to  renovate  a  minimum  of five
properties for an aggregate cost of $3,295. The Company also plans to expend, at
a minimum,  approximately  $1,800 for the  expansion  of two of its  properties.
These  expansions will add  approximately  32,500 square feet to the properties.
These expansions and renovations are expected to be financed  primarily  through
draws on the Company's Lines of Credit.

         The Company expects to continue its renovation and acquisition  program
for the  remainder  of 1999.  However,  the  level  of  future  acquisitions  is
dependent on the  Company's  ability to raise  additional  capital  through debt
proceeds and equity offerings.


Indebtedness

         The  following  table  sets forth  certain  information  regarding  the
indebtedness  of the  Company  (excluding  the  Exchangeable  Debentures)  as of
December 31, 1998:

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

Ashburn Farm Village (4)             6.67%         $   6,637            01/01/01
Bowie Plaza                          7.07%             5,047            12/01/09
Chesapeake Bagel Building            6.59%               735            07/01/01
City Avenue Shopping Center          8.13%             9,752            10/18/05
Clopper's Mill                       7.37%            13,888            03/21/06
Davis Ford, First State Plaza,
  James Island,
  Valley Centre and Bryans Road (5)  8.92%            38,500            07/01/99
Elkridge Corners                     7.91%             6,546            11/01/10
Festival at Woodholme                9.83%            11,364            04/30/00


                                       18

<PAGE>

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

Allen Street and Stefko
  Boulevard (6)                      8.40%             5,817            01/31/06
Firstfield                           7.53%             2,445            12/01/05
Glen Lea, Hanover Village,
  Laburnum Park
  and Laburnum Square (7)            8.76%            12,968            10/01/02
Kings Park Shopping Center           8.05%             4,625            11/01/14
McHenry Commons                      7.11%             6,355            06/01/99
Mallard Creek                        7.18%            11,443            05/10/99
Mayfair Shopping Center (8)(9)       5.46%             6,870            06/24/10
Mitchellville Plaza Shopping Center  7.43%            15,026            06/24/05
Northway Shopping Center             7.98%             6,168            01/01/07
Northway Shopping Center (10)        8.84%             1,760            07/01/99
Parkville                            7.12%             3,465            03/01/08
Pheasant Hill Shopping Center        7.33%             7,834            07/15/00
Potomac Plaza Shopping Center        7.03%             3,656            07/01/99
River's Edge                         7.13%             2,384            07/10/99
Shoppes of Kildaire                  7.89%             7,574            05/31/06
Southside Marketplace                8.77%             7,927            08/01/05
Stonebrook Plaza                     7.34%             6,002            07/15/00
The Oaks                             7.46%             9,706            05/01/03
Town Center at Sterling              7.00%             9,274            07/01/03
Valley Centre                        7.75%               569            06/30/07
Willston II                          6.97%            10,576            10/01/02
Lines of Credit                      7.65%             9,200            02/01/01
                                    ------             -----

 TOTALS                              7.85%          $244,113
                                     =====          ========


(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
     $6,415.

(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 1.5%.  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
     enhancement expires in June 2003.

(10) This loan is a second trust which is also secured by a letter of credit.

         As of  December  31,  1998,  the Company  had total  mortgage  notes of
approximately   $244,113,   which   consisted  of   approximately   $237,243  in
indebtedness  collateralized  by  36  of  the  Properties  and  tax-exempt  bond
financing  obligations  issued  by the  Philadelphia  Authority  for  Industrial
Development (the "Bond Obligations") of approximately  $6,870  collateralized by
one of the properties. Of the Company's indebtedness, $22,707 (9.3%) is variable
rate  indebtedness  and  $221,406  (90.7%)  is at a fixed  rate.  The fixed rate
indebtedness  has interest  rates  ranging from 6.59% to 9.83%,  with a weighted
average interest rate (excluding the Bond Obligations) of 7.92%, and will mature
between 1999 and 2014, with a weighted average remaining term to maturity of 3.4
years.  A large portion of the Company's  indebtedness  will become due by 2000,
requiring  balloon  payments of $88,933 in 1999 and  $24,381 in 2000.  From 1999
through 2014,  the Company will have to refinance an aggregate of  approximately
$229,548.  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
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 (5.06% at December
31, 1998) plus 2.0% and mature on July 1, 1999,  were closed to  prepayment  for
the first 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

                                       19

<PAGE>

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 zero at December 31, 1998.

         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,  1998,  the
Company would have paid approximately $12.

         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, 1998:

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

$38,500           12/95        07/01/99 - 12/01/03      6.37%           $(2,106)
 20,000           08/97        03/01/99 - 03/01/04      6.44%            (1,142)
 15,000           11/97        06/01/99 - 06/01/04      6.18%           (   665)
 24,000           01/98        05/01/00 - 05/02/05      5.85%           (   598)
 ------                                                ------           --------

$97,500                                                  6.23%          $(4,511)
=======                                                 =====           ========

         In February 1999, the Company signed an application  with  Metropolitan
Life Insurance  Company ( "Met Life") for loans totaling $75.0 million.  Closing
of the loans is subject to the final approval of Met Life's investment committee
which is expected to occur by April 5, 1999.  Although the Company believes that
the loans will be  approved,  there  currently is no  obligation  of Met Life to
approve and make the loans. The following is a summary of the anticipated terms:

Collateral                         Amount           Interest Rate   Term (years)
-----------                        ------           -------------   ------------

Davis Ford Crossing                $10,700             6.79%           10
First State Plaza                   13,700             6.79%           10
Fox Mill Shopping Center            11,800             6.84%           12
Mallard Creek Shopping Center       10,900             6.85%           10
McHenry Commons                      6,700             6.85%           10
Valley Centre                       21,200             6.84%           12
                                    ------
                                   $75,000
                                   =======

         There will be six separate loans and six separate mortgages.  The loans
will not be  cross-collateralized  and will  allow  for the  assumption  of each
individual  loan to a qualified  buyer upon sale of the property by the Company.
The all-in weighted  average  interest rate of the loans will be 7.31% including
the  amortization  of financing costs and the costs of closing out interest rate
swap agreements as discussed  below. Monthly debt service payments will be based
on a 25-year amortization schedule.  The proceeds of the loans will be used  to
retire

                                       20

<PAGE>


1999  maturities of $63,933  (excluding the  Exchangeable  Debentures  which are
expected to convert to Preferred Stock). Any excess proceeds will be used to pay
down outstandings on the Company's Lines of Credit. The Company expects to incur
a loss on the  early  extinguishment  of debt of  approximately  $100 due to the
early retirement of the $38,500 Numura loan.

         With the  application  to Met Life the  Company  executed  a rate  lock
agreement  thereby  fixing  the  interest  rate  for  the  term  of  the  loans.
Accordingly,  in February 1999 the Company closed out the three swap  agreements
which were to commence in 1999. These  agreements which had a combined  notional
amount of $73.5  million  were  closed out at a combined  cost to the Company of
$3,100. This cost will be amortized over the life of the Met Life loan using the
effective interest rate method.

Exchangeable 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 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 $45,000 with Union Bank of Switzerland. This line is collateralized by
seven properties  (Kenhorst Plaza,  Shoppes of Graylyn,  Four Mile Fork,  Takoma
Park, Centre Ridge Marketplace, Watkins Park Plaza 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%).  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 August 31, 1999. Loans under this line are  collateralized  by a first
mortgage lien on Brafferton  Shopping Center. As of December 31, 1998, there was
$9,200 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,  $63,933 of the  Company's  indebtedness  becomes due. The
Company  believes that it will be able to retire this debt through a refinancing
of the debt using the  properties as collateral  (currently  expected to be with
Met  Life  as  discussed  above).   The  Company  currently  believes  that  the
loan-to-values  ratios on the Retail  Properties are at a level that will enable
the Company to fully  refinance the loans without an additional  requirement for
capital. On June 27, 1999 The $25,000 Exchangeable Debentures mature. The holder
of The Exchangeable Debentures has the

                                       21

<PAGE>



option of either  converting its holding to 1,000,000 shares of Preferred Stock;
calling  the  loan;  extending  the  loan on  similar  or  revised  terms;  or a
combination of all of the above. The Company has had discussions with the holder
but no definitive  agreements have been reached.  It is possible that the holder
will wait until  June 27,  1999  before  making a  decision  on their  course of
action.  If the holder  demands a payoff of the loan the Company  will use draws
from its Lines of  Credit,  cash on hand,  proceeds  from a  refinance  of other
Retail  Properties,  or a  combination  of the above to retire the  Exchangeable
Debentures.

Other

Year 2000 Issue

         The "Year 2000 Issue" is the result of many existing  computer programs
using only the last two  digits to refer to a year.  Therefore,  these  computer
programs may not properly  recognize a year that begins with "20" instead of the
familiar "19". If not corrected, many computer applications could fail or create
erroneous results.

         The Company is in the process of  conducting  a review of its  computer
systems to identify  which  systems could be affected by the "Year 2000" problem
and to what extent such problems will have an impact on the Company's ability to
conduct its' business.

     The  Company  has  developed a Year 2000  Compliance  Plan ("The  Plan") to
address these issues.  The Plan is being managed by two of the Company's  senior
executives and has been approved by senior management. The  progress of the Plan
is being monitored by the Company's Board of Directors. The Plan focuses on four
major  components:  IT systems  such as the  Company's  accounting  and property
management  software packages and related  hardware;  non-IT systems such as the
Company's telephone system; voice mail system and  other office  equipment;  the
state of readiness of the Company's critical trading partners such as its banks,
utilities and tenants;  and embedded systems,  particularly those located at the
Company's Retail Properties such as sprinkler  systems,  security systems,  etc.
(Note: The Retail  Properties'  access does not rely on elevator service because
the structures are no higher than two stories.) The Plan contains  ten phases as
follows:

                                             Estimated       Estimated
      Phase Description                      Start Date      Completion Date
      ------------------                     -----------     ---------------

1.    Educate senior management              Commenced       Completed
2.    Designate a Plan manager               Commenced       Completed
3.    Inventory all systems                  Commenced       April 1, 1999
4.    Contact suppliers of systems           Commenced       Mail by May 1, 1999
5.    Send questionnaire to tenants          All have been   Currently receiving
                                             mailed          responses
6.    Send questionnaire to other
          critical trading partners          Commenced       Mail by May 1, 1999
7.    Prioritize problems
          (critical vs. non-critical)        Commenced       June 1, 1999
8.    Identify solutions (repair
          or replace)                        Commenced       July 1, 1999
9.    Test Solutions                         July 1, 1999    August 31, 1999
10.   Anticipate contingencies including
          the most reasonably likely
          worst case scenario                Commenced       Continuous

     The Company has incurred approximately $20 to date in the implementation of
the Plan.  These costs have  primarily been incurred to upgrade the desktop PC's
at the Company's home office.  The Company has determined that  implementing the
plan  will cost less than  $100.  However,  the  Company has  budgeted  $500  to
replace its current accounting and property management software system. Although
the Company  believes that the current system is materially  Year 2000 compliant
the  Company  has  decided to migrate  because of the  improved  technology  and
reporting  capabilities of the new system. The Company anticipates going live on
the new system by October 1, 1999. These costs will be funded from the Company's
cash flow.  The Plan  efforts  will be  primarily  staffed by  employees  of the
Company.

     The most  reasonably  likely  worst  case  scenario  is that the  Company's
tenants are delayed in  generating  their rental  payments due to their own Year
2000 IT problems.  If this occurs the Company's  property  managers will attempt
to accelerate rental payments by requesting manual checks by personally visiting
the tenants or by contacting the appropriate  personnel at the tenants' accounts
payable  departments.  Also, the Company will have available its lines of credit
to fund immediate cash flow needs if such delay occurs.

         The Company  presently  believes that the Year 2000 issue will not pose
significant  operational  problems  for the Company.  However,  if all Year 2000
issues are not properly  identified,  or if assessment,  remediation and testing
are not effected  timely or accurately with respect to Year 2000 issues that are
identified, there can be no assurance that

                                       22

<PAGE>

the Year 2000 issue will not materially  adversely affect the Company's  results
of operations.  Also, there can be no assurance that the Year 2000 issues of the
Company's suppliers,  vendors, tenants and other important trading partners will
not have a  material  adverse  impact on the  Company's  business  or results of
operations.

     The  costs  of  the  Company's   Year  2000   identification,   assessment,
remediation and testing  efforts and the dates on which the Company  believes it
will complete such efforts are based upon  management's  best  estimates,  which
were derived using numerous assumptions  regarding future events,  including the
continued availability of certain resources,  third-party remediation plans, and
other factors.  There can be no assurance that these  estimates will prove to be
accurate,  and actual  results  could  differ  materially  from those  currently
anticipated.  Specific  factors  that  could  cause  such  material  differences
include,  but are not limited to, the availability and cost of relevant computer
codes and embedded technology,  and similar uncertainties.  Although some of the
Company's agreements with suppliers and contractors contain provisions requiring
such parties to indemnify the Company under some circumstances,  there can be no
assurance that such  indemnification  agreements will cover all of the Company's
liabilities  and costs  related to claims by third  parties  related to the Year
2000 issue.

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 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.

New Accounting Standards

         On March 19,  1988,  the  Emerging  Issues  Task Force  ("EITF") of the
Financial  Accounting  Standards  Board  reached a  consensus  opinion  on issue
No.97-11,  "Accounting  for  Internal  Costs  Relating to Real  Estate  Property
Acquisitions"   which  requires  that  the  internal  costs  of   preacquisition
activities  incurred in connection with the acquisition of an operating property
be expensed as incurred.  The Company has historically  capitalized internal pre
acquisition  cost of  operating  properties  as a component  of the  acquisition
price.  The Company  capitalized $227 for the period January 1 through March 19,
1998 and $229 for the  twelve  months  ended  December  31,  1997.  The  Company
experienced  an  increase  in  general  and  administrative  expense  due to the
adoption of this ruling.

         During the second  quarter,  the Financial  Accounting  Standards Board
issued  Statement No. 133  "Accounting  for Derivative  Instruments  and Hedging
Activities",  which will be effective for the Company's  fiscal year 2000.  This
statement  establishes  accounting and reporting  standards requiring that every
derivative  instrument,  including certain  derivative  instruments  imbedded in
other  contracts,  be  recorded  in the  balance  sheet  as  either  an asset or
liability  measured at its fair value.  The statement also requires that changes
in the  derivative's  fair value be recognized in earnings unless specific hedge
accounting  criteria are met. The Company is currently  assessing  the impact of
this new  statement  on its  consolidated  financial  position,  liquidity,  and
results of operations.


Item 7a.  Qualitative and Quantitative Disclosures about Market Risk

         The  Company is exposed to certain  financial  market  risks,  the most
predominant being fluctuations in interest rates. Interest rate fluctuations are
monitored  by  management  as an integral  part of the  Company's  overall  risk
management program,  which recognizes the  unpredictability of financial markets
and seeks to reduce the potentially adverse effect on the Company's results. The
effect of interest rate fluctuations historically has been small relative to

                                       23

<PAGE>


other factors affecting  operating results,  such as rental rates and occupancy.
The specific  market risks and the potential  impact on the Company's  operating
results are described below:

         The  Company's  operating  results are  affected by changes in interest
rates as a result of borrowing under the Company's Line of Credit  facilities as
well as other  mortgages and notes with  variable  interest  rates.  If interest
rates increased by 1% percent,  the Company's annual interest expense would have
increased by $220, based on balances during the year ending December 31, 1998.


Item 8.  Financial Statements and Supplementary Data

Index to  Consolidated  Financial  Statements  is  included  on Page F-1 of this
report.


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

     None.

                                       24

<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 7, 1999.

                                     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

1.   The  Company  filed a  Current  Report  on Form  8-K on  October  23,  1998
     announcing the adoption of a Stockholder Rights Plan.

2.   The  Company  filed a  Current  Report  on Form  8-K on  October  27,  1998
     reporting other events under Item 5.

3.   The  Company  filed a  Current  Report  on Form  8-K on  October  30,  1998
     reporting other events under Item 5.


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


3.1  Articles of Incorporation of the Company (amendments and originals). (1)

3.2  Amended and Restated Bylaws of the Company. (2)

10.1 First  Amended  and  Restated  Agreement  of Limited  Partnership  of First
     Washington Realty Limited Partnership. (3)

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. (3)

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. (3)


                                       25

<PAGE>


10.4 Second Amended and Restated  Employment  Agreement  between the Company and
     William J. Wolfe, dated May 1, 1998. (4)

10.5 Second Amended and Restated  Employment  Agreement  between the Company and
     Stuart J. Halpert, dated May 1, 1998. (4)

10.6 Revolving  Credit  Agreement  dated  January 22, 1998 between Union Bank of
     Switzerland and First Washington Realty Limited Partnership. (5)

21.1 List of Subsidiaries. (1)

23.1 Consent of PricewaterhouseCoopers LLP. (1)

27   Financial Data Schedule. (1)


(1)  Filed herewith

(2)  Incorporated  herein by reference from the Company's Current Report on Form
     8-K filed on October 23, 1998.

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

(4)  Incorporated  herein by reference from the Company's Current Report on Form
     8-K/A filed on January 19, 1999.

(5)  Incorporated  herein by reference from the Company's  Annual Report on Form
     10-K for the year ended December 31, 1997.


                                       26

<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             , 1999

     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                             Title                            Date

 /s/ Stuart D. Halpert             Chairman of the              March 30, 1999
-----------------------------      Board of Directors
Stuart D. Halpert



 /s/ William J. Wolfe              President, Chief Executive   March 30, 1999
---------------------              Officer, Director
William J. Wolfe



 /s/ James G. Blumenthal           Executive Vice President,    March 30, 1999
------------------------           Chief Financial Officer
James Blumenthal



/s/ Lester Zimmerman               Director                     March 30, 1999
-----------------------------
Lester Zimmerman



 /s/ Stanley T. Burns              Director                     March 30, 1999
---------------------
Stanley T. Burns



 /s/ Matthew J. Hart               Director                     March 30, 1999
--------------------
Matthew J. Hart



/s/ William M. Russell             Director                     March 30, 1999
----------------------
William J. Russell



/s/ Heywood Wilansky               Director                     March 30, 1999
--------------------
Heywood Wilansky


                                       27


<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page

Financial Statements:

     Report of Independent Accountants.......................................F-2

     Consolidated Balance Sheets as of December 31, 1998 and 1997............F-3

     Consolidated Statements of Operations for each of the three years
     in the period ended December 31, 1998...................................F-4

     Consolidated Statements of Changes in  Stockholders' Equity
     for each of the three years in the period ended
     December 31, 1998.......................................................F-5

     Consolidated Statements of Cash Flows each of the three years
     in the period ended December 31, 1998...................................F-6

     Notes to Consolidated Financial Statements..............................F-7


Financial Statement Schedules:

     II -- Valuation and Qualifying Accounts................................F-23

     III -- Real Estate and Accumulated Depreciation........................F-24


All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.



                                       F-1
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS


TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
  OF FIRST WASHINGTON REALTY TRUST, INC.

     IN  OUR  OPINION,  THE  CONSOLIDATED  FINANCIAL  STATEMENTS  LISTED  IN THE
ACCOMPANYING  INDEX ON PAGE F-1 PRESENT FAIRLY,  IN ALL MATERIAL  RESPECTS,  THE
FINANCIAL  POSITION OF FIRST WASHINGTON  REALTY TRUST,  INC. AND SUBSIDIARIES AT
DECEMBER 31, 1998 AND 1997,  AND THE RESULTS OF THEIR  OPERATIONS AND THEIR CASH
FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD  ENDED  DECEMBER  31,  1998,  IN
CONFORMITY  WITH  GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES.  THESE  FINANCIAL
STATEMENTS   ARE  THE   RESPONSIBILITY   OF  THE   COMPANY'S   MANAGEMENT;   OUR
RESPONSIBILITY  IS TO EXPRESS AN OPINION ON THESE FINANCIAL  STATEMENTS BASED ON
OUR AUDITS.  WE CONDUCTED  OUR AUDITS OF THESE  STATEMENTS  IN  ACCORDANCE  WITH
GENERALLY ACCEPTED AUDITING STANDARDS WHICH 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,
ASSESSING THE  ACCOUNTING  PRINCIPLES  USED AND  SIGNIFICANT  ESTIMATES  MADE BY
MANAGEMENT,  AND EVALUATING THE OVERALL  FINANCIAL  STATEMENT  PRESENTATION.  WE
BELIEVE  THAT OUR AUDITS  PROVIDE A REASONABLE  BASIS FOR THE OPINION  EXPRESSED
ABOVE.





PRICEWATERHOUSECOOPERS LLP



Washington, D.C.
January 31, 1999














                                      F-2




<PAGE>

              FIRST WASHINGTON REALTY TRUST, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        as of December 31, 1998 and 1997
                    (dollars in thousands, except share data)

                                   -----------


                                                     1998                   1997
                                                   --------               ------

                                     ASSETS

Rental properties:
  Land                                            $108,562              $89,042
  Buildings and improvements                       447,584              367,756
                                                   -------              -------
                                                   556,146              456,798
  Accumulated depreciation                         (51,475)             (40,839)
                                                   --------             --------
  Rental properties, net                           504,671               415,959

Cash and equivalents                                 3,163                 3,142
Tenant receivables, net                              9,463                 7,274
Deferred financing costs, net                        1,921                 2,734
Other assets                                        13,736                10,032
                                                   --------              -------
          Total assets                            $532,954              $439,141
                                                   ========             ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Mortgage notes payable                          $244,113              $212,030
  Debentures                                        25,000                25,000
  Accounts payable and accrued expenses             11,542                10,914
                                                    ------           -----------
          Total liabilities                        280,655               247,944

Minority interest                                   66,218                38,255

Commitments and contingencies (note 11)

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; 8,566,985 and 7,291,732 shares
     issued and outstanding, respectively             86                     72
  Additional paid-in capital                     218,345                179,356
  Accumulated distributions in excess
     of earnings                                 (32,373)               (26,509)
                                                 --------             ----------
          Total stockholders' equity             186,081                152,942
                                                 --------               --------
          Total liabilities and stockholders'
          equity                                $532,954               $439,141
                                                ========               ========



                     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, 1998, 1997 and 1996
                  (amounts in thousands, except per share data)
                                   -----------

                                   1998                1997            1996
                                   ----                ----            ----
Revenues:                          
     Minimum rents                $56,702           $43,857           $31,398
     Tenant reimbursements         14,176             9,506             6,704
     Percentage rents               1,613             1,060               664
     Other income                   1,573             1,211             1,672
                                    -----             -----            ------
         Total revenues            74,064            55,634            40,438
                                   ------            ------           -------

Expenses:
     Property operating and
       maintenance                 17,934            13,522             9,743
     General and administrative     3,789             3,363             3,137
     Interest                      19,966            18,416            14,986
     Depreciation and amortization 14,627            11,172             8,019
                                   ------            ------           -------
         Total expenses            56,316            46,473            35,885
                                   ------            ------           -------

Income before gain on sale of
properties, income from Management
Company, extraordinary item,
minority interest and distributions
to Preferred Stockholders          17,748             9,161             4,553

Gain on sale of properties          2,371               549                 -

Income from Management Company         82               433               221
                                   -------           -------           ------

Income before extraordinary item,
minority interest and
distributions to Preferred
Stockholders                       20,201            10,143             4,774

Extraordinary item - Loss on
early extinguishment of debt       (358)             (954)                  -
                                   ---------         ---------        -------

Income before minority interest
and distributions to Preferred
Stockholders                       19,843             9,189             4,774

Income allocated to minority
interest                           (4,521)           (1,579)            (694)
                                 ---------           -------          -------

Income before distributions
to Preferred Stockholders          15,322             7,610             4,080

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

Income (loss) allocated 
to Common Stockholders             $9,681            $1,969           $(1,561)
                                  =======           =======           ========

Earnings (loss) per 
Common Share - Basic 

     Income (loss) before
     extraordinary item             $1.26             $0.52            $(0.46)
     Extraordinary item             (0.05)            (0.17)                 -
                                    -------           ------           -------
     Net income (loss)              $1.21             $0.35            $(0.46)
                                   ======             ======          ========

Earnings (loss) per 
Common Share - Diluted

     Income (loss) before
     extraordinary item             $1.25             $0.51            $(0.46)
     Extraordinary item             (0.05)            (0.17)                 -
                                    ------           -------          --------
     Net income (loss)              $1.20             $0.34            $(0.46)

                                    =====            =======          =========

Weighted average 
  Common Shares - Basic             7,978             5,663             3,367
Dilutive effect of stock options
  and common stock equivalents        77                67                  -
                                    ------           -------           --------

Weighted average 
     common shares - Diluted        8,055             5,730             3,367
                                    =====             =====             ======

                     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, 1998, 1997 and 1996
                             (dollars in thousands)
                                    ---------

<TABLE>
<S> 

<C>                                       <C>           <C>           <C>
                                          Convertible                 Additional
                                          Preferred      Common       Paid-in
                                          Stock          Stock        Capital
                                        ------------   ---------      ----------


Balance, December 31, 1995                   $23          $32           $80,699

Income before distributions
 to Preferred Stockholders
Issuance of Common Stock
  (1,655,000 shares)                                       17             33,418
Cash distributions to Common and
    Preferred Stockholders
Exchange of common units for
  common shares (17,416 shares)                                               83
Adjustment for minority interests'
  ownership of the Operating Partnership                                   1,868
                                            -----       ------        ----------

Balance, December 31, 1996                     23           49           116,068

Income before distributions
  to Preferred Stockholders
Issuance of Common Stock
  (2,155,562 shares)                                        22            48,850
Issuance of Common Stock for compensation
  (144,084 shares)                                           1             3,447
Exercise of Stock Options (2,956 shares)                                      58
Cash distributions to Common and
   Preferred Stockholders
Exchange of common units for
  common shares (38,251)                                                     320
Adjustment for minority interests'
  ownership of the Operating Partnership                                  10,613
                                         --------    ---------            ------

Balance, December 31, 1997                     23           72           179,356

Income before distributions
 to Preferred Stockholders
Issuance of Common Stock
  (1,150,000 shares)                                        12            25,769
Issuance of Common Stock for
 Compensation (10,000 shares)                                1               269
Vesting of Restricted Shares
 for Compensation (25,290 shares)                            1               617
Exercise of Stock Options
  (2,919 shares)                                                              56
Cash distributions to Common and
   Preferred Stockholders
Exchange of Common Units
 for Common Shares (100,456 shares)                                        1,297
Adjustment for minority interests'
 ownership of the Operating Partnership                                   10,981
                                          -------     --------            ------

Balance, December 31, 1998                    $23          $86          $218,345
                                              ===          ===          ========


<C>                <C>
Accumulated
Distributions
in Excess of
Earnings             Total
-------------       ----------

$(9,678)               $71,076
  4,080                  4,080
                        33,435
(11,965)              (11,965)
                            83
                         1,868
--------------      ----------

Balance, December 31, 1996

 (17,563)               98,577

   7,610                 7,610
                        48,872
                         3,448
                            58
 (16,556)              (16,556)
                           320
                        10,613
------------        ----------

Balance, December 31, 1997

 (26,509)              152,942

  15,322                15,322
                        25,781
                           270
                           618
                            56
 (21,186)              (21,186)
                         1,297
                        10,981
------------           --------

Balance, December 31, 1998

 $(32,373)             $186,081
==============         =========

</TABLE>



                   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, 1998 1997 and 1996
                             (Dollars in thousands)
                                    --------
 

                                       1998              1997              1996
                                      --------          --------          ------


Operating activities:
     Income before distributions
     to Preferred Stockholders        $15,322            $7,610           4,080
     Adjustments to reconcile to 
     net cash provided by operating
     activities:
          Income allocated to
          minority interest             4,521            1,579              694
          Depreciation and
          amortization                 14,627           11,172            8,019
          Gain on sale of rental
          properties                   (2,371)            (549)              - 
          Loss on early 
          extinguishment of debt          358              954               - 
          Amortization of deferred
          financing costs and loan
          premiums                       (629)             979            2,167
          Equity in earnings of
          Management Company              398               47              259
          Compensation paid or payable
          in Company stock              1,284            1,866            1,649
          Provision for uncollectable
          accounts                      1,993            1,285              527
          Recognition of deferred rent (1,122)          (1,337)            (921)

     Net changes in:
         Tenant receivables            (3,060)          (2,582)          (1,032)
         Other assets                  (4,729)          (1,525)          (4,230)
         Accounts payable and accrued
         expenses                         556            3,942              404
                                          ---        ---------         ---------

     Net cash provided by operating
     activities                        27,148           23,441            11,616
                                       ------         --------          --------

Investing activities:
     Additions to rental
     properties                        (7,126)         (7,891)          (4,476)
     Acquisition of rental
     properties                       (27,175)        (19,864)         (52,518)
     Proceeds from sale of rental
     properties                         6,071            2,066             -   
                                      ---------        ----------      --------

     Net cash used in investing
     activities                       (28,230)         (25,689)        (56,994)
                                   -----------      ---------         ---------

Financing activities:
     Proceeds from Line of 
     Credit draws                      38,138           23,800            9,867
     Proceeds from mortgage notes         318              398           31,376
     Proceeds from issuance 
     of Common Stock                   25,781           48,930           33,651
     Proceeds from exercise 
     of Stock Option                       56              -                 -
     Repayment of Line of Credit      (32,237)         (20,500)          (9,867)
     Repayment on mortgage notes       (3,325)         (38,704)            (823)
     Additions to deferred financing
     costs                               (639)            (686)            (739)
     Prepayment Penalties                 (56)            (169)             -
     Distributions paid to 
     Preferred Stockholders            (5,641)          (5,641)          (5,641)
     Distributions paid to 
     Common Stockholders              (15,545)         (10,915)          (6,324)
     Distributions paid to 
     minority interest                 (5,747)          (2,903)          (2,148)
                                      --------         --------         --------


     Net cash provided by (used in)
     financing activities               1,103           (6,390)           49,352
                                        -----         ---------           ------

     Net increase (decrease)
     in cash and equivalents               21           (8,638)            3,974
     Cash and equivalents, 
     beginning of year                  3,142           11,780             7,806
                                      -------         --------          --------

     Cash and equivalents, 
     end of year                       $3,163           $3,142           $11,780
                                        =====         ========           =======

                     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. As of December 31, 1998 the Company owned
        a  portfolio  of  55  retail  properties  (the  "  Retail   Properties")
        containing  a total of  approximately  6.0 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 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,  Eckerd Drug 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 108,000 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, 1998 and 1997,  the Company owned  approximately  73%
        and 79% 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 13 third-party  clients  consisting of 21 properties and 2.0
        million square feet of GLA. As of December 31, 1998, the Company and the
        Operating Partnership,  including subsidiary partnerships,  collectively
        owned 100% of the Retail 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 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.

                                       F-7

<PAGE>


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

                      In July 1998, the Company  completed a public  offering of
        1,150,000 shares of Common Stock (the "July 1998 Offering").  The shares
        were priced at $23.75 per share  resulting in net  offering  proceeds of
        $25,781.

                      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 1998, the Company  acquired eight shopping  centers
        for an aggregate  acquisition  cost of approximately  $103,198.  All the
        acquisitions  were accounted for using the purchase method of accounting
        and the  operations  of each  property  are  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    Anchor   Anchor
Acquired  Property Name       Location     GLA    Cost           Tenant    (GLA)
--------  -------------       --------     ---    -----------    -----     -----

01/98     Bowie Plaza         Bowie, MD    104,836   $12,189     Giant,   21,750
                                                                 CVS      15,000
03/98     Watkins Park Plaza  Mitchell-
                              ville, MD    112,143    14,662     Safeway, 43,205
                                                                 CVS      11,192

04/98    Parkville           Baltimore, MD 140,925     8,388     A&P      18,750
                                                                 Superfresh,
                                                                 Rite Aid  8,608

06/98    Elkridge Corners    Baltimore, MD  73,529     8,862     A&P      39,571
                                                                 Superfresh
                                                                 Rite Aid 10,408

06/98    Village Center      Richmond, VA  110,885    13,305     Ukrop's  39,003
                                                                 Super
                                                                 Market,
                                                                 CVS      11,700

11/98    Willston Centre I   Falls 
                             Church, VA     86,468    10,382     CVS      11,206

11/98    Willston Centre II  Falls 
                             Church, VA    127,434    13,339     Safeway  42,491

11/98    Town Center
         at Sterling         Sterling, VA  179,002    22,071     Giant
                                                                 Food     39,187
                                           -------    ------              ------

                                           935,222   $103,198            312,071
                                           =======   ========            =======

The acquisitions were funded as follows:

     Assumed Mortgage Debt (including premiums)                          $35,521
     Market Value of 1,618,794 Common Units                               39,674
     Deferred consideration                                                  828
     Cash                                                                 27,175
                                                                     -----------
                   Total                                                $103,198
                                                                      ==========

                                       F-8

<PAGE>

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


                   The deferred  consideration  is due October 1999 and is to be
          paid in the form of 36,000 common  Operating  Partnership  Units.  The
          deferred  consideration  was determined at the date of acquisition and
          was included in determining the cost of the related acquisition.

                   The following  unaudited pro forma condensed combined results
          of  operations  for the years  ended  December  31,  1998 and 1997 are
          presented as if the  acquisitions  and sales of the rental  properties
          that  occurred  during 1998 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 July 1998  Offerings
          occurred  on  January  1,  of  the  periods  presented.  The  proforma
          statements are based on historical  information and do not necessarily
          reflect the actual results that would have occurred if the Company had
          owned  the  properties   for  the  periods   presented  nor  are  they
          necessarily indicative of future results of operations of the Company.

                                                              1998          1997
                                                            --------      ------
                                                                  (unaudited)

Total revenues                                             $79,680       $76,083
                                                           =======       =======
Income before minority interest and
     distributions to Preferred Stockholders               $20,429       $18,996
                                                           =======      ========
Net income per common share - Basic                          $1.17         $0.99
                                                          ========     =========
Net income per common share - Diluted                        $1.16         $0.98
                                                          ========     =========

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.

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.

                                       F-9

<PAGE>


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


Rental Properties


        Rental  properties are carried at the lower of depreciated  cost or fair
value less costs to sell.  Depreciation is computed on the  straight-line  basis
over the  estimated  useful  lives of the assets.  The Company uses a 31.5 to 40
year  estimated  life for buildings and 5 to 40 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  incurred by FWM, are  amortized  over the lease term and are
included in other assets.

Deferred Financing Costs

        Costs of interest rate caps, interest rate swaps, 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, 1998 and 1997 was $8,022 and $7,683,  respectively.  Deferred financing cost
amortization  expense is included in  interest  expense and  amounted to $1,148,
$1,546 and $2,167 during 1998, 1997 and 1996, 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, 1998 and 1997 the
amounts of these straight-line receivables were $5,685 and $4,689, respectively.
The  amount of rental  income  from the  straight-lining  of rents  amounted  to
$1,122,  $1,337 and $921 for the years ended 1998,  1997 and 1996  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.
Additional rental revenue is recognized when it

                                      F-10

<PAGE>

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

is probable  that the lessee  will reach the  established  level of sales.  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  uncollectable.  Tenant
accounts  receivable in the accompanying  consolidated  balance sheets are shown
net of an allowance  for  doubtful  accounts of $2,493 and $1,453 as of December
31, 1998 and 1997, 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 1998 (unaudited):


                        Ordinary       Return              Capital         Total
                         Income       of Capital             G              Paid
                         ------       ----------           -------        ------

         Preferred       $2.44          $0.00              $0.00           $2.44
         Common          $1.46          $0.49              $0.00           $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.

Earnings (Loss) per Common Share

        Basic earnings  (loss) per common 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
earnings  (loss) per common share  reflects the dilutive  effect of  outstanding
employee  stock options  using the treasury  stock method and other common stock
equivalents.  The  assumed  conversion  of  the  partnership  units  (3,707,364,
2,121,089  and 782,360  common  units as of  December  31,  1998,  1997 and 1996
respectively and 429,147,  429,147,  419,609  preferred units as of December 31,
1998,  1997  and  1996,  respectively),  held  by the  limited  partners  of the
Operating  Partnership  would result in the  elimination  of earnings and losses
allocated to minority interests.  The conversion of the preferred units would be
anti-dilutive  while the  conversion of the common units would have no effect on
the periods presented. The conversion of Preferred Stock (2,966,908 common share
equivalents  as of  December  31,  1998,  1997,  and 1996) and the  Exchangeable
Debentures (1,282,051 common share equivalents as of December 31, 1998, 1997 and
1996) would be anti-dilutive for the periods presented.

Minority Interest

        Minority interest represents the limited partners' interest of 3,707,364
and 2,121,089 common units in the Operating  Partnership as of December 31, 1998
and  1997,  respectively,  and  429,147  Exchangeable  Preferred  Units  in  the
Operating  Partnership  as of  December  31,  1998 and  1997.  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

                                      F-11

<PAGE>

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


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

        On June 16,  1998,  FASB  issued  Statement  No.  133,  "Accounting  for
Derivative  Instruments and Hedging  Activities"  (SFAS 133), which is effective
for fiscal years beginning after June 15, 1999. SFAS 133 establishes  accounting
and reporting standards for derivative instruments and hedging activities. Under
this  statement  derivatives  are recognized at fair market value and changes in
fair market value are recognized as gains or losses. Management has not assessed
the impact of the  adoption  of SFAS 133 due to plans for  refinancing  the debt
associated with interest rate swaps.


 4.     Rental Properties

                  Depreciation  expense for each of the years ended December 31,
        1998, 1997 and 1996 was $13,997, $10,719, and $7,675, respectively.

                  For each of the years ended December 31, 1998, 1997, and 1996,
        maintenance  and  repairs   expense  was  $4,299,   $3,501  and  $2,767,
        respectively,  and real  estate  taxes  were  $7,535,  $4,968 and $3,070
        respectively.  Such  amounts  are  included in  property  operating  and
        maintenance  expense  in the  accompanying  consolidated  statements  of
        operations.

                  During 1998, the Company sold its two  multifamily  properties
        and three of the Georgetown  Properties.  The two multifamily properties
        (Branchwood and Park Place Apartments) were sold in March for a combined
        sales price of approximately  $8,050. The gain on sale was approximately
        $1,536.  In  addition,  in  March  1998,  the  Company  sold  one of the
        Georgetown  retail shops  consisting of 5,000 square feet for $750.  The
        gain on sale was approximately $147. In September 1998, the Company sold
        one of the Georgetown  retail shops  consisting of 3,700 square feet for
        $800.  The gain on sale was  approximately  $335. In December  1998, the
        Company sold another one of the  Georgetown  retail Shops  consisting of
        4,100 square feet for $1,075. The gain on sale was approximately $353.


5.      Mortgage Debt

                  Mortgage and other notes payable consisted of the following as
        of December 31, 1998 and 1997, respectively:

                                                       1998                 1997
                                                     --------             ------

     Fixed-rate debt payable to 2014 at 6.59%
     to 9.90% (a)(b)(c)                              $221,406           $194,925

     Notes Payable under the Lines of Credit            9,200                -


                                      F-12

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

     Industrial revenue bonds payable June 2010 (d)       6,870            7,075

     Other variable rate mortgage
     payable January 2001 at LIBOR + 1.50%                6,637           10,030
                                                          -----           ------

          Total                                        $244,113         $212,030
                                                       ========         ========

(a)  As part of the loans the lenders  require the Company to  establish  escrow
     accounts for real estate taxes,  insurance and a replacement reserve. These
     escrows, totaling $3,034 December 31, 1998 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 (5.06% at
     December  31,  1998) plus 2.0% and mature on July 1, 1999,  were  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 $0 at December 31,
     1998.

(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
     July 1, 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, 1998,  the Company  would have paid
     approximately $12.

(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 1.5%.  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 1.5%
     credit enhancement fee, was 4.25% at December 31, 1998 The Bond Obligations
     have a stated maturity of February 1, 2010,  however,  the letter of credit
     supporting the Bond Obligations expires on June 24, 2003.

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  2.0,  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  $150,000.  At December 31, 1998 the Company is
in compliance with all restrictive covenants.

        Maturities  of the  existing  indebtedness  at December  31, 1998 are as
follows:

                  Principal            Amortization      Balloon
                  Curtailment           of Premiums       Amount           Total
                  -----------          ------------      -------        --------

1999                $ 3,877              $  1,480       $ 63,933        $ 69,290
2000                  3,864                 1,133         24,381          29,378
2001                  4,121                   952         16,386          21,459
2002                  4,115                   881          9,031          14,027
2003                  3,578                   608         14,924          19,110
Thereafter           13,594                 1,362         75,893          90,849
                    -------               -------      ---------     -----------
                    $33,149                $6,416       $204,548        $244,113
                    =======                ======       ========        ========

                                      F-13

<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, 1998:

               Date                Period             Fixed          Fair
Notational     of                  of                 Rate           Market
Amount         Agreement           Contract           Payable        Value
----------     ---------           ---------          -------        ------
(in 000's)                                                         (in 000's)

$38,500        12/95          07/01/99 - 12/01/03      6.37%       $ (2,106)
 20,000        08/97          03/01/99 - 03/01/04      6.44%         (1,142)
 15,000        11/97          06/01/99 - 06/01/04      6.18%         (  665)
 24,000        01/98          05/01/00 - 05/02/05      5.85%         (  598)
--------                                              ------        --------

$97,500                                                6.23%       $ (4,511)
=======                                                =====        =========


     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 $45,000 with Union Bank of  Switzerland.  This line is  collateralized  by
seven properties (Kenhorst Plaza,  Shoppes of Graylyn,  Watkins Park Plaza, 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 August 31, 1999. This Line of Credit
is collateralized by a first mortgage lien on Brafferton  Shopping Center. As of
December 31, 1998, there was $9,200 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, 1998,  1997,  and 1996 was
$20,595, $17,437, and $12,471, respectively.


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 7.5% 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 Retail Properties.

                                      F-14

<PAGE>

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




7.   Accounts Payable and Accrued Expenses

     Accounts  payable and accrued  expenses  consisted  of the  following as of
December 31, 1998 and 1997, respectively:

                                                              1998          1997
                                                          -----------    -------

     Accrued real estate taxes                               $2,780       $2,577
     Deferred acquisition payments                            1,939        2,223
     Tenant security deposits                                 2,170        1,767
     Accrued compensation payable in Company stock            1,479          682
     Accounts payable and other accrued expenses              3,174        3,665
                                                              -----        -----
          Total                                             $11,542      $10,914
                                                           ========    =========

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, 1998,
1997, and 1996 were as follows:

                                               1998         1997            1996
                                            ---------     --------        ------

     Liabilities assumed in purchase
     of rental properties                  $ 35,521      $74,657         $20,171


     Common and Preferred Units in the
     Operating Partnership issued in
     connection with the purchase
     of rental properties                  $ 39,674      $33,851          $8,978


     Common Units in the Operating Partnership

                                      F-15

<PAGE>


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


Issued to pay deferred consideration liability    $1,462         -          -

Adjustment for minority interest's
     ownership of the Operating Partnership      $10,981      $10,613     $1,868

Exchange of Common Units in the
     Operating Partnership for Common Shares      $1,297         $320        $83


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, 1998 are as follows:

     1999                                                     $  59,651
     2000                                                        51,964
     2001                                                        45,244
     2002                                                        38,418
     2003                                                        31,091
     Thereafter                                                 170,966
                                                               --------
                                                               $397,334
                                                               ========

     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 or for percentage rentals.

11.  Commitments and Contingencies


     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.

        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.

                                      F-16

<PAGE>


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

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.


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 1998, 1997 and 1996. The Company's equity in earnings
        of FWM for the year ended December 31, 1998, 1997 and 1996 was $398, $47
        and $259 respectively.

                  FWM provides  property  management,  leasing and other related
        services to the Company.  Management  and other fees paid by the Company
        in  1998,  1997  and  1996  amounted  to  $4,546,  $3,687,  and  $1,955,
        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 1,296,691
        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 1998, 1997 and 1996 are estimated to be $161.4, $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 5.50%, 7.37% and 7.37%;  dividend rate of 9.34%, 8.71%
        and  8.71%;  volatility  factors  of the  expected  market  price of the
        Company's  shares of 17.27%,  16.96% and 16.96%;  and a weighted average
        expected life of the options of 3.00, 3.82 and 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.

                  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:

                                      F-17

<PAGE>

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


                                         1998                 1997          1996
                                         ----                 ----          ----

Pro forma net income (loss) before
     extraordinary item                 $ 9,878              $2,702     $(1,566)
Extraordinary item                        (358)               (954)        -
                                          -----             -------     --------

Pro forma net income (loss)             $ 9,520             $1,748      $(1,566)
                                         =======            =======     ========

Pro forma earnings (loss)
     per Common Share - Basic

     Income (loss) before
     extraordinary item                  $ 1.24             $0.48        $(0.47)
     Extraordinary item                   (0.05)            (0.17)          -
                                         -------            ------      --------
     Net income (loss)                   $1.19              $0.31        $(0.47)
                                         =======            ======      ========

Pro forma earnings per Common
Share - Diluted
     Income (loss) before
     extraordinary item                  $1.23              $0.47        $(0.47)
     Extraordinary item                  (0.05)             (0.17)          -
                                         ------             ------      --------

     Net income (loss)                    $1.18             $0.30        $(0.47)
                                         ======             ======      ========

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

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 Stock
Option 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


Amendment of Stock
  Option Plan           -          500,000

Options granted     105,500       (105,500)             $25.50         $25.50
Options exercised    (2,919)          -                 $19.50         $19.50
Options expired/
  forfeited          (8,228)         8,228              $23.69   $19.50 - $25.50
                     -------       ---------------

December 31, 1998   576,317        719,348              $21.67   $19.50 - $25.50
                     =======       ===============


     At December 31, 1998,  1997 and 1996  options for 379,150  shares,  334,131
shares and 336,148 shares, respectively were exercisable.  The average remaining
contractual life of options outstanding at December 31, 1998, 1997 and 1996 were
7.2 years,  7.9 years and 8.0 years,  respectively.  The weighted  average grant
date fair value per options granted in 1998, 1997 and 1996 was $1.53,  $1.52 and
$1.54 respectively.

                                      F-18

<PAGE>

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

Contingent and Restricted Stock Plans

                  Two of the Company's  senior  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.  During 1998,
         5,000  shares were  issued to each of the two  officers.  The  weighted
         average fair value of the shares was $270. 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).

                  In addition to the above restricted  shares,  during 1998 each
         of the two  officers  elected  to  receive a cash  bonus in the form of
         4,750 restricted shares. Such restricted shares are subject to a 3 year
         vesting period.

                  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 22,862 were issued as of December 31, 1998.

                  On May 8, 1998, the Board amended the employment agreements of
         the  two  senior  officers  effective  March  1998.  The  terms  of the
         employment  agreements  were  extended an additional  three years.  The
         amended  employment  agreements  continue  to provide for a base salary
         plus an incentive  compensation  arrangement,  payable in cash based on
         the Company meeting certain operating result requirements.  The amended
         employment  agreements  further  provide for a grant of 150,000  shares
         each of  additional  Restricted  Stock on January  1, 2000.  The shares
         issued will be subject to vesting as follows:  25,000 shares on January
         1, 2001; 50,000 shares on January 1, 2002, and 75,000 shares on January
         1,  2003.  The  amended  employment  agreements  also  provide  for the
         issuance of an additional  25,000  shares each of  Contingent  Stock on
         each  of  March  31,  2001,  2002  and  2003,  based  on the  Company's
         attainment of performance goals during the preceding fiscal year.


                                      F-19

<PAGE>

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

Stock Plan Amendments

                  To provide for the  additional  options  and shares  described
         above on May 8, 1998 the Stockholders  approved amendments to the Stock
         Option Plan  (increasing the shares available for issuance by 500,000),
         Restricted  Stock Plan  (increasing the number of shares  available for
         issuance by 350,000 shares to 368,508 shares), and the Contingent Stock
         Agreements by granting an additional 150,000 shares.

14.      Condensed Quarterly Financial Information (Unaudited)

1998                              First            Second     Third       Fourth
----                              -----            ------     -----       ------

Total revenues                  $16,640           $18,112   $18,563      $20,749

Income before extraordinary
item, preferred distributions
and minority interest            $5,507            $3,940    $5,151       $5,603

Extraordinary item                $(358)             -          -            -

Income allocated
to Common Stockholders           $2,673            $1,643    $2,625       $2,740

Earnings per Common Share-Basic:
Income before extraordinary item  $0.41            $0.22      $0.31        $0.32
Extraordinary item                (0.05)             -          -            -
                                  -----         ---------- --------     --------
Net income                        $0.36            $0.22      $0.31        $0.32
                                  =====           =======     =====        =====

Earnings per Common Share-Diluted:
Income before extraordinary item  $0.41            $0.22      $0.31        $0.32
Extraordinary item                (0.05)             -          -            -
                                  ------         --------    -------    --------
Net income                        $0.36            $0.22      $0.31        $0.32
                                  ======          =======    =======      ======


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

Total revenues                  $12,359           $12,888   $14,116      $16,271

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

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

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

Earnings (loss) per Common
  Share-Basic
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
                                =======          ========    =====        =====

Earnings (loss) per
  Common Share - Diluted:
Income (loss) before
  extraordinary item            $(0.03)          $(0.01)     $0.16         $0.26
  Extraordinary item             (0.03)                -     (0.10)       (0.04)
                                 ------         --------     ------       ------
Net income (loss)                $0.00           $(0.01)     $0.06        $0.22
                                 ======         ========     =====        =====

                                      F-20

<PAGE>


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



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.

     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:


                                       1998                         1997
                             -------------------------     ---------------------

                              Carrying            Fair      Carrying        Fair
Financial Assets:             Value               Value     Value          Value
                              --------            -----     --------      ------

Cash and Equivalents           $3,163            $3,163      $3,142       $3,142

Financial Liabilities:

Mortgage notes payable       $244,113          $275,499    $212,030     $248,200

Debentures                    $25,000         $  30,369     $25,000      $35,256

Off-Balance Sheet Assets/
Liabilities:

Interest Rate Swaps and
Caps receive/(pay)               -             $(4,523)        -          $(612)

16.  Business Segments

     The Company owns one property type only i.e. neighborhood shopping centers.
The Company's  management  makes  decisions on allocation of resources,  designs
compensation  packages and performs  internal  financial  analysis  based on the
following business segments:


                                      F-21

<PAGE>


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

<TABLE>
<S> 

<C>                                                     <C>           <C>
                                                          Retail
                                                        Properties    FWM, Inc.
                                                        ----------    ---------

Year ended December 31, 1998:
Revenues                                                  $72,942         $6,487
Operating and maintenance expenses                         17,934          6,405
                                                          ------           -----
Income from operations                                    $55,008            $82
                                                          =======            ===
Commercial real estate property
 expenditures                                            $110,646             $0
                                                         ========             ==
Segment assets at December 31, 1998                      $532,954             $0
                                                         ========             ==


Year ended December 31, 1997:
Revenues                                                  $54,297         $5,902
Operating and maintenance expenses                         13,522          5,469
                                                           ------          -----
Income from operations                                    $40,775           $433
                                                          =======           ====
Commercial real estate property
 expenditures                                            $144,411             $0
                                                         ========             ==
Segment assets at December 31, 1997                      $439,141             $0
                                                         ========             ==

Year ended December 31, 1996:
Revenues                                                 $39,517          $5,652
Operating and maintenance expenses                         9,743           5,431
                                                           -----           -----
Income from operations                                   $29,774            $221
                                                         =======            ====
Commercial real estate property
 expenditures                                            $86,143              $0
                                                         =======              ==
Segment assets at December 31, 1996                     $313,613              $0
                                                        ========              ==


<C>                   <C>
Other (1)             Total
---------             -----

($5,365)            $74,064
 (6,405)             17,934
 -------             ------
 $1,040             $56,130
 =======            =======
  $0               $110,646
 =======           ========

  $0               $532,954
 =======           ========


($4,565)            $55,634
 (5,469)             13,522
 -------             ------
  $904              $42,112
 =======            =======
   $0              $144,411
 =======           ========
   $0              $439,141
 =======           ========

($4,731)            $40,438
 (5,431)              9,743
 -------            -------
  $700              $30,695
 =======            =======
   $0               $86,143
 =======            =======
   $0              $313,613
 =======            =======


</TABLE>

         The following  table  reconciles  income from operations for reportable
segments  to  income  (loss)  before  extraordinary  items  as  reported  in the
Consolidated Statements of Operations.


                                                         Years ended December 31
                                                         -----------------------

                                                1998           1997         1996
                                                ----           ----         ----

Income from operations for reportable segments  $56,130      $42,112     $30,695
General and administrative expenses              (3,789)      (3,363)    (3,137)
Interest expense                                (19,966)     (18,416)   (14,986)
Depreciation and amortization                   (14,627)     (11,172)    (8,019)
Income allocated to minority interest            (4,521)      (1,579)      (694)
Distributions to Preferred Stockholders          (5,641)      (5,641)    (5,641)
Income from Management Company                     82           433          221
Gain on sale of properties                        2,371         549            -
                                                  -----       -------   --------
Income (loss) before extraordinary items        $10,039       $2,923    ($1,561)
                                                =======       ======    ========

(1)  Represents the adjustment for  straight-lining  of rents and reflecting the
     net income from FWM using the equity method of accounting.




                                      F-22

<PAGE>


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






17.  Subsequent Events

     On January  18,  1999 the Board of  Directors  declared a  distribution  of
$0.4875 and $0.6094 per Common and  Preferred  share of stock,  respectively  to
shareholders   of  record  as  of  February  1,  1999.  On  February  15,  1999,
distributions in the amount of $7,606 were paid.

     On January 5, 1999 the Company  acquired Kamp  Washington  Shopping  Center
located in Fairfax, Virginia. The total acquisition cost of $15,200 was financed
through assumed mortgage indebtedness of $3,100, a draw on the Company's Line of
Credit of $9,800 and cash of $2,300,  which included $1,800 of proceeds from the
sale of  properties  in 1998,  which were treated as a Section 1031 exchange for
tax  purposes.  The mortgage loan carries an all-in  effective  interest rate of
7.0% and matures in December 2009. Kamp  Washington  contains 71,825 square feet
of GLA and is anchored by Borders Books.



                                      F-23

<PAGE>


                       FIRST WASHINGTON REALTY TRUST, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              for the years Ended December 31, 1998, 1997 and 1996

                                    --------

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

Allowance for
Doubtful Accounts:


Year Ended
December 31, 1998   $1,453           $1,993            $(953)         $2,493
                    ======           ======            ======         ======

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

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


                                      F-24

<PAGE>

       SCHEDULE III - REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
                                December 31, 1998
                         -----------------------------
                             (dollars in thousands)


<TABLE>
<S> 
<C>                            <C>                               <C>
Property                       Location                          Encumbrance
--------                       --------                          -----------
Retail:

   Allen Street (1)            Allentown, PA                         $5,817
   Ashburn Village             Ashburn, VA                            6,637
   Bowie Plaza                 Bowie, MD                              5,047
   Brafferton (2)              Garrisonville, VA                        -
   Bryans Road (3)             Bryans Road ,MD                       38,500
   Capital Corner              Landover, MD                             -
   Centre Ridge Marketplace (2)Centreville, VA                        9,200
   Chesapeake Bagel Building   Alexandria, VA                           735
   City Avenue Shopping Center Philadelphia, PA                       9,751
   Clinton Square              Clinton, MD                              -
   Clopper's Mill              Germantown, MD                        13,888
   4483 Connecticut            Washington, D.C.                         -
   Colonial Square             York, PA                                 -
   Davis Ford Crossing (3)     Manassas, VA                             -
   Elkridge Corner             Elkridge, MD                           6,546
   Festival at Woodholme       Baltimore, MD                         11,364
   Firstfield                  Gaithersburg, MD                       2,445
   First State Plaza (3)       New Castle, DE                           -
   Four Mile Fork (2)          Fredericksburg, VA                       -
   Fox Mill (4)                Reston, VA                            25,000
   Georgetown Shops (5)        Washington, D.C.                         -
   Glen Lea (6)                Richmond, VA                          12,968
   Hanover Village (6)         Mechanicsville, VA                       -
   James Island (3)            Charleston, SC                           -
   Kenhorst Plaza (2)          Reading, PA                              -
   Kings Park                  Burke, VA                              4,626
   Laburnum Park (6)           Richmond, VA                             -
   Laburnum Square (6)         Richmond, VA                             -
   McHenry Commons             McHenry, IL                            6,355
   Mallard Creek               Round Lake Beach, IL                  11,443
   Mayfair                     Philadelphia, PA                       6,870
   Mitchellville Plaza         Mitchellville, MD                     15,026
   Newtown Square (2)          Newtown Square, PA                       -
   Northway                    Millersville, MD                       7,928
   Parkville Shopping Center   Baltimore, MD                          3,465
   Penn Station (4)            District Heights, MD                     -
   P.G. County Comm & Tech Pk. Beltsville, MD                           -
   Pheasant Hill               Bolingbrook, IL                        7,834
   Potomac Plaza               Woodbridge, VA                         3,656
   Riverside Square/
      River's EDGE             Chicago, IL                            2,384
   Rosecroft                   Temple Hills, MD                         -


                                                       Gross amounts at
                              Capitalized              which carried at
Initial Cost                  Subsequent to            the close of period
------------                  -------------            -------------------

<C>       <C>                      <C>                <C>       <C>   
          Building &               Acquisition
Land      Improvements             Improvements        Land      Improvement
----      ------------             ------------        ----      ----------

$  867     $2,404                      $1,029          $ 867       $ 3,433
 2,373      7,494                          13          2,373         7,507
 2,256      9,933                         405          2,256        10,338
 1,595      6,385                         490          1,595         6,875
 1,214      3,314                       4,056          1,230         7,354
   966        0                         3,512            989         3,489
 4,847      3,807                       2,223          5,108         5,769
   191        804                         661            192         1,464
 3,135     12,540                       1,899          3,259        14,315
   242      1,437                        (140)           251         1,288
 4,011     16,006                         125          4,011        16,131
    91        932                         152             95         1,080
   639      1,678                         258            646         1,929
 2,574     10,092                         293          2,543        10,416
 1,625      7,236                          15          1,625         7,251
 2,915     11,660                         230          2,915        11,890
   699      2,797                         235            699         3,032
 2,575     10,358                         792          2,575        11,150
 1,196      4,783                         192          1,196         4,975
 2,752     11,019                         395          2,752        11,414
   949      3,174                      (2,153)           516         1,454
   757      3,027                         204            757         3,231
 1,081      4,323                         198          1,081         4,521
 1,321      2,758                         427          1,324         3,182
 2,253      9,013                       1,654          2,253        10,667
 1,153      4,613                         622          1,153         5,235
 1,194      4,774                        (367)         1,148         4,453
 1,104      4,418                       1,037          1,105         5,454
 1,669      6,676                         146          1,609         6,882
 2,674     10,695                          76          2,560        10,885
 2,463      9,860                         360          2,463        10,220
 4,279     17,114                         112          3,877        17,628
 2,508     10,031                          48          2,508        10,079
 1,838      7,400                         586          1,837         7,987
 1,678      6,711                           7          1,678         6,718
 4,275        0                        21,377          4,285        21,367
 1,309        972                       5,513          1,342         6,452
 2,012      8,047                          56          1,899         8,216
   795      4,235                       1,200            733         5,497
 2,772     11,086                         424          2,749        11,533
   664      2,723                       2,535            688         5,234

<C>                      <C>                 <C>                 <C>       
                         Accumulated         Date of             Date
Total                    Depreciation        Construction        Acquired
-------------            ------------        ------------        ---------------

$4,300                      $336                 1958                 1996
 9,880                       437                 1996                 1997
12,594                       315                 1966                 1998
 8,470                       998                 1974                 1994
 8,584                     1,968                 1972                 1990
 4,478                     1,506                 1987                 1986
10,877                       473                 1996                 1996
 1,656                       701                 1800's               1983
17,574                       845                 1950's-60's          1997
 1,539                       748                 1979                 1984
20,142                     1,432                 1995                 1996
 1,175                       420                 1954                 1986
 2,575                       551                 1955                 1990
12,959                     1,483                 1988                 1994
 8,876                       121                 1990                 1998
14,805                     1,385                 1986                 1995
 3,731                       299                 1978                 1995
13,725                     1,730                 1988                 1994
 6,171                       323                 1975                 1997
14,166                     1,648                 1988                 1994
 1,970                       599                 1800's            1983-1989
 3,988                       371                 1969                 1995
 5,602                       538                 1971                 1995
 4,506                       902                 1967                 1990
12,920                     1,142                 1990                 1995
 6,388                       341                 1966                 1996
 5,601                       513                 1988                 1995
 6,559                       633                 1975                 1995
 8,491                       290                 1988                 1997
13,445                       468                 1987                 1997
12,683                     1,502                 1988                 1994
21,505                       704                 1991                 1997
12,587                       642                 1960's-70's          1996
 9,824                       517                 1987                 1996
 8,396                       178                 1961                 1998
25,652                     6,495                 1989                 1986
 7,794                     2,586                 1985                 1985
10,115                       347                 1983                 1997
 6,230                     1,926                 1963                 1985
14,282                       482                 1986                 1997
 5,922                     2,010                 1963                 1985

</TABLE>

                                      F-25

<PAGE>


       SCHEDULE III - REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
                                December 31, 1998
                            ------------------------
                             (dollars in thousands)
                                   (Continued)

<TABLE>
<S> 

<C>                            <C>                               <C>
Property                       Location                          Encumbrance
--------                       --------                          -----------
Retail:

Shoppes of Graylyn (2)             Wilmington, DE                        -
Shoppes of Kildaire                Cary, NC                           7,574
Southside Marketplace              Baltimore, MD                      7,927
Spring Valley Shopping Center      Washington, DC                        -
Stefko Boulevard (1)               Bethlehem, PA                         -
Stonebrook Plaza                   Merrionette Park, IL               6,002
Takoma Park (2)                    Takoma Park                           -
The Oaks                           Des Plaines, IL                    9,706
Town Center at Sterling            Sterling, VA                       9,274
Valley Center (3)                  Owings Mills, MD                     569
Village Shopping Center            Richmond, VA                          -
Watkins Park (2)                   Mitchellville, MD                     -
Willston Centre I                  Falls Church, VA                      -
Willston Centre II                 Falls Church, VA                  10,576
                                                                     ------

                                                                   $269,113

                                                       Gross amounts at
                              Capitalized              which carried at
Initial Cost                  Subsequent to            the close of period
------------                  -------------            -------------------

<C>       <C>                      <C>                <C>       <C>   
          Building &               Acquisition
Land      Improvements             Improvements        Land      Improvement
----      ------------             ------------        ----      ----------

 1,478       5,912                       79             1,478          5,991
 2,202       8,833                    2,102             2,208         10,929
 2,209       8,835                      366             2,209          9,201
 1,175       4,698                      211             1,175          4,909
 1,149       3,187                    1,889             1,149          5,076
 1,657       6,626                      136             1,570          6,849
   957       3,829                    1,148               957          4,977
 2,892      11,570                      549             2,735         12,276
 4,414      14,659                    3,000             4,414         17,659
 4,718      18,938                    2,044             5,551         20,149
 2,660      10,638                       24             2,660         10,662
 2,932      11,729                        3             2,932         11,732
 2,076       8,305                      228             2,115          8,494
 2,667      10,671                       15             2,667         10,685
 -----      ------                  --------          -------         ------

$108,697   $384,759                 $62,691          $108,562        $447,584
========   ========                 =======          =========       ========


<C>                      <C>                 <C>                 <C>       
                         Accumulated         Date of             Date
Total                    Depreciation        Construction        Acquired
-------------            ------------        ------------        ---------------

 7,469                          394              1971                1997
13,137                        3,953              1986                1986
11,410                          762              1990                1996
 6,084                          164              1930                1997
 6,225                          503              1958-60-75          1996
 8,419                          295              1984                1997
 5,934                          410              1960                1996
15,011                          520              1983                1997
22,073                           74              1973-1978           1998
25,700                        2,889              1987                1994
13,322                          198              1948                1998
14,664                          291              1985                1998
10,609                           53              1952                1998
13,352                           64              1986                1998

$556,146                    $51,475
=========                   =======

</TABLE>

(1)  These properties are encumbered by first deeds of trust as collateral for a
     $5,817 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  for  the  $25,000   Exchangeable
     Debentures.

(5)  Consists  of five  locations  in the  shopping  district of  Georgetown  in
     Washington, DC.

        Three properties was subsequently sold in 1998.

(6)  These properties are encumbered by first deeds of trust as collateral for a
     $12,968 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
     40.0 years respectively.

                                Property
                                Acquisitions   Additions/     Cost       Balance
                  Balance at    Charges to     Improvements   of         at
                  Beginning     Depreciation   to             Estate     End of
                  of Year       Expense        Properties     Sold       Year
                  ===========   ============   ============   ======     =======

Rental Properties $456,798      $103,191        $7,455       $(11,298)  $556,146
                  ========      ========        =======      =========  ========

Accumulated
Depreciation        40,839        13,997              -      (3,361)     $51,475
                   =======        ======        =======      ========  =========

<PAGE>