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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(Mark One)

|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, 2003 or



| ̈ | 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 0-6201



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BRESLER & REINER, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 52-0903424                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|11140 Rockville Pike, Suite 620, Rockville, MD                 |  | 20852                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             
|                                                               | 
|Registrants telephone number, including area code             |  | (301) 945-4300                         





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



Securities registered pursuant to Section
12 (g) of the Act: Common Stock, $.01 par value



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§229.405 of this chapter) 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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ̈No  x



The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant (556,268 shares) was approximately $23,836,000
as of June 30, 2003. The aggregate market value was computed by reference to the last sale of the Common Stock of the Registrant at $42.85 per share. For purposes of this computation, directors, officers and holders of 5% or more of the
Registrants Common Stock are considered affiliates of the Registrant at that date.



As of March 29, 2004 there were 2,738,606 shares of the Registrants Common Stock issued and outstanding.



DOCUMENTS INCORPORATED BY REFERENCE.



Certain information is incorporated by reference to the Proxy Statement for the Registrants 2004 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.



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##### Table of Contents

BRESLER & REINER, INC.



ANNUAL REPORT ON FORM 10-K

DECEMBER 31, 2003



TABLE OF CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                        |  | 4 
|Item 1. Business                                                                              |  | 8 
|Item 2. Properties                                                                            |  | 12
|Item 3. Legal Proceedings                                                                     |  | 12
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 13
|                                                                                              | 
|PART II                                                                                       |  | 13
|Item 5. Market for the Companys Common Equity and Related Stockholder Matters                |  | 14
|Item 6. Selected Financial Data                                                               |  | 14
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 25
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk                           |  | 26
|Item 8. Financial Statements and Supplementary Data                                           |  | 26
|Item 9. Disagreements on Accounting and Financial Disclosure                                  |  | 26
|                                                                                              | 
|PART III                                                                                      |  | 26
|Item 10. Directors and Executive Officers of the Company                                      |  | 26
|Item 11. Executive Compensation                                                               |  | 26
|Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  | 26
|Item 13. Certain Relationships and Related Transactions                                       |  | 26
|Item 14. Controls and Procedures                                                              |  | 27
|                                                                                              | 
|PART IV                                                                                       |  | 27
|Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     |  | 27
|A.    Financial Statements                                                                    |  | 27
|B.    Exhibits                                                                                |  | 28
|C.    Reports on Form 8-K                                                                     |  | 28
|SIGNATURES                                                                                    |  | 29
|CERTIFICATIONS                                                                                |  |   



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PART I



Forward-Looking Statements



This Annual Report on Form 10-K contains forward-looking statements that
are based on current estimates, expectations, forecasts and projections about us, our future performance, the industry in which we operate, our beliefs and managements assumptions. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of us. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes,
seeks, estimates, or would be, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include:



| |  | our ability to compete effectively;
| | - | -----------------------------------



| |  | our exposure to the credit risks of our tenants;
| | - | ------------------------------------------------



| |  | our ability to recruit and retain key personnel;
| | - | ------------------------------------------------



| |  | adverse changes in the local or general economy and market conditions;
| | - | ----------------------------------------------------------------------



| |  | our inability to obtain necessary governmental permits and approvals;
| | - | ---------------------------------------------------------------------



| |  | our inability to secure tenants for our projects and properties;
| | - | ----------------------------------------------------------------



| |  | our inability to sustain occupancy levels at our properties through failing to keep existing tenants and to secure new ones;
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | our inability to secure tenants for the residential and commercial properties that we develop;
| | - | ----------------------------------------------------------------------------------------------



| |  | our inability to obtain mortgage financing on acceptable terms;
| | - | ---------------------------------------------------------------



| |  | future litigation; and
| | - | ----------------------



| |  | changes in environmental health and safety laws.
| | - | ------------------------------------------------



Item 1. Business



Bresler & Reiner, Inc.
(B&R and, together with its subsidiaries and affiliates, we, the Company or us) was incorporated under the laws of the State of Delaware in 1970 and has been publicly traded since 1971. We engage
in real estate business activities including commercial, residential, and hospitality property ownership, residential and commercial property development, land development and residential property management, through either direct ownership or
through joint ventures with unrelated third parties. We engage in these activities in the Washington, DC, Orlando, Florida and Philadelphia, Pennsylvania metropolitan areas.



As an opportunistic investor in real estate, we evaluate a broad range of investment opportunities available in the marketplace, for their
ability to generate significant cash returns on our invested capital. Our evaluation of these investment opportunities includes an analysis of the type of real estate assets to be acquired, the percentage of capital to be invested by asset type, the
percentage ownership interest in particular assets to be acquired, and any resulting liabilities to be assumed. Our investment strategy is adjusted from time-to-time to adapt to changing marketplaces and phases in the real estate cycle. Prior to
making an investment, we conduct appropriate due diligence studies to evaluate risks and opportunities of each prospective investment and the likelihood of generating a cash return on our equity investment that meets or exceeds our internal target
rates.



In general, we employ independent management companies to perform
on-site management, leasing, maintenance, and development activities. We also partner with well-respected regional and national developers to develop and reposition properties. Post-acquisition, we perform asset-management services, conducting a
management process that includes the development of short and long-term capital replacement plans, review and approval of detailed annual budgets, and review of monthly operations variance analysis reports that allow us to monitor property
performance and operations, and leasing and development activities. We also have an internal audit function that documents and tests controls and procedures at the management companies to ensure compliance with our operating, accounting, and
reporting policies and procedures.



Segments of Business



We report segment information for the following four real estate categories:



Commercial Rental Property



This segment includes the rental income derived by commercial properties from leases of
office, industrial and retail space and other related revenue sources. Commercial leases generally provide for a fixed monthly rental over terms that range from three to 10 years, with the tenant normally providing a security deposit. At December
31, 2003 we owned, or had an ownership interest in, 21 commercial property buildings containing approximately 1,435,000 square feet of space. The properties are located in the Washington, DC and Philadelphia, Pennsylvania metropolitan areas. The
table below sets forth these commercial rental properties.



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|                                  |  |             |  |           |   |  |                 |  |                 |  
|--------------------------------- |  | ----------- |  | --------- | - |  | --------------- |  | --------------- | -
|Property                          |  | Square Feet |  | Occupancy |   |  | Location        |  | B&R Ownership % |  
|Washington Business Park (1)      |  | 568,182     |  | 91.1      | % |  | Lanham, MD      |  | 80.0            | %
|Versar Center                     |  | 217,350     |  | 95.7      | % |  | Springfield, VA |  | 100.0           | %
|1925K Street                      |  | 149,414     |  | 98.3      | % |  | Washington, DC  |  | 85.0            | %
|Sudley North (Buildings A,B&C)(2) |  | 116,228     |  | 96.8      | % |  | Manassas, VA    |  | 98.8            | %
|Congressional South (3)           |  | 81,374      |  | 32.8      | % |  | Rockville, MD   |  | 25.0            | %
|Madison Building                  |  | 81,875      |  | 97.0      | % |  | McLean, VA      |  | 24.9            | %
|Sudley North (Building D)         |  | 69,374      |  | 100.0     | % |  | Manassas, VA    |  | 49.4            | %
|900 Northbrook                    |  | 66,285      |  | 94.0      | % |  | Trevose, PA     |  | 87.5            | %
|Fort Hill                         |  | 66,072      |  | 98.2      | % |  | Centreville, VA |  | 80.0            | %
|7800 Building                     |  | 15,460      |  | 100.0     | % |  | Manassas, VA    |  | 100.0           | %
|Bank Building                     |  | 3,478       |  | 100.0     | % |  | Manassas, VA    |  | 100.0           | %
|Total                             |  | 1,435,092   |  | 91.0      | % |  |                 |  |                 |  

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|(1) | Consists of two office buildings and seven flex and warehouse buildings
|--- | -----------------------------------------------------------------------

|(2) | Consists of three office buildings
|--- | ----------------------------------

|(3) | A portion of the property is currently under development
|--- | --------------------------------------------------------



Also included in this segment is income generated from management and leasing activities associated with our 50% ownership interest in Redwood Commercial Management, LLC
(Redwood), a commercial management company. Redwood manages approximately 1,488,000 square feet of commercial office space, approximately 488,000 of which is owned by entities in which we have an ownership interest.



Residential Rental Property



This segment includes the rental income derived from residential properties from leases of
apartment units and other related revenue sources. Apartment leases generally provide for a fixed monthly rental over a one-year term with the tenant normally providing a security deposit. At December 31, 2003 we owned, or had a material ownership
interest in, three residential properties containing a total of 942 apartment units. The properties are located in the Washington, DC and Orlando, Florida metropolitan areas. The table below sets forth these residential rental properties.



|                  |  |            |  |           |   |  |               |  |                 |  
|----------------- |  | ---------- |  | --------- | - |  | ------------- |  | --------------- | -
|Property          |  | Apt. Units |  | Occupancy |   |  | Location      |  | B&R Ownership % |  
|The Fountains     |  | 400        |  | 94.5      | % |  | Orlando, FL   |  | 100.0           | %
|Victoria Place    |  | 364        |  | 95.1      | % |  | Orlando, FL   |  | 85.0            | %
|Charlestown North |  | 178        |  | 85.4      | % |  | Greenbelt, MD |  | 100.0           | %
|                  |  |            |  |          
|Total             |  | 942        |  | 93.0      | % |  |               |  |                 |  



Included in this segment are fees
generated from a wholly owned subsidiary that manages residential properties owned both by us and by an affiliated third party. During the year ended December 31, 2003 the management contracts on two residential properties that we managed for an
affiliated third party, containing 414 apartment units and 20 townhouses, were terminated. As of December 31, 2003, we continued to manage two residential properties containing 434 apartment units, one of which is owned by us and one is owned by an
affiliated third party. We anticipate that these two remaining contracts will be terminated by mutual agreement in 2004.



Hospitality Properties



This segment includes revenue and income from two hospitality properties: The Inn at the Colonnade located in Baltimore, Maryland and the Holiday Inn Express located in
Camp Springs, Maryland. The Inn at the Colonnade, which is a Doubletree branded property, is managed by a third party manager, while the Holiday Inn Express is managed by a wholly owned subsidiary of the company.



Commercial, Residential and Land Development



This segment primarily includes the development of homes and residential
condominium units, the development of commercial buildings and the development of lots as part of residential subdivisions. Also included are the revenues and costs associated with undeveloped commercial land sales, and other construction activity.
At December 31, 2003 we owned, or had ownership interests in: two vacant buildings located in Philadelphia, Pennsylvania, one of which we are developing into 32 for-sale residential condominium units and the other of which we plan to develop into an
approximately 135 unit rental apartment property; the Waterfront Complex



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located in Washington DC that is being redeveloped (see Item 2. Properties, below); a parcel of undeveloped land in
Clarksburg, Maryland, which is subdivided into 159 residential lots, 11 of which we had developed and sold through December 31, 2003; and undeveloped commercial land subdivided into 26 land parcels, 13 of which had been sold by December 31,
2003.



Competition



In virtually all aspects of our real estate activities we operate in highly competitive
marketplaces. During the acquisition process we compete primarily based on offer prices and the ability to fund the acquisition and close the transaction in a timely manner. In our commercial rental, residential rental and hospitality segments we
compete for tenants and guests primarily based on price, location and amenities offered.



During the acquisition process we compete against other acquirers of real estate, including both public and private real estate investment trusts, real estate development companies, investment firms, investment funds
and financial institutions. This competition may affect our ability to acquire properties at prices that enable us to generate cash returns on invested capital that meet or exceed our target rates of return.



Oversupply of office space as a result of the weak economy, slowdown in the high-tech sector,
and low job growth have led to low demand from tenants, thereby increasing the competitive pressure on our commercial properties. Competition from other developers, managers, and owners could produce material adverse effects on our ability to lease
space and on the rents realized or concessions granted. Such a situation could materially and adversely affect our results of operations and cash flows.



The development of new residential properties and rent abatement offers by competitors, in addition to the low interest rate environment which has enabled potential
tenants to seek home ownership, have all added to the competitive pressure on our residential properties, which could produce material adverse effects on our ability to rent apartment units.



The general marketplace for lodging in the Baltimore/Washington area is highly competitive
and subject to general economic conditions and possible adverse effects from homeland security issues. This competition tends to adversely affect occupancy rates and exert pricing pressure on room rates at our hospitality properties. This pricing
pressure will increase due to the planned development of several new hotels in the downtown Baltimore area in the next two years.



Employment



On December 31, 2003, we employed 63 persons.



Risk Factors That May Affect Our Future Results



The Value
Of and Our Income from Our Real Property Investments May Decline



Our real
estate properties and businesses can be affected by changes in national economic and market conditions, as well as local economic and market conditions. The national economic factors include: a decline in the national economy leading to a lack of
job growth and lower demand for office space; an increase in interest rates; a drop in consumer and corporate confidence; and a tightening of the availability of credit. The more specific factors that could adversely affect occupancy levels, leasing
rates and property values of a property include: lower tenant retention, the failure of tenants that lease significant amounts of space to renew their leases; an adverse change in prospective tenant perception about the attractiveness of the
property; the physical deterioration of the property; community opposition to development or construction on a specific site; the inability to collect rents; and a substantial increase in uncontrollable operating expenses. Furthermore, properties
can be adversely affected by competitive pressures such as newly developed properties within the same geographic market, and rent abatements offered by competitors. These competitive pressures could adversely affect our ability to lease space and
the rental rates at which we lease them, thereby deteriorating our results of operations.



Development of New Projects or the Repositioning Of Existing Projects Could Be Adversely Affected



Plans for future development of commercial properties, residential communities, and the repositioning of our commercial properties can be affected by a number of factors
including: time delays in obtaining necessary governmental permits and approvals, an inability to secure tenants necessary to support the project, the availability of financing, and an increase in construction costs.



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We May Be Unable to Sell or Finance Underperforming Properties



The ability to sell or finance underperforming properties may be adversely affected by the
illiquid nature of real estate and by market conditions, including the weakening of capital markets thereby affecting the availability of credit. This situation could lead to operating losses and potential write-downs in the value of our properties.



Our Operating Results and Cash Flows May Be Adversely Affected By Tenant
Defaults and High Tenant Turnover



If a significant number of tenants are
unable to meet their rental obligations or choose not to renew their leases, or if we are unable to substantially lease on economically favorable terms, our operating results and cash flows could be adversely affected. Tenant defaults may result in
significant collection expenses. In addition, the failure to renew the leases of major tenants or relet vacant space could adversely affect operating results and cash flows. At our residential properties, which typically have twelve-month lease
terms there is increased exposure to tenants not renewing their leases.



Changes in Tax Laws Could Adversely Affect Operating Results



We believe that our recorded tax reserves are adequate. However, we cannot predict the future effect of possible changes in the tax laws or regulations. These changes, if made, could have a material adverse effect on operating results.



Environmental Matters



Under various federal, state, and local environmental laws, an owner or operator of real
property may become liable for the costs associated with the investigation, removal, and remediation of hazardous or toxic substances at the property. Environmental laws often impose liability without regard to the owner/operators knowledge
of, or responsibility for, the presence of the hazardous or toxic substances. The presence of, or failure to remediate, hazardous or toxic substances may adversely affect an owners ability to sell or rent the property or to borrow funds with
the property as collateral. In some instances, the laws require abatement or removal of specific toxic-containing materials in the event of demolition, renovations, remodeling, damage, or decay.



We could be held liable for the environmental costs associated with the release of regulated
substances or related claims, whether by us, our tenants, former owners or tenants of the affected property, or others. The presence of hazardous substances on a property could result in personal injury or other claims by private parties. These
claims could result in costs or liabilities that could exceed the value of that property. We are aware of asbestos-containing materials that exist in the Waterfront Complex that will require remediation as part of the propertys redevelopment.
A $3,000,000 escrow account to address the asbestos removal project at the Waterfront Complex has been established with our contributing 54% of the escrow funds. We cannot provide assurance that this reserve is adequate to complete the remediation
of this project. Any additional costs would have an adverse affect on our cash flows. We are not aware of any notification by any party or governmental authority of any claim in connection with environmental conditions at any of our other properties
that we believe will involve any material expenditure. However, we cannot provide assurance that any non-compliance, liability, claim, or expenditure will not arise with respect to other properties in our portfolio.



Increase in Interest Rates Would Raise our Cost of Capital and May Affect Our Ability to
Obtain New Mortgage Debt and Refinance Existing Mortgage Debt



An increase
in interest rates would affect our ability to obtain new mortgage debt and to refinance existing mortgage debt and would limit our ability to make future acquisitions, through increasing our cost of capital. Higher interest rates would also decrease
cash flow from operations, negatively impacting our earnings and lowering our cash returns as a percentage of our invested equity. In addition a rise in interest rates would raise the cost of servicing our variable rate debt, thereby negatively
impacting earnings.



We May Have Difficulty Obtaining Financing



Weak real estate markets not only affect the prices for which real estate
properties can be purchased or sold, and rental revenues, but also affect the availability of financing. During weak real estate markets, lenders are reluctant to make or renew loans secured by real estate. Therefore, even if we would like to
purchase properties, or refinance debt, during weak markets, we may have difficulty obtaining the funds to do so.



New Accounting Pronouncements and Regulations Could Have an Impact on our Earnings



We are required to implement new accounting pronouncements and regulations applicable to our business when issued by the Financial
Accounting Standards Board, SEC and other regulatory organizations within the accounting profession. Currently a pronouncement is being considered that may impact the real estate industry. The proposal, Accounting for Certain Costs and
Activities Related to Property, Plant and Equipment, would eliminate the capitalization of various development costs and would require depreciation of different asset components based upon each of their lives. The proposal is still in the
adoption process and has not been finalized. Accordingly, there can be no assurance that it will be adopted in its current form or at all. If adopted, the final form of this proposal and others being considered could have an impact on our earnings.



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Access to Company Information



We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and
amendments to these reports, with the Securities and Exchange Commission (the SEC). The public may read and copy any of the reports that are filed with the SEC at the SECs Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically.



We make available, free of charge, by responding to requests addressed to our investor relations department, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to
these reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. These reports can also be accessed on the Companys website
(http://www.breslerandreiner.com).



Item 2. Properties



Commercial Rental Property



Following is a description of our asset portfolio at December 31, 2003:



900 Northbrook In November 2003, a joint venture in which we own
an 87.5% interest and unaffiliated third-parties own the remaining 12.5% interest, acquired a 66,285 square foot office building located in a commercial office park in Bucks County, Pennsylvania. The purchase price for the office building was
$12,050,000. We invested $1,312,500 for our interest in the joint venture. At the time of the acquisition, the joint venture placed a 10-year, 5.98% fixed rate mortgage of $11,200,000 on this property. At December 31, 2003, the property was 94.0%
leased.



Washington Business ParkIn November 2001, a joint venture
in which we own an 80% interest and an unaffiliated third party owns the balance, acquired two office buildings containing 105,320 square feet and seven flex and warehouse buildings containing 462,862 square feet, for a total purchase price of
$46,300,000. These buildings constitute a portion of the Washington Business Park located in Lanham, Maryland. We invested $8,806,000 for our interest in the joint venture. In December 2001, the joint venture placed a 30-year, 7.63% fixed-rate
mortgage of $40,000,000 on these properties. The unaffiliated third party has a right through May 2004, to acquire an additional 30% ownership interest in the joint venture by making additional capital contributions that equalize the members
capital accounts. At December 31, 2003, this portfolio of buildings was 91.1% leased.



Versar CenterIn January 2002, we acquired two office buildings located in Springfield, Virginia, called the Versar Center, that contain 217,350 square feet of office space, for a purchase price of approximately $20,000,000. In
May 2002, we placed a ten-year, 6.18% fixed rate mortgage of $18,500,000 on this property. At December 31, 2003, these buildings were 95.7% leased.



1925 K StreetIn June 2002, a joint venture in which we own an 85% interest and an unaffiliated third-party owns the balance, acquired a 149,414 square foot
office building located in the central business district of Washington, DC. The purchase price for the office building was $27,150,000. We invested $6,800,000 for our interest in the joint venture. At the time of the acquisition, the joint venture
placed a five-year, variable rate (one month LIBOR + 235 basis points) mortgage of $20,438,000 on this property, of which $4,343,000 is guaranteed by us. At December 31, 2003, the property was 98.3% leased.



Madison BuildingIn August 2002, a joint venture in which we own a 24.9% interest
and an unaffiliated third-party owns the balance, acquired a 81,875 square foot office building and an adjacent developable parcel located in McLean, Virginia. The adjacent parcel is currently used for parking for the office building. We invested
$2,200,000 for our interest in this joint venture. In August 2002, the joint venture placed a 10-year, 6.345% fixed rate mortgage of $14,600,000 on this property. At December 31, 2003, the property was 97.0% leased



Fort Hill Office BuildingIn September 2000, a joint venture in which we hold an
80% interest and an unaffiliated third party owns the balance, purchased, for $7,050,000, a 66,072 square foot office building located in Centreville, Virginia. We invested $1,340,000 for our interest in the joint venture. In February 2001, the
joint venture placed a 10-year, 7.7% fixed-rate mortgage of $5,750,000 on this property. At December 31, 2003, the building was 98.2% occupied.



Congressional SouthIn December 2002, we contributed approximately $2,800,000 for a 25% limited partnership interest in a partnership that owns a shopping
center located in Rockville, Maryland. The center contains 81,374 square feet of retail space, in addition to retail space that is currently being redeveloped. The partnership also owns a parcel of ground adjacent to the shopping center that is
leased on a net basis to an apartment developer who is currently constructing approximately 400 apartment units thereon. The unaffiliated third parties who own the remaining 75% interest have an option to purchase our interest in the partnership for
the original contributed capital plus a 20% return per annum thereon, less any distributions paid through the repurchase date. At December 31, 2003, the property was 32.8% leased. Occupancy rates have been adversely affected by the redevelopment of
a portion of the retail space.



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7800 BuildingWe own a 15,460 square foot office building located in Manassas, Virginia, which was 100%
leased at December 31, 2003. We are currently holding this property for sale. It is anticipated that some of the tenants in the building will relocate to one of the new buildings planned for a nearby site. (see Paradise Developers below).



Paradise DevelopersWe own approximately 31 acres of undeveloped
commercial land in Manassas, Virginia. We plan to develop three office buildings, on approximately 10 of these acres, one of which will be offered for sale as condominium office units. The three buildings will contain a total of between 150,000 and
180,000 square feet of office space.



Bank BuildingWe own a 3,478
square foot building located in Manassas, Virginia, which is 100% leased to a bank. The lease terminates in December 2006, with the tenant holding options to renew the lease for up to three successive five-year terms.



Paradise Sudley North Office BuildingsFour office buildings, containing 185,602
square feet of space, have been developed on a 16.35-acre parcel located in Manassas, Virginia. Three of the buildings (Buildings A, B and C) are owned by Paradise Sudley North Limited Partnership (Sudley), of which we are the sole
general partner and 98.8% owner. The fourth building (Building D) is owned by Paradise Sudley North Building D Partnership, a joint venture in which Sudley is a 50% partner and a limited liability company controlled by a Co-Chairman of B&R is
the remaining 50% owner.



In March 2002, we placed a 10-year, 7.47% fixed rate
mortgage of $18,010,000 on the Bank Building and the four Paradise Sudley North Office Buildings.



At December 31, 2003, Building A was 85.9% occupied and Buildings B, C and D were 100% occupied.



Convenience StoresWe previously owned sixteen parcels of improved real estate, located in the southern and southeastern United States that were leased to
convenience store operators. Through December 31, 2003, eight of the properties have been sold. Five further properties, all of which have leases that expire in February 2005, are being held for sale and as such are accounted for as discontinued
operations in our financial statements. The remaining three sites are vacant. We have established an impairment reserve of approximately $197,000 for these assets.



WMC Management CompanyWMC Management Company, Inc. (WMC), a wholly owned subsidiary of ours, has contracts to act
as managing agent and, in certain cases, leasing agent, for residential properties, owned by both wholly-owned subsidiaries of ours as well as by partnerships in which we have a partnership interest and the Co-Chairmen, officers, directors, and
principal shareholders of the Company, have substantial interests, and by partnerships in which we have no interest and the Co-Chairmen, officers, directors, and principal shareholders of the Company, have substantial interests. In November, 2003,
three of WMCs five management contracts were terminated by mutual consent of the parties. We anticipate that the remaining two contracts will be terminated in 2004 by mutual consent of the parties.



Redwood Commercial Management, LLCIn December 2001, we and an unaffiliated third
party, created a property management and leasing company, known as Redwood Commercial Management, LLC (Redwood). Each member holds a 50% ownership interest in Redwood with the other member managing Redwood on a day-to-day basis. Redwood
performs management and leasing services for properties containing approximately 1,488,000 square feet of office, commercial and warehouse space, approximately 488,000 square feet of which are in our properties and the remainder of which are in
properties that are owned by unaffiliated third parties.



Residential Rental
Property



Fountains at Waterford Lakes In September 2003 we
acquired a 400 unit apartment community, located in Orange County, Florida, called The Fountains at Waterford Lakes (The Fountains). The purchase price of The Fountains was $35,100,000. We assumed $24,600,000 of mortgage debt on the
property as apart of the transaction. This loan bears interest at 5.00% per annum, is non-amortizing and matures in December 2007. No prepayments on the loan are permitted prior to December 2005. At December 31, 2003, the property was 94.5% leased.



Victoria Place Apartments In July 2003, we acquired an 85%
membership interest in Victoria Place Apartments, LLC (Victoria Place) which owns a 364 unit apartment complex located in Orange County, Florida. An unaffiliated third-party acquired the remaining 15% interest as part of the same
transaction. The purchase price for Victoria Place was $39,500,000. We invested $8,500,000 for our 85% interest in the venture. At the time of the acquisition, the joint venture placed a 10-year, 4.72% fixed rate mortgage of $34,120,000 on this
property. $30,620,000 of the mortgage funds were disbursed at closing and the remaining $3,500,000 were disbursed in February 2004, upon the property achieving certain occupancy and debt service coverage goals. At December 31, 2003, the property was
95.1% leased.



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Charlestown North We constructed, own and operate a 178 unit apartment project called Charlestown North,
which is located in Greenbelt, Maryland. At December 31, 2003, the apartment building was 85.4% leased.



The Commons We constructed a 116 unit apartment project in southwest Washington, DC called The Commons. In December, 2003 we sold 95% of our interest in The Commons for a sales price of $9,918,000. The
purchaser has a call option to purchase, and we have a corresponding put option to sell, the remaining 5% interest in The Commons for a price of $522,000, beginning December 2004. It is our intention to exercise our put option.



Town Center East Apartment Buildings We are the sole general partner, with a 1%
interest, of Third Street Southwest Investors (Third Street), a limited partnership, which owns two high-rise apartment buildings containing 256 units. A wholly-owned subsidiary of ours also acts as the management agent for the
buildings. The Co-Chairmen of the Company own approximately 8% of the limited partnership interests in Third Street.



Hospitality Properties



Holiday Inn ExpressWe own and operate a 151 room Holiday Inn Express located in Camp Springs, Maryland, opposite the main entrance to Andrews Air Force Base. The Holiday Inn Express commenced business in
March 1970. Under our franchise agreement with Holiday Inns, Inc., we pay Holiday Inns a monthly royalty fee and additional reimbursements for advertising and trading services. The Holiday Inn Express license agreement expires in March 2007. In July
2001, we placed a ten-year, 7.875% fixed rate mortgage of $3,800,000 on this property.



For the year ended December 31, 2003 the average occupancy level was 69.7% and the average daily room rate was $75.38. For the year ended December 31, 2002 the average occupancy level was 61.2% and the average daily room rate was $73.41.



The Inn at the ColonnadeWe own a portion of The Colonnade
Building, which is a multi-purpose residential condominium, hotel, office and retail building located across from the Johns Hopkins University campus in Baltimore, Maryland. The portion of the building that we own consists of 125 hotel rooms
operated for us by ARAMARK Corporation as a Doubletree Hotel, a 5,200 square foot restaurant, leased to an unrelated operator, 7,600 square feet of retail and office space and a 137 parking space garage. In September 2001, we placed a 10-year, 7.45%
fixed rate mortgage of $10,300,000 on this property.



For the year ended
December 31, 2003 the average occupancy level was 67.1% and the average daily room rate was $130.37. For the year ended December 31, 2002 the average occupancy level was 65.0% and the average daily room rate was $133.22.



Commercial, Residential and Land Development



900 Northbrook Development Parcel On November 26, 2003 we acquired for
$2,000,000 a 9.6-acre tract of land adjacent to the 900 Northbrook building in the commercial office park in Trevose, Pennsylvania. We plan to develop a commercial office building on the land.



699 North Broad Street Associates, L.P. On August 27, 2003 a joint venture in
which we own a 95% interest, and two unaffiliated third parties own the balance, acquired a historic building in Philadelphia, PA, called the Divine Lorraine, for a purchase price of $2,295,000. The joint venture plans to redevelop the building into
an approximately 135 unit apartment property. We invested $2,375,000 for our interest in the joint venture.



Cigar Factory Apartments L.P. On July 24, 2003, we invested $1,000,000 in exchange for a 66.7% interest in Cigar Factory Apartments L.P. (Cigar Factory). Two unaffiliated third parties own the
remaining 33.3% interest. Cigar Factory owns a warehouse in Philadelphia, PA, which is being redeveloped into a 32 unit for-sale condominium property, together with parking and associated spaces. Cigar Factory has obtained an acquisition and
construction loan in the amount of $5,370,000. We have provided a payment guarantee for 66.7% of the loan balance outstanding, with the remaining balance guaranteed by the other members of Cigar Factory.



Clarksburg RidgeOn March 18, 2003 we purchased a 100% interest in Clarksburg
Ridge, LLC (Clarksburg Ridge). Clarksburg Ridge owns a parcel of undeveloped residential land in Clarksburg, Maryland, which is subdivided into 159 residential lots. Simultaneous with the acquisition, we entered into an approximately
$7,000,000 development management agreement with a third party for the site grading, sewer installation, street paving and other infrastructure. In July 2002, Clarksburg Ridge entered into a sales contract with NVR, Inc. (NVR) that
provides for the structured takedown of lots commencing in 2003 and completing in 2005. With the execution of the sales contract, NVR paid Clarksburg Ridge a non-refundable deposit of $4,950,000. Also in July 2002, Clarksburg Ridge entered into a
loan agreement for the acquisition, development, interest reserve, and real estate taxes associated with the property. The variable rate loan bears interest at the lenders prime rate of interest plus 100 basis points. As security for this
loan, we have deposited $2,000,000 in an investment account with the lender. The aggregate purchase price of Clarksburg Ridge of $12,200,000, was funded through $5,000,000 in cash, the assumption of the outstanding balance on the Bank loan of
$4,200,000, and



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the application of $3,000,000 of deposit proceeds from NVR. The remaining $1,950,000 of the NVR deposit was refunded to
NVR and an appropriate amendment made to the NVR sales contract to reflect the return of deposit monies. We had sold eleven of the residential lots through December 31, 2003.



Undeveloped Land at Washington Business ParkIn November 2001, a joint venture in which we own an 80% interest and an
unaffiliated third party owns the balance, acquired approximately 26 parcels on 79 acres of undeveloped land in the Washington Business Park located in Lanham, Maryland. The purchase price was $8,700,000. In December 2001, the joint venture placed a
$5,000,000 mortgage loan on this property. Interest on the loan is calculated at the lenders Prime Rate of Interest plus 75 basis points. The loan matures in November 2004. We invested $4,194,000 for our 80% interest in the joint venture. The
unaffiliated third party has a right through May 2004, to acquire an additional 30% ownership interest in the joint venture by making additional capital contributions that equalize the members capital accounts. The joint venture may sell one
or more land parcels while holding other land parcels for development opportunities. Through December 31, 2003, the joint venture has sold 13 land parcels totaling approximately 29 acres.



Waterfront ComplexBeginning in 1964, we developed, on a portion of the southwest Washington, D.C. Urban Renewal Area, a
shopping-office center (Complex) containing approximately 1,144,000 square feet of office, retail and storage space, consisting of two high-rise office buildings (Office Buildings) containing approximately 326,000 square
feet, an enclosed center (Center) consisting of approximately 740,000 square feet, most of which is office space and the balance consisting of retail space, approximately 1,100 parking spaces and approximately 78,000 square feet of
storage space. These improvements were constructed on ground leased from The District of Columbia Redevelopment Land Agency (RLA) for a term expiring in 2058 with an option to extend for an additional 20 years.



We assigned our interests in the Complex to a joint venture entity, B&R Waterfront
Properties, LLC (BRW). We are the managing member and hold a 54% interest in BRW. A partnership in which Co-Chairmen of the company are among the partners holds a portion of the remaining 46% interest. The results of operation of BRW
have been reported on a consolidated basis with elimination of the minority interest.



Prior to September 2002, the United States General Services Administration (GSA) leased all of the space in the two Office Buildings, as well as the second and third floors of the adjacent Center and a portion of another smaller
structure, totaling approximately 955,000 square feet, or 89.6% of the total office and retail space in the complex, under a thirty year lease agreement. In September 2002 the GSA lease expired and was not subsequently renewed.



On October 1, 2002, BRW formed a joint venture, called Waterfront Associates LLC
(WALLC), with K/FCE Investment LLC (K/FCE), a joint venture between the Washington DC based developer, The Kaempfer Company, Inc., and the national developer, Forest City Enterprises, Inc., to redevelop and reposition the
Complex. BRW contributed the leasehold improvements relating to the Complex to WALLC. Affiliates of K/FCE are marketing, leasing, redeveloping, and managing the complex. K/FCE has the right, subject to certain conditions, to increase its ownership
in the joint venture up to 50% by the making of capital contributions or by causing the joint venture to make capital distributions. To the extent required, K/FCE has committed to contribute the first $25,000,000 of redevelopment funds. If
necessary, BRW may be required to contribute a portion of the additional equity required in excess of the $25,000,000. K/FCE, as the managing member of WALLC, has sole responsibility for the management, control, and operation of the LLC, as well as
for the formulation and execution of its business and investment policy. Since BRW does not have a controlling interest in WALLC, it accounts for its investment in the joint venture by the equity method.



While WALLC still operates the retail space, the expiration of the GSA lease adversely
affected the retail tenants in the Complex who relied heavily on business generated by the employees who occupied the GSA space and several have since vacated their premises. BRW is obligated to pay the costs associated with tenant relocation
expenses for the remaining tenants in connection with the redevelopment of the Complex. Such costs would be considered part of redevelopment, however we cannot determine at this time the amount or timing of these relocation expenses.



As part of the redevelopment of the Waterfront Complex, BRW may incur significant costs
relating to the remediation of hazardous materials. A reserve has been established in the amount of $3,000,000, $1,620,000 of which was contributed by us and the balance was contributed by the minority partners of BRW.



WALLC is currently active in the preliminary planning and development phase of the
redevelopment and is pursuing its first tenant. Through December 31, 2003, approximately $8,000,000 of planning and development costs had been incurred by the joint venture and funded by capital contributions from K/FCE.



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Item 3. Legal Proceedings



We are not presently
involved in any litigation nor to our knowledge is any litigation threatened against us or our subsidiaries that, in managements opinion, would result in any material adverse effect on our ownership, financial condition, management or
operation of our properties.



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



No matters were submitted to the vote of the security holders during the fourth quarter of 2003.



The following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to
be held on June 16, 2004.



Executive Officers of Registrant (included pursuant
to instruction 3 to Item 401(b) of Regulation S-K).



|                    |  |     |  |                                                                              |  |                                              
|------------------- |  | --- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------
|Name                |  | Age |  | Positions & Offices                                                          |  | Date Elected to Office                       
|Charles S. Bresler  |  | 76  |  | Chairman & Director                                                          |  | June 1970                                    
|Burton J. Reiner    |  | 75  |  | President & Director Co-Chairman                                             |  | June 1970 February 2003                      
|Sidney M. Bresler   |  | 49  |  | Chief Operating Officer Chief Executive
Officer Director Assistant Secretary |  | June 2000 June 2002 August 2002 February 2003
|William L. Oshinsky |  | 61  |  | Treasurer                                                                    |  | April 1994                                   
|Jean S. Cafardi     |  | 57  |  | Corporate Secretary                                                          |  | November 2000                                
|Darryl M. Edelstein |  | 36  |  | Chief Financial Officer                                                      |  | August 2003                                  



In accordance with Article V of the
By-Laws of the Company, each officer was elected to serve until his successor is chosen and shall have qualified or until his earlier resignation or removal.



The instances of family relationships are as follows: Mr. Sidney M. Bresler is the son of Mr. Charles S. Bresler and Mr. William L. Oshinsky is the brother-in-law of Mr.
Burton J. Reiner.



Each officer has held the above positions as his principal
occupation for more than the past five years with the exception of Mr. Sidney M. Bresler, Ms. Jean S. Cafardi and Mr. Darryl M. Edelstein. Prior to June 2000 and during his sixteen years of employment with the Company, Mr. Bresler has served in
various capacities. Prior to November 2000 and during her thirty-seven years of employment with the Company, Ms. Jean S. Cafardi has served in various capacities.



Mr. Darryl M. Edelstein joined us in August 2003, as our Chief Financial Officer. During the past five years Mr. Edelstein has worked in
various finance capacities for Crestline Capital Corporation. During the eight years prior to that he worked at Host Marriott Corporation, Kraft Foods Inc. and Ernst & Young, LLP. Mr. Edelstein is a Certified Public Accountant.



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PART II



Item 5. Market for the Companys Common Equity and Related Stockholder Matters



Our Common Stock is traded in the over-the-counter market. The following table presents the high and low bid quotations for the periods shown, as reported by the National
Quotation Bureau, Inc. No dividends were declared or paid during the years reported.



|        |  |      |  |            |       |            |   |      
|------- |  | ---- |  | ---------- | ----- | ---------- | - | -----
|Quarter |  |      |  | 2003 Price |       | 2002 Price
|1st     |  | High |  | $          | 42.35 |            | $ | 45.75
|        |  | Low  |  | $          | 41.55 |            | $ | 44.85
|        |  |      |  |            |       |            |   |      
|2nd     |  | High |  | $          | 42.35 |            | $ | 46.55
|        |  | Low  |  | $          | 42.35 |            | $ | 45.75
|        |  |      |  |            |       |            |   |      
|3rd     |  | High |  | $          | 43.20 |            | $ | 47.00
|        |  | Low  |  | $          | 42.35 |            | $ | 44.10
|        |  |      |  |            |       |            |   |      
|4th     |  | High |  | $          | 45.75 |            | $ | 47.00
|        |  | Low  |  | $          | 43.25 |            | $ | 40.25



The above quotations represent prices
between dealers and do not include retail markup, markdown or commissions and do not represent actual transactions. As of March 26, 2004, there were 80 record holders of Common Stock.



The Company has not declared any dividends since inception.



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Item 6. Selected Financial Data



The following
table sets forth selected consolidated financial data (in thousands, except per share amounts) for us, including our consolidated subsidiaries. The historical financial data should be read in conjunction with the consolidated financial statements
and accompanying notes and the discussion set forth in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, each included elsewhere in this Form 10-K.



|                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                |  | YEARS ENDED DECEMBER 31, |        
|                                |  | 2003                     |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Revenues                        |  | $                        | 34,703  |   |      | $ | 56,835  |      |  | $ | 49,739  |   |  | $    | 42,042  |   |  | $ | 36,426  |  
|Net income                      |  | $                        | 9,581   |   |      | $ | 6,086   |      |  | $ | 10,216  |   |  | $    | 10,158  |   |  | $ | 11,905  |  
|                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings per common share       |  | $                        | 3.50    |   |      | $ | 2.22    |      |  | $ | 3.73    |   |  | $    | 3.71    |   |  | $ | 4.30    |  
|                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                    |  | $                        | 347,926 |   |      | $ | 243,492 |      |  | $ | 203,778 |   |  | $    | 136,523 |   |  | $ | 105,252 |  
|                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Long-term obligations           |  | $                        | 183,142 |   |      | $ | 100,586 |      |  | $ | 72,496  |   |  | $    | 19,373  |   |  | $ | 5,054   |  
|                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash dividends per common share |  |                          | (1      | ) |      |   | (1      | )    |  |   | (1      | ) |  |      | (1      | ) |  |   | (1      | )

---

|(1) | No dividends have been declared or paid.
|--- | ----------------------------------------



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.



Overview



We are a real estate owner and developer with a portfolio that includes commercial,
residential and hospitality properties as well as undeveloped and developed land. We earn our revenues and profits primarily from leasing commercial office space and residential apartment units, operating hospitality properties, selling residential
properties, and selling both developed and undeveloped land.



Our four
segments, commercial property rentals; residential apartment rentals; hospitality; and commercial, residential and land development, provide us with a diversified portfolio of assets across the real estate spectrum. Our strategy revolves around
using our strong liquidity position to invest in commercial and residential real estate through acquisitions of both operational and development properties. We also acquire other forms of real estate, such as undeveloped commercial and residential
land as such opportunities arise. We are an active owner of our real estate assets, focusing on maximizing profitability throughout our portfolio. We work closely with the third party management companies that manage our properties to increase
profitability through identifying revenue generation and expense reduction opportunities. In the past our strategy included performing property management services, however while we continue to provide these services for two residential properties
and one hospitality property, we will no longer be focused on this area of the business. When acquiring properties we will look to local third party management companies to provide these services. We may, however continue to invest in third party
management companies, while not controlling the day-today operations of these companies.



Historically our real estate investments were primarily limited to the Washington DC metropolitan area. During the year ended December 31, 2003 we expanded the geography of our portfolio to include the Orlando,
Florida and Philadelphia, Pennsylvania metropolitan areas. We anticipate continuing to acquire assets principally in these three metropolitan areas, while at the same time exploring opportunities in other geographical areas.



With the goal of achieving the highest possible risk-adjusted return on our invested capital,
we typically try to minimize the amount of equity we put into any one acquisition property or investment. In the low interest rate environment of the last two years we were able to do this through obtaining or assuming high levels of debt relative
to the purchase price of the assets we acquired, while still maintaining strong debt service coverage ratios on our mortgage debt. In some instances we further reduced our required equity contributions through entering into joint venture agreements
with unaffiliated third party investors. During the year ended December 31, 2003 we acquired, through both wholly-owned subsidiaries and joint venture entities with unaffiliated third parties that we consolidate in our financial statements,
approximately $103,500,000 of real estate, including two undeveloped parcels of land, two residential apartment properties, two residential development properties and one commercial property. We took advantage of the low



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interest rate environment, obtaining fixed-rate mortgage debt totaling $45,320,000 at an average interest rate of 5.0%,
and assumed $28,800,000 of fixed-rate mortgage debt at an average interest rate of 5.0%. Since the year ended December 31, 2003, as more fully described in Footnote 18 to the Consolidated Financial Statements, (Subsequent Events), we acquired,
through both wholly-owned and joint venture entities with unaffiliated third parties, $99,114,000 of real estate assets consisting of three commercial properties and one development property. In connection with the acquisitions we obtained and
assumed fixed-rate mortgage debt of $80,530,000, at an average interest rate of 5.7%, and obtained variable rate mortgage debt of $6,000,000. While interest rates remain low our strategy will continue to involve obtaining high debt levels relative
to the purchase price of acquired properties. However, should interest rates increase we may be required to obtain lower levels of debt and look for greater participation from our equity partners or invest larger amounts of our own equity. A higher
interest rate environment would also raise our cost of capital, thereby making it more difficult to find acquisition opportunities that have the potential to meet or exceed our required returns on investment.



While we are focused on growing our portfolio of assets, we also divest underperforming or
older properties that either do not generate adequate returns or do not fit with our overall strategy. During the year ended December 31, 2003 we sold a commercial building leased to a nursing home operator and a residential apartment complex. We
are currently holding for sale a commercial building containing 15,460 square feet of office space and five commercial properties leased to convenience store operators. In the future we may continue to divest properties that either do not generate
adequate cash returns or do not fit in with our overall goals and objectives.



Our biggest challenge in 2003 was the replacement of the revenue and income that was previously generated from the GSA lease at the Waterfront Complex (see Item 2. Properties). To help replace this revenue and income, while the Waterfront
Complex is under development, we aggressively acquired commercial, residential and development properties and land in 2003 and continued this trend in the first quarter of 2004. In 2004 the benefits of our acquisition activity will be more fully
realized with a full year of operations of the commercial and residential properties we acquired in 2003 and partial year of operations of the properties we have acquired in the first quarter of 2004. We will also generate income from the sale of
residential apartment units and residential lots that are currently under development. Our biggest challenge in 2004 will be to continue to utilize our cash and other sources of financing available to purchase real estate that has the potential to
generate strong cash returns on our investment, in an interest-rate environment that may not be as accommodating as it has been in recent years, and to maximize the cash returns on our existing assets.



In preparing our financial statements, we have made best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to materiality. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results
could differ from these estimates. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any intention or obligation to update publicly any forward-looking
statements after the distribution of this MD&A, whether as a result of new information, future events, changes in assumptions, or otherwise.



The discussion that follows is based primarily on our consolidated balance sheets as of December 31, 2003 and 2002, and the results of operations for the years ended
December 31, 2003, 2002 and 2001 and should be read along with the Selected Financial Data, and our consolidated financial statements and related notes. The ability to compare one period to another may be significantly affected by
operating properties in the process of being repositioned, acquisitions and dispositions of commercial and residential properties, residential subdivisions fully developed and completed, the acquisition and subsequent partial sale of undeveloped
commercial and residential lots, and the acquisition and subsequent partial development and sale of residential lots. Historical results set forth in the Selected Financial Data and our consolidated financial statements are not
necessarily indicative of our future financial position and results of our operations.



Application of Critical Accounting Policies



Certain of our
critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Our accounting policies comply with accounting principles generally accepted in the United States, although a change
in the facts and circumstances of the underlying transactions could significantly change the application of an accounting policy and the resulting financial statement impact. We have listed below those policies that we believe are critical and
require the use of significant judgment in their application.



Rental
Property and Equipment



On an annual basis, we assess whether there are
any indicators that the value of the real estate properties may be impaired. A propertys value is impaired only if our estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Our estimate is based on a subjective assessment that considers factors such as expected future operating income, trends, and prospects, as well as the effects of demand, competition and other factors.
To the extent impairment has occurred, an impairment reserve is established, resulting in an immediate negative adjustment to net income. The impairment amount is measured as the excess of the carrying amount of the property over the fair value of
the property, such fair value calculated on a discounted future cash flow basis using a risk-adjusted discount rate. The assessment of impairment could affect both our earnings and the carrying value of property on our balance sheet.



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Acquisition of Real Estate



In accordance with FAS 141 Business Combinations, we evaluate the purchase price of our commercial and residential acquisitions
to determine an appropriate apportionment of the purchase price to land, building, furniture and fixtures and acquired leases. Acquired leases are valued relative to their market value. Acquired leases with above-market terms result in the
recognition of an intangible asset, while acquired leases with below-market terms result in the recognition of an intangible liability. This intangible asset or liability is then amortized over the term of the lease as a reduction, in the case of an
intangible asset, and an increase, in the case of an intangible liability, to rental revenue.



In order to determine the value to be allocated to the acquired leases, we are required to make several assumptions regarding the relative value of the in-place leases when compared to market value. Some of the
judgments required as a part of this exercise include:



| | (i) | determining the market rental rates of the acquired leases,
| | --- | -----------------------------------------------------------



| | (ii) | estimating the market value of concessions (rent abatements, tenant improvement allowances, etc.) and leasing commissions to be paid on new leases,
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | estimating the lease-up period required to attain the occupancy levels that the property has at the time of the acquisition, and
| | ----- | --------------------------------------------------------------------------------------------------------------------------------



| | (iv) | applying an estimated risk-adjusted discount rate to the existing tenants.
| | ---- | --------------------------------------------------------------------------



As a result of the significant judgment required in the assigning a value to the in-place leases, the actual value of leases acquired could differ from the value
presented in our financial statements. Since the useful life of in-place leases typically differs substantially from that of a buildings useful life, this could affect the amount of depreciation and amortization recorded.



In accordance with FAS 141, we are also required to reflect on our balance sheet the fair
value of debt assumed in connection with our acquisitions. In order to calculate the fair value of assumed debt we are required to estimate the market rate of interest for a loan of that type, taking into account such factors as the cash flow
generated by the property, any guarantees of indebtedness, and the amount of debt relative to the propertys fair market value. The estimate of fair value of the assumed debt will affect our interest expense and the carrying amount of the
assumed debt on our balance sheet.



Real Estate Sales



We follow the provisions of Statement of Financial Accounting Standards (FASB)
No. 66, Accounting for Sales of Real Estate for reporting the disposition of homes, residential lots held for sale, and commercial land held for development. Homebuilding and related costs are charged to the cost of the homes sold under
the specific identification method. Land development costs are charged to the cost of land parcels sold on a relative sales value basis. An inaccurate allocation of costs could affect our gains on sale of homes and developed land.



Investments in Joint Ventures



For all our joint ventures created after January 31, 2003, we are required to determine if
the entity is a variable interest entity (VIE). Such a determination includes, among other requirements, that we evaluate whether the equity investment at risk is sufficient to allow the entity to finance its activities without additional
subordinated support from others. If the equity at risk is not sufficient then the entity is considered a VIE and is subject to consolidation based on the guidelines of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). If the equity at risk is sufficient, and various other conditions are met, then the entity is not considered to be a VIE and is accounted for based on other control considerations.



If a joint venture of ours is subject to FIN 46, we are required to determine whether we are
the primary beneficiary through being subject to a majority of the potential variability in gains or losses of the VIE (with the primary focus on losses). If we are the primary beneficiary, then we consolidate our investment in the joint venture. If
we are not the primary beneficiary, then we account for our investment by the equity method.



Our evaluation of the sufficiency of equity at risk and our determination of the primary beneficiary is based on subjective assessments that involve our estimating a number of possible future outcomes of the entity as
well as the probability of each outcome occurring. This process includes our estimating future operating income and losses, taking into account industry trends, the impact of macro economic forces, as well as the effects of demand, competition and
other factors. The evaluation of the sufficiency of equity of a joint venture and the determination of the primary beneficiary will effect the presentation of that joint venture in the consolidated balance sheet and results of operations.



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Depreciation Expense



We use judgment in order to allocate the purchase price of all acquired assets and assign useful lives to those assets that have finite lives. Depreciation expense is
generally computed using the straight-line method applied over the deemed useful life of depreciable assets. Tennant improvements are capitalized and amortized over the term of the corresponding lease. Repairs, maintenance and minor improvements are
expensed as incurred. The allocation of assets or assignment of useful lives will affect the amount of depreciation recorded.



Balance Sheet Overview



The following table reflects certain condensed balance sheet items from our audited consolidated balance sheets as of the dates presented (in thousands):



|                                                        |  |                   |         |                   |   |                     |  |   |         |  
|------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | ------------------- |  | - | ------- | -
|                                                        |  | December 31, 2003 |         | December 31, 2002 |   | Change 2003 to 2002 | 
|Assets:                                                 |  |                   |         |                   |   |                     |  |   |         |  
|Rental property and equipment, at cost                  |  | $                 | 201,703 |                   | $ | 112,991             |  | $ | 88,712  |  
|Property and land development                           |  |                   | 22,127  |                   |   |                    |  |   | 22,127  |  
|Cash, cash equivalents, restricted cash and investments |  |                   | 79,064  |                   |   | 86,988              |  |   | (7,924  | )
|Total assets                                            |  |                   | 347,926 |                   |   | 243,492             |  |   | 104,434 |  
|                                                        |  |                   |        
|Liabilities:                                            |  |                   |         |                   |   |                     |  |   |         |  
|Mortgage and construction loans and other debt          |  |                   | 183,142 |                   |   | 100,586             |  |   | 82,556  |  
|Deferred income taxes payable                           |  |                   | 9,773   |                   |   | 4,681               |  |   | 5,092   |  
|Other liabilities                                       |  |                   | 3,927   |                   |   | 814                 |  |   | 3,113   |  
|Total liabilities                                       |  |                   | 204,044 |                   |   | 111,650             |  |   | 92,394  |  
|                                                        |  |                   |        
|Shareholders Equity                                    |  |                   | 128,095 |                   |   | 118,514             |  |   | 9,581   |  



Material changes in assets include:



| |  | Rental property and equipment increased primarily as a result of the acquisition of the Victoria Place apartment complex, The Fountains apartment complex and the 900 Northbrook
building.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Property and land development increased primarily as a result of the acquisition of the Clarksburg Ridge land, the 900 Northbrook undeveloped land, the 699 North Broad building and
the Cigar Factory building.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cash, cash equivalents, restricted cash and investments decreased in total primarily due to the use of cash in acquisitions.
| | - | ----------------------------------------------------------------------------------------------------------------------------



Material changes in liabilities include:



| |  | Total debt increased primarily as a result of mortgage loans obtained or assumed in connection with the acquisition of the Victoria Place apartment complex, The Fountains apartment
complex, the 900 Northbrook building and the Clarksburg Ridge land.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred income taxes payable increased primarily due to the deferral of our tax liability on the gains on the sale of the Maplewood Manor nursing home and The Commons residential
apartment building. Both sales were part of a tax free exchange under §1031 of the US Internal Revenue Code and, as such the taxable gain on the sale was deferred.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other liabilities increased primarily as a result of the NVR deposit on the Clarksburg Ridge lots.
| | - | --------------------------------------------------------------------------------------------------



17



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##### Table of Contents

Financial Overview



The following table reflects key line items from our audited statements of operations for the years ended December 31, 2003 and December 31, 2002 (in thousands, except
percentages):



|                                                               |  |                   |        |                   |   |                    |  |   |                       |   |  |       |  
|-------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------------------ |  | - | --------------------- | - |  | ----- | -
|                                                               |  | December 31, 2003 |        | December 31, 2002 |   | Change2003 to 2002 |  |   | % Change 2003 to 2002 |  
|Revenues from commercial rental properties                     |  | $                 | 15,503 |                   | $ | 33,975             |  | $ | (18,472               | ) |  | (54.4 | )
|Revenues from residential rental properties                    |  |                   | 4,592  |                   |   | 1,578              |  |   | 3,014                 |   |  | 191.0 |  
|Revenues from hospitality properties                           |  |                   | 7,896  |                   |   | 7,571              |  |   | 325                   |   |  | 4.3   |  
|Homebuilding, residential lots and other construction revenues |  |                   | 1,633  |                   |   | 8,176              |  |   | (6,543                | ) |  | (80.0 | )
|Income from equity investments                                 |  |                   | 1,725  |                   |   | 1,607              |  |   | 118                   |   |  | 7.4   |  
|Interest income                                                |  |                   | 2,041  |                   |   | 2,738              |  |   | (697                  | ) |  | (25.5 | )
|Total Revenues                                                 |  |                   | 34,703 |                   |   | 56,835             |  |   | (22,132               | ) |  | (38.9 | )
|Commercial operating expenses                                  |  |                   | 6,622  |                   |   | 10,460             |  |   | (3,838                | ) |  | (36.7 | )
|Residential operating expenses                                 |  |                   | 2,107  |                   |   | 1,056              |  |   | 1,051                 |   |  | 99.5  |  
|Hospitality operating expenses                                 |  |                   | 5,236  |                   |   | 4,751              |  |   | 485                   |   |  | 10.2  |  
|Residential depreciation expense                               |  |                   | 1,025  |                   |   | 218                |  |   | 807                   |   |  | 370.2 |  
|Cost of homebuilding, residential lots and other development   |  |                   | 1,650  |                   |   | 7,259              |  |   | (5,609                | ) |  | 77.3  |  
|General and administrative expense                             |  |                   | 3,762  |                   |   | 3,497              |  |   | 265                   |   |  | 7.6   |  
|                                                               |  |                   |        |                  
|Interest expense                                               |  |                   | 8,025  |                   |   | 7,078              |  |   | 947                   |   |  | 13.4  |  
|                                                               |  |                   |        |                  
|Minority interest                                              |  |                   | 49     |                   |   | 6,422              |  |   | (6,373                | ) |  | (99.2 | )
|                                                               |  |                   |        |                  
|Other expenses                                                 |  |                   | 14     |                   |   | 3,115              |  |   | (3,101                | ) |  | (99.6 | )
|Income from discontinued operations, net of tax                |  |                   | 7,832  |                   |   | 866                |  |   | 6,966                 |   |  | 804.4 |  
|                                                               |  |                   |        |                  
|Net income                                                     |  |                   | 9,581  |                   |   | 6,086              |  |   | 3,495                 |   |  | 57.4  |  



General Overview. Relative to
the year ended December 31, 2002, our results for the year ended December 31, 2003 were adversely impacted by the September 2002 expiration of the GSA lease at the Waterfront Complex and fewer home sales. During the year ended December 31, 2002,
revenue and pre-tax net income earned from the Waterfront Complex totaled $19,555,000 and $6,910,000, respectively. In 2003, we incurred a $33,000 pre-tax loss from our equity ownership in the remaining operations at the Waterfront Complex. In 2002
we earned $7,986,000 of revenue and $827,000 of pre-tax income related to home sales, compared to $183,000 in revenue and $43,000 in pre-tax income in 2003.



Our revenue was positively impacted by the following transactions in 2003, which helped to offset this reduction in revenue:



| |  | the purchase of the Victoria Place residential apartment complex in July 2003;
| | - | ------------------------------------------------------------------------------



| |  | the purchase of The Fountains residential apartment complex in September 2003;
| | - | ------------------------------------------------------------------------------



| |  | the sale of 11 of the 159 Clarksburg Ridge residential lots that were purchased in March 2003; and
| | - | --------------------------------------------------------------------------------------------------



| |  | the purchase of the 900 Northbrook commercial building in November 2003.
| | - | ------------------------------------------------------------------------



Our net income also benefited from the following transactions in 2003:



| |  | the sale of Maplewood Manor nursing home in May 2003, resulting in an after-tax gain of $1,711,000;
| | - | ---------------------------------------------------------------------------------------------------



| |  | the sale of The Commons residential property in December, 2003, resulting in an after-tax gain of $5,419,000;
| | - | -------------------------------------------------------------------------------------------------------------



Commercial Rental Property.



At December 31, 2003, our commercial portfolio of properties owned by entities that we
consolidate, excluding properties we are holding for sale, contained approximately 1,107,000 square feet of commercial space, compared to approximately 1,041,000 square feet at December 31, 2002, an increase of approximately 66,000 square feet. The
average lease space available during 2003 decreased from 2002 by approximately 776,000 square feet, primarily as a result of the September 2002 expiration of the GSA lease at the Waterfront Complex, and subsequent deconsolidation of the entity that
owns the Complex, which comprised of approximately 1,066,000 square feet of commercial space. At December 31, 2003 the total commercial property portfolio was 93.8% leased, compared to 89.9% at December 31, 2002.



18



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##### Table of Contents

The $18,472,000 revenue decrease in 2003 relative to 2002 can be primarily attributed to a $19,555,000 decrease in
revenue related to the GSA lease at the Waterfront Complex, partially offset by a $604,000 increase in revenue related to the January, 2002 acquisition of the Versar Center and the November, 2003 acquisition of the 900 Northbrook building, and a
$450,000 increase in revenue at Washington Business Park and the Sudley North Buildings due to higher occupancy rates.



Operating expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense.
Operating expenses in 2003 decreased relative to 2002 by $3,838,000 primarily due to a $4,922,000 decrease in expenses related to the GSA lease at the Waterfront Complex, partially offset by a $433,000 increase in expenses related to the Versar
Center and the 900 Northbrook building acquisitions and a $651,000 increase in expenses related to all other commercial buildings principally as a result of higher snow removal and utility costs due to severe weather conditions and record snowfalls
in the Washington, DC region during the first quarter of 2003.



We expect that
both rental revenues and operating expenses will increase in 2004 due to the acquisitions we have made in 2003 and the first quarter of 2004.



Residential Rental Property.



Our residential portfolio of properties owned by entities that we consolidate contained 942 apartment units at December 31, 2003, compared to 178 apartment units at
December 31, 2002. The average number of apartment units available during 2003 increased from 2002 by 282 units as a result of the July 2003 acquisition of 364 units at Victoria Place and the September 2003 acquisition of 400 units at The Fountains,
partially offset by the December 2003 sale of 95% of our interest in the Commons, which contains 116 units. At December 31, 2003 the residential rental portfolio was 93.0% leased compared to 85.4% at December 31, 2002.



The $3,014,000 increase in residential rental revenue over prior year can be primarily
attributed to a $3,055,000 increase in revenue from the acquisitions of Victoria Place and The Fountains.



Operating expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense and depreciation expense. The increase in residential operating expenses of
$1,051,000 over the prior year can be primarily attributed to a $1,025,000 increase in operating expenses from the acquisitions of Victoria Place and The Fountains.



Depreciation expense in 2003 increased by $807,000 over the prior year primarily due to acquisitions made in 2003.



We expect that both rental revenues and operating expenses will increase in 2004 due to the
acquisitions we have made in 2003.



Hospitality Properties.



The average daily room rate at The Inn at the Colonnade decreased to $130.37 from $133.22
in the prior year, while occupancy increased to 67.1% from 65.0%. The average daily room rate at the Holiday Inn increased to $75.38 from $73.41 in the prior year, while occupancy increased to 69.7% from 61.2%.



The $325,000 increase in revenue over the prior year reflects a $405,000 increase in revenue
at the Holiday Inn, partially offset by a $80,000 decrease in revenues at the Inn at the Colonnade. The increase in revenue at the Holiday Inn is primarily due to increased military operations at neighboring Andrews Air Force Base. The decrease in
revenue at the Inn at the Colonnade is indicative of the continued weak demand in the hospitality industry as a result of the slow economy, the war in Iraq and homeland security threats.



Operating expenses consist of direct operating costs of the properties including property taxes and insurance and excluding interest expense
and depreciation expense. The increase in operating expenses of $485,000 over the prior year is due in part to the cost of snow removal at both properties as a result of the heavier than normal snowfall experienced in the region. Additionally, the
Inn at the Colonnade incurred higher payroll costs relative to the prior year, in part due to the hiring of a property controller during 2003.



Homebuilding, Residential Lots and other construction.Homebuilding, residential lots and other construction revenue in 2003 decrease by $6,543,000 compared to the
prior year. The decrease can be primarily attributed to the following:



| |  | in 2003 we sold the final home in the Yorkshire Knolls residential subdivision. In 2002 we sold 48 homes and six lots in the Yorkshire Knolls subdivision and the final seven lots in
the St. Marys County subdivision. As a result, homebuilding revenue declined by $7,803,000. This decrease was partially offset by;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | an increase in residential lot revenue of $1,451,000 due to the sale of eleven developed lots in Clarksburg Ridge in 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The cost of homebuilding, residential lots and other construction in 2003 decreased by $5,609,000 compared to the prior
year. The decrease can be primarily attributed to a $7,019,000 decline in expenses related to fewer home and lot sales in the Yorkshire Knolls and St. Marys subdivisions, partially offset by a $1,421,000 increase in expenses related to the
cost of sales of the Clarksburg Ridge lots.



Interest Income.Interest
income in 2003 totaled decreased by $697,000 compared to the prior year. The decrease is attributable to lower interest rates compared to the prior year, coupled with a lower balance in our short-term investment portfolio relative to the prior year,
due to the use of funds for investment purposes.



Income from Equity
Investments.Income from investments in joint ventures and partnerships consists of our share of profits and losses generated by non-consolidated joint ventures and partnerships in which we hold an equity interest. Income from equity investments
increased in 2003 by $118,000 over the prior year. The increase can be primarily attributed to a $439,000 increase related to the operations at Congressional South, in which we invested in December 2002 and a $712,000 increase related to 1925K
Street, which was acquired in June 2002, partially offset by a $1,016,000 decrease related to WBP Undeveloped Land, due to lower margins on land parcel sales.



General and Administrative Expense .The increase in general and administrative expense of $265,000 over the prior year is primarily due to an increase in
salaries, pension costs and legal, accounting and consulting fees, partially offset by a decrease in bonuses. In 2002 a $1,000,000 performance bonus was paid to the Companys Co-Chairman Charles S. Bresler.



Interest Expense.The increase in interest expense of $947,000 over the prior year is
primarily due to interest on debt obtained or assumed in 2003 in connection with the acquisitions of Victoria Place and The Fountains as well as interest on the debt placed on the Paradise Sudley North Office Buildings in 2002.



Minority Interest.Minority interest expense in 2003 decreased by $6,373,000
primarily due to the expiration of the GSA lease at the Waterfront Complex. The lease expiration and the subsequent contribution of the Complex to an unconsolidated joint venture, resulted in a reduction in minority interest expense of $5,915,000.



Other expenses.Other expenses during 2003 decreased by
$3,101,000. The decrease can be attributed to the following:



| |  | a $1,620,000 accrual established in 2002 for expenses associated with the removal of hazardous materials at the Waterfront Complex;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | an $891,000 impairment allowance established in 2002 related to the write-down of our 50% share of Tech High Leasing, and a write-down of three vacant properties that had previously
been leased to convenience store operators; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $585,000 write-off in 2002 for cash advances made to a partnership during that year, of which collection was uncertain.
| | - | -------------------------------------------------------------------------------------------------------------------------



Income from Discontinued Operations, net of Tax.The increase in income from
discontinued operations, net of tax, of $6,966,000 is primarily attributable to a $1,711,000 gain, net of tax, related to the sale of Maplewood Manor and a $5,419,000 gain, net of tax, related to the sale of The Commons.



Results of Operations  Comparison of the results of operations for the year ended
December 31, 2002 compared to 2001.



The following table reflects key line
items from our audited statements of operations for the years presented (in thousands, except for percentages):



|                                                               |  |                   |        |                   |   |                     |  |   |                       |   |  |         |   
|-------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------------------- |  | - | --------------------- | - |  | ------- | --
|                                                               |  | December 31, 2002 |        | December 31, 2001 |   | Change 2002 to 2001 |  |   | % Change 2002 to 2001 |  
|Revenues from commercial rental properties                     |  | $                 | 33,975 |                   | $ | 31,256              |  | $ | 2,719                 |   |  | 8.7     |   
|Revenues from residential rental properties                    |  |                   | 1,578  |                   |   | 1,521               |  |   | 57                    |   |  | 3.7     |   
|Revenues from hospitality properties                           |  |                   | 7,571  |                   |   | 7,711               |  |   | (140                  | ) |  | (1.8    | ) 
|Homebuilding, residential lots and other construction revenues |  |                   | 8,176  |                   |   | 4,965               |  |   | 3,211                 |   |  | 64.7    |   
|Income from equity investments                                 |  |                   | 1,607  |                   |   | 130                 |  |   | 1,477                 |   |  | 1,136.2 |   
|Interest income                                                |  |                   | 2,738  |                   |   | 3,030               |  |   | (292                  | ) |  | (9.6    | ) 
|Total Revenues                                                 |  |                   | 56,835 |                   |   | 49,739              |  |   | 7,096                 |   |  | 14.3    |   
|Commercial operating expenses                                  |  |                   | 10,460 |                   |   | 9,637               |  |   | 823                   |   |  | 8.5     |   
|Residential operating expenses                                 |  |                   | 1,056  |                   |   | 915                 |  |   | 141                   |   |  | 15.4    |   
|Hospitality operating expenses                                 |  |                   | 4,751  |                   |   | 4,758               |  |   | (7                    | ) |  | (0.1    | ) 
|Commercial depreciation expense                                |  |                   | 4,323  |                   |   | 3,232               |  |   | 1,091                 |   |  | 33.8    |   
|Cost of homebuilding, residential lots and other development   |  |                   | 7,259  |                   |   | 4,802               |  |   | 2,457                 |   |  | 51.2    |   
|General and administrative expense                             |  |                   | 3,497  |                   |   | 2,172               |  |   | 1,325                 |   |  | 61.0    |   
|Interest Expense                                               |  |                   | 7,078  |                   |   | 2,000               |  |   | 5,078                 |   |  | 253.9   |   
|Minority interest                                              |  |                   | 6,422  |                   |   | 7,225               |  |   | (803                  | ) |  | (11.1   | ) 
|Other expenses                                                 |  |                   | 3,115  |                   |   | 262                 |  |   | 2,853                 |   |  | 1,088.9 |   
|                                                               |  |                   |        |                  
|Net income                                                     |  |                   | 6,086  |                   |   | 10,216              |  |   | 4,130                 |   |  | (40.4   | )%



20



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##### Table of Contents

The increase in total revenue was primarily due to an increase in revenue from home sales and an increase in revenue
generated from our November 2001 acquisition of Washington Business Park, and our January 2002 acquisition of the Versar Center, partially offset by decreased revenue at the Waterfront Complex as a result of the September 2002 GSA lease expiration.
The decrease in net income is primarily due to increased interest expense on mortgage loans closed in 2002 and 2001, as well as increased general and administration costs in 2002 and accruals for removal of hazardous materials and asset impairment
write-downs in 2002.



Commercial Rental Property.



At December 31, 2002, our commercial portfolio of properties owned by entities that we
consolidate, excluding properties we are holding for sale, contained approximately 1,041,000 square feet of commercial space, compared to approximately 1,902,000 square feet at December 31, 2001, a decrease of approximately 861,000 square feet. The
decrease is primarily due to the joint venture agreement with K/FCE and the resulting deconsolidation of the entity that owns the Waterfront Complex, partially offset by the acquisition of the Versar Center. At December 31, 2002 the total commercial
property portfolio was 90.1% leased, compared to 99.0% at December 31, 2001.



The $2,719,000 revenue increase in 2002 over the prior year can primarily be attributed to a $6,984,000 increase in revenue related to Washington Business Park, which was acquired in November 2001 and a $3,396,000 increase in revenue
related to the Versar Center, which was acquired in January 2002, partially offset by a $6,001,000 decrease in revenue related to the expiration of the GSA lease at the Waterfront Complex.



The $823,000 increase in operating expenses in 2002 over the prior year can primarily be
attributed to a $2,398,000 increase in expenses related to the Washington Business Park operating properties and a $1,296,000 increase in expenses related to the Versar Center property, partially offset by a $2,736,000 decrease in expenses related
to the expiration of the GSA lease at the Waterfront Complex.



Depreciation
expense increased by $1,091,000 over the prior year primarily due to the acquisitions of Washington Business Park and the Versar Center, partially offset by the contribution of the Waterfront Complex to an unconsolidated joint venture.



Residential Rental Property.



Revenue was comparable with the prior year since average occupancy levels remained stable.



The $141,000 increase in operating expenses over the prior year resulted
primarily from increased operating expenses at the Companys Charlestown North Apartments. Expense increases occurred in payroll costs, electricity charges, repair and maintenance costs, and property insurance.



Hospitality Properties.



The average daily room rate at The Inn at the Colonnade increased to $133.22 from $128.48 in the prior year, while occupancy decreased to
65.0% from 68.5%. The average daily room rate at the Holiday Inn increased to $73.41 from $72.71 in the prior year, while occupancy decreased to 61.2% from 62.6%.



The $140,000 decrease in revenue in 2002 reflects a $90,000 decrease at the Inn at the Colonnade and a $50,000 decrease at the Holiday Inn.
The decrease in revenue at both properties reflects the post September 11thdrop in demand for lodging and the
decreased business and personal travel due to a weak economy.



21



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##### Table of Contents

Operating expenses in 2002 were comparable with the prior year.



Homebuilding, Residential Lots and other construction.Homebuilding, residential lots
and other construction revenues, comprised principally of home and residential lot sales, increased in 2002 over the prior year by $3,211,000. The growth in revenue was primarily due to increased unit sales of homes and lots. The number of homes
sold increased to 49 in 2002 from 31 in 2001. The average sales price per home increased by $2,000 to an average 2002 price of $157,000. Residential lots sold also increased to seven lots in 2002 from one lot in 2001. The gross profit margin
percentage increased to 64.5% in 2002 from 52.2% in 2001.



The cost of
homebuilding, residential lots and other construction increased in 2002 by $2,457,000 compared to the prior year as a result of the increase in home and residential lot sales.



At December 31, 2002, all the lots at the St. Marys County subdivision had been sold and only one home remained in inventory at the
Yorkshire Knolls residential subdivision.



Income from Equity Investments.The increase in income from equity investments in 2002 of $1,477,000 over the prior year can be primarily attributed to equity income of $1,218,000 as a result of WBP Undeveloped Land ground parcel sales in 2002 and equity income of $217,000
from 1925K, in which we invested in June 2002.



General and Administrative
Expense.General and administrative expense increased in 2002 by $1,325,000 over the prior year primarily due to a $1,000,000 performance bonus paid to the Companys Co-Chairman in 2002, as well as an increase in professional fees.



Interest Expense



Interest expense increased in 2002 by $5,078,000 over the prior year as a result of mortgage
loans placed on the Sudley North Buildings, the Washington Business Park Buildings and the Versar Center in 2002 and 2001.



Minority Interest .Minority interest expense deceased in 2002 by $803,000 compared to the prior year primarily due to the expiration of the GSA lease at the
Waterfront Complex and the subsequent contribution of the Complex to an unconsolidated joint venture during 2002.



Other expenses.Other expenses during 2002 increased by $2,853,000 over the prior year. The increase can be attributed to an accrual established in 2002 for
$1,620,000 associated with the removal of hazardous materials at the Waterfront Complex, an impairment allowance established in 2002 for $891,000 for both a write-down of our 50% share of Tech High Leasing and a write-down of three vacant properties
that had previously been leased to convenience store operators, and a write-off in 2002 for $585,000 of cash advances made to a partnership during that year, of which collection was uncertain.



Funds From Operations



We consider Funds From Operations (FFO) to be a meaningful measure of our performance and we evaluate management based on FFO
and FFO per share. We provide FFO as a supplemental measure for reviewing our comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance). FFO is a
recognized metric used extensively by the real estate industry. Accounting for real estate assets using historical cost accounting under generally accepted accounting principles (GAAP) assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results that exclude historical cost
depreciation to be useful in evaluating the operating performance of real estate companies. As a result, the National Association of Real Estate Investment Trusts (NAREIT) created the concept of FFO as a standard supplemental measure of
operating performance that excludes historical cost depreciation from  or adds it back to  GAAP net income.



While we are not a real estate investment trust (REIT), in light of the fact that we are a real estate company with large amounts of depreciable and
amortizable real estate assets and we compete against REITS, we believe FFO to be a relevant measurement of our performance.



FFO as defined by the NAREIT is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. Our FFO measure
differs from NAREITS definition in that we exclude income tax expense related to property sales. The exclusion of income tax expense on property sales is consistent with the objective of presenting comparative period operating performance. FFO
should not be considered an alternative to net income as an indicator of



22



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##### Table of Contents

our operating performance, or as an alternative to cash flows from operating, investing or financing activities as a
measure of liquidity. Additionally, the FFO measure presented by us is not calculated in the same manner as FFO measures of other real estate companies and therefore may not necessarily be comparable. We believe that FFO provides relevant
information about our operations and is useful, along with net income, for an understanding of our operating activities.



Our funds from operations were $9,753,000 in 2003, compared to $11,221,000 in 2002, a decrease of $1,468,000. The reduction is primarily the result of the GSA lease
expiration and fewer home sales, partially offset by an increase in funds from operations from land sales as well as from properties acquired in 2003 and 2002.



Our funds from operations were $11,221,000 in 2002, compared to $13,864,000 in 2001, a decrease of $2,643,000. The decrease is primarily the result of the GSA lease
expiration and from mortgage loans placed on properties in 2002, partially offset by properties acquired and investments made in joint ventures in 2002 and 2001.



The following table reflects the calculation of funds from operations (in thousands):



|                                                                                                |  |                                 |         |   |      |   |        |  |   |       
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ |  | - | ------
|                                                                                                |  | For the years ended December 31
|                                                                                                |  | 2003                            |         |   | 2002 |   | 2001  
|Net income                                                                                      |  | $                               | 9,581   |   |      | $ | 6,086  |  | $ | 10,216
|Add: Depreciation and amortization including share of unconsolidated real estate joint ventures |  |                                 | 7,301   |   |      |   | 5,135  |  |   | 3,648 
|Add: Income tax expense from property sales                                                     |  |                                 | 4,753   |   |      |   |       |  |   |      
|Less: Gain on sale of properties                                                                |  |                                 | (11,882 | ) |      |   |       |  |   |      
|                                                                                                |  |                                 |         |   |      |   |        |  |   |       
|Funds from operations                                                                           |  | $                               | 9,753   |   |      | $ | 11,221 |  | $ | 13,864



Liquidity and Capital Resources



Cash Flows



Our principal sources of cash are cash from our operations, our ability to obtain mortgage
financing and additional financing through various financial markets, and asset dispositions. Our principal uses of cash are real estate acquisitions, investments in real estate joint ventures, funding working capital requirements and payments of
debt, capital expenditures, operating costs and corporate expenses. With current cash and cash equivalents and investments that are principally short-term in nature, totaling $66,196,000 our sources of cash are sufficient to meet our liquidity
needs; however we cannot be assured that our actual cash requirements will not be greater than we currently expect.



Operating Activities:



During 2003 net cash used in operating activities was $6,470,000. This primarily resulted from the purchase of the Clarksburg Ridge development parcel and the purchase of the Cigar Factory.



Investing Activities:



During 2003, net cash used in investing activities totaled $32,009,000. Cash used for investments primarily resulted from cash outflows of
$72,157,000 primarily for the acquisition of: the Victoria Place and The Fountains apartment complexes; the 900 Northbrook commercial building and development parcel; and the 699 North Broad Street building.



These outflows were reduced by cash inflows totaling $40,148,000 primarily consisting of
proceeds received from: the liquidation of a portion of our municipal bond investments; the sale of Maplewood Manor and The Commons; and distributions from joint ventures.



At December 31, 2003 we had made deposits totaling approximately $2,044,000 for the acquisition of properties (see Footnote 18
Subsequent Events, for discussion).



23



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##### Table of Contents

Financing Activities:



With interest rates at historical lows, we used the favorable interest rate climate to help finance acquisitions.



During 2003, net cash generated by financing activities totaled $44,956,000. This primarily
resulted from the placement of mortgage debt related to the acquisition of Victoria Place and the 900 Northbrook building, the placement of $6,000,000 of unsecured debt and partially offset by principal payments on mortgage debt.



Excess cash flow generated from our properties, from distributions from joint ventures and
from proceeds of new mortgage loans placed on unencumbered properties and refinancing of existing debt, is typically invested in municipal bonds that are short-term in nature. These investments are then liquidated as needed for our real estate
acquisitions and investments in joint ventures. At December 31, 2003, we had $52,635,000 of such investments.



Future Capital Requirements



Several
current factors are positive with respect to our cash flow and capital requirements:



| |  | mortgage interest rates remain at historical low rates facilitating our financing of acquisitions;
| | - | --------------------------------------------------------------------------------------------------



| |  | 2004 forecasted cash flow from operations indicate that current obligations and working capital needs can be met; and
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | availability of $66,196,000 of cash, cash equivalents and investments at December 31, 2003. This liquidity allows us to be well positioned to quickly respond to real estate
acquisition opportunities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Unanticipated funding requirements
could surface during 2004 or in the immediately ensuing years including:



| |  | possible funding requirements for the redevelopment of the Waterfront Complex;
| | - | ------------------------------------------------------------------------------



| |  | funds for the possible redevelopment of the 1925 K Street asset;
| | - | ----------------------------------------------------------------



| |  | funds for the development project at Sudley North; and
| | - | ------------------------------------------------------



| |  | unexpected revenue losses caused by tenant defaults or bankruptcies that have a detrimental affect on the cash flow generated from operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



Furthermore, pursuant to our $6,000,000 unsecured loan, we are required to maintain a minimum
liquidity of $30,000,000.



Longer term our main challenge will be to refinance
our existing fixed-rate debt at interest rates that will allow us to continue to maximize cash returns on our investments. At December 31, 2003 the weighted average interest rate on our fixed-rate mortgage debt was 6.4%. Based on the fixed-rate debt
outstanding at December 31, 2003, a 100 basis point increase in the weighted average interest rate on our debt would increase our annual financing costs by approximately $1,700,000. Our fixed-rate mortgage debt begins to mature in 2007 (see annual
contractual principal payments schedule in the footnotes to the financial statements).



Off-Balance Sheet Commitments



As of December 31, 2003, our
off-balance sheet commitments were as follows:



| |  | We have provided an unconditional and irrevocable payment guaranty of $4,342,970 to Riggs Bank in connection with the $20,437,500 loan made by Riggs Bank to 1925K Associates, LLC
(1925K). A portion of this loan has also been guaranteed by the other third-party member of 1925K. As further conditions of the guaranty, we are required to maintain a consolidated net worth of not less than $25,000,000 and a minimum consolidated
liquidity of at least $15,000,000. Riggs Bank has also placed two covenants on the loan: (1) principal outstanding cannot exceed 75% of the current market value of the property, and (2) net operating income to interest expense must exceed 1.35 to
1.00. During the year ended December 31, 2003 we were in compliance with all covenants under the loan. In February 2004, 1925K refinanced the loan at essentially the same terms as the previous loan and a variable interest rate of one month LIBOR
plus 145 basis points.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have provided an unconditional and irrevocable payment guaranty to Riggs Bank for 33.3% of the loan balance outstanding under the $7,100,000 construction loan, made to Selborne
House at St. Marks Owner, LLC (Selborne House). The other members of Selbourne House have guaranteed the remaining balance under the loan. The loan matures January 2006 and has an extension option of 5 years. Our payment guarantee will
be reduced to 16.7% of the outstanding loan balance, upon Selborne House maintaining a debt service ratio of 1.25 to 1.0 for a period of one year. Additionally, along with the other members of Selborne House, we have jointly and severally guaranteed
the completion of the project prior to July 2005. At December 31, 2003, the outstanding loan balance totaled $1,578,000 and unused capacity under the loan totaled $5,522,000.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

| |  | We have guaranteed repayment of 66.6% of the loan balance outstanding under the $5,370,000 acquisition and construction loan, made by Citizens Bank of Pennsylvania to Cigar
Factory Apartments, L.P. (Cigar Factory). The remainder of the outstanding balance under the loan has been guaranteed by the other members of Cigar Factory. The loan matures July 2005, but may be extended for an additional year at the
option of the borrower. Together with the other members of Cigar Factory, we have also guaranteed completion of construction of improvements to Cigar Factory on or before the maturity date of the loan, or if the loan is extended, the extended
maturity date. At December 31, 2003, the outstanding loan balance totaled $894,000 and unused capacity under the loan totaled $4,476,000.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At December 31, 2003, we had unused capacity under a development loan for Clarksburg Ridge of $288,000.
| | - | -------------------------------------------------------------------------------------------------------



| |  | At December 31, 2003 we had approximately $156,000 of outstanding letters of credit representing performance guarantees for land improvements in home building and land development
operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Based on the operating agreement of Waterside Associates, LLC (WALLC), K/FCE, the managing member of WALLC, may elect to require that additional capital contributions be
made to pay expenses incurred both during and subsequent to the development of the Waterfront Complex. The initial $25,000,000 of contributions are required to be made by K/FCE. Thereafter each members required contribution will be based on
their respective ownership percentage in the joint venture at the time of the required contribution.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Contractual Obligations



The following table summarizes our contractual obligations as of December 31, 2003 (in thousands):



|                              |  |       |         |                        |   |             |  |             |        |                    |   |        |  |   |        
|----------------------------- |  | ----- | ------- | ---------------------- | - | ----------- |  | ----------- | ------ | ------------------ | - | ------ |  | - | -------
|                              |  |       |         | Payments Due by Period
|                              |  | Total |         | Less than 1- Year      |   | 1 - 3 Years |  | 3 - 5 Years |        | More than 5- Years
|Long-term debt obligations(1) |  | $     | 183,142 |                        | $ | 2,181       |  | $           | 18,394 |                    | $ | 29,968 |  | $ | 132,599
|Operating lease obligations   |  |       | 785     |                        |   | 118         |  |             | 246    |                    |   | 261    |  |   | 160    
|Outstanding letters of credit |  |       | 156     |                        |   | 156         |  |             |       |                    |   |       |  |   |       
|                              |  |       |         |                        |   |             |  |             |        |                    |   |        |  |   |        
|Total                         |  | $     | 184,083 |                        | $ | 2,455       |  | $           | 18,640 |                    | $ | 30,229 |  | $ | 132,759
|                              |  |       |         |                        |   |             |  |             |        |                    |   |        |  |   |        

---

|(1) | Included on balance sheet.
|--- | --------------------------



Item 7A. Quantitative and Qualitative Disclosures About Market Risk



Market risk is the risk of loss arising from adverse changes in interest rates. Our market risk arises from interest rate risk inherent in our investment assets and our variable rate debt. Interest rate risk is the
possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate-sensitive assets, liabilities and commitments.



We do not believe that we have any material exposures to adverse changes in interest rates associated with our investment assets. We invest
in investment grade state and local government issues with short-term maturities and fixed rates of return. The short-term nature of the investments provides opportunities for reinvestment at higher interest rates, as those rates increase.



We have $7,606,000 of variable-rate development loans outstanding, that are
subject to interest-rate sensitivity. In addition, we have an unsecured $6,000,000 variable-rate loan outstanding that matures in 2005, and a joint venture, in which we have an 85% non-controlling interest has a $20,187,000 variable-rate loan
outstanding that matures in 2007. Based on the total variable-rate debt outstanding at December 31, 2003, a 100 basis point increase in market interest rates would impact our pre-tax earnings by approximately $308,000. Assuming the rate increase is
not caused by an increase in credit spreads and that there is a proportionate 100 basis point increase in returns on our cash, cash equivalents and investments, our annual interest income would increase by approximately $662,000.



25



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##### Table of Contents

Based upon requirements for assessing the market value of debt instruments, we estimate the fair market value by
discounting future cash payments at interest rates that approximate the current market. Based on these parameters, at December 31, 2003, the carrying amount of our total fixed-rate debt was $169,536,000 compared to an estimated fair value of
$176,603,000.



Item 8. Financial Statements and Supplementary Data



The financial statements are listed under Item 15 in this annual report and are included therein.



No supplementary data are supplied because none are required.



Item 9. Disagreements on Accounting and Financial Disclosure



On June 27, 2002, upon the recommendation of our Audit Committee, the Board of Directors dismissed Arthur Andersen LLP (Arthur Andersen) as our independent auditors and appointed Ernst & Young LLP (Ernst &
Young) to serve as our independent auditors for the fiscal year ending on December 31, 2002.



Arthur Andersens reports on our consolidated financial statements for the fiscal years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope or accounting principles.



During the fiscal years ended December 31, 2001 and 2000 and through the date of dismissal there were: (i) no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Arthur Andersens satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for such periods; and (ii)
there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.



During each of 2000 and 2001 and through the date of their appointment, we did not consult Ernst & Young with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or
the type of audit opinion that might be rendered on our consolidated financial statements, or (ii) any matter that was either the subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any reportable
event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.



Since the date of their appointment, there were: (i) no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst
& Youngs satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for the fiscal years ended December 31, 2003, 2002 and 2001; and (ii) there were
no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.



PART III



Item 10. Directors and Executive Officers of the Company



The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors, which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of
our fiscal year.



Item 11. Executive Compensation



The information
required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors, which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of our fiscal year, except
for the information contained under such definitive proxy statement under the captions Board Compensation Committee Report on Executive Compensation and Performance Graph.



Item 12. Security Ownership of Certain Beneficial Owners and Management



The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors, which is expected to be filed by the Company pursuant to Regulation 14A,
within 120 days after the close of our fiscal year.



Item 13. Certain Relationships and Related Transactions



The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors, which is expected to be filed by the Company pursuant to Regulation 14A, within 120 days after the
close of our fiscal year.



26



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##### Table of Contents

Item 14. Controls and Procedures



Under the
supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of a date within 90
days of the filing date of this annual report, the evaluation date (Evaluation Date). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in
informing them of material information relating to the Company that is required to be included in our reports filed or submitted under the Exchange Act of 1934 (the Exchange Act). Since the Evaluation Date, there have been no significant
changes in our internal controls or in other factors that could significantly affect these controls.



Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding required disclosure.



PART IV



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



A. FINANCIAL STATEMENTS



Report
of Independent Accountants



Consolidated Balance Sheets as of
December 31, 2003 and 2002



Consolidated Statements of
Operations for the years ended December 31, 2003, 2002 and 2001



Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2003, 2002 and 2001



Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001



Notes to the Consolidated Financial Statements



Schedule III  Real estate and accumulated depreciation as of December 31, 2003



Schedule IV  Mortgage loans on real estate as of December 31, 2003



Schedules other than those listed above have been omitted
because they are not required, not applicable, or the required information is set forth in the financial statements or notes thereto.



27



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##### Table of Contents

B. Exhibits



|               |  |                                                                                                                                                                                                                                                                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|3.1            |  | Restated Certificate of Incorporation of Registrant filed February 23, 1971, Amendment filed August 12, 1987, and Amendment filed May 31, 1991. (Incorporated by reference to Exhibit 3A of
Registrants Quarterly Report on Form 10-Q for the second quarter of 1991, filed August 14, 1991.)                                                                                                
|               | 
|3.2            |  | Amended and Restated By-laws of Registrant. (Incorporated by reference to Exhibit 4 to Registrants Annual Report on Form 10-K for 2001, filed April 1, 2002.)                                                                                                                                                                                                                                
|               | 
|3.3            |  | First Amendment to Bresler & Reiner, Inc. Amended and Restated Bylaws of Registrant. (Incorporated by reference to Exhibit 3.3 of Registrants Report on Form 10-K for 2002, filed
March 31, 2003.)                                                                                                                                                                                           
|               | 
|3.4            |  | Second Amendment to Bresler & Reiner, Inc. Amended and Restated Bylaws of Registrant. (Incorporated by reference to Exhibit 3.2 to Registrants Current Report on Form 8-K filed
February 26, 2003.)                                                                                                                                                                                          
|               | 
|9.1            |  | First Amended and Restated Shareholders Agreement, dated as of July 31, 2002, by and between Bresler Family Investors, LLC, Burton J. Reiner and Anita O. Reiner, Joint Tenants, Burton and
Anita Reiner Charitable Remainder Unitrust and Registrant. (Incorporated by reference to Exhibit 2.5 to Registrants Current Report on Form 8-K, filed August 8, 2002.)                           
|               | 
|9.2            |  | Second Amended and Restated Shareholders Agreement, dated as of February 21, 2003, by and among Bresler Family Investors, LLC, Burton J. Reiner and Anita O. Reiner, husband and wife as joint
tenants, Burton and Anita Reiner Charitable Remainder Unitrust and Registrant. (Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K, filed February 26, 2003.)
|               | 
|10.1           |  | Agreement of Sale and Purchase dated May 14. 2001 between ASP Washington, L.L.C. and ASP Washington Development, L.L.C., and Cohen Companies, LLC. (Filed herewith.) .                                                                                                                                                                                                                        
|               | 
|10.2           |  | Membership Interest Purchase Agreement dated May 6, 2003 by and among KGH Corporation, Victoria Place Apartments, Ltd. and Osprey Capital, Inc., P.A.C. Land Development Corporation and
Bresler & Reiner, Inc. (Filed herewith.)                                                                                                                                                             
|               | 
|10.3           |  | Purchase and Sale Agreement dated June 6, 2003 between Fountain Ponds, LLC and Bresler & Reiner, Inc. (Filed herewith.)                                                                                                                                                                                                                                                                       
|               | 
|16.1           |  | Letter from Arthur Andersen LLP to the SEC dated June 27, 2002 regarding the change in certifying accountants. (Incorporated by reference to Exhibit 16 to Registrants Current Report on
Form 8-K, filed June 27, 2002.)                                                                                                                                                                     
|               | 
|21             |  | Subsidiaries of the Registrant. (Filed herewith.)                                                                                                                                                                                                                                                                                                                                             
|               | 
|31.1           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from Sidney M. Bresler, Chief Executive Officer. (Filed herewith.)                                                                                                                                                                                                                                                    
|               | 
|31.2           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from Darryl M. Edelstein, Chief Financial Officer. (Filed herewith.)                                                                                                                                                                                                                                                  
|               | 
|32             |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from Sidney M. Bresler, Chief Executive Officer and Darryl M. Edelstein, Chief Financial Officer. (Filed
herewith.)                                                                                                                                                                                                   



C. Reports on Form 8-K



We filed one report on
Form 8-K during the fourth quarter of 2003.



On December 9, 2003, we filed a
Report on Form 8-K/A for the purpose of amending the Form 8-K filed on September 29, 2003 that provided certain information regarding our acquisition of the Fountains at Waterford Lakes.



Shareholders may obtain a copy of any financial statement schedules and any exhibits filed with Form 10-K by writing to: Mr. Darryl M.
Edelstein, 11140 Rockville Pike, Suite 620, Rockville, MD 20852. Mr. Edelstein will advise shareholders of the fee for any exhibit.



28



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2004.



BRESLER & REINER, INC.By:

/s/    SIDNEY M.
BRESLERSidney M. Bresler Chief Executive OfficerBy:

/s/    DARRYL M.
EDELSTEINDarryl M. Edelstein Chief Financial Officer




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 Company and in the capacities indicated on March 30, 2004.



|                                                  |  |                                                                   
|------------------------------------------------- |  | ------------------------------------------------------------------
|                                                  | 
|/s/    SIDNEY M.
BRESLERSidney M.
Bresler         |  | Chief Executive Officer, Director                                 
|                                                  | 
|/s/    DARRYL M.
EDELSTEINDarryl M.
Edelstein     |  | Chief Financial Officer (Principal Financial & Accounting Officer)
|                                                  | 
|/s/    BENJAMIN C.
AUGERBenjamin C.
Auger         |  | Director                                                          
|                                                  | 
|/s/    CHARLES S.
BRESLERCharles S.
Bresler       |  | Director                                                          
|                                                  | 
|/s/    GARY F.
BULMASHGary F.
Bulmash             |  | Director                                                          
|                                                  | 
|Ralph S. Childs, Jr.                              |  | Director                                                          
|                                                  | 
|/s/    MICHAEL W.
MALAFRONTEMichael W.
Malafronte |  | Director                                                          
|                                                  | 
|/s/    BURTON J.
REINERBurton J.
Reiner           |  | Director                                                          
|                                                  | 
|/s/    RANDALL L.
REINERRandall L.
Reiner         |  | Director                                                          
|                                                  | 
|George W. Huguely, III                            |  | Director                                                          



29



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##### Table of Contents

BRESLER & REINER, INC.



FINANCIAL STATEMENTS



YEARS ENDED DECEMBER 31, 2003 and 2002



CONTENTS



|                                                           |  |    
|---------------------------------------------------------- |  | ---
|Report of Independent Auditors                             |  | F-1
|Audited Financial Statements                               |  |    
|Consolidated Balance Sheets                                |  | F-2
|Consolidated Statements of Operations                      |  | F-3
|Consolidated Statements of Changes in Shareholders Equity |  | F-4
|Consolidated Statements of Cash Flows                      |  | F-5
|Notes to Consolidated Financial Statements                 |  | F-6



---

##### Table of Contents

Report of Independent Auditors



To the Shareholders of Bresler & Reiner, Inc.



We have audited the accompanying consolidated balance sheets of Bresler & Reiner, Inc. (a Delaware corporation, the Company) as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at
Item 15(a). These consolidated financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.



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



In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bresler & Reiner Inc., at December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements, taken as a whole, present fairly, in all material respects, the information set forth therein.





/s/ Ernst & Young LLP





McLean, Virginia



March 26, 2004



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##### Table of Contents

Bresler & Reiner, Inc.



CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002



|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                 |  | December 31,2003 |             |   | December 31,2002 |  
|ASSETS                                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Real Estate:                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Rental property and equipment                                                                                                                                    |  | $                | 201,703,000 |   |                  | $ | 112,991,000 |  
|Property and land development                                                                                                                                    |  |                  | 22,127,000  |   |                  |   |            |  
|Land held for investment and homes held for sale                                                                                                                 |  |                  | 3,231,000   |   |                  |   | 3,103,000   |  
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Real estate, at cost                                                                                                                                             |  |                  | 227,061,000 |   |                  |   | 116,094,000 |  
|Less: accumulated depreciation                                                                                                                                   |  |                  | (24,278,000 | ) |                  |   | (20,009,000 | )
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Total real estate, net                                                                                                                                           |  |                  | 202,783,000 |   |                  |   | 96,085,000  |  
|                                                                                                                                                                 |  |                 
|Assets held for sale, net                                                                                                                                        |  |                  | 1,669,000   |   |                  |   | 3,630,000   |  
|                                                                                                                                                                 |  |                 
|Receivables:                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Income taxes receivable                                                                                                                                          |  |                  | 3,881,000   |   |                  |   | 1,096,000   |  
|Mortgage and notes receivables, affiliates                                                                                                                       |  |                  | 2,276,000   |   |                  |   | 2,433,000   |  
|Mortgage and notes receivables, other                                                                                                                            |  |                  | 5,718,000   |   |                  |   | 4,222,000   |  
|Other receivables                                                                                                                                                |  |                  | 4,068,000   |   |                  |   | 3,315,000   |  
|                                                                                                                                                                 |  |                 
|Cash and cash equivalents                                                                                                                                        |  |                  | 13,561,000  |   |                  |   | 7,084,000   |  
|Restricted cash and deposits held in escrow                                                                                                                      |  |                  | 12,868,000  |   |                  |   | 4,069,000   |  
|Investments                                                                                                                                                      |  |                  | 52,635,000  |   |                  |   | 75,835,000  |  
|Investment in and advances to joint ventures                                                                                                                     |  |                  | 35,230,000  |   |                  |   | 36,649,000  |  
|Deferred charges and other assets, net                                                                                                                           |  |                  | 13,237,000  |   |                  |   | 9,074,000   |  
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Total assets                                                                                                                                                     |  | $                | 347,926,000 |   |                  | $ | 243,492,000 |  
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|                                                                                                                                                                 |  |                 
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                             |  |                  |             |   |                  |   |             |  
|Liabilities:                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Mortgage and construction loans and other debt                                                                                                                   |  | $                | 183,142,000 |   |                  | $ | 100,586,000 |  
|Accounts payable, trade and accrued expenses                                                                                                                     |  |                  | 7,202,000   |   |                  |   | 5,569,000   |  
|Deferred income taxes payable                                                                                                                                    |  |                  | 9,773,000   |   |                  |   | 4,681,000   |  
|Other liabilities                                                                                                                                                |  |                  | 3,927,000   |   |                  |   | 814,000     |  
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                |  |                  | 204,044,000 |   |                  |   | 111,650,000 |  
|                                                                                                                                                                 |  |                 
|Minority interest                                                                                                                                                |  |                  | 15,787,000  |   |                  |   | 13,328,000  |  
|                                                                                                                                                                 |  |                 
|Shareholders equity:                                                                                                                                            |  |                  |             |   |                  |   |             |  
|Common shares, $0.01 par value; 4,000,000 shares authorized; 2,893,653 shares issued; 2,738,606 shares outstanding as of December 31, 2003 and
December 31, 2002 |  |                  | 28,000      |   |                  |   | 28,000      |  
|Additional paid-in capital                                                                                                                                       |  |                  | 7,565,000   |   |                  |   | 7,565,000   |  
|Retained earnings                                                                                                                                                |  |                  | 122,319,000 |   |                  |   | 112,738,000 |  
|Treasury stock (101,047 shares as of December 31, 2003 and December 31, 2002)                                                                                    |  |                  | (1,817,000  | ) |                  |   | (1,817,000  | )
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Total shareholders' equity                                                                                                                                       |  |                  | 128,095,000 |   |                  |   | 118,514,000 |  
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Total liabilities and shareholders' equity                                                                                                                       |  | $                | 347,926,000 |   |                  | $ | 243,492,000 |  
|                                                                                                                                                                 |  |                  |             |   |                  |   |             |  



See
Notes to Consolidated Financial Statements



F-2



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##### Table of Contents

|                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------
|BRESLER & REINER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and
2001



|                                                             |  |      |            |   |      |   |            |  |   |           
|------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- |  | - | ----------
|                                                             |  | 2003 |            |   | 2002 |   | 2001      
|REVENUES                                                     |  |      |            |   |      |   |            |  |   |           
|Homebuilding, residential lots and other construction        |  | $    | 1,633,000  |   |      | $ | 8,176,000  |  | $ | 4,965,000 
|Rentals  Commercial                                         |  |      | 15,503,000 |   |      |   | 33,975,000 |  |   | 31,256,000
|Rentals  Residential                                        |  |      | 4,592,000  |   |      |   | 1,578,000  |  |   | 1,521,000 
|Hospitality                                                  |  |      | 7,896,000  |   |      |   | 7,571,000  |  |   | 7,711,000 
|Management fees, affiliates                                  |  |      | 365,000    |   |      |   | 527,000    |  |   | 419,000   
|Interest                                                     |  |      | 2,041,000  |   |      |   | 2,738,000  |  |   | 3,030,000 
|Income from equity investments                               |  |      | 1,725,000  |   |      |   | 1,607,000  |  |   | 130,000   
|Other                                                        |  |      | 948,000    |   |      |   | 663,000    |  |   | 707,000   
|                                                             |  |      |            |   |      |   |            |  |   |           
|                                                             |  |      | 34,703,000 |   |      |   | 56,835,000 |  |   | 49,739,000
|                                                             |  |      |            |   |      |   |            |  |   |           
|COSTS AND EXPENSES                                           |  |      |            |   |      |   |            |  |   |           
|Cost of homebuilding, residential lots and other development |  |      | 1,650,000  |   |      |   | 7,259,000  |  |   | 4,802,000 
|Rental expense  commercial                                  |  |      |            |   |      |   |            |  |   |           
|Operating expenses                                           |  |      | 6,622,000  |   |      |   | 10,460,000 |  |   | 9,637,000 
|Depreciation and amortization expense                        |  |      | 4,190,000  |   |      |   | 4,323,000  |  |   | 3,232,000 
|Rental expense  residential                                 |  |      |            |   |      |   |            |  |   |           
|Operating expenses                                           |  |      | 2,107,000  |   |      |   | 1,056,000  |  |   | 915,000   
|Depreciation and amortization expense                        |  |      | 1,025,000  |   |      |   | 218,000    |  |   | 170,000   
|Hospitality expense                                          |  |      |            |   |      |   |            |  |   |           
|Operating expenses                                           |  |      | 5,236,000  |   |      |   | 4,751,000  |  |   | 4,758,000 
|Depreciation and amortization expense                        |  |      | 863,000    |   |      |   | 834,000    |  |   | 827,000   
|General and administrative expense                           |  |      | 3,762,000  |   |      |   | 3,497,000  |  |   | 2,172,000 
|Interest expense                                             |  |      | 8,025,000  |   |      |   | 7,078,000  |  |   | 2,000,000 
|Minority interest                                            |  |      | 49,000     |   |      |   | 6,422,000  |  |   | 7,225,000 
|Other expenses                                               |  |      | 14,000     |   |      |   | 3,115,000  |  |   | 262,000   
|                                                             |  |      |            |   |      |   |            |  |   |           
|                                                             |  |      | 33,543,000 |   |      |   | 49,013,000 |  |   | 36,000,000
|                                                             |  |      |            |   |      |   |            |  |   |           
|Income before income taxes and discontinued operations       |  |      | 1,160,000  |   |      |   | 7,822,000  |  |   | 13,739,000
|Provision (benefit) for income taxes                         |  |      | (589,000   | ) |      |   | 2,602,000  |  |   | 4,243,000 
|                                                             |  |      |            |   |      |   |            |  |   |           
|Income from continuing operations                            |  |      | 1,749,000  |   |      |   | 5,220,000  |  |   | 9,496,000 
|Income from discontinued operations, net of tax              |  |      | 7,832,000  |   |      |   | 866,000    |  |   | 720,000   
|                                                             |  |      |            |   |      |   |            |  |   |           
|Net income                                                   |  | $    | 9,581,000  |   |      | $ | 6,086,000  |  | $ | 10,216,000
|                                                             |  |      |            |   |      |   |            |  |   |           
|Income from continuing operations per common share           |  | $    | 0.64       |   |      | $ | 1.90       |  | $ | 3.47      
|                                                             |  |      |            |   |      |   |            |  |   |           
|Income from discontinued operations per common share         |  | $    | 2.86       |   |      | $ | 0.32       |  | $ | 0.26      
|                                                             |  |      |            |   |      |   |            |  |   |           
|Net income per common share                                  |  | $    | 3.50       |   |      | $ | 2.22       |  | $ | 3.73      
|                                                             |  |      |            |   |      |   |            |  |   |           
|Weighted average number of common shares outstanding         |  |      | 2,738,606  |   |      |   | 2,738,751  |  |   | 2,738,906 
|                                                             |  |      |            |   |      |   |            |  |   |           



See
Notes to Consolidated Financial Statements



F-3



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##### Table of Contents

RESLER & REINER, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE YEARS
ENDED DECEMBER 31, 2003, 2002 AND 2001



|                           |  |              |        |                         |   |                   |  |                |             |  |                            |            |   |  |   |             |  
|-------------------------- |  | ------------ | ------ | ----------------------- | - | ----------------- |  | -------------- | ----------- |  | -------------------------- | ---------- | - |  | - | ----------- | -
|                           |  | COMMON STOCK |        | CAPITALIN EXCESS OF PAR |   | RETAINED EARNINGS |  | TREASURY STOCK |             |  | TOTAL SHAREHOLDERS' EQUITY |           
|Balance, December 31, 2000 |  | $            | 28,000 |                         | $ | 7,565,000         |  | $              | 96,436,000  |  | $                          | (1,804,000 | ) |  | $ | 102,225,000 |  
|                           |  |              |        |                         |  
|Net income                 |  |              |       |                         |   |                  |  |                | 10,216,000  |  |                            |           |   |  |   | 10,216,000  |  
|                           |  |              |        |                         |   |                   |  |                |             |  |                            |            |   |  |   |             |  
|Balance, December 31, 2001 |  |              | 28,000 |                         |   | 7,565,000         |  |                | 106,652,000 |  |                            | (1,804,000 | ) |  |   | 112,441,000 |  
|                           |  |              |        |                         |  
|Net income                 |  |              |       |                         |   |                  |  |                | 6,086,000   |  |                            |           |   |  |   | 6,086,000   |  
|                           |  |              |        |                         |  
|Purchase of treasury stock |  |              |       |                         |   |                  |  |                |            |  |                            | (13,000    | ) |  |   | (13,000     | )
|                           |  |              |        |                         |   |                   |  |                |             |  |                            |            |   |  |   |             |  
|                           |  |              |        |                         |  
|Balance, December 31, 2002 |  |              | 28,000 |                         |   | 7,565,000         |  |                | 112,738,000 |  |                            | (1,817,000 | ) |  |   | 118,514,000 |  
|                           |  |              |        |                         |  
|Net income                 |  |              |       |                         |   |                  |  |                | 9,581,000   |  |                            |           |   |  |   | 9,581,000   |  
|                           |  |              |        |                         |   |                   |  |                |             |  |                            |            |   |  |   |             |  
|                           |  |              |        |                         |  
|Balance, December 31, 2003 |  | $            | 28,000 |                         | $ | 7,565,000         |  | $              | 122,319,000 |  | $                          | (1,817,000 | ) |  | $ | 128,095,000 |  
|                           |  |              |        |                         |   |                   |  |                |             |  |                            |            |   |  |   |             |  







See Notes to Consolidated Financial Statements



F-4



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##### Table of Contents

BRESLER & REINER, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002



|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                            |  | 2003 |             |   | 2002 |   |             | 2001 | 
|OPERATING ACTIVITIES:                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                                  |  | $    | 9,581,000   |   |      | $ | 6,086,000   |      |  | $ | 10,216,000  |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                               |  |      | 7,554,000   |   |      |   | 6,110,000   |      |  |   | 4,680,000   |  
|Gain on sale of properties and realty interests                                             |  |      | (11,990,000 | ) |      |   | (330,000    | )    |  |   | (109,000    | )
|Income from equity investments                                                              |  |      | (1,725,000  | ) |      |   | (1,607,000  | )    |  |   | (130,000    | )
|Minority interest expense                                                                   |  |      | 49,000      |   |      |   | 6,422,000   |      |  |   | 7,225,000   |  
|Deferred income taxes                                                                       |  |      | 5,092,000   |   |      |   | (1,081,000  | )    |  |   | (599,000    | )
|Amortization of finance costs                                                               |  |      | 472,000     |   |      |   | 450,000     |      |  |   | 180,000     |  
|Asset impairment write-down                                                                 |  |      |            |   |      |   | 891,000     |      |  |   |            |  
|Changes in assets and liabilities:                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|(Increase) decrease in:                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|Residential building and lot development                                                    |  |      | (7,774,000  | ) |      |   |            |      |  |   |            |  
|Cost of homebuilding and land development                                                   |  |      | 1,560,000   |   |      |   | 3,232,000   |      |  |   | (1,244,000  | )
|Assets held for sale, net                                                                   |  |      | (36,000     | ) |      |   | 477,000     |      |  |   | 520,000     |  
|Restricted cash                                                                             |  |      | (4,384,000  | ) |      |   | 1,993,000   |      |  |   | 2,837,000   |  
|Receivables                                                                                 |  |      | (3,518,000  | ) |      |   | (135,000    | )    |  |   | 3,379,000   |  
|Other assets                                                                                |  |      | (3,222,000  | ) |      |   | 3,987,000   |      |  |   |            |  
|Other liabilities                                                                           |  |      | 1,871,000   |   |      |   | 38,000      |      |  |   | 1,067,000   |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Total adjustments                                                                           |  |      | (16,051,000 | ) |      |   | 20,447,000  |      |  |   | 17,806,000  |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash (used in) provided by operating activities                                         |  |      | (6,470,000  | ) |      |   | 26,533,000  |      |  |   | 28,022,000  |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                                            |  |      |            
|INVESTING ACTIVITIES:                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Distributions from (investment in) joint ventures                                           |  |      | 3,144,000   |   |      |   | (23,441,000 | )    |  |   | 2,070,000   |  
|Deposits for property acquisitions                                                          |  |      | (2,044,000  | ) |      |   |            |      |  |   |            |  
|Decrease (increase) in investments in municipal bonds                                       |  |      | 23,200,000  |   |      |   | (16,758,000 | )    |  |   | (17,542,000 | )
|Proceeds from sale of properties and realty interests                                       |  |      | 13,804,000  |   |      |   |            |      |  |   |            |  
|Purchase of rental property, equipment and other                                            |  |      | (64,039,000 | ) |      |   | (11,533,000 | )    |  |   | (44,955,000 | )
|Purchase of property and land held for development                                          |  |      | (4,735,000  | ) |      |   | 340,000     |      |  |   | (9,917,000  | )
|Increase in notes receivable                                                                |  |      | (1,339,000  | ) |      |   |            |      |  |   | (4,000,000  | )
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                                       |  |      | (32,009,000 | ) |      |   | (51,392,000 | )    |  |   | (74,344,000 | )
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                                            |  |      |            
|FINANCING ACTIVITIES:                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Proceeds from real estate and other loans                                                   |  |      | 51,306,000  |   |      |   | 44,410,000  |      |  |   | 59,100,000  |  
|Repayment of notes and real estate loans payable                                            |  |      | (1,201,000  | ) |      |   | (8,420,000  | )    |  |   | (5,977,000  | )
|Deposits held in escrow                                                                     |  |      | (4,415,000  | ) |      |   | (1,581,000  | )    |  |   | (930,000    | )
|Distribution to minority partners                                                           |  |      | (123,000    | ) |      |   | (560,000    | )    |  |   | (3,777,000  | )
|Increase in deferred charges                                                                |  |      | (611,000    | ) |      |   | (5,022,000  | )    |  |   | (4,900,000  | )
|Purchase of treasury stock                                                                  |  |      |            |   |      |   | (13,000     | )    |  |   |            |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                   |  |      | 44,956,000  |   |      |   | 28,814,000  |      |  |   | 43,516,000  |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                        |  |      | 6,477,000   |   |      |   | 3,955,000   |      |  |   | (2,806,000  | )
|Cash and cash equivalents, beginning of year                                                |  |      | 7,084,000   |   |      |   | 3,129,000   |      |  |   | 5,935,000   |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, end of period                                                    |  | $    | 13,561,000  |   |      | $ | 7,084,000   |      |  | $ | 3,129,000   |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                                            |  |      |            
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Cash paid during the year for:                                                              |  |      |             |   |      |   |             |      |  |   |             |  
|Interest (net of amount capitalized)                                                        |  | $    | 8,673,000   |   |      | $ | 7,017,000   |      |  | $ | 1,953,000   |  
|Income taxes (current and estimated)                                                        |  |      | 2,241,000   |   |      |   | 5,974,000   |      |  |   | 1,836,000   |  
|                                                                                            |  |      |            
|SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Acquisition of Sarnia liabilities and mortgage note payable                                 |  |      |            |   |      |   | 12,796,000  |      |  |   |            |  
|Contribution of Waterfront Complex to Waterfront Associates LLC                             |  |      |            |   |      |   | 9,913,000   |      |  |   |            |  
|Debt assumed on Clarksburg Ridge acquisition                                                |  |      | 4,338,000   |   |      |   |            |      |  |   |            |  
|Deposit liability assumed on Clarksburg Ridge acquisition                                   |  |      | 2,875,000   |   |      |   |            |      |  |   |            |  
|Debt assumed on Fountains acquisition                                                       |  |      | 24,846,000  |   |      |   |            |      |  |   |            |  



See Notes to
Consolidated Financial Statements









F-5



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



BASIS OF PRESENTATION AND ORGANIZATION



Bresler & Reiner, Inc. (B&R and, together with its subsidiaries and affiliates, we, the Company or us) engages in
the acquisition, development, ownership, and management of commercial and residential real estate located in the Washington, DC, Orlando, Florida and Philadelphia, Pennsylvania metropolitan areas. In addition, we participate in hotel ownership and
management activities in the Washington, DC area.



PRINCIPLES OF
CONSOLIDATION



Our consolidated financial statements include the accounts
of Bresler & Reiner, Inc., our wholly owned subsidiaries, and entities which we control or, for entities created after January 31, 2003, entities that are required to be consolidated under Financial Accounting Standards Board Interpretation No.
46 (FIN 46). Entities which we do not control, or entities created after January 31, 2003 that are not required to be consolidated under FIN 46, are accounted for under the equity method.



All significant intercompany balances and transactions have been eliminated in consolidation.



REVENUE RECOGNITION



Real estate sales Gains on sales of homes and land parcels are recognized pursuant to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sales of Real Estate. Revenues and cost of sales are recorded at the time each home or land parcel is closed and title and possession
have been transferred to the buyer. Homebuilding and related costs are charged to the cost of the homes closed under the specific identification method. Land development costs are charged to the cost of land parcels closed on a relative sales value
basis.



Leasing operationsWe recognize revenue in accordance with SFAS
No. 13, Accounting for Leases. SFAS No. 13 requires that revenue be recognized on a straight-line basis over the term of the lease.



Hospitality revenueWe recognize hospitality revenue as services are provided.



Rental, construction and management feesWe generally recognize rental, construction and management fees as services are provided.



RENTAL PROPERTY AND EQUIPMENT



Rental property and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets, generally 40 years for buildings and three to 10 years for furniture, fixtures and equipment. Replacements and renovations that extend the useful life of an asset are
capitalized and depreciated over their estimated useful lives. Tenant improvements are capitalized and depreciated over the shorter of the terms of the respective tenants lease or estimated useful life. Depreciation expense for 2003, 2002 and
2001 was $6,312,000, $5,012,000 and $4,680,000, respectively.



In accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded
based upon the difference between the carrying value of the asset and the fair value.



During 2002, we identified impairment indicators for certain long-lived assets resulting in charges of approximately $891,000 based upon internal management projections of future cash flows. Of the total, $694,000 represents an impairment
charge against our investment in Tech-High Leasing Company, a joint venture in which we own a 50% interest. Tech-High holds an investment in a partnership that owns an office building in Dallas, Texas. The balance of the impairment charge relates to
vacant buildings owned by us, on which we do not expect to recover our carrying value in the foreseeable future. The impairment charges are included in other expenses in the consolidated statement of operations. There were no impairment charges
recorded in 2003.



F-6



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



PROPERTY AND LAND DEVELOPMENT



When construction commences, costs are transferred to property and land development where they are accumulated by project. Project costs
included in property and land development include interest on construction loans, property taxes, materials and labor. These costs are charged to costs of homes and lots sold on a pro rata basis as properties and lots are sold, in accordance with
SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects. We review our accumulated costs to ensure that any costs in excess of net realizable value are charged to operations when identified.



LAND HELD FOR INVESTMENT



Land held for investment is recorded at the lower of cost or estimated fair value less cost
to sell.



INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND PARTNERSHIPS



For entities created prior to January 31, 2003, or entities that are not
deemed to be variable interest entities (VIEs), as set forth in FIN46 Consolidation of Variable Interest Entities, we account for our investments in non-consolidated partnerships and joint ventures in accordance with
Statement of Position 78-9, Accounting for Investments in Real Estate Ventures and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.



For entities that we control we consolidate the investment and a minority interest is
recognized in our consolidated financial statements. Minority interest in the balance sheet represents the minority owners share of equity as of the balance sheet date; minority interest expense in the income statement represents the minority
owners share of the income or loss of the consolidated joint venture. For entities that we do not control we account for our investment using the equity method of accounting and do not consolidate the investment. We evaluate control primarily
based on the investors relative voting rights in the joint venture.



For
entities created after January 31, 2003, that are deemed to be VIEs, we account for our investments in joint ventures in accordance with FIN 46. If we are the primary beneficiary through being subject to a majority of the potential variability
in gains or losses of the VIE (with the primary focus on losses), then we consolidate our investment in the joint venture. If we are not the primary beneficiary, then we account for our investment by the equity method.



INVESTMENTS



Investments consist principally of investments in municipal instruments. At December 31, 2003 and December 31, 2002, the total of these
investments that were short term in nature with maturities of less than one year, were $43,392,000 and $75,095,000, respectively. The fair value of these instruments approximates carrying value at year-end. There were no unrealized gains or losses
in 2003 or 2002.



CASH AND CASH EQUIVALENTS



We consider all highly liquid investments purchased with an original maturity of three
months or less at the date of purchase to be cash equivalents.



F-7



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



RESTRICTED CASH AND CASH DEPOSITS HELD IN ESCROW



Cash deposits held in escrow include: escrow balances funded in accordance with lender
requirements, including escrows for real estate taxes, insurance, replacement reserves, and lease reserves; deposits held in escrow for tenants; deposits on homes held for sale; and loan funds held back by a lender pending the successful achievement
of various coverage targets and occupancy statistics.



DEFERRED CHARGES AND
OTHER ASSETS



Included in deferred charges are fees incurred in connection
with obtaining financing for our real estate. These fees are deferred and amortized as a part of interest expense over the term of the related debt instrument on a straight-line basis, which approximates the effective interest method. In addition,
deferred costs include leasing charges, comprised of tenant allowances and lease commissions incurred to originate a lease, which are amortized on a straight-line basis over the term of the related lease.



The application of SFAS No. 141 Business Combinations and SFAS No. 142
Goodwill and Other Intangible Assets (together SFAS Nos. 141 and 142) to real estate acquisitions requires us to allocate the purchase price of acquisitions to acquired in-place leases in addition to land, building and
improvements. In order to determine the value to be allocated to the acquired leases, we are required to make several assumptions regarding the relative value of the in-place leases when compared to the current market. Some of the judgments required
as a part of this exercise include (1) determining the market rental rates of the acquired leases, (2) estimating the market value of concessions (rent abatements, tenant improvement allowances, etc.) and leasing commissions to be paid on new
leases, (3) estimating the lease-up period required to achieve the occupancy levels that the property has at the time of the acquisition, and (4) applying an estimated risk-adjusted discount rate to the existing tenants. As a result of adopting SFAS
Nos. 141 and 142, we have intangible lease assets totaling $6,911,000 and $4,557,000 at December 31, 2003 and December 31, 2002, respectively, related to the fair value of acquired leases. The lease intangibles are amortized on a straight-line basis
over the lives of the acquired leases and are recorded as a reduction in rental income. The amortization of in-place leases totaled $1,242,000 and $1,098,000 for 2003 and 2002, respectively.



Also included in other assets are deposits for properties acquired in the first quarter of
2004 of approximately $2,044,000.



USE OF ESTIMATES



The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the stated amounts of assets, liabilities, revenues, and expenses presented in the financial statements, as well as the disclosures relating to
contingent liabilities. Consequently, actual results could differ from those estimates that have been reported in our financial statements.



RECLASSIFICATIONS



Certain amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.



INCOME TAXES



SFAS No. 109, Accounting for Income Taxes, is applied in calculating our provision for income taxes. As prescribed therein, the provision for income tax is based on both current and deferred taxes. Current
taxes represent the estimated taxes payable or refundable in the current year, and deferred taxes represent estimated future tax effects attributable to temporary differences and loss carryforwards. Nontaxable income, such as interest on state and
municipal securities, is excluded from the provision calculation.



Deferred
income taxes result principally from temporary differences related to the timing of (1) the recognition of real estate sales, lease income, interest expense, and real estate taxes during development and (2) depreciation for tax and financial
reporting purposes.



EARNINGS PER SHARE



We have no dilutive securities; therefore, basic and fully diluted earnings per share are
identical. Earnings per common share are based upon the weighted-average number of shares outstanding during each year (2,738,606 shares in 2003, 2,738,751 shares in 2002 and 2,738,906 shares in 2001).



COMPREHENSIVE INCOME



Except for net income, we do not have any items impacting comprehensive income. Therefore, comprehensive income and net income are the same.



2. NEW ACCOUNTING PRONOUNCEMENTS



Financial Accounting Standard No. 150 In May 2003, the FASB issued SFAS No.
150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes standards for how an issuer classifies and measures in its financial statements certain financial instruments
with characteristics of both liabilities and equity. With the exception of certain financial measurement criteria deferred indefinitely by the FASB, SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150 had no impact on our
financial condition or results of operations.



FASB Interpretation No. 46
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities to expand upon and strengthen existing accounting guidance that address when a company should include the assets, liabilities and activities
of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities (VIEs), FIN 46 requires that a VIE be consolidated by a company if that company is the primary
beneficiary through being subject to a majority of the potential variability in gains or losses of the VIE (with the primary focus on losses). Prior to FIN 46, a company generally included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003.



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BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



For entities created prior to January 31, 2003, that are not deemed to be special purpose entities, the effective
date of FIN 46 is the first interim or annual period ending after March 15, 2004. If it is reasonably possible that a company will consolidate or disclose information about a VIE when this interpretation becomes effective, certain disclosures are
required in all financial statements issued after January 31, 2003. We are an investor in several joint ventures or partnerships, which were created prior to January 31, 2003. In instances where we have a controlling interest in an entity we
consolidate the entity. We are currently reviewing the application of FIN 46 to these investments in order to determine whether we will be required to consolidate any of these joint ventures into our financial statements. The consolidation of any of
our equity investments under FIN 46 may have a significant impact on our balance sheet and the presentation of our results of operations. Footnote number 6 below provides summary financial statements of all of our equity investments that may be
subject to consolidation under FIN 46.



Financial Accounting Standard Board
Interpretation No. 45 In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 clarifies the requirements relating to a guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that guarantee. FIN 45s provisions for initial recognition and measurement are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on our consolidated financial statements.



Financial Accounting Standards No. 144  Effective January 1, 2002, we adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. Among other
things, SFAS No. 144 establishes criteria for classifying a component of an entity as discontinued operations. We have reported the operations of our properties meeting the criteria of SFAS No. 144, as well as the gain on the
sale of these properties, as discontinued operations in our consolidated statements of operations for the periods presented.



3. SIGNIFICANT ACQUISITIONS



During 2003 and 2002 the Company entered into several material transactions as described below. All acquisitions of real estate and investments in joint ventures have
been included in our accompanying statements of operations from the date of the transaction forward.



900 Northbrook In November 2003, a joint venture, in which we own an 87.5% interest and two unaffiliated third parties own the balance, acquired a 66,285 square foot office building located in a commercial
office park in Trevose, Pennsylvania. The purchase price for the office building was $12,050,000. At the time of the acquisition, the joint venture placed a ten-year, 5.98% fixed-rate mortgage of $11,200,000 on the property. We invested $1,312,500
for our interest in the joint venture. We have consolidated the entitys assets and liabilities and results of operations in our consolidated financial statements. In accordance with the provisions of SFAS No. 141, we have reflected on our
balance sheet the fair value of the acquired in-place leases, which were determined to be $2,063,000.



900 Northbrook Development ParcelIn November 2003 we acquired for $2,000,000 a 9.6-acre tract of land adjacent to the 900 Northbrook building in the commercial office park in Trevose, Pennsylvania. We plan to
develop a commercial office building on the land.



The Fountains at
Waterford LakesIn September 2003 we acquired a 400 unit apartment community, located in Orange County, Florida, called The Fountains at Waterford Lakes (The Fountains). The purchase price of The Fountains was $35,100,000, which was
paid in part by the assumption of a $24,600,000 permanent, non-recourse mortgage on the property. The loan bears interest at 5.00% per annum and is non-amortizing, with the outstanding principal balance due and payable in December 2007. No
prepayments on the loan are permitted prior to December 2005. The remainder of the purchase price was paid in cash, $6,000,000 of which was funded through an unsecured loan to us. This non-amortizing loan bears interest at one month LIBOR plus 195
basis points per annum, matures in September 2005, and has no prepayment penalty. Covenants on the loan include requirements that we maintain, on a consolidated basis, a net worth of not less than $75,000,000, liquid assets (consisting of cash,
United States government securities and municipal bonds with investment grade credit ratings) of not less than $30,000,000 and net income per each fiscal year of not less than $3,000,000. In accordance with the provisions of SFAS No. 141, we have
reflected the fair value of the assumed loan, determined to be $24,846,000, on our consolidated balance sheet along with the fair value of the acquired in-place leases, which were determined to be $119,000.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



699 North Broad Street Associates, L.P.In August 2003 a joint venture, in which we own a 95% interest and two
unaffiliated third parties own the balance, acquired a historic building in Philadelphia, PA, called the Divine Lorraine, for a purchase price of $2,295,000. The joint venture plans to redevelop the building into a 135 unit rental apartment
property. We invested $2,375,000 for our interest in the joint venture. We have consolidated the entitys assets and liabilities in our consolidated financial statements.



Cigar Factory Apartments L.P.In July 2003, we invested $1,000,000 in exchange for a 66.7% interest in Cigar Factory Apartments L.P.
(Cigar Factory). Two unaffiliated third parties own the remaining 33.3% interest. Cigar Factory owns a warehouse in Philadelphia, PA, which will be redeveloped into a 32 unit for-sale condominium property, together with parking and
associated spaces. Cigar Factory has obtained an acquisition and construction loan in the amount of $5,370,000. We have provided a payment guarantee for 66.7% of the loan balance outstanding, with the remaining balance guaranteed by the other
members of Cigar Factory. We have consolidated the entitys assets and liabilities in our consolidated financial statements.



Selborne HouseIn July 2003, we invested $400,000 in exchange for a 33.3% interest in Selborne House at St. Marks Owner, LLC (Selborne House), which is
developing an 80 unit age-restricted apartment community in Montgomery County, Maryland. Two unaffiliated third parties own the remaining 66.7%. The development and construction of the community is being financed by a $7,100,000 construction loan.
We have provided an unconditional and irrevocable payment guaranty to the lender for 33.3% of the balance outstanding under the construction loan, which is also guaranteed by the other members of Selborne House. We have accounted for our investment
in the joint venture by the equity method in the accompanying consolidated financial statements.



Victoria Place Apartment, LLCIn July 2003, we invested $8,500,000 for an 85% membership interest in Victoria Place Apartments, LLC (Victoria Place). An unaffiliated investor acquired the remaining
15% membership interest as part of the same transaction. Victoria Place owns and operates a 364 unit apartment complex, which is located in Orange County, Florida. The purchase price for Victoria Place was $39,500,000. The balance of the purchase
price was funded by a $34,120,000 permanent, non-recourse ten-year mortgage on the property which bears interest at 4.72% per annum. At closing, $30,620,000 of the mortgage was disbursed and the remaining $3,500,000 was disbursed in February 2004,
upon the property achieving certain occupancy and debt service coverage targets. The February loan disbursement reduced our invested capital to $5,525,000. We have consolidated the entitys assets and liabilities and results of operations in
our consolidated financial statements. In accordance with the provisions of SFAS No. 141, we have reflected on our balance sheet the fair value of the acquired in-place leases, which were determined to be $172,000.



Clarksburg Ridge, LLCIn March 2003, we purchased a 100% interest in Clarksburg Ridge,
LLC (Clarksburg Ridge) for an aggregate purchase price of $12,200,000. Clarksburg Ridge owns a parcel of undeveloped residential land in Clarksburg, Maryland which is subdivided into 159 residential lots. Simultaneous with the
acquisition, we entered into an approximately $7,000,000 development management agreement with a third party for the site grading, sewer installation, street paving and other infrastructure. In July 2002, Clarksburg Ridge entered into a sales
contract with NVR, Inc. (NVR) that provides for the structured takedown of lots. With the execution of the sales contract, NVR paid Clarksburg Ridge a non-refundable deposit of $4,950,000. Also in July 2002, Clarksburg Ridge entered into
a loan agreement with Columbia Bank (the Bank) for the acquisition, development, interest reserve, and real estate taxes associated with the property. The purchase price of Clarksburg Ridge consisted of $5,000,000 in cash, the assumption
of the outstanding balance on the Bank loan of $4,200,000, and the application of $3,000,000 of deposit proceeds from NVR. The remaining $1,950,000 of the NVR deposit was refunded to NVR and an appropriate amendment was made in the NVR sales
contract.



Congressional SouthIn December 2002, we contributed
approximately $2,800,000 in exchange for a 25% interest in Congressional South Associates LLC (Congressional South). Unaffiliated third parties own the remaining 75% interest. Congressional South owns a shopping center containing
approximately 81,000 square feet located in Rockville, Maryland. In addition, it owns a parcel of ground adjacent to the shopping center that is leased on a net basis to an apartment developer who is currently constructing approximately 400
apartment units thereon. The unaffiliated third party members of the joint venture have an option to purchase our interest in the partnership for the original contributed capital plus a 20% return thereon, less any distributions paid through the
repurchase date. We have accounted for our investment in the joint venture by the equity method in our consolidated financial statements.



Madison Building In August 2002 a joint venture in which we have a 24.9% interest and unaffiliated third parties own the balance, acquired a 82,000 square foot
office building in McLean, Virginia. We invested $2,200,000 for our interest in the joint venture. We have accounted for our investment in the joint venture by the equity method in our consolidated financial statements.



1925 K StreetIn June 2002, 1925K Associates, LLC (1925 K), a joint
venture in which we own an 85% interest and an



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BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



unaffiliated third party owns the balance, acquired a 149,414 square foot office building located at 1925 K Street in
Northwest Washington, DCs central business district, for a purchase price of $27,150,000. We invested approximately $6,800,000 for our 85% interest the joint venture. At the time of the acquisition 1925K Street placed $20,437,500 of mortgage
debt on the property at a variable interest-rate of one month LIBOR plus 2.35%. The loan matures in 2007, however the borrower has the option to extend the loan for a two year period. We have provided a $4,342,970 payment guaranty on the loan. As
further conditions of the guaranty, we are required to maintain a consolidated net worth of not less than $25,000,000 and a minimum consolidated liquidity of at least $15,000,000. The lender has also placed two covenants on the loan: (1) principal
outstanding cannot exceed 75% of the current market value of the property, and (2) net operating income to interest expense must exceed 1.35 to 1.00. Since the other member of the joint venture has significant approval rights and day-to-day control
of 1925K, we have account for our investment under the equity method in our consolidated financial statements.



Versar Center In January 2002 we acquired two office buildings located in Springfield, Virginia, called the Versar Center. The purchase price was approximately $20,000,000. In December 2002 we placed a
ten-year, $18,500,000 mortgage loan, bearing interest at a fixed interest rate of 6.18 %, on the property. In accordance with SFAS No. 141, we have reflected on our consolidated balance sheet the fair value of the acquired in-place leases, which
were determined to be $828,000.



Pro-Forma Results of Operations 
UnauditedThe following unaudited pro-forma statements reflect our results of operations as if the acquisition of the above listed consolidated entities had occurred on the first day of 2002 (in thousands, except earnings per share amounts):



|                   |  |                                    |        |      |   |       
|------------------ |  | ---------------------------------- | ------ | ---- | - | ------
|                   |  | Pro-forma Years Ended December 31,
|                   |  | 2003                               |        | 2002
|Revenue            |  | $                                  | 40,201 |      | $ | 62,046
|Net income         |  | $                                  | 9,207  |      | $ | 5,415 
|Earnings per share |  | $                                  | 3.36   |      | $ | 1.98  



4. RENTAL PROPERTY AND EQUIPMENT
(in thousands):



|                                   |  |              |         |   |      |   |         |  
|---------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                   |  | December 31, |        
|                                   |  | 2003         |         |   | 2002 |  
|Land                               |  | $            | 27,826  |   |      | $ | 14,114  |  
|Buildings and improvements         |  |              | 167,202 |   |      |   | 94,161  |  
|Equipment                          |  |              | 6,675   |   |      |   | 4,716   |  
|                                   |  |              |         |   |      |   |         |  
|                                   |  |              | 201,703 |   |      |   | 112,991 |  
|LessAccumulated Depreciation      |  |              | (24,278 | ) |      |   | (20,009 | )
|                                   |  |              |         |   |      |   |         |  
|Rental property and equipment, net |  | $            | 177,425 |   |      | $ | 92,982  |  
|                                   |  |              |         |   |      |   |         |  



5. MORTGAGE AND NOTES RECEIVABLES



MORTGAGES AND NOTES, AFFILIATE (in thousands):



|                     |  |              |       |      |   |      
|-------------------- |  | ------------ | ----- | ---- | - | -----
|                     |  | December 31,
|                     |  | 2003         |       | 2002
|Mortgages and notes: |  |              |       |      |   |      
|Due 2009(1)          |  | $            | 1,216 |      | $ | 1,234
|Installment sales:   |  |              |       |      |   |      
|Due 2004(2)          |  |              | 1,060 |      |   | 1,199
|                     |  |              |       |      |   |      
|                     |  | $            | 2,276 |      | $ | 2,433
|                     |  |              |       |      |   |      



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BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---

(1)Amounts due in monthly installments of $11,200, including interest at 9.5% through 2009, with a final payment due in 2009 of approximately $1,074,000 from a
limited partnership in which we are the sole general partner and have a 1% interest. Certain of the Companys officers and directors own 8% of the limited partnership.

(2)Amounts due are net of deferred gains of $818,000 and $926,000 in 2003 and 2002,
respectively. The amounts are due in monthly installments of $36,600, including interest at 9.5% through 2004, with a final payment due in 2004 of approximately $1,735,000 from a limited partnership in which we are the sole general partner and have
a 1% interest. The building is pledged as collateral for the note with no further recourse to the partnership. Certain of the Companys officers and directors own 8% of the limited partnership.



MORTGAGES AND NOTES, OTHER (in thousands):



|                                                                                                 |  |              |       |      |   |      
|------------------------------------------------------------------------------------------------ |  | ------------ | ----- | ---- | - | -----
|                                                                                                 |  | December 31,
|                                                                                                 |  | 2003         |       | 2002
|Mortgages and notes:                                                                             |  |              |       |      |   |      
|Home sales, 8% to 12.5% due through 2020                                                         |  | $            |      |      | $ | 69   
|Condominium sales, 8% to 13%, net of deferred gain of $24 and $43 in 2003 and 2002, respectively |  |              | 23    |      |   | 42   
|Notes receivable:                                                                                |  |              |       |      |   |      
|7% to 12%, due through 2012                                                                      |  |              | 373   |      |   | 84   
|18% due through 2004                                                                             |  |              | 3,300 |      |   | 4,000
|16% due through 2004                                                                             |  |              | 2,000 |      |   |     
|Tenant improvements, 10%, due through 2004                                                       |  |              | 22    |      |   | 27   
|                                                                                                 |  |              |       |      |   |      
|                                                                                                 |  | $            | 5,718 |      | $ | 4,222
|                                                                                                 |  |              |       |      |   |      



All mortgages are collateralized by
first trusts on real estate property.



6. INVESTMENTS IN AND ADVANCES TO
JOINT VENTURES AND PARTNERSHIPS



At December 31, 2003, our investments in
non-consolidated joint ventures and partnerships consisted of the following:



|                              |  |                      |  
|----------------------------- |  | -------------------- | -
|JOINT VENTURE OR PARTNERSHIP  |  | OWNERSHIP PERCENTAGE |  
|WBP Undeveloped Land          |  | 80                   | %
|1925 K Street                 |  | 85                   | %
|Madison Building              |  | 25                   | %
|Waterfront Associates         |  | 92                   | %
|Congressional South           |  | 25                   | %
|Selborne House                |  | 33                   | %
|Redwood Commercial Management |  | 50                   | %
|Tech-High Leasing             |  | 50                   | %
|Builders Leasing              |  | 20                   | %
|Third Street SW Investors     |  | 1                    | %



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BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Below are condensed balance sheets for our unconsolidated joint venture entities as of December 31, 2003 and 2002 (in
thousands):



|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|------------------------------------- |  | ----------------- | ------ | --------------- | - | ------------------ |  | ------------------ | ------ | -------------------- | - | --------- |  | - | ------ |  | - | ------ | - |  | - | -------
|                                      |  | DECEMBER 31, 2003
|                                      |  | 1925 KStreet      |        | MadisonBuilding |   | CongressionalSouth |  | WBPUndevelopedLand |        | WaterfrontAssociates |   | Other (1) |  |   | Total 
|ASSETS                                |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Cash                                  |  | $                 | 327    |                 | $ | 289                |  | $                  | 54     |                      | $ |          |  | $ | 156    |  | $ | 312    |   |  | $ | 1,138  
|Land held for investment              |  |                   |       |                 |   |                   |  |                    |       |                      |   | 5,432     |  |   |       |  |   |       |   |  |   | 5,432  
|Construction in progress              |  |                   |       |                 |   |                   |  |                    |       |                      |   |          |  |   |       |  |   | 1,822  |   |  |   | 1,822  
|Land, building and equipment, net     |  |                   | 30,179 |                 |   | 17,068             |  |                    | 18,877 |                      |   |          |  |   | 26,395 |  |   | 1,495  |   |  |   | 94,014 
|Other assets                          |  |                   | 698    |                 |   | 457                |  |                    | 14,992 |                      |   | 842       |  |   | 228    |  |   | 773    |   |  |   | 17,990 
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Total assets                          |  | $                 | 31,204 |                 | $ | 17,814             |  | $                  | 33,923 |                      | $ | 6,274     |  | $ | 26,779 |  | $ | 4,402  |   |  | $ | 120,396
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|LIABILITIES AND MEMBERS EQUITY       |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Mortages and notes                    |  | $                 | 20,187 |                 | $ | 14,404             |  | $                  | 28,146 |                      | $ | 5,000     |  | $ |       |  | $ | 4,784  |   |  | $ | 72,521 
|Other liabilities                     |  |                   | 3,713  |                 |   | 249                |  |                    |       |                      |   | 365       |  |   | 571    |  |   | 2,889  |   |  |   | 7,787  
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Total liabilities                     |  |                   | 23,900 |                 |   | 14,653             |  |                    | 28,146 |                      |   | 5,365     |  |   | 571    |  |   | 7,673  |   |  |   | 80,308 
|Members equity (deficit)             |  |                   | 7,304  |                 |   | 3,161              |  |                    | 5,777  |                      |   | 909       |  |   | 26,208 |  |   | (3,271 | ) |  |   | 40,088 
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Total liabilities and members equity |  | $                 | 31,204 |                 | $ | 17,814             |  | $                  | 33,923 |                      | $ | 6,274     |  | $ | 26,779 |  | $ | 4,402  |   |  | $ | 120,396
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Companys interest in members equity |  | $                 | 6,829  |                 | $ | 1,964              |  | $                  | 3,259  |                      | $ | 292       |  | $ | 18,297 |  | $ | 1,030  |   |  | $ | 31,671 
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        

---

(1) Represents the combined balance sheets of Third
Street SW Investors, Tech-High Leasing, Builders Leasing, Selbourne House and Redwood Commercial Management.



|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|------------------------------------- |  | ----------------- | ------ | --------------- | - | ------------------ |  | ------------------ | ------ | -------------------- | - | --------- |  | - | ------ |  | - | ------ | - |  | - | -------
|                                      |  | DECEMBER 31, 2002
|                                      |  | 1925 K Street     |        | MadisonBuilding |   | CongressionalSouth |  | WBPUndevelopedLand |        | WaterfrontAssociates |   | Other (1) |  |   | Total 
|ASSETS                                |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Cash                                  |  | $                 | 562    |                 | $ | 256                |  | $                  | 60     |                      | $ |          |  | $ | 124    |  | $ | 887    |   |  | $ | 1,889  
|Land held for investment              |  |                   |       |                 |   |                   |  |                    |       |                      |   | 7,240     |  |   |       |  |   |       |   |  |   | 7,240  
|Land, building and equipment, net     |  |                   | 27,502 |                 |   | 17,352             |  |                    | 19,743 |                      |   |          |  |   | 18,449 |  |   | (311   | ) |  |   | 82,735 
|Other assets                          |  |                   | 745    |                 |   | 468                |  |                    | 7,282  |                      |   | 1,837     |  |   | 466    |  |   | 1,257  |   |  |   | 12,055 
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Total assets                          |  | $                 | 28,809 |                 | $ | 18,076             |  | $                  | 27,085 |                      | $ | 9,077     |  | $ | 19,039 |  | $ | 1,833  |   |  | $ | 103,919
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|LIABILITIES AND MEMBERS EQUITY       |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Mortages and notes                    |  | $                 | 20,385 |                 | $ | 14,562             |  | $                  | 22,701 |                      | $ | 4,868     |  | $ |       |  | $ | 5,611  |   |  | $ | 68,127 
|Other liabilities                     |  |                   | 570    |                 |   | 277                |  |                    | 699    |                      |   | 14        |  |   | 680    |  |   | 1,534  |   |  |   | 3,774  
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Total liabilities                     |  |                   | 20,955 |                 |   | 14,839             |  |                    | 23,400 |                      |   | 4,882     |  |   | 680    |  |   | 7,145  |   |  |   | 71,901 
|Members equity (deficit)             |  |                   | 7,854  |                 |   | 3,237              |  |                    | 3,685  |                      |   | 4,195     |  |   | 18,359 |  |   | (5,312 | ) |  |   | 32,018 
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Total liabilities and members equity |  | $                 | 28,809 |                 | $ | 18,076             |  | $                  | 27,085 |                      | $ | 9,077     |  | $ | 19,039 |  | $ | 1,833  |   |  | $ | 103,919
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        
|Companys interest in members equity |  | $                 | 6,736  |                 | $ | 2,105              |  | $                  | 2,800  |                      | $ | 4,188     |  | $ | 18,359 |  | $ | 513    |   |  | $ | 34,701 
|                                      |  |                   |        |                 |   |                    |  |                    |        |                      |   |           |  |   |        |  |   |        |   |  |   |        



F-13



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---

(1) Represents the combined balance sheets of Third
Street SW Investors, Tech-High Leasing, Builders Leasing and Redwood Commercial Management.



Below are condensed statements of operations for our unconsolidated joint venture entities for the periods indicated (in thousands):



Year ended December 31, 2003



|                                                                     |  |                      |       |               |   |                  |  |                     |       |                       |   |       |           |   |       |       |  |   |       |   |  |   |       
|-------------------------------------------------------------------- |  | -------------------- | ----- | ------------- | - | ---------------- |  | ------------------- | ----- | --------------------- | - | ----- | --------- | - | ----- | ----- |  | - | ----- | - |  | - | ------
|                                                                     |  | WBP Undeveloped Land |       | 1925 K Street |   | Madison Building |  | Congressional South |       | Waterfront Associates |   |       | Other (1) |   |       | Total
|Operating revenues                                                   |  | $                    | 3,413 |               | $ | 4,584            |  | $                   | 2,424 |                       | $ | 2,578 |           | $ | 2,663 |       |  | $ | 2,947 |   |  | $ | 18,609
|                                                                     |  |                      |       |               |   |                  | 
|Operating expenses                                                   |  |                      | 2,899 |               |   | 2,077            |  |                     | 698   |                       |   | 453   |           |   | 2,730 |       |  |   | 2,734 |   |  |   | 11,591
|                                                                     |  |                      |       |               |   |                  | 
|Interest expense                                                     |  |                      | 261   |               |   | 737              |  |                     | 931   |                       |   | 4     |           |   |      |       |  |   | 330   |   |  |   | 2,263 
|                                                                     |  |                      |       |               |   |                  | 
|Depreciation expense                                                 |  |                      |      |               |   | 734              |  |                     | 509   |                       |   | 365   |           |   |      |       |  |   | 95    |   |  |   | 1,703 
|                                                                     |  |                      |       |               |   |                  |  |                     |       |                       |   |       |           |   |       |       |  |   |       |   |  |   |       
|Net income (loss)                                                    |  | $                    | 253   |               | $ | 1,036            |  | $                   | 286   |                       | $ | 1,756 |           | $ | (67   | )     |  | $ | (212  | ) |  | $ | 3,052 
|                                                                     |  |                      |       |               |   |                  |  |                     |       |                       |   |       |           |   |       |       |  |   |       |   |  |   |       
|Companys equity in earnings (loss) of unconsolidated joint ventures |  | $                    | 202   |               | $ | 881              |  | $                   | 71    |                       | $ | 439   |           | $ | (61   | )     |  | $ | 193   |   |  | $ | 1,725 
|                                                                     |  |                      |       |               |   |                  |  |                     |       |                       |   |       |           |   |       |       |  |   |       |   |  |   |       

---

(1) Represents the combined results of Third Street SW
Investors, Tech-High Leasing, Builders Leasing and Redwood Commercial Management.



Year ended December 31, 2002



|                                                              |  |                      |       |               |   |                  |  |                     |     |  |           |        |       |  |   |       |  |   |       
|------------------------------------------------------------- |  | -------------------- | ----- | ------------- | - | ---------------- |  | ------------------- | --- |  | --------- | ------ | ----- |  | - | ----- |  | - | ------
|                                                              |  | WBP Undeveloped Land |       | 1925 K Street |   | Madison Building |  | Congressional South |     |  | Other (1) |        | Total
|Operating revenues                                            |  | $                    | 3,669 |               | $ | 2,100            |  | $                   | 890 |  | $         | 1,940  |       |  | $ | 4,688 |  | $ | 13,287
|                                                              |  |                      |       |               |   |                 
|Operating expenses                                            |  |                      | 1,913 |               |   | 917              |  |                     | 252 |  |           | 611    |       |  |   | 3,207 |  |   | 6,900 
|                                                              |  |                      |       |               |   |                 
|Interest expense                                              |  |                      | 234   |               |   | 439              |  |                     | 340 |  |           | 2,310  |       |  |   | 381   |  |   | 3,704 
|                                                              |  |                      |       |               |   |                 
|Depreciation expense                                          |  |                      |      |               |   | 489              |  |                     | 205 |  |           | 216    |       |  |   | 97    |  |   | 1,007 
|                                                              |  |                      |       |               |   |                  |  |                     |     |  |           |        |       |  |   |       |  |   |       
|Net income (loss)                                             |  | $                    | 1,522 |               | $ | 255              |  | $                   | 93  |  | $         | (1,197 | )     |  | $ | 1,003 |  | $ | 1,676 
|                                                              |  |                      |       |               |   |                  |  |                     |     |  |           |        |       |  |   |       |  |   |       
|Companys equity in earnings of unconsolidated joint ventures |  | $                    | 1,218 |               | $ | 217              |  | $                   | 16  |  | $         |       |       |  | $ | 156   |  | $ | 1,607 
|                                                              |  |                      |       |               |   |                  |  |                     |     |  |           |        |       |  |   |       |  |   |       

---

(1) Represents the combined results of Waterfront
Associates (subsequent to September 2002), Third Street SW Investors, Tech-High Leasing, Builders Leasing and Redwood Commercial Management.



F-14



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The difference between the carrying value of our investment in unconsolidated joint ventures and partnerships and our
accumulated membership interest noted above is primarily due to advances to the joint ventures and capitalized interest on our investment balance in joint ventures that own real estate under development.



Waterfront AssociatesIn October 2002, following the expiration of the GSA lease at
the Waterfront Complex, BRW, a 54% owned subsidiary of ours, entered into a joint venture with K/FCE Investment LLC (K/FCE), a joint venture between the Washington DC based developer, The Kaempfer Company, Inc., and the national
developer, Forest City Enterprises, Inc., to redevelop and reposition the Waterfront Complex. The joint venture is called Waterfront Associates LLC (WALLC). BRW contributed the leasehold improvements relating to the Waterfront Complex to
WALLC. Affiliates of K/FCE are marketing, leasing, redeveloping, and managing the complex. K/FCE is the managing member of WALLC and has sole responsibility for the management, control, and operation of the WALLC, as well as for the formulation and
execution of its business and investment policy. Because BRW no longer has control of the Waterfront Complex, it no longer consolidates the assets, liabilities and operations of WALLC, and accounts for its investment under the equity method.



7. MORTGAGE AND CONSTRUCTION LOANS AND OTHER DEBT (in thousands):



|                                                     |  |               |   |  |          |  |                   |         |                   |   |        
|---------------------------------------------------- |  | ------------- | - |  | -------- |  | ----------------- | ------- | ----------------- | - | -------
|Property (1)                                         |  | Interest Rate |   |  | Maturity |  | December 31, 2003 |         | December 31, 2002
|Fort Hill Office Building                            |  | 7.70          | % |  | 2011     |  | $                 | 5,609   |                   | $ | 5,649  
|Washington Business Park                             |  | 7.63          | % |  | 2031     |  |                   | 39,343  |                   |   | 39,684 
|Victoria Place Apartments                            |  | 4.72          | % |  | 2013     |  |                   | 33,895  |                   |   |       
|The Fountains                                        |  | 5.00          | % |  | 2007     |  |                   | 24,831  |                   |   |       
|Inn at the Colonnade                                 |  | 7.45          | % |  | 2011     |  |                   | 9,978   |                   |   | 10,128 
|Holiday Inn Express                                  |  | 7.88          | % |  | 2011     |  |                   | 3,682   |                   |   | 3,734  
|Charlestown North                                    |  | 6.74          | % |  | 2012     |  |                   | 4,926   |                   |   | 4,976  
|900 Northbrook                                       |  | 5.98          | % |  | 2013     |  |                   | 11,200  |                   |   |       
|Sudley North Buildings A,B,C,& D and Bank Building   |  | 7.47          | % |  | 2012     |  |                   | 17,760  |                   |   | 17,915 
|Clarksburg Ridge                                     |  | (2)           |   |  | 2005     |  |                   | 6,712   |                   |   |       
|Cigar Factory                                        |  | (3)(4)        |   |  | 2005     |  |                   | 894     |                   |   |       
|Versar Center                                        |  | 6.18          | % |  | 2013     |  |                   | 18,312  |                   |   | 18,500 
|                                                     |  |               |   |  |          |  |                   |         |                   |   |        
|Total mortgage and construction loans                |  |               |   |  |          |  |                   | 177,142 |                   |   | 100,586
|                                                     |  |               |   |  |          |  |                   |         |                   |   |        
|Other debt                                           |  | (5)(6)        |   |  | 2005     |  |                   | 6,000   |                   |   |       
|                                                     |  |               |   |  |          |  |                   |         |                   |   |        
|Total mortgage and construction loans and other debt |  |               |   |  |          |  | $                 | 183,142 |                   | $ | 100,586
|                                                     |  |               |   |  |          |  |                   |         |                   |   |        

---

(1) Note is secured by related property.

(2) Variable interest rate of lenders prime plus 100 basis points.

(3) Variable interest rate of one month LIBOR plus 275 basis points.

(4) The Company has provided a payment guarantee on 66.7% of the outstanding
debt under this loan.

(5) Variable interest rate of one month LIBOR plus 195 basis points.

(6) Note is an unsecured loan to the Company.



As of December 31, 2003, we are in compliance with all debt covenants. We capitalized $1,023,000 of interest in 2003.



Annual contractual principal payments as of December 31, 2003, are as follows (in thousands):



|                    |  |       |        
|------------------- |  | ----- | -------
|                    |  | Total
|2004                |  | $     | 2,181  
|2005                |  |       | 15,925 
|2006                |  |       | 2,469  
|2007                |  |       | 27,228 
|2008                |  |       | 2,740  
|2009 and thereafter |  |       | 132,599
|                    |  |       |        
|Total               |  | $     | 183,142
|                    |  |       |        



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



8. CAPITAL STOCK



At December 31, 2003 and 2002, the total number of shares authorized and outstanding was as follows:



|                                          |  |                             |  |                              |  |                             |  |                             
|----------------------------------------- |  | --------------------------- |  | ---------------------------- |  | --------------------------- |  | ----------------------------
|                                          |  | December 31, 2003           |  | December 31, 2002           
|                                          |  | Number of Shares Authorized |  | Number of Shares Outstanding |  | Number of Shares Authorized |  | Number of Shares Outstanding
|Common shares, $0.01 par value            |  | 4,000,000                   |  | 2,738,606                    |  | 4,000,000                   |  | 2,738,606                   
|Non-voting common shares, $0.01 par value |  | 2,000,000                   |  |                             |  | 2,000,000                   |  |                            



9. COMMITMENTS AND CONTINGENCIES



FINANCIAL COMMITMENTS



At December 31, 2003, we had approximately $156,000 of outstanding letters of credit
representing performance guarantees for land improvements in home building and land development operations.



GUARANTEES



We have provided an
unconditional and irrevocable payment guaranty of $4,342,970 to Riggs Bank in connection with the $20,437,500 loan made by Riggs Bank to 1925K Associates, LLC (1925K). A portion of this loan has also been guaranteed by the other third-party member
of 1925K. As further conditions of the guaranty, we are required to maintain a consolidated net worth of not less than $25,000,000 and a minimum consolidated liquidity of at least $15,000,000. Riggs Bank has also placed two covenants on the loan:
(1) principal outstanding cannot exceed 75% of the current market value of the property, and (2) net operating income to interest expense must exceed 1.35 to 1.00. During the year ended December 31, 2003 we were in compliance with all covenants
under the loan.



We have provided an unconditional and irrevocable payment
guaranty to Riggs Bank for 33.3% of the loan balance outstanding under the $7,100,000 construction loan, made to Selborne House at St. Marks Owner, LLC (Selborne House). The other members of Selbourne House have guaranteed the remaining
balance under the loan. The loan matures January 2006 and has an extension option of 5 years. Our payment guarantee will be reduced to 16.7% of the outstanding loan balance, upon Selborne House maintaining a debt service ratio of 1.25 to 1.0 for a
period of one year. Additionally, along with the other members of Selborne House, we have jointly and severally guaranteed the completion of the project prior to July 2005. At December 31, 2003, the outstanding loan balance totaled $1,578,000.



We have guaranteed repayment of 66.6% of the loan balance outstanding under
the $5,370,000 acquisition and construction loan, made by Citizens Bank of Pennsylvania to Cigar Factory Apartments, L.P. (Cigar Factory). The remainder of the outstanding balance under the loan has been guaranteed by the other
members of Cigar Factory. The loan matures July 2005, but may be extended for an additional year at the option of the borrower. Together with the other members of Cigar Factory, we have also guaranteed completion of construction of improvements to
Cigar Factory on or before the maturity date of the loan, or if the loan is extended, the extended maturity date. At December 31, 2003, the outstanding loan balance totaled $894,000.



F-16



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



LITIGATION



We are not presently involved in any litigation nor to our knowledge is any litigation threatened against us or our subsidiaries that, in managements opinion, would
result in any material adverse effect on our ownership, financial condition, management, or operation of our properties.



10. DISCONTINUED OPERATIONS



In December 2003, we sold 95% of our interest in Town Square Commons, LLC (The Commons), to an unaffiliated third party, for a total price of $9,918,000. The
Commons owns a 116 unit apartment complex in Washington DC. The sale was part of a tax free exchange under §1031 of the US Internal Revenue Code and, as such, the taxable gain on the sale is deferred. The purchaser has a call option to
purchase, and we have a corresponding put option to sell, the remaining 5% interest in The Commons for a price of $522,000, beginning December 2004. We have recorded the results of operations of The Commons along with a $5,419,000 gain, net of taxes
as part of discontinued operations, in the accompanying consolidated financial statements.



In May 2003, we sold to a third party our Maplewood Manor nursing home in Lakewood, New Jersey. Pursuant to this agreement, the purchaser acquired the nursing home for $6,500,000. Of the total purchase price,
$3,900,000 was paid in cash with the balance of the purchase price, $2,600,000, given by us as a charitable gift to the purchaser, a charitable organization. The sale was part of a tax free exchange under §1031 of the US Internal Revenue Code
and, as such, the taxable gain on the sale is deferred. We have recorded the operating results of the nursing home along with a $1,711,000 gain, net of taxes as part of discontinued operations in the accompanying consolidated financial statements.



We are currently holding for sale the 7800 Building, which is a commercial
office building containing approximately 15,000 square feet of space and five commercial properties currently leased to convenient store operators. The operating results of these properties are classified as discontinued operations in the
accompanying consolidated statement of operations.



The following summary
presents the combined operating results of and gains on sale from properties we have classified as discontinued operations (in thousands):



|                                                          |  |                         |        |      |   |       |  |   |      
|--------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | -----
|                                                          |  | Years Ended December 31
|                                                          |  | 2003                    |        | 2002 |   | 2001 
|Revenues                                                  |  | $                       | 1,927  |      | $ | 2,548 |  | $ | 2,309
|Income before gain on sale and provision for income taxes |  |                         | 907    |      |   | 1,443 |  |   | 1,200
|Gain on sale                                              |  |                         | 11,882 |      |   |      |  |   |     
|Provision for income taxes                                |  |                         | 4,957  |      |   | 577   |  |   | 480  
|                                                          |  |                         |        |      |   |       |  |   |      
|Income from discontinued operations                       |  | $                       | 7,832  |      | $ | 866   |  | $ | 720  
|                                                          |  |                         |        |      |   |       |  |   |      



11. INCOME TAXES



SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and
reporting standards for the effects of income taxes that result from our activities during the current and preceding years. It requires an asset and liability approach to accounting for income taxes. Balance sheet accruals for income taxes are
adjusted to reflect changes in tax rates in the period such changes are enacted.



We file a consolidated federal income tax return. The provision for income taxes includes the following components (in thousands):



|                                 |  |      |       |   |      |   |        |      |  |   |       |  
|-------------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                 |  | 2003 |       |   | 2002 |   |        | 2001 | 
|Provision for income taxes       |  |      |       |   |      |   |        |      |  |   |       |  
|Current tax                      |  | $    | (724  | ) |      | $ | 4,260  |      |  | $ | 5,322 |  
|Deferred tax                     |  |      | 5,092 |   |      |   | (1,081 | )    |  |   | (599  | )
|                                 |  |      |       |   |      |   |        |      |  |   |       |  
|Total provision for income taxes |  | $    | 4,368 |   |      | $ | 3,179  |      |  | $ | 4,723 |  
|                                 |  |      |       |   |      |   |        |      |  |   |       |  



F-17



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



A reconciliation of the statutory federal tax rate to the Companys effective income tax rate follows:



|                                               |  |      |    |  |      |    |  |       |   
|---------------------------------------------- |  | ---- | -- |  | ---- | -- |  | ----- | --
|                                               |  | 2003 |    |  | 2002 |    |  | 2001  |   
|Statutory rate                                 |  | 34.0 | %  |  | 34.0 | %  |  | 34.0  | % 
|Increase (decrease) resulting from:            |  |      |    |  |      |    |  |       |   
|State taxes, net of federal income tax benefit |  | 5.5  | %  |  | 6.3  | %  |  | 5.3   | % 
|Interest income from tax-exempt bonds          |  | (5.7 | )% |  | (6.6 | )% |  | (10.5 | )%
|Other                                          |  | (2.5 | )% |  | 0.6  | %  |  | 2.8   | % 
|                                               |  |      |    |  |      |    |  |       |   
|Effective rate                                 |  | 31.3 | %  |  | 34.3 | %  |  | 31.6  | % 
|                                               |  |      |    |  |      |    |  |       |   



The current provision (benefit) for
income taxes from continuing operations of $(724,000) for 2003 primarily results from the Companys tax exempt investment portfolio and return to accrual adjustments.



Deferred income taxes result from temporary differences in the recognition of revenue and expense for income tax and financial statement
reporting purposes. The sources of these differences and the estimated tax effect of each are as follows (in thousands):



|                            |  |                                                        |        |   |                                                                              |   |       |                                                        |  |   |        |  
|--------------------------- |  | ------------------------------------------------------ | ------ | - | ---------------------------------------------------------------------------- | - | ----- | ------------------------------------------------------ |  | - | ------ | -
|                            |  | Deferred tax liability (asset) as of December 31, 2003 |        |   | Deferred income tax provision (benefit) for the year ended December 31, 2003 |   |       | Deferred tax liability (asset) as of December 31, 2002 | 
|Basis in property           |  | $                                                      | 2,746  |   |                                                                              | $ | 391   |                                                        |  | $ | 2,355  |  
|Investments in partnerships |  |                                                        | 3,303  |   |                                                                              |   | (169  | )                                                      |  |   | 3,472  |  
|Lease intangibles           |  |                                                        | (766   | ) |                                                                              |   | (259  | )                                                      |  |   | (507   | )
|Condemnation of property    |  |                                                        | 868    |   |                                                                              |   | (11   | )                                                      |  |   | 879    |  
|Installment sales           |  |                                                        | 127    |   |                                                                              |   | (19   | )                                                      |  |   | 146    |  
|Gain on sale                |  |                                                        | 5,095  |   |                                                                              |   | 5,095 |                                                        |  |   |       |  
|Other                       |  |                                                        | (1,600 | ) |                                                                              |   | 64    |                                                        |  |   | (1,664 | )
|                            |  |                                                        |        |   |                                                                              |   |       |                                                        |  |   |        |  
|Total                       |  | $                                                      | 9,773  |   |                                                                              | $ | 5,092 |                                                        |  | $ | 4,681  |  
|                            |  |                                                        |        |   |                                                                              |   |       |                                                        |  |   |        |  



12. OPERATING LEASES



AS A LESSEE



In February 2003, we entered into a lease agreement for the lease of our corporate offices
in Rockville, Maryland. The lease expires in February 2010. Rent paid under the lease for the year ended 2003 was $88,000.



Minimum rentals to be paid under this lease at December 31, 2003, are as follows (in thousands):



|                    |  |        |    
|------------------- |  | ------ | ---
|                    |  | Amount
|2004                |  | $      | 118
|2005                |  |        | 121
|2006                |  |        | 125
|2007                |  |        | 129
|2008                |  |        | 132
|2009 and thereafter |  |        | 160
|                    |  |        |    
|Total               |  | $      | 785
|                    |  |        |    



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



AS A LESSOR



Substantially all noncancelable leases of residential property are for a term of one year of less. Other leases are subject to cancellation at the lessees option
under certain conditions. Minimum future rentals to be received for commercial property subject to noncancelable and other leases are as follows (in thousands):



|                    |  |                      |       
|------------------- |  | -------------------- | ------
|                    |  | Noncancelable Leases
|2004                |  | $                    | 14,758
|2005                |  |                      | 11,614
|2006                |  |                      | 9,215 
|2007                |  |                      | 7,465 
|2008                |  |                      | 5,742 
|2009 and thereafter |  |                      | 4,388 
|                    |  |                      |       
|Total               |  | $                    | 53,182
|                    |  |                      |       



13. TRANSACTIONS WITH AFFILIATES



We have business transactions with several affiliates that are owned in
part by certain of our shareholders, officers, and directors. These transactions are summarized as follows (in thousands):



|                   |  |      |     |      |   |      |  |   |    
|------------------ |  | ---- | --- | ---- | - | ---- |  | - | ---
|                   |  | 2003 |     | 2002 |   | 2001
|Revenues:          |  |      |     |      |   |      |  |   |    
|Leasing fees       |  | $    |    |      | $ | 171  |  | $ | 389
|Management fees    |  |      | 365 |      |   | 527  |  |   | 419
|Interest           |  |      | 306 |      |   | 330  |  |   | 352
|Cost and expenses: |  |      |     |      |   |      |  |   |    
|Interest           |  |      |    |      |   | 164  |  |   | 721



In addition, certain affiliated
entities participate under our insurance policy and reimburse us for the associated policy premiums.



14. PENSION PLAN



We have a
noncontributory defined benefit pension plan (the Plan) along with certain subsidiaries. The Plan covers substantially all full-time employees and provides for benefits to be paid to eligible employees at retirement based primarily upon
years of service with the Company and their compensation rates for the five years preceding retirement. Our funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist of stocks, bonds, government
securities and cash equivalents. The Companys pension related assets and liabilities were not material for 2003 and 2002. The Companys pension expense for the years ending December 31, 2003, 2002 and 2001 was $421,000, $293,000 and
$295,000, respectively.



15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS



SFAS No. 107, Disclosures about Fair Value of Financial
Instruments requires all entities to disclose the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the statements of financial condition for which it is practicable to estimate fair value. If
estimating fair value is not practicable, SFAS No. 107 requires disclosure of descriptive information pertinent to estimating the fair value of a financial instrument.



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The estimated fair values of our financial instruments are as follows (in thousands):



|                                            |  |                   |         |                   |   |                |  |           |         |  |   |        
|------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                            |  | December 31, 2003 |         | December 31, 2002
|                                            |  | CarryingAmount    |         | FairValue         |   | CarryingAmount |  | FairValue
|Mortgage, construction loans and other debt |  | $                 | 183,142 |                   | $ | 190,209        |  | $         | 100,586 |  | $ | 105,587



The fair value of mortgage debt is
estimated by discounting the future cash flows based on borrowing rates currently available to us for financing on similar terms for borrowers with similar credit ratings. For short-term mortgage and construction loans and for variable rate loans
the carrying amount is a reasonable estimate of fair value. The fair value of all of our other financial assets and liabilities are assumed to equal their carrying amounts.



16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (in thousands except earnings per share amounts):



|                                   |  |                    |       |   |               |   |                    |  |                   |       |  |   |       
|---------------------------------- |  | ------------------ | ----- | - | ------------- | - | ------------------ |  | ----------------- | ----- |  | - | ------
|                                   |  | Three months ended
|                                   |  | March 31, 2003     |       |   | June 30, 2003 |   | September 30, 2003 |  | December 31, 2003
|Revenues                           |  | $                  | 7,067 |   |               | $ | 8,308              |  | $                 | 8,227 |  | $ | 11,101
|Net income (loss)                  |  |                    | (228  | ) |               |   | 2,939              |  |                   | 213   |  |   | 6,657 
|Net income (loss) per common share |  |                    | (0.06 | ) |               |   | 1.07               |  |                   | 0.08  |  |   | 2.41  



|                                   |  |                    |        |               |   |                    |  |                   |        |  |   |       |  
|---------------------------------- |  | ------------------ | ------ | ------------- | - | ------------------ |  | ----------------- | ------ |  | - | ----- | -
|                                   |  | Three months ended |       
|                                   |  | March 31, 2002     |        | June 30, 2002 |   | September 30, 2002 |  | December 31, 2002 |       
|Revenues                           |  | $                  | 15,623 |               | $ | 18,357             |  | $                 | 15,137 |  | $ | 7,718 |  
|Net income (loss)                  |  |                    | 1,945  |               |   | 2,615              |  |                   | 1,940  |  |   | (414  | )
|Net income (loss) per common share |  |                    | 0.71   |               |   | 0.95               |  |                   | 0.71   |  |   | (0.15 | )



17. SEGMENT INFORMATION:



In accordance with SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Company reports segment information for the following categories:



| |  | Commercial Rental consists of the rental income derived by commercial properties from leases of office space in the Washington, D.C. and Philadelphia, Pennsylvania
metropolitan areas.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Residential Rental consists of rental income derived by residential properties from leases of apartment units in the Washington, D.C. and Orlando, Florida metropolitan areas.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Hotel Operations  consists of income derived from our two hotel properties, located in the Washington, D.C. metropolitan area.
| | - | -------------------------------------------------------------------------------------------------------------------------------



| |  | Commercial, residential and land development  consists of the development and sale of homes and residential condominium units, the development and sale of lots as part of
residential subdivisions, the sale of undeveloped commercial land, and other construction activity.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Corporate and other  consists primarily of interest income, general and administrative expenses and interest expense on unsecured debt to the Company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



We are not involved in any operations in countries other than
the United States.



F-20



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The accounting policies of the segments are the same as those described in the summary of significant accounting
policies. We evaluate performance based upon revenues less operating expenses of the combined properties in each segment.



Our reportable segments are a consolidation of related subsidiaries that are managed separately as each segment requires different operating, pricing, and leasing
strategies.



|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | -------------------------------------------- | ------ | ----------------- | - | ------- | ------------------ |  | - | ----------- | - |  | ------------------- | ------ | - | ------------ | - | ------- | - |  | - | ------- | -
|December 31, 2003 (in thousands)                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|                                                             |  | Commercial, Residential and Land Development |        | Commercial Rental |   |         | Residential Rental |  |   | Hospitality |   |  | Corporate and Other |        |   | Consolidated |  
|Total revenues                                               |  | $                                            | 1,774  |                   | $ | 17,452  |                    |  | $ | 4,592       |   |  | $                   | 7,896  |   |              | $ | 2,989   |   |  | $ | 34,703  |  
|Cost of homebuilding, residential lots and other development |  |                                              | 1,650  |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 1,650   |  
|Operating expenses                                           |  |                                              |       |                   |   | 6,622   |                    |  |   | 2,107       |   |  |                     | 5,236  |   |              |   |        |   |  |   | 13,965  |  
|Depreciation and amortization expense                        |  |                                              |       |                   |   | 4,190   |                    |  |   | 1,025       |   |  |                     | 863    |   |              |   |        |   |  |   | 6,078   |  
|Interest expense                                             |  |                                              |       |                   |   | 6,402   |                    |  |   | 1,485       |   |  |                     | 1,090  |   |              |   | (952    | ) |  |   | 8,025   |  
|Minority interest                                            |  |                                              | 96     |                   |   | (69     | )                  |  |   | 22          |   |  |                     |       |   |              |   |        |   |  |   | 49      |  
|General, administrative and other expenses                   |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 3,776   |   |  |   | 3,776   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Net income (loss) before taxes and discontinued operations   |  |                                              | 28     |                   |   | 307     |                    |  |   | (47         | ) |  |                     | 707    |   |              |   | 165     |   |  |   | 1,160   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Income from equity investments                               |  |                                              | 141    |                   |   | 1,584   |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 1,725   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Assets:                                                      |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Real estate at cost                                          |  |                                              | 25,358 |                   |   | 105,516 |                    |  |   | 80,809      |   |  |                     | 14,709 |   |              |   | 669     |   |  |   | 227,061 |  
|Accumulated depreciation                                     |  |                                              |       |                   |   | (12,186 | )                  |  |   | (3,829      | ) |  |                     | (7,921 | ) |              |   | (342    | ) |  |   | (24,278 | )
|Investments in joint ventures                                |  |                                              | 19,083 |                   |   | 13,374  |                    |  |   | 2,773       |   |  |                     |       |   |              |   |        |   |  |   | 35,230  |  
|Cash, cash equivalents and restricted cash                   |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 26,429  |   |  |   | 26,429  |  
|Investments                                                  |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 52,635  |   |  |   | 52,635  |  
|Other                                                        |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 30,849  |   |  |   | 30,849  |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|                                                             |  | $                                            | 44,441 |                   | $ | 106,704 |                    |  | $ | 79,753      |   |  | $                   | 6,788  |   |              | $ | 110,240 |   |  | $ | 347,926 |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|                                                             |  |                                              |        |                   |   |        
|December 31, 2002 (in thousands)                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|                                                             |  | Commercial, Residential and Land Development |        | Commercial Rental |   |         | Residential Rental |  |   | Hospitality |   |  | Corporate and Other |        |   | Consolidated |  
|Total revenues                                               |  | $                                            | 8,176  |                   | $ | 34,891  |                    |  | $ | 2,796       |   |  | $                   | 7,571  |   |              | $ | 3,401   |   |  | $ | 56,835  |  
|Cost of homebuilding, residential lots and other development |  |                                              | 7,259  |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 7,259   |  
|Operating expenses                                           |  |                                              |        |                   |   | 10,460  |                    |  |   | 1,056       |   |  |                     | 4,751  |   |              |   |        |   |  |   | 16,267  |  
|Depreciation and amortization expense                        |  |                                              |       |                   |   | 4,323   |                    |  |   | 218         |   |  |                     | 834    |   |              |   |        |   |  |   | 5,375   |  
|Interest expense                                             |  |                                              |       |                   |   | 5,628   |                    |  |   | 214         |   |  |                     | 1,072  |   |              |   | 164     |   |  |   | 7,078   |  
|Minority interest                                            |  |                                              |       |                   |   | 6,422   |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 6,422   |  
|General, administrative and other expenses                   |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 6,612   |   |  |   | 6,612   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Net income before taxes and discontinued operations          |  |                                              | 917    |                   |   | 8,058   |                    |  |   | 1,308       |   |  |                     | 914    |   |              |   | (3,375  | ) |  |   | 7,822   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Income from equity investments                               |  |                                              |       |                   |   | 389     |                    |  |   | 1,218       |   |  |                     |       |   |              |   |        |   |  |   | 1,607   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Assets:                                                      |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Real estate at cost                                          |  |                                              | 3,103  |                   |   | 93,733  |                    |  |   | 4,440       |   |  |                     | 14,377 |   |              |   | 441     |   |  |   | 116,094 |  
|Accumulated depreciation                                     |  |                                              |       |                   |   | (10,070 | )                  |  |   | (2,748      | ) |  |                     | (7,058 | ) |              |   | (133    | ) |  |   | (20,009 | )
|Investments in joint ventures                                |  |                                              | 22,547 |                   |   | 12,202  |                    |  |   | 1,900       |   |  |                     |       |   |              |   |        |   |  |   | 36,649  |  
|Cash, cash equivalents and restricted cash                   |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 11,153  |   |  |   | 11,153  |  
|Investments                                                  |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 75,835  |   |  |   | 75,835  |  
|Other                                                        |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 23,770  |   |  |   | 23,770  |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|                                                             |  |                                              | 25,650 |                   |   | 95,865  |                    |  |   | 3,592       |   |  |                     | 7,319  |   |              |   | 111,066 |   |  |   | 243,492 |  
|                                                             |  |                                              |        |                   |   |        
|December 31, 2001 (in thousands)                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|                                                             |  | Commercial,Residential and Land Development  |        | Commercial Rental |   |         | Residential Rental |  |   | Hospitality |   |  | Corporate and Other |        |   | Consolidated |  
|Total revenues                                               |  | $                                            | 4,965  |                   | $ | 31,805  |                    |  | $ | 1,521       |   |  | $                   | 7,711  |   |              | $ | 3,737   |   |  | $ | 49,739  |  
|                                                             |  |                                              |        |                   |   |        
|Cost of homebuilding, residential lots and other development |  |                                              | 4,802  |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 4,802   |  
|Operating expenses                                           |  |                                              |       |                   |   | 9,637   |                    |  |   | 915         |   |  |                     | 4,758  |   |              |   | 262     |   |  |   | 15,572  |  
|Depreciation and amortization expense                        |  |                                              |       |                   |   | 3,232   |                    |  |   | 170         |   |  |                     | 827    |   |              |   |        |   |  |   | 4,229   |  
|Interest expense                                             |  |                                              |       |                   |   | 654     |                    |  |   | 212         |   |  |                     | 408    |   |              |   | 726     |   |  |   | 2,000   |  
|Minority interest                                            |  |                                              |       |                   |   | 7,225   |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 7,225   |  
|General, administrative and other expenses                   |  |                                              |       |                   |   |        |                    |  |   |            |   |  |                     |       |   |              |   | 2,172   |   |  |   | 2,172   |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Net income before taxes and discontinued operations          |  |                                              | 163    |                   |   | 11,057  |                    |  |   | 224         |   |  |                     | 1,718  |   |              |   | 577     |   |  |   | 13,739  |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  
|Income from equity investments                               |  |                                              |       |                   |   | 130     |                    |  |   |            |   |  |                     |       |   |              |   |        |   |  |   | 130     |  
|                                                             |  |                                              |        |                   |   |         |                    |  |   |             |   |  |                     |        |   |              |   |         |   |  |   |         |  



F-21



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



18. SUBSEQUENT EVENTS:



Fort WashingtonOn February 26, 2004, a joint venture, in which we own a 96.5% interest and two unaffiliated third parties own the
balance, acquired an executive center located in Fort Washington, Pennsylvania, consisting of three commercial buildings containing a total of 393,000 square feet of office space. The purchase price of the property was $52,664,000. At the time of
the acquisition the joint venture placed a $33,300,000 mortgage loan on two of the buildings and a $15,700,000 mortgage loan on the third building. Each of the loans, bear a fixed-interest rate of 5.6% and matures in ten years. As a condition of
financing, we executed conditional master lease agreements as tenant, on each of the loans for certain periods and space within the properties. We invested $7,000,000 for our 96.5% interest in the joint venture.



One Northbrook On February 18, 2004, we acquired a 95,000 square foot office building
located in a commercial office park in Trevose, Pennsylvania, for a purchase price of $16,900,000. The purchase was part of a tax free exchange under §1031 of the US Internal Revenue Code, and as such the proceeds from the sale of The Commons,
totaling $9,648,000 were used to help fund the acquisition. On February 19, 2004, we placed a ten-year, 5.75% fixed-rate mortgage of $15,300,000 on the property thereby reducing our investment in the property to $3,046,000. As a condition of
financing, we executed a master lease agreement as tenant for certain periods and space within the property.



640 North BroadOn February 14, 2004, a joint venture in which we own a 86.5% interest and two unaffiliated third parties own the balance, acquired a historic property in Philadelphia, PA, comprising two
buildings, for a purchase price of $9,050,000. At the time of the acquisition, the joint venture placed a $6,000,000 loan on the buildings. The loan, which bears a variable-interest rate of one month LIBOR plus 175 basis points, matures in one year.
The joint venture plans to redevelop the buildings into an approximately 266 unit apartment property. We invested $3,200,000 for our 86.5% interest in the joint venture.



220 West Germantown PikeOn February 5, 2004, a joint venture, in which we own a 97.5% interest and two unaffiliated third parties
own the balance, acquired an office complex containing two commercial office buildings, in Plymouth Meeting, Pennsylvania comprising a total of 115,000 square feet . The total purchase price of the office buildings was $20,500,000. In connection
with the acquisition, the joint venture assumed a 5.9% fixed-rate mortgage loan on the buildings. The loan, which had an outstanding principal balance of $16,246,000 at the time of the assumption, matures in 2013. We invested $4,875,000 for our
97.5% interest in the joint venture.





F-22



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##### Table of Contents

Schedule III

BRESLER & REINER, INC.



REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2003

(Dollars in thousands)



|                                                                                                       |  |              |         |                         |   |                                            |  |                                                  |         |      |   |                           |  |       |        |                                                                 |   |                     |  |              |         |  |   |        |  |      |  |      |  |            
|------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ----------------------- | - | ------------------------------------------ |  | ------------------------------------------------ | ------- | ---- | - | ------------------------- |  | ----- | ------ | --------------------------------------------------------------- | - | ------------------- |  | ------------ | ------- |  | - | ------ |  | ---- |  | ---- |  | -----------
|                                                                                                       |  |              |         | Initial cost to Company |   | CostCapitalizationsubsequent toacquisition |  | Gross amount at which carried at close of period |         |      |   |                           |  |       |        | Life on whichdepreciation on latest income statement iscomputed
|Description                                                                                            |  | Encumbrances |         | Land                    |   | Buildings andimprovements                  |  | Improvements                                     |         | Land |   | Buildings andimprovements |  | Total |        | Accumulateddepreciation                                         |   | Date ofConstruction |  | Dateacquired |        
|Versar Center (Two office (buildings in Springfield, Virginia)                                         |  | $            | 18,312  |                         | $ | 2,187                                      |  | $                                                | 21,149  |      | $ | 1,672                     |  | $     | 2,187  |                                                                 | $ | 22,821              |  | $            | 25,008  |  | $ | 1,233  |  |      |  | 2002 |  | 391/2years 
|Bank Building (Office building in Manassas, Virginia)                                                  |  |              | 977     |                         |   | 63                                         |  |                                                  | 798     |      |   | 15                        |  |       | 118    |                                                                 |   | 758                 |  |              | 876     |  |   | 307    |  | 1991 |  |     |  | 311/2years 
|Paradise/Sudley North (Four office buildings in Manassas, Virginia)                                    |  |              | 16,783  |                         |   | 2,216                                      |  |                                                  | 12,679  |      |   | 2,852                     |  |       | 3,337  |                                                                 |   | 14,410              |  |              | 17,747  |  |   | 8,229  |  | 1987 |  |     |  | 311/2years 
|Fort Hill (Office building in Centreville, Virginia)                                                   |  |              | 5,609   |                         |   | 500                                        |  |                                                  | 6,492   |      |   | 191                       |  |       | 500    |                                                                 |   | 6,683               |  |              | 7,183   |  |   | 633    |  |     |  | 2000 |  | 391/2years 
|Washington Business Park (Two office buildings and seven flex warehouse buildings in Lanham, Maryland) |  |              | 39,343  |                         |   | 9,260                                      |  |                                                  | 30,492  |      |   | 4,963                     |  |       | 9,260  |                                                                 |   | 35,455              |  |              | 44,715  |  |   | 1,820  |  |     |  | 2001 |  | 391/2years 
|900 Northbrook (Office building in Trevose, Pennsylvania)                                              |  |              | 11,200  |                         |   | 2,114                                      |  |                                                  | 7,874   |      |   |                          |  |       | 2,114  |                                                                 |   | 7,874               |  |              | 9,988   |  |   | 21     |  |      |  | 2003 |  | 1540 years
|Charlestown North (Apartments in Greenbelt, Maryland)                                                  |  |              | 4,926   |                         |   |                                           |  |                                                  | 2,179   |      |   | 2,850                     |  |       | 152    |                                                                 |   | 4,877               |  |              | 5,029   |  |   | 3,041  |  |     |  | 1971 |  | 540 years 
|Victoria Place (Apartments in Orlando, Florida)                                                        |  |              | 33,895  |                         |   | 3,825                                      |  |                                                  | 35,896  |      |   |                          |  |       | 3,825  |                                                                 |   | 35,896              |  |              | 39,721  |  |   | 499    |  |      |  | 2003 |  | 540 years 
|The Fountains (Apartments in Orlando, Florida)                                                         |  |              | 24,831  |                         |   | 4,000                                      |  |                                                  | 31,780  |      |   | 279                       |  |       | 4,000  |                                                                 |   | 32,059              |  |              | 36,059  |  |   | 234    |  |      |  | 2003 |  | 540 years 
|Inn at the Colonnade (Hotel in Baltimore, Maryland)                                                    |  |              | 9,978   |                         |   | 1,955                                      |  |                                                  | 5,413   |      |   | 1,056                     |  |       | 1,955  |                                                                 |   | 6,469               |  |              | 8,424   |  |   | 3,454  |  |     |  | 1993 |  | 540 years 
|Holiday Inn Express (Hotel in Camp Spings, Maryland)                                                   |  |              | 3,682   |                         |   | 378                                        |  |                                                  | 2,793   |      |   | 3,115                     |  |       | 378    |                                                                 |   | 5,908               |  |              | 6,286   |  |   | 4,466  |  |     |  | 1987 |  | 19 years   
|                                                                                                       |  |              |         |                         |   |                                            |  |                                                  |         |      |   |                           |  |       |        |                                                                 |   |                     |  |              |         |  |   |        |  |      |  |      |  |            
|Total properties                                                                                       |  | $            | 169,536 |                         | $ | 26,498                                     |  | $                                                | 157,545 |      | $ | 16,993                    |  | $     | 27,826 |                                                                 | $ | 173,210             |  | $            | 201,036 |  | $ | 23,937 |  |      |  |      |  |            
|                                                                                                       |  |              |         |                         |   |                                            |  |                                                  |         |      |   |                           |  |       |        |                                                                 |   |                     |  |              |         |  |   |        |  |      |  |      |  |            
|Corporate                                                                                              |  |              | 6,000   |                         |   |                                           |  |                                                  |        |      |   | 667                       |  |       |       |                                                                 |   | 667                 |  |              | 667     |  |   | 341    |  |      |  |      |  | 510 years 
|                                                                                                       |  |              |         |                         |   |                                            |  |                                                  |         |      |   |                           |  |       |        |                                                                 |   |                     |  |              |         |  |   |        |  |      |  |      |  |            
|Total Properties and Corporate                                                                         |  | $            | 175,536 |                         | $ | 26,498                                     |  | $                                                | 157,545 |      | $ | 17,660                    |  | $     | 27,826 |                                                                 | $ | 173,877             |  | $            | 201,703 |  | $ | 24,278 |  |      |  |      |  |            
|                                                                                                       |  |              |         |                         |   |                                            |  |                                                  |         |      |   |                           |  |       |        |                                                                 |   |                     |  |              |         |  |   |        |  |      |  |      |  |            



F-23



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##### Table of Contents

BRESLER & REINER, INC.



NOTES TO SCHEDULE III

(in thousands)





The aggregate cost of total real estate
for Federal income tax purposes was approximately $215,636 at December 31, 2003.



The changes in rental property and equipment for the years ended December 31, 2003, 2002 and 2001 are as follows:



|                                               |  |                         |         |   |      |   |         |      |  |   |        
|---------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------
|                                               |  | Years ended December 31
|                                               |  | 2003                    |         |   | 2002 |   |         | 2001
|Balance, January 1                             |  | $                       | 112,991 |   |      | $ | 146,864 |      |  | $ | 101,926
|Additions during periodAcquisitions and other |  |                         | 90,382  |   |      |   | 21,152  |      |  |   | 44,938 
|Deductions during periodOther                 |  |                         | (1,670  | ) |      |   | (55,025 | )    |  |   |       
|                                               |  |                         |         |   |      |   |         |      |  |   |        
|Balance, December 31                           |  | $                       | 201,703 |   |      | $ | 112,991 |      |  | $ | 146,864
|                                               |  |                         |         |   |      |   |         |      |  |   |        



The changes in accumulated
depreication for the years ended December 31, 2003, 2002 and 2001 are as follows:



|                                             |  |                         |        |   |      |   |         |      |  |   |       
|-------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------
|                                             |  | Years ended December 31
|                                             |  | 2003                    |        |   | 2002 |   |         | 2001
|Balance, January 1                           |  | $                       | 20,009 |   |      | $ | 53,883  |      |  | $ | 49,608
|Additions during periodDepreciation expense |  |                         | 6,129  |   |      |   | 5,465   |      |  |   | 4,275 
|Deductions during periodOther               |  |                         | (1,860 | ) |      |   | (39,339 | )    |  |   |      
|                                             |  |                         |        |   |      |   |         |      |  |   |       
|Balance, December 31                         |  | $                       | 24,278 |   |      | $ | 20,009  |      |  | $ | 53,883
|                                             |  |                         |        |   |      |   |         |      |  |   |       



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##### Table of Contents

BRESLER & REINER, INC.



SCHEDULE IVMORTGAGE LOANS ON REAL ESTATE

AS OF DECEMBER 31, 2003





|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|-------------------------------------------------------------------- |  | ------------- |  | ------------ |  | --------------------- | ------------ | --- | ---------- | ---- | ----------------------- | - | -------------------------- |  | --------------------------------------------------------------------------- | --------- |  | ----
|Column A                                                             |  | Column B      |  | Column C     |  | Column D              |              |     | Column E   |      | Column F                |   | Column G                   |  | Column H                                                                   
|Description                                                          |  | Interest      |  | Maturitydate |  | Periodic paymentterms |              |     | Priorliens |      | Face amount ofmortgages |   | Carryingamount ofmortgages |  | Principal amount ofmortgage loanssubject to delinquentprincipal or interest
|As of December 31, 2003:                                             |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|Related parties                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|Second mortgages:                                                    |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|3rd Street Southwest Investors(S. W. Washington, D.C.)               |  | 9.5%          |  | 2004         |  | $                     | 36,600/month | (1) |            | None |                         | $ | 4,350,000                  |  | $                                                                           | 1,060,000 |  | None
|3rd Street Southwest Investors(S. W. Washington, D.C.)               |  | 9.5%          |  | 2009         |  |                       | 11,200/month | (2) |            | None |                         |   | 1,333,333                  |  |                                                                             | 1,216,000 |  | None
|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  | $                                                                           | 2,276,000 |  |     
|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|Other                                                               |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|First mortgages:                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|Condominium loans (Oxon Hill, Maryland;$10,000 to $20,000; 28 units) |  | 8.0% to 13.0% |  | 2004         |  |                       |              |     |            |      |                         |   |                            |  |                                                                             | 23,000    |  | None
|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     
|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  | $                                                                           | 2,299,000 |  |     
|                                                                     |  |               |  |              |  |                       |              |     |            |      |                         |   |                            |  |                                                                             |           |  |     



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##### Table of Contents

Bresler & Reiner, Inc.



Notes to Schedule IV



|                                                  |  |      |           |      |   |           |  |   |          
|------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                  |  | 2003 |           | 2002 |   | 2001     
|Carrying value at January 1                       |  | $    | 2,531,000 |      | $ | 2,694,000 |  | $ | 2,846,000
|                                                  |  |      |          
|Deductions during period-Collections of principal |  |      | 232,000   |      |   | 163,000   |  |   | 152,000  
|                                                  |  |      |           |      |   |           |  |   |          
|Carrying value at December 31                     |  | $    | 2,299,000 |      | $ | 2,531,000 |  | $ | 2,694,000
|                                                  |  |      |           |      |   |           |  |   |          

---

|(1) | The terms of this agreement call for a final payment of $1,735,000 due in 2004.
|--- | -------------------------------------------------------------------------------

|(2) | The terms of this agreement call for a final payment of $1,074,000 due in 2009.
|--- | -------------------------------------------------------------------------------



F-26