##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K



---



(Mark One)



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2003



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from              to



Commission File number 1-7184



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B. F. SAUL REAL ESTATE INVESTMENT TRUST

(Exact name of registrant as specified in its charter)



---



|Maryland                                                       |  | 52-6053341                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|7501 Wisconsin Avenue, Bethesda, Maryland |  | 20814     
|----------------------------------------- |  | ----------
|(Address of principal executive offices)  |  | (Zip Code)



Registrants
telephone number, including area code:    (301) 986-6000



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



|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|N/A                 |  | N/A                                      



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



N/A

(Title of class)



---



Indicate by check mark whether 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
requires to file such reports), and (2) has been subject to such filing requirement for the past 90 days.    Yes   x    No ̈



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



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



There were no Common Shares of Beneficial Interest held by non-affiliates
of the registrant as of December 19, 2003.



The number of
Common Shares of Beneficial Interest, $1 Par Value, outstanding as of December 19, 2003 was 4,807,510.



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##### Table of Contents

TABLE OF CONTENTS



|PART I   |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|         |  |                                                                                      
|ITEM 1.  |  | BUSINESS                                                                             
|         |  |                                                                                      
|         |  | Overview                                                                             
|         |  | Real Estate                                                                          
|         |  | Banking                                                                              
|         |  | Federal Taxation                                                                     
|         |  |                                                                                      
|ITEM 2.  |  | PROPERTIES                                                                           
|         |  |                                                                                      
|         |  | Real Estate                                                                          
|         |  | Banking                                                                              
|         |  |                                                                                      
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                    
|         |  |                                                                                      
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|         | 
|PART II  |  |                                                                                      
|         |  |                                                                                      
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|         |  |                                                                                      
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                              
|         |  |                                                                                      
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|         |  |                                                                                      
|         |  | Financial Condition                                                                  
|         |  | Real Estate                                                                          
|         |  | Banking                                                                              
|         |  |                                                                                      
|         |  | Liquidity and Capital Resources                                                      
|         |  | Real Estate                                                                          
|         |  | Banking                                                                              
|         |  |                                                                                      
|         |  | Results of Operations                                                                
|         |  | Fiscal 2003 Compared to Fiscal 2002                                                  
|         |  | Real Estate                                                                          
|         |  | Banking                                                                              
|         |  |                                                                                      
|         |  | Fiscal 2002 Compared to Fiscal 2001                                                  
|         |  | Real Estate                                                                          
|         |  | Banking                                                                              
|         |  |                                                                                      
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|         |  |                                                                                      
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|         |  |                                                                                      
|         |  | Managements Statement on Responsibility                                             
|         |  |                                                                                      
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|         |  |                                                                                      
|ITEM 9A. |  | CONTROLS AND PROCEDURES                                                              
|         | 
|PART III |  |                                                                                      
|         |  |                                                                                      
|ITEM 10. |  | TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST                                        
|         |  |                                                                                      
|         |  | Executive Officers of the Trust Who Are Not Directors                                
|         |  | Committees of the Board of Trustees                                                  
|         |  |                                                                                      
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                               
|         |  |                                                                                      
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       
|         |  |                                                                                      
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       
|         | 
|PART IV  |  |                                                                                      
|         |  |                                                                                      
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                      



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##### Table of Contents

PART I



ITEM 1. BUSINESS



Overview



B.F. Saul Real Estate
Investment Trust operates as a Maryland real estate investment trust. The Real Estate Trust began its operations in 1964 as an unincorporated business trust organized under a Declaration of Trust governed by District of Columbia law. The Real Estate
Trust terminated its status as a qualified real estate investment trust for federal income tax purposes in 1978 and is now taxable as a corporation. On October 24, 1988, the Real Estate Trust amended its Declaration of Trust to qualify as a
statutory real estate investment trust under Maryland law.



The
principal business activities of the Trust are the ownership of 80% of the outstanding common stock of Chevy Chase Bank, F.S.B. (Chevy Chase), whose assets accounted for 96% of the Trusts consolidated assets at September 30, 2003,
and the ownership and development of income-producing properties. By virtue of its ownership of a majority interest in Chevy Chase, the Trust is a savings and loan holding company and subject to regulation, examination and supervision by the Office
of Thrift Supervision, also know as OTS. See BankingHolding Company Regulation.



The Trust recorded net income of $45.9 million in the fiscal year ended September 30, 2003, compared to a net income of $25.9 million in the fiscal year
ended September 30, 2002.



The Trust has prepared its financial
statements and other disclosures on a fully consolidated basis. The term Trust used in the text and the financial statements included herein refers to the combined entity, which includes B.F. Saul Real Estate Investment Trust and its
subsidiaries, including Chevy Chase and Chevy Chases subsidiaries. The term Real Estate Trust refers to B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chases subsidiaries. The
operations conducted by the Real Estate Trust are designated as Real Estate, while the business conducted by Chevy Chase and its subsidiaries is identified as Banking.



Real Estate



The Real Estate
Trusts long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate. The properties owned by the Real Estate Trust are located predominantly in the mid-Atlantic and Southeastern regions
of the United States and consist principally of hotels, office projects, and undeveloped land parcels.



The Real Estate Trust has significant relationships with B.F. Saul Company (Saul Company) and two of its wholly owned subsidiaries, B.F. Saul
Advisory Company L.L.C., referred to in this report as the Advisor, and B.F. Saul Property Company, (Saul Property Co.). Saul Company, founded in 1892, specializes in commercial property management and leasing, hotel
management, development and construction management, acquisitions, sales and financing of real estate property and insurance. Certain officers and trustees of the Real Estate Trust are also officers and/or directors of Saul Company, the Advisor and
Saul Property Co. Other than uncompensated officers, the Real Estate Trust has no employees. See Item 13. Certain Relationships and Related TransactionsManagement Personnel.



The Advisor acts as the Real Estate Trusts investment advisor and
manages the day-to-day financial, accounting, legal and administrative affairs of the Real Estate Trust. Saul Property Co. acts as leasing and management agent for the income-producing properties owned by the Real Estate Trust, and plans and
oversees the development of new properties and the expansion and renovation of existing properties.



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Banking



Chevy Chase Bank, F.S.B.,
referred to in this document as Chevy Chase or the Bank, is a federally chartered and federally insured stock savings bank which at September 30, 2003 was conducting business from 210 full-service branch offices, including 54
grocery store banking centers, and 812 automated teller machines in Maryland, Delaware, Virginia and the District of Columbia. The Bank has its home office in McLean, Virginia and its executive offices in Bethesda, Maryland, both suburban
communities of Washington, DC. The Bank either directly or through a wholly owned subsidiary also maintains a commercial loan production office located in Baltimore, Maryland and six mortgage loan production offices in the mid-Atlantic region. In
addition, the Bank maintains a network of third party originators in order to supplement its direct origination of loans. At September 30, 2003, the Bank had total assets of $11.8 billion and total deposits of $8.1 billion. Based on total assets at
September 30, 2003, Chevy Chase is the largest full-service bank headquartered in the Washington, DC metropolitan area.



Chevy Chase is a consumer oriented, full-service banking institution principally engaged in the business of attracting deposits from the public and using
such deposits, together with borrowings and other funds, to make loans secured by real estate, primarily residential mortgage loans, and other consumer loans. The Bank also has an active commercial lending program. The Banks principal deposit
and retail lending markets are located in the Washington, DC metropolitan area. The Banks wholesale activities include the acquisition of loans through a nationwide network of third party originators. As a complement to its basic deposit and
lending activities, the Bank provides related financial services to its customers, including securities brokerage and insurance products offered through its subsidiaries. In addition, the Bank offers a variety of investment products and provides
fiduciary services to a primarily institutional customer base through its subsidiary, ASB Capital Management, Inc., and to a primarily high net worth customer base through another subsidiary, Chevy Chase Trust Company.



The Bank seeks to capitalize on its status as the largest locally
headquartered full-service bank in the Washington, DC metropolitan area by expanding its community banking operations. Accordingly, the Bank continues to build its branch and alternative delivery systems, to maintain and expand its mortgage banking
operations, and to offer a broad range of consumer products, including home equity loans and lines of credit and other consumer loans. In addition, the Bank continues to expand its business banking program, with an emphasis on businesses operating
in the Washington, DC metropolitan area. The Bank also continues to further develop the fee-based services it provides to customers, including securities brokerage, trust, asset management and insurance products offered through its subsidiaries.



Chevy Chase recorded operating income of $146.2 million for
the year ended September 30, 2003, compared to operating income of $103.6 million for the year ended September 30, 2002. At September 30, 2003, the Banks tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were
5.75%, 5.75%, 7.67% and 11.05%, respectively. The Banks regulatory capital ratios exceeded the requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, also known as FIRREA, as well as the
standards established for well-capitalized institutions under the prompt corrective action regulations established pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, also known as FDICIA.



In October 2003, the Bank issued $125 million of its 8%
Noncumulative Perpetual Preferred Stock, Series C (the 8% Preferred Stock) and used the proceeds to redeem all of its 13% Noncumulative Perpetual Preferred Stock, Series A (the 13% Preferred Stock) on October 31, 2003. On
December 2, 2003, the Bank issued $175 million of its 67/8% subordinated debentures due 2013 (the 2003
Debentures). The net proceeds of the offering, along with short-term borrowings, will be used to redeem all of the Banks subordinated debentures due 2005 and 2008.



Chevy Chase is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (the
OTS) and, to a lesser extent, by the Federal Deposit Insurance Corporation (the FDIC). The Banks deposit accounts are fully insured up to $100,000 per insured depositor by the FDIC.



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REAL ESTATE



Real Estate Investments



The Real Estate Trusts investment portfolio consists principally of seasoned operating properties. The Real Estate Trust expects to hold its
properties as long-term investments and has no maximum period for retention of any investment. It may acquire additional income-producing properties, expand and improve its properties, or sell such properties, as and when circumstances warrant. The
Real Estate Trust also may participate with other entities in property ownership, through joint ventures or other types of co-ownership.



The following tables set forth, at and for the periods indicated, certain information regarding the properties in the Real Estate Trusts investment
portfolio at September 30, 2003.



HOTELS



|               |  |                                    |  |           |  | Average Occupancy (2)    |   |  | Average Room Rate       
|-------------- |  | ---------------------------------- |  | --------- |  | ------------------------ | - |  | ------------------------
|               |  |                                    |  |           |  | Year Ended September 30, |   |  | Year Ended September 30,
|Location       |  | Name                               |  | Rooms (1) |  | 2003                     |   |  | 2002                    
|COLORADO       |  |                                    |  |           |  |                          |   |  |                         
|Pueblo         |  | Pueblo Holiday Inn                 |  | 191       |  | 46                       | % |  | 51                      
|               |  |                                    |  |           |  |                          |   | 
|FLORIDA        |  |                                    |  |           |  |                          |   |  |                         
|Boca Raton     |  | Boca Raton SpringHill Suites       |  | 146       |  | 55                       | % |  | 59                      
|Boca Raton     |  | Boca Raton TownePlace Suites       |  | 91        |  | 67                       | % |  | 74                      
|Ft. Lauderdale |  | Ft. Lauderdale TownePlaceSuites    |  | 95        |  | 71                       | % |  | 75                      
|               |  |                                    |  |           |  |                          |   | 
|MARYLAND       |  |                                    |  |           |  |                          |   |  |                         
|Gaithersburg   |  | Gaithersburg Holiday Inn           |  | 300       |  | 58                       | % |  | 57                      
|Gaithersburg   |  | Gaithersburg TownePlace Suites     |  | 91        |  | 71                       | % |  | 76                      
|               |  |                                    |  |           |  |                          |   | 
|MICHIGAN       |  |                                    |  |           |  |                          |   |  |                         
|Auburn Hills   |  | Auburn Hills Holiday Inn Select    |  | 190       |  | 64                       | % |  | 65                      
|               |  |                                    |  |           |  |                          |   | 
|NEW YORK       |  |                                    |  |           |  |                          |   |  |                         
|Rochester      |  | Rochester Airport Holiday Inn      |  | 279       |  | 66                       | % |  | 59                      
|               |  |                                    |  |           |  |                          |   | 
|OHIO           |  |                                    |  |           |  |                          |   |  |                         
|Cincinnati     |  | Cincinnati Holiday Inn             |  | 275       |  | 54                       | % |  | 55                      
|               |  |                                    |  |           |  |                          |   | 
|VIRGINIA       |  |                                    |  |           |  |                          |   |  |                         
|Arlington      |  | National Airport Crowne Plaza      |  | 308       |  | 63                       | % |  | 62                      
|Arlington      |  | National Airport Holiday Inn       |  | 280       |  | 60                       | % |  | 57                      
|Herndon        |  | Herndon Holiday Inn Express        |  | 115       |  | 61                       | % |  | 55                      
|McLean         |  | Tysons Corner Courtyard (3)        |  | 229       |  | 67                       | % |  | 64                      
|McLean         |  | Tysons Corner Holiday Inn (4)      |  | 316       |  | 54                       | % |  | 63                      
|Sterling       |  | Dulles Airport Hampton Inn         |  | 124       |  | 62                       | % |  | 54                      
|Sterling       |  | Dulles Airport Holiday Inn         |  | 297       |  | 63                       | % |  | 60                      
|Sterling       |  | Dulles Airport TownePlace Suites   |  | 95        |  | 80                       | % |  | 74                      
|Sterling       |  | Dulles Town Center Hampton Inn (5) |  | 152       |  | 69                       | % |  | 62                      
|               |  |                                    |  |           |  |                          |   |  |                         
|               |  |                                    |  | 3,574     |  | 61                       | % |  | 61                      

---

|(1) | Available rooms as of September 30, 2003.
|--- | -----------------------------------------

|(2) | Average occupancy is calculated by dividing the rooms occupied by the rooms available.
|--- | --------------------------------------------------------------------------------------

|(3) | Opened December 15, 2000.
|--- | -------------------------

|(4) | Under renovation during fiscal 2003.
|--- | ------------------------------------

|(5) | Opened November 27, 2000.
|--- | -------------------------



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OFFICE AND INDUSTRIAL



|Location        |  | Name                     |               | Gross Leasable Area (1) |  | Leasing Percentages       |   |  | Expiring Leases (1) |  
|--------------- |  | ------------------------ | ------------- | ----------------------- |  | ------------------------- | - |  | ------------------- | -
|                |  |                          | September 30, |                         |  | Year Ending September 30, |  
|                |  |                          | 2003          |                         |  | 2002                      |   |  | 2001                |  
|FLORIDA         |  |                          |               |                         |  |                           |   |  |                     |  
|Fort Lauderdale |  | Commerce CenterPhase II |               | 61,149                  |  | 85                        | % |  | 92                  | %
|                |  |                          |               |                         |  |                           |  
|GEORGIA         |  |                          |               |                         |  |                           |   |  |                     |  
|Atlanta         |  | 900 Circle 75 Parkway    |               | 345,502                 |  | 78                        | % |  | 82                  | %
|Atlanta         |  | 1000 Circle 75 Parkway   |               | 89,412                  |  | 88                        | % |  | 97                  | %
|Atlanta         |  | 1100 Circle 75 Parkway   |               | 269,049                 |  | 90                        | % |  | 95                  | %
|                |  |                          |               |                         |  |                           |  
|MARYLAND        |  |                          |               |                         |  |                           |   |  |                     |  
|Laurel          |  | Sweitzer Lane (2)        |               | 150,020                 |  | 100                       | % |  | 100                 | %
|                |  |                          |               |                         |  |                           |  
|VIRGINIA        |  |                          |               |                         |  |                           |   |  |                     |  
|McLean          |  | 8201 Greensboro Drive    |               | 360,854                 |  | 75                        | % |  | 81                  | %
|McLean          |  | Tysons Park Place        |               | 247,581                 |  | 97                        | % |  | 86                  | %
|Sterling        |  | Dulles North             |               | 59,886                  |  | 100                       | % |  | 100                 | %
|Sterling        |  | Dulles North Two         |               | 79,210                  |  | 100                       | % |  | 100                 | %
|Sterling        |  | Dulles North Four (3)    |               | 100,207                 |  | 100                       | % |  | 100                 | %
|Sterling        |  | Dulles North Five        |               | 80,391                  |  | 100                       | % |  | 100                 | %
|Sterling        |  | Dulles North Six (4)     |               | 53,517                  |  | 100                       | % |  | 100                 | %
|Sterling        |  | Loudoun Tech I (5)       |               | 81,238                  |  | 0                         | % |  | 0                   | %
|                |  |                          |               |                         |  |                           |   |  |                     |  
|                |  | Totals                   |               | 1,978,016               |  | 85                        | % |  | 86                  | %

---

|(1) | Square feet
|--- | -----------

|(2) | Acquired November 15, 2000.
|--- | ---------------------------

|(3) | Operational April 1, 2002.
|--- | --------------------------

|(4) | Operational October 1, 2000.
|--- | ----------------------------

|(5) | Operational December 14, 2001.
|--- | ------------------------------

|(6) | Represents 9.6% and 13.0%, respectively, of the Real Estate Trusts office and industrial portfolio in terms of square footage as of September 30, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



LAND PARCELS



|Location        |  | Name                          |  | Acres |  | Zoning                        
|--------------- |  | ----------------------------- |  | ----- |  | ------------------------------
|FLORIDA         |  |                               |  |       |  |                               
|Boca Raton      |  | Arvida Park of Commerce       |  | 6.5   |  | Mixed Use                     
|Fort Lauderdale |  | Commerce Center               |  | 1.6   |  | Office and Warehouse          
|                |  |                               | 
|GEORGIA         |  |                               |  |       |  |                               
|Atlanta         |  | Circle 75                     |  | 124.9 |  | Office and Industrial         
|                |  |                               | 
|KANSAS          |  |                               |  |       |  |                               
|Overland Park   |  | Overland Park                 |  | 161.9 |  | Residential, Office and Retail
|                |  |                               | 
|MICHIGAN        |  |                               |  |       |  |                               
|Auburn Hills    |  | Auburn Hills Holiday Inn      |  | 0.5   |  | Commercial                    
|                |  |                               | 
|NEW YORK        |  |                               |  |       |  |                               
|Rochester       |  | Rochester Airport Holiday Inn |  | 2.9   |  | Commercial                    
|                |  |                               | 
|VIRGINIA        |  |                               |  |       |  |                               
|Sterling        |  | Cedar Green                   |  | 10.7  |  | Commercial                    
|Sterling        |  | Church Road                   |  | 39.9  |  | Office and Industrial         
|Sterling        |  | Sterling Boulevard            |  | 31.9  |  | Industrial                    
|                |  |                               |  |       |  |                               
|                |  | Total                         |  | 380.8 |  |                               



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OTHER REAL ESTATE INVESTMENTS



PURCHASE-LEASEBACK PROPERTIES (1)



APARTMENTS



|Location         |  | Name          |  | Number of Units        
|---------------- |  | ------------- |  | -----------------------
|LOUISIANA        |  |               |  |                        
|Metairie         |  | Chateau Dijon |  | 336                    
|                 |  |              
|TENNESSEE        |  |               |  |                        
|Knoxville        |  | Country Club  |  | 232                    
|                 |  |               |  |                        
|                 |  | Total         |  | 568                    
|                
|SHOPPING CENTERS
|                 |  |              
|Location         |  | Name          |  | Gross Leasable Area (2)
|GEORGIA          |  |               |  |                        
|Warner Robbins   |  | Houston Mall  |  | 264,000                



OTHER REAL ESTATE



|Location |  | Name         |  | Gross Leasable Area (2)
|-------- |  | ------------ |  | -----------------------
|GEORGIA  |  |              |  |                        
|Atlanta  |  | Old National |  | 160,000                

---

|(1) | The Real Estate Trust owns the land under certain income-producing properties and receives fixed ground rent, which is subject to periodic escalation, from the owners of the
improvements. In certain instances, the Real Estate Trust also receives percentage rent based upon the income generated by the properties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Square feet.
|--- | ------------



Investment in Saul Holdings Limited Partnership



On August 26, 1993, the Real Estate Trust consummated a series of transactions in which it transferred 22 shopping center properties and one of its office properties together with the debt associated with such
properties, to a newly organized limited partnership, Saul Holdings Limited Partnership (Saul Holdings Partnership), and one of two newly organized subsidiary limited partnerships of Saul Holdings Partnership.



In exchange for the transferred properties, the Real Estate Trust received
securities representing a 21.5% limited partnership interest in Saul Holdings Partnership. Entities under common control with the Trust received limited partnership interests collectively representing a 5.5% partnership interest in Saul Holdings
Partnership in exchange for the transfer of property management functions and certain other properties to Saul Holdings Partnership and its subsidiaries. Saul Centers, Inc., a newly organized, publicly held real estate investment trust (Saul
Centers), received a 73.0% general partnership interest in Saul Holdings Partnership in exchange for the contribution of approximately $220.7 million to Saul Holdings Partnership.



Affiliates of the Trust received certain cash distributions from Saul Holdings Partnership and purchased 4.0% of the common
stock of Saul Centers in a private offering consummated concurrently with the initial public offering of such common stock. Certain officers and trustees of the Trust are also officers and/or directors of Saul Centers. See Item 13. Certain
Relationships and Related TransactionsManagement Personnel.



As of September 30, 2003 the Real Estate Trust and certain affiliates of the Trust owned 5,185,000 units of limited partnership interests in Saul Holdings Partnership, representing a 24.8% limited partnership interest. The Real Estate Trust
and affiliates of the Trust own rights enabling them to convert their limited partnership interests



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in Saul Holdings Partnership into shares of Saul Centers common stock on the basis of one share of Saul Centers common stock for each partnership
unit. However, under the terms of the limited partnership agreement of Saul Holdings Partnership, at the current time, the units may not be converted into shares of Saul Centers common stock because the conversion would cause the Real Estate
Trust and certain affiliates of the Trust to beneficially own collectively greater than 29.9% of the value of the outstanding equity securities of Saul Centers.



The shares of Saul Centers common stock are listed on the New York Stock Exchange under trading symbol BFS.



Saul Centers operates as a real estate investment trust for federal income
tax purposes under Sections 856 through 860 of the Internal Revenue Code. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements. If Saul Centers continues to qualify as a REIT, it generally will
not be subject to federal income tax, provided it makes certain distributions to its stockholders and meets certain organizational and other requirements. Saul Centers has made and has announced that it intends to continue to make regular quarterly
dividend distributions to its stockholders.



Allocations and
Distributions of Saul Holdings Partnership. The net income or net loss of Saul Holdings Partnership for tax purposes generally will be allocated to Saul Centers and the limited partners in accordance with their percentage interests, subject to
compliance with the applicable provisions of the Internal Revenue Code and the regulations promulgated thereunder. Net cash flow after reserves of Saul Holdings Partnership and after reimbursement of specified expenses will be distributed quarterly
to the partners in proportion to their respective partnership interests.



Competition



As an
owner of, or investor in, commercial real estate properties, the Real Estate Trust is subject to competition from a variety of other owners of similar properties in connection with their sale, lease or other disposition and use. Management believes
that success in such competition is dependent upon the geographic location of the property, the performance of property managers, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive
factors with respect to commercial and industrial properties are the ease of access to the property, the adequacy of related facilities such as parking, and the ability to provide rent concessions and additional tenant improvements while keeping
rents competitive. Management believes that general economic circumstances and trends and new properties in the vicinity of each of the Real Estate Trusts properties also will be competitive factors.



Environmental Matters



The Real Estate Trusts properties are subject to various laws and
regulations relating to environmental and pollution controls. The Real Estate Trust requires an environmental study to be performed with respect to a property that may be subject to possible environmental hazards prior to its acquisition to
ascertain that there are no material environmental hazards associated with such property. Although the effect upon the Real Estate Trust of the application of environmental and pollution laws and regulations cannot be predicted with certainty,
management believes that their application either prospectively or retrospectively will not have a material adverse effect on the Real Estate Trusts property operations.



Holding Company Regulation



The Trust, the Saul Company, Chevy Chase Property Company, referred to in this report as CCPC, and CCPCs wholly-owned subsidiary,
Westminster Investing Corporation, collectively referred to in this report as the Holding Companies, are registered as savings and loan holding companies because of their direct or indirect ownership interests in the bank,
and are subject to regulation, examination and supervision by the OTS. The bank is prohibited from making or guaranteeing loans or advances to or for the benefit of the Holding Companies or other affiliates engaged in activities beyond those
permissible for bank holding companies and



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##### Table of Contents

from investing in the securities of the Holding Companies or other affiliates. Transactions between the bank and the Holding Companies must be on terms
substantially the same, or at least as favorable to the bank, as those that would be available to non-affiliates.



Recent revisions to the OTSs Regulatory Handbook for Holding Companies suggest a more active role for the OTS in the direct regulation of thrift
holding companies such as the Holding Companies. The current handbook places a greater emphasis on reviewing the adequacy of the Holding Companies capital, their level of debt, and their ability to fund outstanding debt obligations, and
suggests that particular scrutiny will be given to holding companies that, like the Holding Companies, are engaged in real estate activities.



The Holding Companies must obtain OTS approval before acquiring any federally insured savings institution or any savings and loan holding company. The
status of the Holding Companies as unitary thrift holding companies and the activities in which the Holding Companies may engage have been grandfathered under the Gramm-Leach-Bliley Act of 1999 (the GLB Act). As grandfathered
unitary thrift holding companies, the Holding Companies are virtually unrestricted in the types of business activities in which they may engage provided the bank continues to meet the QTL test. See BankingQualified Thrift Lender
(QTL) Test. The GLB Act prohibits the sale of grandfathered unitary thrift holding companies such as the Holding Companies (together with their thrift subsidiaries) or their thrift subsidiaries alone to commercial companies.
Corporate reorganizations are expressly permitted.



If the
Holding Companies were to acquire one or more federally insured institutions and operate them as separate subsidiaries rather than merging them into the bank, the Holding Companies would become multiple savings and loan holding
companies. As multiple savings and loan holding companies, the Holding Companies would be subject to limitations on the types of business activities in which they would be permitted to engage, unless the additional thrifts were troubled institutions
acquired pursuant to certain emergency acquisition provisions and all subsidiary thrifts met the QTL test. The Holding Companies may acquire and operate additional savings institution subsidiaries outside of Maryland and Virginia only if the laws of
the target institutions state specifically permit such acquisitions or if the acquisitions are made pursuant to emergency acquisition provisions.



The Trust and the Saul Company entered into an agreement with OTSs predecessor, the Federal Savings and Loan Insurance Corporation, to maintain the
banks regulatory capital at the required levels, and, if necessary, to infuse additional capital to enable the bank to meet those requirements. Since the execution of this agreement, the OTS has changed its policy and no longer requires such
agreements from companies acquiring thrift institutions. In addition, the regulatory capital requirements applicable to the bank have changed significantly as a result of FIRREA. The OTS has stated that capital maintenance agreements entered into
prior to the modification of OTS policy and the enactment of FIRREA were not affected by those changes. The Trust and the Saul Company have not sought to modify the existing agreement. To the extent the bank is unable to meet regulatory capital
requirements in the future, the OTS could seek to enforce the obligations of the Trust and the Saul Company under the agreement.



If the bank were to become undercapitalized under the prompt corrective action regulations, it would be required to file a capital restoration
plan with the OTS setting forth, among other things, the steps the bank would take to become adequately capitalized. The OTS could not accept the plan unless the Holding Companies guaranteed in writing the banks compliance with
that plan. The aggregate liability of the Holding Companies under such a commitment would be limited to the lesser of:



| |  | an amount equal to 5.0% of the banks total assets at the time the bank became undercapitalized, and
| | - | ------------------------------------------------------------------------------------------------------



| |  | the amount necessary to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with its capital plan.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



If the Holding Companies refused to provide the guarantee, the bank would
be subject to the more restrictive supervisory actions applicable to significantly undercapitalized institutions. See BankingPrompt Corrective Action.



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BANKING



REGULATION



FEDERAL HOME LOAN BANK SYSTEM.The Bank is a member of the Federal Home Loan Bank (the FHLB) of Atlanta, which is one of 12 FHLBs
administered by the Federal Housing Finance Board, an independent agency within the executive branch of the federal government. The FHLBs serve as central credit facilities for their members. Their primary credit mission is to facilitate residential
mortgage lending and support community and economic development activity in rural and urban communities. From time to time, the Bank obtains advances from the FHLB of Atlanta. At September 30, 2003, the Bank had outstanding advances of $2.0 billion.
See Note 21 to the Consolidated Financial Statements in this report and Deposits and Other Sources of FundsBorrowings.



As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in that bank in an amount equal to the greater of:



| |  | 1.0% of mortgage-related assets;
| | - | --------------------------------



| |  | $500; or
| | - | --------



| |  | 5.0% of outstanding advances.
| | - | -----------------------------



The Bank had an investment of $107.4 million in the capital stock of the FHLB of Atlanta at September 30, 2003. The Bank earned dividends on that stock of
$4.3 million and $5.3 million during the years ended September 30, 2003 and 2002, respectively. Since 1999, membership in the FHLB has been voluntary rather than mandatory for federal thrifts like the Bank. Because membership is required to obtain
advances from the FHLB and the Bank continues to rely on FHLB advances as an important source of funds, the Bank currently intends to retain its voluntary membership in the FHLB of Atlanta.



LIQUIDITY REQUIREMENTS. The Bank is required to maintain sufficient
liquidity to ensure its safe and sound operation. Failure to meet this requirement could subject the Bank to monetary penalties imposed by the OTS. Management believes that the Banks ratio of cash and cash equivalents and other liquid assets
to deposits and short-term borrowings of 6.09% at September 30, 2003 was sufficient to ensure the Banks safe and sound operation.



DEPOSIT INSURANCE PREMIUMS. Under FDIC insurance regulations, the Bank is required to pay premiums to the Savings Association Insurance Fund
(SAIF) for insurance of its deposit accounts. The FDIC utilizes a risk-based premium system in which an institution pays premiums for deposit insurance on its insured deposits based on supervisory evaluations and on the
institutions capital category under the OTSs prompt corrective action regulations. See Prompt Corrective Action.



Although the FDIC insures commercial banks as well as thrifts, the insurance funds for commercial banks and thrifts have been segregated into the Bank
Insurance Fund (the BIF) and the SAIF. The FDIC is required to maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured deposits. If the reserve level of an insurance fund falls below 1.25%, the FDIC is required by
law to impose a premium of at least 23 basis points on all institutions whose accounts are insured by that fund until its ratio is restored above the 1.25% minimum. The BIFs reserve ratio was 1.32% and the SAIFs reserve ratio was 1.39%
as of September 30, 2003.



As a result of the Banks
assumption of approximately $33 million of deposits (along with $16 million of loans) of FBR National Bank and Trust on August 18, 2003, a small amount of the Banks deposits (less than 1%) are insured by the BIF.



Commercial banks and thrifts are required to share in the payment of interest
due on Financing Corporation (FICO) bonds used to provide liquidity to the savings and loan industry in the 1980s. Annual FICO assessments added to deposit insurance premiums equaled 1.65 basis points for the first semi-annual period of
2003 and 1.56 basis points for the second semi-annual period of 2003.



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Deposit insurance may be terminated by the FDIC, after notice and a 30-day corrective period, if the FDIC
finds that a financial institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or condition imposed by the FDIC. The 30-day period may
be eliminated by the FDIC with the approval of the OTS.



Earlier this year, the House of Representatives passed and the Senate considered legislation that would reform the deposit insurance system by, among other things, (i) increasing FDIC insurance coverage from $100,000 to $130,000 per account
(with certain retirement accounts generally receiving increased coverage) and indexing future coverage to accommodate inflation, (ii) merging the BIF and the SAIF into a single new Deposit Insurance Fund, (iii) permitting the Funds required
reserve ratio to float in a designated range, (iv) eliminating the current prohibition against assessing risk-based premiums on well-capitalized institutions with high supervisory ratings, thus permitting the FDIC to assess ongoing premiums for all
institutions based on their risk profile, and allowing gradual increases in those premiums if the new Funds ratio falls below the lower end of the designated range, (v) providing, in the case of the House bill, dividends to institutions if the
ratio exceeds the upper end of the range, and (vi) providing refunds or credits towards future assessments based on an institutions earlier contributions to the BIF or the SAIF. However, the Senate is expected to adjourn without taking action
on its version of the bill. The Bank expects that these proposals will be considered again during the next session of Congress. Because it remains unclear at this time whether, or in what form, any such legislation ultimately may be enacted, the
Bank is unable to assess the potential effects on the Bank.



REGULATORY
CAPITAL



The Bank is subject to:



| |  | a minimum tangible capital requirement;
| | - | ---------------------------------------



| |  | a minimum core (or leverage) capital requirement; and
| | - | -----------------------------------------------------



| |  | a minimum risk-based capital requirement.
| | - | -----------------------------------------



Each of these requirements generally must be no less stringent than the capital standards for national banks. At September 30, 2003, the Banks
tangible capital ratio was 5.75%, its core (or leverage) capital ratio was 5.75%, and its total risk-based capital ratio was 11.05%, compared to the minimum requirements of 1.50%, 4.00% and 8.00%, respectively.



The tangible capital requirement adopted by the OTS requires the Bank to
maintain tangible capital in an amount not less than 1.5% of tangible assets. Tangible capital is defined as core capital less investments in certain subsidiaries and any intangible assets (including supervisory goodwill),
plus qualifying servicing assets valued at the amount that can be included in core capital.



Under the minimum leverage capital requirement, Chevy Chase must maintain a ratio of core capital to tangible assets of not less than 4.0%. Core capital generally includes common
shareholders equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, less investments in certain subsidiaries and certain intangible assets.



Under OTS regulations, servicing assets can be included in core capital in an
amount up to 100% of core capital. Non-mortgage servicing assets are subject to a sublimit of 25% of core capital. For these purposes, servicing assets are valued at the lesser of 90% of fair market value or 100% of the current unamortized book
value. At September 30, 2003, the Bank had qualifying servicing assets with a carrying value of $90.7 million, which constituted 13.4% of core capital at that date.



The risk-based capital requirements imposed by the OTS vary the amount of capital required for an asset based on the degree
of credit risk associated with that asset and include, in the asset base, off-balance sheet items used to compute the Banks risk-based capital ratio.



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There are currently four categories of risk-weightings:



| |  | 0% for cash and similar assets;
| | - | -------------------------------



| |  | 20% for qualifying mortgage-backed securities;
| | - | ----------------------------------------------



| |  | 50% for qualifying residential permanent real estate loans; and
| | - | ---------------------------------------------------------------



| |  | 100% for other assets, including consumer loans, commercial real estate loans, loans more than 90 days past due, and real estate acquired in settlement of loans.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



The Bank generally must maintain risk-based
capital equal to 8.0% of risk-weighted assets, with at least half of that amount in the form of core capital.



Under OTS regulations, residential mortgage loans with negative amortization features that are initially assigned to the 50% risk-weighting may have to be
reassigned to the 100% risk-weighting if, as a result of negative amortization, the loan-to-value ratios are no longer commensurate with the risk associated with the loans. The OTS intends to conduct a more comprehensive assessment of
negatively amortizing loans and may issue supervisory guidance on their capital treatment.



Capital also must be maintained against assets sold with recourse despite the fact that the assets are accounted for as having been sold. The current rules:



| |  | require that risk-based capital be held in an amount equal to the amount of residual interests (which include interest-only strips receivable, spread accounts, cash collateral
accounts, over-collateralization of receivables, retained subordinated interests and other similar forms of on-balance sheet assets that function as credit enhancements) that are retained on balance sheet following a securitization, net of any
deferred tax liability (i.e., dollar-for-dollar), even if that amount exceeds the otherwise applicable capital requirement on the underlying loans;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | require a deduction from Tier 1 capital equal to the amount of credit enhancing interest-only strips receivable that exceeds 25 percent of Tier 1 capital; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | apply a ratings-based approach that sets capital requirements for positions in securitizations according to their relative risk exposure.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



For transactions entered into prior to January 1, 2002, previous capital
rules regarding the treatment of residual interests applied until December 31, 2002; thereafter, the current rules apply.



At September 30, 2003, the Bank had credit enhancing interest-only strips receivable of $8.0 million, which constituted 1.2% of Tier 1 capital.



The Bank may use supplementary capital to satisfy the
risk-based capital requirement up to an amount equal to its core capital. Supplementary capital includes cumulative perpetual preferred stock, qualifying non-perpetual preferred stock, qualifying subordinated debt, non-withdrawable accounts and
pledged deposits, and allowances for loan losses up to a maximum of 1.25% of risk-weighted assets. At September 30, 2003, the Bank had $58.4 million in its allowance for loan losses, all of which was includable as supplementary capital.



Subordinated debt may be included in supplementary capital with OTS
approval subject to a phase-out based on its remaining term to maturity. The phase-out permits these instruments to be included in supplementary capital under one of two options:



| |  | at the beginning of each of the last five years prior to the maturity date of the instrument, the Bank must reduce the amount eligible to be included by 20% of the original amount,
or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | during the seven years immediately prior to an instruments maturity, the Bank may include only the aggregate amount of maturing capital instruments that mature in any one year
that does not exceed 20% of its capital.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Bank has selected the second option for its subordinated debentures due 2005 and must continue to use
that option for its subordinated debentures due 2008 and any future issuances as long as the prior issuance remains outstanding. At September 30, 2003, the Bank had $250.0 million in maturing subordinated capital instruments, all of which was
includable as supplementary capital. Of that amount, $150.0 million matures in 2005 and $100.0 million matures in 2008. On December 2, 2003, the Bank issued $175 million of its 2003 Debentures. The net proceeds of the offering, along with short-term
borrowings, will be used to redeem all of the 1993 Debentures and the 1996 Debentures. The Bank plans to continue to use the second option for determining the amount of the 2003 Debentures that is eligible for inclusion in supplementary capital. See
Deposits and Other Sources of FundsBorrowings.



The OTS is authorized to establish individual minimum capital requirements for thrifts on a case-by-case basis, including capital requirements based on an application of its interest rate risk model used to identify those thrifts that are
exposed to excessive interest rate risk. The Bank continues to monitor its interest-rate exposure in accordance with OTS guidance. See Asset and Liability Management.



The OTS also considers concentration of credit risk and risks arising from non-traditional activities, as well as a
thrifts ability to manage these risks, in evaluating whether the thrift should be subject to increased capital requirements.



All or a portion of the assets of each of the Banks subsidiaries are generally consolidated with the assets of the Bank for regulatory capital
purposes unless all of the Banks investments in, and extensions of credit to, those subsidiaries are deducted from capital. The Banks investments in, and loans to, subsidiaries engaged in activities not permissible for a national bank
are, with certain exceptions, deducted from capital under each of the three regulatory capital requirements. The Banks real estate development subsidiaries are its only subsidiaries engaged in activities not permissible for a national bank. At
September 30, 2003, the Banks investments in, and loans to, these non-includable subsidiaries totaled approximately $1.1 million, of which $0.9 million constituted a deduction from tangible capital. The Bank has $0.2 million of
valuation allowances maintained against its non-includable subsidiaries, which, pursuant to OTS guidelines, are available as a credit against the otherwise required deductions from capital.



OTS capital regulations also require a 100% deduction from total capital of
all equity investments that are not permissible for national banks. The Bank has two assets at September 30, 2003 that are treated as equity investments for regulatory capital purposes. One is a property classified as real estate held for sale which
had a book value of $2.1 million at September 30, 2003. The other property is classified as property and equipment and had a book value of $21.9 million at September 30, 2003.This property was sold subsequent to September 30, 2003.



OTS capital regulations provide a five-year holding period for
real estate acquired in settlement of loans (REO or real estate held for sale) to qualify for an exception from treatment as an equity investment. The five year period may be extended by the OTS. If an REO property is
considered an equity investment, its then-current book value is deducted from total capital. Accordingly, if the Bank is unable to dispose of any REO property prior to the end of its applicable five-year holding period and is unable to obtain an
extension of that five-year holding period from the OTS, the Bank could be required to deduct the then-current book value of such REO property from risk-based capital. In February 2003, the Bank received from the OTS additional extensions through
February 7, 2004, of the holding periods for certain of its REO properties acquired through foreclosure in fiscal years 1990, 1991 and 1995. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsFinancial ConditionCapital.



Under
guidance issued by the OTS and other federal bank regulatory agencies, institutions with subprime lending portfolios that exceed 25% of Tier 1 capital generally are expected to hold capital against those portfolios in an amount that is 11/2to 3 times the amount required for non-subprime assets of the same type. However, examiners are given broad
discretion over how to apply the guidelines to a particular institution. The Banks subprime automobile lending portfolio (held through a subsidiary) did not exceed the 25% threshold at September 30, 2003.



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In January 2001, the Basle Committee on Banking Supervision published a revised proposal to amend its
1988 risk-based capital accord, which forms the basis for the risk-based capital requirements of the OTS and the other U.S. federal financial institution regulators. Key components of the revised proposal include:



| |  | adding a fifth risk-weighting of 150 percent for loans to low-quality companies;
| | - | --------------------------------------------------------------------------------



| |  | using rating agency assessments to determine risk-weightings for claims on banks, commercial loans and securitization interests;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | liberalizing capital requirements for certain collateralized and guaranteed loans;
| | - | ----------------------------------------------------------------------------------



| |  | authorizing regulators to use the supervisory review process to determine whether to impose increased capital requirements on individual institutions with high levels of
interest-rate risk or to require reduction of that risk;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | establishing a methodology for requiring that capital be maintained against operational risk; and
| | - | -------------------------------------------------------------------------------------------------



| |  | authorizing regulators to impose explicit capital requirements on managed or securitized assets.
| | - | ------------------------------------------------------------------------------------------------



The Basle Committee continues to review comments received on, and the results of several quantitative impact studies on the
effects of, its January 2001 release, as amended, and continues to refine its proposed amendments to the 1988 capital accord as appropriate. In August 2003, the OTS, along with the other federal banking regulators, issued an Advance Notice of
Proposed Rulemaking setting forth a framework for adoption of the new accord. Under the notice, only the largest U.S. banks would be subject to the new accord, which could adversely affect the competitive position of smaller institutions like the
Bank. The Basle Committee is working toward finalizing its amendments to the 1988 capital accord in late 2004, and U.S. banking regulators are expected to amend their capital rules by 2006. The Bank is unable to predict whether, or in what form, any
final changes will be adopted by the Basle Committee, or the extent to which any changes actually adopted will be reflected in the capital requirements that apply to the Bank.



The Banks ability to maintain capital compliance depends on a number of factors, including, for example, changes in
regulatory requirements, general economic conditions and the condition of local markets. See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital. The OTS has
the authority to require an institution to maintain capital at levels above the minimum levels generally required, but has not done so for the Bank.



PROMPT CORRECTIVE ACTION. The OTS and the other federal banking agencies have adopted regulations which apply to every FDIC-insured commercial bank
and thrift institution a system of mandatory and discretionary supervisory actions, which generally become more severe as the capital levels of an individual institution decline. The regulations establish five capital categories for purposes of
determining an institutions treatment under these prompt corrective action provisions.



An institution is categorized as well capitalized under the regulations if (i) it has a leverage ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital
ratio of at least 10.0%, and (ii) is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the OTS to meet and maintain a specific capital level.



An institution is considered adequately capitalized if its
leverage ratio is at least 4.0% (3.0% if rated in the highest supervisory category), its tier 1 risk-based capital ratio is at least 4.0% and its total risk-based capital ratio is at least 8.0%.



An institution with a leverage ratio below 4.0% (3.0% if rated in the highest
supervisory category), a tier 1 risk-based capital ratio below 4.0% or a total risk-based capital ratio below 8.0% is considered undercapitalized. An institution with a leverage ratio or tier 1 risk-based ratio under 3.0% or a total
risk-based ratio under 6.0% is considered significantly undercapitalized. Finally, an institution is considered critically



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##### Table of Contents

undercapitalized, and subject to provisions mandating appointment of a conservator or receiver, if its ratio of tangible equity to total
assets is 2.0% or less. Tangible equity generally includes core capital plus cumulative perpetual preferred stock.



An institutions classification category could be downgraded if, after notice and an opportunity for a hearing, the OTS determined that the
institution is in an unsafe or unsound condition or has received and has not corrected a less than satisfactory examination rating for asset quality, management, earnings or liquidity. The Bank has not received notice from the OTS of any potential
downgrade.



At September 30, 2003, the Banks leverage
ratio of 5.75%, its tier 1 risk-based ratio of 7.67%, and its total risk-based capital ratio of 11.05% exceeded the minimum ratios established for well-capitalized institutions.



QUALIFIED THRIFT LENDER TEST. The Bank must meet a Qualified Thrift
Lender (QTL) test to avoid imposition of certain restrictions. The QTL test requires the Bank to maintain a thrift investment percentage equal to a minimum of 65%. The numerator of the percentage is the Banks
qualified thrift investments and the denominator is the Banks portfolio assets. Portfolio assets is defined as total assets minus



| |  | the Banks premises and equipment used to conduct the Banks business;
| | - | ----------------------------------------------------------------------



| |  | liquid assets up to 20 percent of total assets; and
| | - | ---------------------------------------------------



| |  | intangible assets, including goodwill.
| | - | --------------------------------------



The QTL test must be met on a monthly average basis in nine out of every 12 months.



The Banks qualified thrift investments consist of residential housing loans (including home equity loans
and manufactured housing loans), mortgage-backed securities, FHLB and Fannie Mae stock, small business loans, credit card loans and educational loans. Portions of other assets are also includable, provided that the total of these assets does not
exceed 20% of portfolio assets. Assets in this category include consumer loans (other than credit card and educational loans); 50% of residential housing loans originated and sold within 90 days; investments in real estate-oriented service
corporations and 200% of mortgage loans for residences, churches, schools, nursing homes and small businesses in low- or moderate-income areas where credit demand exceeds supply. Intangible assets, including goodwill, are specifically excluded from
qualified thrift investments.



The Bank had 91.1% of its assets
invested in qualified thrift investments at September 30, 2003, and met the QTL test in each of the previous 12 months.



An institution that fails to meet the QTL test is subject to significant penalties. Immediately after an institution ceases to meet the QTL test, it may
not:



| |  | make any new investment or engage directly or indirectly in any other new activity unless the investment or activity would be permissible for a national bank;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | establish any new branch office at any location at which a national bank could not establish a branch office;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | obtain new advances from the FHLB; or
| | - | -------------------------------------



| |  | pay dividends beyond the amounts permissible if it were a national bank.
| | - | ------------------------------------------------------------------------



One year following an institutions failure to meet the QTL test, the institutions holding company parent must register and be subject to
supervision as a bank holding company. Three years after failure to meet the QTL test, an institution may not retain any investments or engage in any activities that would be impermissible for a national bank. Failure to meet the QTL test also could
limit the Banks ability to establish and maintain branches outside of its home state of Virginia.



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Because the Bank is engaged in activities that are not currently permissible for national banks, such as
investing in subsidiaries that engage in real estate development activities, failure to satisfy the QTL test would require the Bank to terminate these activities and divest itself of any prohibited assets held at such time. Based on a review of the
Banks current activities, management of the Bank believes that compliance with these restrictions would not have a significant adverse effect on the Bank. However, the B.F. Saul Real Estate Investment Trust (the Trust), which owns
80% of the common stock of the Bank, is engaged in real estate ownership and development activities currently prohibited for bank and financial holding companies. As a result, failure by the Bank to meet the QTL test, in the absence of a significant
restructuring of the Trusts operations, would, in effect, require the Trust to reduce its ownership of the Bank to a level at which it no longer would be deemed to control the Bank.



The Bank has taken, and will continue to take, steps to meet the QTL test by structuring its balance sheet to include the
required percentage of qualified thrift investments.



DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS.OTS regulations limit the ability of the Bank to make capital distributions. Capital distributions include payment of dividends, stock repurchases, cash-out mergers,
repurchases of subordinated debt and other distributions charged against the capital accounts of an institution. The regulations do not apply to interest or principal payments on debt, including interest or principal payments on the Banks
outstanding subordinated debentures.



The Bank must notify the
OTS before making any capital distribution. In addition, the Bank must apply to the OTS to make any capital distribution if the Bank does not qualify for expedited treatment under OTS regulations. If the Bank qualifies for expedited treatment, an
application is required only if the total amount of all of the Banks capital distributions for the year exceeds the sum of the Banks net income for the year and its retained net income for the previous two years.



In considering a notice or application, the OTS will not permit a capital
distribution if:



| |  | the Bank would be undercapitalized following the distribution;
| | - | --------------------------------------------------------------



| |  | the capital distribution raises safety and soundness concerns; or
| | - | -----------------------------------------------------------------



| |  | the capital distribution violates any statute, regulation, agreement with the OTS, or condition imposed by the OTS.
| | - | -------------------------------------------------------------------------------------------------------------------



The OTS had approved the payment of dividends on the Banks outstanding
13% Preferred Stock, provided that:



| |  | immediately after giving effect to the dividend payment, the Banks core and risk-based regulatory capital ratios would not be less than 4.0% and 8.0%, respectively;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | dividends are earned and payable in accordance with the OTS capital distribution regulation; and
| | - | ------------------------------------------------------------------------------------------------



| |  | the Bank continues to make progress in the disposition and reduction of its non-performing loans and real estate owned.
| | - | -----------------------------------------------------------------------------------------------------------------------



In October 2003, the Bank issued $125 million of its 8% Preferred Stock and
used the proceeds to redeem all of the 13% Preferred Stock on October 31, 2003. The OTS has informed the Bank that the advance conditional approval of dividends on the 13% Preferrred Stock will not apply to the 8% Preferred Stock. In addition, the
OTS has conditioned the Banks recent payments of common stock dividends on the Banks maintaining its well-capitalized status and there can be no assurance that the OTS will not impose a similar condition on payment of dividends on the 8%
Preferred Stock.



Dividends paid on the 103/8% Noncumulative Exchangeable Preferred Stock, Series A, (the REIT Preferred Stock) issued by Chevy
Chase Preferred Capital Corporation (the REIT Subsidiary) are not considered capital distributions provided the Bank is classified as well capitalized. However, if the Bank



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##### Table of Contents

were not classified as well capitalized, the entire amount of the REIT Subsidiary preferred dividends would be treated as a capital distribution.
See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital.



Failure of the Bank to remain well capitalized therefore could have a material adverse effect on the Banks ability to pay dividends on its common,
preferred and REIT Preferred Stock.



In May 1988, in connection
with the merger of a Virginia thrift into the Bank, the B.F. Saul Company (the Saul Company) and the Trust entered into a capital maintenance agreement in which they agreed not to cause the Bank, without prior written approval of the
OTS, to pay dividends in any fiscal year in excess of 50% of the Banks net income for that fiscal year, provided that any dividends permitted under such limitation could be deferred and paid in a subsequent year.



The Bank is subject to other limitations on its ability to pay dividends. The
indenture pursuant to which $150 million principal amount of the Banks 91/4% Subordinated Debentures due
2005 was issued in 1993 provides that the Bank may not pay dividends on its capital stock unless, after giving effect to the dividend, no event of a continuing default shall have occurred and the Bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed the sum of:



| |  | $15 million;
| | - | ------------



| |  | 662/3% of the Banks consolidated net
income (as defined) accrued on a cumulative basis commencing on October 1, 1993; and
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | the aggregate net cash proceeds received by the Bank after October 1, 1993 from the sale of qualified capital stock or certain debt securities, minus the aggregate amount of any
restricted payments made by the Bank.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Notwithstanding these restrictions on dividends, provided no event of default has occurred or is continuing under the 1993 Indenture, the 1993 Indenture does not restrict the payment of dividends on the 13% Preferred Stock or any
payment-in-kind preferred stock issued in lieu of cash dividends on the 13% Preferred Stock or the redemption of any such payment-in-kind preferred stock. The indenture pursuant to which $100 million principal amount of the Banks 1996
Debentures was issued provides that the proposed dividend may not exceed the sum of the restrictions discussed above for the 1993 Indenture and the aggregate liquidation preference of the Banks 103/8% Noncumulative Preferred Stock, Series B (the Series B Preferred Stock), if issued in exchange for the outstanding REIT Preferred Stock.



Under the indenture pursuant to which the Banks
2003 Debentures were issued, the Bank may not pay dividends on its stock unless, after giving effect to the dividend, no default or event of default has occurred and is continuing under the indenture and it is in compliance with its regulatory
capital requirements. In addition, the amount of the dividend (together with any other restricted payments under the indenture) may not exceed the sum of:



| |  | $50.0 million;
| | - | --------------



| |  | 662/3% of the Banks consolidated net
income (as defined) accrued on a cumulative basis commencing October 1, 2002; and
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | the aggregate cash proceeds received by the Bank after October 1, 2002 from the sale of qualified capital stock or certain debt securities, minus the aggregate amount of any
restricted payments (and certain amounts used to redeem securities) made by the Bank.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dividends on the 8% Preferred Stock and the REIT Preferred Stock are excluded from this limit on restricted payments.



See Managements Discussion and Analysis of Financial Condition
and Results of OperationsFinancial ConditionCapital and Security Ownership of Certain Beneficial Owners and Management.



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The payment of any dividends on the Banks common stock and preferred stock will be determined by
the Board of Directors based on the Banks liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors that the Board of Directors determines are relevant, including
applicable government regulations and policies. See Deposits and Other Sources of FundsBorrowings.



LENDING LIMITS.The Bank generally is prohibited from lending to one borrower and its related entities amounts in excess of 15% of unimpaired
capital and unimpaired surplus. The Bank may lend an additional 10% for loans fully secured by readily marketable collateral. The Banks regulatory lending limit was approximately $147.8 million at September 30, 2003, and no group relationships
exceeded this limit at that date.



SAFETY AND SOUNDNESS
STANDARDS.The federal financial institution regulators have developed standards to evaluate the operations of depository institutions, as well as standards relating to asset quality, earnings and compensation. The operational standards cover
internal controls and audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and employee compensation. An institution that fails to meet a standard that is imposed through regulation may be required to submit a
plan for corrective action within 30 days. If a savings association fails to submit or implement an acceptable plan, the OTS must order it to correct the deficiency, and may:



| |  | restrict its rate of asset growth;
| | - | ----------------------------------



| |  | prohibit asset growth entirely;
| | - | -------------------------------



| |  | require the institution to increase its ratio of tangible equity to assets;
| | - | ---------------------------------------------------------------------------



| |  | restrict the interest rate paid on deposits to the prevailing rates of interest on deposits of comparable amounts and maturities; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| |  | require the institution to take any other action the OTS determines will better carry out the purpose of prompt corrective action.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Imposition of these sanctions is within the discretion of the OTS in most
cases, but is mandatory if the savings institution commenced operations or experienced a change in control during the 24 months preceding the institutions failure to meet these standards, or underwent extraordinary growth during the preceding
18 months.



The asset quality standards require that the Bank
establish and maintain a system to identify problem assets and prevent deterioration of those assets. The earnings standards require that the Bank establish and maintain a system to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves.



REGULATORY ASSESSMENTS. The OTS imposes five separate fees to fund its operations:



| |  | semi-annual assessments for all savings institutions;
| | - | -----------------------------------------------------



| |  | examination fees for certain affiliates of savings institutions;
| | - | ----------------------------------------------------------------



| |  | application fees;
| | - | -----------------



| |  | securities filing fees; and
| | - | ---------------------------



| |  | publication fees.
| | - | -----------------



Of these fees, the semi-annual assessments are the most significant, totaling $1.8 million for the Bank for the 12 month period ending December 31, 2003.



The OTS formula for charging examination and supervisory
assessments imposes a surcharge on institutions with a supervisory rating of 3, 4 or 5. Surcharges are also imposed on complex institutions, which the OTS



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defines as any institution with over $1 billion of off-balance sheet assets consisting of loans serviced for others, trust assets and recourse obligations or
direct credit substitutes. The Bank is treated as a complex institution for these purposes.



ENVIRONMENTAL REGULATION.The Banks business and properties are subject to federal and state laws and regulations governing environmental
matters, including the regulation of hazardous substances and wastes. Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), and under some state laws, owners of properties
and secured lenders which take a deed-in-lieu of foreclosure, purchase a mortgaged property at a foreclosure sale, or operate a mortgaged property may become liable in some circumstances for the costs of cleaning up hazardous substances regardless
of whether they have contaminated the property. These costs could exceed the original or unamortized principal balance of a loan or the value of the property securing a loan. The Bank is eligible in many instances for an exemption from CERCLA
liability as a secured creditor, provided the Bank does not participate in the management of a property and only acts to protect its security interest in the property. Under this exemption, the Bank may foreclose on a mortgaged property, purchase it
at a foreclosure sale or accept a deed-in-lieu of foreclosure, provided it seeks to sell the mortgaged property at the earliest practicable commercially reasonable time on commercially reasonable terms. Other federal and state environmental laws may
impose additional liabilities in certain circumstances, including certain state laws that impose environmental liens that could be senior to the Banks prior recorded liens. These laws may influence the Banks decision whether to foreclose
on property that is found to be contaminated. The Banks general policy is to obtain an environmental assessment prior to foreclosing on commercial property.



OTHER REGULATIONS AND LEGISLATION. The Bank must obtain prior approval of the OTS before merging with another
institution or before acquiring insured deposits through certain transactions. Also, as a SAIF-insured institution, the Bank is subject to limitations on its ability to buy or sell deposits from or to, or to combine with, a BIF-insured institution.
Despite these restrictions, SAIF-insured thrifts may be acquired by banks or by bank holding companies under certain circumstances.



The federal agencies regulating financial institutions possess broad enforcement authority over the institutions they regulate, including the authority to
impose civil money penalties of up to $1 million per day for violations of laws and regulations.



Federally chartered thrifts like Chevy Chase generally are permitted to operate branches anywhere in the United States, provided that they meet the QTL
test and their regulatory capital requirements and have at least a satisfactory rating under the Community Reinvestment Act (CRA).



Amounts realized by the FDIC from the liquidation or other resolution of any insured depository institution must be distributed to pay claims (other than
secured claims to the extent of any such security) in the following order of priority:



| |  | administrative expenses of the receiver;
| | - | ----------------------------------------



| |  | any deposit liability of the institution;
| | - | -----------------------------------------



| |  | any other general or senior liability of the institution (which is not an obligation described below);
| | - | ------------------------------------------------------------------------------------------------------



| |  | any obligation subordinated to depositors or general creditors which is not a stockholder obligation; and
| | - | ---------------------------------------------------------------------------------------------------------



| |  | any obligation to stockholders arising as a result of their status as stockholders.
| | - | -----------------------------------------------------------------------------------



In response to the September 11, 2001 terrorist attacks, on October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the USA Patriot Act). Title III of the USA Patriot Act amends the Bank Secrecy Act and contains provisions designed to detect and
prevent the use of the U.S. financial system for money laundering and



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terrorist financing activities by, among other things, imposing new compliance obligations on savings associations, trust companies and securities
broker-dealers. Many of these compliance obligations focus on transactions between U.S. financial institutions and non-U.S. banks, entities and individuals, and therefore will not have a significant impact on the Banks operations. However, the
Bank has taken steps to enhance its anti-money laundering policies and procedures following enactment of the USA Patriot Act and will continue to monitor developments regarding implementation of the Act and make further adjustments to those policies
and procedures as appropriate.



On July 29, 2002, the
Department of Housing and Urban Development proposed a rule that would: (i) clarify the disclosure rules regarding yield spread premiums paid to mortgage brokers and their cost to borrowers, (ii) amend the format of the good faith estimate
(GFE) disclosure, and (iii) allow lenders to provide guaranteed packages of settlement services and prescribe a form, as an alternative to the traditional GFE disclosure, for lenders to use when presenting guaranteed packages of
settlement services to consumers. While the rule confirms that yield spread premiums are a permissible form of mortgage broker compensation and would permit the Bank to provide guaranteed packages of settlement services to its borrowers, the Bank is
uncertain whether or in what form the proposed rule will ultimately be adopted and accordingly is not yet able to ascertain the impact it may have on the Bank. The comment period on the proposed rule closed October 28, 2002 and no further action has
been taken.



FEDERAL RESERVE SYSTEM



The Federal Reserve Board requires the Bank to maintain reserves against its
transaction accounts and certain non-personal deposit accounts. Because reserves generally must be maintained in cash or non-interest-bearing accounts, the effect of the reserve requirement is to decrease the Banks earnings.



Prior to November 26, 2002, the first $5.7 million of the Banks
transaction accounts were subject to a 0% reserve requirement. The next $35.6 million in net transaction accounts were subject to a 3% reserve requirement and any net transaction accounts over $41.3 million were subject to a 10% reserve requirement.
Effective November 26, 2002, the FRB increased the amount of transaction accounts subject to a 0% reserve requirement from $5.7 million to $6.0 million and increased the low reserve tranche from $35.6 million to $36.1 million, which
brings the net transaction amount that was subject to the 10% reserve requirement to amounts over $42.1 million. The Bank met its reserve requirements for each period during the year ended September 30, 2003. Effective November 25, 2003, the first
$6.6 million of the Banks transaction accounts will be subject to a 0% reserve requirement. The next $38.8 million in net transaction accounts will be subject to a 3% reserve requirement and net transaction accounts over $45.4 million will be
subject to a 10% reserve requirement.



The Bank may borrow from
the Federal Reserves discount window. FDICIA imposes limitations on the ability of the Federal Reserve to lend to undercapitalized institutions through the discount window.



COMMUNITY REINVESTMENT ACT



Under the CRA and OTS regulations, the Bank has a continuing and affirmative
obligation to help meet the credit needs of its local communities, including low- and moderate-income neighborhoods and low- and moderate-income individuals and families, consistent with the safe and sound operation of the institution. The OTS is
required to assess the institutions record in satisfying the intent of the CRA in connection with its examination of the Bank. In addition, the OTS is required to take into account the Banks record of meeting the credit needs of its
community in determining whether to grant approval for certain types of applications.



The Bank is committed to fulfilling its CRA obligation by providing access to a full range of credit-related products and services to all segments of its community. Based on the last OTS examination covering the
period from January 2000 through December 2002, the Bank received an outstanding CRA rating. The Bank anticipates that its next CRA examination will take place in the latter part of 2004 or early in 2005.



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Under the CRA, the Bank is tested in three areas:



| |  | LENDINGhow well the Bank meets the credit needs of low- and moderate-income borrowers and neighborhoods in its defined assessment areas;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | SERVICEthe Banks ability to deliver reasonable and accessible financial products and services, such as retail banking branches and ATMs, and
support community development services, such as financial literacy education and homebuyer counseling; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | INVESTMENTthe Banks ability to commit to innovative and qualified CRA investments such as equity investments which support and promote
affordable housing and economic development in low- and moderate-income neighborhoods in the Banks assessment areas.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Examples of qualified CRA investments are the Banks investment in the Mid Atlantic Affordable Housing Fund I in January 2000 for $5 million and in
the Mid Atlantic Affordable Housing Fund II in March 2001 for $5 million. These investments allowed the Bank to provide equity financing to several multifamily housing projects located in Maryland, Delaware, Northern Virginia and the District of
Columbia, which provide rental housing for low- and moderate-income seniors and families. Because the Banks investments qualify for low-income housing tax credits under federal tax laws, the Bank will receive tax benefits relating to these
investments over the next 15 years.



During fiscal year 2003,
the Bank invested $100,000 of a $1.0 million commitment in the New Market Growth Fund (NMGF). NMGF, operating out of the University of Maryland in College Park, MD, is a $20 million venture capital fund that makes equity investments and
provides operational assistance to both early stage ventures and small to mid sized high growth companies located in low-to-moderate income (LMI) neighborhoods in the greater Baltimore and Washington metropolitan areas. The objective is
to invest in and build successful, high growth, sustainable companies which will support economic revitalization in LMI communities.



On July 19, 2001, the OTS and the other federal banking regulators issued a joint advance notice of proposed rulemaking, seeking public comment on a broad
range of issues under the agencies current CRA regulations in an effort to assess how the regulations should be amended to better analyze a financial institutions performance under the CRA. Recommendations on CRA changes are expected to
be released by the end of 2003. The Bank is unable to predict whether, or in what form, any final changes will be adopted, or the impact those changes may have on the Bank.



OTHER ASPECTS OF FEDERAL LAW



The Bank is also subject to federal statutory provisions covering matters such as security procedures, currency transactions reporting, insider and
affiliated party transactions, management interlocks, truth-in-lending, electronic funds transfers, funds availability, equal credit opportunity and privacy of consumer information.



HOLDING COMPANY REGULATION



The Trust, the Saul Company, Chevy Chase Property Company, and Westminster
Investing Corporation (the Holding Companies) are registered as savings and loan holding companies because of their direct or indirect ownership interests in the Bank, and are subject to regulation, examination and
supervision by the OTS. The Bank is prohibited from making or guaranteeing loans or advances to or for the benefit of the Holding Companies or other affiliates engaged in activities beyond those permissible for bank holding companies and from
investing in the securities of the Holding Companies or other affiliates. Transactions between the Bank and the Holding Companies must be on terms substantially the same, or at least as favorable to the Bank, as those that would be available to
non-affiliates.



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Recent revisions to the OTSs Regulatory Handbook for Holding Companies suggest a more active role
for the OTS in the direct regulation of thrift holding companies such as the Holding Companies. The current handbook places a greater emphasis on reviewing the adequacy of the Holding Companies capital, their level of debt, and their ability
to fund outstanding debt obligations, and suggests that particular scrutiny will be given to holding companies that, like the Holding Companies, are engaged in real estate activities.



The Holding Companies must obtain OTS approval before acquiring any federally insured savings institution or any savings and
loan holding company. The status of the Holding Companies as unitary thrift holding companies and the activities in which the Holding Companies may engage have been grandfathered under the Gramm-Leach-Bliley Act of 1999 (the GLB
Act). As grandfathered unitary thrift holding companies, the Holding Companies are virtually unrestricted in the types of business activities in which they may engage provided the Bank continues to meet the QTL test. See Qualified Thrift
Lender Test. The GLB Act prohibits the sale of grandfathered unitary thrift holding companies such as the Holding Companies (together with their thrift subsidiaries) or their thrift subsidiaries alone to commercial companies. Corporate
reorganizations are expressly permitted.



If the Holding
Companies were to acquire one or more federally insured institutions and operate them as separate subsidiaries rather than merging them into the Bank, the Holding Companies would become multiple savings and loan holding companies. As
multiple savings and loan holding companies, the Holding Companies would be subject to limitations on the types of business activities in which they would be permitted to engage, unless the additional thrifts were troubled institutions acquired
pursuant to certain emergency acquisition provisions and all subsidiary thrifts met the QTL test. The Holding Companies may acquire and operate additional savings institution subsidiaries outside of Maryland and Virginia only if the laws of the
target institutions state specifically permit such acquisitions or if the acquisitions are made pursuant to emergency acquisition provisions.



The Trust and the Saul Company entered into an agreement with OTSs predecessor, the Federal Savings and Loan Insurance Corporation, to maintain the
Banks regulatory capital at the required levels, and, if necessary, to infuse additional capital to enable the Bank to meet those requirements. Since the execution of this agreement, the OTS has changed its policy and no longer requires such
agreements from companies acquiring thrift institutions. In addition, the regulatory capital requirements applicable to the Bank have changed significantly as a result of FIRREA. The OTS has stated that capital maintenance agreements entered into
prior to the modification of OTS policy and the enactment of FIRREA were not affected by those changes. The Trust and the Saul Company have not sought to modify the existing agreement. To the extent the Bank is unable to meet regulatory capital
requirements in the future, the OTS could seek to enforce the obligations of the Trust and the Saul Company under the agreement.



If the Bank were to become undercapitalized under the prompt corrective action regulations, it would be required to file a capital restoration
plan with the OTS setting forth, among other things, the steps the Bank would take to become adequately capitalized. The OTS could not accept the plan unless the Holding Companies guaranteed in writing the Banks compliance with
that plan. The aggregate liability of the Holding Companies under such a commitment would be limited to the lesser of:



| |  | an amount equal to 5.0% of the Banks total assets at the time the Bank became undercapitalized, or
| | - | -----------------------------------------------------------------------------------------------------



| |  | the amount necessary to bring the Bank into compliance with all applicable capital standards as of the time the Bank fails to comply with its capital plan.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



If the Holding Companies refused to provide the guarantee, the Bank would
be subject to the more restrictive supervisory actions applicable to significantly undercapitalized institutions. See RegulationPrompt Corrective Action.



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RECENT ACCOUNTING PRONOUNCEMENTS



The Bank adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) effective October 1, 2000. SFAS 133 was amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
ActivitiesDeferral of Effective Date of Financial Accounting Standards Board Statement No. 133 (SFAS 137) and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan amendment
of FASB Statement No. 133 (SFAS 138). SFAS 133, as amended by SFAS 137 and SFAS 138, establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires an entity to recognize all
derivative instruments as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Changes in the fair value of those instruments are reported in earnings or other comprehensive income
depending on the use of the derivative, its hedge designation and whether the hedge is effective in achieving offsetting changes in the fair value or cash flows of the asset or liability hedged. On October 1, 2000, the Bank recorded an after tax
loss of $476,000 in Other Comprehensive Income representing its transition adjustment from the adoption of these standards.



On July 1, 2002, the Bank implemented FASB guidance regarding the application of SFAS 133, which requires that interest rate locks (IRL) on
mortgage loans held for sale be treated as derivatives. The IRLs are treated as free standing derivatives with changes in fair value recorded in the income statement and reported on the balance sheet. In connection with this change, the Banks
forward sale commitments were re-designated from cash flow hedges to either fair value hedges or non-designated hedge relationships. The net income statement impact of the change was $80,000, net of tax. The net impact on other accumulated
comprehensive income was $1.2 million.



The Bank adopted SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142) effective October 1, 2002. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 establishes new guidance on accounting for goodwill and
other assets acquired in a business combination and reaffirms that acquired intangible assets should initially be recognized at fair value and the costs of internally developed intangible assets should be charged to expense as incurred. SFAS 142
also requires that goodwill arising in a business combination should no longer be amortized, but, instead, be subjected to impairment testing. An impairment loss is recognized if fair value is less than the carrying amount. At October 1, 2002, the
fair value of the goodwill recorded on the Banks balance sheet exceeded its carrying value. See Note 13 to the Consolidated Financial Statements in this report.



SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144) was issued
in August 2001. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material
effect on the Banks financial condition or results of operations.



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation
expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from



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both the disclosure and recognition requirements of FIN 45, including, among others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan commitments, subordinated interests in a special purpose entity, and guarantees of a companys own future performance. Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS No. 133, a parents guarantee of debt owed to a third party by its subsidiary or vice versa,
and a guarantee which is based on performance, not price. The disclosure requirements of FIN 45 are effective for the Bank as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future
payments that the guarantor could be required to make under the guarantee, and the current amount of liability, if any, for the guarantors obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively
to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Banks consolidated financial condition or results of operations.



In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. FIN 46 is an Interpretation of Accounting Research Bulletin No. 51 and addresses consolidation by business enterprises of variable interest entities (VIEs). FIN 46 is based on the theory that an enterprise
controlling another entity through interests other than voting interests should consolidate the controlled entity. Business enterprises are required under the provisions of FIN 46 to identify VIEs, based on specified characteristics, and then
determine whether they should be consolidated. An enterprise that holds a majority of the variable interests in another enterprise is considered the primary beneficiary of that enterprise and, therefore, should consolidate the VIE. The primary
beneficiary of a VIE is also required to include various disclosures in interim and annual financial statements. Additionally, an enterprise that holds a significant variable interest in a VIE, but that is not the primary beneficiary, is also
required to make certain disclosures. At September 30, 2003, the Bank is the primary beneficiary of one VIE, which holds the ground lease under the Banks executive offices. The Bank adopted FIN 46 effective July 1, 2003 and, as a result,
recorded a $0.9 million gain as a cumulative effect of a change in accounting principle, net of tax. In addition, the Bank recorded $31.4 million each in property and equipment and minority interest on the Consolidated Balance Sheet effective July
1, 2003 related to the ground lease. See Notes 16 and 32 to the Consolidated Financial Statements in this report.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS
149). This statement amends Statement 133 for certain decisions made by the FASBs Derivatives Implementation Group. SFAS 149 also amends SFAS 133 to incorporate clarification of the definition of a derivative. SFAS 149 requires contracts
with comparable characteristics to be accounted for similarly and will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and
should be applied prospectively. The adoption of this statement did not have a material effect on the Banks financial condition or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments
as liabilities, which may have been previously classified as equity, because those instruments embody obligations of the issuer. SFAS 150 also requires disclosure of the nature and terms of the financial instruments and the rights and obligations
embodied in those instruments. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective as of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not
have a material impact on the Banks financial condition or results of operations.



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MARKET AREA



The Banks principal deposit and lending markets are located in the Washington, DC metropolitan area. Service industries and federal, state and local
governments employ a significant portion of the Washington, DC area labor force, while a substantial number of the nations 500 largest corporations have some presence in the area. The Washington, DC areas seasonally unadjusted
unemployment rate is generally below the national rate and was 3.2% in September 2003, compared to the national rate of 6.1%.



Chevy Chase historically has relied on retail deposits originated in its branch network as its primary funding source. See Deposits and Other
Sources of Funds. Chevy Chases principal market for deposits consists of Montgomery and Prince Georges Counties in Maryland and Fairfax County in Virginia. Approximately 6.2% of the Banks deposits at September 30, 2003 were
obtained from depositors residing outside of Maryland, Northern Virginia and the District of Columbia. Chevy Chase had the largest market share of deposits in Montgomery County, ranked third in market share of deposits in Prince Georges County
and ranked seventh in market share in Fairfax County at June 30, 2003, according to the most recently published industry statistics. The per capita incomes of Montgomery and Fairfax Counties rank among the highest of counties and equivalent
jurisdictions nationally. These two counties are also the Washington, DC areas largest suburban employment centers, with a substantial portion of their labor force consisting of federal, state and local government employees. Private employment
is concentrated in services and retail trade centers. The unemployment rate in each of Montgomery, Prince Georges and Fairfax Counties in September 2003 was 2.5%, 4.5% and 2.4%, respectively, each of which was below the national rate of 6.1%.
The individual state rates were 4.1% for Maryland and 3.8% for Virginia for the same month.



The Bank historically has concentrated its lending activities in the Washington, DC metropolitan area. In recent years, the Bank has expanded its lending activities outside the Washington, DC Metropolitan area. See
Lending Activities.



INVESTMENT AND OTHER SECURITIES



The Bank is required by OTS regulations to maintain
sufficient liquidity to ensure its safe and sound operations. See RegulationLiquidity Requirements. To meet this requirement, the Bank maintains a portfolio of cash, federal funds, treasury securities and other readily marketable
fixed-income securities. Managements objective is to maintain liquidity at a level sufficient to assure adequate funds to meet expected and unexpected balance sheet fluctuations.



The Bank classifies its U.S. Government securities and mortgage-backed securities as either held-to-maturity,
available-for-sale or trading at the time such securities are acquired. All U.S. Government securities and mortgage-backed securities were classified as held-to-maturity at September 30, 2003 and 2002.



As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed securities, which are classified as trading securities, to third party investors in the month of issuance. Gains and losses on sales of trading securities are determined using
the specific identification method. There were no mortgage-backed securities classified as trading securities at September 30, 2003 and 2002.



At September 30, 2002, the Bank held shares in Concord EFS, Inc., a publicly traded ATM service provider, with a carrying value of $3.9 million, which
were classified as trading securities. The Bank sold the shares in Concord EFS, Inc. during fiscal year 2003.



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LENDING AND LEASING ACTIVITIES



LOAN PORTFOLIO COMPOSITION. At September 30, 2003, the Banks loan portfolio totaled $8.9 billion, which
represented 75.8% of its total assets. All references in this report to the Banks loan portfolio refer to loans, whether they are held for sale and/or securitization or for investment, and exclude mortgage-backed securities. Loans
collateralized by single-family residences constituted 79.7% of the loan portfolio and 60.2% of total assets at that date. The following table sets forth information concerning the Banks loan portfolio, net of unfunded commitments, for the
periods indicated.



Loan Portfolio

(Dollars in thousands)



|                                             |  | September 30, |          
|-------------------------------------------- |  | ------------- | ---------
|                                             |  | 2003          |          
|                                             |  | Balance       |          
|Single family residential (1)                |  | $             | 5,761,993
|Home equity (1)                              |  |               | 1,336,776
|Commercial real estate and multifamily       |  |               | 19,435   
|Real estate construction and ground (2)      |  |               | 234,356  
|Commercial (2)                               |  |               | 888,847  
|Prime automobile loans (1)                   |  |               | 492,896  
|Subprime automobile loans (1)                |  |               | 96,128   
|Home improvement and related loans (1)       |  |               | 48,145   
|Overdraft lines of credit and other consumer |  |               | 36,461   
|                                             |  |               |          
|                                             |  |               | 8,915,037
|                                             |  |               |          
|Less:                                        |  |               |          
|Unearned premiums and discounts              |  |               | (1,428   
|Net deferred loan origination costs          |  |               | (80,320  
|Allowance for loan losses                    |  |               | 58,397   
|                                             |  |               |          
|                                             |  |               | (23,351  
|                                             |  |               |          
|Total loans receivable                       |  | $             | 8,938,388
|                                             |  |               |          

---

|(1) | Includes loans held for securitization and/or sale, if any.
|--- | -----------------------------------------------------------

|(2) | Net of undisbursed portion of loans.
|--- | ------------------------------------



The Bank adjusts the composition of its loan portfolio in response to a variety of factors, including regulatory requirements and asset and liability
management objectives. See RegulationRegulatory Capital, Qualified Thrift Lender Test and Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial
ConditionAsset and Liability Management.



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CONTRACTUAL PRINCIPAL REPAYMENTS OF LOANS. The following table shows the scheduled contractual
principal repayments of the Banks loans at September 30, 2003. The entire balance of loans held for securitization and/or sale is shown in the year ending September 30, 2004, because such loans are expected to be sold in less than one year.



Contractual Principal Repayments

(In thousands)



|                                                   |  | PrincipalBalanceOutstanding atSeptember 30,2003(1) |           | Approximate Principal Repayments Due in Years Ending September 30,
|-------------------------------------------------- |  | -------------------------------------------------- | --------- | ------------------------------------------------------------------
|                                                   |  | 2004                                               |           | 2005                                                              
|Single family residential                          |  | $                                                  | 4,397,394 |                                                                   
|Home equity                                        |  |                                                    | 1,336,776 |                                                                   
|Commercial real estate and multifamily             |  |                                                    | 19,435    |                                                                   
|Real estate construction and ground                |  |                                                    | 234,356   |                                                                   
|Commercial                                         |  |                                                    | 888,847   |                                                                   
|Prime automobile loans                             |  |                                                    | 492,896   |                                                                   
|Subprime automobile loans                          |  |                                                    | 96,128    |                                                                   
|Home improvement and related loans                 |  |                                                    | 48,145    |                                                                   
|Overdraft lines of credit and other consumer loans |  |                                                    | 36,461    |                                                                   
|Loans held for securitization and/or sale          |  |                                                    | 1,364,599 |                                                                   
|                                                   |  |                                                    |           |                                                                   
|Total loans and leases receivable(2)               |  | $                                                  | 8,915,037 |                                                                   
|                                                   |  |                                                    |           |                                                                   
|Fixed-rate loans                                   |  | $                                                  | 2,356,548 |                                                                   
|Adjustable-rate loans                              |  |                                                    | 5,193,890 |                                                                   
|Loans held for securitization and/or sale          |  |                                                    | 1,364,599 |                                                                   
|                                                   |  |                                                    |           |                                                                   
|Total loans receivable(2)                          |  | $                                                  | 8,915,037 |                                                                   
|                                                   |  |                                                    |           |                                                                   

---

|(1) | Of the total amount of loans and leases outstanding at September 30, 2003, which were due after one year, an aggregate principal balance of approximately $1.8 billion had fixed
interest rates and an aggregate principal balance of approximately $4.9 billion had adjustable interest rates.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Before deduction of allowance for loan and lease losses, unearned premiums and discounts and deferred loan origination fees (costs).
|--- | ------------------------------------------------------------------------------------------------------------------------------------



Actual payments may not reflect scheduled contractual principal repayments
due to the effect of loan refinancings, prepayments and enforcement of due-on-sale clauses. Due-on-sale clauses give the Bank the right to declare a conventional loanone that is neither insured by the Federal Housing Administration
nor partially guaranteed by the Veterans Administrationimmediately due and payable in the event, among other



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things, that the borrower sells the property securing the loan without the consent of the Bank. Although the Banks single-family residential loans
historically have had stated maturities of generally 30 years, such loans normally have remained outstanding for substantially shorter periods because of these factors. At September 30, 2003, excluding loans held for securitization and/or sale,
aggregate principal repayments of $823.8 million against all loans are contractually due within the next year. Of this amount, $546.0 million is due on fixed-rate loans and $277.8 million is due on adjustable-rate loans.



ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS. The Bank has
general authority to make loans secured by real estate located throughout the United States. The following table shows changes in the composition of the Banks real estate loan portfolio and the net change in mortgage-backed securities.



Origination, Purchase and Sale of Real Estate Loans

(In thousands)



|                                                                 |  | For the Year Ended September 30, |           
|---------------------------------------------------------------- |  | -------------------------------- | ----------
|                                                                 |  | 2003                             |           
|Real estate loan originations and purchases:(1)                  |  |                                  |           
|Single family residential                                        |  | $                                | 9,009,575 
|Home equity                                                      |  |                                  | 1,032,924 
|Commercial real estate and multifamily                           |  |                                  | 1,231     
|Real estate construction and ground                              |  |                                  | 274,856   
|                                                                 |  |                                  |           
|Total originations and purchases                                 |  |                                  | 10,318,586
|                                                                 |  |                                  |           
|Principal repayments                                             |  |                                  | (2,767,214
|Sales                                                            |  |                                  | (3,753,682
|Loans transferred to real estate acquired in settlement of loans |  |                                  | (3,019    
|                                                                 |  |                                  |           
|                                                                 |  |                                  | (6,523,915
|                                                                 |  |                                  |           
|Transfers to mortgage-backed securities(2)                       |  |                                  | (2,358,732
|                                                                 |  |                                  |           
|Increase (decrease) in real estate loans                         |  | $                                | 1,435,939 
|                                                                 |  |                                  |           

---

|(1) | Net of undisbursed portion of loans.
|--- | ------------------------------------

|(2) | Represents real estate loans which were pooled and exchanged for mortgage-backed securities.
|--- | --------------------------------------------------------------------------------------------



SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING.The Bank originates a variety of loans secured by single-family
residences. At September 30, 2003, $7.1 billion, or 79.7%, of the Banks loan portfolio consisted of loans secured by first or second mortgages on such properties, as compared to $5.6 billion, or 73.1%, at September 30, 2002. Of these amounts,
$44.2 million and $12.9 million consisted of FHA-insured or VA-guaranteed loans at September 30, 2003 and 2002, respectively. Approximately 26.0% of the principal balance of the Banks single-family residential real estate loans at September
30, 2003 were secured by properties located in Maryland, Virginia or the District of Columbia.



The Bank originates VA, FHA and a wide variety of conventional residential mortgage loans through its wholly owned mortgage banking subsidiary, B. F. Saul Mortgage Company, and through Chevy Chase Mortgage, a division
of the Bank. The Bank currently offers fixed-rate loans with maturities of 10 to 30 years and adjustable-rate residential mortgage loans, principally with maturities of 30 years.



The Bank maintains a network of third party originators, including loan brokers and financial institutions, in order to
supplement its direct origination of single-family residential mortgage loans. The Bank determines the



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specific loan products and rates under which the third party originates the loan, and subjects the loan to the Banks underwriting criteria and review.
During the year ended September 30, 2003, approximately $6.0 billion of loans settled under this program.



Interest rates on the majority of the Banks ARMs are adjusted based on either changes in (a) yields on U.S. Treasury securities or (b) the London
Interbank Offered Rate (LIBOR) of varying maturities. The interest rate adjustment provisions of the Banks ARMs may contain limitations on the frequency and/or maximum amount of interest rate adjustments. These limitations are
determined by a variety of factors, including mortgage loan competition in the Banks markets.



The Bank has significantly expanded its origination of residential ARMs with interest rates that adjust monthly, semi-annually and annually, some of which
provide a borrower with a below-market introductory interest rate and a variety of monthly payment options. Certain of these loans have a payment option that could result in interest being added to the principal of the loan, or negative
amortization. During fiscal years 2003 and 2002, the Bank originated $3.9 billion and $3.0 billion, respectively, of these ARMs, of which $2.4 billion and $2.7 billion, respectively, contained terms that permit negative amortization. At
September 30, 2003, loans with this negative amortization option totaled $2.7 billion, which includes approximately $1.1 million of negative amortization in excess of the original principal balance of those loans with negative amortization. Each
loan contains terms which limit the amount of negative amortization to a percentage of the original loan amount. The Bank is monitoring the risks associated with these ARM products, and has established terms for loans it originates (including caps
on the amount of negative amortization) designed to minimize credit risks without adversely affecting the Banks competitive position. Increased emphasis of these ARM products is a key part of managements efforts to focus on originating
mortgage loans with interest rates that adjust more frequently in order to reduce the Banks interest-rate risk in the event market interest rates rise from their current low levels. At September 30, 2003, 87.9% of the Banks single-family
residential loans were comprised of ARMs and 61.7% of the Banks single-family residential loans were comprised of ARMs that have interest rates which adjust annually or more frequently.



Loan sales provide the Bank with liquidity and additional funds for lending,
enabling the Bank to increase the volume of loans originated and thereby increase loan interest and fee income as well as gains on sales of loans. In fiscal year 2003, sales of mortgage loans originated or purchased for sale by the Bank totaled $3.8
billion compared to $2.0 billion during fiscal year 2002. The marketability of loans, loan participations and mortgage-backed securities depends on purchasers investment limitations, general market and competitive conditions, mortgage loan
demand and other factors.



The Banks conforming
fixed-rate, single-family loans are originated on terms which conform to Federal Home Loan Mortgage Corporation, Federal National Mortgage Association or Government National Mortgage Association guidelines in order to facilitate the securitization
and/or sale of those loans. In order to manage its interest-rate exposure, the Bank hedges its held for sale mortgage loan pipeline by entering into whole loan and mortgage-backed security forward sale commitments. Sales of residential mortgage
loans are generally made without recourse to the Bank. At September 30, 2003 and 2002, the Bank had $1.4 billion and $930.6 million, respectively, of single-family residential loans held for securitization and/or sale to investors.



From time to time, as part of its capital and liquidity management plans, the
Bank may consider exchanging loans held in its portfolio for lower risk-weighted mortgage-backed securities and retaining those securities in its portfolio rather than selling them. During fiscal years 2003 and 2001, the Bank exchanged $88.5 million
and $837.7 million, respectively, of single-family residential loans held in its portfolio for mortgage-backed securities, which the Bank retained for its own portfolio. The Bank did not exchange any of its loans held in its portfolio for
mortgage-backed securities during fiscal year 2002.



When the
Bank sells a residential whole loan or loan participation and retains servicing, or purchases mortgage servicing assets from third parties, it collects and remits loan payments, makes certain insurance and



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tax payments on behalf of borrowers and otherwise services the loans. The servicing fee, generally ranging from 0.25% to 0.50% per year of the outstanding
loan principal amount, is recognized as income over the life of the loans. The Bank also typically derives income from temporary investment for its own account of loan collections pending remittance to the participation or whole loan purchaser. At
September 30, 2003 and 2002, the Bank was servicing residential permanent loans totaling $8.0 billion and $6.9 billion, respectively, for other investors. See Loan Servicing.



SALES OF MORTGAGE-BACKED SECURITIES.The Bank originates and sells mortgage-backed securities pursuant to its normal
mortgage banking operations. The securities are generally sold in the same month as they are issued. The securities are formed from conforming mortgage loans originated for sale or from conforming mortgage loans resulting from the borrowers
election to convert from an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities held for sale in conjunction with mortgage banking activities are classified as trading securities. During the years ended September 30, 2003 and 2002,
the Bank originated and sold $2.3 billion and $1.2 billion, respectively, of mortgage-backed securities and recognized gains of $30.4 million and $6.2 million, respectively. As a result of the sale of trading securities in the month such securities
are formed, the Consolidated Statements of Cash Flows in this report reflect significant proceeds from the sales of trading securities, even though there are no balances of such securities at September 30, 2003.



HOME EQUITY LENDING. The Bank makes home equity loans and credit line
loans, the majority of which are secured by a first or a second mortgage on the borrowers home. Home equity credit line loans provide revolving credit, bear interest at a variable rate that adjusts monthly based on changes in the applicable
interest rate index and generally are subject to a maximum annual interest rate of between 18.0% and 24.0%. Generally, except for any amortization of principal that may occur as a result of monthly payments, there are no required payments of
principal until maturity. Home equity loans have fixed rates of interest and amortize over their term, which ranges from five to 20 years.



From time to time, the Bank may purchase home equity loans and credit line loans from other lenders as a way to supplement its direct origination of these
loans. During fiscal years 2003 and 2002, the Bank made no such purchases.



Securitization and sale of home equity credit line receivables has been an important element of the Banks strategies to enhance liquidity and to maintain compliance with regulatory capital requirements. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition. The Bank transferred $11.5 million and $32.8 million of home equity credit line receivables in existing trusts to
investors and recognized gains of $0.5 million and $1.3 million during the years ended September 30, 2003 and 2002, respectively. The Bank continues to service the underlying accounts.



COMMERCIAL REAL ESTATE AND REAL ESTATE CONSTRUCTION LENDING. Commercial real estate, real estate construction and
ground loans are originated directly by the Bank. Aggregate balances of residential and commercial construction, ground and commercial real estate and multifamily loans decreased 9.6% to $253.8 million at September 30, 2003, from $280.8 million at
September 30, 2002. The Bank provides financing, at market rates, to certain purchasers of its real estate owned. Additionally, the Bank finances the construction of residential real estate, principally single-family detached homes and townhouses,
but generally only when a home is under contract for sale by the builder to a consumer. Loan concentrations among types of real estate are reviewed and approved by the Banks Credit Risk Management Committee.



COMMERCIAL LENDING.The Bank makes loans to business entities for a
variety of purposes, including working capital and acquisitions of real estate, machinery and equipment or other assets. A wide variety of products are offered, including revolving lines of credit for working capital or seasonal needs; term loans
for the financing of fixed assets; letters of credit; cash management services; and other deposit and investment products. Concentrations among industries and structure types, such as syndications, are reviewed and approved by the Banks Credit
Risk Management Committee.



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Business development efforts of the Banks Business Banking Group have been concentrated in the
major industry groups in the metropolitan Washington, DC and Baltimore areas, as well as a broad base of businesses and community service organizations. Commercial loans increased $85.7 million (or 10.7%) during fiscal year 2003 to $888.8 million at
September 30, 2003 from $803.2 million at September 30, 2002. In addition, management believes that the ability to offer a broader variety of investment products and fiduciary services to institutional customers through the Banks subsidiaries,
ASB Capital Management, Inc. and Chevy Chase Trust Company, will continue to enhance the operations of the Business Banking Group.



At September 30, 2003, the Bank held $186.9 million (21.0% of total commercial loans) of participations in commercial loans originated by other financial
institutions, a decrease from $212.2 million (26.4% of total commercial loans) at September 30, 2002.



Federal laws and regulations limit the Banks commercial loan portfolio to 20% of assets, with at least 10% consisting of small business loans. At
September 30, 2003 the Bank complied with this limit.



OTHER
CONSUMER LENDING ACTIVITIES. Effective March 26, 2003, the Bank stopped originating indirect automobile loans. The Bank continues its collection efforts on the existing portfolio, and continues to serve its customers by making direct prime
automobile loans. In addition to the types of loans described above, Chevy Chase currently offers a variety of other consumer loans, including overdraft lines of credit and other unsecured loans for traditional consumer purchases and needs. The Bank
does not offer its own credit card loans, but has an agreement with another financial institution pursuant to which that institution issues credit cards in the Banks name to the Banks local customers. The Banks portfolios of
automobile loans, home improvement and related loans and other consumer loans totaled $589.0 million, $48.1 million and $36.5 million, respectively, at September 30, 2003, which accounted for a combined 7.6% of total loans at that date.



The Bank stopped originating subprime automobile loans in November 2000.
The Banks subprime automobile lending portfolio, which totaled $96.1 million at September 30, 2003, represents 14.2% of its Tier 1 capital. The Bank continues its collection efforts on the remaining portfolio.



Federal and state lawmakers and regulators are considering, and in some cases
have adopted, a variety of additional requirements relating to subprime and perceived abusive or predatory lending practices. Those requirements range from increased reporting and capital requirements to prohibition of specific lending
practices. In light of the Banks decision to stop originating subprime automobile loans, management currently believes that any other enactments of new regulatory requirements for these types of loans should not have a material adverse effect
on the Banks financial condition.



Federal laws and
regulations limit the Banks secured and unsecured consumer loans to 35% of its total assets. Home improvement, secured deposit account and educational loans are not included in the 35% limit. At September 30, 2003, the Bank complied with this
limit.



AUTOMOBILE LEASING. Effective March 26, 2003,
the Bank stopped originating indirect automobile leases. The Bank continues its collection efforts on the existing portfolio, and continues to serve its customers by making direct prime automobile loans. At September 30, 2003 and 2002, the
Banks portfolio of automobiles subject to lease totaled $855.4 million and $1.1 billion, respectively. In addition to credit risk associated with a lessees possible default under the lease, the Bank is exposed to the risk that the value
of the vehicle at maturity of the lease may be less than the future residual value as estimated by the Bank at the inception of the lease. To reduce that risk, the Bank (a) purchases insurance in the full amount of the estimated residual value to
protect the Bank against possible future decreases in residual values, and (b) does not use estimates of residual value that exceed published industry estimates unless that excess is also insured.



Although the Bank insures residual values, limitations in the insurance
policy, and other factors, may result in losses at lease maturity that may not be fully covered by that insurance.



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REAL ESTATE LOAN UNDERWRITING. In the loan approval process, Chevy Chase assesses both the
borrowers ability to repay the loan and the adequacy of the proposed security. The Board of Directors has delegated credit approval authority to the Executive Loan Committee and certain senior officers based on credit authorizations approved
by the Board of Directors. Generally, all construction and commercial real estate loans originated by the Banks commercial lending group are reviewed and approved by the Executive Loan Committee. Any significant loan not conforming to the
Banks approved policies must be approved by the Executive Loan Committee or the Chief Executive Officer. All credit exposures of $30 million or more are presented to the Board of Directors for final approval.



The approval process for all types of real estate loans includes appraisals
or evaluations of the properties securing such loans and a review of the applicants financial information and credit and payment history, financial statements of any guarantors, and tax returns of guarantors of construction and commercial real
estate loans.



In an effort to minimize the increased risk of
loss associated with construction and development loans, Chevy Chase considers the reputation of the borrower and the contractor, reviews pre-construction sale and leasing information, and requires an independent inspecting engineer or architect to
review the progress of multifamily and commercial real estate projects. In addition, the Bank generally requires personal guarantees of developers for all development loans and, if a general contractor is used by the developer, may require the
posting of a performance bond.



The Bank generally lends on its
residential mortgage loans up to 95% of the appraised value of owner-occupied single-family homes. In some circumstances, the Bank originates a first and second residential mortgage loan simultaneously, provided that the aggregate loan amount does
not exceed 95% of the appraised value of the residential property. The Bank generally also lends up to 90% of the lesser of the acquisition cost or the appraised value of the completed project to finance the construction of such homes. The
loan-to-value (LTV) ratio generally applied by the Bank to commercial real estate loans and multifamily residential loans has been 80% of the appraised value of the completed project. Currently, the Bank offers home equity loans and
credit line loans up to a 100% maximum loan-to-value ratio.



LTV ratios are determined at the time a loan is originated. Consequently, subsequent declines in the value of a loans collateral could expose the Bank to losses. Loans with LTV ratios above 90 percent without mortgage insurance may
not exceed 100 percent of the Banks total risk-based capital.



OTS regulations require institutions to adopt internal real estate lending policies, including LTV limitations conforming to specific guidelines established by the OTS. The Banks current lending policies conform to these regulations.



On all loans secured by real estate, other than home
improvement and related loans and certain home equity credit line loans, Chevy Chase requires title insurance policies protecting the priority of the Banks liens. The Bank requires fire and casualty insurance for permanent loans including home
equity credit line loans and fire, casualty and builders risk insurance for construction loans. The borrower selects the insurance carrier, subject to Chevy Chases approval. Generally, for any residential loan in an amount exceeding 80%
of the appraised value of the security property, Chevy Chase currently requires mortgage insurance from an independent mortgage insurance company. The majority of the Banks mortgage insurance is currently placed with four carriers.



Substantially all fixed-rate mortgage loans originated by the Bank contain
a due-on-sale clause which provides that the Bank may declare a loan immediately due and payable in the event, among other things, that the borrower sells the property securing the loan without the consent of the Bank. The Banks ARMs generally
are assumable, subject to certain conditions.



COMMERCIAL
LOAN UNDERWRITING.All commercial loan applications are underwritten and approved under authorities granted to specified committees and individuals as outlined in the Banks credit policies. All credit exposures of $30 million or more are
presented to the Board of Directors for final approval.



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The scope and depth of the underwriting for a particular request are generally dictated by the size and complexity of the proposed transaction. All
commercial loans greater than $100,000 are assigned a risk rating at inception, based on a risk-rating system established in the Banks credit policies.



Subsequent to origination, all commercial loans with balances greater than $100,000 are reviewed annually. Changes in the credit quality of the loans are
noted and the risk ratings are modified as appropriate.



OTHER CONSUMER LOAN AND LEASE UNDERWRITING.Other consumer loans, which include automobile loans, home improvement and related loans and overdraft lines of credit, and automobiles subject to lease are originated or purchased by the
Bank after a review in accordance with established underwriting procedures.



The underwriting procedures are designed to provide a basis for assessing the borrowers ability and willingness to repay the loan or make the payments required under the lease. In conducting this assessment, the
Bank considers the borrowers ratio of debt to income, various credit scoring models and evaluates the borrowers credit history through a review of a written credit report compiled by a recognized consumer credit reporting bureau. The
borrowers equity in the collateral and the terms of the loan or lease are also considered. The Banks guidelines are intended only to provide a basis for lending decisions, and exceptions to the guidelines may, within certain limits, be
made based upon the credit judgement of the Banks lending officer. The Bank periodically conducts audits to ensure compliance with its established underwriting policies and procedures. Effective March 2003, the Bank stopped originating and
purchasing indirect prime automobile loans and leases.



The
Bank purchases residual value insurance on vehicles subject to lease to reduce the risk that the vehicles value at maturity of the lease may be less than the estimated future residual value at the inception of the lease. The Bank periodically
conducts audits of its vehicle lease files to ensure compliance with the requirements of the residual value insurance policies.



Prior to November 2000, the Bank also originated subprime automobile loans through one of its operating subsidiaries. The underwriting guidelines for this
subsidiary applied to a category of lending in which loans may be made to applicants who have experienced certain adverse credit events and therefore would not necessarily meet all of the Banks guidelines for its traditional loan program, but
who meet certain other creditworthiness tests. These loans may experience higher rates of delinquencies, repossessions and losses, especially under adverse economic conditions, compared with loans originated pursuant to the Banks traditional
lending program. In November 2000, the Bank stopped the origination of subprime automobile loans. The Bank continues its collection efforts on the remaining portfolio.



LOAN ORIGINATIONS, SECURITIZATIONS AND SALESRETAINED INTERESTS AND SERVICING ASSETS.In connection with its
loan origination, securitization and sale activities, the Bank generally retains various interests in the sold loans, including servicing assets and interest-only strips receivable. The Bank also purchases servicing assets related to loans
originated by third parties. The Bank records these interests as assets on its financial statements. In some cases, the Bank determines the carrying value of the asset based on expected future cash flows to be received by the Bank from the
underlying asset. Some of these cash flows are payable to the Bank before the claims of others, while other cash flows are subordinated to the claims of others. The table below summarizes the carrying value of these assets at September 30, 2003.



|                                |  | Not Subordinated |         | Subordinated |   | Total 
|------------------------------- |  | ---------------- | ------- | ------------ | - | ------
|                                |  | (in thousands)  
|Servicing assets                |  | $                | 96,268  |              | $ |      
|Interest-only strips receivable |  |                  | 131,764 |              |   | 8,017 
|Overcollateralization of loans  |  |                  |        |              |   | 4,678 
|Reserve accounts                |  |                  |        |              |   | 19,034
|                                |  |                  |         |              |   |       
|Total                           |  | $                | 228,032 |              | $ | 31,729
|                                |  |                  |         |              |   |       



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LOAN SERVICING.The Banks investment in servicing assets is periodically evaluated for
impairment. The Bank stratifies its servicing assets for purposes of evaluating impairment by taking into consideration relevant risk characteristics, including loan type and note rate. The Bank evaluates its servicing assets for impairment based on
fair value. To measure fair value of its servicing assets, the Bank uses either third party market prices or discounted cash flow analyses using market based assumptions for servicing fee income, servicing costs, prepayment rates and discount rates.



If actual prepayment or default rates significantly exceed the
estimates used to calculate the carrying values of the servicing assets, the actual amount of future cash flow could be less than the expected amount and the value of the servicing assets, as well as the Banks earnings, could be negatively
impacted. No assurance can be given that underlying loans will not experience significant increases in prepayment or default rates or that the Bank may not have to write down the value of its servicing assets. See Note C and Note 14 to the
Consolidated Financial Statements in this report.



The Bank
receives income through servicing of loans and fees in connection with loan origination, loan modification, late payments, changes of property ownership and miscellaneous services related to its loans. Servicing income, earned on (a) single-family
residential mortgage loans owned by third parties and (b) the Banks securitization and servicing of home equity, automobile and home loan receivables portfolios, is a source of substantial earnings for the Bank. Income from these activities
varies with the volume and type of loans originated and sold.



The following table sets forth certain information relating to the Banks servicing portfolio and servicing income as of or for the years indicated.



|                                             |  | As of or for the Year Ended September 30,
|-------------------------------------------- |  | -----------------------------------------
|                                             |  | 2003                                     
|                                             |  | (in thousands)                           
|Residential                                  |  | $                                        
|Home equity                                  |  |                                          
|Automobile                                   |  |                                          
|Home Improvement loans                       |  |                                          
|                                             |  |                                          
|Total amount of loans serviced for others(1) |  | $                                        
|                                             |  |                                          
|Servicing and securitization income          |  | $                                        
|                                             |  |                                          

---

|(1) | The carrying value of the Banks servicing assets and interest-only strips receivable at September 30, 2003, 2002 and 2001 was $236.0 million, $149.7 million
and $125.4 million, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
Banks level of servicing and securitization income varies based in large part on the amount of the Banks securitization activities with respect to these loan types. As the Bank securitizes and sells assets, acquires servicing assets
either through purchase or origination, or sells mortgage loans and retains the servicing rights on those loans, the level of servicing and securitization income generally increases. During fiscal year 2003, the Bank securitized and sold $2.6
billion of loan receivables through both new and existing securitization trusts compared to $1.7 billion during fiscal year 2002.



INTEREST-ONLY STRIPS RECEIVABLE. Interest-only strips receivable are carried at fair value. The Bank estimates fair value by computing the present
value of estimated future cash flows to be generated by the underlying loans. The carrying value is adjusted and the adjustment is recognized as an unrealized gain or loss in the period the change occurs. Several estimates are used when determining
the present value, the most significant of which are the estimated rate of repayment of the underlying loans, discount rate and estimated credit losses.



If actual prepayment or default rates significantly exceed the estimates used to calculate the values of the interest only strips receivable, the actual
amount of future cash flow could be less than the expected amount and



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the value of the interest only strips receivable, as well as the Banks earnings, could be negatively impacted. No assurance can be given that
underlying loans will not experience significant increases in prepayment or default rates or that the Bank may not have to write down the value of its interest only strips receivable. See Note C and Note 15 to the Consolidated Financial Statements
in this report.



OVERCOLLATERALIZATION OF LOANS AND RESERVE
ACCOUNTS.Overcollateralization of loans and reserve accounts represent assets of the Bank which have been pledged to the securitization trusts and which are subordinated to the interests of the investors in those trusts. The Bank carries these
assets at their estimated fair value, which is equal to the net present value of the future cash flows expected to be received from these assets.



DELINQUENCIES, FORECLOSURES AND ALLOWANCES FOR LOSSES



DELINQUENCIES AND FORECLOSURES.When a borrower fails to make a required payment on a mortgage loan, the loan is considered delinquent and, after
expiration of the applicable cure period, the borrower is charged a late fee. The Bank follows practices customary in the banking industry in attempting to cure delinquencies and in pursuing remedies upon default. Generally, if the borrower does not
cure the delinquency within 90 days, the Bank initiates foreclosure action. If the loan is not reinstated, paid in full or refinanced, the security property is sold. In some instances, the Bank may be the purchaser. Thereafter, the acquired property
is treated as real estate acquired in settlement of loans until it is sold. Deficiency judgements generally may be enforced against borrowers in Maryland, Virginia and the District of Columbia, but may not be available or may be subject to
limitations in other jurisdictions in which loans are originated by the Bank.



See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionAsset QualityDelinquent Loans for a discussion of the Banks
delinquent loan portfolio at September 30, 2003.



ALLOWANCES
FOR LOSSES.The allowance for loan losses represents managements estimate of credit losses inherent in the Banks loan portfolios as of the balance sheet date. The Banks methodology for assessing the appropriate level of the
allowance consists of several key elements, which include the allocated allowance, specific allowances for identified loans and the unallocated allowance. Management reviews the adequacy of the valuation allowances on loans using a variety of
measures and tools including historical loss performance, delinquent status, current economic conditions, internal risk ratings and current underwriting policies and procedures.



The allocated allowance is assessed on both homogeneous and non-homogeneous loan portfolios. The range is calculated by
applying loss and delinquency factors to the outstanding loan balances of these portfolios. Loss factors are based on analysis of the historical performance of each loan category and an assessment of portfolio trends and conditions, as well as
specific risk factors impacting the loan portfolios. Each homogeneous portfolio, such as single-family residential loans or automobile loans, is evaluated collectively.



Non-homogeneous type loans, such as business banking loans and real estate banking loans, are analyzed and segregated by
risk according to the Banks internal risk rating system. These loans are reviewed by the Banks credit and loan review groups on an individual loan basis to assign a risk rating. Industry loss factors are applied based on the risk rating
assigned to the loan. Industry loss factors are used because of the Banks lack of history in these portfolios. A specific allowance may be assigned to non-homogeneous type loans that have been individually determined to be impaired. Any
specific allowance considers all available evidence including, as appropriate, the present value of payments expected to be received or, for loans that are solely dependent on collateral for repayment, the estimated fair value of the collateral.



The unallocated allowance is based upon managements
evaluation and judgement of various conditions that are not directly measured in the determination of the allocated and specific allowances. The conditions evaluated in connection with the unallocated allowance may include existing general economic
and business conditions



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affecting the key lending areas of the Bank, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio,
specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, regulatory examination results and findings of the Banks internal credit evaluations.



The allowances for losses are based on estimates and ultimate losses may vary
from current estimates. As adjustments to the allowances become necessary, provisions for losses are reported in operations in the periods they are determined to be necessary.



REO is carried at the lower of cost or fair value, less selling costs. To date, sales of REO, non-residential mortgage
loans, commercial loans and loans classified as investments in real estate have resulted in no material additional aggregate loss to the Bank above the amounts already reserved. However, these results do not necessarily assure that the Bank will not
suffer losses in the future beyond its level of allowances.



The Banks review of its various asset portfolios takes place within its Asset Review and Asset Classification Committees, which meet on a quarterly basis. The Asset Classification Committee reviews risk performance trends within the
Banks loan and REO portfolios and economic trends and conditions, which might impact those portfolios. This Committee also reviews the status of individual criticized and classified assets from $500,000 up to $5,000,000 and the allowance for
loan losses. The Asset Review Committee, which meets in conjunction with the Asset Classification Committee, reviews the status of individual criticized and classified assets of $5,000,000 and greater.



The Federal Financial Institutions Examination Council (FFIEC),
which is composed of the OTS and the other federal banking agencies, has issued guidelines regarding the appropriate levels of general valuation allowances that should be maintained by insured institutions and guidance on the design and
implementation of loan loss allowance methodologies and supporting documentation practices. The Bank believes that its levels of general valuation allowances at September 30, 2003 and its procedures comply with the guidelines.



The Banks assets are subject to review and classification by the OTS
upon examination. Based on such examinations, the Bank could be required to establish additional valuation allowances or incur additional charge-offs.



DEPOSITS AND OTHER SOURCES OF FUNDS



GENERAL.Deposits are the primary source of the Banks funds for use in lending and for other general business purposes. In addition to
deposits, Chevy Chase receives funds from loan repayments and loan sales. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced by general interest rates and money-market conditions. Borrowings
may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels or deposit outflows, or to support the Banks operating or investing activities, or planned growth. In recent years, the
Bank has relied to a greater degree on borrowed funds, particularly FHLB advances, to fund its planned asset growth. This source of funding is generally more volatile and expensive than traditional core deposits.



DEPOSITS.Chevy Chase currently offers a variety of deposit accounts
with a range of interest rates and maturities designed to attract both long-term and short-term deposits. Deposit programs include Super Money Fund, Super Statement Savings, Super NOW, Insured Money Fund, Checking, Simple Statement Savings, Young
Savers, Certificate, and special programs for Individual Retirement and Keogh self-employed retirement accounts.



Chevy Chase attracts deposits through its branch network and advertisements, and offers depositors access to their accounts through 812 ATMs, including
214 ATMs located in grocery stores. These ATMs significantly enhance the Banks position as a leading provider of convenient ATM service in its primary market area. The Bank is a member of the STAR® ATM network which offers nationwide access, and the PLUS® ATM



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network, which offers worldwide access. In addition, the Bank has a partnership agreement with a regional grocery store chain that authorizes the Bank to
provide in-store banking centers at potentially all of its Maryland, Virginia, Delaware and Washington, DC area stores. As of September 30, 2003, the Bank has opened 54 in-store banking centers as part of this agreement.



From time to time, Chevy Chase accepts brokered deposits as a way to
diversify the Banks funding sources and provide additional funding for planned growth. The Bank had no brokered deposits at September 30, 2003. At September 30, 2002, the Bank had $76.9 million of brokered deposits. Under FDIC regulations, the
Bank can accept brokered deposits as long as it meets the capital standards established for well-capitalized institutions or, with FDIC approval, adequately capitalized institutions, under the prompt corrective action regulations. Brokered deposits
typically have higher interest rates and are more volatile than traditional retail deposits. Management believes that brokered deposits are a viable alternative source of funds for the Bank, and will continue to evaluate the use of brokered deposits
as a source of funds in the future.



The Bank obtains deposits
primarily from customers residing in Montgomery and Prince Georges Counties in Maryland and Northern Virginia. Approximately 36.2% of the Banks deposits at September 30, 2003 were obtained from depositors residing outside of Maryland,
with approximately 23.0% from depositors residing in Northern Virginia.



The following table shows the amounts of Chevy Chases deposits by type of account at the dates indicated.



DEPOSIT COMPOSITION TABLE



Deposit Analysis

(Dollars in
thousands)



|                                     |  | September 30, |          
|------------------------------------ |  | ------------- | ---------
|                                     |  | 2003          |          
|                                     |  | Balance       |          
|Demand accounts                      |  | $             | 951,844  
|NOW accounts                         |  |               | 1,951,281
|Money market deposit accounts        |  |               | 2,321,026
|Statement savings accounts           |  |               | 997,686  
|Other deposit accounts               |  |               | 152,758  
|Certificate accounts, less than $100 |  |               | 1,207,728
|Certificate accounts, $100 or more   |  |               | 518,182  
|                                     |  |               |          
|Total deposits                       |  | $             | 8,100,505
|                                     |  |               |          



Average Cost of
Deposits



|                                             |  | Year Ended September 30, |  
|-------------------------------------------- |  | ------------------------ | -
|                                             |  | 2003                     |  
|Demand and NOW accounts                      |  | 0.26                     | %
|Money market accounts                        |  | 1.01                     | %
|Statement savings and other deposit accounts |  | 0.45                     | %
|Certificate accounts                         |  | 2.55                     | %
|                                             |  |                          |  
|Total deposit accounts                       |  | 1.15                     | %
|                                             |  |                          |  



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The range of deposit account products offered by the Bank through its extensive branch and ATM network
allows the Bank to be competitive in obtaining funds from its local retail deposit market. At the same time, however, as customers have increasingly responded to changes in interest rates, the Bank has experienced some fluctuations in deposit flows.
Chevy Chases ability to attract and maintain deposits and its cost of funds will continue to be significantly affected by market conditions and its pricing strategy.



The following table sets forth Chevy Chases deposit flows during the periods indicated.



|                                            |  | Year Ended September 30, |            
|------------------------------------------- |  | ------------------------ | -----------
|                                            |  | 2003                     |            
|                                            |  | (in thousands)           |            
|Deposits to accounts                        |  | $                        | 45,309,516 
|Withdrawals from accounts                   |  |                          | (44,726,718
|                                            |  |                          |            
|Net cash to (from) accounts                 |  |                          | 582,798    
|Interest credited to accounts               |  |                          | 80,122     
|                                            |  |                          |            
|Net increase (decrease) in deposit balances |  | $                        | 662,920    
|                                            |  |                          |            



Deposit growth may be
moderated by the Bank from time to time either to take advantage of lower cost funding alternatives or in response to more modest expectations for loan and other asset growth.



The following table sets forth, by weighted average interest rates, the types and amounts of deposits as of September 30,
2003, which will mature during the fiscal years indicated.



WEIGHTED DEPOSIT RATE CHART





Weighted Average Interest Rates of Deposits

(Dollars in thousands)



|                                        |  | Demand, NOW and Money Market Deposit Accounts |           |                     | Statement Savings Accounts |   |        | Other Core Accounts |                     |  | Certificate Accounts |        |  | Total               |        
|--------------------------------------- |  | --------------------------------------------- | --------- | ------------------- | -------------------------- | - | ------ | ------------------- | ------------------- |  | -------------------- | ------ |  | ------------------- | -------
|Maturing DuringYear EndingSeptember 30, |  | Amount                                        |           | WeightedAverageRate |                            |   | Amount |                     | WeightedAverageRate |  |                      | Amount |  | WeightedAverageRate |        
|2004                                    |  | $                                             | 5,224,151 |                     | 0.39                       | % |        | $                   | 997,686             |  | 0.28                 | %      |  | $                   | 152,758
|2005                                    |  |                                               |          |                     |                           |   |        |                     |                    |  |                     |        |  |                     |       
|2006                                    |  |                                               |          |                     |                           |   |        |                     |                    |  |                     |        |  |                     |       
|2007                                    |  |                                               |          |                     |                           |   |        |                     |                    |  |                     |        |  |                     |       
|2008                                    |  |                                               |          |                     |                           |   |        |                     |                    |  |                     |        |  |                     |       
|                                        |  |                                               |           |                     |                            |   |        |                     |                     |  |                      |        |  |                     |        
|Total                                   |  | $                                             | 5,224,151 |                     | 0.39                       | % |        | $                   | 997,686             |  | 0.28                 | %      |  | $                   | 152,758
|                                        |  |                                               |           |                     |                            |   |        |                     |                     |  |                      |        |  |                     |        



The following table
summarizes maturities of certificate accounts in amounts of $100,000 or greater as of September 30, 2003.



|Year Ending September 30, |  | Amount                 |         | Weighted Average Rate |     
|------------------------- |  | ---------------------- | ------- | --------------------- | ----
|                          |  | (Dollars in thousands) |         |                       |     
|2004                      |  | $                      | 433,781 |                       | 1.51
|2005                      |  |                        | 31,513  |                       | 3.03
|2006                      |  |                        | 30,848  |                       | 4.75
|2007                      |  |                        | 6,717   |                       | 4.45
|2008                      |  |                        | 15,323  |                       | 2.88
|                          |  |                        |         |                       |     
|Total                     |  | $                      | 518,182 |                       | 1.87
|                          |  |                        |         |                       |     



The following table
represents the amounts of deposits by various interest rate categories as of September 30, 2003 maturing during the fiscal years indicated.



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MATURITIES BY RATE CATEGORY TABLE



Maturities of Deposits by Interest Rates



(In thousands)



|                     |  | Accounts Maturing During Year Ending September 30,
|-------------------- |  | --------------------------------------------------
|Interest Rate        |  | 2004                                              
|Demand deposits (0%) |  | $                                                 
|0.01% to 1.99%       |  |                                                   
|2.00% to 2.99%       |  |                                                   
|3.00% to 3.99%       |  |                                                   
|4.00% to 4.99%       |  |                                                   
|5.00% to 5.99%       |  |                                                   
|6.00% to 7.99%       |  |                                                   
|                     |  |                                                   
|Total                |  | $                                                 
|                     |  |                                                   



BORROWINGS.The
FHLB system functions as a central reserve bank providing credit for member institutions. As a member of the FHLB of Atlanta, Chevy Chase is required to own capital stock in the FHLB of Atlanta and is authorized to apply for advances on the security
of that stock and certain of its mortgages and other assets, principally securities which are obligations of, or guaranteed by, the United States or its agencies, provided certain standards related to creditworthiness have been met.



Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon their financial condition, and the adequacy of collateral pledged to secure the extension of credit. Extensions of credit may be obtained pursuant to several different credit programs, each of which has its own
rate and range of maturities. Advances from the FHLB of Atlanta must be secured by certain types of collateral with a value, as determined by the FHLB of Atlanta, at least equal to 100% of the borrowers outstanding advances. The Bank had
outstanding FHLB advances of $2.0 billion at September 30, 2003.



From time to time the Bank enters into repurchase agreements, which are treated as financings. The Bank sells securities, which are usually mortgage-backed securities, and agrees to buy back the same securities at a specified time, which is
generally within seven to 90 days. The Bank pays a stated interest rate for the use of the funds for the specified time period. The obligation to repurchase the securities sold is reflected as a liability and the securities underlying the agreements
are included in assets in the Consolidated Statements of Financial Condition in this report. These arrangements are, in effect, borrowings by the Bank secured by the securities sold. The Bank had outstanding repurchase agreements of $5.8 million at
September 30, 2003.



The following table sets forth a summary
of the repurchase agreements of the Bank as of the dates and for the years indicated.



|                                                    |  | September 30,          |        
|--------------------------------------------------- |  | ---------------------- | -------
|                                                    |  | 2003                   |        
|                                                    |  | (Dollars in thousands) |        
|Securities sold under repurchase agreements:        |  |                        |        
|Balance at year-end                                 |  | $                      | 5,816  
|Average amount outstanding during the year          |  |                        | 268,870
|Maximum amount outstanding at any month-end         |  |                        | 506,065
|Weighted average interest rate during the year      |  |                        | 1.44   
|Weighted average interest rate on year-end balances |  |                        | 0.77   



On November 23, 1993,
the Bank sold $150 million principal amount of its 91/4% Subordinated Debentures due 2005 (the 1993
Debentures). Interest on the 1993 Debentures is payable semiannually on December 1 and



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June 1 of each year. The OTS approved the inclusion of the principal amount of the 1993 Debentures in the Banks supplementary capital for regulatory
capital purposes. Since December 1, 1998, the 1993 Debentures have been redeemable, in whole or in part, at any time at the option of the Bank.



On December 3, 1996, the Bank sold $100 million principal amount of its 91/4% Subordinated Debentures due 2008 (the 1996 Debentures). Interest on the 1996 Debentures is payable semiannually on December 1stand June 1stof
each year. The OTS approved the inclusion of the principal amount of the 1996 Debentures in the Banks supplementary capital for regulatory capital purposes. On December 1, 2001, the 1996 Debentures became redeemable, in whole or in part, at
any time at the option of the Bank.



Under the OTS
capital regulations, redemption of the 1993 Debentures or the 1996 Debentures prior to their stated maturity requires prior approval of the OTS unless the debentures are redeemed with the proceeds of, or replaced by, a like amount of a similar
or higher quality capital instrument.



On December 2,
2003, the Bank issued $175 million aggregate principal amount of its 2003 Debentures. The net proceeds of the offering, along with short-term borrowings, will be used to redeem all of the 1993 Debentures and the 1996 Debentures. The OTS has approved
inclusion of the 2003 Debentures in the Banks regulatory capital, as well as the redemption of the 1993 and 1996 Debentures.



The Bank may redeem some or all of the 2003 Debentures at any time after December 1, 2008 at the following redemption prices plus accrued and unpaid
interest:



|If redeemed during the 12-month period beginning December 1, |  | Redemption Price |  
|------------------------------------------------------------ |  | ---------------- | -
|2008                                                         |  | 103.4375         | %
|2009                                                         |  | 102.2917         | %
|2010                                                         |  | 101.1458         | %
|2011 and thereafter                                          |  | 100.0000         | %



SUBSIDIARIES



OTS regulations generally permit the Bank to make investments in service
corporation subsidiaries in an amount not to exceed 3.0% of the Banks assets, provided that any investment in excess of 2.0% of assets serves primarily community, inner city or community development purposes. These regulations also permit the
Bank to make conforming loans to those subsidiaries and joint ventures in an amount not to exceed 50% of the Banks regulatory capital. At September 30, 2003, 2.0% and 3.0% of the Banks assets was equal to $235.9 million and
$353.9 million, respectively, and the Bank had $34.2 million invested in its service corporation subsidiaries, $5.0 million of which was in the form of conforming loans.



The Bank may establish operating subsidiaries to engage in any activities in which the Bank may engage directly. There are
no regulatory limits on the amount the Bank can invest in operating subsidiaries. The Bank is required to provide 30 days advance notice to the OTS and to the FDIC before establishing a new subsidiary or conducting a new activity in an existing
subsidiary. The Bank engages in a variety of other activities through its subsidiaries, including those described below.



REAL ESTATE DEVELOPMENT ACTIVITIES. Manor Investment Company, a subsidiary of the Bank, was engaged in certain real estate development activities
commenced prior to the enactment of FIRREA and continues to manage the remaining property it holds. As a result of the stringent capital requirements that FIRREA applies to investments in subsidiaries, such as Manor, that engage in activities
impermissible for national banks, Manor has not entered, and does not intend to enter, into any new real estate development arrangements. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsFinancial ConditionAsset Quality.



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SECURITIES BROKERAGE SERVICES. Chevy Chase Securities, Inc., is a wholly owned subsidiary of Chevy
Chase Financial Services Corporation (CCFS), which is a wholly owned direct subsidiary of Chevy Chase. Chevy Chase Securities is a licensed broker-dealer, which sells securities on a retail basis to the general public, including
customers and depositors of the Bank.



INSURANCE
SERVICES. Chevy Chase Insurance Agency, Inc. (CCIA), a wholly owned subsidiary of CCFS, is a licensed insurance broker offering a variety of personal line property and casualty and life insurance programs to the general
public, including customers and depositors of the Bank. CCIAs primary programs consist of homeowner and automobile insurance in the property and casualty sector and mortgage and credit life and disability insurance in the life insurance
sector.



LENDING SUBSIDIARIES. Chevy Chase engages in
significant mortgage lending activities through B. F. Saul Mortgage Company. See Lending Activities. CFCConsumer Finance Corporation previously engaged in subprime automobile lending. In November 2000, the Bank stopped the
origination of subprime automobile loans. The Bank continues its collection efforts on the existing portfolio.



REIT SUBSIDIARY. Chevy Chase Preferred Capital Corporation invests in real estate loans, mortgage-backed securities and related assets and issued
preferred stock to outside investors, which is included as Tier 1 capital of the Bank.



INVESTMENT, MANAGEMENT AND FIDUCIARY SERVICES. The Bank offers investment, management and fiduciary services through two wholly owned subsidiaries: Chevy Chase Trust Company, a licensed fiduciary and registered
investment adviser, which serves primarily high net worth individuals, and ASB Capital Management, Inc., a registered investment adviser, which serves primarily institutional customers.



SPECIAL PURPOSE SUBSIDIARIES. At September 30, 2003, Chevy Chase Real Estate, LLC, (CCRE) a wholly owned
subsidiary of Chevy Chase, held 100% of the common stock of 12 subsidiaries, 4 of which are active, a majority of which were formed for the sole purpose of acquiring title to various real estate projects pursuant to foreclosure or deed-in-lieu of
foreclosure. The Banks investment in the subsidiaries was $23.1 million at September 30, 2003. CCRE is an operating subsidiary and, therefore, the Banks investment in CCRE is not subject to the 3.0% service corporation investment limit
discussed above.



EMPLOYEES.The Bank and its
subsidiaries had 3,282 full-time and 437 part-time employees at September 30, 2003. The Bank provides its employees with a comprehensive range of employee benefit programs, including group health benefits, life insurance, disability insurance, paid
sick leave, certain free deposit services and certain loan discounts. See Executive Compensation for a discussion of certain compensation programs available to the Banks executive officers. None of the Banks employees is
represented by a collective bargaining agent. The Bank believes that its employee relations are good.



COMPETITION.Chevy Chase encounters strong competition both in attracting deposits and making loans in its markets. The Banks most direct
competition for deposits comes from other thrifts, commercial banks and credit unions, as well as from money market funds and corporate and government securities. In addition to offering competitive interest rates, Chevy Chase offers a variety of
services, convenient ATM locations and convenient office locations and hours to attract deposits. Competition for real estate and other loans comes principally from other thrifts, banks, mortgage banking companies, insurance companies and other
institutional lenders. Chevy Chase competes for loans through interest rates, loan fees and the variety and quality of services provided to borrowers and brokers.



The Banks major competition comes from local depository institutions and, as a result of deregulation of the financial
services industry and changing market demands over recent years, regional, national and international financial institutions and other providers of financial services. The GLB Act amended federal law to permit broader affiliations among commercial
banks, securities firms, insurance companies, and other financial services providers.



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The Bank competes with numerous depository institutions in its deposit-taking activities in the
Washington, DC metropolitan area. The Bank also competes with these institutions in the origination of single-family residential mortgage loans and home equity credit line loans. According to the most recently published industry statistics, at June
30, 2003, Chevy Chase had the largest market share, with approximately 24% of deposits, in Montgomery County, Maryland, and ranked third in market share, with approximately 15% of deposits, in Prince Georges County, Maryland. Based on publicly
available information, Chevy Chase estimates that, in the Washington, DC metropolitan area, it is one of the leaders in market share of single-family residential mortgage and home equity credit line loans.



FEDERAL TAXATION.Savings institutions, such as the Bank, generally are taxed in the same manner as other corporations. There are, however, several special rules that apply principally to savings institutions and, in some
cases, other financial institutions. Certain significant aspects of the federal income taxation of the Bank are discussed below:



GENERAL. The Bank and its subsidiaries are included in the consolidated federal income tax return filed by the Trust on a fiscal year basis. Each
member of an affiliated group of corporations which files consolidated income tax returns is liable for the groups federal income tax liability.



BAD DEBT RESERVE. For taxable years beginning before December 31, 1995, savings institutions that satisfied certain requirements were permitted to
establish reserves for bad debts and to deduct each year reasonable additions to those reserves in lieu of taking a deduction for bad debts actually sustained during the taxable year. To qualify for this treatment, at least 60% of a savings
institutions assets had to be qualifying assets, including cash, certain U.S. and state government securities and loans secured by interests in residential real property.



In establishing its reserves from calendar year 1988 through fiscal year
1996, the Bank calculated its bad debt deduction for tax purposes using the experience method. The experience method was based on the institutions actual loan loss experience over a prescribed period. As of September 30, 1996, accumulated
reserves were approximately $111.8 million.



In 1996, Congress
repealed the thrift bad debt provisions of the Internal Revenue Code effective for taxable years beginning after December 31, 1995. As a result, the Bank can deduct only those bad debts actually incurred during the respective taxable years. The bad
debt provisions of the 1996 legislation also require thrifts to recapture and pay income tax on bad debt reserves accumulated since 1987 over a six year period, beginning with a thrifts taxable year starting after December 31, 1995 or, if the
thrift meets a loan origination test, beginning up to two years later. The Banks accumulated reserves since 1987, which are subject to recapture under this rule are $101.3 million. Of this amount, $16.9 million was recaptured in each of 2001,
2002 and 2003, and $16.8 million remains subject to recapture over the remainder of the six year recapture period which ends September 2004. The tax liability related to the recapture of the bad debt reserves accumulated since 1987 has been
reflected in the Banks financial statements.



CONSOLIDATED TAX RETURNS; TAX SHARING PAYMENTS. Generally, the operations of the Trust have generated significant net operating losses and the Banks taxable income generally has been sufficient to fully utilize the losses of
the Trust. Under the terms of a tax sharing agreement dated June 28, 1990, as amended, the Bank is obligated to make payments to the Trust based on its taxable income, as explained more fully below.



The tax sharing agreement generally provides that each member of the
Trusts affiliated group is required to pay the Trust an amount equal to 100% of the tax liability that the member would have been required to pay to the IRS if the member had filed on a separate return basis. These amounts generally must be
paid even if the affiliated group has no overall tax liability or the groups tax liability is less than the sum of those amounts. Under the tax sharing agreement, the Trust, in turn, is obligated to pay to the appropriate tax authorities the
overall tax liability, if any, of the group. In addition, to the extent the net operating losses or tax credits of a



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particular member reduce the overall tax liability of the group, the Trust is required to reimburse that member on a dollar-for-dollar basis, thereby
compensating the member for the groups use of its net operating losses or tax credits. Under the tax sharing agreement, the Bank and its subsidiaries are treated as a single member of the Trusts affiliated group.



The Bank made tax sharing payments of $11.5 million in fiscal year 2003. At
September 30, 2003, the amount of tax sharing payments due to the Trust from the bank was $400,000. It is expected that the Bank will have taxable income in future years and additional operating losses of the Trust will be utilized to reduce the
overall tax liability of the group which would otherwise arise from such taxable income of the Bank or from the taxable income of other members of the Trusts affiliated group.



In general, if the Bank has net operating losses or unused tax credits in any taxable year, under the tax sharing agreement
the Trust is obligated to reimburse the Bank in an amount generally equal to (1) the tax benefit to the group of using those tax losses or unused tax credits in the groups consolidated federal income tax return for such year, plus (2) to the
extent those losses or credits are not used by the group in that year, the amount of the tax refunds which the Bank would otherwise have been able to claim if it were not included in the consolidated federal income tax return of the group, but not
in excess of the net amount paid by the Bank to the Trust pursuant to the tax sharing agreement. There is no assurance that the Trust would be able to fulfill this obligation. If the Trust did not make the reimbursement, the OTS could attempt to
characterize the nonpayment as an extension of credit by the Bank to the Trust which, as described above under Holding Company Regulation, is prohibited under current law. The tax sharing agreement itself does not provide for any
specific remedies upon a breach by any party of its obligations under the agreement.



The Bank, as a member of an affiliated group of corporations filing consolidated income tax returns, is liable under the Internal Revenue Code for the groups tax liability. Although the Bank would be entitled to
reimbursement under the tax sharing agreement for income tax paid with respect to the income of other members of the affiliated group, there can be no assurance that the Trust or other members would be able to fulfill this obligation.



STATE TAXATION.Many states, most significantly Maryland, do not allow
the filing of combined or consolidated income tax returns, and thus the Trust and its subsidiaries, which includes the Bank and its subsidiaries, that are subject to those states income taxes are required to file separately in those states. The
Trust and its subsidiaries are also subject to income taxes in certain other states, some of which allow or require combined or consolidated filings.



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ITEM 2. PROPERTIES



REAL ESTATE



A list of the
investment properties of the Real Estate Trust is set forth under Item 1. BusinessReal EstateReal Estate Investments.



The Trust conducts its principal business from its executive offices at 7501 Wisconsin Avenue, Suite 1500, Bethesda, Maryland. The Saul Company leases all
office facilities on behalf of the Trust.



BANKING



At September 30, 2003,
the Bank conducted its business from its home office at 7926 Jones Branch Drive, McLean, Virginia and its executive offices at 7501 Wisconsin Avenue, Bethesda, Maryland; its operations centers at 6151 and 6200 Chevy Chase Drive, Laurel, Maryland,
and 14601 Sweitzer Lane, Laurel, Maryland; its office facilities at 1919 M Street, NW, Washington, DC; and 210 full-service offices located in Maryland, Virginia, Delaware and the District of Columbia. On that date, the Bank owned the building and
land for 35 of its branch offices and leased its remaining 175 branch offices. Chevy Chase leases the office facilities at 7926 Jones Branch Drive, 6200 Chevy Chase Drive, 14601 Sweitzer Lane and 1919 M Street, NW. Chevy Chase owns the building and
land at 7501 Wisconsin Avenue. In addition, the Bank leases office space in which its subsidiaries are housed. The office facility leases have various terms expiring from fiscal years 2004 to 2023 and the ground leases have terms expiring from
fiscal years 2029 to 2081. The Bank also owns the building and land at 5202 Presidents Court, Frederick, Maryland, the site of its former credit card operations center, which is now leased to third parties and 6151 Chevy Chase Drive, Laurel,
Maryland. The Bank also owns the building and leases the land at 7700 Old Georgetown Road, Bethesda, Maryland. The Bank also leases the office facilities at 7735 Old Georgetown Road, Bethesda, Maryland. Both of these office facilities were occupied
by Bank personnel prior to the consolidation into the Banks new corporate headquarters. The Bank is in the process of leasing and subleasing these facilities to third parties. See Note 18 to the Consolidated Financial Statements in this report
for lease expense and commitments.



The following table sets
forth the location of the Banks 210 full-service branch offices at September 30, 2003.



|1 Catoctin Circle Leesburg, VA
20176             |  | 8201 Greensboro Drive McLean, VA
22102         |  | 1100 Wilson Boulevard Arlington, VA
22209           
|------------------------------------------------ |  | ---------------------------------------------- |  | ----------------------------------------------------
|                                                 |  |                                               
|1100 W. Broad Street Falls Church, VA
22046      |  | 234 Maple Avenue East Vienna, VA
22180         |  | 4229 Merchant Plaza Woodbridge, VA
22192            
|                                                 |  |                                               
|3941 Pickett Road Fairfax, VA
22031              |  | 8436 Old Keene Mill Road Springfield, VA
22152 |  | 14125 St. Germain Drive Centreville, VA
20121       
|                                                 |  |                                               
|1439 Chain Bridge Road McLean, VA
22101          |  | 8120 Sudley Road Manassas, VA
20109            |  | 3532 Columbia Pike Arlington, VA
22204              
|                                                 |  |                                               
|6367 Seven Corners Center Falls Church, VA
22044 |  | 13344-A Franklin Farms Road Herndon, VA
20171  |  | 11200 Main Street Fairfax, VA
22030                 
|                                                 |  |                                               
|1100 S. Hayes Street Arlington, VA
22202         |  | 20970 Southbank Street Potomac Falls, VA
20165 |  | 13043 Lee Jackson Memorial Highway Fairfax,
VA 22033
|                                                 |  |                                               
|2932 Chain Bridge Road Oakton, VA
22124          |  | 7030 Little River Turnpike Annandale, VA
22003 |  | 2079 Daniel Stuart Square Woodbridge, VA
22191      
|                                                 |  |                                               
|1201 Elden Street Herndon, VA
20170              |  | 3095 Nutley Street Fairfax, VA
22031           |  | 2901-11 South Glebe Road Arlington, VA
22206        



44



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##### Table of Contents

|5613 Stone Road Centreville, VA
20120                 |  | 4700 Lee Highway Arlington, VA
22207              |  | 7501 Huntsman Boulevard Springfield, VA
22153     
|----------------------------------------------------- |  | ------------------------------------------------- |  | --------------------------------------------------
|                                                      |  |                                                  
|44151 Ashburn Shopping Plaza Ashburn, VA
20147        |  | 5851 Crossroads Center Way Falls Church,
VA 22041 |  | 1230 West Broad Street Falls Church, VA
22047     
|                                                      |  |                                                  
|3690-A King Street Alexandria, VA
22302               |  | 6800 Richmond Highway Alexandria, VA
22306        |  | 10346 Courthouse Road Spotsylvania, VA
22553      
|                                                      |  |                                                  
|6609 Springfield Mall Springfield, VA
22150           |  | 7935 L Tysons Corner Center McLean, VA
22102      |  | 3480 South Jefferson Street Falls Church,
VA 22041
|                                                      |  |                                                  
|500 South Washington Street Alexandria, VA
22314      |  | 11874 Spectrum Center Reston, VA
20190            |  | 1459 North Point Village Reston, VA
20194         
|                                                      |  |                                                  
|10100 Dumfries Road Manassas, VA
20110                |  | 5230-A Port Royal Road Springfield, VA
22151      |  | 61 Catoctin Circle, NE Leesburg, VA
20175         
|                                                      |  |                                                  
|5870 Kingstowne Boulevard Alexandria, VA
22310        |  | 8628-A Richmond Highway Alexandria, VA
22309      |  | 6426 Springfield Plaza Springfield, VA
22150      
|                                                      |  |                                                  
|3499 S. Jefferson Street Baileys Crossroads,
VA 22041 |  | 3046 Gatehouse Plaza Falls Church, VA
22042       |  | 21800 Town Center Plaza, #255 Sterling,
VA 20164  
|                                                      |  |                                                  
|1621 B Crystal Square Arcade Arlington, VA
22202      |  | 46160 Potomac Run Plaza Sterling, VA
20164        |  | 5740 Union Mills Road Clifton, VA
20124           
|                                                      |  |                                                  
|21100 Dulles Town Circle Dulles, VA
20166             |  | 9863 Georgetown Pike Great Falls, VA
22066        |  | 8110 Fletcher Avenue McLean, VA
22101             
|                                                      |  |                                                  
|7575 Newlinton Hall Road Gainesville, VA
20155        |  | 2251 John Milton Drive Herndon, VA
20171          |  | 3501 Plank Road Fredericksburg, VA
22407          
|                                                      |  |                                                  
|12445 Hedges Run Drive Lakeridge, VA
22192            |  | 7137 Columbia Pike Annandale, VA
22003            |  | 6011 Burke Center Parkway Burke, VA
22015         
|                                                      |  |                                                  
|8025 Sudley Road Manassas, VA
22110                   |  | 1228 Elden Street Herndon, VA
22070               |  | 4309 Dale Boulevard Dale City, VA
22193           
|                                                      |  |                                                  
|41 West Lee Highway Warrenton, VA
22186               |  | 3131 Duke Street Alexandria, VA
22314             |  | 697 North Washington Street Alexandria,
VA 22313  
|                                                      |  |                                                  
|43330 Junction Plaza Ashburn, VA
20147                |  | 8098 Rolling Road Springfield, VA
22153           |  | 45545 Dulles Eastern Plaza Sterling, VA
20163     
|                                                      |  |                                                  
|43931 Farmwell Hunt Plaza Ashburn, VA
20147           |  | 6949 Commerce Street Springfield, VA
22150        |  | 5902 Old Centreville Road Centreville, VA
20121   
|                                                      |  |                                                  
|3141 Lee Highway Arlington, VA
22201                  |  | 8981 Ox Road Lorton, VA
22079                     |  | 26001 Ridge Road Damascus, MD
20872               
|                                                      |  |                                                  
|2063 West Street Annapolis, MD
21401                  |  | 14943 Shady Grove Road Rockville, MD
20850        |  | 21117 Frederick Road Germantown, MD
20876         
|                                                      |  |                                                  
|901 N. Nelson Street Arlington, VA
22203              |  | 4101 Cheshire Station Plaza Dale City, VA
22193   |  | 1010 East Main Street Purcellville, VA
20132      
|                                                      |  |                                                  
|9761 Traville Gateway Drive Rockville, MD
20850       |  | 402 East Ridgeville Boulevard Mt. Airy,
MD 21771  |  | 7200 Cradlerock Way Columbia, MD
21045            
|                                                      |  |                                                  
|17831 Georgia Avenue Olney, MD
20832                  |  | 15407 Excelsior Drive Bowie, MD
20716             |  | 317 Kentlands Boulevard Gaithersburg, MD
20878    



45



---

##### Table of Contents

|8315 Georgia Avenue Silver Spring, MD
20910           |  | 5552 Norbeck Road Rockville, MD
20853            |  | 215 N. Washington Street Rockville, MD
20850       
|----------------------------------------------------- |  | ------------------------------------------------ |  | ---------------------------------------------------
|                                                      |  |                                                 
|11261 New Hampshire Avenue Silver Spring, MD
20904    |  | 6200 Annapolis Road Landover Hills, MD
20784     |  | 573 Governor Ritchie Highway Severna
Park, MD 21146
|                                                      |  |                                                 
|101 Halpine Road Rockville, MD
20852                  |  | 33 West Franklin Street Hagerstown, MD
21740     |  | 4745 Dorsey Hall Drive Ellicott City, MD
21042     
|                                                      |  |                                                 
|6107 Greenbelt Road Berwyn Heights, MD
20740          |  | 6400 Belcrest Road Hyattsville, MD
20782         |  | 1130 Smallwood Drive Waldorf, MD
20603             
|                                                      |  |                                                 
|12 Bureau Drive Gaithersburg, MD
20878                |  | 8740 Arliss Street Silver Spring, MD
20901       |  | 1040 Largo Center Drive Largo, MD
20774            
|                                                      |  |                                                 
|19610 Club House Road Gaithersburg, MD
20886          |  | 2409 Wooton Parkway Rockville, MD
20850          |  | 6335 Marlboro Pike District Heights, MD
20747      
|                                                      |  |                                                 
|812 Muddy Branch Road Gaithersburg, MD
20878          |  | 8845 Branch Avenue Clinton, MD
20735             |  | 7530 Annapolis Road Lanham, MD
20784               
|                                                      |  |                                                 
|10211 River Road Potomac, MD
20854                    |  | 1181 University Boulevard Langley Park,
MD 20783 |  | 11241 Georgia Avenue Wheaton, MD
20902             
|                                                      |  |                                                 
|14113 Baltimore Avenue Laurel, MD
20707               |  | 19801 Century Boulevard Germantown, MD
20874     |  | 13301 New Hampshire Avenue Silver Spring,
MD 20904 
|                                                      |  |                                                 
|701 Pennsylvania Avenue, NW Washington, DC
20004      |  | 1009 West Patrick Street Frederick, MD
21701     |  | 7101 Democracy Boulevard Bethesda, MD
20817        
|                                                      |  |                                                 
|8676 Georgia Avenue Silver Spring, MD
20910           |  | 7937 Ritchie Highway Glen Burnie, MD
21061       |  | 4825 Cordell Avenue Bethesda, MD
20814             
|                                                      |  |                                                 
|12228 Viers Mill Road Silver Spring, MD
20906         |  | 19781-83 Frederick Road Germantown, MD
20876     |  | 7515 Greenbelt Road Greenbelt, MD
20770            
|                                                      |  |                                                 
|115 University Boulevard West Silver Spring,
MD 20901 |  | 16827 Crabbs Branch Way Rockville, MD
20855      |  | 15777 Columbia Pike Burtonsville, MD
20866         
|                                                      |  |                                                 
|9707 Old Georgetown Road Bethesda, MD
20814           |  | 2321-E Forest Drive Annapolis, MD
21401          |  | 509 N. Frederick Avenue Gaithersburg, MD
20877     
|                                                      |  |                                                 
|7941 Tuckerman Lane Potomac, MD
20854                 |  | 15460 Annapolis Road Bowie, MD
20715             |  | 5823 Eastern Avenue Chillum, MD
20782              
|                                                      |  |                                                 
|Stamp Student Union College Park, MD
20742            |  | 20000 Goshen Road Gaithersburg, MD
20879         |  | 3355 Corridor Market Place Laurel, MD
20724        
|                                                      |  |                                                 
|5400 Corporate Drive Frederick, MD
21703              |  | 12097 Rockville Pike Rockville, MD
20852         |  | 10400 Old Georgetown Road Bethesda, MD
20814       
|                                                      |  |                                                 
|20944 Frederick Road Germantown, MD
20876             |  | 10159 New Hampshire Avenue Hillandale, MD
20903  |  | 6020 Marshalee Drive Elkridge, MD
21075            
|                                                      |  |                                                 
|3601 St. Barnabas Road Silver Hill, MD
20746          |  | 10800 Baltimore Avenue Beltsville, MD
20705      |  | 135 East Baltimore Street Baltimore, MD
21202      
|                                                      |  |                                                 
|18331 Leaman Farm Road Germantown, MD
20876           |  | 8171 Elliot Road Talbot, MD
21601                |  | 2801 University Boulevard West Kensington, MD 20895
|                                                      |  |                                                 
|1734 York Road Lutherville, MD
21093                  |  | 7700 Old Georgetown Road Bethesda, MD
20814      |  | 4624 Edmondson Avenue Baltimore, MD
21229          



46



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##### Table of Contents

|11399 York Road Cockeysville, MD
21030                |  | 18104 Town Center Drive Olney, MD
20832            |  | 6000 Greenbelt Road Greenbelt, MD
20704            
|----------------------------------------------------- |  | -------------------------------------------------- |  | ---------------------------------------------------
|                                                      |  |                                                   
|751 South Salisbury Boulevard Salisbury, MD
21801     |  | 6197 Oxon Hill Road Oxon Hill, MD
20745            |  | 9730 Groffs Mill Drive Owings Mills, MD
21117      
|                                                      |  |                                                   
|5700 Southeast Crain Highway Upper Marlboro,
MD 20772 |  | 10821 Connecticut Avenue Kensington, MD
20895      |  | 6340 York Road Towson, MD
21212                    
|                                                      |  |                                                   
|5476 Wisconsin Avenue Chevy Chase, MD
20815           |  | 18006 Mateny Road Germantown, MD
20874             |  | 4622 Wilkens Avenue Baltimore, MD
21229            
|                                                      |  |                                                   
|8100 Loch Raven Boulevard Towson, MD
21286            |  | 7406 Baltimore Avenue College Park, MD
20740       |  | 11301 Rockville Pike Kensington, MD
20895          
|                                                      |  |                                                   
|842 Muddy Branch Road Gaithersburg, MD
20878          |  | 980 E. Swan Creek Road Fort Washington,
MD 20744   |  | 7501 Wisconsin Avenue Bethesda, MD
20814           
|                                                      |  |                                                   
|229 Kentlands Boulevard Gaithersburg, MD
20878        |  | 3828 International Drive Silver Spring,
MD 20906   |  | 5370 Westbard Avenue Bethesda, MD
20816            
|                                                      |  |                                                   
|12051 Rockville Pike Rockville, MD
20852              |  | 3400 Crain Highway Bowie, MD
20716                 |  | 7340 Westlake Terrace Bethesda, MD
20817           
|                                                      |  |                                                   
|15791 Columbia Pike Burtonsville, MD
20866            |  | 2315 Randolph Road Silver Spring, MD
20906         |  | 1327 Lamberton Drive Silver Spring, MD
20902       
|                                                      |  |                                                   
|2215 Bel Pre Road Wheaton, MD
20906                   |  | 45101 First Colony Way California, MD
20619        |  | 13490 New Hampshire Avenue Silver Spring,
MD 20904 
|                                                      |  |                                                   
|8401 Connecticut Avenue Chevy Chase, MD
20815         |  | 802 Pleasant Drive Rockville, MD
20850             |  | 2611 Brandermill Boulevard Gambrills, MD
21054     
|                                                      |  |                                                   
|5424 Western Avenue Chevy Chase, MD
20815             |  | 8000 York Road Towson, MD
21252                    |  | 4701 Sangamore Road Bethesda, MD
20816             
|                                                      |  |                                                   
|13641 Connecticut Avenue Wheaton, MD
20906            |  | 7940 Crain Highway Glen Burnie, MD
21061           |  | 9245 Baltimore National Pike Ellicot
City, MD 21042
|                                                      |  |                                                   
|1000 Hilltop Circle Baltimore, MD
21250               |  | 1161 Maryland Route 3N Gambrills, MD
21054         |  | 625 Hungerford Drive Rockville, MD
20850           
|                                                      |  |                                                   
|7566 Ridge Road Hanover, MD
21706                     |  | 1100 17th Street, NW Washington, DC
20036          |  | 4000 Wisconsin Avenue, NW Washington, DC
20016     
|                                                      |  |                                                   
|4455 Connecticut Avenue, NW Washington, DC
20008      |  | 1545 Wisconsin Avenue, NW Washington, DC
20007     |  | 1717 Pennsylvania Avenue, NW Washington,
DC 20006  
|                                                      |  |                                                   
|2831 Alabama Avenue, SE Washington, DC
20020          |  | 4860 Massachusetts Avenue, NW Washington,
DC 20016 |  | 925 15thStreet, NW Washington, DC 20005            
|                                                      |  |                                                   
|1800 M Street, NW Washington, DC
20036                |  | 210 Michigan Avenue, NE Washington, DC
20017       |  | 1299 Pennsylvania Avenue, NW Washington,
DC 20005  
|                                                      |  |                                                   
|5714 Connecticut Avenue, NW Washington, DC
20015      |  | 1850 K Street, NW Washington, DC
20006             |  | 4400 Massachusetts Avenue, NW Washington,
DC 20016 
|                                                      |  |                                                   
|3519 Connecticut Avenue, NW Washington, DC
20008      |  | 22 Lighthouse Plaza Rehoboth Beach, DE
19971       |  | 19268 Old Landing Road Rehoboth, DE
19971          



47



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At September 30, 2003, the net book value of the Banks office facilities, including leasehold
improvements, was $309.9 million, net of accumulated depreciation of $112.9 million. The Bank owns additional assets, including furniture and data processing equipment. At September 30, 2003, these other assets had a book value of $177.9 million,
net of accumulated depreciation of $146.8 million. The Bank also has operating leases, primarily for certain data processing equipment and software. Those leases have month-to-month or year-to-year terms. See Note 16 to the Consolidated Financial
Statements in this report.



As of October 2003, the Bank had
received OTS approval to open seven additional full-service branch offices. The branches, three in Virginia, three in Maryland and one in Washington, DC, are scheduled to open during fiscal year 2004.



The Bank also owns automobiles which are leased to third parties. The leases
are accounted for as operating leases with lease payments recognized as rental income. At September 30, 2003, automobiles subject to lease had a book value $855.4 million, net of accumulated depreciation of $322.8 million.



ITEM 3. LEGAL PROCEEDINGS



In the
normal course of business, the Trust is involved in certain litigation, including litigation arising out of the collection of loans, the enforcement or defense of the priority of its security interests, the continued development and marketing of
certain of its real estate properties, disputes with tenants and certain employment claims. In the opinion of management, litigation which is currently pending will not have a material adverse impact on the financial condition or future operations
of the Trust.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2003.



48



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##### Table of Contents

PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



There currently is no established public trading market for Common Shares. At November 15, 2003, there were seven corporate or individual holders of
record of Common Shares. All holders of Common Shares at such date were affiliated with the Trust. The Trust did not pay any cash dividends on its Common Shares during the past two fiscal years. See Item 12. Security Ownership of Certain
Beneficial Owners and Management.



ITEM 6. SELECTED FINANCIAL DATA



The selected financial data of the Trust herein have been derived from the Consolidated Financial Statements of the Trust. The data should be read in conjunction with Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements included elsewhere in this report.



SELECTED FINANCIAL DATA



|                                                                                                             |  | Year Ended September 30 |        
|------------------------------------------------------------------------------------------------------------ |  | ----------------------- | -------
|(In thousands, except per share amounts and other data)                                                      |  | 2003                    |        
|STATEMENT OF OPERATIONS DATA:                                                                                |  |                         |        
|Real Estate:                                                                                                 |  |                         |        
|Revenues                                                                                                     |  | $                       | 128,032
|Operating expenses                                                                                           |  |                         | 158,254
|Equity in earnings of unconsolidated entities, net                                                           |  |                         | 7,248  
|Impairment loss on investments                                                                               |  |                         | (998   
|Gain on sales of property                                                                                    |  |                         | 9,079  
|                                                                                                             |  |                         |        
|Real estate operating loss                                                                                   |  |                         | (14,893
|                                                                                                             |  |                         |        
|Banking:                                                                                                     |  |                         |        
|Interest income                                                                                              |  |                         | 451,551
|Interest expense                                                                                             |  |                         | 205,479
|                                                                                                             |  |                         |        
|Net interest income                                                                                          |  |                         | 246,072
|Provision for loan losses                                                                                    |  |                         | (18,422
|                                                                                                             |  |                         |        
|Net interest income after provision for loan losses                                                          |  |                         | 227,650
|                                                                                                             |  |                         |        
|Other income:                                                                                                |  |                         |        
|Deposit servicing fees                                                                                       |  |                         | 122,473
|Servicing and securitization income                                                                          |  |                         | 103,422
|Automobile rental income                                                                                     |  |                         | 235,801
|Gain on sales of trading securities and sales of loans, net                                                  |  |                         | 41,190 
|Gain (loss) on real estate held for investment or sale, net                                                  |  |                         | 6,780  
|Gain on other investment                                                                                     |  |                         |       
|Other                                                                                                        |  |                         | 30,616 
|                                                                                                             |  |                         |        
|Total other income                                                                                           |  |                         | 540,282
|                                                                                                             |  |                         |        
|Operating expenses                                                                                           |  |                         | 621,742
|                                                                                                             |  |                         |        
|Banking operating income                                                                                     |  |                         | 146,190
|                                                                                                             |  |                         |        
|Total Company:                                                                                               |  |                         |        
|Operating income                                                                                             |  |                         | 131,297
|Provision for income taxes                                                                                   |  |                         | 46,221 
|                                                                                                             |  |                         |        
|Income before minority interest, cumulative effect of change in accounting principle, and extraordinary item |  |                         | 85,076 
|Minority interest held by affiliates                                                                         |  |                         | (13,926
|Minority interestother                                                                                      |  |                         | (26,160
|Cumulative effect of change in accounting principle                                                          |  |                         | 897    
|Extraordinary item                                                                                           |  |                         |       
|                                                                                                             |  |                         |        
|Total company net income                                                                                     |  | $                       | 45,887 
|                                                                                                             |  |                         |        
|Net income available to common shareholders                                                                  |  | $                       | 40,469 
|Income before minority interest, cumulative effect of change in accounting principle, and extraordinary item |  | $                       | 16.53  
|Minority interest held by affiliates                                                                         |  |                         | (2.89  
|Minority interestother                                                                                      |  |                         | (5.43  
|Cumulative effect of change in accounting principle                                                          |  |                         | 0.19   
|Extraordinary item                                                                                           |  |                         |       
|                                                                                                             |  |                         |        
|Total company net income                                                                                     |  | $                       | 8.40   
|                                                                                                             |  |                         |        

Continued on following page.



49



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##### Table of Contents

SELECTED FINANCIAL DATA

(Continued)



|                                                        |  | Year Ended September 30 |           
|------------------------------------------------------- |  | ----------------------- | ----------
|(In thousands, except per share amounts and other data) |  | 2003                    |           
|BALANCE SHEET DATA:                                     |  |                         |           
|Assets:                                                 |  |                         |           
|Real estate assets                                      |  | $                       | 429,285   
|Income-producing properties, net                        |  |                         | 275,005   
|Land parcels                                            |  |                         | 42,425    
|Banking assets                                          |  |                         | 11,779,440
|Total company assets                                    |  |                         | 12,208,725
|                                                        |  |                         |           
|Liabilities:                                            |  |                         |           
|Real estate liabilities                                 |  |                         | 652,856   
|Mortgage notes payable                                  |  |                         | 322,437   
|Notes payablesecured                                   |  |                         | 203,800   
|Notes payableunsecured                                 |  |                         | 55,349    
|Banking liabilities                                     |  |                         | 11,039,425
|Minority interest held by affiliates                    |  |                         | 98,062    
|Minority interestother                                 |  |                         | 249,698   
|Total company liabilities                               |  |                         | 12,040,041
|                                                        |  |                         |           
|Shareholders equity                                    |  |                         | 168,684   
|                                                        |  |                         |           
|OTHER DATA:                                             |  |                         |           
|Hotels:                                                 |  |                         |           
|Number of hotels                                        |  |                         | 18        
|Number of guest rooms                                   |  |                         | 3,574     
|Average occupancy                                       |  |                         | 61        
|Average room rate                                       |  | $                       | 85.93     
|Office properties:                                      |  |                         |           
|Number of properties                                    |  |                         | 13        
|Leasable area (square feet)                             |  |                         | 1,978,016 
|Leasing percentages                                     |  |                         | 85        
|Land parcels:                                           |  |                         |           
|Number of parcels                                       |  |                         | 9         
|Total acreage                                           |  |                         | 381       



50



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##### Table of Contents

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The Trust has prepared its financial statements and other disclosures on a consolidated basis. The term Trust used in the text and the
financial statements included herein refers to the combined entity, which includes B. F. Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase and Chevy Chases subsidiaries. The term Real Estate Trust refers
to B. F. Saul Real Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chases subsidiaries. The operations conducted by the Real Estate Trust are designated as Real Estate, while the business conducted by
the bank and its subsidiaries is identified by the term Banking.



CRITICAL ACCOUNTING POLICIES.



The
Trusts consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (GAAP), which requires the Trust to make certain estimates and assumptions that affect its reported
results (see Summary of Significant Accounting in Notes to the Consolidated Financial Statements included herein). The Trust has identified six policies, that due to estimates and assumptions inherent in those policies, involve a relatively high
degree of judgment and complexity.



REAL ESTATE



REAL ESTATE PROPERTIES: Income producing properties are stated at the
lower of depreciated cost (except those which were acquired through foreclosure or equivalent proceedings, the carrying amounts of which are based on the lower of cost or fair value at the time of acquisition) or net realizable value. Management
believes that these assets have generally appreciated in value and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Real Estate Trusts liabilities as reported in these financial
statements. Because these financial statements are prepared in conformity with GAAP, they do not report the current value of the Real Estate Trusts real estate assets.



Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the Real Estate Trust
recognizes an impairment loss. Measurement of an impairment loss for long-lived assets and identifiable intangibles that the Real Estate Trust expects to hold and use is based on the fair value of the asset. Long-lived assets and certain intangibles
to be disposed of are generally reported at the lower of carrying amount or fair value less the cost to sell.



Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is completed and the assets are
placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. The Real Estate Trust considers a project to be substantially complete and held available for occupancy
upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Expenditures for repairs and maintenance are
charged to operations as incurred.



Depreciation is calculated
using the straight-line method and the estimated useful lives of 15 to 50 years for buildings and up to 20 years for certain other improvements. Tenant improvements are amortized on a straight-line basis over the lesser of their estimated useful
lives or the term of the related lease.



Long-lived assets to
be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cashflows (undiscounted and without interest charges) is less
than the carrying amount of the asset, the Trust



51



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##### Table of Contents

recognizes an impairment loss. Measurement of an impairment loss for long-lived assets that the Trust expects to hold and use is based on the fair value of
the asset. Long-lived assets to be disposed of are generally reported at the lower of carrying amount or fair value less costs to sell.



INCOME RECOGNITION: The Real Estate Trust derives room and other revenues from the operations of its hotel portfolio. Hotel revenue is recognized
as earned. The Real Estate Trust derives rental income under noncancelable long-term leases from tenants at its commercial properties. Commercial property rental income is recognized on a straight-line basis.



BANKING



GENERAL: The Banks consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP), which requires the Bank to make certain estimates and assumptions that affect its reported results (see Note 1 to the Consolidated Financial Statements included herein).



ALLOWANCE FOR LOSSES: The Bank maintains allowances for possible
losses on its loans at levels it believes to be adequate to absorb estimated losses inherent in the loan portfolio at the balance sheet date. Management reviews the adequacy of the allowance for losses using a variety of measures and tools
appropriate for the asset type, including historical loss performance, delinquent status, current economic conditions, internal risk ratings, current underwriting policies and practices and market values for similar assets.



DERIVATIVE INSTRUMENTS: The Bank uses a variety of derivative
financial instruments in order to mitigate its exposure to changes in market interest rates. To mitigate the risk that the value of mortgage loans held for sale will change as interest rates change, the Bank generally enters into mortgage-backed
security forward sales contracts. To mitigate the risk that the value of the Banks mortgage servicing rights will change as interest rates change, the Bank uses futures contracts and options on futures contracts related to U.S. Treasury
securities. In addition, the Bank issues commitments to make fixed-rate mortgage loans in which the customer locks in the interest rate before closing on the loan. These interest rate locks are treated as derivative instruments in the
financial statements. All derivative instruments are recorded on the balance sheet at their fair value, which generally represents the amount of money the Bank would receive or pay if the item were bought or sold in a current transaction.



Fair market values are based on market prices when they are
available. If market quotes are not available, fair values are based on market or dealer prices of similar items or discounted cash flows using market estimates of interest rates, prepayment speeds and other assumptions.



When determining the extent to which interest rate exposures should be
hedged, the Bank makes certain estimates and judgments relating to, among other things, whether an interest-rate lock will become a loan, the timing of the loan closing, the timing of the subsequent sale of the loan, and the prepayment speed of
mortgage loans underlying the mortgage servicing rights. To the extent that the actual results are different than the Banks assumptions, the hedging strategy may not be effective in offsetting the changes in the values of the hedged items, and
the Banks earnings may be adversely impacted.



INTEREST-ONLY STRIPS RECEIVABLE: From time to time, the Bank sells loans and retains an interest-only strip receivable related to the sold loans. The interest-only strips receivable are initially recorded by allocating the previous
carrying value of the assets involved in the transactions between the assets sold and the interests retained, including the interest-only strip receivable. Subsequently, the interest-only strips receivable are carried at their fair values, with
changes in fair value reflected in income. Fair value of these interest-only strips receivable is based on discounted expected future cash flows, which are determined using market assumptions such as discount rates and prepayment speeds, and, in
certain circumstances, an estimate of credit losses based on



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the Banks historical experience. If actual prepayment or default rates significantly exceed the estimates, the actual amount of future cash flow could
be less than the expected amount and the value of the interest-only strips receivable, as well as the Banks earnings, could be negatively impacted.



MORTGAGE SERVICING RIGHTS:The Bank sells mortgage loans and retains the right to service those loans (originated MSR). The originated
MSR are initially recorded by allocating the previous carrying value of the loans between the portion sold and the retained originated MSR. The Bank also purchases the right to service mortgage loans originated by third parties (purchased
MSR and, together with originated MSR, MSR). Purchased MSR are initially recorded at their acquisition cost. Subsequent to origination or purchase, MSR are carried at the lower of their amortized cost or fair value. Fair value of
MSR is based on discounted expected future income, net of related expenses, to be generated by servicing the underlying loans. When determining fair value, the Bank uses several assumptions, the most significant of which are the estimated rate of
repayment of the underlying loans and the discount rate. If actual repayment rates significantly exceed the estimates, the actual amount of future cash flow could be less than the expected amount and the value of the MSR, as well as the Banks
earnings, could be negatively impacted.



The Bank believes that
the judgements, estimates and assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements to these
items, the use of other judgements, estimates and assumptions, as well as differences between actual results and the estimates and assumptions, could result in material differences in our results of operations and financial condition.



FINANCIAL CONDITION



REAL ESTATE



The Real Estate
Trusts investment portfolio at September 30, 2003 consisted primarily of hotels, office projects, and land parcels. See Item 1. BusinessReal EstateReal Estate Investments.



Overall, the hotel portfolio experienced an average occupancy rate of 61% and
an average room rate of $85.93 during fiscal 2003, compared to an average occupancy of 61% and an average room rate of $86.82 during the prior year. REVPAR (revenue per available room) was $52.52 for fiscal 2003, a 0.3% decrease from REVPAR for
fiscal 2002 of $52.66.



The Real Estate Trusts hotel
portfolio, and the hospitality sector in general, continues to be impacted by the overall national economic downturn, particularly the decline in general business travel.



Office space in the Real Estate Trusts office property portfolio was 85% leased at September 30, 2003, compared to a
leasing rate of 86% at September 30, 2002. The Trust placed into service during December 2001 an 81,000 square foot building in Sterling, Virginia that remains unleased. In addition, the Trust has been experiencing a downward trend in its leasing
rates and renewals of leases commensurate with the weakening commercial office markets in Northern Virginia as well as in Atlanta, Georgia. At September 30, 2003, the Real Estate Trusts office property portfolio consisted of 13 properties and
had a total gross leasable area of 1,978,000 square feet, of which 191,000 square feet (9.6%) and 257,000 square feet (13.0%) are subject to leases expiring in fiscal 2004 and fiscal 2005.



BANKING



General.The
Banks assets grew to $11.8 billion during fiscal year 2003, an increase of $506.2 million from fiscal year 2002. The Bank recorded operating income of $146.2 million during fiscal year 2003, compared to operating income of $103.6 million
during fiscal year 2002. The increase in income for fiscal year 2003 was primarily attributable to a $19.3 million increase in servicing and securitization income, a $30.9 million increase in gain on trading securities and sales of loans, an $8.8
million increase in deposit servicing fees and a decrease



53



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of $32.9 million in the provision for loan losses. Partially offsetting the increased income was an increase in operating expenses of $19.6 million and a
$22.1 million decrease in net interest income. The increase in operating expenses is largely attributable to increases in salaries and employee benefits and depreciation and amortization. See Results of Operations.



Servicing and securitization income increased $19.3 million, or 22.9%, during
fiscal year 2003 primarily as a result of increased securitization activity. During fiscal year 2003, the Bank securitized and sold $2.6 billion of loan receivables and recognized a gain of $92.9 million compared to securitization and sale of $1.6
billion of loan receivables and a gain of $56.9 million in fiscal year 2002. See Notes C and 15 to the Consolidated Financial Statements in this report. See Liquidity. The Bank recognized a net unrealized loss of $12.5 million and $8.7
million on its interest-only strips receivable during fiscal years 2003 and 2002, respectively.



Real estate owned, net of valuation allowances, decreased from $23.4 million at September 30, 2002 to $21.8 million at September 30, 2003. This reduction
was primarily due to sales in the communities and other properties and to provisions for losses, partially offset by capitalized costs. At September 30, 2003, based on an analysis of the value of REO and the prospect for recoveries of value, the
Bank charged off its valuation allowances of REO in the amount of $71.7 million. See Asset QualityREO.



At September 30, 2003, the Banks tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were 5.75%, 5.75%, 7.67% and
11.05%, respectively. The Banks capital ratios exceeded regulatory requirements as well as the standards established for well-capitalized institutions under OTS prompt corrective action regulations. See Capital.



In October 2003, the Bank issued $125 million of its 8% Preferred Stock, and
used the proceeds to redeem all of its 13% Preferred Stock, on October 31, 2003. On December 2, 2003, the Bank issued $175 million of its 2003 Debentures. The net proceeds of the offering, along with short-term borrowings, will be used to redeem all
of the 1993 Debentures and the 1996 Debentures. The effect of these transactions will be to increase the Banks Tier 1 Capital and to reduce the dividend and interest rates associated with these capital instruments.



During fiscal year 2003, the Bank declared and paid, out of the retained
earnings of the Bank, cash dividends on its Common Stock in the aggregate amount of $2,000 per share.



The Banks assets are subject to review and classification by the OTS upon examination. The OTS concluded its most recent safety and soundness
examination of the Bank in December 2002.



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Asset Quality. Non-Performing Assets. The Banks level of non-performing assets
decreased during fiscal year 2003. The following table sets forth information concerning the Banks non-performing assets at the dates indicated. The figures shown are after charge-offs and, in the case of real estate acquired in settlement of
loans, after all valuation allowances.



Non-Performing Assets

(Dollars in thousands)



|                                                                                                                 |  | September 30, |       
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | ------
|                                                                                                                 |  | 2003          |       
|Non-performing assets:                                                                                           |  |               |       
|Non-accrual loans:                                                                                               |  |               |       
|Residential                                                                                                      |  | $             | 8,047 
|Real estate and construction and ground                                                                          |  |               | 1,004 
|                                                                                                                 |  |               |       
|Total non-accrual real estate loans                                                                              |  |               | 9,051 
|Commercial                                                                                                       |  |               | 249   
|Subprime automobile                                                                                              |  |               | 4,372 
|Other consumer                                                                                                   |  |               | 1,928 
|                                                                                                                 |  |               |       
|Total non-accrual loans (1)                                                                                      |  |               | 15,600
|                                                                                                                 |  |               |       
|Real estate acquired in settlement of loans                                                                      |  |               | 21,820
|Allowance for losses on real estate acquired in settlement of loans                                              |  |               |      
|                                                                                                                 |  |               |       
|Real estate acquired in settlement of loans, net                                                                 |  |               | 21,820
|                                                                                                                 |  |               |       
|Total non-performing assets                                                                                      |  | $             | 37,420
|                                                                                                                 |  |               |       
|Troubled debt restructurings                                                                                     |  | $             |      
|                                                                                                                 |  |               |       
|Allowance for losses on loans                                                                                    |  | $             | 58,397
|Allowance for losses on real estate held for investment                                                          |  |               | 202   
|Allowance for losses on real estate acquired in settlement of loans                                              |  |               |      
|                                                                                                                 |  |               |       
|Total allowances for losses                                                                                      |  | $             | 58,599
|                                                                                                                 |  |               |       
|Interest income recorded                                                                                         |  |               |       
|Non-accrual assets                                                                                               |  | $             | 39    
|                                                                                                                 |  |               |       
|Restructured loans                                                                                               |  | $             |      
|                                                                                                                 |  |               |       
|Interest income that would have been recorded had the loans been current in accordance with their original terms |  |               |       
|Non-accrual assets                                                                                               |  | $             | 2,059 
|                                                                                                                 |  |               |       
|Restructured loans                                                                                               |  | $             |      
|                                                                                                                 |  |               |       

---

|(1) | Before deduction of allowances for losses.
|--- | ------------------------------------------



|                                                                                        |  | September 30, 2003 |      |  | September 30, |     
|--------------------------------------------------------------------------------------- |  | ------------------ | ---- |  | ------------- | ----
|                                                                                        |  |                    | 2002 |  |               | 2001
|Ratios:                                                                                 |  |                    |      |  |               |     
|Non-performing assets to total assets                                                   |  | 0.32               | %    |  | 0.44          | %   
|Allowance for losses on real estate loans to non-accrual real estate loans (1)          |  | 90.51              | %    |  | 44.05         | %   
|Allowance for losses on other consumer loans to non-accrual other consumer loans (1)(2) |  | 451.88             | %    |  | 393.65        | %   
|Allowance for losses on loans to non-accrual loans (1)                                  |  | 374.34             | %    |  | 248.86        | %   
|Allowance for losses on loans to total loans receivable (3)                             |  | 0.65               | %    |  | 0.85          | %   

---

|(1) | Before deduction of allowances for losses.
|--- | ------------------------------------------

|(2) | Includes subprime automobile loans.
|--- | -----------------------------------

|(3) | Includes loans receivable and loans held for securitization and/or sale, before deduction of allowance for losses.
|--- | ------------------------------------------------------------------------------------------------------------------



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Non-performing assets include non-accrual loans, non-accrual real estate held for investment, and REO,
acquired either through foreclosure or deed-in-lieu of foreclosure, or pursuant to in-substance foreclosure. Non-accrual loans consist of loans contractually past due 90 days or more or with respect to which other factors indicate that full payment
of principal and interest is unlikely.



Non-performing assets
totaled $37.4 million at September 30, 2003, compared to $49.9 million, after valuation allowances on REO of $71.3 million, at September 30, 2002. Based on an analysis of REO and the prospect for recoveries of values, the Bank charged off its
valuation allowances on REO at September 30, 2003. The Bank maintained valuation allowances of $58.4 million and $66.1 million on its loan portfolio at September 30, 2003 and 2002, respectively. The $12.5 million decrease in non-performing assets
reflected a net decrease in REO of $1.6 million and a net decrease in non-accrual loans of $10.9 million.



Non-accrual Loans. The Banks non-accrual loans totaled $15.6 million at September 30, 2003, a decrease from $26.6 million at September 30,
2002. At September 30, 2003, non-accrual loans consisted of $9.1 million of non-accrual real estate loans and $6.5 million of non-accrual subprime automobile, commercial and other consumer loans compared to non-accrual real estate loans of $14.3
million and non-accrual subprime automobile and other consumer loans of $12.2 million at September 30, 2002. The decrease in non-accrual subprime automobile loans reflects the winding down of that portfolio.



REO. At September 30, 2003, the Banks REO totaled $21.8 million,
as set forth in the following table:



|                                     |  | Number ofProperties    |  | Gross Balance |         | Charge-offs |   | BalanceAfterCharge-offs |  | Percent of Total |       
|------------------------------------ |  | ---------------------- |  | ------------- | ------- | ----------- | - | ----------------------- |  | ---------------- | ------
|                                     |  | (Dollars in thousands) | 
|Communities                          |  | 2                      |  | $             | 94,284  |             | $ | 77,812                  |  | $                | 16,472
|Commercial ground                    |  | 1                      |  |               | 10,380  |             |   | 6,363                   |  |                  | 4,017 
|Single-family residential properties |  | 6                      |  |               | 1,478   |             |   | 147                     |  |                  | 1,331 
|                                     |  |                        |  |               |         |             |   |                         |  |                  |       
|Total REO                            |  | 9                      |  | $             | 106,142 |             | $ | 84,322                  |  | $                | 21,820
|                                     |  |                        |  |               |         |             |   |                         |  |                  |       



During fiscal year
2003, REO decreased $1.6 million, primarily as a result of sales in the communities and other properties and additional provisions for losses, which was partially offset by additional capitalized costs.



The principal component of REO consists of the two communities, both of which
are under active development. At September 30, 2003, one of the communities had 134 remaining residential lots, which were under contract and pending settlement. This community also had approximately 167 remaining acres of land designated for
commercial use. The other community has only one remaining commercial lot, which was under contract and pending settlement at September 30, 2003. In addition, at September 30, 2003, the Bank was engaged in discussions with potential purchasers
regarding the sale of retail land.



The Bank continues to
monitor closely its major non-performing and potential problem assets in light of current and anticipated market conditions. The Banks asset workout group focuses its efforts on resolving these problem assets as expeditiously as possible.



Potential Problem Assets. Although not considered
non-performing assets, primarily because the loans are not 90 or more days past due and the borrowers have not abandoned control of the properties, potential problem assets are experiencing problems sufficient to cause management to have serious
doubts as to the ability of the borrowers to comply with present repayment terms. At September 30, 2003 and 2002, potential problem assets totaled $14.8 million and $22.4 million, respectively.



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The Banks Watch List Committee meets quarterly and reviews all commercial lending relationships
which are rated as vulnerable, criticized or classified and have commitments of $1.0 million or greater. This Committee reviews the current status of each relationship, recent changes, performance against the corrective action plan presented at the
prior meeting, and the current action plan for the relationship. On September 4, 2003, the Committee reviewed loans with outstanding balances of $80.2 million at June 30, 2003.



Delinquent Loans. At September 30, 2003, delinquent loans totaled $61.4 million, or 0.7% of loans, compared to $69.2
million, or 0.9% of loans, at September 30, 2002. The following table sets forth information regarding the Banks delinquent loans at September 30, 2003.



|                      |  | Principal Balance (Dollars in Thousands) |        | Total as aPercentageof Loans (1) |  
|--------------------- |  | ---------------------------------------- | ------ | -------------------------------- | -
|                      |  | RealEstateLoans                          |        | SubprimeAutomobileLoans          |  
|Loans delinquent for: |  |                                          |        |                                  |  
|30-59 days            |  | $                                        | 15,634 |                                  | $
|60-89 days            |  |                                          | 2,494  |                                  |  
|                      |  |                                          |        |                                  |  
|Total                 |  | $                                        | 18,128 |                                  | $
|                      |  |                                          |        |                                  |  

---

|(1) | Includes loans held for sale and/or securitization, before deduction of valuation allowances,
unearned premiums and discounts and deferred loan origination fees (costs).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Real estate loans classified as delinquent 30-89 days consists entirely of single-family permanent residential mortgage loans and home equity loans. Total delinquent real estate loans increased to $18.1 million at
September 30, 2003, from $10.8 million at September 30, 2002 reflecting growth in the portfolio. Non-accrual and delinquent real estate loans as a percentage of total real estate loans equaled 0.37% and 0.43% at September 30, 2003 and 2002,
respectively.



Total delinquent subprime automobile loans
decreased to $23.8 million at September 30, 2003, from $45.8 million at September 30, 2002, primarily because the Banks portfolio of these loans continues to decline as a result of the Banks prior decision to discontinue origination of
these loans.



Commercial loans classified as delinquent 30-89
days consisted of 15 loans totaling $10.8 million at September 30, 2003 compared to 12 loans totaling $4.3 million at September 30, 2002. The increase in delinquencies reflects the maturation in the Banks portfolio.



Other consumer loans delinquent 30-89 days increased slightly to $8.6 million
at September 30, 2003 from $8.2 million at September 30, 2002.



Troubled Debt Restructurings. A troubled debt restructuring occurs when the Bank agrees to modify significant terms of a loan in favor of a borrower experiencing financial difficulties. The Bank had no troubled debt restructurings at
September 30, 2003 and 2002.



Real Estate Held for
Investment. At September 30, 2003 and 2002, real estate held for investment consisted of one property with book value of $0.9 million, net of a valuation allowance of $0.2 million.



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Allowances for Losses. The following tables show loss experience by asset type and the components
of the allowance for losses on loans and the allowance for losses on real estate held for investment or sale. These tables reflect charge-offs taken against assets during the years indicated and may include charge-offs taken against assets, which
the Bank disposed of during such years.



Analysis of
Allowance for and Charge-offs of Loans

(Dollars in thousands)



|                                                           |  | Year Ended September 30, |        
|---------------------------------------------------------- |  | ------------------------ | -------
|                                                           |  | 2003                     |        
|Balance at beginning of year                               |  | $                        | 66,079 
|                                                           |  |                          |        
|Provision for loan losses                                  |  |                          | 18,422 
|                                                           |  |                          |        
|Charge-offs:                                               |  |                          |        
|Single family residential and home equity                  |  |                          | (1,032 
|Commercial real estate and multifamily                     |  |                          | (382   
|Subprime automobile                                        |  |                          | (30,227
|Other consumer                                             |  |                          | (13,316
|                                                           |  |                          |        
|Total charge-offs                                          |  |                          | (44,957
|                                                           |  |                          |        
|Recoveries (1):                                            |  |                          |        
|Single family residential and home equity                  |  |                          | 248    
|Commercial real estate and multifamily                     |  |                          | 14     
|Subprime automobile                                        |  |                          | 13,384 
|Other consumer                                             |  |                          | 5,207  
|                                                           |  |                          |        
|Total recoveries                                           |  |                          | 18,853 
|                                                           |  |                          |        
|Charge-offs, net of recoveries                             |  |                          | (26,104
|                                                           |  |                          |        
|Balance at end of year                                     |  | $                        | 58,397 
|                                                           |  |                          |        
|Provision for loan losses to average loans (2)             |  |                          | 0.25   
|Net loan charge-offs to average loans (2)                  |  |                          | 0.36   
|Ending allowance for losses on loans to total loans (2)(3) |  |                          | 0.75   

---

|(1) | Includes proceeds received from the sale of charged-off loans.
|--- | --------------------------------------------------------------

|(2) | Includes loans held for securitization and/or sale.
|--- | ---------------------------------------------------

|(3) | Before deduction of allowance for losses.
|--- | -----------------------------------------



Components of Allowance for Losses on Loans by Type

(Dollars in thousands)



|                                             |  | September 30, |       
|-------------------------------------------- |  | ------------- | ------
|                                             |  | 2003          |       
|                                             |  | Amount        |       
|Balance at end of year allocated to:         |  |               |       
|Single family residential                    |  | $             | 2,161 
|Home equity                                  |  |               | 2,426 
|Commercial real estate and multifamily       |  |               | 162   
|Real estate construction and ground          |  |               | 2,098 
|Commercial                                   |  |               | 14,400
|Prime Automobile loans                       |  |               | 7,013 
|Subprime automobile                          |  |               | 16,000
|Home improvement and related loans           |  |               | 1,049 
|Overdraft lines of credit and other consumer |  |               | 2,020 
|Unallocated                                  |  |               | 11,068
|                                             |  |               |       
|Total                                        |  | $             | 58,397
|                                             |  |               |       



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Analysis of Allowance for and Charge-offs of Real Estate Held for Investment or Sale

(In thousands)



|                                                                          |  | Year Ended September 30, |        
|------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                          |  | 2003                     |        
|Balance at beginning of year:                                             |  |                          |        
|Real estate held for investment                                           |  | $                        | 202    
|Real estate held for sale                                                 |  |                          | 71,293 
|                                                                          |  |                          |        
|Total                                                                     |  |                          | 71,495 
|                                                                          |  |                          |        
|Provision for real estate losses:                                         |  |                          |        
|Real estate held for investment                                           |  |                          |       
|Real estate held for sale                                                 |  |                          |       
|                                                                          |  |                          |        
|Total                                                                     |  |                          |       
|                                                                          |  |                          |        
|Charge-offs, net of recoveries :                                          |  |                          |        
|Real estate held for sale:                                                |  |                          |        
|Residential ground                                                        |  |                          |       
|Commercial ground                                                         |  |                          | (3,631 
|Communities                                                               |  |                          | (67,662
|                                                                          |  |                          |        
|Total (charge-offs) recoveries on real estate held for investment or sale |  |                          | (71,293
|                                                                          |  |                          |        
|Balance at end of year:                                                   |  |                          |        
|Real estate held for investment                                           |  |                          | 202    
|Real estate held for sale                                                 |  |                          |       
|                                                                          |  |                          |        
|Total                                                                     |  | $                        | 202    
|                                                                          |  |                          |        



Components of
Allowance for Losses on Real Estate Held for Investment or Sale

(In thousands)



|                                                                      |  | September 30,
|--------------------------------------------------------------------- |  | -------------
|                                                                      |  | 2003         
|Allowance for losses on real estate held for investment               |  | $            
|                                                                      |  |              
|Allowance for losses on real estate held for sale:                    |  |              
|Residential ground                                                    |  |              
|Commercial ground                                                     |  |              
|Communities                                                           |  |              
|                                                                      |  |              
|Total                                                                 |  |              
|                                                                      |  |              
|Total allowance for losses on real estate held for investment or sale |  | $            
|                                                                      |  |              



The Bank maintains
valuation allowances for estimated losses on loans and real estate. The Banks total valuation allowances for losses on loans and real estate held for investment or sale decreased to $58.6 million at September 30, 2003, from $137.6 million at
September 30, 2002. At September 30, 2003, the Bank charged off $71.3 million of its valuation allowances on REO following an analysis of the REO and the prospect for recoveries of value. The allowance for losses on loans decreased to $58.4 million
at September 30, 2003 from $66.1 million at September 30, 2002, reflecting decreased delinquencies and charge-offs during the current year. Management reviews the adequacy of the valuation allowances on loans and real estate using a variety of



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measures and tools including historical loss performance, delinquent status, current economic conditions, internal risk ratings and current underwriting
policies and procedures. Using this analysis, management determines a range of acceptable valuation allowances.



The allowance for losses on loans secured by real estate totaled $6.8 million at September 30, 2003, which constituted 75.6% of total non-performing real
estate loans. This amount represented a $0.5 million increase from the September 30, 2002 level of $6.3 million, or 44.0% of total non-performing real estate loans at that date.



The allowance for losses on other consumer loans, including automobile, home improvement, overdraft lines of credit and
other consumer loans, decreased to $26.1 million at September 30, 2003 from $38.9 million at September 30, 2002. Net charge-offs of subprime automobile loans for fiscal year 2003 were $16.8 million, compared to $29.4 million for fiscal year 2002.
The decrease in the allowance and charge-offs was due to the decline in the Banks portfolio of these loans as a result of the Banks prior decision to discontinue origination of these loans.



The allowance for losses on commercial loans decreased to $14.4 million at
September 30, 2003 from $16.9 million at September 30, 2002. Net charge-offs of commercial loans have been minimal during the fiscal years ended September 30, 2003 and 2002.



The unallocated allowance for losses increased to $11.1 million at September 30, 2003 from $3.9 million at September 30,
2002. The unallocated allowance is based upon managements evaluation and judgement of various conditions that are not directly measured in the determination of the allocated allowance. The conditions evaluated in connection with the
unallocated allowance include existing general economic and business conditions affecting key lending areas of the Bank, credit quality trends, collateral volumes, loan volumes and concentrations, seasoning of the loan portfolio, specific industry
conditions within portfolio segments, recent loss experience, regulatory examination results and findings of the Banks internal credit evaluations.



When real estate collateral securing an extension of credit is initially recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change, it may be necessary to provide additional valuation allowances based on new information.



Consistent with regulatory requirements, the Bank performs ongoing real estate evaluations for all REO as a basis for
substantiating the carrying values in accordance with accounting principles generally accepted in the United States. As indicated, as of September 30, 2003, the Banks REO consisted primarily of two residential communities under active
development. As a part of its development activities, the Bank maintains and updates real estate project evaluations in accordance with regulatory requirements which include analyses of lot and acreage sales, status and budgets for development
activities and consideration of project market trends. These real estate evaluations are reviewed periodically as part of managements review and evaluation of the carrying values of REO. Following a review of the real estate assets and the
related carrying values, management reports its actions to the Banks Board of Directors.



Asset and Liability Management. A key element of banking is the monitoring and management of liquidity risk and interest-rate risk. The process of planning and controlling asset and liability mix, volume and
maturity to stabilize the net interest spread is referred to as asset and liability management. The objective of asset and liability management is to maximize the net interest yield within the constraints imposed by prudent lending and investing
practices, liquidity needs and capital planning.



The
Banks assets and liabilities are inherently sensitive to changes in interest rates. These movements can result in variations to the overall level of income and market value of equity. Based on the characteristics of a specific asset or
liability (including maturity, repricing frequency and interest rate caps) a change in interest rates can significantly affect the contribution to net income and market value for the instrument. If, in the aggregate, the Banks assets mature or
reprice more quickly or to a greater extent than its liabilities, the Bank is termed



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asset sensitive and will tend to experience an increase in interest income and market value during periods of rising interest rates and declining
interest income and market value during periods of falling interest rates. Conversely, if the Banks liabilities mature or reprice more quickly or to a greater extent than its assets, the Bank is termed liability sensitive and will
tend to experience a decrease in interest income and market value during periods of rising interest rates and increased interest income and market value during periods of falling interest rates.



The Bank pursues an asset-liability management strategy designed both to
control risk from changes in market interest rates and to maximize interest income in its loan portfolio. To achieve this strategy, the Bank emphasizes the origination and retention of a mix of both adjustable-rate and fixed-rate loan products.



Throughout fiscal year 2003, the Bank continued to originate
and hold in its portfolio adjustable rate loan products at a greater volume than those with fixed interest rates. At September 30, 2003, adjustable-rate loans accounted for 68.8% of total loans, compared to 60.0% at September 30, 2002. This increase
was primarily due to increased originations of adjustable-rate mortgage products, which typically reprice monthly and are tied to the one month LIBOR, and an increase in payoffs of fixed-rate mortgage loans due to refinancing activity.



A traditional measure of interest-rate risk within the banking industry is
the interest sensitivity gap, which is the sum of all interest-earning assets minus all interest-bearing liabilities subject to repricing within the same period. Gap analysis is a tool used by management to evaluate interest-rate risk
which results from the difference between repricing and maturity characteristics of the Banks assets and those of the liabilities that fund them. By analyzing these differences, management can attempt to estimate how changes in interest rates
may affect the Banks future net interest income. The Bank views control over interest rate sensitivity as a key element in its financial planning process and monitors interest rate sensitivity through its forecasting system. The Bank manages
interest rate exposure and will narrow or widen its gap depending on its perception of interest rate movements and the composition of its balance sheet.



A number of asset and liability management strategies are available to the Bank in structuring its balance sheet. These include selling or retaining
certain portions of the Banks current residential mortgage loan production; altering the Banks pricing on certain deposit products to emphasize or de-emphasize particular maturity categories; altering the type and maturity of securities
acquired for the Banks investment portfolio when replacing securities following normal portfolio maturation and turnover; lengthening or shortening the maturity or repricing terms for any current period asset securitizations; and altering the
maturity or interest rate reset profile of borrowed funds, if any, including funds borrowed from the FHLB of Atlanta.



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The following table presents the interest rate sensitivity of the Banks interest-earning assets and
interest-bearing liabilities at September 30, 2003, which reflects managements estimate of mortgage loan prepayments and amortization and provisions for adjustable interest rates. Adjustable and floating rate loans are included in the period
in which their interest rates are next scheduled to adjust, and prepayment rates are assumed for the Banks loans based on recent actual experience. Statement savings and passbook accounts with balances under $20,000 are classified based upon
managements assumed attrition rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW accounts, are assumed to be subject to repricing within six months or less.



Interest Rate Sensitivity Table (Gap)

(Dollars in thousands)



|                                                        |  | Six Monthsor Less |           |   | More thanSix MonthsthroughOne Year |   |           | More thanOne YearthroughThree Years |  |   | More thanThree YearsthroughFive Years |    |  | More thanFive Years |         |   | Total
|------------------------------------------------------- |  | ----------------- | --------- | - | ---------------------------------- | - | --------- | ----------------------------------- |  | - | ------------------------------------- | -- |  | ------------------- | ------- | - | -----
|As of September 30, 2003                                |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Real estate loans:                                      |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Adjustable-rate                                         |  | $                 | 3,145,543 |   |                                    | $ | 318,020   |                                     |  | $ | 469,760                               |    |  | $                   | 436,715 |   |      
|Fixed-rate                                              |  |                   | 9,830     |   |                                    |   | 9,393     |                                     |  |   | 32,604                                |    |  |                     | 23,615  |   |      
|Home equity credit lines and second mortgages           |  |                   | 1,091,257 |   |                                    |   | 37,513    |                                     |  |   | 109,743                               |    |  |                     | 64,827  |   |      
|Commercial                                              |  |                   | 708,723   |   |                                    |   | 15,050    |                                     |  |   | 49,260                                |    |  |                     | 35,381  |   |      
|Consumer and other                                      |  |                   | 406,180   |   |                                    |   | 58,481    |                                     |  |   | 109,659                               |    |  |                     | 78,292  |   |      
|Loans held for securitization and/or sale               |  |                   | 1,378,831 |   |                                    |   |          |                                     |  |   |                                      |    |  |                     |        |   |      
|Mortgage-backed securities                              |  |                   | 98,257    |   |                                    |   | 95,046    |                                     |  |   | 96,105                                |    |  |                     | 51,267  |   |      
|Other investments                                       |  |                   | 205,806   |   |                                    |   |          |                                     |  |   | 46,345                                |    |  |                     |        |   |      
|                                                        |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Total interest-earning assets                           |  |                   | 7,044,427 |   |                                    |   | 533,503   |                                     |  |   | 913,476                               |    |  |                     | 690,097 |   |      
|Total non-interest earning assets                       |  |                   |          |   |                                    |   |          |                                     |  |   |                                      |    |  |                     |        |   |      
|                                                        |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Total assets                                            |  | $                 | 7,044,427 |   |                                    | $ | 533,503   |                                     |  | $ | 913,476                               |    |  | $                   | 690,097 |   |      
|                                                        |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Deposits:                                               |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Fixed maturity deposits                                 |  | $                 | 907,442   |   |                                    | $ | 477,201   |                                     |  | $ | 267,846                               |    |  | $                   | 73,421  |   |      
|NOW, statement and passbook accounts                    |  |                   | 2,499,862 |   |                                    |   | 54,963    |                                     |  |   | 183,063                               |    |  |                     | 124,597 |   |      
|Money market deposit accounts                           |  |                   | 2,321,026 |   |                                    |   |          |                                     |  |   |                                      |    |  |                     |        |   |      
|Borrowings:                                             |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Capital notessubordinated                              |  |                   |          |   |                                    |   |          |                                     |  |   | 150,000                               |    |  |                     |        |   |      
|Other                                                   |  |                   | 1,058,694 |   |                                    |   | 501,634   |                                     |  |   | 445,447                               |    |  |                     | 66,674  |   |      
|                                                        |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Total interest-bearing liabilities                      |  |                   | 6,787,024 |   |                                    |   | 1,033,798 |                                     |  |   | 1,046,356                             |    |  |                     | 264,692 |   |      
|Minority interest                                       |  |                   |          |   |                                    |   |          |                                     |  |   |                                      |    |  |                     |        |   |      
|Total non-interest bearing liabilities                  |  |                   |          |   |                                    |   |          |                                     |  |   |                                      |    |  |                     |        |   |      
|Stockholders equity                                    |  |                   |          |   |                                    |   |          |                                     |  |   |                                      |    |  |                     |        |   |      
|                                                        |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Total liabilities & stockholders equity                |  | $                 | 6,787,024 |   |                                    | $ | 1,033,798 |                                     |  | $ | 1,046,356                             |    |  | $                   | 264,692 |   |      
|                                                        |  |                   |           |   |                                    |   |           |                                     |  |   |                                       |    |  |                     |         |   |      
|Gap                                                     |  | $                 | 257,403   |   |                                    | $ | (500,295  | )                                   |  | $ | (132,880                              | )  |  | $                   | 425,405 |   |      
|Cumulative gap                                          |  | $                 | 257,403   |   |                                    | $ | (242,892  | )                                   |  | $ | (375,772                              | )  |  | $                   | 49,633  |   |      
|Adjusted cumulative gap as a percentage of total assets |  |                   | 2.2       | % |                                    |   | (2.1      | )%                                  |  |   | (3.2                                  | )% |  |                     | 0.4     | % |      



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The Banks one-year gap as a percentage of total assets was negative 2.1% at September 30, 2003,
compared to negative 1.0% at September 30, 2002. The slight decline in the Banks one-year gap results primarily from an increase during fiscal year 2003 in deposits and borrowings with repricing terms of one year or less. The increase in these
liabilities was partially offset by an increase in adjustable rate mortgages with repricing characteristics of one year or less. The Bank continues to consider a variety of strategies to manage its interest rate risk position.



In addition to gap measurements, the Bank measures and manages interest-rate
risk with the extensive use of computer simulation. This simulation includes calculations of Market Value of Portfolio Equity and Net Interest Margin as promulgated by the OTSs Thrift Bulletin 13a. Under this bulletin, institutions are
required to establish limits on the sensitivity of their net interest income and net portfolio value (NPV) to parallel changes in interest rates. Those changes in interest rates are defined as instantaneous and sustained movements of
interest rates in 100 basis point increments. In addition, the Bank is required to calculate its ratio of NPV to the present value of total assets (NPV Ratio) for each interest rate shock scenario. The following table shows the estimated
impact of parallel shifts in interest rates at September 30, 2003, calculated in a manner consistent with the requirements of TB 13a.



|(Dollars in thousands)                |        
|------------------------------------- | -------
|(Basis Points)Change inInterest Rates |        
|                                      | Percent
|+ 200                                 |        
|+ 100                                 |        
|- 100                                 |        

---

|(1) | Represents the difference between net interest income for 12 months in a stable interest rate
environment and the various interest rate scenarios.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the difference between net portfolio value (NPV) of the Banks equity in a
stable interest rate environment and the NPV in the various rate scenarios. The OTS defines NPV as the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities plus
the present value of expected net cashflows from existing off-balance sheet contracts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Computations of prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and, therefore, should not be relied upon as indicative of actual results. Certain limitations are inherent in these computations. Although certain assets and liabilities may have similar maturities or periods
of repricing, they may react at different times and in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates
on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgage loans, may have features, which restrict interest rate changes on a short-term basis and over the life of the
asset. In the event of a change in market interest rates, loan prepayments and early deposit withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, credit risk may increase if an
interest rate increase adversely affects the ability of borrowers to service their debt.



Inflation.The impact of inflation on the Bank is different from the impact on an industrial company because substantially all of the assets and liabilities of the Bank are monetary in nature. The most direct
impact of an extended period of inflation would be to increase interest rates and to place upward pressure on the operating expenses of the Bank. However, the actual effect of inflation on the net interest income of the Bank would depend on the
extent to which the Bank was able to maintain a spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, which would depend to a significant extent on its asset-liability sensitivity. The
effect of inflation on the Banks results of operations for the past three fiscal years has been minimal.



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Deferred Taxes.At September 30, 2003, the Bank recorded a net deferred tax liability of $134.5
million, which generally represents the cumulative excess of the Banks income tax expense for financial reporting purposes over its actual income tax liability. See Note 33 to the Consolidated Financial Statements in this report.



Capital.At September 30, 2003, the Bank was in compliance with all
of its regulatory capital requirements under FIRREA, and its capital ratios exceeded the ratios established for well-capitalized institutions under OTS prompt corrective action regulations.



The following table shows the Banks regulatory capital levels at
September 30, 2003, in relation to the regulatory requirements in effect at that date. The information below is based upon the Banks understanding of the regulations and interpretations currently in effect and may be subject to change.



Regulatory Capital Chart



Regulatory Capital

(Dollars in thousands)



|                                                          |  | Actual |         |   | MinimumCapital Requirement |       |   | ExcessCapital |  
|--------------------------------------------------------- |  | ------ | ------- | - | -------------------------- | ----- | - | ------------- | -
|                                                          |  | Amount |         |   | As a %of Assets            |       |   | Amount        |  
|Stockholders equity per financial statements             |  | $      | 580,997 |   |                            |       |   |               |  
|Minority interest in REIT Subsidiary (1)                  |  |        | 144,000 |   |                            |       |   |               |  
|                                                          |  |        |         |   |                            |       |   |               |  
|                                                          |  |        | 724,997 |   |                            |       |   |               |  
|Adjustments for tangible and core capital:                |  |        |         |   |                            |       |   |               |  
|Intangible assets                                         |  |        | (42,666 | ) |                            |       |   |               |  
|Non-includable subsidiaries (2)                           |  |        | (939    | ) |                            |       |   |               |  
|Non-qualifying purchased/originated loan servicing rights |  |        | (5,427  | ) |                            |       |   |               |  
|                                                          |  |        |         |   |                            |       |   |               |  
|Total tangible capital                                    |  |        | 675,965 |   |                            | 5.75  | % |               | $
|                                                          |  |        |         |   |                            |       |   |               |  
|Total core capital (3)                                    |  |        | 675,965 |   |                            | 5.75  | % |               | $
|                                                          |  |        |         |   |                            |       |   |               |  
|Tier 1 risk-based capital (3)                             |  |        | 675,965 |   |                            | 7.67  | % |               | $
|                                                          |  |        |         |   |                            |       |   |               |  
|Adjustments for total risk-based capital:                 |  |        |         |   |                            |       |   |               |  
|Subordinated capital debentures                           |  |        | 250,000 |   |                            |       |   |               |  
|Allowance for general loan losses                         |  |        | 58,397  |   |                            |       |   |               |  
|                                                          |  |        |         |   |                            |       |   |               |  
|Total supplementary capital                               |  |        | 308,397 |   |                            |       |   |               |  
|                                                          |  |        |         |   |                            |       |   |               |  
|Total available capital                                   |  |        | 984,362 |   |                            |       |   |               |  
|Equity investments (2)(4)                                 |  |        | (24,009 | ) |                            |       |   |               |  
|                                                          |  |        |         |   |                            |       |   |               |  
|Total risk-based capital (3)                              |  | $      | 960,353 |   |                            | 11.05 | % |               | $
|                                                          |  |        |         |   |                            |       |   |               |  

---

|(1) | Eligible for inclusion in core capital in an amount up to 25% of the Banks core capital pursuant to authorization from the OTS.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Reflects an aggregate offset of $0.2 million representing the general allowance for losses maintained against the Banks equity investments and non-includable subsidiaries
which, pursuant to OTS guidelines, is available as a credit against the deductions from capital otherwise required for such investments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Under the OTS prompt corrective action regulations, the standards for classification as well capitalized are a leverage (or core capital) ratio
of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes two properties treated as equity investments for regulatory capital purposes. One property has a book value of $2,053 and is classified as real estate held for sale. The
other property has a book value of $21,956 and is classified as property and equipment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Under the OTS prompt corrective action regulations, an institution is categorized as well capitalized if
it has a leverage or core capital ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of at least 10.0% and is not subject to any written agreement, order, capital directive or prompt
corrective action directive to meet and maintain a specific capital level. At September 30, 2003, the Banks leverage, tier 1 risk-based and total risk-based capital ratios were 5.75%, 7.67% and 11.05%, respectively, which exceeded the ratios
established for well-capitalized institutions. The OTS may reclassify an institution from one category to the next lower category, for example from well capitalized to adequately capitalized, if, after notice and an opportunity for a hearing, the
OTS determines that the institution is in an unsafe or unsound condition or has received and has not corrected a less than satisfactory examination rating for asset quality, management, earnings or liquidity. The Bank has not received notice from
the OTS of any potential downgrade.



OTS capital regulations
provide a five-year holding period, or such longer period as may be approved by the OTS, for REO to qualify for an exception from treatment as an equity investment. If an REO property is considered an equity investment, its then-current book value
is deducted from total risk-based capital. Accordingly, if the Bank is unable to dispose of any REO property, whether through bulk sales or otherwise, prior to the end of its applicable five-year holding period and is unable to obtain an extension
of the five-year holding period from the OTS, the Bank could be required to deduct the then-current book value of such REO property from total risk-based capital. In February 2003, the Bank received from the OTS an extension of the holding periods
for certain of its REO properties through February 7, 2004. The following table sets forth the Banks REO at September 30, 2003, by the fiscal year in which the property was acquired through foreclosure.



|Fiscal Year |  | (In thousands) |       
|----------- |  | -------------- | ------
|1990        |  | $              | 2,053 
|1991        |  |                | 14,419
|1995        |  |                | 4,017 
|2002        |  |                | 220   
|2003        |  |                | 1,111 
|            |  |                |       
|Total REO   |  | $              | 21,820
|            |  |                |       

---

|(1) | The Bank treats this property as an equity investment for regulatory capital purposes.
|--- | --------------------------------------------------------------------------------------

|(2) | The Bank received an extension of the holding periods for these properties through February 7, 2004.
|--- | ----------------------------------------------------------------------------------------------------



Failure to obtain further REO extensions could adversely affect the
Banks regulatory capital ratios. The Banks ability to maintain or increase its capital levels in future periods also will be subject to general economic conditions, particularly in the Banks local markets. Adverse general economic
conditions or a downturn in local real estate markets could require further additions to the Banks allowances for losses and further charge-offs. Any of those developments would adversely affect the Banks earnings and thus its regulatory
capital levels.



The Bank has historically relied on preferred
stock and subordinated debt as significant components of its regulatory capital. Those instruments require significant fixed payments to holders, which increase the Banks expenses and make it more difficult for the Bank to generate additional
core capital through retained earnings.



In October 2003, the
Bank issued $125 million of its 8% Preferred Stock. The net proceeds from the issuance of the 8% Preferred Stock were used to redeem all of the 13% Preferred Stock, on October 31, 2003.



On December 2, 2003, the Bank issued $175 million aggregate principal amount of its 2003 Debentures. The net proceeds of the
offering, along with short-term borrowings, will be used to redeem all of the 1993 Debentures and the 1996 Debentures.



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The following table shows actual and proforma regulatory capital ratios at September 30, 2003 adjusted
for the impact of the issuance of the 8% Preferred Stock, the redemption of the 13% Preferred Stock, the issuance of the 2003 Debentures and the anticipated redemption of the 1993 Debentures and the 1996 Debentures:



|                          |  | Actual |   |  | As Adjusted |  
|------------------------- |  | ------ | - |  | ----------- | -
|Core capital              |  | 5.75   | % |  | 6.00        | %
|Tier 1 risk-based capital |  | 7.67   | % |  | 8.04        | %
|Total risk-based capital  |  | 11.05  | % |  | 10.53       | %



Failure by the Bank to
remain well capitalized could have a material adverse effect on certain aspects of the Banks operations, including its ability to pay dividends. See Dividends and Other Capital Distributions.



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LIQUIDITY AND CAPITAL RESOURCES



REAL ESTATE



The Real Estate
Trusts cash flows from operating activities have been historically insufficient to meet all of its cash flow requirements. The Real Estate Trusts internal source of funds, primarily cash flow generated by its income-producing properties,
generally have been sufficient to meet its cash needs other than the repayment of principal on outstanding debt, including outstanding unsecured notes sold to the public, the payment of interest on its indebtedness, and the payment of capital
improvement costs. In the past, the Real Estate Trust funded such shortfalls through a combination of external funding sources, primarily new financings, the sale of unsecured notes, refinancing of maturing mortgage debt, proceeds from asset sales,
and dividends and tax sharing payments from the bank. For the foreseeable future, the Real Estate Trusts ability to generate positive cash flow from operating activities and to meet its liquidity needs, including debt service payments,
repayment of debt principal and capital expenditures, will continue to depend on these available external sources. Dividends received from the bank are a component of funding sources available to the Real Estate Trust. The availability and amount of
dividends in future periods is dependent upon, among other things, the banks operating performance and income, and regulatory restrictions on such payments. See also the discussion of potential limitations on the payment of dividends by the
bank contained in Item 1. BusinessBankingDividends and Other Capital Distributions.



During fiscal 2003, the bank made tax sharing payments totaling $11.5 million and dividend payments totaling $16.0 million to the Real Estate Trust. At
September 30, 2003, the Trust is due $400,000 in tax sharing payments from the bank.



In recent years, the operations of the Real Estate Trust have generated net operating losses while the bank has reported net income. The Trusts consolidation of the banks operations into the Trusts
federal income tax return has resulted in the use of the Real Estate Trusts net operating losses to reduce the federal income taxes the bank would otherwise have owed. If in any future year, the bank has taxable losses or unused credits, the
Trust would be obligated to reimburse the bank for the greater of (1) the tax benefit to the group using such tax losses or unused tax credits in the groups consolidated federal income tax returns or (2) the amount of the refund which the bank
would otherwise have been able to claim if it were not being included in the consolidated federal income tax return of the group.



During fiscal 2003, the Real Estate Trust purchased through dividend reinvestment approximately 334,000 shares of common stock of Saul Centers, and as of
September 30, 2003, owns approximately 3,744,000 shares representing 23.8% of such companys outstanding common stock. As of September 30, 2003, the market value of these shares was approximately $99.4 million. Substantially all of these shares
have been pledged as collateral with the Real Estate Trusts revolving credit lenders.



As the owner, directly and through two wholly-owned subsidiaries, of a limited partnership interest in Saul Holdings Partnership, the Real Estate Trust shares in cash distributions from operations and from capital
transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly cash distributions to the partners out of net cash flow. See Item 1. BusinessReal EstateInvestment in Saul
Holdings Limited Partnership. In fiscal 2003, the Real Estate Trust received total cash distributions of $6.5 million from Saul Holdings Partnership. Substantially all of the Real Estate Trusts ownership interest in Saul Holdings
Partnership has been pledged as collateral with the Real Estate Trusts two revolving credit lenders.



In March 1998, the Trust issued $200.0 million aggregate principal amount of 93/4% Senior Secured Notes due 2008. These Notes are nonrecourse obligations of the Trust and are secured by a first priority perfected security interest in 8,000 shares, or 80%, of
the issued and outstanding common stock of the bank, which constitute all of the bank common stock held by the Trust.



During 2003, the Real Estate Trust sold unsecured notes, with a maturity ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. During fiscal 2003, the Real Estate Trust sold



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notes amounting to $12.5 million at a weighted average interest rate of 7.2%. To the degree that the Real Estate Trust does not sell new unsecured notes in
an amount sufficient to finance completely the scheduled repayment of outstanding unsecured notes as they mature, it will finance such repayments from other sources of funds.



In fiscal 1995, the Real Estate Trust established a $15.0 million secured revolving credit line with an unrelated bank. This
facility was for a two-year term subject to extension for one or more additional one-year terms. In fiscal 1997, the facility was increased to $20.0 million and was renewed for an additional two-year period. In September 1999, this facility was
increased to $50.0 million and its term was set at three years with provisions for extending the term annually. The maturity date for this line is September 29, 2004. On December 12, 2003 this facility was increased to $55.0 million and the maturity
date extended to December 12, 2006. This facility is secured by a portion of the Real Estate Trusts ownership in Saul Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index, and at September 30, 2003,
the rate was 4.0%. At September 30, 2003, the Real Estate Trust had outstanding borrowings under the facility of $3.8 million and unrestricted availability of $46.2 million.



In fiscal 1996, the Real Estate Trust established an $8.0 million revolving credit line with an unrelated bank. This
facility was for a one-year term, after which any outstanding loan amount would amortize over a two-year period. During fiscal 1997, 1998 and 2000, the line of credit was increased to $10.0, $20.0, and $25.0 million. In November 2002, this line was
increased to $35.0 million. In September 2003, this line was again increased to $45.0 million. The current maturity date for this line is September 26, 2006. This facility is secured by a portion of the Real Estate Trusts ownership in Saul
Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index. At September 30, 2003, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $45.0 million.



The maturity schedule for the Real Estate Trusts outstanding debt at
September 30, 2003 for fiscal years commencing October 1, 2003 is set forth in the following table:



Debt Maturity Schedule



|Fiscal Year |  | MortgageNotes  |         | NotesPayableSecured |   | NotesPayableUnsecured |  | Total
|----------- |  | -------------- | ------- | -------------------- | - | ---------------------- |  | -----
|            |  | (In thousands)
|2004        |  | $              | 11,792  |                      | $ | 3,800                  |  | $    
|2005        |  |                | 16,387  |                      |   |                       |  |      
|2006        |  |                | 94,672  |                      |   |                       |  |      
|2007        |  |                | 5,543   |                      |   |                       |  |      
|2008        |  |                | 5,952   |                      |   | 200,000                |  |      
|Thereafter  |  |                | 188,091 |                      |   |                       |  |      
|            |  |                |         |                      |   |                        |  |      
|Total       |  | $              | 322,437 |                      | $ | 203,800                |  | $    
|            |  |                |         |                      |   |                        |  |      



Of the $322.4 million
of mortgage notes outstanding at September 30, 2003, $314.5 million was nonrecourse to the Real Estate Trust.



In June 2003 the Real Estate Trust refinanced three hotels with a new fixed rate non-recourse financing. The financing consisted of three separate loans
totaling $46 million, each with a term of 10 years and a 5.9% interest rate. This financing replaced $38.3 million in existing financing on the three hotels.



Development and Capital Expenditures



On June 29, 2000, the Real Estate Trust purchased a 6.17 acre site in the Loudoun Tech Center, a 246-acre business park located in Loudoun County,
Virginia, for $1.1 million. The site was purchased for the purpose of developing an 81,000 square foot office/flex building known as Loudoun Tech Phase I. The cost of development



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was budgeted at approximately $8.4 million with financing of $7.4 million. This loan has a five-year term, a floating interest rate and an option for one
two-year renewal. Construction was completed in December 2000, and the building was placed in service in December 2001. No leases have been signed as yet.



During the quarter ended September 30, 2000, the Real Estate Trust began the development of a 100,000 square foot office/flex building located on an 8.3
acre site in Dulles North Corporate Park near other Real Estate Trust projects. The new building is known as Dulles North Four. Development costs were $10.8 million and were financed with the proceeds of a $9.5 million construction loan. The
building was placed in service in April 2002. The Real Estate Trust has signed a lease with a tenant for the entire building. The construction loan was repaid in August 2002 with the proceeds of a $9.0 million, 7.56%, ten-year permanent loan.



On November 15, 2000, the Real Estate Trust purchased a 19.1
acre land parcel in Laurel, Maryland, which contains a 105,000 square foot office/warehouse building known as Sweitzer Lane. The purchase price was $13.8 million and was financed from the Real Estate Trusts revolving credit lines. The entire
building was leased to Chevy Chase under a long-term agreement. The Real Estate Trust obtained permanent loan financing in July 2001 of $10.8 million.



On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon apartment project in Dallas, Texas. The sales price was $3.1 million and the Real
Estate Trust recognized a gain of $2.2 million on the transaction. The proceeds of the sales were used to acquire a 10.7 acre parcel of land in Loudoun County, Virginia, for $2.8 million.



On June 13, 2001, the Real Estate Trust sold a 4.79 acre section of its Circle 75 land parcel located in Atlanta, Georgia,
for $3.0 million. The Real Estate Trust recognized a gain of $2.4 million on this transaction.



On August 8, 2001, the Real Estate Trust sold Metairie Tower, a 91,000 square foot office building located in Metairie, Louisiana, for $7.2 million. The Real Estate Trust recognized a gain of $5.2 million on this
transaction.



On September 7, 2001, the Real Estate Trust sold
9.5 acres of its Commerce Center land parcel located in Ft. Lauderdale, Florida, for approximately $2.0 million, and recognized a gain of $245,000 on the transaction.



During fiscal 2001, the Real Estate Trust also received net proceeds of $2.0 million and recognized a gain of $620,000 from
the condemnation of portions of two land parcels in Colorado and Michigan.



On September 25, 2003, the Real Estate Trust sold 7.7 acres located in Rockville, Maryland, for $11.3 million, and recognized a gain of $9.1 million on the transaction.



The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $11.0 to $19.0 million per year for the next several years.



BANKING



Liquidity. The
Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. A standard measure of liquidity in the savings industry is the ratio of cash and short-term U.S. Government and other specified securities to net withdrawable
accounts and borrowings payable in one year or less. See BUSINESSRegulationLiquidity Requirements.



The Banks primary sources of funds historically have consisted of:



| |  | principal and interest payments on loans and mortgage-backed securities;
| | - | ------------------------------------------------------------------------



| |  | savings deposits;
| | - | -----------------



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| |  | sales of loans and trading securities;
| | - | --------------------------------------



| |  | securitizations and sales of loans; and
| | - | ---------------------------------------



| |  | borrowed funds, including funds borrowed from the FHLB of Atlanta.
| | - | ------------------------------------------------------------------



The Banks holdings of readily marketable securities and eligible loans constitute another important source of liquidity. As of September 30, 2003,
the estimated remaining borrowing capacity, after market value and other adjustments, against that portion of those assets that may be pledged to the FHLB of Atlanta and various securities dealers totaled $2.1 billion. A portion of these assets may
also be available to be pledged to the Federal Reserve Bank of Richmond. Assets available to be pledged to the Federal Reserve Bank of Richmond totaled $621.1 million. A portion of these assets may also be available to be pledged to the FHLB of
Atlanta.



In addition, the Bank from time to time accesses the
capital markets as an additional means of funding its operations and managing its capital ratios and asset growth. Specifically, the Bank has securitized financial assets, including home equity, home loan and automobile loan receivables, as well as
single-family residential loans, because the securitizations provide the Bank with a source of financing at competitive rates and assist the Bank in maintaining compliance with regulatory capital requirements. Additionally, the securitizations have
permitted the Bank to limit the credit risk associated with these assets while continuing to earn servicing fees and other income associated with the securitized assets.



Since 1988, the Bank has securitized approximately $18.6 billion of loan receivables. At September 30, 2003, the Bank
continues to service $3.4 billion, $19.0 million, $389.7 million and $18.9 million of securitized residential mortgages, home equity, automobile and home loan receivables, respectively. Chevy Chase derives fee-based income from servicing these
securitized portfolios. However, that fee-based income has been adversely affected in prior periods by increases in prepayments, delinquencies and charge-offs related to the receivables in these securitized pools.



The Banks securitization transactions transfer the risk of repayment on
securitized assets to a trust, which holds the receivables and issues the asset-backed certificates, and ultimately the risk of repayment is transferred to the holders of those certificates. The Bank retains credit risk with respect to the assets
transferred to the trust only to the extent that it retains recourse based on the performance of the assets or holds subordinated certificates issued by the trust. In its securitizations, the Bank sometimes retains a limited amount of recourse
through one or more means, most often through the establishment of reserve accounts, overcollateralization of receivables or retention of subordinated asset-backed certificates. Reserve accounts are funded by initial deposits, if required, and by
amounts generated by the securitized assets over and above the amount required to pay interest, defaults and other charges and fees on the investors interests in the securitization transaction. Because amounts on deposit in the reserve
accounts are at risk depending upon performance of the securitized receivables, those amounts represent recourse to the Bank. At September 30, 2003 and 2002, total recourse to the Bank related to securitization transactions was $30.0 million and
$40.1 million, respectively.



The Bank securitized and sold
$2.6 billion and $1.6 billion of loan receivables during fiscal year 2003 and 2002, respectively. At September 30, 2003 and 2002, the Bank had $1.4 billion and $1.2 billion, respectively, of loan receivables held for securitization and/or sale. The
proceeds from the securitization and sale of single-family residential, home equity and home loan receivables will continue to be a significant source of liquidity for the Bank.



As part of its operating strategy, the Bank continues to explore opportunities to sell assets and to securitize and sell
mortgage, home equity and home loan receivables to meet liquidity and other balance sheet objectives.



The Bank is also obligated under a recourse provision related to the servicing of certain of its residential mortgage loans. At each of September 30, 2003
and 2002, the recourse to the Bank under this arrangement totaled $3.4 million.



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The Bank uses its liquidity primarily to meet its commitments to fund maturing savings certificates and
deposit withdrawals, fund existing and continuing loan commitments, repay borrowings and meet operating expenses. During fiscal year 2003, the Bank used the cash provided by operating, investing and financing activities primarily to (i) fund
maturing savings certificates and deposit withdrawals of $44.6 billion, (ii) fund existing and continuing loan commitments, including real estate held for investment or sale, of $4.5 billion, (iii) purchase investments and loans of $6.2 billion,
(iv) meet operating expenses, before depreciation and amortization, of $405.8 million and (v) repay borrowings of $206.7 million net of proceeds from additional borrowings. These commitments were funded primarily through (i) proceeds from customer
deposits and sales of certificates of deposit of $45.3 billion, (ii) proceeds from sales of loans, trading securities and real estate of $6.1 billion, and (iii) principal and interest collected on investments, loans, and securities of $3.8 billion.



The Banks commitments to extend credit at September 30,
2003 are set forth in the following table.



|                                         |  | (In thousands)
|---------------------------------------- |  | --------------
|Commitments to originate loans           |  | $             
|                                         |  |               
|Loans in process (collateralized loans): |  |               
|Home equity                              |  |               
|Real estate construction and ground      |  |               
|Commercial                               |  |               
|                                         |  |               
|Subtotal                                 |  |               
|                                         |  |               
|Loans in process (unsecured loans):      |  |               
|Overdraft lines                          |  |               
|Commercial                               |  |               
|                                         |  |               
|Subtotal                                 |  |               
|                                         |  |               
|Total commitments to extend credit       |  | $             
|                                         |  |               



Based on historical
experience, the Bank expects to fund substantially less than the total amount of its outstanding overdraft line and home equity credit line commitments, which together accounted for 34.6% of commitments to extend credit at September 30, 2003.



At September 30, 2003, repayments of borrowed money scheduled
to occur during the next 12 months were $1.6 billion. Certificates of deposit maturing during the next 12 months amounted to $1.4 billion. The Bank expects that a significant portion of these maturing certificates of deposit will remain with the
Bank. In the event that deposit withdrawals are greater than anticipated, the Bank may have to increase deposit interest rates or rely on alternative and potentially higher cost sources of funds in order to meet its liquidity needs.



There were no material commitments for capital expenditures at September 30,
2003.



The Banks liquidity requirements in years
subsequent to fiscal year 2003 will continue to be affected both by the asset size of the Bank, the growth of which may be constrained by capital requirements, and the composition of the asset portfolio. Management believes that the Banks
primary sources of funds, described above, will be sufficient to meet the Banks foreseeable liquidity needs. The mix of funding sources utilized from time to time will be determined by a number of factors, including capital planning
objectives, lending and investment strategies and market conditions.



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RESULTS OF OPERATIONS



The Real
Estate Trusts ability to generate revenues from property ownership and development is significantly influenced by a number of factors, including national and local economic conditions, the level of mortgage interest rates, governmental
actions, such as changes in real estate tax rates, and the type, location, size and stage of development of the Real Estate Trusts properties. Debt service payments and most of the operating expenses associated with income-producing properties
are not decreased by reductions in occupancy or rental income. Therefore, the ability of the Real Estate Trust to produce net income in any year from its income-producing properties is highly dependent on the Real Estate Trusts ability to
maintain or increase the properties levels of gross income. The relative illiquidity of real estate investments tends to limit the ability of the Real Estate Trust to vary its portfolio promptly in response to changes in economic, demographic,
social, financial and investment conditions. See Financial ConditionReal Estate.



The banks operating results historically have depended primarily on its net interest spread, which is the difference between the rates
of interest earned on its loans and securities investments and the rates of interest paid on its deposits and borrowings. In recent periods, the bank has generated significant income from loan servicing and securities activities and deposit fees. In
addition to interest paid on its interest-bearing liabilities, the banks principal expenses are operating expenses.



FISCAL 2003 COMPARED TO FISCAL 2002



REAL ESTATE



The Real Estate
Trust recorded income before depreciation and amortization of debt service of $5.5 million and an operating loss of $14.9 million for fiscal 2003, compared to income before depreciation and amortization of debt service of $500,000 and an operating
loss of $19.5 million for fiscal 2002. The increase was largely attributable to a $9.1 million gain on the sale of a property which offset higher impairment losses and losses on unconsolidated entities.



Income after direct operating expenses from hotels decreased $1.4 million, or
4.8%, in fiscal 2003 from the level achieved in fiscal 2002. Total revenue decreased $432,000, or 0.5%, as increased revenues at many of the hotel properties were offset by a substantial decrease in revenue at one of the hotel properties as this
property was under renovation for much of the fiscal year and occupancy was lower due to rooms being taken out of service for the renovation. Room sales for fiscal 2003 decreased $322,000, or 0.5%, from fiscal year 2002, while food, beverage and
other sales decreased $110,000, or 0.6%. Direct operating expenses increased $942,000, or 1.6%, due mainly to increased payroll and utility costs.



Income after direct operating expenses from office and industrial properties increased $307,000, or 1.1%, in fiscal 2003 compared to fiscal 2002. Total
revenue increased $198,000, or 0.5%, in fiscal 2003 as revenue increased at the two new office properties which were placed into service in fiscal year 2002 by $925,000 which was offset by lower revenue at the eleven office properties owned and
operating throughout both periods of $727,000. This lower revenue was a result of leased space turning over at lower rental rates in the current period. Direct operating expenses remained constant, decreasing $109,000, or 0.9%.



Other income, which includes interest income, income from other real estate
properties and other miscellaneous income, decreased $152,000, or 10.5%, principally due to lower interest income in the current period.



Land parcels and other expense increased $43,000, or 3.8%, in fiscal 2003 from fiscal 2002 due to higher real estate taxes and other carrying charges.



Interest expense remained relatively constant, decreasing
$341,000, or approximately 0.7%, in fiscal 2003. The average balance of outstanding borrowings increased to $585.1 million for fiscal 2003 from $578.9 million for the prior fiscal year. The change in borrowings occurred as a result of mortgage loan
refinancings and unsecured note sales. The average cost of borrowings was 8.68% in fiscal 2003 and 8.67% in fiscal 2002.



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There was no development activity in fiscal 2003 therefore no interest was capitalized in the period.
Capitalized interest totaled $287,000 in fiscal 2002.



Depreciation expense increased $183,000, or approximately 1.0%, as a result of new income-producing assets and tenant improvements placed into service.



Amortization of debt expense increased $142,000, or 14.9%, reflecting costs incurred in connection with obtaining and refinancing mortgage loans in the
current and prior fiscal periods.



Advisory, management and
leasing fees paid to related parties decreased $26,000, or 0.2%, in fiscal 2003. The advisory fee in fiscal 2003 was $458,000 per month compared to $475,000 per month for fiscal 2002, an aggregate decrease of $204,000. This decrease in advisory fees
was partially offset by increased office management and leasing fees of $178,000.



General and administrative expense increased $544,000, or 23.9%, in fiscal 2003 principally due to the write-off of certain acquisition and development costs for projects that the Real Estate Trust has determined not
to pursue.



Equity in earnings of unconsolidated entities
reflected net earnings of $7.2 million in fiscal 2003 as compared to $8.8 million in fiscal 2002, a decrease of $1.6 million. Earnings from Saul Holdings Partnership and Saul Centers were lower by $414,000 in fiscal 2003 primarily due to a gain
recognized on the sale of a property in fiscal 2002. Losses from other investments increased approximately $1.2 million in fiscal 2003 as a result of a write-down of a certain non-public investment accounted for under the equity method.



Impairment losses increased $810,000 in fiscal 2003 due to additional
write-downs of certain non-public investments accounted for under the cost method.



On September 25, 2003 the Real Estate Trust sold a land parcel in Rockville, Maryland for $11.3 million resulting in a gain of $9.1 million. There were no property sales in fiscal 2002.



BANKING



Overview. The
Bank recorded operating income of $146.2 million for the year ended September 30, 2003, compared to operating income of $103.6 million for the year ended September 30, 2002. The improvement in income in fiscal year 2003 was primarily due to
increases in servicing and securitization income, deposit servicing fees and gain on trading securities and sales of loans. A decrease in the provision for loan losses also contributed to the increased net income. Partially offsetting the increased
income were a decrease in net interest income and an increase in operating expenses. The Banks operating income in future periods will continue to be affected by increased operating expenses associated with expansion of the Banks branch
network and other areas of business and potential use of relatively higher cost sources of funding to support continued growth.



Net Interest Income. Net interest income, before the provision for loan losses, decreased $22.1 million (or 8.3%) in fiscal year 2003 from fiscal
year 2002. There was no interest income recorded during fiscal year 2003 period on non-accrual assets and restructured loans. The Bank would have recorded interest income of $2.1 million in fiscal year 2003 if non-accrual assets and restructured
loans had been current in accordance with their original terms. The Banks net interest income in future periods will continue to be adversely affected by the Banks non-performing assets. See Financial ConditionAsset
QualityNon-Performing Assets.



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The following table sets forth, for the periods indicated, information regarding the total amount of
income from interest-earning assets and the resulting yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net yield on interest-earning assets.



Net Interest Margin Analysis

(Dollars in thousands)



|                                                                       |  | Year Ended September 30, |           
|---------------------------------------------------------------------- |  | ------------------------ | ----------
|                                                                       |  | 2003                     |           
|                                                                       |  | AverageBalances          |           
|Assets:                                                                |  |                          |           
|Interest-earning assets:                                               |  |                          |           
|Loans receivable, net (1)                                              |  | $                        | 8,512,601 
|Mortgage-backed securities                                             |  |                          | 682,799   
|Federal funds sold and securities purchased under agreements to resell |  |                          | 70,282    
|Trading securities                                                     |  |                          | 87,247    
|Investment securities                                                  |  |                          | 46,399    
|Other interest-earning assets                                          |  |                          | 191,318   
|                                                                       |  |                          |           
|Total                                                                  |  |                          | 9,590,646 
|                                                                       |  |                          |           
|Noninterest-earning assets:                                            |  |                          |           
|Cash                                                                   |  |                          | 298,697   
|Real estate held for investment or sale                                |  |                          | 24,597    
|Property and equipment, net                                            |  |                          | 471,845   
|Automobiles subject to lease, net                                      |  |                          | 1,039,802 
|Goodwill and other intangible assets, net                              |  |                          | 24,597    
|Other assets                                                           |  |                          | 355,771   
|                                                                       |  |                          |           
|Total assets                                                           |  | $                        | 11,805,955
|                                                                       |  |                          |           
|Liabilities and stockholders equity:                                  |  |                          |           
|Interest-bearing liabilities:                                          |  |                          |           
|Deposit accounts:                                                      |  |                          |           
|Demand deposits                                                        |  | $                        | 1,799,489 
|Savings deposits                                                       |  |                          | 1,099,990 
|Time deposits                                                          |  |                          | 1,925,830 
|Money market deposits                                                  |  |                          | 2,114,947 
|                                                                       |  |                          |           
|Total deposits                                                         |  |                          | 6,940,256 
|Borrowings                                                             |  |                          | 2,769,252 
|                                                                       |  |                          |           
|Total liabilities                                                      |  |                          | 9,709,508 
|                                                                       |  |                          |           
|Noninterest-bearing items:                                             |  |                          |           
|Noninterest-bearing deposits                                           |  |                          | 1,091,918 
|Other liabilities                                                      |  |                          | 317,225   
|Minority interest                                                      |  |                          | 146,580   
|Stockholders equity                                                   |  |                          | 540,724   
|                                                                       |  |                          |           
|Total liabilities and stockholders equity                             |  | $                        | 11,805,955
|                                                                       |  |                          |           
|Net interest income                                                    |  |                          |           
|                                                                       |  |                          |           
|Net interest spread (2)                                                |  |                          |           
|                                                                       |  |                          |           
|Net yield on interest-earning assets (3)                               |  |                          |           
|                                                                       |  |                          |           
|Interest-earning assets to interest-bearing liabilities                |  |                          |           
|                                                                       |  |                          |           

---

|(1) | Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Consolidated Statements of Operations and
Comprehensive Income; however, the loan balance is included in the average amount outstanding until transferred to real estate acquired in settlement of loans.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Equals weighted average yield on total interest-earning assets less weighted average rate on total interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(3) | Equals annualized net interest income divided by the average balances of total interest-earning assets.
|--- | -------------------------------------------------------------------------------------------------------



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The following table presents certain information regarding changes in interest income and interest
expense of the Bank during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate); changes
in rate (change in rate multiplied by old volume); and changes in rate and volume.



Volume and Rate Changes in Net Interest Income

(Dollars in thousands)



|                                                                       |  | Year Ended September 30, 2003 Compared to Year Ended September 30,
2002 Increase (Decrease) Due to Change in (1) |         |   | Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 Increase (Decrease) Due to Change in
(1) |  
|---------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- | ------- | - | ---------------------------------------------------------------------------------------------------------------- | -
|                                                                       |  | Volume                                                                                                           |         |   | Rate                                                                                                             |  
|Interest income:                                                       |  |                                                                                                                  |         |   |                                                                                                                  |  
|Loans (2)                                                              |  | $                                                                                                                | 65,112  |   |                                                                                                                  | $
|Mortgage-backed securities                                             |  |                                                                                                                  | (30,248 | ) |                                                                                                                  |  
|Federal funds sold and securities purchased under agreements to resell |  |                                                                                                                  | 326     |   |                                                                                                                  |  
|Trading securities                                                     |  |                                                                                                                  | 2,245   |   |                                                                                                                  |  
|Investment securities                                                  |  |                                                                                                                  | 6       |   |                                                                                                                  |  
|Other interest-earning assets                                          |  |                                                                                                                  | (318    | ) |                                                                                                                  |  
|                                                                       |  |                                                                                                                  |         |   |                                                                                                                  |  
|Total interest income                                                  |  |                                                                                                                  | 37,123  |   |                                                                                                                  |  
|                                                                       |  |                                                                                                                  |         |   |                                                                                                                  |  
|Interest expense:                                                      |  |                                                                                                                  |         |   |                                                                                                                  |  
|Deposit accounts                                                       |  |                                                                                                                  | 5,070   |   |                                                                                                                  |  
|Borrowings                                                             |  |                                                                                                                  | 3,828   |   |                                                                                                                  |  
|                                                                       |  |                                                                                                                  |         |   |                                                                                                                  |  
|Total interest expense                                                 |  |                                                                                                                  | 8,898   |   |                                                                                                                  |  
|                                                                       |  |                                                                                                                  |         |   |                                                                                                                  |  
|Increase (decrease) in net interest income                             |  | $                                                                                                                | 28,225  |   |                                                                                                                  | $
|                                                                       |  |                                                                                                                  |         |   |                                                                                                                  |  

---

|(1) | The net change attributable to the combined impact of volume and rate has been allocated in proportion to the absolute value of the change due to volume and the change due to rate.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes loans held for sale and/or securitization.
|--- | ---------------------------------------------------



Interest income in fiscal year 2003 decreased $89.8 million (16.6%) from fiscal year 2002 primarily as a result of lower average yields on loans
receivable, which was partially offset by increases in the average balances of loans receivable of $1.2 billion. Also contributing to the decreased income were lower average yields and lower average balances of mortgage-backed securities.



The Banks net interest spread decreased to 2.59% in
fiscal year 2003 from 3.16% in fiscal year 2002. The average yield of interest-earning assets decreased at a rate greater than the rate of decrease in the average cost of interest-bearing liabilities. Average interest-earning assets as a percentage
of average interest bearing liabilities increased to 98.8% in fiscal year 2003 compared to 95.1% in fiscal year 2002.



Interest income on loans, the largest category of interest-earning assets, decreased $51.9 million from fiscal year 2002 primarily because of lower
average yields. The decreased average yield on the loan portfolio was primarily due to declines in the various indices on which interest rates on adjustable rate loans are based. The average yield on the loan portfolio decreased 145 basis points
(from 6.18% to 4.73%) from fiscal year 2002. Lower average yields on single-family residential loans during fiscal year 2003 resulted in a $19.0 million (or 7.8%) decrease in interest income. A $541.9 million increase in the average balance of
single-family residential



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loans partially offset this decrease. In addition, lower average yields and, to a lesser extent, lower average balances of automobile loans resulted in a
$30.2 million (or 34.2%) decrease in interest income.



Interest
income on mortgage-backed securities decreased $37.7 million (or 50.7%) primarily because of a $550.4 million reduction in average balances and, to a lesser extent, a decrease in the average interest rates on those securities (from 6.03% to 5.36%).



Interest expense on deposits decreased $63.8 million (or
44.3%) during fiscal year 2003, due to decreased average rates. The 100 basis point decrease in the average rate on deposits (from 2.15% to 1.15%) resulted from a reduction in the rates paid by the Bank in response to declines in market interest
rates as well as the maturity of higher cost brokered deposits.



Interest expense on borrowings decreased $3.9 million (or 3.0%) in fiscal year 2003 compared to fiscal year 2002. The decrease resulted from lower average rates paid on securities sold under repurchase agreements and other borrowings,
which, combined, resulted in a decrease of $5.1 million in interest expense. A decrease in the average interest rate on Federal Home Loan Bank advances (from 5.16% to 4.68%) also contributed to the decrease in interest expense on borrowings.
Partially offsetting the decrease in interest expense on borrowings was an increase in the average balance of Federal Home Loan Bank advances of $216.2 million (or 11.6%).



Provision for Loan Losses. The Banks provision for loan losses decreased to $18.4 million in fiscal year 2003
from $51.4 million in fiscal year 2002. The $33.0 million decrease largely reflects improved credit quality of the loan portfolio following the Banks prior decisions to stop originating indirect automobile loans. See Financial
ConditionAsset QualityAllowances for Losses.



Other Income. Other non-interest income increased to $540.3 million in fiscal year 2003 from $488.9 million in fiscal year 2002. The $51.4 million (or 10.5%) increase resulted from an increase in servicing and securitization income,
an increase in gain on trading securities and sales of loans, an increase in income on real estate held for investment or sale and an increase in deposit servicing fees.



Servicing and securitization income increased to $103.4 million in fiscal year 2003, from $84.2 million in fiscal year 2002,
primarily as a result of an increase in the volume of loans securitized and sold. The Bank securitized and sold $2.6 billion of loans receivable during fiscal year 2003 compared to $1.6 billion in the prior year.



Gain on trading securities and sales of loans increased to $41.2 million in
fiscal year 2003, from $10.3 million in fiscal year 2002. The Bank sold loans amounting to $3.5 billion during fiscal year 2003 compared to sales of $2.3 billion in the prior year.



Income on real estate held for investment or sale was $6.8 million in fiscal year 2003 compared to $1.0 million in the prior
year. The Bank recognized a gain of $5.5 million on the sale of one REO property during fiscal 2003.



Deposit servicing fees increased $8.8 million (or 7.8%) during fiscal year 2003 primarily due to fees generated from the continued expansion of the
Banks branch and ATM network.



Operating Expenses.
Operating expenses for fiscal year 2003 increased $19.6 million (or 3.3%) from fiscal year 2002. The increase in operating expenses was primarily the result of a $9.7 million (or 4.8%) increase in salaries and employee benefits due to the addition
of staff in the residential mortgage lending area and retail branch network. Also contributing to the increase in operating expenses was an increase in depreciation and amortization of $14.8 million during the current year due to depreciation
expense on automobiles subject to lease and, to a lesser extent, the fair market value adjustment of one office building held for sale.



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FISCAL 2002 COMPARED TO FISCAL 2001



REAL ESTATE



The Real Estate
Trust recorded income before depreciation and amortization of debt expense of $500,000 and an operating loss of $19.5 million for fiscal 2002, compared to income before depreciation and amortization of debt expense of $18.9 million and an operating
loss of $700,000 for fiscal 2001. The decline was largely attributable to lower revenues from hotels and office and industrial properties.



Income after direct operating expenses from hotels decreased $7.9 million, or 21.5%, in fiscal 2002 from the level achieved in fiscal 2001. Total revenue
decreased $12.3 million, or 12.2%, as the hotel portfolio experienced a reduction in average occupancy and average room rental rates as a result of the sharp decline in air travel and the overall decline in the hotel industry as a result of the
September 11 terrorist attacks. Room sales for fiscal 2002 decreased $10.7 million, or 13.2%, from fiscal 2001, while food, beverage and other sales decreased $1.6 million, or 8.4%. Direct operating expenses decreased $4.4 million, or 6.9%, due
mainly to reduced payroll, advertising and other operating expenses.



Income after direct operating expenses from office and industrial properties decreased $1.2 million, or 4.3%, in fiscal 2002 compared to such income in fiscal 2001. Gross income decreased $1.5 million, or 3.7%, in fiscal 2002, while
expenses decreased $259,000, or 2.2%. The decline was largely due to increased vacancies.



Other income, which includes interest income, income from other real estate properties and miscellaneous receipts, declined by approximately $1.0 million, or 41.3%, in fiscal 2002 due to lower interest income and the
sale of the Real Estate Trusts only apartment project.



Land parcels and other expense decreased $41,000, or 3.5%, in fiscal 2002 primarily due to the sale of the Real Estate Trusts apartment project in fiscal 2001.



Interest expense decreased $110,000, or 0.2%, in fiscal 2002, primarily because of lower interest rates on outstanding
borrowings. The average balance of outstanding borrowings increased to $578.9 million for fiscal 2002 from $560.1 million for the prior year. The change in average borrowings occurred as a result of mortgage loan refinancings and unsecured note
sales. The average cost of borrowings was 8.67% in fiscal 2002 and 8.96% in fiscal 2001.



Capitalized interest decreased $282,000, or 49.6% during fiscal 2002 due to the lower level of development activity in the current year.



Depreciation increased $547,000, or 2.9%, in fiscal 2002 as a result of new income-producing properties, new tenant
improvements and capital replacements.



Amortization of debt
expense decreased $32,000, or 3.3%, primarily due to fewer new financings completed during fiscal 2002 compared to fiscal 2001.



Advisory, management and leasing fees paid to related parties increased $690,000, or 5.9%, in fiscal 2002. The advisory fee in fiscal 2002 was $475,000
per month compared to $363,000 per month for fiscal 2001, which resulted in an aggregate increase of $1,347,000, or 30.9%. Management and leasing fees were lower by $657,000, or 8.9%, in fiscal 2002 as a result of lower gross income on which fees
are based.



General and administrative expense decreased $1.9
million, or 45.7%, in fiscal 2002 principally as a result of the high level of write-offs of abandoned development costs in fiscal 2001.



Equity in earnings of unconsolidated entities reflected earnings of $9,057,000 in fiscal 2002 and earnings of $7,402,000 in fiscal 2001, an increase of
$1,655,000 or 22.4%. The improvement was due to increased period-to-period earnings of Saul Centers.



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There were no property sales during fiscal 2002. Gain on sale of property was $11,077,000 in fiscal 2001
and consisted of a $2.2 million gain on the sale of an apartment project in Texas, a gain of $5.2 million on the sale of an office project in Louisiana, and an aggregate gain of $3.7 million on the sales of land parcels in Florida, Georgia, and
Maryland, and the condemnation of two land parcels in Colorado and Michigan.



BANKING



Overview. The
Bank recorded operating income of $103.6 million for the year ended September 30, 2002, compared to operating income of $95.6 million for the year ended September 30, 2001. The increase in income in fiscal year 2002 was primarily due to an increase
of $75.3 million in automobile rental income, an increase in servicing and securitization income of $32.0 million, a $12.2 million increase in deposit service fees and an $8.1 million decrease in the provision for loan losses. Partially offsetting
the increased income was a $83.4 million increase in operating expenses, a $30.4 million decrease in net interest income and a $10.3 million gain on other investment in fiscal year 2001.



Net Interest Income. Net interest income, before the provision for loan losses, decreased $30.4 million (or 10.2%) in
fiscal year 2002 over fiscal year 2001. Interest income during fiscal year 2002 included $0.3 million of recorded income on non-accrual assets and restructured loans. The Bank would have recorded additional interest income of $2.9 million in fiscal
year 2002 if non-accrual assets and restructured loans had been current in accordance with their original terms. The Banks net interest income in future periods will continue to be adversely affected by the Banks non-performing assets.
See Financial ConditionAsset QualityNon-Performing Assets.



Interest income in fiscal year 2002 decreased $179.9 million (or 24.9%) from the level in fiscal year 2001 as a result of lower average yields and to a lesser extent, lower average balances of loans receivable.



The Banks net interest spread decreased to 3.16% in
fiscal year 2002 from 3.38% in fiscal year 2001. A shift in the mix of consumer loans to lower yielding prime automobile loans from higher yielding subprime automobile loans contributed to the decrease. An increase in the average balances of
mortgage-backed securities, home equity loans and commercial loans, which was funded primarily with Federal Home Loan Bank advances and deposits partially offset the decline. Average interest-earning assets as a percentage of average interest
bearing liabilities decreased to 95.1% in fiscal year 2002 compared to 96.5% in fiscal year 2001.



Interest income on loans, the largest category of interest-earning assets, decreased by $175.6 million from fiscal year 2001 primarily because of lower
average yields and to a lesser extent, lower average balances. The average yield on the loan portfolio in fiscal year 2002 decreased 189 basis points (from 8.07% to 6.18%) from the average yield in fiscal year 2001. The average yield on
single-family residential loans decreased to 5.60% during fiscal year 2002 from 6.97% during fiscal year 2001, which resulted in an $80.0 million (or 22.8%) decrease in interest income from such loans. Also contributing to the decreased average
yield on the loan portfolio were decreases in the various indices on which interest rates on adjustable rate loans are based.



Lower average balances of the Banks single-family residential loans, which decreased $193.7 million (or 3.9%), also contributed to the decrease in
interest income from those loans. Average balances of subprime automobile loans and construction loans decreased $215.9 million and $39.9 million, respectively, and contributed to a $39.9 million and $10.5 million decrease in interest income from
those loans, respectively.



Interest income on mortgage-backed
securities increased $2.7 million (or 3.7%) primarily because of higher average balances. Offsetting the $89.7 million increase in average balances was a decrease in the average interest rates on those securities from 6.27% to 6.03%.



Interest expense on deposits decreased $103.7 million (or 41.9%) during
fiscal year 2002 due to decreased average rates. The 164 basis point decrease in the average rate on deposits (from 3.79% to 2.15%) resulted from



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declining market interest rates, which allowed the Bank to reduce the interest paid on deposits, coupled with a shift in the deposit mix towards lower cost
money market and NOW deposits. During fiscal year 2002, the Bank decreased its use of higher cost brokered deposits as an alternative funding source.



Interest expense on borrowings decreased $45.9 million (or 26.2%) in fiscal year 2002 from fiscal year 2001. A $395.0 million (or 17.5%) decrease in
average balances on Federal Home Loan Bank advances and a 27 basis point decrease in the average rate paid on such borrowings (from 5.43% to 5.16%) resulted in a decrease of $26.5 million in interest expense. During fiscal year 2002, interest
expense on securities sold under repurchase agreements decreased $13.8 million, contributing to the decrease in interest expense on borrowings, as a result of lower average rates (from 5.48% to 1.96%). A slight increase of $7.5 million in the
average balance partially offset the decrease in interest expense on securities sold under repurchase agreements.



Provision for Loan Losses. The Banks provision for loan losses decreased to $51.4 million in fiscal year 2002 from $59.5 million in fiscal
year 2001. The $8.1 million decrease primarily reflected decreased charge-offs of subprime automobile loans because the Banks portfolio of these loans continues to decline as a result of the Banks prior decision to discontinue
originations of these loans. See Financial ConditionAsset QualityAllowances for Losses.



Other Income. Other income increased to $488.9 million in fiscal year 2002 from $375.3 million in fiscal year 2001. The $113.6 million (or 30.3%)
increase was primarily attributable to increases in automobile rental income of $75.3 million, servicing and securitization income of $32.0 million and deposit service fees of $12.2 million, which were partially offset by a non-recurring gain on
other investment of $10.3 million in fiscal year 2001.



Automobile rental income increased to $242.6 million in fiscal year 2002 from $167.4 million in fiscal year 2001 primarily due to growth in the Banks automobile leasing program.



Servicing and securitization income during fiscal year 2002 increased $32.0
million (or 61.3%) from fiscal year 2001, primarily as a result of gains of $56.9 million resulting from the securitization and sale of $1.6 billion of loan receivables during fiscal year 2002 compared to gains of $27.9 million resulting from the
securitization and sale of $804.9 million of loan receivables during fiscal year 2001.



Deposit servicing fees increased $12.2 million (or 12.0%) during the current year primarily due to fees generated from the continued expansion of the Banks branch and ATM networks.



Gain on other investment was $10.3 million in fiscal year 2001. The $10.3
million non-recurring gain was the result of the sale of the Banks interest in Star Systems, Inc. to Concord EFS, Inc.



Operating Expenses. Operating expenses for fiscal year 2002 increased $83.5 million (or 16.1%) from fiscal year 2001. The increase in operating
expenses is largely attributable to an increase in depreciation and amortization and servicing assets amortization and other loan expenses. Depreciation and amortization increased $55.7 million (or 38.5%) due to growth in the Banks automobile
leasing program. Servicing assets amortization and other loan expenses increased $14.8 million primarily due to write-downs in the market value of the Banks mortgage servicing assets. Increased loan prepayments during fiscal year 2002
resulting from lower mortgage interest rates in turn resulted in increased amortization of mortgage servicing assets. Salaries and employee benefits increased $5.6 million (or 2.8%) in fiscal year 2002. Also contributing to the increase in operating
expenses was an increase in property and equipment expense of $4.5 million primarily due to land lease expense and property taxes associated with the Banks new headquarters.



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##### Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Information required by this Item is included in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
OperationsFinancial ConditionBankingAsset and Liability Management.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The financial statements of the Trust and its consolidated subsidiaries are included in this report on the pages indicated and are incorporated herein by reference:



|    |  |                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Report of Independent Auditors.                                                                                                           
|    |  |                                                                                                                                           
|(b) |  | Consolidated Balance SheetsAs of September 30, 2003 and 2002.                                                                            
|    |  |                                                                                                                                           
|(c) |  | Consolidated Statements of OperationsFor the years ended September 30, 2003, 2002 and 2001.                                              
|    |  |                                                                                                                                           
|(d) |  | Consolidated Statements of Comprehensive Income and Changes in Shareholders EquityFor the years ended September 30, 2003, 2002 and 2001.
|    |  |                                                                                                                                           
|(e) |  | Consolidated Statements of Cash FlowsFor the years ended September 30, 2003, 2002 and 2001.                                              
|    |  |                                                                                                                                           
|(f) |  | Notes to Consolidated Financial Statements.                                                                                               



Summary financial
information with respect to the bank is also included in Part I, Item 1.



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REPORT OF INDEPENDENT AUDITORS



TRUSTEES AND SHAREHOLDERS

B.F. SAUL REAL
ESTATE INVESTMENT TRUST



We have audited the accompanying
consolidated balance sheets of B.F. Saul Real Estate Investment Trust (the Trust) as of September 30, 2003 and 2002, and the related consolidated statements of operations, comprehensive income and shareholders equity and cash flows
for each of the three years in the period ended September 30, 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
Trust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 B.F. Saul Real Estate Investment Trust as of September 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 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 financial
statements taken as a whole, present fairly in all material respects the information set forth therein.



As discussed in the notes to the consolidated financial statements, the Trust adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended on October 1, 2000.



As discussed in the notes to the consolidated financial statements, the Trust adopted Financial Accounting Standards Board Interpretation No.
(FIN) 46, Consolidation of Variable Interest Entities, effective July 1, 2003.



/s/ Ernst & Young LLP

McLean, Virginia



December 2, 2003



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##### Table of Contents

Consolidated Balance Sheets

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                                                                                               |  | September 30 |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------
|(In thousands)                                                                                                                                                                 |  | 2003         |           
|ASSETS                                                                                                                                                                         |  |              |           
|Real Estate                                                                                                                                                                    |  |              |           
|Income-producing properties                                                                                                                                                    |  |              |           
|Hotel                                                                                                                                                                          |  | $            | 258,060   
|Office and industrial                                                                                                                                                          |  |              | 180,385   
|Other                                                                                                                                                                          |  |              | 2,803     
|                                                                                                                                                                               |  |              |           
|                                                                                                                                                                               |  |              | 441,248   
|Accumulated depreciation                                                                                                                                                       |  |              | (166,243  
|                                                                                                                                                                               |  |              |           
|                                                                                                                                                                               |  |              | 275,005   
|Land parcels                                                                                                                                                                   |  |              | 42,425    
|Investment in Saul Holdings and Saul Centers                                                                                                                                   |  |              | 53,383    
|Cash and cash equivalents                                                                                                                                                      |  |              | 18,979    
|Note receivable and accrued interestrelated party                                                                                                                             |  |              | 2,987     
|Other assets                                                                                                                                                                   |  |              | 36,506    
|                                                                                                                                                                               |  |              |           
|Total real estate assets                                                                                                                                                       |  |              | 429,285   
|                                                                                                                                                                               |  |              |           
|Banking                                                                                                                                                                        |  |              |           
|Cash and other deposits                                                                                                                                                        |  |              | 339,960   
|Interrest bearing deposits                                                                                                                                                     |  |              | 74,667    
|Loans held for securitization and/or sale                                                                                                                                      |  |              | 1,378,831 
|Trading securities                                                                                                                                                             |  |              |          
|Investment securities (market value $46,531 and $46,969, respectively)                                                                                                         |  |              | 46,345    
|Mortgage-backed securities (market value $490,764 and $1,057,852, respectively)                                                                                                |  |              | 478,392   
|Loans receivable (net of allowance for losses of $58,397 and $66,079, respectively)                                                                                            |  |              | 7,559,557 
|Federal Home Loan Bank stock                                                                                                                                                   |  |              | 107,374   
|Real estate held for investment or sale (net of allowance for losses of $202 and $71,495, respectively)                                                                        |  |              | 22,745    
|Property and equipment, net                                                                                                                                                    |  |              | 490,731   
|Automobiles subject to lease, net                                                                                                                                              |  |              | 855,410   
|Goodwill and other intangible assets, net                                                                                                                                      |  |              | 24,329    
|Interest only strips, net                                                                                                                                                      |  |              | 139,781   
|Servicing assets, net                                                                                                                                                          |  |              | 96,268    
|Other assets                                                                                                                                                                   |  |              | 165,050   
|                                                                                                                                                                               |  |              |           
|Total banking assets                                                                                                                                                           |  |              | 11,779,440
|                                                                                                                                                                               |  |              |           
|TOTAL ASSETS                                                                                                                                                                   |  | $            | 12,208,725
|                                                                                                                                                                               |  |              |           
|LIABILITIES                                                                                                                                                                    |  |              |           
|Real Estate                                                                                                                                                                    |  |              |           
|Mortgage notes payable                                                                                                                                                         |  | $            | 322,437   
|Notes payablesecured                                                                                                                                                          |  |              | 203,800   
|Notes payableunsecured                                                                                                                                                        |  |              | 55,349    
|Accrued dividends payablepreferred shares of beneficial interest                                                                                                              |  |              | 6,139     
|Other liabilities and accrued expenses                                                                                                                                         |  |              | 65,131    
|                                                                                                                                                                               |  |              |           
|Total real estate liabilities                                                                                                                                                  |  |              | 652,856   
|                                                                                                                                                                               |  |              |           
|Banking                                                                                                                                                                        |  |              |           
|Deposit accounts                                                                                                                                                               |  |              | 8,100,505 
|Borrowings                                                                                                                                                                     |  |              | 168,314   
|Federal Home Loan Bank advances                                                                                                                                                |  |              | 1,987,469 
|Custodial accounts                                                                                                                                                             |  |              | 173,842   
|Amounts due to banks                                                                                                                                                           |  |              | 69,081    
|Other liabilities                                                                                                                                                              |  |              | 290,214   
|Capital notessubordinated                                                                                                                                                     |  |              | 250,000   
|                                                                                                                                                                               |  |              |           
|Total banking liabilities                                                                                                                                                      |  |              | 11,039,425
|                                                                                                                                                                               |  |              |           
|Commitments and contingencies                                                                                                                                                  |  |              |           
|Minority interest held by affiliates                                                                                                                                           |  |              | 98,062    
|Minority interestother                                                                                                                                                        |  |              | 249,698   
|                                                                                                                                                                               |  |              |           
|TOTAL LIABILITIES                                                                                                                                                              |  |              | 12,040,041
|                                                                                                                                                                               |  |              |           
|SHAREHOLDERS EQUITY                                                                                                                                                           |  |              |           
|Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares authorized, 516,000 shares issued and
outstanding, liquidation value $51.6 million |  |              | 516       
|Common shares of beneficial interest, $1 par value, 10 million shares authorized, 6,641,598 shares issued                                                                      |  |              | 6,642     
|Paid-in surplus                                                                                                                                                                |  |              | 92,943    
|Retained earnings                                                                                                                                                              |  |              | 112,424   
|                                                                                                                                                                               |  |              |           
|                                                                                                                                                                               |  |              | 212,525   
|Less cost of 1,834,088 and 1,814,688 common shares of beneficial interest in treasury, respectively                                                                            |  |              | (43,841   
|                                                                                                                                                                               |  |              |           
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                     |  |              | 168,684   
|                                                                                                                                                                               |  |              |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  | $            | 12,208,725
|                                                                                                                                                                               |  |              |           



The Notes to
Consolidated Financial Statements are an integral part of these statements.



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Consolidated Statements of Operations

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                                |  | For the Year Ended September 30 |        
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------
|(In thousands, except per share amounts)                                                                        |  | 2003                            |        
|REAL ESTATE                                                                                                     |  |                                 |        
|Income                                                                                                          |  |                                 |        
|Hotels                                                                                                          |  | $                               | 87,611 
|Office and industrial (including $5,290, $5,100 and $3,983 of rental income from banking segment, respectively) |  |                                 | 39,121 
|Other                                                                                                           |  |                                 | 1,300  
|                                                                                                                |  |                                 |        
|Total income                                                                                                    |  |                                 | 128,032
|                                                                                                                |  |                                 |        
|Expenses                                                                                                        |  |                                 |        
|Direct operating expenses:                                                                                      |  |                                 |        
|Hotels                                                                                                          |  |                                 | 60,146 
|Office and industrial properties                                                                                |  |                                 | 11,484 
|Land parcels and other                                                                                          |  |                                 | 1,183  
|Interest expense                                                                                                |  |                                 | 49,770 
|Capitalized interest                                                                                            |  |                                 |       
|Depreciation                                                                                                    |  |                                 | 19,330 
|Amortization of debt expense                                                                                    |  |                                 | 1,092  
|Advisory, management and leasing feesrelated parties                                                           |  |                                 | 12,426 
|General and administrative                                                                                      |  |                                 | 2,823  
|                                                                                                                |  |                                 |        
|Total expenses                                                                                                  |  |                                 | 158,254
|                                                                                                                |  |                                 |        
|Equity in earnings (losses) of unconsolidated entities:                                                         |  |                                 |        
|Saul Holdings and Saul Centers                                                                                  |  |                                 | 8,643  
|Other                                                                                                           |  |                                 | (1,395 
|Impairment loss on investments                                                                                  |  |                                 | (998   
|Gain on sales of property                                                                                       |  |                                 | 9,079  
|                                                                                                                |  |                                 |        
|REAL ESTATE OPERATING LOSS                                                                                      |  | $                               | (14,893
|                                                                                                                |  |                                 |        
|BANKING                                                                                                         |  |                                 |        
|Interest income                                                                                                 |  |                                 |        
|Loans                                                                                                           |  | $                               | 402,405
|Mortgage-backed securities                                                                                      |  |                                 | 36,625 
|Trading securities                                                                                              |  |                                 | 4,801  
|Investment securities                                                                                           |  |                                 | 1,192  
|Other                                                                                                           |  |                                 | 6,528  
|                                                                                                                |  |                                 |        
|Total interest income                                                                                           |  |                                 | 451,551
|                                                                                                                |  |                                 |        
|Interest expense                                                                                                |  |                                 |        
|Deposit accounts                                                                                                |  |                                 | 80,122 
|Short-term borrowings                                                                                           |  |                                 | 10,836 
|Long-term borrowings                                                                                            |  |                                 | 114,521
|                                                                                                                |  |                                 |        
|Total interest expense                                                                                          |  |                                 | 205,479
|                                                                                                                |  |                                 |        
|Net interest income                                                                                             |  |                                 | 246,072
|Provision for loan losses                                                                                       |  |                                 | (18,422
|                                                                                                                |  |                                 |        
|Net interest income after provision for loan losses                                                             |  |                                 | 227,650
|                                                                                                                |  |                                 |        
|Other income                                                                                                    |  |                                 |        
|Deposit servicing fees                                                                                          |  |                                 | 122,473
|Servicing and securitization income                                                                             |  |                                 | 103,422
|Automobile rental income, net                                                                                   |  |                                 | 235,801
|Gain on sales of trading securities and sales of loans, net                                                     |  |                                 | 41,190 
|Income on real estate held for investment or sale, net                                                          |  |                                 | 6,780  
|Gain on other investment                                                                                        |  |                                 |       
|Other                                                                                                           |  |                                 | 30,616 
|                                                                                                                |  |                                 |        
|Total other income                                                                                              |  |                                 | 540,282
|                                                                                                                |  |                                 |        



Continued on following page.



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##### Table of Contents

Consolidated Statements of Operations (Continued)

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                                         |  | For the Year Ended September 30 |        
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | -------
|(In thousands, except per share amounts)                                                                                 |  | 2003                            |        
|BANKING (Continued)                                                                                                      |  |                                 |        
|Operating expenses                                                                                                       |  |                                 |        
|Salaries and employee benefits                                                                                           |  | $                               | 212,697
|Servicing assets amortization and other loan expenses                                                                    |  |                                 | 51,364 
|Property and equipment (including $5,290, $5,100 and $3,983 of rental expense paid to real estate segment,
respectively) |  |                                 | 38,309 
|Marketing                                                                                                                |  |                                 | 9,516  
|Data processing                                                                                                          |  |                                 | 35,301 
|Depreciation and amortization                                                                                            |  |                                 | 215,428
|Deposit insurance premiums                                                                                               |  |                                 | 1,266  
|Amortization of goodwill and other intangible assets                                                                     |  |                                 | 533    
|Other                                                                                                                    |  |                                 | 57,328 
|                                                                                                                         |  |                                 |        
|Total operating expenses                                                                                                 |  |                                 | 621,742
|                                                                                                                         |  |                                 |        
|BANKING OPERATING INCOME                                                                                                 |  | $                               | 146,190
|                                                                                                                         |  |                                 |        
|TOTAL COMPANY                                                                                                            |  |                                 |        
|Operating income                                                                                                         |  | $                               | 131,297
|Income tax provision                                                                                                     |  |                                 | 46,221 
|                                                                                                                         |  |                                 |        
|Income before minority interest and cumulative effect of change in accounting principle                                  |  |                                 | 85,076 
|Minority interest held by affiliates                                                                                     |  |                                 | (13,926
|Minority interestother                                                                                                  |  |                                 | (26,160
|                                                                                                                         |  |                                 |        
|Income before cumulative effect of change in accounting principle                                                        |  |                                 | 44,990 
|Cumulative effect of change in accounting principle, net of tax                                                          |  |                                 | 897    
|                                                                                                                         |  |                                 |        
|TOTAL COMPANY NET INCOME                                                                                                 |  | $                               | 45,887 
|                                                                                                                         |  |                                 |        
|Dividends: Real Estate Trusts preferred shares of beneficial interest                                                   |  |                                 | (5,418 
|                                                                                                                         |  |                                 |        
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                                              |  | $                               | 40,469 
|                                                                                                                         |  |                                 |        
|NET INCOME PER COMMON SHARE                                                                                              |  |                                 |        
|Income before minority interest and cumulative effect of change in accounting principle                                  |  | $                               | 16.53  
|Minority interest held by affiliates                                                                                     |  |                                 | (2.89  
|Minority interestother                                                                                                  |  |                                 | (5.43  
|Cumulative effect of change in accounting principle                                                                      |  |                                 | 0.19   
|                                                                                                                         |  |                                 |        
|NET INCOME PER COMMON SHARE (BASIC AND DILUTED)                                                                          |  | $                               | 8.40   
|                                                                                                                         |  |                                 |        





The Notes to Consolidated Financial Statements are an integral part of these statements.



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Consolidated Statements of Comprehensive Income and Changes in Shareholders Equity

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                        |  | For the Year Ended September 30 |        
|----------------------------------------------------------------------- |  | ------------------------------- | -------
|(Dollars in thousands)                                                  |  | 2003                            |        
|COMPREHENSIVE INCOME                                                    |  |                                 |        
|                                                                        |  |                                 |        
|Net income                                                              |  | $                               | 45,887 
|Other comprehensive income (loss):                                      |  |                                 |        
|Cumulative effect of change in accounting principle                     |  |                                 |       
|Net unrealized gain (loss) on cash flow hedges                          |  |                                 |       
|Income tax related to other comprehensive income                        |  |                                 |       
|                                                                        |  |                                 |        
|Other comprehensive income (loss), net of tax                           |  |                                 |       
|                                                                        |  |                                 |        
|TOTAL COMPREHENSIVE INCOME                                              |  | $                               | 45,887 
|                                                                        |  |                                 |        
|CHANGES IN SHAREHOLDERS EQUITY                                         |  |                                 |        
|                                                                        |  |                                 |        
|PREFERRED SHARES OF BENEFICIAL INTEREST                                 |  |                                 |        
|Beginning and end of period (516,000 shares)                            |  | $                               | 516    
|                                                                        |  |                                 |        
|COMMON SHARES OF BENEFICIAL INTEREST                                    |  |                                 |        
|Beginning and end of period (6,641,598 shares)                          |  |                                 | 6,642  
|                                                                        |  |                                 |        
|PAID-IN SURPLUS                                                         |  |                                 |        
|Beginning and end of period                                             |  |                                 | 92,943 
|                                                                        |  |                                 |        
|RETAINED EARNINGS                                                       |  |                                 |        
|Beginning of period                                                     |  |                                 | 68,438 
|Net income                                                              |  |                                 | 45,887 
|Adjustments - Saul Holdings investment                                  |  |                                 | 3,517  
|Dividends:                                                              |  |                                 |        
|Real Estate Trust preferred shares of beneficial interest:              |  |                                 |        
|Distributions payable                                                   |  |                                 | (5,418 
|                                                                        |  |                                 |        
|End of period                                                           |  |                                 | 112,424
|                                                                        |  |                                 |        
|ACCUMULATED OTHER COMPREHENSIVE INCOME                                  |  |                                 |        
|Beginning of period                                                     |  |                                 |       
|Cumulative effect of change in accounting principle                     |  |                                 |       
|Net unrealized gain (loss) on cash flow hedges                          |  |                                 |       
|                                                                        |  |                                 |        
|End of period                                                           |  |                                 |       
|                                                                        |  |                                 |        
|TREASURY SHARES                                                         |  |                                 |        
|Beginning of year (1,814,688 shares)                                    |  |                                 | (41,848
|Purchases (19,400 shares)                                               |  |                                 | (1,993 
|                                                                        |  |                                 |        
|End of period (1,834,088, 1,814,688 and 1,814,688 shares, respectively) |  |                                 | (43,841
|                                                                        |  |                                 |        
|TOTAL SHAREHOLDERS EQUITY                                              |  | $                               | 168,684
|                                                                        |  |                                 |        



The Notes to
Consolidated Financial Statements are an integral part of these statements.



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Consolidated Statements of Cash Flows

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                            |  | For the Year Ended September 30 |           
|------------------------------------------------------------------------------------------- |  | ------------------------------- | ----------
|(In thousands)                                                                              |  | 2003                            |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |  |                                 |           
|Real Estate                                                                                 |  |                                 |           
|Net loss                                                                                    |  | $                               | (9,815    
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:   |  |                                 |           
|Depreciation                                                                                |  |                                 | 19,330    
|Amortization of debt expense                                                                |  |                                 | 2,028     
|Equity in earnings of unconsolidated entities, net                                          |  |                                 | (7,248    
|Impairment losses on investments                                                            |  |                                 | 998       
|Gain on sale of property                                                                    |  |                                 | (9,079    
|Deferred tax (benefit) expense                                                              |  |                                 | (657      
|Increase in accounts receivable and accrued income                                          |  |                                 | (3,346    
|(Decrease) increase in accounts payable and accrued expenses                                |  |                                 | (3,465    
|Dividends and tax sharing payments                                                          |  |                                 | 27,460    
|Other                                                                                       |  |                                 | (2,435    
|                                                                                            |  |                                 |           
|                                                                                            |  |                                 | 13,771    
|                                                                                            |  |                                 |           
|Banking                                                                                     |  |                                 |           
|Net income                                                                                  |  |                                 | 55,702    
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                 |           
|Amortization of premiums, discounts and net deferred loan fees                              |  |                                 | 24,393    
|Deferred tax provision                                                                      |  |                                 | 42,812    
|Depreciation and amortization                                                               |  |                                 | 215,428   
|Loss on retirement of fixed assets                                                          |  |                                 | 607       
|Provision for loan losses                                                                   |  |                                 | 18,422    
|Capitalized interest on real estate under development                                       |  |                                 |          
|Proceeds from sales of trading securities                                                   |  |                                 | 2,304,238 
|Net fundings of loans held for sale and/or securitization                                   |  |                                 | (3,716,075
|Proceeds from sales of loans held for sale and/or securitization                            |  |                                 | 3,773,127 
|Gain on sales of loans                                                                      |  |                                 | (10,795   
|Gain on sale of real estate held for sale                                                   |  |                                 | (5,824    
|Provision for losses on real estate held for investment or sale                             |  |                                 |          
|Gain on trading securities, net                                                             |  |                                 | (30,442   
|Increase in interest-only strips                                                            |  |                                 | (50,475   
|(Increase) decrease in servicing assets                                                     |  |                                 | (35,838   
|Amortization of goodwill and other intangible assets                                        |  |                                 | 533       
|Decrease in other assets                                                                    |  |                                 | 4,570     
|(Decrease) increase in custodial accounts                                                   |  |                                 | (34,963   
|(Decrease) increase in other liabilities                                                    |  |                                 | (38,935   
|Minority interest held by affiliates                                                        |  |                                 | 13,926    
|Minority interestother                                                                     |  |                                 | 9,750     
|                                                                                            |  |                                 |           
|                                                                                            |  |                                 | 2,540,161 
|                                                                                            |  |                                 |           
|Net cash provided by operating activities                                                   |  |                                 | 2,553,932 
|                                                                                            |  |                                 |           
|CASH FLOWS FROM INVESTING ACTIVITIES                                                        |  |                                 |           
|Real Estate                                                                                 |  |                                 |           
|Capital expendituresproperties                                                             |  |                                 | (9,855    
|Property acquisitions                                                                       |  |                                 |          
|Property sales                                                                              |  |                                 | 11,306    
|Note receivable and accrued interestrelated party Repayments                               |  |                                 | 3,500     
|Equity investment in unconsolidated entities                                                |  |                                 | 4,213     
|Other investments                                                                           |  |                                 | (1,864    
|Other                                                                                       |  |                                 |          
|                                                                                            |  |                                 |           
|                                                                                            |  |                                 | 7,300     
|                                                                                            |  |                                 |           
|Banking                                                                                     |  |                                 |           
|Net proceeds from maturities of investment securities                                       |  |                                 |          
|Net proceeds from redemption of Federal Home Loan Bank stock                                |  |                                 | 152,625   
|Net proceeds from sales of real estate                                                      |  |                                 | 13,957    
|Net principal collected of loans                                                            |  |                                 | 2,348,511 
|Net repayments (purchases) of automobiles subject to lease                                  |  |                                 | 84,603    
|Principal collected on mortgage-backed securities                                           |  |                                 | 636,084   
|Purchases of Federal Home Loan Bank stock                                                   |  |                                 | (171,350  
|Purchases of investment securities                                                          |  |                                 |          
|Purchases of mortgage-backed securities                                                     |  |                                 |          
|Purchases of loans receivable                                                               |  |                                 | (6,032,492
|Purchases of property and equipment                                                         |  |                                 | (32,175   
|Purchase of Tucker Asset Management, net                                                    |  |                                 |          
|Disbursements for real estate held for investment or sale                                   |  |                                 | (3,525    
|                                                                                            |  |                                 |           
|                                                                                            |  |                                 | (3,003,762
|                                                                                            |  |                                 |           
|Net cash used in investing activities                                                       |  |                                 | (2,996,462
|                                                                                            |  |                                 |           

Continued on following page.



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Consolidated Statements of Cash Flows (Continued)

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                          |  | For the Year Ended September 30 |            
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -----------
|(In thousands)                                                                                            |  | 2003                            |            
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                      |  |                                 |            
|Real Estate                                                                                               |  |                                 |            
|Proceeds from mortgage financing                                                                          |  | $                               | 46,000     
|Principal curtailments and repayments of mortgages                                                        |  |                                 | (48,600    
|Proceeds from secured note financings                                                                     |  |                                 | 25,050     
|Repayments of secured note financings                                                                     |  |                                 | (23,000    
|Proceeds from sales of unsecured notes                                                                    |  |                                 | 5,539      
|Repayments of unsecured notes                                                                             |  |                                 | (5,346     
|Costs of obtaining financings                                                                             |  |                                 | (1,705     
|Purchase of treasury stock                                                                                |  |                                 | (1,993     
|Dividends paidpreferred shares of beneficial interest                                                    |  |                                 | (12,000    
|                                                                                                          |  |                                 |            
|                                                                                                          |  |                                 | (16,055    
|                                                                                                          |  |                                 |            
|Banking                                                                                                   |  |                                 |            
|Proceeds from customer deposits and sales of certificates of deposit                                      |  |                                 | 45,309,516 
|Customer withdrawals of deposits and payments for maturing certificates of deposit                        |  |                                 | (44,646,596
|Net (decrease) increase in securities sold under repurchase agreements                                    |  |                                 | (499,324   
|Advances from the Federal Home Loan Bank                                                                  |  |                                 | 13,445,065 
|Repayments of advances from the Federal Home Loan Bank                                                    |  |                                 | (13,160,560
|Net increase (decrease) in other borrowings                                                               |  |                                 | 8,154      
|Cash dividends paid on preferred stock                                                                    |  |                                 | (9,750     
|Cash dividends paid on common stock                                                                       |  |                                 | (20,000    
|                                                                                                          |  |                                 |            
|                                                                                                          |  |                                 | 426,505    
|                                                                                                          |  |                                 |            
|Net cash provided by (used in) financing activities                                                       |  |                                 | 410,450    
|                                                                                                          |  |                                 |            
|Net (decrease) increase in cash and cash equivalents                                                      |  |                                 | (32,080    
|Cash and cash equivalents at beginning of year                                                            |  |                                 | 465,686    
|                                                                                                          |  |                                 |            
|Cash and cash equivalents at end of year                                                                  |  | $                               | 433,606    
|                                                                                                          |  |                                 |            
|                                                                                                          |  |                                 |            
|Components of cash and cash equivalents at end of period as presented in the consolidated balance sheets: |  |                                 |            
|Real Estate                                                                                               |  |                                 |            
|Cash and cash equivalents                                                                                 |  | $                               | 18,979     
|Banking                                                                                                   |  |                                 |            
|Cash and other deposits                                                                                   |  |                                 | 339,960    
|Interest-bearing deposits                                                                                 |  |                                 | 74,667     
|                                                                                                          |  |                                 |            
|Cash and cash equivalents at end of period                                                                |  | $                               | 433,606    
|                                                                                                          |  |                                 |            
|Supplemental disclosures of cash flow information:                                                        |  |                                 |            
|Cash paid during the year for:                                                                            |  |                                 |            
|Interest (net of amount capitalized)                                                                      |  | $                               | 248,372    
|Income taxes paid (refunded)                                                                              |  |                                 | 17,415     
|Shares of Saul Centers, Inc. common stock                                                                 |  |                                 | 7,835      
|Cash received during the year from:                                                                       |  |                                 |            
|Dividends on shares of Saul Centers, Inc. common stock                                                    |  |                                 | 5,521      
|Distributions from Saul Holdings Limited Partnership                                                      |  |                                 | 6,527      
|Supplemental disclosures of noncash activities:                                                           |  |                                 |            
|Rollovers of notes payableunsecured                                                                      |  |                                 | 7,005      
|Loans held for sale and/or securitization exchanged for trading securities                                |  |                                 | 2,270,261  
|Loans receivable transferred to loans held for sale and/or securitization                                 |  |                                 | 2,472,538  
|Loans made in connection with the sale of real estate                                                     |  |                                 |           
|Loans receivable transferred to real estate acquired in settlement of loans                               |  |                                 | 3,019      
|Loans receivable exchanged for mortgage-backed securities held-to-maturity                                |  |                                 | 88,471     
|                                                                                                          |  |                                 |            





The Notes to Consolidated Financial Statements are an integral part of these statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESTrust



GENERAL



B.F. Saul Real Estate Investment Trust operates as a Maryland real estate investment trust. The principal business
activities of B.F. Saul Real Estate Investment Trust and its consolidated subsidiaries (the Trust or Total Company) are the ownership of 80% of the outstanding common stock of Chevy Chase Bank, F.S.B., whose assets accounted
for 96% of the Trusts consolidated assets as of September 30, 2003, and the ownership and development of income-producing properties. The properties are located predominantly in the mid-Atlantic and Southeastern regions of the United States
and consist principally of hotels, office projects, and undeveloped land parcels. Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock savings bank and, as such, is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision (OTS) and by the Federal Deposit Insurance Corporation (FDIC). The bank is principally engaged in the business of attracting deposits from the public and using such deposits,
together with borrowings and other funds, to make loans secured by real estate, primarily residential mortgage loans, and various types of consumer loans and leases and commercial loans. The banks principal deposit market is the Washington, DC
metropolitan area.



Real Estate Trust or Real
Estate refers to B.F. Saul Real Estate Investment Trust and its wholly owned subsidiaries. Chevy Chase Bank, F.S.B. and its subsidiaries are referred to in the consolidated financial statements and notes thereto as Banking or the
Bank or the Corporations. The accounting and reporting practices of the Trust conform to accounting principles generally accepted in the United States and, as appropriate, predominant practices within the real estate and
banking industries.



PRINCIPLES OF CONSOLIDATION



The consolidated financial statements include the accounts of the Real
Estate Trust and its subsidiaries. Accordingly, the accompanying financial statements reflect the assets, liabilities, operating results, and cash flows for two business segments: Real Estate and Banking. Entities in which the Trust holds a
non-controlling interest (generally 50% or less) are accounted for on the equity method. See Note 3. All significant intercompany transactions, except as disclosed elsewhere in the financial statements, including intercompany office rental
agreements, have been eliminated in consolidation. Tax sharing and dividend payments between the Real Estate Trust and the Bank are presented gross in the Consolidated Statements of Cash Flows.



Although the financial results of Trust subsidiaries are included in these
consolidated financial statements, each Trust subsidiary, including, but not limited to, Arlington Hospitality Corp., Auburn Hills Hotel Corporation, Dulles Hospitality Corp., Herndon Hotel Corporation, Pueblo Hotel Corp. and Sharonville Hotel
Corporation, is a separate legal entity whose assets are not available to pay the claims of creditors of other entities included in these consolidated financial statements.



USE OF ESTIMATES



The financial statements have been prepared in conformity with accounting principles generally accepted in the United States. In preparing the financial
statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the balance sheet and revenues and expenses for the reporting
period. Actual results could differ from those estimates.



ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS



Long-lived assets and
certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the Trust recognizes an impairment loss.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Measurement of an impairment loss for long-lived assets and identifiable intangibles that the Trust
expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of are generally reported at the lower of carrying amount or fair value less the cost to sell.



INCOME TAXES



The Trust files a consolidated federal income tax return which includes operations of all 80% or more owned subsidiaries. It
voluntarily terminated its qualification as a real estate investment trust under the Internal Revenue Code during fiscal 1978.



The Trust uses an asset and liability approach in accounting for income taxes. Deferred income taxes are recorded using currently enacted tax laws and
rates. To the extent that realization of deferred tax assets is more likely than not, such assets are recognized.



NET INCOME PER COMMON SHARE



Net income per common share is determined by dividing net income, after deducting preferred share dividend requirements, by the weighted average number of
common shares outstanding during the year. For fiscal year 2003, the weighted average number of shares used in the calculation was 4,819,628. For fiscal years 2002 and 2001, the weighted average number of shares used in the calculation was
4,826,910. The Trust has no common share equivalents.



RECLASSIFICATIONS



Certain reclassifications have been made to the
consolidated financial statements for the years ended September 30, 2002 and 2001 to conform with the presentation used for the year ended September 30, 2003.



B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESREAL ESTATE TRUST



CASH EQUIVALENTS



The Real Estate Trust considers all highly liquid, temporary investments with an original maturity of three months or less to be cash equivalents.



PROPERTIES



Income-producing properties are stated at the lower of depreciated cost
(except those which were acquired through foreclosure or equivalent proceedings, the carrying amounts of which are based on the lower of cost or fair value at the time of acquisition) or net realizable value.



Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is completed and the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. The Real Estate Trust
considers a project to be substantially complete and held available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are
accounted for as separate projects. Expenditures for repairs and maintenance are charged to operations as incurred.



Depreciation is calculated using the straight-line method and estimated useful lives of 28 to 47 years for buildings and up to 20 years for certain other
improvements. Tenant improvements are amortized over the lesser of their estimated useful lives or the lives of the related leases using the straight-line method.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



INCOME RECOGNITION



The Real Estate Trust derives room and other revenues from the operations of its hotel properties. Hotel revenue is recognized as earned. The Real
Estate Trust derives rental income under noncancelable long-term leases from tenants at its commercial properties. Commercial property rental income is recognized on a straight-line basis.



INVESTMENT IN SAUL CENTERS, INC.



The Real Estate Trust accounts for its investments in Saul Holdings Limited
Partnership and Saul Centers, Inc. on the equity method of accounting because the Trust does not have effective control of the respective entities.



FAIR VALUE OF FINANCIAL INSTRUMENTS



The following methods and assumptions were used to estimate the fair value of each class of financial instruments.



Cash and Cash Equivalents



The carrying amount approximates fair value because of the short-term
maturity of these instruments.



Liabilities



The fair market value of notes payablesecured is approximately $210
million. The fair value of mortgage notes payable is based on managements estimate of current market rates for its debt. At September 30, 2003, and 2002, the fair value of mortgage notes payable was $326.4 and $333.7 million. The fair value of
notes payableunsecured is based on the rates currently offered by the Real Estate Trust for similar notes. At September 30, 2003 and 2002, the fair value of notes payableunsecured was $59.9 and $59.4 million.



ADOPTION OF RECENTLY ISSUED ACOUNTING STANDARDS



Statement of Financial Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144) was issued in August 2001. SFAS 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-lived Assets to be Disposed of, and the
accounting and reporting provisions of APB Opinion NO. 30, Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 was effective for
fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material effect on the Real Estate Trusts financial condition or results of operations.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB No. 13 and
Technical Corrections. SFAS No. 145, among other things, changes the financial reporting requirements for the gains or losses recognized from the extinguishment of debt. Under SFAS No. 4, all gains and losses from the extinguishment of debt
were required to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. SFAS No. 145 eliminates SFAS No. 4 and as a result, the criteria in APB Opinion No. 30 now will be used to classify those
gains and losses. The Real Estate Trust has no gains or losses from debt extinguishment that would require restatement. The Real Estate Trust does not expect the adoption of SFAS No. 145 to have a material impact on its financial condition or
results of operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others. FIN 45 outlines the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees. It states that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of its obligation. The Real Estate Trust has no liabilities
that need to be recognized as a result of the adoption of FIN 45, and the Real Estate Trust does not expect the adoption of FIN 45 to have a material impact on its financial condition or results of operations.



In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. FIN 46 is an Interpretation of Accounting Research Bulletin No. 51 and addresses consolidation by business enterprises of variable interest entities (VIEs). FIN 46 is based on the theory that an enterprise
controlling another entity through interests other than voting interests should consolidate the controlled entity. Business enterprises are required under the provisions of FIN 46 to identify VIEs, based on specified characteristics, and then
determine whether they should be consolidated. An enterprise that holds a majority of the variable interests in another enterprise is considered the primary beneficiary of that enterprise and, therefore, should consolidate the VIE. The primary
beneficiary of a VIE is also required to include various disclosures in interim and annual financial statements. Additionally, an enterprise that holds a significant variable interest in a VIE, but that is not the primary beneficiary, is also
required to make certain disclosures. At September 30, 2003, the real Estate Trust does not have any unconsolidated entities or VIEs and therefore the adoption of FIN 46 will not have an impact on its financial condition or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments as liabilities, which may have been previously classified as equity, because those instruments embody obligations of the issuer. SFAS 150 also requires
disclosure of the nature and terms of the financial instruments and the rights and obligations embodied in those instruments. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective as
of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Real Estate Trusts financial condition or results of operations.



C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  THE BANK



CASH AND CASH EQUIVALENTS:



For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits, federal funds sold and securities purchased under agreements to resell.



Federal Reserve Board regulations require the Bank to maintain reserves in the form of cash or deposits in its account at the Federal Reserve Bank of
Richmond. The Banks average reserve requirements, before credit for vault cash, were $56.0, $44.1 and $189.1 million during the years ended September 30, 2003, 2002 and 2001, respectively.



LOANS HELD FOR SECURITIZATION AND/OR SALE:



At September 30, 2003, loans held for sale are composed of single-family
residential loans. At September 30, 2002, loans held for sale are composed of single-family residential loans, automobile loans and home improvement and related loans. These loans are originated or purchased for sale in the secondary market and are
carried at the lower of aggregate cost or aggregate market value. Single-family residential loans held for sale will either be sold or will be exchanged for mortgage-backed securities and then sold.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Gains and losses on sales of whole loans held for sale are determined using the specific
identification method.



The Bank periodically securitizes and
sells certain pools of loan receivables in the public and private markets. Securitizations are recorded as sales. Loans held for securitization and sale are reported at the lower of aggregate cost or aggregate market value for each asset type.



U.S. GOVERNMENT AND MORTGAGE-BACKED SECURITIES:



The Bank classifies its U.S. Government and mortgage-backed securities as
either held-to-maturity, available-for-sale or trading at the time such securities are acquired. U.S. Government and mortgage-backed securities classified as held-to-maturity are reported at amortized
cost. U.S. Government and mortgage-backed securities classified as available-for-sale are reported at fair value, with unrealized gains and losses, net of the related tax effect, reported as a separate component of stockholders
equity. U.S. Government and mortgage-backed securities classified as trading are reported at fair value, with unrealized gains and losses included in earnings. All U.S. Government securities and mortgage-backed securities are classified
as held-to-maturity at September 30, 2003 and 2002. Premiums and discounts on U.S. Government securities and mortgage-backed securities are amortized or accreted using the level-yield method.



TRADING SECURITIES:



As part of its mortgage banking activities, the Bank exchanges loans held for sale for mortgage-backed securities and then
sells the mortgage-backed securities, which are classified as trading securities, to third party investors in the month of issuance. Proceeds from sales of trading securities were $2,304.2, $1,196.0 and $844.6 million during the years ended
September 30, 2003, 2002 and 2001, respectively. The Bank realized net gains of $30.4, $6.2 and $14.5 million on the sales of trading securities for the years ended September 30, 2003, 2002 and 2001, respectively. Gains and losses on sales of
trading securities are determined using the specific identification method. There were no mortgage-backed securities classified as trading securities at September 30, 2003 and 2002.



The Bank sold its stock held in Concord EFS, Inc. during fiscal year 2003. The Bank recognized net losses of $47,000 on this
investment during the year ended September 30, 2003. At September 30, 2002, the stock had a carrying amount of $3.9 million, which was classified as trading securities. The Bank recognized net losses of $2.1 million on this investment during the
year ended September 30, 2002. The Bank recognized net unrealized gains of $1.1 million and net realized gains of $10.3 million on this investment during the year ended September 30, 2001.



LOAN ORIGINATION AND COMMITMENT FEES:



Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased are deferred. Net deferred fees (costs) related to loans held for investment are amortized over the life of the loan using the straight-line method for line of credit loans
and the level-yield method for all other loan types. Net fees (costs) related to loans held for sale are deferred until such time as the loan is sold, at which time the net deferred fees (costs) become a component of the gain or loss on sale.



IMPAIRED LOANS:



A loan is considered impaired when, based on all current information and
events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the agreement, including all scheduled principal and interest payments. Loans reviewed by the Bank for impairment include real
estate and



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commercial loans and loans modified in a troubled debt restructuring. Large groups of smaller-balance homogeneous loans that have not been modified in a
troubled debt restructuring are collectively evaluated for impairment, which for the Bank include residential mortgage loans and other consumer loans. Impaired loans are measured based on the present value of expected future cash flows, discounted
at the loans effective interest rate or, as a practical expedient, impairment may be measured based on the loans observable market price, or, if the loan is collateral-dependent, the fair value of the collateral. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Loans for which foreclosure is probable continue to be classified as loans.



Each impaired real estate or commercial loan is evaluated individually to
determine the income recognition policy. Generally, payments received are applied as a reduction of principal.



At September 30, 2003, the Bank had one impaired loan with a book value of $249,000. At September 30, 2002, the Bank did not have any impaired loans. The
Bank did not recognize any interest income on impaired loans during the years ended September 30, 2003, 2002 and 2001.



ALLOWANCE FOR LOSSES:



The allowance for loan losses represents managements estimate of credit losses inherent in the Banks loan portfolios as of the balance sheet
date. The Banks methodology for assessing the appropriate level of the allowance consists of several key elements, which include the allocated allowance, specific allowances for identified loans and the unallocated allowance. Management
reviews the adequacy of the valuation allowances on loans using a variety of measures and tools including historical loss performance, delinquent status, current economic conditions, internal risk ratings and current underwriting policies and
procedures. The allocated allowance is assessed on both homogeneous and non-homogeneous loan portfolios. The range is calculated by applying loss and delinquency factors to the outstanding loan balances of these portfolios. Loss factors are based on
analysis of the historical performance of each loan category and an assessment of portfolio trends and conditions, as well as specific risk factors impacting the loan portfolios. Each homogeneous portfolio, such as single-family residential loans or
automobile loans, is evaluated collectively.



Non-homogeneous
type loans, such as business banking loans and real estate banking loans, are analyzed and segregated by risk according to the Banks internal risk rating system. These loans are reviewed by the Banks credit and loan review groups on an
individual loan basis to assign a risk rating. Industry loss factors are applied based on the risk rating assigned to the loan. A specific allowance may be assigned to non-homogeneous type loans that have been individually determined to be impaired.
Any specific allowance considers all available evidence including, as appropriate, the present value of payments expected to be received, observable market price or, for loans that are solely dependent on collateral for repayment, the estimated fair
value of the collateral.



The unallocated allowance is based
upon managements evaluation and judgement of various conditions that are not directly measured in the determination of the allocated and specific allowances. The conditions evaluated in connection with the unallocated allowance include
existing general economic and business conditions affecting the key lending areas of the Bank, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio
segments, recent loss experience in particular segments of the portfolio, regulatory examination results and findings of the Banks internal credit evaluations.



The allowance for losses is based on estimates and ultimate losses may vary from current estimates. As adjustments to the
allowance become necessary, provisions for losses are reported in operations in the periods they are determined to be necessary.



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ACCRUED INTEREST RECEIVABLE ON LOANS:



Loans are reviewed on a monthly basis and are placed on non-accrual status when, in the opinion of management, the full
collection of principal or interest has become unlikely. Uncollectible accrued interest receivable on non-accrual loans is charged against current period interest income.



REAL ESTATE HELD FOR INVESTMENT OR SALE:



REAL ESTATE HELD FOR INVESTMENT:



At September 30, 2003 and 2002, real estate held for investment consists of developed land owned by one of the Banks subsidiaries. Real estate held
for investment is carried at the lower of cost or net realizable value. See Note 12.



REAL ESTATE HELD FOR SALE:



Real estate held
for sale consists of real estate acquired in settlement of loans (REO) and is carried at the lower of cost or fair value (less estimated selling costs). Costs relating to the development and improvement of property, including interest,
are capitalized, whereas costs relating to the holding of property are expensed.



The Bank did not capitalize interest during the years ended September 30, 2003 and 2002 because there were no properties under active development. Capitalized interest amounted to $2.0 million for the year ended
September 30, 2001. At September 30, 2003, based on an analysis of the values of REO and the prospects for recoveries of values, the Bank charged off its valuation allowances on REO in the amount of $71.3 million.



PROPERTY AND EQUIPMENT:



Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method, which allocates the cost of the applicable assets over their estimated useful lives as set forth in Note 16. Major improvements and alterations to office premises and leaseholds are capitalized. Leasehold
and tenant improvements are amortized over the shorter of the terms of the respective leases (including renewal options that are expected to be exercised) or 20 years. Maintenance and repairs are charged to operating expenses as incurred.
Capitalized interest amounted to $4.7 million during the year ended September 30, 2001 and was primarily related to the Banks new headquarters building that was placed in service on October 1, 2001.



AUTOMOBILES SUBJECT TO LEASE:



The Bank owns automobiles, which are leased to third parties. The leases are
accounted for as operating leases with lease payments recognized as rental income. Automobiles are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method which allocates the cost of the automobile
less estimated residual value over the term of the lease. The Bank periodically updates the estimated residual values of its automobile leases. If estimated residual values have declined from the prior estimate, the amount of the decline is recorded
as additional depreciation expense over the remaining term of the lease.



GOODWILL AND OTHER INTANGIBLE ASSETS:



The
Bank adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) on October 1, 2002. SFAS 142 requires that goodwill no longer be amortized, but, instead, be subjected to impairment testing. An impairment loss on
goodwill is recognized if the fair value is less than the carrying amount. At September 30, 2003, the fair value of the goodwill recorded on the Banks balance sheet exceeded its carrying value. At September 30, 2003 and 2002, goodwill totaled
$23.7 million. In February 2001, the Bank purchased an



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investment management firm and recorded $4.2 million of goodwill. The acquisition was accounted for using the purchase method and the operating results have
been included in the Banks Consolidated Statements of Operations since the date of acquisition. See Note 13.



The premium attributable to the value of home equity relationships related to certain home equity loans purchased in fiscal 1999, amounting to $614,000
and $1.1 million at September 30, 2003 and 2002, respectively, is included in goodwill and other intangible assets in the Consolidated Balance Sheets. This premium is being amortized over the estimated term of the underlying relationships. The Bank
did not purchase any home equity loans during fiscal years 2003, 2002 and 2001.



Accumulated amortization of goodwill and other intangible assets was $54.1 million and $53.6 million at September 30, 2003 and 2002, respectively.



SERVICING ASSETS:



Servicing assets are recorded when purchased and in conjunction with loan sales and securitization transactions. Servicing assets, which are stated net of
accumulated amortization, are amortized in proportion to the remaining net servicing revenues estimated to be generated by the underlying loans.



The Bank periodically evaluates its servicing assets for impairment based upon fair value. For purposes of evaluating impairment, the Bank stratifies its
servicing assets taking into consideration relevant risk characteristics including loan type and note rate. The fair value of servicing assets is estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a
market discount rate. To the extent the carrying value of servicing assets exceeds the fair value of such assets, a valuation allowance is recorded. See Note 14.



INTEREST-ONLY STRIPS RECEIVABLE:



Interest-only strips receivable capitalized in the years ended September 30, 2003, 2002 and 2001 amounted to $108.9, $68.6 and $55.2 million,
respectively, and were related to the securitization and sale of loan receivables. The Bank accounts for its interest-only strips receivable as trading securities and, accordingly, carries them at fair value. The Bank estimates the fair value of the
interest-only strips receivable on a discounted cash flow basis using market based discount and prepayment rates. The fair value adjustments for interest-only strips receivable are included in servicing and securitization income. The fair value
adjustments amounted to a net loss of $12.5, $7.2 and $11.5 million in fiscal years 2003, 2002 and 2001, respectively.



Interest income on interest-only strips receivable is recognized using the effective yield method over the estimated lives of the underlying loans. The
Bank uses certain assumptions to calculate the carrying values of the interest-only strips receivable, mainly estimates of prepayment speeds, credit losses and interest rates, which are beyond the control of the Bank. To the extent actual results
differ from the assumptions, the carrying values are adjusted accordingly. See Note 15.



DERIVATIVE FINANCIAL INSTRUMENTS:



The Bank
uses various strategies to minimize interest-rate risk with respect to its mortgage banking activities. At September 30, 2003 and 2002 all derivatives are recorded on the balance sheet at their fair market value. See Note 24.



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ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:



The Bank adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) effective October 1, 2000. SFAS 133 was amended by SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities  Deferral of Effective Date of Financial Accounting Standards Board Statement No. 133 (SFAS 137) and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 138). SFAS 133, as amended by SFAS 137 and SFAS 138, establishes accounting and reporting standards for derivative instruments and hedging activities.
SFAS 133 requires an entity to recognize all derivative instruments as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Changes in the fair value of those instruments are reported in
earnings or other comprehensive income depending on the use of the derivative, its hedge designation and whether the hedge is effective in achieving offsetting changes in the fair value or cash flows of the asset or liability hedged. On October 1,
2000, the Bank recorded an after tax loss of $476,000 in Other Comprehensive Income representing its transition adjustment from the adoption of these standards.



On July 1, 2002, the Bank implemented FASB implementation guidance regarding the application of SFAS 133, which requires that interest rate locks
(IRL) on mortgage loans originated for sale be treated as derivatives. The IRLs are treated as free standing derivatives with changes in fair value recorded in the income statement and reported on the balance sheet. In connection with
this change, the Banks forward sale commitments were re-designated from cash flow hedges to fair value hedges or non-designated hedge relationships. The net income statement impact of the change was $80,000 net of tax. The net impact on Other
Comprehensive Income was $1.2 million.



The Bank adopted
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142) on October 1, 2002. SFAS 142 supersedes APB
Opinion No. 17, Intangible Assets. SFAS 142 establishes new guidance on accounting for goodwill and other assets acquired in a business combination and reaffirms that acquired intangible assets should initially be recognized at fair
value and the costs of internally developed intangible assets should be charged to expense as incurred. SFAS 142 also requires that goodwill arising in a business combination should no longer be amortized, but, instead, be subjected to impairment
testing. An impairment loss is recognized if fair value is less than the carrying amount. At October 1, 2002, the fair value of the goodwill recorded on the Banks balance sheet exceeded its carrying value. See Note 13.



SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets (SFAS 144) was issued in August 2001. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 was effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS 144 did not have a material effect on the Banks financial condition or results of operations.



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to
recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently



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require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security
of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN 45, including, among others, guarantees relating to employee compensation, residual value guarantees under capital lease
arrangements, commercial letters of credit, loan commitments, subordinated interests in a special purpose entity, and guarantees of a companys own future performance. Other guarantees are subject to the disclosure requirements of FIN 45 but
not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS No. 133, a parents guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is
based on performance, not price. The disclosure requirements of FIN 45 are effective for the Bank as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of liability, if any, for the guarantors obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Banks financial condition or results of operations.



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 is an Interpretation of Accounting Research
Bulletin No. 51 and addresses consolidation by business enterprises of variable interest entities (VIEs). FIN 46 is based on the theory that an enterprise controlling another entity through interests other than voting interests should
consolidate the controlled entity. Business enterprises are required under the provisions of FIN 46 to identify VIEs, based on specified characteristics, and then determine whether they should be consolidated. An enterprise that holds a majority of
the variable interests in another enterprise is considered the primary beneficiary of that enterprise and, therefore, should consolidate the VIE. The primary beneficiary of a VIE is also required to include various disclosures in interim and annual
financial statements. Additionally, an enterprise that holds a significant variable interest in a VIE, but that is not the primary beneficiary, is also required to make certain disclosures. At September 30, 2003, the Bank is the primary beneficiary
of one VIE, which holds the ground lease under the Banks executive offices. The Bank adopted FIN 46 effective July 1, 2003 and, as a result, recorded a $897,000 gain as a cumulative effect of a change in accounting principle, net of tax. In
addition, the Bank recorded $31.4 million each in property and equipment and minority interest on the Consolidated Balance Sheets at September 30, 2003 related to the ground lease. See Notes 16 and 32.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, (SFAS 149). This statement amends Statement 133 for certain decisions made by the FASBs Derivatives Implementation Group. SFAS 149 also amends SFAS 133 to incorporate
clarification of the definition of a derivative. SFAS 149 requires contracts with comparable characteristics to be accounted for similarly and will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS
149 is effective for contracts entered into or modified after June 30, 2003 and is to be applied prospectively. The adoption of this statement did not have a material effect on the Banks financial condition or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments as liabilities, which may have been previously classified as equity, because those instruments embody obligations of the issuer. SFAS 150 also requires
disclosure of the nature and terms of the financial instruments and the rights and obligations embodied in those instruments. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective as
of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Banks financial condition or results of operations.



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1. LIQUIDITY AND CAPITAL RESOURCESREAL ESTATE TRUST



The Real Estate Trusts cash flow from operating activities has been
historically insufficient to meet all of its cash flow requirements. The Real Estate Trusts internal sources of funds, primarily cash flow generated by its income-producing properties, generally have been sufficient to meet its cash needs
other than the repayment of principal on outstanding debt, including outstanding unsecured notes sold to the public, the payment of interest on its indebtedness, and the payment of capital improvement costs. In the past, the Real Estate Trust funded
such shortfalls through a combination of external funding sources, primarily new financing, the sale of unsecured notes, refinancing of maturing mortgage debt, proceeds from asset sales, and dividends and tax sharing payments from the bank. For the
foreseeable future, the Real Estate Trusts ability to generate positive cash flow from operating activities and to meet its liquidity needs, including debt service payments, repayment of debt principal and capital expenditures, will continue
to depend on these available external sources. Dividends received from the Bank are a component of funding sources available to the Real Estate Trust. The availability and amount of dividends in future periods is dependent upon, among other things,
the Banks operating performance and income, and regulatory restrictions on such payments. Tax sharing and dividend payments received by the Real Estate Trust are presented as cash flows from operating activities in the Consolidated Statements
of Cash Flows.



During fiscal 2003, 2002 and 2001, the Bank
made tax sharing payments totaling $11.5, $5.7 and $3.4 million to the Real Estate Trust. During fiscal 2003, 2002 and 2001, the Bank made dividend payments totaling $16.0, $16.0 and $12.8 million to the Real Estate Trust.



In recent years, the operations of the Trust have generated net operating
losses while the Bank has reported net income. The Trusts consolidation of the Banks operations into the Trusts federal income tax return has resulted in the use of the Trusts net operating losses to reduce the federal income
taxes the Bank would otherwise have owed. If in any future year, the Bank has taxable losses or unused credits, the Trust would be obligated to reimburse the Bank for the greater of (i) the tax benefit to the group using such tax losses or unused
tax credits in the groups consolidated federal income tax returns or (ii) the amount of the refund which the Bank would otherwise have been able to claim if it were not being included in the consolidated federal income tax return of the group.



2. SAUL HOLDINGS LIMITED PARTNERSHIPREAL ESTATE TRUST



In fiscal 1993, the Real Estate Trust entered into a series of
transactions undertaken in connection with an initial public offering of common stock of a newly organized corporation, Saul Centers, Inc. The Real Estate Trust transferred its 22 shopping centers and one of its office properties together with the
debt associated with such properties to a newly formed partnership, Saul Holdings, in which as of September 30, 2003, the Real Estate Trust owns (directly or through one of its wholly owned subsidiaries) a 20.0% interest, other entities affiliated
with the Real Estate Trust own a 4.8% interest, and Saul Centers owns a 75.2% interest. Certain officers and trustees of the Trust are also officers and/or directors of Saul Centers.



In connection with the transfer of its properties to Saul Holdings, the Real Estate Trust was relieved of approximately $196
million in mortgage debt and deferred interest. Pursuant to a reimbursement agreement among the partners of Saul Holdings and its subsidiary limited partnerships (collectively, the Partnerships), the Real Estate Trust and its
subsidiaries that are partners in the Partnerships have agreed to reimburse Saul Centers and the other partners in the event the Partnerships fail to make payments with respect to certain portions of the Partnerships debt obligations and Saul
Centers or any such other partners personally make payments with respect to such debt obligations. At September 30, 2003, the maximum potential obligations of the Real Estate Trust and its subsidiaries under this agreement totaled approximately
$115.5 million.



The fair market value of each of the
properties contributed to the Partnerships by the Real Estate Trust at the date of transfer (the FMV of each such property) exceeded the tax basis of such property (with respect to each



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property, such excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as general partner of the Partnerships, causes the Partnerships
to dispose of one or more of such properties, a disproportionately large share of the total gain for federal income tax purposes would be allocated to the Real Estate Trust or its subsidiaries. In general, if the gain recognized by the Partnerships
on a property disposition is less than or equal to the FMV-Tax Difference for such property (as previously reduced by the amounts of special tax allocations of depreciation deductions to the partners), a gain equal to the FMV-Tax Difference (as
adjusted) will be allocated to the Real Estate Trust. To the extent the gain recognized by the Partnerships on the property disposition exceeds the FMV-Tax Difference (as adjusted), such excess generally will be allocated among all the partners in
Saul Holdings based on their relative percentage interests. In general, the amount of gain allocated to the Real Estate Trust in the event of such a property disposition is likely to exceed, perhaps substantially, the amount of cash, if any,
distributable to the Real Estate Trust as a result of the property disposition. In addition, future reductions in the level of the Partnerships debt, or any release of the guarantees of such debt by the Real Estate Trust, could cause the Real
Estate Trust to have taxable constructive distributions without the receipt of any corresponding amounts of cash. Currently, management does not intend to seek a release of or a reduction in the guarantees or to convert its limited partner units in
Saul Holdings into shares of Saul Centers common stock.



At the
date of transfer of the Real Estate Trust properties to Saul Holdings, liabilities exceeded assets transferred by approximately $104.3 million on an historical cost basis. The assets and liabilities were recorded by Saul Holdings and Saul Centers at
their historical cost rather than market value because of affiliated ownership and common management and because the assets and liabilities were the subject of the business combination between Saul Centers and Saul Holdings, newly formed entities
with no prior operations.



Immediately subsequent to the
business combination and initial public offering of common stock by Saul Centers, Saul Centers had total owners equity of approximately $16.4 million of which approximately $3.5 million related to the Real Estate Trusts original 21.5%
ownership interest. Changes in the Real Estate Trusts equity investment balance resulting from capital transactions of the investee are recognized directly in the Trusts shareholders equity in the accompanying financial statements.



The management of Saul Centers has adopted a strategy of
maintaining a ratio of total debt to total asset value, as estimated by management, of fifty percent or less. The management of Saul Centers has concluded at September 30, 2003, that the total debt of Saul Centers remains below fifty percent of
total asset value. As a result, the management of the Real Estate Trust has concluded that fundings under the reimbursement agreement are remote.



As of September 30, 2003, the Real Estate Trusts investment in the consolidated entities of Saul Centers, which is accounted for under the equity
method, consisted of the following.



|(In thousands)                                  |  |   |        
|----------------------------------------------- |  | - | -------
|Saul Holdings:                                  |  |   |        
|Investment in partnership units                 |  | $ | 12,045 
|Distributions in excess of allocated net income |  |   | (19,844
|Saul Centers:                                   |  |   |        
|Investment in common shares                     |  |   | 73,059 
|Distributions in excess of allocated net income |  |   | (11,877
|                                                |  |   |        
|Total                                           |  | $ | 53,383 
|                                                |  |   |        



The Trusts
investments in Saul Centers exceeded the underlying book value of the investment at the time of the purchases. At September 30, 2003 the cumulative excess totaled $69.6 million. This amount is being amortized over the useful life of the underlying
real estate assets. At September 30, 2003, the unamortized balance was $62.5 million.



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As of September 30, 2003, the Real Estate Trust, through its partnership interest in Saul Holdings of
20.0% and its ownership of common shares of Saul Centers of 23.8% (market value of $99.4 million at September 30, 2003), effectively owns 37.9% of the consolidated entities of Saul Centers. Substantially all of these shares and/or units have been
deposited as collateral for the Trusts revolving lines of credit. See Note 4.



The unaudited Condensed Consolidated Balance Sheets as of September 30, 2003 and 2002, and the unaudited Condensed Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001 of Saul
Centers follow.



SAUL CENTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                            |  | September 30, |         
|------------------------------------------- |  | ------------- | --------
|(In thousands)                              |  | 2003          |         
|Assets                                      |  |               |         
|Real estate investments                     |  | $             | 537,172 
|Accumulated depreciation                    |  |               | (161,153
|Other assets                                |  |               | 41,515  
|                                            |  |               |         
|Total assets                                |  | $             | 417,534 
|                                            |  |               |         
|Liabilities and stockholders deficit       |  |               |         
|Notes payable                               |  | $             | 400,668 
|Other liabilities                           |  |               | 22,470  
|                                            |  |               |         
|Total liabilities                           |  |               | 423,138 
|Total stockholders deficit                 |  |               | (5,604  
|                                            |  |               |         
|Total liabilities and stockholders deficit |  | $             | 417,534 
|                                            |  |               |         



SAUL CENTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                    |  | For the Twelve Months Ended September 30, |       
|----------------------------------- |  | ----------------------------------------- | ------
|(In thousands)                      |  | 2003                                      |       
|Revenue                             |  |                                           |       
|Base rent                           |  | $                                         | 76,900
|Other revenue                       |  |                                           | 19,363
|                                    |  |                                           |       
|Total revenue                       |  |                                           | 96,263
|                                    |  |                                           |       
|Expenses                            |  |                                           |       
|Operating expenses                  |  |                                           | 19,843
|Interest expense                    |  |                                           | 25,882
|Amortization of debt expense        |  |                                           | 819   
|Depreciation and amortization       |  |                                           | 16,815
|General and administrative          |  |                                           | 6,032 
|                                    |  |                                           |       
|Total expenses                      |  |                                           | 69,391
|                                    |  |                                           |       
|Operating income                    |  |                                           | 26,872
|Non-operating item                  |  |                                           |       
|Gain on sale of property            |  |                                           |      
|                                    |  |                                           |       
|Net income before minority interest |  |                                           | 26,872
|Minority interest                   |  |                                           | (8,082
|                                    |  |                                           |       
|Net income                          |  | $                                         | 18,790
|                                    |  |                                           |       



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3. INVESTMENT PROPERTIESREAL ESTATE TRUST



The following table summarizes the cost basis of income-producing properties and land parcels together with their related
debt.



|                            |  | No. |  | Land |        | Buildings andImprovements |   | Total   |  | RelatedDebt |        
|--------------------------- |  | --- |  | ---- | ------ | ------------------------- | - | ------- |  | ----------- | -------
|September 30, 2003          |  |     |  |      |        |                           |   |         |  |             |        
|Income-producing properties |  |     |  |      |        |                           |   |         |  |             |        
|Hotels                      |  | 18  |  | $    | 18,684 |                           | $ | 239,376 |  | $           | 258,060
|Office and industrial       |  | 13  |  |      | 14,786 |                           |   | 165,599 |  |             | 180,385
|Other                       |  | 4   |  |      | 2,803  |                           |   |        |  |             | 2,803  
|                            |  |     |  |      |        |                           |   |         |  |             |        
|                            |  | 35  |  | $    | 36,273 |                           | $ | 404,975 |  | $           | 441,248
|                            |  |     |  |      |        |                           |   |         |  |             |        
|Land Parcels                |  | 9   |  | $    | 42,425 |                           | $ |        |  | $           | 42,425 
|                            |  |     |  |      |        |                           |   |         |  |             |        

---

|(1) | Amount includes $322.4 million of mortgage notes payable and approximately $700,000 of capital leases.
|--- | ------------------------------------------------------------------------------------------------------



|(Dollars in thousands)      |  | No. |  | Land |        | Buildings andImprovements |   | Total   |  | RelatedDebt |        
|--------------------------- |  | --- |  | ---- | ------ | ------------------------- | - | ------- |  | ----------- | -------
|September 30, 2002:         |  |     |  |      |        |                           |   |         |  |             |        
|Income-producing properties |  |     |  |      |        |                           |   |         |  |             |        
|Hotels                      |  | 18  |  | $    | 18,684 |                           | $ | 236,882 |  | $           | 255,566
|Office and industrial       |  | 13  |  |      | 14,786 |                           |   | 162,134 |  |             | 176,920
|Other                       |  | 4   |  |      | 2,803  |                           |   |        |  |             | 2,803  
|                            |  |     |  |      |        |                           |   |         |  |             |        
|                            |  | 35  |  | $    | 36,273 |                           | $ | 399,016 |  | $           | 435,289
|                            |  |     |  |      |        |                           |   |         |  |             |        
|Land Parcels                |  | 10  |  | $    | 44,020 |                           | $ |        |  | $           | 44,020 
|                            |  |     |  |      |        |                           |   |         |  |             |        

---

|(2) | Amount includes $326.2 million of mortgage notes payable and $1.3 million of capital leases.
|--- | --------------------------------------------------------------------------------------------



On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon apartment project in Dallas, Texas. The sales price
was $3.1 million and the Real Estate Trust recognized a gain of $2.2 million on the transaction. The proceeds of the sales were used to acquire a 10.7 acre parcel of land in Loudoun County, Virginia, for $2.8 million.



On June 13, 2001, the Real Estate Trust sold a 4.79 acre section of its
Circle 75 land parcel located in Atlanta, Georgia for $3.0 million. The Real Estate Trust recognized a gain of $2.4 million on this transaction.



On August 8, 2001, the Real Estate Trust sold Metairie Tower, a 91,000 square foot office building located in Metairie, Louisiana, for $7.2 million. The
Real Estate Trust recognized a gain of $5.2 million on this transaction.



On September 7, 2001, the Real Estate Trust sold 9.5 acres of its Commerce Center land parcel located in Ft. Lauderdale, Florida, for approximately $2.0 million, and recognized a gain of $245,000 on the transaction.



During fiscal 2001, the Real Estate Trust also received net
proceeds of $2.0 million and recognized a gain of $620,000 from the condemnation of portions of two land parcels in Colorado and Michigan.



On September 25, 2003, the Real Estate Trust sold 7.7 acres located in Rockville, Maryland, for $11.3 million, and recognized a gain of $9.1 million on
the transaction.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4. DEBTREAL ESTATE TRUST



Mortgage notes payable are secured by various income-producing properties, land parcels, and properties under construction.
Almost all mortgage notes are payable in monthly installments, have maturity dates ranging to 2021 and accrue interest at annual rates from 3.1% to 9.1%. Certain mortgages contain a number of restrictions, including cross default provisions. At
September 30, 2003, the Real Estate Trust is in compliance with the debt covenants.



Notes payableunsecured includes notes which have been sold by the Real Estate Trust directly to investors at varying interest rates with maturities of one to ten years. These notes do not contain any provisions
for conversion, sinking fund or amortization, but are subject to a provision permitting the Real Estate Trust to call them prior to maturity. The weighted average interest rates were 9.2% and 9.8% at September 30, 2003 and 2002. During fiscal 2003
and 2002, the Real Estate Trust sold notes amounting to approximately $12.5 and $7.6 million. At September 30, 2003, the Real Estate Trust is in compliance with the debt covenants.



In March 1998, the Real Estate Trust issued $200.0 million aggregate principal amount of 93/4% Senior Secured Notes. These Notes are non-recourse obligations of the Real Estate Trust and are secured by a
first priority perfected security interest in 8,000 shares, or 80%, of the issued and outstanding common stock of the Bank, which constitute all of the Bank common stock held by the Real Estate Trust.



In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial two-year period subject to extension for one or more additional one-year terms. In fiscal 1997, the facility was increased to $20.0 million and was renewed for an
additional two-year period. In September 1999, this facility was increased to $50.0 million and its term was set at three years with provisions for extending the term annually. The maturity date for this line is September 29, 2004. On December 12,
2003 this facility was increased to $55.0 million and the maturity date extended to December 12, 2006. This facility is secured by a portion of the Real Estate Trusts ownership in Saul Holdings Partnership and Saul Centers. Interest is
computed by reference to a floating rate index. At September 30, 2003, the Real Estate Trust had borrowings under the facility of $3.8 million and unrestricted availability of $46.2 million. At September 30, 2003 the interest rate under this
facility was 4.0%.



In fiscal 1996, the Real Estate Trust
established an $8.0 million revolving credit line with an unrelated bank, secured by a portion of the Real Estate Trusts ownership interest in Saul Holdings Partnership. This facility was initially for a one-year term, after which any
outstanding loan amount would amortize over a two-year period. During fiscal 1997, 1998, 2000, and 2003 the line of credit was increased to $10.0, $20.0, $25.0 and $45.0 million. The current maturity date for this line is September 26, 2006.
Interest is computed by reference to a floating rate index. At September 30, 2003, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $45.0 million.



The maturity schedule for the Real Estate Trusts outstanding debt at September 30, 2003 for the fiscal years
commencing October 1, 2003 is set forth in the following table.



|            |  | Debt Maturity Schedule (In thousands)
|----------- |  | -------------------------------------
|Fiscal Year |  | Mortgage Notes                       
|2004        |  | $                                    
|2005        |  |                                      
|2006        |  |                                      
|2007        |  |                                      
|2008        |  |                                      
|Thereafter  |  |                                      
|            |  |                                      
|Total       |  | $                                    
|            |  |                                      



Of the $322.4 million
of mortgage notes outstanding at September 30, 2003, $314.5 million was non-recourse to the Real Estate Trust.



102



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



5. INCOME FROM COMMERCIAL PROPERTIESREAL ESTATE TRUST



Income from commercial properties includes minimum rent arising from
non-cancelable commercial leases. Minimum rent for fiscal years 2003, 2002, and 2001 amounted to $34.9, $34.9 and $37.0 million. Future minimum rentals as of September 30, 2003 under non-cancelable leases are as follows:



|Fiscal Year |  | (In thousands)
|----------- |  | --------------
|2004        |  | $             
|2005        |  |               
|2006        |  |               
|2007        |  |               
|2008        |  |               
|Thereafter  |  |               
|            |  |               
|Total       |  | $             
|            |  |               



6. TRANSACTIONS WITH RELATED
PARTIESREAL ESTATE TRUST



TRANSACTIONS WITH B. F. SAUL COMPANY
AND ITS SUBSIDIARIES



The Real Estate Trust is managed by
B. F. Saul Advisory Company, L.L.C., (the Advisor), a wholly-owned subsidiary of B. F. Saul Company (Saul Co.). All of the Real Estate Trust officers and four Trustees of the Trust are also officers and/or directors of Saul
Co. The Advisor is paid a fixed monthly fee which is subject to annual review by the Trustees. The monthly fee was $458,000 during fiscal 2003, $475,000 during fiscal 2002, and $363,000 during fiscal 2001. The advisory contract has been extended
until September 30, 2004, and will continue thereafter unless canceled by either party at the end of any contract year. Certain loan agreements prohibit termination of this contract.



Saul Co. and B.F. Saul Property Company (Saul Property Co.), a wholly-owned subsidiary of Saul Co., provide
services to the Real Estate Trust through commercial property management and leasing, hotel management, development and construction management, and acquisitions, sales and financings of real property. Fees paid to Saul Co. and Saul Property Co.
amounted to $6.9, $6.8 and $7.4 million in fiscal 2003, 2002 and 2001.



The Real Estate Trust reimburses the Advisor and Saul Property Co. for costs and expenses incurred on behalf of the Real Estate Trust, in-house legal expenses, and for all travel expenses incurred in connection with the affairs of the Real
Estate Trust.



The Real Estate Trust currently pays the Advisor
fees equal to 2% of the principal amount of the unsecured notes as they are issued to offset its costs of administering the program. These payments amounted to $251,000, $183,000 and $93,000 in fiscal 2003, 2002 and 2001.



A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trusts insurance program. Such commissions and fees amounted to approximately $302,000, $196,000 and $171,000 in fiscal 2003, 2002 and 2001.



At October 1, 2000, the Real Estate Trust had an unsecured note receivable
from the Saul Co. with an outstanding balance of $11.8 million. During fiscal 2003, 2002 and 2001, curtails of $3.5, $1.3 and $4.0 million were paid by the Saul Co. Interest on the loan is computed by reference to a floating rate index. At September
30, 2003, the total due the Real Estate Trust was $3.0 million. Interest accrued on these loans amounted to $151,000, $300,000 and $700,000 during fiscal 2003, 2002 and 2001.



103



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



REMUNERATION OF TRUSTEES AND OFFICERS



For fiscal years 2003, 2002, and 2001, the Real Estate Trust paid the Trustees approximately $109,000, $95,000 and $94,000
for their services. No compensation was paid to the officers of the Real Estate Trust for acting as such; however, one Trustee was paid by the Bank for his services as Chairman and Chief Executive Officer of the Bank, and four received payments for
their services as directors of the Bank. Four of the Trustees and all of the officers of the Real Estate Trust receive compensation from Saul Co. as directors and/or officers.



SAUL HOLDINGS LIMITED PARTNERSHIP AND SAUL CENTERS, INC.



The Real Estate Trust accounts for these investments under the equity method. The Real Estate Trusts share of earnings
for fiscal 2003, 2002 and 2001 was $8.6, $9.1 and $7.4 million. See Note 2.



OTHER TRANSACTIONS



The Real Estate Trust
leases space to the Bank and Saul Property Co. at two of its income-producing properties. Minimum rents and expense recoveries paid by these affiliates amounted to approximately $5.4, $5.1 and $4.0 million in fiscal 2003, 2002 and 2001.



7. LOANS HELD FOR SECURITIZATION AND/OR SALETHE BANK



Loans held for securitization and/or sale are composed of the following:



|(In thousands)                     |  | September 30,
|---------------------------------- |  | -------------
|                                   |  | 2003         
|Single-family residential          |  | $            
|Automobile                         |  |              
|Home improvement and related loans |  |              
|                                   |  |              
|Total                              |  | $            
|                                   |  |              



8. INVESTMENT SECURITIESTHE
BANK



At September 30, 2003 and 2002, investment
securities are composed of U.S. Government securities and are classified as held-to-maturity. Gross unrealized holding gains and losses on the Banks U.S. Government securities at September 30, 2003 and 2002 are as follows:



|(In thousands)                                                                     |  | Amortized Cost |        | GrossUnrealizedHolding Gains |   | GrossUnrealizedHolding Losses |  | Aggregate Fair Value
|---------------------------------------------------------------------------------- |  | -------------- | ------ | ---------------------------- | - | ----------------------------- |  | --------------------
|September 30, 2003                                                                 |  |                |        |                              |   |                               |  |                     
|U.S. Government securities:Original maturity after one year, but within five years |  | $              | 46,345 |                              | $ | 186                           |  | $                   
|                                                                                   |  |                |        |                              |   |                               |  |                     
|September 30, 2002                                                                 |  |                |        |                              |   |                               |  |                     
|U.S. Government securities:Original maturity after one year, but within five years |  | $              | 46,445 |                              | $ | 524                           |  | $                   
|                                                                                   |  |                |        |                              |   |                               |  |                     



There were no sales of
investment securities during the years ended September 30, 2003, 2002 and 2001.



104



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



9. MORTGAGE-BACKED SECURITIESTHE BANK



At September 30, 2003 and 2002, all mortgage-backed securities are classified as held-to-maturity. Gross unrealized holding
gains and losses on the Banks mortgage-backed securities at September 30, 2003 and 2002 are as follows:



|(In thousands)           |  | Amortized Cost |           | Gross UnrealizedHolding Gains |   | Gross UnrealizedHolding Losses |  | Aggregate Fair Value
|------------------------ |  | -------------- | --------- | ----------------------------- | - | ------------------------------ |  | --------------------
|September 30, 2003       |  |                |           |                               |   |                                |  |                     
|FNMA                     |  | $              | 170,849   |                               | $ | 4,741                          |  | $                   
|FHLMC                    |  |                | 222,777   |                               |   | 7,494                          |  |                     
|Private label, AAA-rated |  |                | 84,766    |                               |   | 219                            |  |                     
|                         |  |                |           |                               |   |                                |  |                     
|Total                    |  | $              | 478,392   |                               | $ | 12,454                         |  | $                   
|                         |  |                |           |                               |   |                                |  |                     
|September 30, 2002       |  |                |           |                               |   |                                |  |                     
|FNMA                     |  | $              | 226,680   |                               | $ | 5,837                          |  | $                   
|FHLMC                    |  |                | 658,965   |                               |   | 20,028                         |  |                     
|Private label, AAA-rated |  |                | 142,988   |                               |   | 3,459                          |  |                     
|                         |  |                |           |                               |   |                                |  |                     
|Total                    |  | $              | 1,028,633 |                               | $ | 29,324                         |  | $                   
|                         |  |                |           |                               |   |                                |  |                     



Contractual maturities
of the Banks mortgage-backed securities at September 30, 2003 are as follows:



|(In thousands)                             |  |  
|------------------------------------------ |  | -
|Due within one year                        |  | $
|Due after one year, but within five years  |  |  
|Due after five years, but within ten years |  |  
|Due after ten years                        |  |  
|                                           |  |  
|Total                                      |  | $
|                                           |  |  



Accrued interest
receivable on mortgage-backed securities totaled $2.2 and $5.4 million at September 30, 2003 and 2002, respectively, and is included in other assets in the Consolidated Balance Sheets.



10. LOANS RECEIVABLETHE BANK



Loans receivable is composed of the following:



|(In thousands)                                             |  | September 30, |          
|---------------------------------------------------------- |  | ------------- | ---------
|                                                           |  | 2003          |          
|Single-family residential                                  |  | $             | 4,397,394
|Home equity                                                |  |               | 1,336,776
|Real estate construction and ground                        |  |               | 402,269  
|Commercial real estate and multifamily                     |  |               | 19,435   
|Commercial                                                 |  |               | 1,599,423
|Automobile                                                 |  |               | 492,896  
|Subprime automobile                                        |  |               | 96,128   
|Home improvement and related loans                         |  |               | 48,145   
|Overdraft lines of credit and other consumer               |  |               | 36,461   
|                                                           |  |               |          
|                                                           |  |               | 8,428,927
|                                                           |  |               |          
|Less:                                                      |  |               |          
|Undisbursed portion of loans                               |  |               | 878,489  
|Unearned discounts and net deferred loan origination costs |  |               | (67,516  
|Allowance for losses on loans                              |  |               | 58,397   
|                                                           |  |               |          
|                                                           |  |               | 869,370  
|                                                           |  |               |          
|Total                                                      |  | $             | 7,559,557
|                                                           |  |               |          



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Bank serviced loans owned by others amounting to $8,475.6 and $7,844.5 million at September 30,
2003 and 2002, respectively.



Accrued interest receivable on
loans totaled $25.4 and $27.8 million at September 30, 2003 and 2002, respectively, and is included in other assets in the Consolidated Balance Sheets.



11. ALLOWANCE FOR LOSSESTHE BANK



Activity in the allowance for losses on loans receivable is summarized as follows:



|(In thousands)       |  | September 30, |        
|-------------------- |  | ------------- | -------
|                     |  | 2003          |        
|Beginning Balance    |  | $             | 66,079 
|Provision for losses |  |               | 18,422 
|Charge-offs          |  |               | (44,957
|Recoveries           |  |               | 18,853 
|                     |  |               |        
|Ending Balance       |  | $             | 58,397 
|                     |  |               |        



12. REAL ESTATE HELD FOR INVESTMENT
OR SALETHE BANK



Real estate held for investment or
sale is composed of the following:



|(In thousands)                                                                            |  | September 30,
|----------------------------------------------------------------------------------------- |  | -------------
|                                                                                          |  | 2003         
|Real estate held for investment (net of allowance for losses of $202 for both periods)    |  | $            
|Real estate held for sale (net of allowance for losses of $71,293, at September 30, 2002) |  |              
|                                                                                          |  |              
|Total real estate held for investment or sale                                             |  | $            
|                                                                                          |  |              



Gain (loss) on real estate held for
investment or sale is composed of the following:



|(In thousands)                     |  | Year Ended September 30, |      
|---------------------------------- |  | ------------------------ | -----
|                                   |  | 2003                     |      
|Provision for losses               |  | $                        |     
|Net gain from operating properties |  |                          | 957  
|Net gain on sales                  |  |                          | 5,823
|                                   |  |                          |      
|Total gain                         |  | $                        | 6,780
|                                   |  |                          |      



13. GOODWILL AMORTIZATIONTHE
BANK



As a result of adopting SFAS 142, the Bank did not
record goodwill amortization expense during the fiscal year ended September 30, 2003. The following table sets forth net income for the fiscal years ended September 30, 2002 and 2001 on a pro forma basis, excluding goodwill amortization.



|(In thousands)                            |  | September 30,
|----------------------------------------- |  | -------------
|                                          |  | 2002         
|Operating income:                         |  |              
|As reported                               |  | $            
|Add back:                                 |  |              
|Goodwill amortization, net of related tax |  |              
|                                          |  |              
|Pro forma operating income                |  | $            
|                                          |  |              



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



14. LOAN SERVICING RIGHTSTHE BANK



Servicing assets are recorded when purchased and in conjunction with loan sales and securitization transactions. Activity in
servicing assets is summarized as follows:



|(In thousands)      |  | Year ended September 30, |        
|------------------- |  | ------------------------ | -------
|                    |  | 2003                     |        
|Beginning Balance   |  | $                        | 105,963
|Additions           |  |                          | 75,277 
|Charge-offs         |  |                          | (30,656
|Amortization        |  |                          | (31,198
|                    |  |                          |        
|Ending Balance      |  |                          | 119,386
|Valuation Allowance |  |                          | (23,118
|                    |  |                          |        
|Carrying Value      |  | $                        | 96,268 
|                    |  |                          |        



Accumulated
amortization was $165.0 and $133.8 million at September 30, 2003 and 2002. The aggregate fair value of servicing assets at September 30, 2003 and 2002 was $96.9 and $60.3 million, respectively.



Activity in the valuation allowance for servicing assets is summarized as
follows:



|(In thousands)                     |  | Year Ended September 30,
|---------------------------------- |  | ------------------------
|                                   |  | 2003                    
|Balance at beginning of year       |  | $                       
|Additions charged to loan expenses |  |                         
|Charge-offs                        |  |                         
|                                   |  |                         
|Balance at end of year             |  | $                       
|                                   |  |                         



There were no sales of
rights to service mortgage loans during fiscal years 2003, 2002 and 2001. Servicing fees are included in servicing and securitization income in the Consolidated Statements of Operations.



At September 30, 2003 and 2002, key assumptions and the sensitivity of the current value of originated servicing assets to
an immediate 10 percent and 20 percent adverse change in those assumptions are as follows:



|(Dollars in thousands)                       |  | September 30, 2003       |       
|-------------------------------------------- |  | ------------------------ | ------
|                                             |  | Single-FamilyResidential |       
|Carrying value                               |  | $                        | 90,209
|Weighted average life (in years)             |  |                          | 4.1   
|Prepayment speed assumption (annual rate)(1) |  |                          | 22.03 
|Impact on fair value at 10% adverse change   |  | $                        | (4,338
|Impact on fair value at 20% adverse change   |  | $                        | (8,220
|Discount rate (annual)                       |  |                          | 8.38  
|Impact on fair value at 10% adverse change   |  | $                        | (1,976
|Impact on fair value at 20% adverse change   |  | $                        | (4,130



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(Dollars in thousands)                       |  | September 30, 2002       |       
|-------------------------------------------- |  | ------------------------ | ------
|                                             |  | Single-FamilyResidential |       
|Carrying value                               |  | $                        | 50,171
|Weighted average life (in years)             |  |                          | 3.1   
|Prepayment speed assumption (annual rate)(1) |  |                          | 29.39 
|Impact on fair value at 10% adverse change   |  | $                        | (3,110
|Impact on fair value at 20% adverse change   |  | $                        | (5,712
|Discount rate (annual)                       |  |                          | 9.05  
|Impact on fair value at 10% adverse change   |  | $                        | (967  
|Impact on fair value at 20% adverse change   |  | $                        | (1,899

---

|(1) | Represents Constant Prepayment Rate.
|--- | ------------------------------------



15. LOAN SECURITIZATION TRANSACTIONSTHE BANK



The Bank periodically sells various receivables through asset-backed securitizations, in which receivables are transferred to trusts, and certificates are
sold to investors. The following chart summarizes the Banks securitization activities as of or for the fiscal years ended September 30, 2003, 2002 and 2001.



|(In thousands)                        |  | As of or for the year ended September 30,
|------------------------------------- |  | -----------------------------------------
|                                      |  | 2003                                     
|Single-Family Residential             |  |                                          
|Loans sold into new trusts            |  | $                                        
|Outstanding trust certificate balance |  |                                          
|Gains recognized                      |  |                                          
|                                      |  |                                          
|Automobile                            |  |                                          
|Loans sold into new trusts            |  | $                                        
|Outstanding trust certificate balance |  |                                          
|Gains recognized                      |  |                                          
|                                      |  |                                          
|Home Equity                           |  |                                          
|Loans sold into existing trusts       |  | $                                        
|Outstanding trust certificate balance |  |                                          
|Gains recognized                      |  |                                          
|                                      |  |                                          
|Home Improvement                      |  |                                          
|Loans sold into existing trusts       |  | $                                        
|Outstanding trust certificate balance |  |                                          
|Gains recognized                      |  |                                          



The Bank continues to
service, and receive servicing fees on, the outstanding balance of securitized receivables. The Bank also retains rights, which may be subordinated, to future cash flows arising from the receivables after the expenses of the securitization trust are
paid. The Bank generally estimates the fair value of retained interests based on the estimated present value of expected future cash flows from securitized and sold receivables, using managements best estimates of the key
assumptionscredit losses, prepayment speeds and discount rates commensurate with the risks involved.



108



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes certain cash flows received from securitization trusts:



|(In thousands)                                  |  | Year Ended September 30,
|----------------------------------------------- |  | ------------------------
|                                                |  | 2003                    
|Proceeds from new securitizations               |  | $                       
|Servicing fees received                         |  |                         
|Other cash flows received on retained interests |  |                         



Servicing and
securitization income includes the initial gains on current securitization and sale transactions and income from interest-only strips receivable recognized in connection with current and prior period securitization and sale transactions.



At September 30, 2003 and 2002, key assumptions and the sensitivity of the
current fair value of the retained interests to an immediate 10 percent and 20 percent adverse change in those assumptions are as follows:



|(Dollars in thousands)                            |  | September 30, 2003       |        
|------------------------------------------------- |  | ------------------------ | -------
|                                                  |  | Single-FamilyResidential |        
|Carrying value (fair value)                       |  | $                        | 149,189
|Weighted average life (in years)                  |  |                          | 4.0    
|Prepayment speed assumption (average annual rate) |  |                          | 22.59  
|Impact on fair value at 10% adverse change        |  | $                        | (9,001 
|Impact on fair value at 20% adverse change        |  | $                        | (16,886
|Expected credit losses (annual rate)              |  |                          | 0.01   
|Impact on fair value at 10% adverse change        |  | $                        | (33    
|Impact on fair value at 20% adverse change        |  | $                        | (66    
|Discount rate (annual rate)                       |  |                          | 8.50   
|Impact on fair value at 10% adverse change        |  | $                        | (3,352 
|Impact on fair value at 20% adverse change        |  | $                        | (6,444 



|(Dollars in thousands)                            |  | September 30, 2002       |       
|------------------------------------------------- |  | ------------------------ | ------
|                                                  |  | Single-FamilyResidential |       
|Carrying value (fair value)                       |  | $                        | 61,515
|Weighted average life (in years)                  |  |                          | 4.57  
|Prepayment speed assumption (average annual rate) |  |                          | 19.64 
|Impact on fair value at 10% adverse change        |  | $                        | (3,407
|Impact on fair value at 20% adverse change        |  | $                        | (6,422
|Expected credit losses (annual rate)              |  |                          | 0.02  
|Impact on fair value at 10% adverse change        |  | $                        | (39   
|Impact on fair value at 20% adverse change        |  | $                        | (79   
|Discount rate (annual rate)                       |  |                          | 8.50  
|Impact on fair value at 10% adverse change        |  | $                        | (1,643
|Impact on fair value at 20% adverse change        |  | $                        | (3,207



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Key assumptions used in measuring retained interests at the date of securitizations completed during
fiscal year 2003 and 2002 are as follows:



|                                                  |  | Single-Family Residential |      |  | Automobile |     
|------------------------------------------------- |  | ------------------------- | ---- |  | ---------- | ----
|Year Ended September 30, 2003                     |  |                           |      |  |            |     
|Prepayment speed assumption (average annual rate) |  | 20.49                     | %(1) |  |           |     
|Expected credit losses (annual rate)              |  | 0.01                      | %    |  |           |     
|Discount rate (annual rate)                       |  | 8.50                      | %    |  |           |     
|                                                  |  |                          
|Year Ended September 30, 2002                     |  |                           |      |  |            |     
|Prepayment speed assumption (average annual rate) |  | 19.56                     | %(1) |  | 1.50       | %(2)
|Expected credit losses (annual rate)              |  | 0.02                      | %    |  | 0.96       | %   
|Discount rate (annual rate)                       |  | 8.50                      | %    |  | 8.00       | %   

---

|(1) | Represents Constant Prepayment Rate. Certain loans may require the payment of a fee if the borrower prepays the loan during the period up to three years after
origination. The Bank uses a lower prepayment assumption during these periods.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents absolute prepayment model or ABSan assumed rate of prepayment each month relative to the original number of automobile loans in a pool.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



These sensitivities are hypothetical and should be used with caution. Changes in fair value based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The effects shown in the above tables of a variation in a particular assumption on the fair value of interest-only strips receivable is
calculated without changing any other assumption. In reality, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities.



Principal balances, delinquent amounts and net credit losses for securitized loans were as follows:



|(In thousands)                                  |  | As of or for the year ended September 30, 2003 |          
|----------------------------------------------- |  | ---------------------------------------------- | ---------
|                                                |  | Total PrincipalAmount of Loans                 |          
|Single-family residential                       |  | $                                              | 3,427,013
|Automobile                                      |  |                                                | 393,333  
|Home equity, home improvement and related loans |  |                                                | 37,606   
|                                                |  |                                                |          
|Total                                           |  | $                                              | 3,857,952
|                                                |  |                                                |          



|(In thousands)                                  |  | As of or for the year ended September 30, 2002
|----------------------------------------------- |  | ----------------------------------------------
|                                                |  | Total PrincipalAmount of Loans                
|Single-family residential                       |  | $                                             
|Automobile                                      |  |                                               
|Home equity, home improvement and related loans |  |                                               
|                                                |  |                                               
|Total                                           |  | $                                             
|                                                |  |                                               



110



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



16. PROPERTY AND EQUIPMENTTHE BANK



Property and equipment is composed of the following:



|(Dollars in thousands)                    |  | EstimatedUseful Lives |      | September 30,
|----------------------------------------- |  | --------------------- | ---- | -------------
|                                          |  |                       | 2003 |              
|Land                                      |  |                      |      | $            
|Projects in progress                      |  |                      |      |              
|Buildings and improvements                |  | 10-65 years           |      |              
|Leasehold and tenant improvements         |  | 5-20 years            |      |              
|Furniture and equipment                   |  | 5-10 years            |      |              
|Automobiles                               |  | 3-5 years             |      |              
|                                          |  |                       |      |              
|                                          |  |                       |      |              
|Less:                                     |  |                       |      |              
|Accumulated depreciation and amortization |  |                       |      |              
|                                          |  |                       |      |              
|Total                                     |  |                       |      | $            
|                                          |  |                       |      |              



Depreciation and
amortization expense amounted to $44.5, $38.7 and $34.2 million for the years ended September 30, 2003, 2002 and 2001, respectively.



Effective July 1, 2003, the Bank adopted FIN 46. FIN 46 requires companies to identify variable interest entities and consolidate them if it is determined
that the company is the primary beneficiary of the variable interest entity. Pursuant to FIN 46, the Bank consolidated the assets and liabilities of 7501 Wisconsin Avenue LLC (the LLC), which owns the land on which the Banks
executive office building was constructed. As a result, property and equipment and minority interest on the Consolidated Balance Sheets each include $31.4 million at September 30, 2003 related to the Banks involvement with the LLC. See Notes C
and 32.



17. AUTOMOBILES SUBJECT TO LEASETHE BANK



Automobiles subject to lease is composed of the following:



|(Dollars in thousands)   |  | EstimatedUseful Lives |      | September 30,
|------------------------ |  | --------------------- | ---- | -------------
|                         |  |                       | 2003 |              
|Automobiles              |  | 3-5 years             |      | $            
|Less:                    |  |                       |      |              
|Accumulated depreciation |  |                       |      |              
|                         |  |                       |      |              
|Total                    |  |                       |      | $            
|                         |  |                       |      |              



Depreciation expense
related to automobile leases amounted to $171.9, $161.9 and $110.6 million for the years ended September 30, 2003, 2002 and 2001, respectively. Automobile rental income amounted to $235.8, $242.6 and $167.4 million for the years ended September 30,
2003, 2002 and 2001, respectively.



The following is a schedule
by years of future minimum automobile rental income at September 30, 2003:



|Year Ending September
30, |  | (In thousands)
|------------------------- |  | --------------
|2004                      |  | $             
|2005                      |  |               
|2006                      |  |               
|2007                      |  |               
|2008                      |  |               
|                          |  |               
|Total                     |  | $             
|                          |  |               



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



18. LEASESTHE BANK



The Bank has noncancelable, long-term leases for office premises and retail space which have a variety of terms expiring
from fiscal year 2004 to fiscal year 2023 and ground leases which have terms expiring from fiscal year 2029 to fiscal year 2081. These leases are accounted for as operating leases. Some of the leases are subject to rent adjustments in the future
based upon changes in the Consumer Price Index and some also contain renewal options. The following is a schedule by years of future minimum lease payments required at September 30, 2003:



|Year Ending September
30, |  | (In thousands)
|------------------------- |  | --------------
|2004                      |  | $             
|2005                      |  |               
|2006                      |  |               
|2007                      |  |               
|2008                      |  |               
|Thereafter                |  |               
|                          |  |               
|Total                     |  | $             
|                          |  |               



Rent expense totaled
$32.4, $29.9 and $26.9 million for the years ended September 30, 2003, 2002 and 2001, respectively. For operating leases with fixed escalation amounts, rent expense is recognized on a straight line basis over the term of the lease.



19. DEPOSIT ACCOUNTSTHE BANK



An analysis of deposit accounts and the related weighted average effective
interest rates at year end are as follows:



|(Dollars in thousands)               |  | September 30, |          
|------------------------------------ |  | ------------- | ---------
|                                     |  | 2003          |          
|                                     |  | Amount        |          
|Demand accounts                      |  | $             | 951,844  
|NOW accounts                         |  |               | 1,951,281
|Money market deposit accounts        |  |               | 2,321,026
|Statement savings accounts           |  |               | 997,686  
|Other deposit accounts               |  |               | 152,758  
|Certificate accounts, less than $100 |  |               | 1,207,728
|Certificate accounts, $100 or more   |  |               | 518,182  
|                                     |  |               |          
|Total                                |  | $             | 8,100,505
|                                     |  |               |          



The Banks
deposits are insured by the FDIC up to $100,000 for each insured depositor.



Interest expense on deposit accounts is composed of the following:



|(In thousands)                |  | Year Ended September 30,
|----------------------------- |  | ------------------------
|                              |  | 2003                    
|NOW accounts                  |  | $                       
|Money market deposit accounts |  |                         
|Statement savings accounts    |  |                         
|Certificate accounts          |  |                         
|Other deposit accounts        |  |                         
|                              |  |                         
|Total                         |  | $                       
|                              |  |                         



112



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Outstanding certificate accounts at September 30, 2003 mature in the years indicated as follows:



|Year Ending September
30, |  | (In thousands)
|------------------------- |  | --------------
|2004                      |  | $             
|2005                      |  |               
|2006                      |  |               
|2007                      |  |               
|2008                      |  |               
|                          |  |               
|Total                     |  | $             
|                          |  |               



At September 30, 2003,
certificate accounts of $100,000 or more have contractual maturities as indicated below:



|                                     |  | (In thousands)
|------------------------------------ |  | --------------
|Three months or less                 |  | $             
|Over three months through six months |  |               
|Over six months through 12 months    |  |               
|Over 12 months                       |  |               
|                                     |  |               
|Total                                |  | $             
|                                     |  |               



20. SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGSTHE BANK



Short-term borrowings are summarized as follows:



|(Dollars in thousands)                              |  | September 30, |        
|--------------------------------------------------- |  | ------------- | -------
|                                                    |  | 2003          |        
|Securities sold under repurchase agreements:        |  |               |        
|Balance at year end                                 |  | $             | 5,816  
|Average amount outstanding during the year          |  |               | 268,870
|Maximum amount outstanding at any month end         |  |               | 506,065
|Amount maturing within 30 days                      |  |               | 2,816  
|Weighted average interest rate during the year      |  |               | 1.44   
|Weighted average interest rate on year end balances |  |               | 0.77   
|                                                    |  |               |        
|Other short-term borrowings:                        |  |               |        
|Balance at year end                                 |  | $             | 162,498
|Average amount outstanding during the year          |  |               | 170,385
|Maximum amount outstanding at any month end         |  |               | 209,805
|Amount maturing within 30 days                      |  |               | 162,498
|Weighted average interest rate during the year      |  |               | 0.55   
|Weighted average interest rate on year end balances |  |               | 0.32   



The investment and
mortgage-backed securities underlying the dealer repurchase agreements were delivered to the dealers who arranged the transactions. The dealers may have loaned such securities to other parties in the normal course of their operations and agreed to
resell to the Bank the identical securities upon the maturities of the agreements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At September 30, 2003, the Bank had pledged mortgage-backed securities and U.S. Government securities
with a combined book value of $172.6 million to secure certain other short-term borrowings. Also at September 30, 2003, the Bank had pledged, but did not borrow against, other loans with a total principal balance of $782.8 million.



21. FEDERAL HOME LOAN BANK ADVANCESTHE BANK



At September 30, 2003, advances from the Federal Home Loan Bank of Atlanta
(FHLB) totaled $1,987.5 million. The advances bear interest at a weighted average interest rate of 4.89%, which is fixed for the term of the advances, and mature over varying periods as follows:



|                                         |  | (In thousands)
|---------------------------------------- |  | --------------
|Six months or less                       |  | $             
|More than six months through one year    |  |               
|More than one year through three years   |  |               
|More than three years through five years |  |               
|More than five years                     |  |               
|                                         |  |               
|Total                                    |  | $             
|                                         |  |               



Under a Specific
Collateral Agreement with the FHLB, advances are secured by the FHLB stock owned by the Bank, qualifying first mortgage loans with a total principal balance of $3,051.1 million, and certain mortgage-backed securities with a book value of $82.8
million. The FHLB requires that members maintain qualifying collateral at least equal to 100% of the members outstanding advances at all times. The collateral held by the FHLB in excess of the September 30, 2003 advances is available to secure
additional advances from the FHLB, subject to its collateralization guidelines.



22. CAPITAL NOTESSUBORDINATEDTHE BANK



Capital notes, which are subordinated to the interest of deposit account holders and other senior debt, are composed of the following:



|(Dollars in thousands)           |  | Issue Date        |      | September 30, |         | InterestRate |  
|-------------------------------- |  | ----------------- | ---- | ------------- | ------- | ------------ | -
|                                 |  |                   | 2003 |               | 2002    |             
|Subordinated debentures due 2005 |  | November 23, 1993 |      | $             | 150,000 |              | $
|Subordinated debentures due 2008 |  | December 3, 1996  |      |               | 100,000 |              |  
|                                 |  |                   |      |               |         |              |  
|Total                            |  |                   |      | $             | 250,000 |              | $
|                                 |  |                   |      |               |         |              |  



The 91/4% Subordinated Debentures due 2005 (the 1993 Debentures) are subject to redemption at any time at the
option of the Bank, in whole or in part, at the following redemption prices plus accrued and unpaid interest:



|If redeemed during the 12-month
period beginning December 1, |  | Redemption Price |  
|------------------------------------------------------------ |  | ---------------- | -
|2002                                                         |  | 100.925          | %
|2003 and thereafter                                          |  | 100.000          | %



114



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The 91/4% Subordinated Debentures due 2008 (the 1996 Debentures) are subject to redemption at any time at the option of the Bank, in whole or in part, at the following redemption prices plus
accrued and unpaid interest:



|If redeemed during the 12-month
period beginning December 1, |  | Redemption Price |  
|------------------------------------------------------------ |  | ---------------- | -
|2002                                                         |  | 103.700          | %
|2003                                                         |  | 102.775          | %
|2004                                                         |  | 101.850          | %
|2005                                                         |  | 100.925          | %
|2006 and thereafter                                          |  | 100.000          | %



The indenture pursuant
to which the 1993 Debentures were sold (the Indenture) provides that the Bank may not pay dividends on its capital stock unless, after giving effect to the dividend, no event of default shall have occurred and be continuing and the Bank
is in compliance with its regulatory capital requirements. In addition, the amount of the proposed dividend may not exceed the sum of (i) $15.0 million, (ii) 662/3% of the Banks consolidated net income (as defined in the Indenture) accrued on a cumulative basis commencing on October 1, 1993 and (iii) the aggregate net cash proceeds
received by the Bank after October 1, 1993 from the sale of qualified capital stock or certain debt securities, minus the aggregate amount of any restricted payments made by the Bank. Notwithstanding the above restrictions on dividends, provided no
event of default has occurred or is continuing, the Indenture does not restrict the payment of dividends on the 13% Preferred Stock (as defined below) or any payment-in-kind preferred stock issued in lieu of cash dividends on the Preferred Stock or
the redemption of any such payment-in-kind preferred stock. The indenture pursuant to which the 1996 Debentures were sold provides that the proposed dividend may not exceed the sum of the restrictions discussed above for the 1993 Indenture and the
aggregate liquidation preference of the new series of preferred stock of the Bank, if issued in exchange for the outstanding REIT Preferred Stock (as defined below). See Note 32.



The Bank received OTS approval to include the principal amount of the 1996 Debentures and the 1993 Debentures in the
Banks supplementary capital for regulatory capital purposes.



Deferred debt issuance costs, net of accumulated amortization, amounted to $4.2 and $5.2 million at September 30, 2003 and 2002, respectively, and are included in other assets in the Consolidated Balance Sheets. See Note 31.



23. PREFERRED STOCKTHE BANK



Cash dividends on the Banks Noncumulative Perpetual Preferred Stock,
Series A (the Series A Preferred Stock) are payable quarterly in arrears at an annual rate of 13%. If the Board of Directors does not declare the full amount of the noncumulative cash dividend accrued in respect of any quarterly dividend
period, in lieu thereof the Board of Directors will be required to declare (subject to regulatory and other restrictions) a stock dividend in the form of a new series of payment-in-kind preferred stock of the Bank.



The OTS has approved the inclusion of the Series A Preferred Stock as core
capital and has not objected to the payment of dividends on the Series A Preferred Stock, provided certain conditions are met. The holders of the Series A Preferred Stock have no voting rights, except in certain limited circumstances.



Holders of the Series A Preferred Stock will be entitled to receive a
liquidating distribution in the amount of $25.00 per share, plus accrued and unpaid dividends for the then-current dividend period in the event of any voluntary liquidation of the Bank, after payment of the deposit accounts and other liabilities of
the Bank, and out of the assets available for distribution to shareholders. The Series A Preferred Stock ranks superior and prior to the issued and outstanding common stock of the Bank with respect to dividend and liquidation rights.



115



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Series A Preferred Stock is redeemable by the Bank at its option at any time on and after May 1,
2003, in whole or in part, at the following per share redemption prices in cash, plus, in each case, an amount in cash equal to accrued and unpaid dividends for the then-current dividend period:



|If redeemed during the 12-month
period beginning May 1, |  | Redemption Price
|------------------------------------------------------- |  | ----------------
|2003                                                    |  | $               
|2004                                                    |  | $               
|2005                                                    |  | $               
|2006                                                    |  | $               
|2007                                                    |  | $               
|2008                                                    |  | $               
|2009                                                    |  | $               
|2010                                                    |  | $               
|2011                                                    |  | $               
|2012                                                    |  | $               
|2013 and thereafter                                     |  | $               



In October 2003, the
Bank sold $125.0 million of its 8% Noncumulative Perpetual Preferred Stock, Series C (the Series C Preferred Stock). The net proceeds from the issuance of the Series C Preferred Stock were used to redeem all of the Series A Preferred
Stock, on October 31, 2003, at a price of $27.25 per share. The Series C Preferred Stock trades on the New York Stock Exchange under the symbol CCX PrC. The Bank will pay quarterly dividends in arrears at an annual rate of 8% on the
Series C Preferred Stock only if the Board of Directors declares them and the OTS does not object. Dividends, once declared, are payable on or before the fifteenth day of February, May, August and November of each year, however, the dividend payment
date for the initial dividend period will be January 15, 2004. Dividends not declared in a quarter will not be paid at any future time, except that upon a liquidation or redemption, accrued dividends for the current period will be paid.



The Series C Preferred Stock is includable in the Banks core
capital. The holders of the Series C Preferred Stock have no voting rights, except in certain limited circumstances.



The Series C Preferred Stock may not be redeemed before October 1, 2008 except under certain circumstances. On and after October 1, 2008, the Series C
Preferred Stock may be redeemed at the option of the Bank, in whole or in part, from time to time, at a redemption price of $25.00 per share, plus all distributions accrued and unpaid on the Series C Preferred Stock that have been declared, and
accrued and unpaid dividends for the then-current dividend period, whether or not declared, up to the date of such redemption.



24. COMPENSATION PLANSTHE BANK



The Bank participates in a defined contribution profit sharing retirement plan (the Plan) which covers those full-time employees who meet the
requirements as specified in the Plan. Prior to January 1, 2002, the Plan, which can be modified or discontinued at any time, required participating employees to contribute 2.0% of their compensation. Beginning January 1, 2002, only corporate
contributions are made to the Plan.



Corporate contributions,
at the discretionary amount of up to six percent of the employees cash compensation, subject to certain limits, were $8.8, $8.2 and $7.3 million for the years ended September 30, 2003, 2002 and 2001, respectively. There are no past service
costs associated with the Plan and the Bank has no liability under the Plan other than its current contributions. The Plan owns 4.0% of the Banks common stock.



The Bank provides a supplemental defined contribution profit sharing retirement plan (the SERP), which covers
certain highly-compensated full-time employees who meet the requirements as specified in the SERP. The



116



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SERP, which can be modified or discontinued at any time, requires participating employees to contribute 2.0% of their compensation in excess of a specified
amount. Corporate contributions, equal to three times the employees contribution, were $1.1 million, $861,000 and $689,000 for the years ended September 30, 2003, 2002 and 2001, respectively. There are no past service costs associated with the
SERP. The Banks liability under the SERP, which includes contributions from employees and is not funded, was $11.2 and $8.7 million at September 30, 2003 and 2002, respectively.



The Bank has granted awards under a deferred compensation plan to certain qualified employees. The deferred compensation
plan provides that, as of the end of each fiscal year in the ten-year period prior to vesting, the Bank will add to or deduct from the account of each employee who has received an award, a contribution or deduction, which represents a hypothetical
interest (which may be positive or negative) earned on the principal contribution, based on the Banks rate of return on average assets as defined in the deferred compensation plan for the fiscal year then ended. The Banks expense under
the deferred compensation plan totaled $5.3, $3.8 and $3.4 million during the years ended September 30, 2003, 2002 and 2001, respectively.



25. REGULATORY MATTERSTHE BANK



The Banks regulatory capital requirements at September 30, 2003 and 2002 were a 1.5% tangible capital requirement, a 4.0% core capital requirement
and an 8.0% total risk-based capital requirement. Under the OTS prompt corrective action regulations, the Bank must maintain minimum leverage, tier 1 risk-based and total risk-based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to
meet the ratios established for adequately capitalized institutions. At September 30, 2003 and 2002, the Bank was in compliance with its tangible, core and total risk-based regulatory capital requirements and exceeded the capital
standards established for well capitalized institutions under the prompt corrective action regulations. The information below is based upon the Banks understanding of the applicable regulations and related
interpretations.



|(Dollars in thousands)                              |  | SEPTEMBER 30, 2003 |        
|--------------------------------------------------- |  | ------------------ | -------
|                                                    |  | ACTUAL             |        
|                                                    |  | Amount             |        
|Capital per financial statements                    |  | $                  | 580,997
|Minority interest in REIT Subsidiary(1)             |  |                    | 144,000
|                                                    |  |                    |        
|Adjusted capital                                    |  |                    | 724,997
|Adjustments for tangible and core capital:          |  |                    |        
|Intangible assets                                   |  |                    | (42,666
|Non-includable subsidiaries(2)                      |  |                    | (939   
|Non-qualifying purchased/ originated loan servicing |  |                    | (5,427 
|                                                    |  |                    |        
|Total tangible capital                              |  |                    | 675,965
|                                                    |  |                    |        
|Total core capital(3)                               |  |                    | 675,965
|                                                    |  |                    |        
|Tier 1 risk-based capital(3)                        |  |                    | 675,965
|                                                    |  |                    |        
|Adjustments for total risk-based capital:           |  |                    |        
|Subordinated capital debentures                     |  |                    | 250,000
|Allowance for general loan losses                   |  |                    | 58,397 
|                                                    |  |                    |        
|Total supplementary capital                         |  |                    | 308,397
|                                                    |  |                    |        
|Total available capital                             |  |                    | 984,362
|Equity investments(2)(4)                            |  |                    | (24,009
|                                                    |  |                    |        
|Total risk-based capital(3)                         |  | $                  | 960,353
|                                                    |  |                    |        



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---

|(1) | Eligible for inclusion in core capital in an amount up to 25% of the Banks core capital
pursuant to authorization from the OTS.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Reflects an aggregate offset of $202,000 representing the allowance for general loan losses
maintained against the Banks equity investments and non-includable subsidiaries which, pursuant to OTS guidelines, is available as a credit against the deductions from capital otherwise required for such investments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Under the OTS prompt corrective action regulations, the standards for
classification as well capitalized are a leverage (or core capital) ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes two properties treated as equity investments for regulatory capital purposes. One
property has a book value of $2.1 million and is classified as real estate held for sale. The other property has a book value of $22.0 million and is classified as property and equipment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(Dollars in thousands)                              |  | SEPTEMBER 30, 2002 |        
|--------------------------------------------------- |  | ------------------ | -------
|                                                    |  | ACTUAL             |        
|                                                    |  | Amount             |        
|Capital per financial statements                    |  | $                  | 531,169
|Minority interest in REIT Subsidiary(1)             |  |                    | 144,000
|                                                    |  |                    |        
|Adjusted capital                                    |  |                    | 675,169
|Adjustments for tangible and core capital:          |  |                    |        
|Intangible assets                                   |  |                    | (43,199
|Non-includable subsidiaries(2)                      |  |                    | (1,413 
|Non-qualifying purchased/ originated loan servicing |  |                    | (2,594 
|                                                    |  |                    |        
|Total tangible capital                              |  |                    | 627,963
|                                                    |  |                    |        
|Total core capital(3)                               |  |                    | 627,963
|                                                    |  |                    |        
|Tier 1 risk-based capital(3)                        |  |                    | 627,963
|                                                    |  |                    |        
|Adjustments for total risk-based capital:           |  |                    |        
|Subordinated capital debentures                     |  |                    | 250,000
|Allowance for general loan losses                   |  |                    | 66,079 
|                                                    |  |                    |        
|Total supplementary capital                         |  |                    | 316,079
|                                                    |  |                    |        
|Total available capital                             |  |                    | 944,042
|Equity investments(2)                               |  |                    | (2,065 
|                                                    |  |                    |        
|Total risk-based capital(3)                         |  | $                  | 941,977
|                                                    |  |                    |        

---

|(1) | Eligible for inclusion in core capital in an amount up to 25% of the Banks core capital
pursuant to authorization from the OTS.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Reflects an aggregate offset of $202,000 representing the allowance for general loan losses
maintained against the Banks equity investments and non-includable subsidiaries which, pursuant to OTS guidelines, is available as a credit against the deductions from capital otherwise required for such investments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Under the OTS prompt corrective action regulations, the standards for
classification as well capitalized are a leverage (or core capital) ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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OTS capital regulations provide a five-year holding period (or such longer period as may be approved
by the OTS) for REO to qualify for an exception from treatment as an equity investment. If an REO property is considered an equity investment, its then-current book value is deducted from total risk-based capital. Accordingly, if the Bank is unable
to dispose of any REO property (through bulk sales or otherwise) prior to the end of its applicable five-year holding period and is unable to obtain an extension of such five-year holding period from the OTS, the Bank could be required to deduct the
then-current book value of such REO property from total risk-based capital. In February 2003, the Bank received from the OTS an extension of the holding periods for certain of its REO properties through February 7, 2004. The following table sets
forth the Banks REO at September 30, 2003, by the fiscal year in which the property was acquired through foreclosure.



|Fiscal Year |  | (In thousands) |       
|----------- |  | -------------- | ------
|1990        |  | $              | 2,053 
|1991        |  |                | 14,419
|1995        |  |                | 4,017 
|2002        |  |                | 220   
|2003        |  |                | 1,111 
|            |  |                |       
|Total REO   |  | $              | 21,820
|            |  |                |       

---

|(1) | The Bank treats this property as an equity investment for regulatory capital purposes.
|--- | --------------------------------------------------------------------------------------

|(2) | The Bank received an extension of the holding periods for these properties through February 7, 2004.
|--- | ----------------------------------------------------------------------------------------------------



26. TRANSACTIONS WITH RELATED PARTIESTHE BANK



Loans Receivable:



From time to time, in the normal course of business, the Bank may make loans to executive officers and directors, their immediate family members or companies with which they are affiliated. These loans are on substantially the same terms as
similar loans with unrelated parties. An analysis of activity with respect to these loans for the year ended September 30, 2003 is as follows:



|                            |  | (In thousands) |       
|--------------------------- |  | -------------- | ------
|Balance, September 30, 2002 |  | $              | 19,195
|Additions                   |  |                | 985   
|Reductions                  |  |                | (6,312
|                            |  |                |       
|Balance, September 30, 2003 |  | $              | 13,868
|                            |  |                |       



Services:



B. F. Saul Company, which is a shareholder of the Trust, and its
subsidiaries provide certain services to the Bank. These services include property management, insurance brokerage and leasing. Fees for these services were $4.7 million, $775,000 and $1.7 million for the years ended September 30, 2003, 2002 and
2001, respectively.



For each of the years ended September 30,
2003, 2002 and 2001, a director of the Bank was paid $100,000 for consulting services rendered to the Bank and $5,000 for service on the Boards of Directors for two of the Banks subsidiaries. Another director of the Bank was paid $100,000 for
services as Chairman of the Banks Audit Committee. A third director of the Bank was paid total fees of $100,000 for consulting services rendered to two subsidiaries of the Bank and $5,000 for services as Chairman of the Boards of Directors of
those subsidiaries. A fourth director of the Bank was paid $50,000 for consulting services rendered to the Bank for each of the years ended September 30, 2002 and 2001.



119



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Tax Sharing Agreement:



The Bank and the other companies in the Trusts affiliated group are parties to a tax sharing agreement dated June 28,
1990 (the Tax Sharing Agreement). The Tax Sharing Agreement provides for payments to be made by members of the Trusts affiliated group to the Trust based on their separate company tax liabilities. The Tax Sharing Agreement also
provides that, to the extent net operating losses or tax credits of a particular member are used to reduce the overall tax liability of the Trusts affiliated group, such member will be reimbursed by the other members of the affiliated group
that have taxable income in an amount equal to such tax reduction. The Bank paid $11.5, $5.7 and $3.4 million to the Trust during fiscal 2003, 2002 and 2001, respectively, under the Tax Sharing Agreement. At September 30, 2003 and 2002, the
estimated net tax sharing payment payable to the Trust by the Bank was $400,000 and $2.2 million, respectively.



Other:



The Bank paid $9.3, $9.2 and $6.9 million for office space leased from or managed by companies affiliated with the Bank or its directors during the years
ended September 30, 2003, 2002 and 2001, respectively.



The
Trust, the B. F. Saul Company, Chevy Chase Lake Corporation and Van Ness Square Corporation, affiliates of the Bank, from time to time maintain interest-bearing deposit accounts with the Bank. Those accounts totaled $40.6 and $31.3 million at
September 30, 2003 and 2002, respectively. The Bank paid interest on the accounts amounting to $342,000, $504,000 and $989,000 during fiscal years ended 2003, 2002 and 2001, respectively.



27. FINANCIAL INSTRUMENTSTHE BANK



The Bank, in the normal course of business, is a party to financial instruments with off-balance-sheet risk and other derivative financial instruments to
meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit at both fixed and variable rates, letters of credit, interest-rate cap
agreements and assets sold with limited recourse. All such financial instruments are held or issued for purposes other than trading.



These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements
of Financial Condition.



The contractual or notional amounts of
these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. For interest-rate cap agreements, assets sold with limited recourse and forward purchase and sale commitments, the contract or notional
amounts do not represent exposure to credit loss in the event of nonperformance by the other party. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.



Commitments to Extend Credit:



The Bank had approximately $3.0 billion of commitments to extend credit at
September 30, 2003. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments are subject to the Banks
normal underwriting and credit evaluation policies and procedures.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Standby Letters of Credit:



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a
third party. At September 30, 2003, the Bank had issued standby letters of credit in the amount of $106.9 million to guarantee the performance of and irrevocably assure payment by customers under construction projects.



Of the total, $58.3 million will expire in fiscal 2004 and the remainder will
expire over time through fiscal 2012. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments to customers. The Bank holds mortgage-backed securities with a book value of
$44.5 million that have been pledged as collateral for certain of these letters of credit at September 30, 2003.



Recourse Arrangements:



The Bank is obligated under various recourse provisions (primarily related to credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash accounts and overcollateralization of receivables amounting to $19.0 and $4.7 million, respectively, at September 30, 2003, and $18.3 and $15.9 million, respectively, at
September 30, 2002, both of which are included in other assets in the Consolidated Balance Sheets.



The Bank is also obligated under various recourse provisions related to the swap of single-family residential loans for mortgage-backed securities issued
by the Bank. At September 30, 2003, recourse to the Bank under these arrangements was $4.7 million, consisting of restricted cash accounts of $2.7 million and overcollateralization of receivables of $1.9 million. At September 30, 2002, recourse to
the Bank under these arrangements was $5.9 million, consisting of restricted cash accounts of $3.5 million and overcollateralization of receivables of $2.4 million.



The Bank is also obligated under a recourse provision related to the servicing of certain of its residential mortgage loans.
The recourse to the Bank under this arrangement was $3.4 million at both September 30, 2003 and 2002.



Derivative Financial Instruments:



In accordance with SFAS 133, the Bank assigns derivatives to one of these categories at the purchase date: fair value hedge, cash flow hedge or non-designated hedge. SFAS 133 requires that Banks assess the expected
and ongoing effectiveness of any derivative assigned to a fair value hedge or cash flow hedge relationship.



Fair Value HedgesFor derivatives designated as fair value hedges, the derivative instrument and related hedged item are marked to market
through earnings. Derivatives are included in other assets in the Consolidated Balance Sheets.



The Bank owns mortgage servicing rights which are subject to fluctuations in their fair value. The Bank hedges the change in fair value in mortgage servicing rights related to changes in the benchmark Treasury rate
through treasury futures and options. The Bank evaluates the mortgage servicing portfolio daily at the pool level and monthly at the loan level to insure a high degree of correlation between the hedging instruments and the servicing assets being
hedged. At September 30, 2003 and 2002, mortgage servicing rights with a fair value of $2.1 and $7.0 million respectively, were being hedged. Management expects that the cumulative change in the value of the hedging instrument will be between 80%
and 120% of the inverse cumulative change in the fair value of the hedged mortgage servicing rights. The effectiveness of hedging relationships is assessed on a cumulative basis every three months and whenever financial statements or earnings are
reported by the Bank.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At September 30, 2003, the Bank owned treasury futures contracts representing a notional amount of
$9.2 million and fair value of $550,000, call options on the treasury futures contracts representing a notional amount of $7.5 million and fair value of $240,000 and put options on treasury futures contracts representing a notional amount of $9.5
million and fair value of $170,000 related to its mortgage servicing rights fair value hedges. The cumulative gain on these derivative instruments and related hedged item in fiscal year 2003 was $3.2 million and is reflected as a reduction of
servicing assets amortization and other loan expenses in the Consolidated Statements of Operations.



At September 30, 2002, the Bank owned treasury futures contracts representing a notional amount of $19.0 million, and fair value of $813,000, call options
on the treasury futures contracts representing a notional amount of $35.0 million and fair value of $1.1 million and put options on treasury futures contracts representing a notional amount of $41.5 million and fair value of $118,000 related to its
mortgage servicing rights fair value hedges. The cumulative gain on these derivative instruments and related hedged item in fiscal year 2002 was $8.6 million and is reflected as a reduction of servicing assets amortization and other loan expenses in
the Consolidated Statements of Operations.



At September 30,
2003, the Bank had certain forward delivery contracts, which were designated as fair value hedges of loans held for sale. The net unrealized loss in value of these contracts was $887,000 at September 30, 2003. The net unrealized gain in the value of
the related hedged item was $830,000. The net unrealized gains and losses are included in other income in the Consolidated Statement of Operations and Comprehensive Income.



At September 30, 2002, the Bank had certain forward delivery contracts, which were designated as fair value hedges of loans
held for sale. The net unrealized loss in value of these contracts was $5.0 million at September 30, 2002. The net unrealized gain in the value of the related hedged item was $5.6 million. The net unrealized gains and losses are included in other
income in the Consolidated Statement of Operations.



Cash Flow HedgesFor derivatives designated as cash flow hedges, mark to market adjustments are recorded as components of equity. At September 30, 2003 and 2002 the Bank did not have any derivatives designated as cash flow
hedges.



Non-Designated HedgesCertain economic
hedges are not designated as cash flow hedges or as fair value hedges for accounting purposes. As a result, changes in their fair value are recorded in other income in the Consolidated Statements of Operations. Derivatives are included in other
assets in the Consolidated Balance Sheets.



At September 30,
2003, the Bank had $520.2 million in forward delivery contracts. The net unrealized loss in the value of these contracts was $12.7 million at September 30, 2003. At September 30, 2003, the Bank had IRLs with a notional amount of $525.4 million. The
net unrealized loss in the value of the IRLs was $1.4 million.



At September 30, 2002, the Bank had $261.9 million in forward delivery contracts. The net unrealized loss in the value of these contracts was $2.1 million at September 30, 2002. At September 30, 2002, the Bank had IRLs with a notional
amount of $468.2 million. The net unrealized gain in the value of the IRLs was $1.9 million.



Concentrations of Credit:



The Banks principal real estate lending market is the metropolitan Washington, DC area. In addition, a significant portion of the Banks consumer loan portfolio was generated by customers residing in the
metropolitan Washington, DC area. Service industries and federal, state and local governments employ a significant portion of the Washington, DC area labor force. Adverse changes in economic conditions could have a direct impact on the timing and
amount of payments by borrowers.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



28. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTSTHE BANK



The majority of the Banks assets and liabilities are financial
instruments; however, certain of these financial instruments lack an available trading market. Significant estimates, assumptions and present value calculations were therefore used for the purposes of the following disclosure, resulting in a great
degree of subjectivity inherent in the indicated fair value amounts. Because fair value is estimated as of the balance sheet date, the amount which would actually be realized or paid upon settlement or maturity could be significantly different.
Comparability of fair value amounts among financial institutions may be difficult due to the wide range of permitted valuation techniques and the numerous estimates and assumptions which must be made.



The estimated fair values of the Banks financial instruments at
September 30, 2003 and 2002 are as follows:



|(In thousands)                                                                                                  |  | September 30, 
|--------------------------------------------------------------------------------------------------------------- |  | --------------
|                                                                                                                |  | 2003          
|                                                                                                                |  | CarryingAmount
|Financial assets:                                                                                               |  |               
|Cash, due from banks,                                                                                           |  |               
|Interest-bearing deposits, federal funds sold and securities purchased under agreements to resell               |  | $             
|                                                                                                                |  |               
|Loans held for securitization and sale                                                                          |  |               
|                                                                                                                |  |               
|Trading securities                                                                                              |  |               
|U.S. Government securities                                                                                      |  |               
|Mortgage-backed securities                                                                                      |  |               
|Loans receivable, net                                                                                           |  |               
|Other financial assets                                                                                          |  |               
|                                                                                                                |  |               
|Financial liabilities:                                                                                          |  |               
|Deposit accounts with no stated maturities                                                                      |  |               
|Deposit accounts with stated maturities                                                                         |  |               
|Securities sold under repurchase agreements and other short-term borrowings and Federal Home Loan Bank advances |  |               
|Capital notes-subordinated                                                                                      |  |               
|Other financial liabilities                                                                                     |  |               

---

|(1) | Net of deferred debt issuance costs which are included in other assets in the Consolidated
Statements of Financial Condition.
|--- | -----------------------------------------------------------------------------------------------------------------------------



The following
methods and assumptions were used to estimate the fair value amounts at September 30, 2003 and 2002:



Cash, due from banks, interest-bearing deposits, federal funds sold and securities purchased under agreements to resell:
Carrying amount approximates fair value.



Loans held for
sale: Fair value is determined using quoted prices for loans, or securities backed by loans with similar characteristics, or outstanding commitment prices from investors.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Loans held for securitization and sale: The fair value of loans held for securitization
and sale is determined using discounted cash flow analysis.



Trading securities:Carrying value equals fair value, which is based on quoted market prices.



U.S. Government securities: Fair value is based on quoted market prices.



Mortgage-backed securities: Fair value is based on quoted market prices, dealer quotes or estimates using
dealer quoted market prices for similar securities.



Loans receivable, net: Fair value of certain homogeneous groups of loans (e.g., single-family residential, automobile loans, home improvement loans and fixed-rate commercial and multifamily loans) is estimated using discounted
cash flow analyses based on contractual repayment schedules and managements estimate of future prepayment rates. The discount rates used in these analyses are based on either the interest rates paid on U.S. Treasury securities of comparable
maturities adjusted for credit risk and non-interest operating costs, or the interest rates currently offered by the Bank for loans with similar terms to borrowers of similar credit quality. For loans, which reprice frequently at market rates (e.g.,
home equity, variable-rate commercial and multifamily, real estate construction and ground loans), the carrying amount approximates fair value. The fair value of the Banks loan portfolio as presented above does not include the value of
established credit line customer relationships, or the value relating to estimated cash flows from future receivables and the associated fees generated from existing customers.



Other financial assets: The carrying amount of Federal Home Loan Bank stock, accrued interest receivable,
interest-bearing deposits maintained pursuant to various asset securitizations and other short-term receivables approximates fair value. Interest-only strips receivable and derivative financial instruments are carried at fair value.



Deposit accounts with no stated maturities: Deposit liabilities
payable on demand, consisting of NOW accounts, money market deposits, statement savings and other deposit accounts, are assumed to have an estimated fair value equal to carrying value. The indicated fair value does not consider the value of the
Banks established deposit customer relationships.



Deposit accounts with stated maturities: Fair value of fixed-rate certificates of deposit is estimated based on discounted cash flow analyses using the remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.



Securities sold under repurchase agreements and other short-term borrowings and Federal Home Loan Bank advances: For these borrowings, which either reprice frequently to market interest rates or are short-term in duration, the
carrying amount approximates fair value. Fair value of the remaining amounts borrowed is estimated based on discounted cash flow analyses using interest rates currently charged by the lender for comparable borrowings with similar remaining
maturities.



Capital notes-subordinated: Fair
value of the 1993 Debentures and the 1996 Debentures is based on quoted market prices.



Other financial liabilities: The carrying amount of custodial accounts, amounts due to banks, accrued interest payable, notes payable and other short-term payables approximates fair value.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



29. BUSINESS SEGMENTSTHE BANK



The Bank has three operating segments: retail banking, commercial banking, and nonbanking services. Retail banking consists
of traditional banking services, which include lending, leasing and deposit products offered to retail and small business customers. Commercial banking also consists of traditional banking services, as well as products and services tailored for
larger corporate customers. Nonbanking services include asset management and similar services offered by subsidiaries of the Bank.



Selected segment information is as follows:



|(In thousands)                |  | Retail Banking |            |   | Other(1) |   |           | Total | 
|----------------------------- |  | -------------- | ---------- | - | -------- | - | --------- | ----- | 
|Year ended September 30, 2003 |  |                |            |   |          |   |           |       | 
|Operating income              |  | $              | 718,912    |   |          | $ | 48,152    |       | 
|Operating expense             |  |                | 582,672    |   |          |   | 41,140    |       | 
|                              |  |                |            |   |          |   |           |       | 
|Core earnings                 |  |                | 136,240    |   |          |   | 7,012     |       | 
|Non-core items                |  |                | 8,435      |   |          |   | (5,497    | )     | 
|                              |  |                |            |   |          |   |           |       | 
|Operating income              |  | $              | 144,675    |   |          | $ | 1,515     |       | 
|                              |  |                |            |   |          |   |           |       | 
|Average assets                |  | $              | 10,641,122 |   |          | $ | 1,164,873 |       | 
|                              |  |                |            |   |          |   |           |       | 
|Year ended September 30, 2002 |  |                |            |   |          |   |           |       | 
|Operating income              |  | $              | 652,451    |   |          | $ | 46,314    |       | 
|Operating expense             |  |                | 528,572    |   |          |   | 41,911    |       | 
|                              |  |                |            |   |          |   |           |       | 
|Core earnings                 |  |                | 123,879    |   |          |   | 4,403     |       | 
|Non-core items                |  |                | (14,140    | ) |          |   | (10,560   | )     | 
|                              |  |                |            |   |          |   |           |       | 
|Operating income (loss)       |  | $              | 109,739    |   |          | $ | (6,157    | )     | 
|                              |  |                |            |   |          |   |           |       | 
|Average assets                |  | $              | 9,962,298  |   |          | $ | 1,132,518 |       | 
|                              |  |                |            |   |          |   |           |       | 
|Year ended September 30, 2001 |  |                |            |   |          |   |           |       | 
|Operating income              |  | $              | 553,479    |   |          | $ | 39,400    |       | 
|Operating expense             |  |                | 465,831    |   |          |   | 37,796    |       | 
|                              |  |                |            |   |          |   |           |       | 
|Core earnings                 |  |                | 87,648     |   |          |   | 1,604     |       | 
|Non-core items                |  |                | 6,190      |   |          |   | 205       |       | 
|                              |  |                |            |   |          |   |           |       | 
|Operating income              |  | $              | 93,838     |   |          | $ | 1,809     |       | 
|                              |  |                |            |   |          |   |           |       | 
|Average assets                |  | $              | 10,069,912 |   |          | $ | 1,088,630 |       | 
|                              |  |                |            |   |          |   |           |       | 

---

|(1) | Includes commercial banking and non-banking services.
|--- | -----------------------------------------------------



The financial information for each segment is reported on the basis used internally by the Banks management to evaluate performance. Core earnings
excludes certain items such as gains and losses related to certain securitization transactions, adjustments to loan loss reserves in excess of net chargeoffs, amortization of goodwill, and certain other nonrecurring items. Items excluded from core
earnings are shown as non-core items. Measurement of the performance of these segments is based on the management structure of the Bank and is not necessarily comparable with financial information from other entities. The information presented is
not necessarily indicative of the segments results of operations if each of the segments were independent entities.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



30. LITIGATIONTHE BANK



During the normal course of business, the Bank is involved in certain litigation, including litigation arising out of its
lending activities, the enforcement or defense of the priority of its security interests, the continued development and marketing of certain of its real estate properties and certain employment claims. Although the amounts claimed in some of these
suits in which the Bank is a defendant may be material, the Bank denies liability and, in the opinion of management, litigation which is currently pending will not have a material impact on the financial condition or future operations of the Bank.



31. SUBSEQUENT EVENTSTHE BANK



On December 2, 2003, the Bank issued $175.0 million aggregate principal
amount of 67/8% subordinated debentures due 2013 (the 2003 Debentures). The net proceeds of the
offering, along with short-term borrowings, will be used to redeem all of the 1993 Debentures and the 1996 Debentures. The Bank may redeem some or all of the 2003 Debentures at any time on and after December 1, 2008 at the following redemption
prices plus accrued and unpaid interest:



|If redeemed during the 12-monthperiod beginning December 1, |  | Redemption Price |  
|----------------------------------------------------------- |  | ---------------- | -
|2008                                                        |  | 103.4375         | %
|2009                                                        |  | 102.2917         | %
|2010                                                        |  | 101.1458         | %
|2011 and thereafter                                         |  | 100.0000         | %



The Bank received OTS
approval to include the principal amount of the 2003 Debentures in the Banks supplementary capital for regulatory capital purposes.



32. MINORITY INTERESTTHE TRUST



At September 30, 2003 and 2002, minority interest held by affiliates of $98.1 and $88.1 million represent the 20% minority interest in the banks
common shares.



Minority interestother consists of the
following:



|                                                 |  | September 30,
|------------------------------------------------ |  | -------------
|(In thousands)                                   |  | 2003         
|Preferred Stock of Chevy Chases REIT subsidiary |  | $            
|Chevy Chases Preferred Stock (See Note 23)      |  |              
|Chevy Chases ground lease (See below)           |  |              
|                                                 |  |              
|Total minority interestother                    |  | $            
|                                                 |  |              



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In April 1998, the Bank entered into a ground lease agreement with the LLC which owns the land on
which the Banks executive office building was constructed. Lease payments made to the LLC are presented as minority interest in the Consolidated Statements of Operations beginning July 1, 2003. The following is a schedule by years of the
future lease payments under the agreement as of September 30, 2003:



|Year Ending September
30, |  | (In thousands)
|------------------------- |  | --------------
|2004                      |  | $             
|2005                      |  |               
|2006                      |  |               
|2007                      |  |               
|2008                      |  |               
|Thereafter                |  |               
|                          |  |               
|Total                     |  | $             
|                          |  |               



The lease, which
expires in year 2062, is subject to fixed rent adjustments. At the end of the lease term, the Bank has the option to purchase the land for $84.1 million from the LLC. The lease also allows the owners of the LLC to put their equity interests in the
LLC to the Bank, subject to certain limitations.



Effective
July 1, 2003, the Bank adopted FIN 46. FIN 46 requires companies to identify variable interest entities and consolidate them if it is determined that the company is the primary beneficiary of the variable interest entity. Pursuant to FIN 46, the
Bank consolidated the assets and liabilities of the LLC. As a result, property and equipment and minority interest on the Consolidated Balance Sheets each include $31.4 million at September 30, 2003 related to the Banks involvement with the
LLC. See Note C.



Minority interest also includes the net
cash proceeds received by a subsidiary of the Bank (the REIT Subsidiary) from the sale of $150.0 million of its Noncumulative Exchangeable Preferred Stock, Series A, par value $5,000 per share (the REIT Preferred Stock). Cash
dividends on the REIT Preferred Stock are payable quarterly in arrears at an annual rate of 103/8%. The
liquidation value of each share of REIT Preferred Stock is $50,000 plus accrued and unpaid dividends. Except under certain limited circumstances, the holders of the REIT Preferred Stock have no voting rights. The REIT Preferred Stock is
automatically exchangeable for a new series of Preferred Stock of the Bank upon the occurrence of certain events.



The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at any time on or after January 15, 2007, in whole or in part, at the
following per share redemption prices plus accrued and unpaid dividends:



|                                                            |  | (In thousands)  
|----------------------------------------------------------- |  | ----------------
|If redeemed during the 12-monthperiod beginning January 15, |  | Redemption Price
|2007                                                        |  | $               
|2008                                                        |  | $               
|2009                                                        |  | $               
|2010                                                        |  | $               
|2011                                                        |  | $               
|2012 and thereafter                                         |  | $               



The Bank received OTS
approval to include the net proceeds from the sale of the REIT Preferred Stock in the core capital of the Bank for regulatory capital purposes in an amount up to 25% of the Banks core capital. Dividends on the REIT Preferred Stock are
presented as minority interest in the Consolidated Statements of Operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



33. INCOME TAXESTHE TRUST



The Trust voluntarily terminated its qualification as a real estate investment trust under the Internal Revenue Code during
fiscal 1978.



The provisions for income taxes for the years
ended September 30, 2003, 2002 and 2001, consist of the following:



|                                                                                     |  | Year Ended September 30, |       
|------------------------------------------------------------------------------------ |  | ------------------------ | ------
|(In thousands)                                                                       |  | 2003                     |       
|Current provision (benefit):                                                         |  |                          |       
|Federal                                                                              |  | $                        | 1,257 
|State                                                                                |  |                          | 2,809 
|                                                                                     |  |                          |       
|                                                                                     |  |                          | 4,066 
|                                                                                     |  |                          |       
|Deferred provision (benefit):                                                        |  |                          |       
|Federal                                                                              |  |                          | 35,936
|State                                                                                |  |                          | 6,219 
|                                                                                     |  |                          |       
|                                                                                     |  |                          | 42,155
|                                                                                     |  |                          |       
|Total                                                                                |  | $                        | 46,221
|                                                                                     |  |                          |       
|Tax effect of other items:                                                           |  |                          |       
|Tax effect of other equity transactions                                              |  | $                        | 1,894 
|Tax effect of net unrealized holding gains (losses) reported in stockholders equity |  |                          |      
|                                                                                     |  |                          |       
|Total                                                                                |  | $                        | 1,894 
|                                                                                     |  |                          |       



The Trusts
effective income tax rate varies from the statutory Federal income tax rate as a result of the following factors:



|                                                                                     |  | Year Ended September 30, |       
|------------------------------------------------------------------------------------ |  | ------------------------ | ------
|(In thousands)                                                                       |  | 2003                     |       
|Computed tax at statutory Federal income tax rate                                    |  | $                        | 45,657
|Increase (reduction) in taxes resulting from:                                        |  |                          |       
|Minority interest                                                                    |  |                          | (5,447
|Goodwill and other purchase accounting adjustments                                   |  |                          |      
|Change in valuation allowance for deferred tax asset allocated to income tax expense |  |                          | 169   
|State income taxes                                                                   |  |                          | 5,863 
|Tax credits                                                                          |  |                          | (977  
|Other                                                                                |  |                          | 956   
|                                                                                     |  |                          |       
|                                                                                     |  | $                        | 46,221
|                                                                                     |  |                          |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The components of the net deferred tax asset (liability) were as follows:



|                                               |  | September 30, |         
|---------------------------------------------- |  | ------------- | --------
|(In thousands)                                 |  | 2003          |         
|Deferred tax assets:                           |  |               |         
|Unrealized gains on loans and investments, net |  | $             | 21,606  
|State net operating loss carry forwards        |  |               | 38,974  
|Provision for loan losses                      |  |               | 24,519  
|Deferred compensation                          |  |               | 13,942  
|Other                                          |  |               | 9,618   
|                                               |  |               |         
|Gross deferred tax assets                      |  |               | 108,659 
|                                               |  |               |         
|Deferred tax liabilities:                      |  |               |         
|Lease financing                                |  |               | (161,806
|Saul Holdings and Saul Centers                 |  |               | (46,145 
|Property                                       |  |               | (14,372 
|Other                                          |  |               | (39,990 
|                                               |  |               |         
|Gross deferred tax liabilities                 |  |               | (262,313
|                                               |  |               |         
|Valuation allowance                            |  |               | (9,240  
|                                               |  |               |         
|Net deferred tax liability                     |  | $             | (162,894
|                                               |  |               |         



The Trust establishes
a valuation allowance against the gross deferred tax asset to the extent the Trust cannot determine that it is more likely than not that such assets will be realized through taxes available in carryback years, future reversals of existing taxable
temporary differences or projected future taxable income. Such a valuation allowance has been established to reduce the gross deferred asset for state net operating loss carryforwards to an amount that is considered more likely than not to be
realized. At the Bank, valuation allowances of $707,000 have been provided against net operating loss carryforwards of certain subsidiaries that do not generate sufficient stand-alone state taxable income. At the Trust, state net operating loss
carryforwards in excess of state deferred tax liabilities are fully reserved due to expected future state tax losses.



Management believes the existing net deductible temporary differences will reverse during periods in which the Bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive consolidated earnings will continue as a result of the Banks earnings.



TAX SHARING AGREEMENT



The Trusts affiliated group, including the Bank, entered into a tax sharing agreement dated June 28, 1990, as amended. This agreement provides that
payments be made by members of the affiliated group to the Trust based on their respective allocable shares of the overall federal income tax liability of the affiliated group for taxable years and partial taxable years beginning on or after that
date.



Allocable shares of the overall tax liability are
prorated among the members with taxable income calculated on a separate return basis. The agreement also provides that, to the extent net operating losses or tax credits of a particular member are used to reduce overall tax liability of the
Trusts affiliated group, such member will be reimbursed on a dollar-for-dollar basis by the other members of the affiliated group that have taxable income in an amount equal to such tax reduction. Under the tax sharing agreement, the Bank paid
$11.5, $5.7 and $3.4 million, to the Trust during fiscal 2003, 2002 and 2001.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In recent years, the operations of the Real Estate Trust have generated net operating losses while
the Bank has reported net income. It is anticipated that the Trusts consolidation of the Banks operations into the Trusts federal income tax return will result in the use of the Real Estate Trusts net operating losses to
reduce the federal income taxes the Bank would otherwise owe. If in any future year, the Bank has taxable losses or unused credits, the Trust would be obligated to reimburse the Bank for the greater of (i) the tax benefit to the group using such tax
losses or unused tax credits in the groups consolidated Federal income tax returns or (ii) the amount of tax refund which the Bank would otherwise have been able to claim if it were not being included in the consolidated Federal income tax
return of the group.



34. SHAREHOLDERS EQUITYTHE TRUST



In June 1990, the Trust acquired from affiliated
companies an additional equity interest in the Bank, which raised the Trusts ownership share of the Bank to 80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a new class of $10.50 cumulative preferred shares of
beneficial interest with a par value of $1 (the preferred shares). The transaction has been accounted for at historical cost in a manner similar to the pooling of interests method because the entities are considered to be under common
control. In addition, the Trust acquired two real estate properties from an affiliate in exchange for 66,000 preferred shares.



The Trust paid preferred dividends of $12.0 million per year in fiscal 2003, 2002 and 2001. At September 30, 2003, 2002, and 2001, the amount of dividends
in arrears on the preferred shares was $6.1 million ($11.90 per share), $12.7 million ($24.65 per share) and $19.3 million ($37.41 per share).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



35. INDUSTRY SEGMENT INFORMATIONTHE TRUST



Industry segment information with regard to the Real Estate Trust is presented below. For information regarding the Bank,
please refer to the Banking sections of the accompanying financial statements.



|                                                          |  | Year Ended September 30 |        
|--------------------------------------------------------- |  | ----------------------- | -------
|(In thousands)                                            |  | 2003                    |        
|INCOME                                                    |  |                         |        
|Hotels                                                    |  | $                       | 87,611 
|Office and industrial properties                          |  |                         | 39,121 
|Other                                                     |  |                         | 1,300  
|                                                          |  |                         |        
|                                                          |  | $                       | 128,032
|                                                          |  |                         |        
|OPERATING PROFIT (LOSS) (1)                               |  |                         |        
|Hotels                                                    |  | $                       | 15,107 
|Office and industrial properties                          |  |                         | 20,688 
|Other                                                     |  |                         | 94     
|                                                          |  |                         |        
|                                                          |  |                         | 35,889 
|Equity earnings of unconsolidated entities                |  |                         | 7,248  
|Impairment loss on investments                            |  |                         | (998   
|Gain on sales of property                                 |  |                         | 9,079  
|Interest and debt expense                                 |  |                         | (50,862
|Advisory fee, management and leasing feesrelated parties |  |                         | (12,426
|General and administrative                                |  |                         | (2,823 
|                                                          |  |                         |        
|Operating loss                                            |  | $                       | (14,893
|                                                          |  |                         |        
|IDENTIFIABLE ASSETS (AT YEAR END)                         |  |                         |        
|Hotels                                                    |  | $                       | 173,662
|Office and industrial properties                          |  |                         | 126,102
|Other                                                     |  |                         | 129,521
|                                                          |  |                         |        
|                                                          |  | $                       | 429,285
|                                                          |  |                         |        
|DEPRECIATION                                              |  |                         |        
|Hotels                                                    |  | $                       | 12,358 
|Office and industrial properties                          |  |                         | 6,949  
|Other                                                     |  |                         | 23     
|                                                          |  |                         |        
|                                                          |  | $                       | 19,330 
|                                                          |  |                         |        
|CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS            |  |                         |        
|Hotels                                                    |  | $                       | 5,485  
|Office and industrial properties                          |  |                         | 3,956  
|Other                                                     |  |                         | 414    
|                                                          |  |                         |        
|                                                          |  | $                       | 9,855  
|                                                          |  |                         |        

---

|(1) | Operating profit (loss) includes income less direct operating expenses and depreciation.
|--- | ----------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



36. CONDENSED FINANCIAL STATEMENTSTHE TRUST



These condensed financial statements reflect the Real Estate Trust and all
its consolidated subsidiaries except for the Bank which has been reflected on the equity method.



CONDENSED BALANCE SHEETS



|                                                                  |  | September 30 |         
|----------------------------------------------------------------- |  | ------------ | --------
|(In thousands)                                                    |  | 2003         |         
|ASSETS                                                            |  |              |         
|Income-producing properties                                       |  | $            | 441,248 
|Accumulated depreciation                                          |  |              | (166,243
|                                                                  |  |              |         
|                                                                  |  |              | 275,005 
|Land parcels                                                      |  |              | 42,425  
|Equity investment in bank                                         |  |              | 392,418 
|Cash and cash equivalents                                         |  |              | 18,979  
|Note receivable and accrued interestrelated party                |  |              | 2,987   
|Other assets                                                      |  |              | 89,726  
|                                                                  |  |              |         
|TOTAL ASSETS                                                      |  | $            | 821,540 
|                                                                  |  |              |         
|LIABILITIES                                                       |  |              |         
|Mortgage notes payable                                            |  | $            | 322,437 
|Notes payablesecured                                             |  |              | 203,800 
|Notes payableunsecured                                           |  |              | 55,349  
|Accrued dividends payablepreferred shares of beneficial interest |  |              | 6,139   
|Other liabilities and accrued expenses                            |  |              | 65,131  
|                                                                  |  |              |         
|Total liabilities                                                 |  |              | 652,856 
|                                                                  |  |              |         
|TOTAL SHAREHOLDERS EQUITY                                        |  |              | 168,684 
|                                                                  |  |              |         
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                        |  | $            | 821,540 
|                                                                  |  |              |         

---

|* | See Consolidated Statements of Shareholders Equity
|- | ---------------------------------------------------



CONDENSED STATEMENTS OF OPERATIONS



|                                                   |  | For the Year Ended September 30 |         
|-------------------------------------------------- |  | ------------------------------- | --------
|(In thousands)                                     |  | 2003                            |         
|Total income                                       |  | $                               | 128,032 
|Total expenses                                     |  |                                 | (158,254
|Equity in earnings of unconsolidated entities, net |  |                                 | 7,248   
|Gain on sales of property                          |  |                                 | 9,079   
|Impairment loss on investments                     |  |                                 | (998    
|                                                   |  |                                 |         
|Real estate operating income (loss)                |  |                                 | (14,893 
|Equity in earnings of bank                         |  |                                 | 55,702  
|                                                   |  |                                 |         
|Total company operating income                     |  |                                 | 40,809  
|Income tax provision (benefit)                     |  |                                 | (5,078  
|                                                   |  |                                 |         
|TOTAL COMPANY NET INCOME                           |  | $                               | 45,887  
|                                                   |  |                                 |         



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



CONDENSED STATEMENTS OF CASH FLOWS



|                                                                                  |  | For the Year Ended September 30 |        
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------
|(In thousands)                                                                    |  | 2003                            |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                                 |        
|Net income                                                                        |  | $                               | 45,887 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |        
|Depreciation                                                                      |  |                                 | 19,330 
|Amortization of debt expense                                                      |  |                                 | 2,028  
|Equity in earnings of bank                                                        |  |                                 | (55,702
|Equity in earnings of unconsolidated entities, net                                |  |                                 | (7,248 
|Impairment loss on investments                                                    |  |                                 | 998    
|Gain on sale of property                                                          |  |                                 | (9,079 
|Deferred taxes                                                                    |  |                                 | (657   
|Increase in accounts receivable and accrued income                                |  |                                 | (3,346 
|Increase (decrease) in accounts payable and accrued expenses                      |  |                                 | (3,465 
|Dividends and tax sharing payments                                                |  |                                 | 27,460 
|Other                                                                             |  |                                 | (2,435 
|                                                                                  |  |                                 |        
|Net cash provided by operating activities                                         |  |                                 | 13,771 
|                                                                                  |  |                                 |        
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                                 |        
|Capital expendituresproperties                                                   |  |                                 | (9,855 
|Property acquisitions                                                             |  |                                 |       
|Property sales                                                                    |  |                                 | 11,306 
|Note receivable and accrued interestrelated party Repayments                     |  |                                 | 3,500  
|Equity investment in unconsolidated entities                                      |  |                                 | 4,213  
|Other investments                                                                 |  |                                 | (1,864 
|Other                                                                             |  |                                 |       
|                                                                                  |  |                                 |        
|Net cash provided by (used in) investing activities                               |  |                                 | 7,300  
|                                                                                  |  |                                 |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                                 |        
|Proceeds from mortgage financing                                                  |  |                                 | 46,000 
|Principal curtailments and repayments of mortgages                                |  |                                 | (48,600
|Proceeds from secured note financings                                             |  |                                 | 25,050 
|Repayments of secured note financings                                             |  |                                 | (23,000
|Proceeds from sales of unsecured notes                                            |  |                                 | 5,539  
|Repayments of unsecured notes                                                     |  |                                 | (5,346 
|Costs of obtaining financings                                                     |  |                                 | (1,705 
|Purchase of treasury stock                                                        |  |                                 | (1,993 
|Dividends paidpreferred shares of beneficial interest                            |  |                                 | (12,000
|                                                                                  |  |                                 |        
|Net cash provided by (used in) financing activities                               |  |                                 | (16,055
|                                                                                  |  |                                 |        
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | 5,016  
|Cash and cash equivalents at beginning of year                                    |  |                                 | 13,963 
|                                                                                  |  |                                 |        
|Cash and cash equivalents at end of year                                          |  | $                               | 18,979 
|                                                                                  |  |                                 |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Managements Statement on Responsibility



The Consolidated Financial Statements and related financial information in this report have been prepared by the Advisor in accordance with generally accepted accounting principles appropriate in the circumstances,
based on best estimates and judgments, with consideration given to materiality.



The Trust maintains a system of internal accounting control supported by documentation to provide reasonable assurance that the books and records reflect authorized transactions of the Trust, and that the assets of
the Trust are safeguarded.



The Board of Trustees exercises its
responsibility for the Trusts financial statements through its Audit Committee, which is composed of two outside Trustees who meet periodically with the Trusts independent accountants and management. The committee considers the audit
scope, discusses financial and reporting subjects, and reviews management actions on these matters. The independent accountants have full access to the Audit Committee.



The independent accountants are recommended by the Audit Committee and confirmed by the Board of Trustees. They consider the
system of internal accounting controls, and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the financial statements related to accounting principles generally accepted in the United States.
Management believes that the policies and procedures it has established provide reasonable assurance that its operations are conducted in conformity with law and a high standard of business conduct.



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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



The Trust maintains disclosure controls and procedures that are designated to ensure that information required to be disclosed in the Trusts reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Trusts management, including its Chairman and its Vice President and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosures based closely on the definition of disclosure controls and procedures in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



The Trust carried out an evaluation, under the supervision and with the participation of the Trusts management, including its Chairman and its Vice
President and Chief Financial Officer of the effectiveness of the design and operation of the Trusts disclosure controls and procedures as of September 30, 2003. Based on the foregoing, the Companys Chairman and its Vice President and
Chief Financial Officer concluded that the Trusts disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2003.



During the three months ended September 30, 2003 there were no significant changes in the Trusts internal control over
financial reporting that materially affected, or are reasonably likely to materially affect, the Trusts internal control over financial reporting.



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PART III



ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST



The Declaration of Trust provides that there shall be no fewer than three nor more than twelve trustees, as determined from time to time by the trustees in office. The Board of Trustees has fixed its permanent
membership at six trustees divided into three classes with overlapping three-year terms. The term of each class expires at the Annual Meeting of Shareholders, which is usually held on the last Friday of January.



The following list sets forth the name, age, position with the Trust, present
principal occupation or employment and material occupations, positions, offices or employments during the past five years of each trustee and executive officer of the Trust. Unless otherwise indicated, each individual has held an office with the
Trust for at least the past five years.



Class One TrusteesTerms End
at the 2006 Annual Meeting



Philip D. Caraci, age
65, was elected a Trustee in 2003 after his retirement. For the previous five years he served as Senior Vice President and Secretary of the Trust, Executive Vice President of Saul Company, Senior Vice President of the Advisor, Chairman of the Board
of Saul Property Co., and a Director and President of Saul Centers.



Gilbert M. Grosvenor, age 72, has served as a Trustee since 1971. Mr. Grosvenor also serves as Chairman of the Board of Trustees of the National Geographic Society and as a Director of Chevy Chase, Saul Centers, Marriott
International Corp., and Ethyl Corporation.



B. Francis Saul
II, age 71, has served as a Chairman and Chief Executive Officer of the Trust since 1969 and as a Trustee since 1964. Mr. Saul also serves as President and Chairman of the Board of Directors of Saul Company, the Advisor, Chevy Chase Property
Company, Westminster Investing Corporation, and Chevy Chase Lake Corporation, as Chairman of the Board and Chief Executive Officer of Chevy Chase and Saul Centers, and as a Trustee of the National Geographic Society, the Brookings Institute, the
Johns Hopkins Medicine Board and Washington College.



Mr. Saul is the father of
B. Francis Saul III.



Class Two TrusteesTerms End at the 2004 Annual
Meeting



George M. Rogers, Jr., age 70, has served
as a Trustee since 1969. Mr. Rogers is a Senior Counsel in the law firm of Shaw Pittman LLP, Washington, DC, which serves as counsel to the Trust and Chevy Chase. Mr. Rogers serves as a Director of Chevy Chase, Saul Company, Chevy Chase Property
Company, Westminster Investing Corporation, and Chevy Chase Lake Corporation.



B. Francis Saul III, age 41, has served as a Trustee and Vice President of the Trust since 1997. Mr. Saul also serves as a Director and Vice Chairman of Chevy Chase and as a Director and/or Officer of Saul
Company, the Advisor, Saul Property Co., Chevy Chase Property Company, Westminster Investing Corporation, and Saul Centers. He is also a Chairman of the Board of Childrens Hospital, and the Boys and Girls Club of Greater Washington. Mr. Saul
is the son of B. Francis Saul II.



Class Three TrusteesTerms End at
the 2005 Annual Meeting



Garland J. Bloom, Jr., age
72, has served as a Trustee since 1964. He is currently a real estate consultant. Mr. Bloom was formerly Executive Vice President and Principal of GMB Associates, Inc. (a real estate finance and management firm) from 1988 to 1990 and Vice Chairman
and Chief Operating Officer of Smithy-Braedon Company (a real estate finance and management firm) from 1985 to 1987.



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John R. Whitmore, age 70, has served as a Trustee since 1984. He also has served as Senior Advisor
to The Bessemer Group, Incorporated (a financial management and banking firm) and its Bessemer Trust Company subsidiaries since 1998. Mr. Whitmore is a director of Chevy Chase, Chevy Chase Property Company, Saul Company and Saul Centers. During the
period 1975-1998, Mr. Whitmore was President and Chief Executive Officer of Bessemer Group, Incorporated and its Bessemer Trust Company subsidiaries and a director of Bessemer Securities Corporation.



Executive Officers of the Trust Who Are Not Directors



Stephen R. Halpin, Jr., age 48, serves as Vice President and Chief Financial Officer of the Trust, and Senior Vice President and Chief Financial Officer of Saul Company. He also serves as Executive Vice
President and Chief Financial Officer of Chevy Chase.



Timothy Hanlon, age 66, serves as General Counsel of the Trust and Executive Vice President and General Counsel of Chevy Chase.



Patrick T. Connors, age 41, has served as a Vice President of the Trust and Senior Vice President of Saul Company since January 2000. For the
previous four years, he was an attorney with Shaw Pittman LLP, Washington, DC.



Ross E. Heasley, age 64, serves as Vice President of the Trust, Saul Company, the Advisor, Saul Property Co. and Saul Centers.



Henry Ravenel, Jr., age 69, serves as Vice President of the Trust, Saul Company, the Advisor and Saul Centers.



John A. Spain, age 40, has served as Vice President of
the Trust and Saul Company since August 2001.



Committees of the Board of Trustees



The Board of Trustees met four times during fiscal 2003. Each member of the board attended at least 75% of the aggregate number of meetings of the board and of the committees of the board on which he served.



The Board of Trustees has two standing committees: the Audit Committee and
the Executive Committee.



The Audit Committee is composed of
Messrs. Bloom and Grosvenor. The Board of Trustees has determined that Mr. Bloom is an audit committee financial expert and is independent as such terms are defined in the Exchange Act and the rules and regulations
thereunder. The Audit Committees duties include nominating the Trusts independent auditors, discussing with them the scope of their examination of the Trust, reviewing with them the Trusts financial statements and accompanying
report, and reviewing their recommendations regarding internal controls and related matters. This committee met nine times during fiscal 2003.



The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It is empowered to oversee day-to-day actions of the Advisor and Saul
Property Co. in connection with the operations of the Trust, including the acquisition, administration, sale or disposition of investments. This committee did not meet during fiscal 2003.



Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee of $600 for each board or committee meeting
attended. Trustees from outside the Washington, D.C. area are also reimbursed for out-of-pocket expenses in connection with their attendance at meetings. Mr. Saul II is not paid for attending Executive Committee meetings. For the fiscal year ended
September 30, 2003, the Real Estate Trust paid total fees of $109,000 to the Trustees, including $15,000 to Mr. Saul II.



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Code of Ethics



The Trusts officers and trustees are governed by a code of ethics. The code of ethics will be made available free of charge to any person upon
request.



ITEM 11. EXECUTIVE COMPENSATION



The Real Estate Trust pays no compensation to its executive officers for their services in such capacity. Mr. Saul II receives compensation from Chevy Chase for his services as the banks Chairman of the Board of Directors and Chief
Executive Officer, Mr. Halpin receives compensation from Chevy Chase for his services as Executive Vice President and Chief Financial Officer, and since 2000, Mr. Saul III receives compensation from Chevy Chase for his services as Vice Chairman of
the Board of Directors. No other executive officers of the Real Estate Trust received any compensation from the Real Estate Trust or its subsidiaries with respect to any of the fiscal years ended September 30, 2003, 2002 and 2001.



The following table sets forth the cash compensation paid by Chevy Chase to
Mr. Saul II, Mr. Halpin, and Mr. Saul III for or with respect to the fiscal years ended September 30, 2003, 2002 and 2001 for all capacities in which they served during such fiscal years.



SUMMARY COMPENSATION TABLE



Annual Compensation



|Name and Principal Position                                                                 |  | Year           |  | Salary |                               | Bonus |   | Long-TermCompensationPayouts  |  | All OtherCompensation |                        
|------------------------------------------------------------------------------------------- |  | -------------- |  | ------ | ----------------------------- | ----- | - | ----------------------------- |  | --------------------- | -----------------------
|B. Francis Saul II, Chairman and Chief Executive Officer of Chevy Chase                     |  | 2003 2002 2001 |  | $      | 1,607,311 1,590,004 1,562,320 |       | $ | 1,550,000 1,240,000 1,550,000 |  | $                     | 440,496 440,496 440,496
|                                                                                            |  |                |  |        |                              
|Stephen R. Halpin, Jr., Executive Vice President and Chief Financial Officer of Chevy Chase |  | 2003 2002 2001 |  | $      | 490,197 485,004 478,092       |       | $ | 72,750 58,200 71,250          |  | $                     | 88,099 88,099 88,099   
|                                                                                            |  |                |  |        |                              
|B. Francis Saul III Vice Chairman of Chevy Chase                                            |  | 2003 2002 2001 |  | $      | 228,469 225,004 207,694       |       | $ | 33,750 23,000 30,000          |  | $                     |                     

---

|(1) | The total amounts shown in the All Other Compensation column for fiscal year 2003 consist of the following: (i) contributions made by Chevy Chase to its Supplemental
Executive Retirement Plan on behalf of Mr. Saul II ($215,868), Mr. Halpin ($27,063) and Mr. Saul III ($15,733); (ii) the taxable benefit of premiums paid for group term insurance on behalf of Mr. Saul II ($14,466), Mr. Halpin ($1,698) and Mr. Saul
III ($784); (iii) contributions to the B.F. Saul Company Employees Profit Sharing Retirement Plan (the Retirement Plan), a defined contribution plan, on behalf of Mr. Halpin ($12,000); and (iv) accrued earnings on awards previously made under Chevy
Chases Deferred Compensation Plan on behalf of Mr. Saul II ($523,211), Mr. Halpin ($115,912), andMr. Saul III ($9,116).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The total amounts shown in the All Other Compensation column for fiscal year 2002 consist of the following: (i) contributions made by Chevy Chase to its Supplemental
Executive Retirement Plan on behalf of Mr. Saul II ($193,230), Mr. Halpin ($25,878) and Mr. Saul III ($15,120); (ii) the taxable benefit of premiums paid for group term insurance on behalf of Mr. Saul II ($14,466), Mr. Halpin ($1,698) and Mr. Saul
III ($744); (iii) contributions to the B.F. Saul Company Employees Profit Sharing Retirement Plan (the Retirement Plan), a defined contribution plan, on behalf of Mr. Halpin ($12,000); and (iv) accrued earnings on awards previously made under Chevy
Chases Deferred Compensation Plan on behalf of Mr. Saul II ($223,564), Mr. Halpin ($50,155) and Mr. Saul III ($4,160).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) | The total amounts shown in the All Other Compensation column for fiscal 2001 consist of the following: (i) contributions made by Chevy Chase to its Supplemental
Executive Retirement Plan on behalf of Mr. Saul II ($213,168), Mr. Halpin ($28,046), and Mr. Saul III ($14,262); (ii) the taxable benefit of premiums paid by Chevy Chase for group term insurance on behalf of Mr. Saul II ($14,466) and Mr. Halpin
($1,457); (iii) contributions to the Retirement Plan, a defined contribution plan, on behalf of Mr. Halpin ($10,200); and (iv) accrued earnings on awards previously made under Chevy Chases Deferred Compensation Plan on behalf of Mr. Saul II
($157,097) and Mr. Halpin ($35,784).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



LONG-TERM
INCENTIVE PLAN AWARDS. The following table sets forth certain information concerning the principal contributions (the Principal Contributions) credited by Chevy Chase to the accounts (the Accounts) of the executive officers
named above for fiscal year 2001 under the banks Deferred Compensation Plan (the Plan).



LONG-TERM INCENTIVE PROGRAMAWARDS IN LAST FISCAL YEAR



|Name                   |  | Performance orOther PeriodUntil Maturationor Payout |  | Estimated Future Payouts (1)Under Non-Stock Price-Based Plans
|---------------------- |  | --------------------------------------------------- |  | -------------------------------------------------------------
|                       |  | Threshold                                           |  | Target(2)                                                    
|B. Francis Saul II (3) |  | 2004                                                |  | $                                                            
|                       |  |                                                     |  |                                                              
|Stephen R. Halpin, Jr. |  | 2011                                                |  | $                                                            

---

|(1) | The estimated future payouts shown in the table are based on assumed performance rates for Chevy Chase during each year in the ten-year performance period. The actual payouts under
the Plan may vary substantially from the payouts shown in the table, depending upon the actual rate of return on average assets for each fiscal year in the ten-year performance period ending September 30, 2011.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Plan does not establish any target performance levels. The payout amounts shown in this column have been calculated assuming that Chevy Chases rate of return on average
assets during each of the years in the performance period are the same as the rate of return during the fiscal year ended September 30, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The payout amounts shown for all participants are the estimated amounts that would be payable to such participants if their employment continued with Chevy Chase for the entire
ten-year performance period of the Plan. During fiscal year 2002, Mr. Saul attained the age of 70, at which time he became fully vested in the account maintained for his benefit under the Plan for awards granted prior to fiscal year 2001.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under the Plan, if Mr. Saul were to retire, he could elect to have Chevy Chase pay out the Net Contribution (as defined) in his account prior to the year 2011.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain of the awards credited by Chevy Chase to
the Account maintained for the benefit of Mr. Saul under the Plan vested at the time Mr. Saul attained age 60 in 1992 and age 70 in 2002. Certain other awards credited by Chevy Chase to the Account maintained for the benefit of Mr. Saul will vest
upon the earlier of:



| |  | five years after the date of the award,
| | - | ---------------------------------------



| |  | his attainment of the age of 72 in 2004,
| | - | ----------------------------------------



| |  | his death, or
| | - | -------------



| |  | his total or permanent disability, or a change in control of Chevy Chase (as defined in the Plan).
| | - | --------------------------------------------------------------------------------------------------



Accordingly, as of September 30, 2003, Mr. Saul was fully vested in the Account maintained for his benefit under the Plan
for awards granted prior to fiscal year 2001. As of that date, the vested Account balance maintained for Mr. Sauls benefit under the Plan was $5,489,185. As of September 30, 2003, the following individuals have vested amounts that are payable
within 120 days after September 30, 2003: Mr. Saul ($440,496); Mr. Halpin ($88,099).



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The Plan provides that, as of the end of each fiscal year in the ten-year period ending September 30,
2011 (or the executive officers earlier termination of employment with Chevy Chase), Chevy Chase will add to or deduct from each executive officers Account a contribution or deduction, as the case may be, which represents the
hypothetical interest (which may be positive or negative) earned on the Principal Contribution, based on the banks rate of return on average assets (as computed under the Plan) for the fiscal year then ended. (The Principal Contribution, plus
or minus any interest credited or deducted, is referred to as the Net Contribution.)



Executive officers are entitled to receive the Net Contribution in their respective Account only upon full or partial vesting. Plan participants become
fully vested in their Account under the Plan, provided that they remain continuously employed by Chevy Chase during the vesting period, upon the earliest to occur of any of the following:



| |  | September 30, 2011;
| | - | -------------------



| |  | attainment of age 63;
| | - | ---------------------



| |  | death;
| | - | ------



| |  | total and permanent disability; or
| | - | ----------------------------------



| |  | a change in control of Chevy Chase (as defined in the Plan).
| | - | ------------------------------------------------------------



Plan participants become partially vested, to the extent of 50% of the Net Contribution in the Account, upon the termination of their employment by Chevy
Chase without cause (as defined in the Plan) after September 30, 2006.



Payouts are made under the Plan within 120 days after September 30, 2011, or the earlier termination of the executive officers employment with Chevy Chase, provided that vesting or partial vesting has occurred under the Plan.



OTHER COMPENSATION AGREEMENTS. Mr. Halpin has entered into an
agreement with Chevy Chase entitled Agreement For Executive Level Officers Governing Confidentiality, Nonsolicitation, Ownership of Certain Works and Termination Upon Change in Control under which the executive officer has agreed not to
compete with, solicit customers of or solicit the employees of Chevy Chase for stated periods following any termination of employment with Chevy Chase. In addition, Chevy Chase agrees to pay the executive a specified amount if the executive is
terminated without cause in the three-year period following a change of control of Chevy Chase. The amount payable varies depending upon the executives base compensation and most recent bonus, the length of the executives employment with
Chevy Chase and the per share price at which the triggering change of control has occurred.



Mr. Halpin also has entered into Special Retirement Compensation Agreements under which the executive could receive an amount up to three times his base compensation if he retires from Chevy Chase after
reaching age 65.



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Report of the Chevy Chase Compensation Committee



The Compensation Committee of Chevy Chase reviews compensation of Chevy
Chases senior officers, which include Messrs. Saul II, Saul III and Halpin. The components of compensation reviewed by the Committee include salary, bonuses and deferred compensation. Because Chevy Chases common stock is privately held,
Chevy Chase does not offer stock options as part of its compensation program. As part of its review of compensation, the Committee considers a variety of factors, including each individuals tenure, level of responsibility and performance, as
well as factors relating to the overall performance of Chevy Chase, the results of regulatory examinations, and Chevy Chases overall compliance status.



The Committee also informs itself generally of executive level compensation of banks of comparable size to Chevy Chase. In determining compensation of
Chevy Chases senior officers, the Committee seeks to maintain a competitive position in the marketplace, taking into account that Chevy Chase does not offer equity based compensation programs.



With respect to officers other than Mr. Saul II, the Committee takes into
account the recommendations of MR. Saul II. The Committee is aware that Mr. Saul II is, indirectly, a significant shareholder of Chevy Chase and thus has a strong incentive to act in the best interest of the shareholders. Mr. Saul II does not
participate in the discussion of his own compensation and similarly abstains from voting on his own compensation.



The Committee has not adopted any specific policies concerning the relationship of corporate performance to executive compensation. Instead, the Committee
follows a more flexible approach which it believes to be better suited to the specific circumstances of Chevy Chase.



Members of the Chevy Chase Compensation CommitteeGarland P. Moore, Jr., ChairGeorge M. Rogers, Jr.B. Francis Saul II




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth certain information, as of December 19, 2003, concerning beneficial ownership of Common Shares and preferred shares of
beneficial interest, referred to in this report as the Preferred Shares, by (a) each person known by the Trust to be the beneficial owner of more than 5% of the Common Shares and the Preferred Shares, (b) each member of the Board of
Trustees, (c) each executive officer of the Trust named in the Summary Compensation Table under Item 11. Executive Compensation and (d) all trustees and executive officers of the Trust as a group.



|Name of Beneficial Owner                                   |  | Aggregate Number ofSharesBeneficially Owned (1) |  | Percent ofClass (1) |  
|---------------------------------------------------------- |  | ----------------------------------------------- |  | ------------------- | -
|B. Francis Saul II                                         |  | Preferred: 516,000 (2)                          |  | 100.00              | %
|                                                           |  | Common: 4,807,510 (3)                           |  | 100.00              | %
|All Trustees and executive officers as a group (9 persons) |  | Preferred: 516,000 (2)                          |  | 100.00              | %
|                                                           |  | Common: 4,807,510                               |  | 100.00              | %

---

|(1) | Beneficial owner and percent of class are calculated pursuant to rule 13d-3 under the Securities Exchange Act of 1934.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(2) | Consists of Preferred Shares owned of record by Saul Company and other companies of which Mr. Saul is an officer, director and/or more than 10% shareholder, comprising 270,000
Preferred Shares owned by Saul Company, 90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000 Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares owned by Westminster Investing Corporation. The
address of each person listed in this footnote is 7501 Wisconsin Avenue, Bethesda, Maryland 20814. Pursuant to Rule 13d-3, the Preferred Shares described above are considered to be beneficially owned by Mr. Saul because he has or may be deemed to
have sole or shared voting and/or investment power in respect thereof.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists of Common Shares owned of record by Saul Company and other companies of which Mr. Saul is an officer and director and/or more than 10% shareholder, comprising 1,125,739
Common Shares owned by Westminster Investing Corporation, 43,673 Common Shares owned by Derwood Investment Corporation, a subsidiary of Westminster Investing Corporation, 34,400 Common Shares owned by Somerset Investment Company, Inc., a subsidiary
of Westminster Investing Corporation, 2,751,662 Common Shares owned by Saul Company, 283,400 Common Shares owned by Columbia Securities Company of Washington, D.C., 172,918 Common Shares owned by Franklin Development Company, Inc., and 395,718
Common Shares owned by The Klingle Corporation. The address of each person listed in this footnote is 7501 Wisconsin Avenue, Bethesda Maryland 20814. Pursuant to Rule 13d-3, the Common Shares described above are considered to be beneficially owned
by Mr. Saul because he has or may be deemed to have sole or shared voting and/or investment power in respect thereof.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Preferred Shares were issued in June 1990 in connection with the transaction in which the Trust increased its equity interest in Chevy Chase from 60%
to 80%. The dividend rate on the Preferred Shares is $10.50 per share per annum. Dividends are cumulative and are payable annually or at such other times as the Trustees may determine, as and when declared by the Trustees out of any assets legally
available therefor. The Preferred Shares have a liquidation preference of $100 per share. Subject to limits in certain of the Trusts loan agreements, the Preferred Shares are subject to redemption at the option of the Trust at a redemption
price equal to their liquidation preference. Except as otherwise required by applicable law, the holders of Preferred Shares are entitled to vote only in certain limited situations, such as the merger of the Trust or a sale of all or substantially
all of the assets of the Trust.



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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Management Personnel



All of the officers of
the Trust and Messrs. Saul II, Saul III, Rogers and Whitmore, each of whom is a trustee of the Trust, are also officers and/or directors of Saul Company and/or its subsidiaries. In addition, Messrs. Saul II, Saul III, Whitmore, Grosvenor, Caraci and
Heasley are also officers and/or directors of Saul Centers and/or its subsidiaries.



Transactions with Saul Company and its Subsidiaries. The Real Estate Trust is managed by the Advisor, a wholly owned subsidiary of Saul Company. The Advisor is paid a fixed monthly fee subject to annual review
by the trustees. The monthly fee was $458,000 for fiscal 2003. The advisory contract has been extended until September 30, 2004, and will continue thereafter unless cancelled by either party at the end of any contract year. The monthly fee for
fiscal 2004 will be $472,000. Certain loan agreements prohibit termination of this contract.



Saul Company and Saul Property Co., a wholly owned subsidiary of Saul Company, provide services to the Real Estate Trust in the areas of commercial property management and leasing, hotel management, development and
construction management, and acquisitions, sales and financings of real property. Fees to the two companies amounted to $6.9 million in fiscal 2003.



The Real Estate Trust reimburses the Advisor and Saul Property Co. for costs and expenses incurred in connection with the acquisition and development of
real property on behalf of the Real Estate Trust, in-house legal expenses, and all travel expenses incurred in connection with the affairs of the Real Estate Trust.



The Real Estate Trust pays the Advisor fees equal to 2% of the principal amount of publicly offered unsecured notes as they
are issued to offset the Advisors costs of administering the program. The Advisor received $251,000 in such fees in fiscal 2003.



B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of Saul Company, is a general insurance agency that receives commissions and counter-signature
fees in connection with the Real Estate Trusts insurance program. Such commissions and fees amounted to approximately $302,000 in fiscal 2003.



At October 1, 2001, the Real Estate Trust had an unsecured note receivable from Saul Company with an outstanding balance of $7.8 million. During fiscal
2002 and 2003, curtails of $1.3 and $3.5 million were paid. Interest on the loan is computed by reference to a floating rate index. At September 30, 2003, the total due the Real Estate Trust was $3.0 million. Interest accrued on this note amounted
to $151,000 in fiscal 2003.



The Trust has retained the law
firm of Shaw Pittman LLP, at which Mr. Rogers is senior counsel, to perform legal services for the Trust in fiscal 2002 and 2003.



The Board of Trustees of the Trust, including the two independent trustees, reviews the fees and compensation arrangements between the Real Estate Trust
and Saul Company and its related entities and affiliates and believes that such fees and compensation arrangements are as favorable to the Real Estate Trust as would be obtainable from unaffiliated sources.



Transactions with Saul Centers.



Shared Services. The Trust shares with Saul Centers certain ancillary
functions at cost, such as computer and payroll services, benefits administration, certain other direct and indirect administrative payroll and in-house legal services. In addition, the Trust shares insurance expense with Saul Centers on a pro rata
basis. The Trust believes that the amounts allocated to it for such shared services represent a fair allocation between the Trust and Saul Centers.



Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has entered into an Exclusivity Agreement with, and has granted a right of
first refusal to, Saul Centers and Saul Holdings Partnership. The purpose of these agreements is to minimize potential conflicts of interest between the Real Estate Trust, Saul Centers and Saul Holdings Partnership.



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Holdings Partnership. The exclusivity agreement and right of first refusal generally require the
Real Estate Trust to conduct its shopping center business exclusively through Saul Centers and Saul Holdings Partnership and to grant these entities a right of first refusal to purchase commercial properties and development sites that become
available to the Real Estate Trust in the District of Columbia or adjacent suburban Maryland. Subject to the exclusivity agreement and right of first refusal, the Real Estate Trust will continue to develop, acquire, own and manage commercial
properties and own land suitable for development as, among other things, shopping centers and other commercial properties.



Reimbursement Agreement. Pursuant to a reimbursement agreement among the partners of the Saul Holdings Partnership and certain of their affiliates,
the Real Estate Trust and two of its subsidiaries have agreed to reimburse Saul Centers and the other partners in the event the Saul Holdings Partnership fails to make payments with respect to certain portions of its debt obligations and Saul
Centers or any such other partners personally make payments with respect to such debt obligations. As of September 30, 2003, the maximum potential obligation of the Real Estate Trust and its subsidiaries under the agreement was $115.5 million. See
Note 3 to the Consolidated Financial Statements in this report. The Real Estate Trust believes that Saul Holdings Partnership will be able to make all payments due with respect to its debt obligations.



Tax Conflicts. The fair market value of each of the properties
contributed to Saul Holdings Partnership and its subsidiaries by the Real Estate Trust and its subsidiaries in connection with the formation of Saul Centers and Saul Holdings Partnership in 1993 exceeded the tax basis of such properties. In the
event Saul Centers or its wholly owned subsidiary, Saul QRS, Inc., acting as general partner, causes Saul Holdings Partnership to dispose of, or there is an involuntary disposition of, one or more of such properties, a disproportionately large share
of the total gain for federal income tax purposes would be allocated to the Real Estate Trust and its subsidiaries as a result of the property disposition. See Note 3 to the Consolidated Financial Statements in this report.



Property Dispositions. In October 2000, the Real Estate Trust sold a
newly constructed 30,000 square foot office/flex building located on a 2.2 acre site in the Avenel Business Park in Gaithersburg, Maryland to Saul Centers. The $4.2 million purchase price was paid in cash. The price for the property was determined
by an independent third party appraisal. Management believes that the disposition of this property was on terms no less favorable than those that could have been obtained in a comparable transaction with an unaffiliated third party.



Remuneration of Trustees and Officers. For fiscal 2003, the Trust paid
the trustees $109,000 in fees for their services. See Item 10. Trustees and Executive Officers of the Trust. No compensation was paid to the officers of the Trust for acting as such; however, Mr. Saul II was paid by Chevy Chase for his
services as the banks Chairman and Chief Executive Officer, Mr. Halpin was paid by Chevy Chase for his services as Executive Vice President and Chief Financial Officer, and Mr. Saul III was paid by Chevy Chase for his services as Vice
Chairman. See Item 11. Executive Compensation. Messrs. Grosvenor, Rogers, Saul II and Saul III receive compensation for their services as directors of Chevy Chase and Messrs. Rogers, Saul II, Saul III and Whitmore and all of the officers
of the Real Estate Trust receive compensation from Saul Company and/or its affiliated corporations as directors or officers thereof.



Related Party Rents. The Real Estate Trust leases space to Chevy Chase and the Saul Property Co. at two of its income-producing properties. Minimum
rents and expense recoveries paid under these leases amounted to approximately $5.3 million in fiscal 2003. Chevy Chase leases space in several of the shopping centers owned by Saul Centers. The total rental payments made to Saul Centers by Chevy
Chase in fiscal 2003 was $1.4 million. On September 24, 2001 Chevy Chase entered into an agreement to lease to Saul Company approximately 46,000 square feet of office space at its new corporate headquarters at 7501 Wisconsin Avenue, Bethesda,
Maryland. Total payments under the lease for fiscal 2003 were $1.9 million. In addition, Chevy Chase has retained Saul Company as its leasing agent to secure tenants for additional space that will be available in the new corporate headquarters. The
Trust believes that these leases have comparable terms to leases that would have been entered into with unaffiliated parties.



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PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.



(a) The following documents are filed as part of this report:



1. Financial Statements



The following consolidated financial statements of the Trust are incorporated by reference in Part II, Item 8.



| | (a) | Report of Independent Auditors.
| | --- | -------------------------------



| | (b) | Consolidated Balance SheetsAs of September 30, 2003 and 2002.
| | --- | --------------------------------------------------------------



| | (c) | Consolidated Statements of OperationsFor the years ended September 30, 2003, 2002 and 2001.
| | --- | --------------------------------------------------------------------------------------------



| | (d) | Consolidated Statements of Comprehensive Income and Changes in Shareholders EquityFor the years ended September 30, 2003, 2002 and 2001.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Consolidated Statements of Cash FlowsFor the years ended September 30, 2003, 2002 and 2001.
| | --- | --------------------------------------------------------------------------------------------



| | (f) | Notes to Consolidated Financial Statements.
| | --- | -------------------------------------------



2. Financial Statement Schedules and Supplementary Data



(a) Schedules of the Real Estate Trust:



Schedule ICondensed Financial InformationFor the years ended September 30, 2003, 2002 and 2001.



Schedule IIIConsolidated Schedule of
Investment Properties As of September 30, 2003.



(b) Reports on
Form 8-K



None.



(c) Exhibits



|EXHIBITS                                                                     |  | DESCRIPTION                                                                                                                                                                                                                                                                                                        
|---------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. ORGANIZATIONAL DOCUMENTS                                                 
|                                                                             | 
|(a)                                                                          |  | Second Amended and Restated Declaration of Trust filed with the Maryland State Department of Assessments and Taxation on May 23, 2002 as Exhibit 3(a) to Registration Statement
333-70753 is hereby incorporated by reference.                                                                                     
|                                                                             | 
|(b)                                                                          |  | Second Amended and Restated By-Laws of the Trust dated as of May 23, 2002 as Exhibit 3(b) to Registration Statement 333-70753 is hereby incorporated by reference.                                                                                                                                                 
|                                                                            
|4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
|                                                                             | 
|(a)                                                                          |  | Indenture dated as of March 25, 1998 between the Trust and Norwest Bank Minnesota, National Association, as Trustee, with respect to the Trusts 93/4% Series B Senior Secured Notes due 2008, as filed as Exhibit 4(a) to Registration Statement 333-49937 is hereby
incorporated by reference.                   
|                                                                             | 
|(b)                                                                          |  | Indenture with respect to the Trusts Senior Notes Due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration No. 33-19909 is hereby
incorporated by reference.                                                                                                                    
|                                                                             | 
|(c)                                                                          |  | First Supplemental Indenture with respect to the Trusts Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit T-3C to the Trusts Form T-3
Application for Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference.



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|EXHIBITS               |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d)                    |  | Indenture with respect to the Trusts Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-9336 is hereby
incorporated by reference.                                                                                                                                                                                                       
|                       | 
|(e)                    |  | Fourth Supplemental Indenture with respect to the Trusts Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement
No. 2-95506 is hereby incorporated by reference.                                                                                                                                                                                   
|                       | 
|(f)                    |  | Third Supplemental Indenture with respect to the Trusts Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No.
2-91126 is hereby incorporated by reference.                                                                                                                                                                                    
|                       | 
|(g)                    |  | Second Supplemental Indenture with respect to the Trusts Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement
No. 2-80831 is hereby incorporated by reference.                                                                                                                                                                                   
|                       | 
|(h)                    |  | Supplemental Indenture with respect to the Trusts Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No.
2-68652 is hereby incorporated by reference.                                                                                                                                                                                          
|                       | 
|(i)                    |  | Indenture with respect to the Trusts Senior Notes due from One Year to Five Years from Date of Issue as filed as Exhibit T-3C to the Trusts Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939 (file No. 22-10206) is hereby incorporated by reference                                                                                                               
|                       | 
|(j)                    |  | Indenture dated as of September 1, 1992 with respect to the Trusts Notes due from One to Ten Years form Date of Issue filed as Exhibit 4(a) to Registration Statement No.
33-34930 is hereby incorporated by reference.                                                                                                                                                                                       
|                       | 
|(k)                    |  | First Supplemental Indenture dated as of January 16, 1997 with respect to the Trusts Notes due from One to Ten years from Date of Issue filed as Exhibit 4(b) to Registration
Statement No. 33-34930 is hereby incorporated by reference.                                                                                                                                                                     
|                       | 
|(l)                    |  | Second Supplemental Indenture dated as of January 13, 1999 with respect to the Trusts Notes due from One to Ten Years from Date of Issuance as filed as Exhibit 4(l) to
Registration StatementNo. 333-70753 is hereby incorporated by reference.                                                                                                                                                              
|                      
|10. MATERIAL CONTRACTS
|                       | 
|(a)                    |  | Amended and Restated Advisory Contract by and among the Trust, B.F. Saul Company and B.F. Saul Advisory Company effective October 1, 1992, as amended, as filed as Exhibit 10(a) to
the Trusts Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is hereby incorporated by reference.                                                                                 
|                       | 
|(b)                    |  | Assignment and Guaranty Agreement effective May 1, 1972 by and among the Trust, B.F. Saul Company and B.F. Saul Advisory Company, as filed as Exhibit 10(b) to the Trusts
Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is hereby incorporated by reference.                                                                                                      
|                       | 
|(c)                    |  | Commercial Property Leasing and Management Agreement effective October 1, 1982 between the Trust and B.F. Saul Property Company filed as Exhibit 10(b) to Registration Statement
No. 2-80831 is hereby incorporated by reference.                                                                                                                                                                              
|                       | 
|(d)                    |  | Amendments to Commercial Property Leasing and Management Agreement between the Trust and B.F. Saul Property Company dated as of December 31, 1992 (Amendment No. 5), July 1, 1989
(Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1, 1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby incorporated by reference.
|                       | 
|(e)                    |  | Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy Chase Bank F.S.B. and certain of their subsidiaries filed as Exhibit 10(c) to Registration Statement No. 33-34930
is hereby incorporated by reference.                                                                                                                                                                                        



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|EXHIBITS |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|(f)      |  | First Amendment to Tax Sharing Agreement effective May 16, 1995 among the Trust, Chevy Chase Bank F.S.B. and certain of their subsidiaries, as filed as Exhibit 10(f) to the
Trusts Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is hereby incorporated by reference.                                                                                                                                                                                                                                                                             
|         | 
|(g)      |  | Agreement dated June 28, 1990 among the Trust, B.F. Saul Company, Franklin Development Co., Inc., The Klingle Corporation and Westminster Investing Corporation relating to the
transfer of certain shares of Chevy Chase Bank, F.S.B. and certain real property to the Trust in exchange for Preferred Shares of the Trust filed as Exhibit 10(d) to Registration Statement No. 33-34930 is hereby incorporated by
reference.                                                                                                                                                                  
|         | 
|(h)      |  | Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988 among B.F. Saul Company, the Trust and the Federal Savings and Loan Insurance Corporation filed as Exhibit
10(e) to the Trusts Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 1991 is hereby incorporated by reference.                                                                                                                                                                                                                                                             
|         | 
|(i)      |  | Registration Rights and Lock-Up Agreement dated August 26, 1993 by and among Saul Centers, Inc. and the Trust, Westminster Investing Corporation, Van Ness Square Corporation,
Dearborn, L.L.C., B.F. Saul Property Company and Avenel Executive Park Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference.                                                                                                                                                                                                                       
|         | 
|(j)      |  | First Amendment to Registration Rights and Lock-Up Agreement dated September 29, 1999 by and among Saul Centers, Inc., the Trust, Westminster Investing Corporation, Van Ness
Square Corporation, Dearborn Corporation, Franklin Property Company and Avenel Executive Park Phase II, Inc., as filed as Exhibit 10(b) to the Trusts Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is
hereby incorporated by reference.                                                                                                                             
|         | 
|(k)      |  | Exclusivity and Right of First Refusal Agreement dated August 26, 1993 among Saul Centers, Inc., the Trust, B.F. Saul Company, Westminster Investing Corporation, B.F. Saul
Property Company, Van Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as filed as Exhibit 10.7 to Registration Statement No. 33-64562 hereby incorporated by reference.                                                                                                                                                                                                                               
|         | 
|(l)      |  | Fourth Amended and Restated Reimbursement Agreement dated as of April 25, 2000 by and among Saul Centers, Inc., Saul Holdings Limited Partnership, Saul Subsidiary I Limited
Partnership, Saul Subsidiary II Limited Partnership, Saul QRS, Inc., B.F. Saul Property Company, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn, L.L.C., Avenel Executive Park Phase II, L.L.C., and the Trust, as filed as
Exhibit 10(k) to the Trusts Quarterly Report on Form 10-Q (File No. 1-7184) for the fiscal quarter ended March 31, 2000 is hereby incorporated by reference.
|         | 
|(m)      |  | Bank Stock Registration Rights Agreement dated as of March 25, 1998 between the Trust and Norwest Bank Minnesota, National Association, as Trustee, as filed as Exhibit 4(d) to
Registration Statement No. 333-49937 is hereby incorporated by reference.                                                                                                                                                                                                                                                                                                                                       
|         | 
|(n)      |  | Note Administration Fee Agreement dated as of February 8, 2002, between the Trust and B.F. Saul Advisory Company L.L.C., as filed as Exhibit 10(n) to the Trusts Quarterly
Report on Form 10-Q (File No. 1-7184) for the fiscal quarter ended December 31, 2001 is hereby incorporated by reference.                                                                                                                                                                                                                                                                                           
|         | 
|21.      |  | List of Subsidiaries of the Trust (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | 
|31.      |  | Rule 13a14(a)/15d14(a) Certifications of Principal Executive Officer and Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | 
|32.      |  | Section 1350 Certifications of Principal Executive Officer and Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



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SCHEDULE I



B.F. SAUL REAL ESTATE INVESTMENT TRUST



CONDENSED FINANCIAL INFORMATION



|(a) | Required condensed financial information on the Trust is disclosed in the audited consolidated financial statements included herewith.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(b) | Amounts of cash dividends paid to the Trust by consolidated subsidiaries were as follows:
|--- | -----------------------------------------------------------------------------------------



|Year Ended September 30
|-----------------------
|2003                   
|$16,000,000            



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SCHEDULE III



CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIESREAL ESTATE TRUST

September 30, 2003

(Dollars in Thousands)



|                                              |  | InitialBasis toTrust |         | Costs CapitalizedSubsequent toAcquisition |                           |        | Basis at Close of Period
|--------------------------------------------- |  | -------------------- | ------- | ----------------------------------------- | ------------------------- | ------ | ------------------------
|                                              |  |                      | Land    |                                           | Buildings andImprovements |        | Total                   
|Hotels                                        |  |                      |         |                                           |                           |        |                         
|CourtyardTysons Corner, McLean VA            |  | $                    | 31,077  |                                           | $                         | (416   | )                       
|Crown PlazaNational Airport, Arlington VA    |  |                      | 26,979  |                                           |                           | 5,685  |                         
|Hampton InnDulles Airport, Sterling VA       |  |                      |        |                                           |                           | 6,786  |                         
|Hampton InnDulles Town Center, Sterling VA   |  |                      | 11,379  |                                           |                           |       |                         
|Holiday Inn, Cincinnati OH                    |  |                      | 6,859   |                                           |                           | 3,853  |                         
|Holiday InnDulles Airport, Sterling VA       |  |                      | 6,950   |                                           |                           | 22,241 |                         
|Holiday Inn, Gaithersburg MD                  |  |                      | 3,849   |                                           |                           | 16,301 |                         
|Holiday InnNational Airport, Arlington VA    |  |                      | 10,187  |                                           |                           | 7,590  |                         
|Holiday Inn, Pueblo CO                        |  |                      | 3,458   |                                           |                           | 2,636  |                         
|Holiday InnRochester Airport, Rochester NY   |  |                      | 3,340   |                                           |                           | 10,721 |                         
|Holiday InnTysons Corner, McLean VA          |  |                      | 6,976   |                                           |                           | 14,892 |                         
|Holiday Inn Express, Herndon VA               |  |                      | 5,259   |                                           |                           | 506    |                         
|Holiday Inn Select, Auburn Hills MI           |  |                      | 10,450  |                                           |                           | 2,295  |                         
|SpringHill Suites, Boca Raton FL              |  |                      | 10,942  |                                           |                           | 356    |                         
|TownePlace Suites, Boca Raton FL              |  |                      | 7,527   |                                           |                           | (25    | )                       
|TownePlace SuitesDulles Airport, Sterling VA |  |                      | 5,849   |                                           |                           | 154    |                         
|TownePlace SuitesFt. Lauderdale FL           |  |                      | 7,059   |                                           |                           | (41    | )                       
|TownePlace Suites, Gaithersburg MD            |  |                      | 6,382   |                                           |                           | 4      |                         
|                                              |  |                      |         |                                           |                           |        |                         
|SubtotalHotels                               |  | $                    | 164,522 |                                           | $                         | 93,538 |                         
|                                              |  |                      |         |                                           |                           |        |                         
|Commercial                                    |  |                      |         |                                           |                           |        |                         
|900 Circle 75 Pkway, Atlanta GA               |  | $                    | 33,434  |                                           | $                         | 3,794  |                         
|1000 Circle 75 Pkway, Atlanta GA              |  |                      | 2,820   |                                           |                           | 1,529  |                         
|1100 Circle 75 Pkway, Atlanta GA              |  |                      | 22,746  |                                           |                           | 3,068  |                         
|8201 Greensboro, Tysons Corner VA             |  |                      | 28,890  |                                           |                           | 4,559  |                         
|Commerce Ctr-Ph II, Ft Lauderdale FL          |  |                      | 4,266   |                                           |                           | 588    |                         
|Dulles North, Loudoun County VA               |  |                      | 5,882   |                                           |                           | 54     |                         
|Dulles North Two, Loudoun County VA           |  |                      | 7,729   |                                           |                           | 103    |                         
|Dulles North Four, Loudoun County VA          |  |                      | 11,093  |                                           |                           | 189    |                         
|Dulles North Five, Loudoun County VA          |  |                      | 5,078   |                                           |                           | (76    | )                       
|Dulles North Six, Loudoun County VA           |  |                      | 2,667   |                                           |                           | 17     |                         
|Loudoun Tech Center I, Loudoun County VA      |  |                      | 5,334   |                                           |                           | 77     |                         
|Sweitzer Lane, Laurel MD                      |  |                      | 13,703  |                                           |                           |       |                         
|Tysons Park Place, Tysons Corner VA           |  |                      | 21,811  |                                           |                           | 1,030  |                         
|                                              |  |                      |         |                                           |                           |        |                         
|SubtotalCommercial                           |  | $                    | 165,453 |                                           | $                         | 14,932 |                         
|                                              |  |                      |         |                                           |                           |        |                         



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|                                          |  | InitialBasis toTrust |         | CostsCapitalizedSubsequent toAcquisition |                           |         | Basis at Close of Period
|----------------------------------------- |  | -------------------- | ------- | ---------------------------------------- | ------------------------- | ------- | ------------------------
|                                          |  |                      | Land    |                                          | Buildings andImprovements |         | Total                   
|PurchaseLeasebacks and other             |  |                      |         |                                          |                           |         |                         
|Chateau di Jon, Metairie, LA              |  | $                    | 1,125   |                                          | $                         |        |                         
|Country Club, Knoxville, TN               |  |                      | 500     |                                          |                           | (22     | )                       
|Houston Mall, Warner Robbins, GA          |  |                      | 650     |                                          |                           |        |                         
|Old National, Atlanta, GA (Other)         |  |                      | 550     |                                          |                           |        |                         
|                                          |  |                      |         |                                          |                           |         |                         
|SubtotalPurchase-Leasebacks and other    |  | $                    | 2,825   |                                          | $                         | (22     | )                       
|                                          |  |                      |         |                                          |                           |         |                         
|Total Income-Producing Properties         |  | $                    | 332,800 |                                          | $                         | 108,448 |                         
|                                          |  |                      |         |                                          |                           |         |                         
|Land Parcels                              |  |                      |         |                                          |                           |         |                         
|Arvida Park of Commerce, Boca Raton, FL   |  | $                    | 7,378   |                                          |                           | (1,945  | )                       
|Cedar Green, Loudoun Co., VA              |  |                      | 3,314   |                                          |                           | 34      |                         
|Church Road, Loudoun Co., VA              |  |                      | 2,586   |                                          |                           | 2,200   |                         
|Circle 75, Atlanta, GA                    |  |                      | 12,927  |                                          |                           | 3,601   |                         
|Holiday InnAuburn Hills, Auburn Hills MI |  |                      | 218     |                                          |                           |        |                         
|Holiday InnRochester, Roch., NY          |  |                      | 68      |                                          |                           |        |                         
|Overland Park, Overland Park, KA          |  |                      | 3,771   |                                          |                           | 726     |                         
|Prospect Indust. Pk, Ft. Laud., FL        |  |                      | 2,203   |                                          |                           | (1,943  | )                       
|Sterling Blvd., Loudoun Co., VA           |  |                      | 505     |                                          |                           | 4,083   |                         
|Tysons Park Place II, Fairfax, VA         |  |                      |        |                                          |                           | 2,699   |                         
|                                          |  |                      |         |                                          |                           |         |                         
|Subtotal                                  |  | $                    | 32,970  |                                          | $                         | 9,455   |                         
|                                          |  |                      |         |                                          |                           |         |                         
|Total Investment Properties               |  | $                    | 365,770 |                                          | $                         | 117,903 |                         
|                                          |  |                      |         |                                          |                           |         |                         



|                                              |  | AccumulatedDepreciation |        | (1) RelatedDebt |   | Date ofConstruction |  | DateAcquired/Transferred |  | Buildings andImprovementsDepreciableLives (Years)
|--------------------------------------------- |  | ----------------------- | ------ | --------------- | - | ------------------- |  | ------------------------ |  | -------------------------------------------------
|Hotels                                        |  |                         |        |                 |   |                     |  |                          |  |                                                  
|CourtyardTysons Corner, McLean VA            |  | $                       | 5,238  |                 | $ | 26,295              |  | 2000                     |  | 12/00                                            
|Crown PlazaNational Airport, Arlington VA    |  |                         | 7,147  |                 |   | 16,222              |  | 1959                     |  | 12/97                                            
|Hampton InnDulles Airport, Sterling VA       |  |                         | 3,177  |                 |   | 6,161               |  | 1987                     |  | 4/87                                             
|Hampton InnDulles Town Center, Sterling VA   |  |                         | 2,630  |                 |   | 7,980               |  | 2000                     |  | 11/00                                            
|Holiday Inn, Cincinnati OH                    |  |                         | 6,734  |                 |   | 5,565               |  | 1975                     |  | 2/76                                             
|Holiday InnDulles Airport, Sterling VA       |  |                         | 18,335 |                 |   | 12,168              |  | 1971                     |  | 11/84                                            
|Holiday Inn, Gaithersburg MD                  |  |                         | 10,060 |                 |   | 6,689               |  | 1972                     |  | 6/75                                             
|Holiday InnNational Airport, Arlington VA    |  |                         | 9,866  |                 |   | 11,558              |  | 1973                     |  | 11/83                                            
|Holiday Inn, Pueblo CO                        |  |                         | 3,558  |                 |   | 4,187               |  | 1973                     |  | 3/76                                             
|Holiday InnRochester Airport, Rochester NY   |  |                         | 8,040  |                 |   | 13,028              |  | 1975                     |  | 3/76                                             
|Holiday InnTysons Corner, McLean VA          |  |                         | 10,376 |                 |   | 15,247              |  | 1971                     |  | 6/75                                             
|Holiday Inn Express, Herndon VA               |  |                         | 1,143  |                 |   | 4,617               |  | 1987                     |  | 10/96                                            
|Holiday Inn Select, Auburn Hills MI           |  |                         | 3,922  |                 |   | 11,465              |  | 1989                     |  | 11/94                                            
|SpringHill Suites, Boca Raton FL              |  |                         | 1,495  |                 |   | 5,962               |  | 1999                     |  | 9/99                                             
|TownePlace Suites, Boca Raton FL              |  |                         | 916    |                 |   | 5,406               |  | 1999                     |  | 6/99                                             
|TownePlace SuitesDulles Airport, Sterling VA |  |                         | 950    |                 |   | 6,205               |  | 1998                     |  | 8/98                                             
|TownePlace SuitesFt. Lauderdale FL           |  |                         | 916    |                 |   | 4,434               |  | 1999                     |  | 10/99                                            
|TownePlace Suites, Gaithersburg MD            |  |                         | 918    |                 |   | 4,727               |  | 1999                     |  | 6/99                                             
|                                              |  |                         |        |                 |   |                     |  |                          |  |                                                  
|SubtotalHotels                               |  | $                       | 95,421 |                 | $ | 167,916             |  |                          |  |                                                  
|                                              |  |                         |        |                 |   |                     |  |                          |  |                                                  



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|                                         |  | AccumulatedDepreciation |        | (1) RelatedDebt |   | Date ofConstruction |  | DateAcquired/Transferred |  | Buildings andImprovementsDepreciableLives (Years)
|---------------------------------------- |  | ----------------------- | ------ | --------------- | - | ------------------- |  | ------------------------ |  | -------------------------------------------------
|Commercial                               |  |                         |        |                 |   |                     |  |                          |  |                                                  
|900 Circle 75 Pkway, Atlanta GA          |  | $                       | 19,390 |                 | $ | 22,259              |  | 1985                     |  | 12/85                                            
|1000 Circle 75 Pkway, Atlanta GA         |  |                         | 2,748  |                 |   | 4,758               |  | 1974                     |  | 4/76                                             
|1100 Circle 75 Pkway, Atlanta GA         |  |                         | 14,778 |                 |   | 12,401              |  | 1982                     |  | 9/82                                             
|8201 Greensboro, Tysons Corner VA        |  |                         | 15,578 |                 |   | 35,520              |  | 1985                     |  | 4/86                                             
|Commerce Ctr-Ph II, Ft Lauderdale FL     |  |                         | 2,052  |                 |   | 3,615               |  | 1986                     |  | 1/87                                             
|Dulles North, Loudoun County VA          |  |                         | 2,304  |                 |   | 4,787               |  | 1990                     |  | 10/90                                            
|Dulles North Two, Loudoun County VA      |  |                         | 1,685  |                 |   | 8,256               |  | 1999                     |  | 10/99                                            
|Dulles North Four, Loudoun County VA     |  |                         | 1,116  |                 |   | 8,765               |  | 2002                     |  | 4/02                                             
|Dulles North Five, Loudoun County VA     |  |                         | 625    |                 |   | 6,490               |  | 2000                     |  | 3/00                                             
|Dulles North Six, Loudoun County VA      |  |                         | 244    |                 |   | 4,736               |  | 2000                     |  | 10/00                                            
|Loudoun Tech Center I, Loudoun County VA |  |                         | 197    |                 |   | 3,912               |  | 2001                     |  | 12/01                                            
|Sweitzer Lane, Laurel MD                 |  |                         | 729    |                 |   | 10,506              |  | 1995                     |  | 11/00                                            
|Tysons Park Place, Tysons Corner VA      |  |                         | 9,325  |                 |   | 29,223              |  | 1976                     |  | 12/99                                            
|                                         |  |                         |        |                 |   |                     |  |                          |  |                                                  
|SubtotalCommercial                      |  | $                       | 70,771 |                 | $ | 155,228             |  |                          |  |                                                  
|                                         |  |                         |        |                 |   |                     |  |                          |  |                                                  



|                                          |  | AccumulatedDepreciation |         | RelatedDebt |   | Date ofConstruction |  | Date Acquired/Transferred
|----------------------------------------- |  | ----------------------- | ------- | ----------- | - | ------------------- |  | -------------------------
|PurchaseLeasebacks                       |  |                         |         |             |   |                     |  |                          
|Chateau di Jon, Metairie, LA              |  | $                       |         |             | $ |                     |  |                          
|Country Club, Knoxville, TN               |  |                         |         |             |   |                     |  |                          
|Houston Mall, Warner Robbins, GA          |  |                         |         |             |   |                     |  |                          
|Old National, Atlanta, GA                 |  |                         |         |             |   |                     |  |                          
|                                          |  |                         |         |             |   |                     |  |                          
|SubtotalPurchaseLeasebacks              |  | $                       |         |             | $ |                     |  |                          
|                                          |  |                         |         |             |   |                     |  |                          
|Total Income-Producing Properties         |  | $                       | 166,192 |             | $ | 323,144             |  |                          
|                                          |  |                         |         |             |   |                     |  |                          
|Land Parcels                              |  |                         |         |             |   |                     |  |                          
|Arvida Park of Commerce, Boca Raton, FL   |  | $                       |        |             | $ |                    |  |                          
|Cedar Green, Loudoun Co., VA              |  |                         |        |             |   |                    |  |                          
|Church Road, Loudoun Co., VA              |  |                         |        |             |   |                    |  |                          
|Circle 75, Atlanta, GA                    |  |                         | 51      |             |   |                    |  |                          
|Flagship Centre, Rockville, MD            |  |                         |        |             |   |                    |  |                          
|Holiday InnAuburn Hills, Auburn Hills MI |  |                         |        |             |   |                    |  |                          
|Holiday InnRochester, Roch., NY          |  |                         |        |             |   |                    |  |                          
|Overland Park, Overland Park, KA          |  |                         |        |             |   |                    |  |                          
|Prospect Indust. Pk, Ft. Laud., FL        |  |                         |        |             |   |                    |  |                          
|Sterling Blvd., Loudoun Co., VA           |  |                         |        |             |   |                    |  |                          
|                                          |  |                         |         |             |   |                     |  |                          
|Subtotal                                  |  | $                       | 51      |             | $ |                    |  |                          
|                                          |  |                         |         |             |   |                     |  |                          
|Total Investment Properties               |  | $                       | 166,243 |             | $ | 323,144             |  |                          
|                                          |  |                         |         |             |   |                     |  |                          

---

NOTES:



|(1) | Includes hotel capital lease obligations of approximately $700,000.
|--- | -------------------------------------------------------------------

|(2) | See Summary of Significant Accounting Policies for basis of recording investment properties and computing depreciation. Investment properties are discussed in Note 3 to Consolidated
Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | A reconciliation of the basis of investment properties and accumulated depreciation follows.
|--- | --------------------------------------------------------------------------------------------



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BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION

(In thousands)



|                                                                  |  | For The Year Ended September 30 |        
|----------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                  |  | 2003                            |        
|Basis of investment properties                                    |  |                                 |        
|Balance at beginning of period                                    |  | $                               | 479,309
|Additions (reductions) during the period:                         |  |                                 |        
|Capital expenditures and property acquisitions from nonaffiliates |  |                                 | 10,220 
|Sales to nonaffiliates                                            |  |                                 | (1,873 
|Transferred from construction in progress, net                    |  |                                 |       
|Other                                                             |  |                                 | (3,983 
|                                                                  |  |                                 |        
|Balance at end of period                                          |  | $                               | 483,673
|                                                                  |  |                                 |        
|Accumulated depreciation                                          |  |                                 |        
|Balance at beginning of period                                    |  | $                               | 149,981
|Additions (reductions) during the period:                         |  |                                 |        
|Depreciation expense                                              |  |                                 | 19,330 
|Sales to nonaffiliates                                            |  |                                 |       
|Other                                                             |  |                                 | (3,068 
|                                                                  |  |                                 |        
|Balance at end of period                                          |  | $                               | 166,243
|                                                                  |  |                                 |        



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SIGNATURES



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



|                  |  | B.F. SAUL REAL ESTATE INVESTMENT
TRUST
|----------------- |  | --------------------------------------
|                  |  |                                       
|December 19, 2003 |  | By:                                   
|                  |  |                                       
|                  |  |                                       



Pursuant to the
requirements of the Securities Exchanges Act of 1934. This report had been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates shown. Each person whose signature appears below hereby
constitutes and appoints Stephen R. Halpin, Jr. and John A. Spain as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this Report and to file same,
with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and
hereby ratifying and confirming all that such attorney-in-fact and agent of his substitutes may do or cause to be done by virtue hereof.



|Signature                                    |  | Title                                                                    |  | Date             
|-------------------------------------------- |  | ------------------------------------------------------------------------ |  | -----------------
|                                             |  |                                                                         
|B. FRANCIS SAUL IIB. Francis Saul II         |  | Trustee, Chairman of the Board (Principal Executive Officer)             |  | December 19, 2003
|                                             |  |                                                                         
|STEPHEN R. HALPIN, JR.Stephen R. Halpin, Jr. |  | Vice President and Chief Financial Officer (Principal Financial Officer) |  | December 19, 2003
|                                             |  |                                                                         
|JOHN A. SPAINJohn A. Spain                   |  | Vice President (Acting Principal Accounting Officer)                     |  | December 19, 2003
|                                             |  |                                                                         
|PHILIP D. CARACIPhilip D. Caraci             |  | Trustee                                                                  |  | December 19, 2003
|                                             |  |                                                                         
|GARLAND J. BLOOM, JR.Garland J. Bloom, Jr.   |  | Trustee                                                                  |  | December 19, 2003
|                                             |  |                                                                         
|GILBERT M. GROSVENORGilbert M. Grosvenor     |  | Trustee                                                                  |  | December 19, 2003
|                                             |  |                                                                         
|GEORGE M. ROGERS, JR.George M. Rogers, Jr.   |  | Trustee                                                                  |  | December 19, 2003
|                                             |  |                                                                         
|B. FRANCIS SAUL IIIB. Francis Saul III       |  | Trustee                                                                  |  | December 19, 2003
|                                             |  |                                                                         
|JOHN R. WHITMOREJohn R. Whitmore             |  | Trustee                                                                  |  | December 19, 2003



153